Biden taxes target large businesses, so why are small businesses worried?
President Joe Biden speaks during a visit to Smith Flooring, a minority-owned small business, to promote its US bailout in Chester, Pa. On March 16, 2021.
Andrew Caballero-Reynolds | AFP | Getty Images
Several key political priorities on President Biden’s agenda aim to harness the wealth and power of the biggest corporations. But as the debate shifts to Capitol Hill and the President’s spending ambitions have surprised their scale, pundits on small business policy increasingly feel that it might be too soon, and Main Street might be too soon. becoming a financial victim in several important ways at a time when many operations are only recovering from the pandemic.
New data on business creation are go in the right direction and it is a sign of confidence in the economic recovery.
“The foundation is set for a great economic recovery and a rebound to pre-pandemic levels, but playing with tax rates at a time like this has a dampening effect,” said Karen Kerrigan, President of Small. Business & Entrepreneurship Council.
The most high-profile proposals include a 28% corporate tax hike at a time when companies like Amazon have paid in recent years a zero effective tax rate. Many independent contractors are also concerned about the labor protections in the PRO Act, which could force players in the odd-job economy like Uber and DoorDash to treat independent contractors like employees. The administration is talking more and more targeting the odd-job economy.
These proposals should come as no surprise – they were part of Biden’s platform during his presidential bid. And ambitious spending initiatives on U.S. infrastructure and workers can reap benefits in the form of economic growth and government support in the future funding of employee benefits.
“Supporters of the president’s proposals will present the broad economic benefits,” said Kevin Kuhlman, vice president of federal government relations at the National Federation of Independent Business, and there are areas of small business where spending could. drive growth like broadband and infrastructure. projects. But even if these projects last a few years, they are temporary, he said, while the impact of tax changes could be permanent.
“They definitely view infrastructure spending in a very positive light, but timing is everything, and when they come out of a year of devastation and come out of a big economic hole, they just fear what the wider effects will be. tax increases, ”Kerrigan said. . “Is this just the opening salvo? We’re spending a lot of money. There will be more tax increases to pay pipers beyond what we know today, and that’s a big one. concern, ”she added.
Anthony Nitti, national tax partner at RubinBrown, said business owners who have paid attention should not wake up in shock after Biden’s latest tax policy unveiled this week. There were no big surprises in the latest tax proposals, but there were a few additions and omissions that are notable.
For many small businesses, it will be good news that the President has not highlighted any increase in payroll taxes for Social Security, where a doubling from the current level has been envisioned at higher income levels. “We didn’t see that in the last proposal,” Nitti said. “Business owners will be relieved.”
There have also been no new discussions regarding changing the transfer deduction for businesses created as S corporations and partnerships, which could be phased out at higher income levels. But if the transfer treatment that allows a 20% deduction from business income is not revised and C corporations are subject to a higher corporate tax rate, there could be a reversal of the way which small businesses will form in the future, says Nitti. .
S corps and partnerships could find themselves in a tax advantage over a C corporation if the corporate tax rate increased to 28% – if Congress were to set 25%, the math would change. But with the 20% income deduction available to flow-through entities, even with a top tax rate close to 40%, the structure could be more attractive. Cutting the corporate tax rate to 21% under Trump eliminated the benefits of the pass-through structure, but that could “change dramatically,” Nitti said.
Kuhlman said the Company C issue was of great concern to smaller businesses because the corporate tax hike was not being discussed in terms that would be graduated for smaller businesses with lower income levels. . “The target here is the bigger companies, many of which are listed as paying no corporate tax, but the problem with that is that two-thirds, if not more, of that of corporations are small businesses,” Kuhlman said. , noting that the majority of C corps revenue less than $ 1 million.
Eliminating the current long-term capital gains rate for individuals with taxable income over $ 1 million means it would rise to the same level as the highest ordinary income rate of 39.6%, which would be almost double the maximum rate of 23.8% under current law and would have big implications for any business sale for an owner above the taxable income threshold.
In a recent analysis, Nitti wrote for Forbes, he concluded that for companies currently formed as C corporations – and others have gone to this structure after the 2017 tax law changes – when associated the proposed increase in the corporate rate from 21% to 28%. , the combined top shareholder rate would drop from around 40% to almost 60%.
“If I’m a business owner, I leave this week with two thoughts: I don’t know if my business is going to be in the right structure, and if I don’t plan on continuing to own the business for the long term, I would. better to speed up my exit strategy if the capital gains are really going to double in the future, ”Nitti said.
The Biden administration said there would be protections for farms and family businesses passing from one generation to the next, but experts say the specific details of the policy will protect these entities.
“Tax policy is the biggest drawback from my perspective. Small and medium-sized businesses want to operate in a stable political environment,” Kerrigan said. “The back and forth over tax rates makes planning difficult.”
Some of the wealthy-focused tax proposals will be negative for the minority of small business owners in the highest income brackets, and many independent entrepreneurs might not have this as a major concern, but it’s PRO law. , which seeks to rank more freelancers than employees, is Biden’s policy priority widely hated by this segment of the small business community. A recent Alignable survey found that 45% of small businesses said it would destroy their business
“It seems these policies are aimed at large companies, but the problem is that the burden falls on small companies,” Kuhlman said. He said that the “ABC test” used to qualify employees under the The PRO law would harm independent contractors and franchisees, as well as any business requiring the flexibility to use independent contractors.
There is also an impetus and attraction in other progressive political initiatives. President Biden’s support for the earned income tax credit and child tax credit may benefit small businesses by easing wage pressure, but these benefits may be diminished when compared to the president’s support for increasing. the federal minimum wage at $ 15, as well as sick leave and family leave benefits which may place more funding requirements on employers.
The latest proposals provide a more complete picture of what the administration is looking for, but those multiple elements of fringe benefits that can be passed on to employers in the form of increased labor costs are leaving the industry. small businesses, at least for the moment, “with more questions rather than answers,” according to Kuhlman. While mainstream support for Biden’s policy may focus more on the benefits of spending on infrastructure, small business owners are more used to looking at and being sensitive to the cost side. “There is some concern that the balance sheet does not line up exactly and the government will have to come back for more,” he said.