# How does taxing personal income above $200/$250k hurt small businesses? **URL:** \ **Category:** Factual Questions\ **Created:** [October 11, 2010, 10:30pm UTC](https://boards.straightdope.com/t/how-does-taxing-personal-income-above-200-250k-hurt-small-businesses/556830 "2010-10-11T22:30:36Z")\ **Posts on this page:** 20\ **Page:** 1
**Author:** ![toadspittle](https://avatars.discourse-cdn.com/v4/letter/t/c0e974/32.png) [@toadspittle](https://boards.straightdope.com/u/toadspittle)\ **Post date:** [October 11, 2010, 10:30pm UTC](https://boards.straightdope.com/t/how-does-taxing-personal-income-above-200-250k-hurt-small-businesses/556830/1 "2010-10-11T22:30:36Z")
(Trying to keep this in GQ, not GD, okay?) I saw this article: **[Lincoln may seek compromise on Bush tax cuts](http://news.yahoo.com/s/ap/20101011/ap_on_el_se/us_arkansas_senate_taxes)** > [@](#): > > … Obama and Democratic leaders have said that after the November elections, they want to extend tax cuts for individuals making less than $200,000 and married couples making less than $250,000. Republicans and a growing number of rank-and-file Democrats want to extend them all — even those for the wealthy — at least temporarily. > > Lincoln had floated the idea of a compromise last week during a speech in Little Rock. On Monday, she said she’s asked for numbers from the Congressional Budget Office on how much it would cost to offer more in tax cuts. On Friday she said she believed it was reasonable to consider extending the tax cuts to those making between $250,000 and $1 million a year. > > Lincoln said her openness to a compromise on the tax cuts shows that she’s willing to disagree with the Obama administration and fellow Democrats. Her Republican challenger, U.S. Rep. John Boozman, has criticized Lincoln as too closely allied with the president. > > … > > Boozman has said he supports fully extending the Bush tax cuts for everyone. \*\*Boozman has said limiting the cuts to the middle class would hurt small businesses. \*\*The tax cuts expire at the end of the year. Boozman has accused Lincoln of waffling on the issue of the tax cuts. I would like to know how, exactly, the proposed tax cut lapse would hurt small businesses. I have a small business (an LLC, i.e., a Partnership for IRS purposes). My best friend also has a small business (an S-Corp). Currently, we both take home less than the $200k ($250k for married couples) mentioned above. Even if we made more … so what? If we take money above those limits out of the business as salary/profit-sharing/partner payments/etc., rather than investing it in new equipment, expanding our number of employees, etc. … so what? It hasn’t hurt our _business_. It may have hurt the take-home pay of people running small businesses (those owners whose take-home pay is higher than $200k/$250k), but it hasn’t hurt the business itself. Help me out here. Why should I, as a small business owner (not just as a person with an income), be concerned? ---
**Author:** ![boytyperanma](https://avatars.discourse-cdn.com/v4/letter/b/4491bb/32.png) [@boytyperanma](https://boards.straightdope.com/u/boytyperanma)\ **Post date:** [October 11, 2010, 11:03pm UTC](https://boards.straightdope.com/t/how-does-taxing-personal-income-above-200-250k-hurt-small-businesses/556830/2 "2010-10-11T23:03:25Z")
> [@toadspittle](#): > > (Trying to keep this in GQ, not GD, okay?) > > I saw this article: > > **[Lincoln may seek compromise on Bush tax cuts](http://news.yahoo.com/s/ap/20101011/ap_on_el_se/us_arkansas_senate_taxes)** > > > [@](#): > > > > … Obama and Democratic leaders have said that after the November elections, they want to extend tax cuts for individuals making less than $200,000 and married couples making less than $250,000. Republicans and a growing number of rank-and-file Democrats want to extend them all — even those for the wealthy — at least temporarily. > > > > Lincoln had floated the idea of a compromise last week during a speech in Little Rock. On Monday, she said she’s asked for numbers from the Congressional Budget Office on how much it would cost to offer more in tax cuts. On Friday she said she believed it was reasonable to consider extending the tax cuts to those making between $250,000 and $1 million a year. > > > > Lincoln said her openness to a compromise on the tax cuts shows that she’s willing to disagree with the Obama administration and fellow Democrats. Her Republican challenger, U.S. Rep. John Boozman, has criticized Lincoln as too closely allied with the president. > > > > … > > > > Boozman has said he supports fully extending the Bush tax cuts for everyone. \*\*Boozman has said limiting the cuts to the middle class would hurt small businesses. \*\*The tax cuts expire at the end of the year. Boozman has accused Lincoln of waffling on the issue of the tax cuts. > > I would like to know how, exactly, the proposed tax cut lapse would hurt small businesses. I have a small business (an LLC, i.e., a Partnership for IRS purposes). My best friend also has a small business (an S-Corp). Currently, we both take home less than the $200k ($250k for married couples) mentioned above. Even if we made more … so what? If we take money above those limits out of the business as salary/profit-sharing/partner payments/etc., rather than investing it in new equipment, expanding our number of employees, etc. … so what? It hasn’t hurt our _business_. It may have hurt the take-home pay of people running small businesses (those owners whose take-home pay is higher than $200k/$250k), but it hasn’t hurt the business itself. > > Help me out here. Why should I, as a small business owner (not just as a person with an income), be concerned? Well you’d have to understand what the GOP’s definition of ‘small business’ is and what their definition of ‘hurt’ because likely they don’t coincide with your own. In fact the press has been having trouble getting a straight answer out of the GOP as to what they mean when they say those things. The GOP’s definition of small business doesn’t seem to relate to size or economic activity, a small business to them appears to be any business with a limited number of managers. Then you move on to ‘hurt.’ Hurt could be by not extending tax cuts to the wealthy, the wealthy therefor have less money to spend at small businesses. ---
**Author:** ![OldGuy](https://avatars.discourse-cdn.com/v4/letter/o/3bc359/32.png) [@OldGuy](https://boards.straightdope.com/u/OldGuy)\ **Post date:** [October 11, 2010, 11:05pm UTC](https://boards.straightdope.com/t/how-does-taxing-personal-income-above-200-250k-hurt-small-businesses/556830/3 "2010-10-11T23:05:29Z")
Congress or the GOP defines a small business as one with a small number of owners or employees (\< 500 as heard variously on several news shows recently) and not a business with with small revenues. So what you and I might think of as not very small can be by their standards. It’s not too difficult imagining a company with 500 employees or owners as generating more than $1 million in income. So cutting taxes at that income level would clearly help those small businesses. But like many things, you have to take what a politician says and figure out how it’s true and if that’s the particular truth you’re interested in rather than the truth they wish to convey. ---
**Author:** ![Rand\_Rover](https://avatars.discourse-cdn.com/v4/letter/r/db5fbb/32.png) [@Rand\_Rover](https://boards.straightdope.com/u/Rand_Rover)\ **Post date:** [October 11, 2010, 11:09pm UTC](https://boards.straightdope.com/t/how-does-taxing-personal-income-above-200-250k-hurt-small-businesses/556830/4 "2010-10-11T23:09:42Z")
Well, here’s one way to think about it. Say you look at making an investment under current tax rates, and the investment satisfies your criteria (ie, the range of possible returns, the probability of each return in the range, and your cost of capital all work out so that the investment makes sense). Increasing the tax rate lowers your return on that investment without decreasing its cost, which could toggle it down into “doesn’t make sense” territory. ---
**Author:** ![Fear\_Itself](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/fear_itself/32/19637_2.png) [@Fear\_Itself](https://boards.straightdope.com/u/Fear_Itself)\ **Post date:** [October 12, 2010, 12:37am UTC](https://boards.straightdope.com/t/how-does-taxing-personal-income-above-200-250k-hurt-small-businesses/556830/5 "2010-10-12T00:37:21Z")
> [@Rand\_Rover](#): > > Well, here’s one way to think about it. Say you look at making an investment under current tax rates, and the investment satisfies your criteria (ie, the range of possible returns, the probability of each return in the range, and your cost of capital all work out so that the investment makes sense). Increasing the tax rate lowers your return on that investment without decreasing its cost, which could toggle it down into “doesn’t make sense” territory. And why would that be a problem for small business? Is there a shortage of capital? ---
**Author:** ![dracoi](https://avatars.discourse-cdn.com/v4/letter/d/90db22/32.png) [@dracoi](https://boards.straightdope.com/u/dracoi)\ **Post date:** [October 12, 2010, 1:11am UTC](https://boards.straightdope.com/t/how-does-taxing-personal-income-above-200-250k-hurt-small-businesses/556830/6 "2010-10-12T01:11:50Z")
The problem has to do with how income flows through to the owners. Most small businesses - sole proprietors, S Corporations and partnerships - have the owners pay tax on the business income, whether or not the business paid the owner anything and whether or not there were positive cash flows. So, let’s say you’re a 20% owner of a company that normally makes $10 million in sales and $1 million in profits. This year, the company takes all $1 million in profits and buys a new building. As a result, they cannot pay you any dividends/distributions - the company has spent every bit of profit and has no cash left. But the tax code only allows them to deduct the cost of the building over 39 years, which means the company’s profits are only reduced by 1,000,000/39= 25,641. You now have $195,000 in profit flowing onto your personal tax return, which is clearly enough to put you up over $250k in earnings if you take even a small salary. Another example would be the same company spending the $1 million on inventory they haven’t sold yet. The cash is gone, but they can’t deduct the expense yet. I hear this all the time from my business owners - “How can I owe tax on profits when I have no cash in the bank?!” Well… that’s just how it works. The cash is in assets and inventory and not deductible yet. Anyway, your question is how it hurts the business itself rather than just the owners. The way it hurts the business is simple… the 20% owner says “If I’m going to owe $60,000 in taxes if we buy a building, I’m going to vote against buying a building. Let’s just delay our expansion.” And now the company has limited its growth. More importantly, it also put off the purchase (hurting the real estate market) and put off additional hiring (hurting the job market). In case you don’t think this is a real concern: I have a client who will make a decision in the next two weeks whether to 1) stuff extra cash into his personal retirement plan, 2) buy a new building or 3) improve his existing building. A law passed about two weeks ago means #3 is now his most likely course of action (since the law applies section 179 expensing to leasehold improvements and gives him the biggest deduction now with the greatest benefit long-term). ---
**Author:** ![Rand\_Rover](https://avatars.discourse-cdn.com/v4/letter/r/db5fbb/32.png) [@Rand\_Rover](https://boards.straightdope.com/u/Rand_Rover)\ **Post date:** [October 12, 2010, 1:15am UTC](https://boards.straightdope.com/t/how-does-taxing-personal-income-above-200-250k-hurt-small-businesses/556830/7 "2010-10-12T01:15:59Z")
> [@Fear\_Itself](#): > > > [@Rand\_Rover](#): > > > > Well, here’s one way to think about it. Say you look at making an investment under current tax rates, and the investment satisfies your criteria (ie, the range of possible returns, the probability of each return in the range, and your cost of capital all work out so that the investment makes sense). Increasing the tax rate lowers your return on that investment without decreasing its cost, which could toggle it down into “doesn’t make sense” territory. > > And why would that be a problem for small business? Is there a shortage of capital? I don’t understand your question. ---
**Author:** ![bleibtreu](https://avatars.discourse-cdn.com/v4/letter/b/7c8e57/32.png) [@bleibtreu](https://boards.straightdope.com/u/bleibtreu)\ **Post date:** [October 12, 2010, 1:39am UTC](https://boards.straightdope.com/t/how-does-taxing-personal-income-above-200-250k-hurt-small-businesses/556830/8 "2010-10-12T01:39:59Z")
> [@dracoi](#): > > So, let’s say you’re a 20% owner of a company that normally makes $10 million in sales and $1 million in profits. This year, the company takes all $1 million in profit My reaction as 20% owner would probably be to suggest that we re-think our corporate structure, because our S-Corp setup no longer works for us the way it did when we were a struggling startup. The reason we chose to incorporate that way was because it offered distinct tax benefits, but our growth has changed that situation. We actually should have anticipated that before this point and dealt with this earlier, but we dropped the ball and can only blame ourselves. Or, we could just blame the tax laws, even though they are still exactly what they were when they were working in our favor. ---
**Author:** ![Fear\_Itself](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/fear_itself/32/19637_2.png) [@Fear\_Itself](https://boards.straightdope.com/u/Fear_Itself)\ **Post date:** [October 12, 2010, 1:52am UTC](https://boards.straightdope.com/t/how-does-taxing-personal-income-above-200-250k-hurt-small-businesses/556830/9 "2010-10-12T01:52:57Z")
> [@Rand\_Rover](#): > > > [@Fear\_Itself](#): > > > > And why would that be a problem for small business? Is there a shortage of capital? > > I don’t understand your question. If some investors decide not to invest because it doesn’t make sense, it will be more significant when there is a shortage of capital. Is there a shortage of capital? ---
**Author:** ![Rand\_Rover](https://avatars.discourse-cdn.com/v4/letter/r/db5fbb/32.png) [@Rand\_Rover](https://boards.straightdope.com/u/Rand_Rover)\ **Post date:** [October 12, 2010, 2:30am UTC](https://boards.straightdope.com/t/how-does-taxing-personal-income-above-200-250k-hurt-small-businesses/556830/10 "2010-10-12T02:30:53Z")
> [@Fear\_Itself](#): > > > [@Rand\_Rover](#): > > > > I don’t understand your question. > > If some investors decide not to invest because it doesn’t make sense, it will be more significant when there is a shortage of capital. > > Is there a shortage of capital? Ah. OK. We are talking about different things. You are talking about an investor deciding whether or not to invest in a business. I am talking about a business deciding whether or not to make an investment (e.g., in a new plant or new equipment). So, shortage of capital doesn’t factor into what I’m talking about. ---
**Author:** ![Ludovic](https://avatars.discourse-cdn.com/v4/letter/l/7ab992/32.png) [@Ludovic](https://boards.straightdope.com/u/Ludovic)\ **Post date:** [October 12, 2010, 3:06am UTC](https://boards.straightdope.com/t/how-does-taxing-personal-income-above-200-250k-hurt-small-businesses/556830/11 "2010-10-12T03:06:14Z")
> [@Fear\_Itself](#): > > If some investors decide not to invest because it doesn’t make sense, it will be more significant when there is a shortage of capital. > > Is there a shortage of capital? No, of course not. In fact, we should keep the tax rates low, because low tax rates always encourage investment by providing capital. Keeping the tax rates low will allow us to continue to enjoy the unprecedented level of capital investment we are experiencing today. ---
**Author:** ![J\_Cubed](https://avatars.discourse-cdn.com/v4/letter/j/c6cbf5/32.png) [@J\_Cubed](https://boards.straightdope.com/u/J_Cubed)\ **Post date:** [October 12, 2010, 4:44am UTC](https://boards.straightdope.com/t/how-does-taxing-personal-income-above-200-250k-hurt-small-businesses/556830/12 "2010-10-12T04:44:02Z")
> [@bleibtreu](#): > > My reaction as 20% owner would probably be to suggest that we re-think our corporate structure, because our S-Corp setup no longer works for us the way it did when we were a struggling startup. > > The reason we chose to incorporate that way was because it offered distinct tax benefits, but our growth has changed that situation. We actually should have anticipated that before this point and dealt with this earlier, but we dropped the ball and can only blame ourselves. This, and if there’s something preventing them from reorganizing or from making penalty-free legitimate business investments, then **that’s** what’s wrong with the tax system, not the top marginal income tax rate. ---
**Author:** ![Desert\_Nomad](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/desert_nomad/32/177_2.png) [@Desert\_Nomad](https://boards.straightdope.com/u/Desert_Nomad)\ **Post date:** [October 12, 2010, 7:01am UTC](https://boards.straightdope.com/t/how-does-taxing-personal-income-above-200-250k-hurt-small-businesses/556830/13 "2010-10-12T07:01:33Z")
My wife and I have a small business and would like to be able to leave some money in the company but not spend it right away but with the $250K limit it is better to simply spend it now or we end up giving it to Washington. Since we don’t even live in the USA, it just hurts to send money overseas every year. ---
**Author:** ![dracoi](https://avatars.discourse-cdn.com/v4/letter/d/90db22/32.png) [@dracoi](https://boards.straightdope.com/u/dracoi)\ **Post date:** [October 12, 2010, 12:11pm UTC](https://boards.straightdope.com/t/how-does-taxing-personal-income-above-200-250k-hurt-small-businesses/556830/14 "2010-10-12T12:11:26Z")
> [@bleibtreu](#): > > My reaction as 20% owner would probably be to suggest that we re-think our corporate structure, because our S-Corp setup no longer works for us the way it did when we were a struggling startup. > > The reason we chose to incorporate that way was because it offered distinct tax benefits, but our growth has changed that situation. We actually should have anticipated that before this point and dealt with this earlier, but we dropped the ball and can only blame ourselves. > > Or, we could just blame the tax laws, even though they are still exactly what they were when they were working in our favor. The highest marginal tax rate on individuals is 33%. For a C Corporation, it averages 35% (though it peaks at 39% for some income brackets, it goes back down to 35%). Owners pay an additional 15% tax on dividends from a C Corporation. So an S Corporation setup is still paying at least 2% less tax on corporate profits, and at least 17% less on profits distributed as dividends. In any event, I’m not arguing for or against the proposed tax changes. I’m just wanting to give the OP a scenario that explains how he (as a small business owner and not an individual) should be concerned about tax breaks expiring for those over $250k in income. ---
**Author:** ![Rigamarole](https://avatars.discourse-cdn.com/v4/letter/r/77aa72/32.png) [@Rigamarole](https://boards.straightdope.com/u/Rigamarole)\ **Post date:** [October 12, 2010, 4:31pm UTC](https://boards.straightdope.com/t/how-does-taxing-personal-income-above-200-250k-hurt-small-businesses/556830/15 "2010-10-12T16:31:30Z")
Because if rich people became slightly less rich, they might have to _choose_ between starting a new business and golfing in the Caribbean every other Sunday, and that’s a choice no man should ever have to make. ---
**Author:** ![Really\_Not\_All\_That\_Bright](https://avatars.discourse-cdn.com/v4/letter/r/e8c25b/32.png) [@Really\_Not\_All\_That\_Bright](https://boards.straightdope.com/u/Really_Not_All_That_Bright)\ **Post date:** [October 12, 2010, 4:48pm UTC](https://boards.straightdope.com/t/how-does-taxing-personal-income-above-200-250k-hurt-small-businesses/556830/16 "2010-10-12T16:48:10Z")
The tax code only allows businesses to deduct the cost of a building over 39 years, even if they purchase it outright for cash? ---
**Author:** ![dracoi](https://avatars.discourse-cdn.com/v4/letter/d/90db22/32.png) [@dracoi](https://boards.straightdope.com/u/dracoi)\ **Post date:** [October 12, 2010, 5:18pm UTC](https://boards.straightdope.com/t/how-does-taxing-personal-income-above-200-250k-hurt-small-businesses/556830/17 "2010-10-12T17:18:22Z")
> [@Really\_Not\_All\_That\_Bright](#): > > The tax code only allows businesses to deduct the cost of a building over 39 years, even if they purchase it outright for cash? Yep. 39 years is the standard class life for commercial real property. It goes down to 27.5 years for residential rental property. Other assets also have lives that require them to be deducted (depreciated/amortized) over several years (5, 7, 10 and 15 are the most common lives), but there are many provisions in the law that allow an accelerated deduction, including bonus depreciation (50% write-off in the first year for certain property bought new), Sec 179 (up to 100% write-off election in the first year, if various parameters are met) and Sec 181 (100% write-off for film/media productions). But buildings are not permitted any of those accelerated methods. Neither are most intangible assets which are often amortized over 15 years. I don’t want to make this into a policy debate, but I think the ability to expense asset purchases is a lot more important for small businesses and for stimulating the economy than the tax brackets themselves. ---
**Author:** ![BVLA](https://avatars.discourse-cdn.com/v4/letter/b/858c86/32.png) [@BVLA](https://boards.straightdope.com/u/BVLA)\ **Post date:** [October 13, 2010, 7:59pm UTC](https://boards.straightdope.com/t/how-does-taxing-personal-income-above-200-250k-hurt-small-businesses/556830/18 "2010-10-13T19:59:27Z")
So what this tells me is that the problem is not the income tax rate. But the problem here is the the accounting/tax rules that show taxable take home income that actually is never actually brought home. It seems some corrections to the code in this area would be a great compromise for the small businesses that are affected by this. But in the world of soundbites its much more effective for wealthy people and unaffected business owners to use this as a excuse to argue in an attempt to increase their personal bottom line. ---
**Author:** ![sweeteviljesus](https://avatars.discourse-cdn.com/v4/letter/s/898d66/32.png) [@sweeteviljesus](https://boards.straightdope.com/u/sweeteviljesus)\ **Post date:** [October 13, 2010, 10:30pm UTC](https://boards.straightdope.com/t/how-does-taxing-personal-income-above-200-250k-hurt-small-businesses/556830/19 "2010-10-13T22:30:15Z")
Dracoi, you mention that this is an issue for one of your clients. How big an issue is this nation-wide? Will raising taxes by letting the cuts expire for income \> $250k offset this in any way? Thanks, Rob ---
**Author:** ![dracoi](https://avatars.discourse-cdn.com/v4/letter/d/90db22/32.png) [@dracoi](https://boards.straightdope.com/u/dracoi)\ **Post date:** [October 14, 2010, 2:05am UTC](https://boards.straightdope.com/t/how-does-taxing-personal-income-above-200-250k-hurt-small-businesses/556830/20 "2010-10-14T02:05:48Z")
> [@sweeteviljesus](#): > > Dracoi, you mention that this is an issue for one of your clients. How big an issue is this nation-wide? Will raising taxes by letting the cuts expire for income \> $250k offset this in any way? Newsweek estimated that America’s publicly traded corporations have $2 trillion in cash available to spend. Those tend to be the biggest companies, but it confirms my sense that businesses can come up with a ton of money to spend if they have an incentive. Right now, companies are being very cautious with cash because 1) they can’t count on cheap financing as a reserve like they could have three years ago and 2) there are a lot of regulatory issues that are causing hesitancy. By regulatory issues, I would point to three in particular: health care costs for existing employees, penalties for unemployment if they hire early and get nailed by a double-dip recession and the unknown element of carbon/energy taxes. None of these things are related to tax rates, you might note. Also, my experience is that people are mostly worried about relative differences in tax. For example, the difference between 33% maximum on owners of S Corps vs. 35% on C Corps is a big motivator to be an S Corp. If you raise BOTH rates - say, to 38% and 40% - you won’t really change behavior because the marginal advantage is the same. Raising the first rate to 36% while leaving the other at 35% would cause a significant number of people to change how they’re taxed. My experience is that businesses are also very focused on the short term. Give a person a choice between $10,000 in tax savings today and $2,000 in savings for 5 years, and everyone prefers the first one. This is part of why I’m such a fan of accelerated expensing for business assets - the big deduction this year replaces small deductions over future years. There is a cost to the government in giving the big tax savings today and then recouping it… but at least it is recouped. It’s more like TARP (which is being repaid) than the Obama stimulus (which is just being paid). Lowering the income tax rates is money that’s just plain gone. I’m still busy finishing up tax returns on extension, so I still have to do some research on the specific provisions that are expiring (or not) in the Bush tax cuts. What I’ll be looking for are those two factors: relatives changes in tax rates and short-term incentives. Anything else is just not a big motivator for behavior. [Next page](https://boards.straightdope.com/t/how-does-taxing-personal-income-above-200-250k-hurt-small-businesses/556830.md?page=2)