President Joe Biden speaks as he visits Smith Flooring, a small minority-owned company, to promote his U.S. rescue plan in Chester, Pennsylvania, on March 16, 2021.
Andrew Caballero-Reynolds | AFP | Getty Images
Several important political priorities in President Biden̵
New data on business formation is heading in the right direction, and it is a signal of confidence in the economic recovery.
“The foundation is set for a major economic recovery and leaps back to pre-pandemic levels, but playing with tax rates at a time like this has a calming effect,” said Karen Kerrigan, president of the Small Business & Entrepreneurship Council.
The highest-profile proposals include an increase in corporate tax to 28% at a time when companies such as Amazon have paid an effective tax rate of zero in recent years. Many independent entrepreneurs are also concerned about the protection of labor in the PRO Act, which may require gig-economy players such as Uber and DoorDash to treat independent entrepreneurs as employees. The administration is more pronounced about its targeting of the concert economy.
No big Biden policy surprises, but questions
These proposals should not come as a surprise – they were part of Biden’s platform while running for the presidency. And ambitious spending initiatives on infrastructure and America’s workers could lead to benefits in terms of economic growth and government support in future financing of employee benefits.
“Proponents of the president’s proposal will bring the broad economic benefits,” said Kevin Kuhlman, vice president of federal government at the National Federation of Independent Business, and there are smaller business sectors where spending can result in growth such as broadband and infrastructure projects. But even if these projects last for a few years, they are temporary, he said, while the impact of tax changes could be permanent.
“They certainly see infrastructure spending very positively, but the timing is everything, and when they come out of a year of devastation and just dig out a big economic hole, they just fear what the broader effects of tax increases will be,” Kerrigan said. “Is it just opening salvo? We spend a lot of money. There will be more tax increases to pay beeps beyond what we know about today, and that’s a big concern,” she added.
Increase in corporation tax and small businesses
Anthony Nitti, national tax partner at RubinBrown, said business owners who have been paying attention should not wake up in shock after Biden’s latest tax policy was revealed this week. There were no major surprises in recent tax proposals, but there were a few additions and omissions that are notable.
For many small businesses, it would be good news that the president did not highlight any increase in payroll contributions to social security, where a doubling from the current level has been under consideration at higher income levels. “We did not see it in the latest proposal,” Nitti said. “Business owners will be relieved.”
Nor was there any new talk of changes in the pass-through deduction for companies set up as S-companies and partnerships that could be phased out at higher income levels. However, if the pass-through treatment, which allows for a 20% deduction for business income, is not revised and C-companies are subject to a higher corporate tax rate, there may be a reversal in the way small companies incorporate in the future, Nitti says.
S-corps and partnerships can end up in a favorable tax position compared to a C-corps if the corporation tax rate rises to 28% – if Congress settles to 25%, the math would change. However, with the 20% income deduction available for recurring units, even with a top tax rate of almost 40%, the structure can be more appealing. Cutting corporation tax to 21% under Trump eliminated the benefits of the pass-through structure, but it could “change dramatically,” Nitti said.
Kuhlman said there are major concerns about the C-corp issue for the smallest companies because the increase in corporation tax is not discussed in terms that would be graduated for smaller companies with lower income levels. “The goal here is the largest companies, many of which are listed that do not pay corporation tax, but the problem with that is that two-thirds or even more than the companies are small companies,” Kuhlman said, noting that the majority of C-corps have receipts for less than $ 1 million.
Tax on capital gains and business ownership
Removing the current rate of long-term capital gains for individuals with taxable income over $ 1 million means that it will go to the same level as the top ordinary income rate of 39.6%, which would be close to double the 23.8 % top rate under applicable law and would have major consequences for any sale of a business to an owner above the taxable income limit.
In a recent analysis written by Nitti for Forbes, he concluded that for companies currently set up as C companies – and more went to this structure after the 2017 tax law changes – combined with the proposed increase in the corporate rate from 21% to 28%, the total top rate on shareholders would increase from approx. 40% to almost 60%.
“If I’m a business owner, I’m leaving this week with two thoughts: I do not know if my business will be in the right structure, and if I do not plan to continue to do business in the long run, I better speed up my exit strategy whose capital gains will really double in the future, ”said Nitti.
The Biden administration said there will be protection for farms and family-owned businesses that go back generations, but experts say it is still unclear what specific policy details will protect these devices.
“Tax policy is the biggest negative from my perspective. Small to medium-sized businesses want to operate in a political environment with stability,” Kerrigan said. “Back and forth over tax rates makes it difficult to plan.”
PRO law and employee benefits
Some of the tax proposals focused on wealthy individuals will be negative for the minority of small business owners in the highest income groups, and many independent entrepreneurs may not have this as a major concern, but it is the PRO Act that seeks to classify more freelancers as employees, it is the priority of the Biden policy that this segment of the small business does not like much. A recent Alignable survey found that 45% of small businesses said it would ruin their business.
“It seems that these policies are targeted at large companies, but the problem is that the burden is falling on smaller companies,” Kuhlman said. He said the “ABC test” used to qualify employees under the PRO Act would harm independent contractors and franchisees as well as any company that requires the flexibility of using independent contractors.
There is also a push and pull in other progressive policy initiatives. President Biden’s support for child labor tax deductions and child tax deductions may benefit small businesses by reducing wage pressures, but these benefits can be diminished when opposed to the president’s support to raise the federal minimum wage to $ 15 as well as sick and family leave benefits. which may impose additional financing requirements on employers.
Recent proposals provide a more complete picture of what the administration is looking for, but these many elements of employee benefits that can flow through to employers in the form of increased labor costs are leaving the small business sector, at least right now, “with more questions than answers , “according to Kuhlman. While public support for Biden’s policy may focus more on the benefits of using infrastructure, small business owners are more accustomed to looking at the cost side and being sensitive to it. “There is some concern about how balance does not exactly match and the government will have to return for more,” he said.