April 10, 2019
By Rhonda Abrams
My CPA emailed me Friday night, letting me know the taxes I’ll have to pay on my small business income. Gulp—those number are high! (Note to CPAs—wait til Monday to clobber small business clients with bad news, let us enjoy our weekends.)
Is it because I had a banner year? Nope, my income was down. How about that new tax policy passed in 2017—wasn’t that supposed to help small business owners? Well, it helped businesses, all right. Overwhelmingly, tax breaks went to huge corporations; we small business owners were (once again) left behind. It’s time to change that.
“There’s no reason tax cuts had to favor large corporations,” said Anne Zimmerman, small business CPA and co-chair of Businesses for Responsible Tax Reform (BRTR), a coalition of small business organizations working to improve tax laws for small companies.
The “Tax Cut and Jobs Act” of 2017 – the “Trump tax cut” — was supposed to include breaks for small businesses; that relief was mostly window dressing. Yes, there was a 20% deduction of pass-through income, but only for some—certainly not all—sole proprietors and small businesses and that break expires in 2025. Meanwhile, large corporations got a permanent 40% reduction of their tax rate.
In fact, 21% of small business owners expect to pay more in taxes this year, according to a survey by Capital One.
Tax breaks and loopholes result in ridiculously low—or no—taxes for some large corporations. Amazon, with $11 billion in profits, paid no—ZERO—federal taxes for 2018. And none last year. Netflix had $845 million in profits, paid no federal or state taxes, and received a $22 million federal tax rebate!
That means small businesses and individuals pay more. Even in red states, small business owners are increasingly recognizing that the tax code is tilted against them. In a March, 2018 BRTR poll of small business owners in four Senate battleground states (Arizona, Tennessee, Maine, Nevada), 54% of small business owners said the tax law favors large corporations over small businesses and 55% say it creates an uneven playing field.
What could be done to level the playing field with tax policies that really serve small businesses?
“Rolling back some of the 40 percent corporate tax break could fund a host of initiatives,” said Zimmerman, “…including equalizing tax rates between small and large businesses, offering tax relief on payroll taxes, doubling the start-up deduction to encourage entrepreneurs to launch new businesses, or even make the first $25,000 in small business profits tax free.”
Like BRTR, Small Business Majority, an organization advocating for Main Street businesses, suggests a tax deduction of the first $25,000 for small businesses and the self-employed.
But I have other suggestions for small-business friendly tax policies, including:
1. First employee tax credit
Hiring your first employee is daunting and expensive. But having an employee enables a sole proprietor to grow and immediately creates jobs. A one-time “first employee tax credit” would encourage many one-person businesses to hire.
2. Income averaging
Income for very small businesses can vary dramatically from year to year. Decades ago, a small business could average up to five years of income. Yes, you can carry forward or backward an income loss, but not every bad year results in a loss. Allow small companies—with an income cap (to stop companies like private equity firms)—to income average.
3. Tax credits for opening small companies in opportunity zones
There are tax benefits for investors who invest in property in distressed areas, but why not assist the people who live in those zones in creating their own opportunities?
4. Tax credits for small businesses when big corporations get incentives
When Amazon was offered millions of dollars in incentives from cities wanting them to open offices, did independent bookstores or local retailers get any tax breaks? Heck, no. Let’s change that. Every time a jurisdiction gives tax breaks to large corporations, local small businesses need to receive tax breaks or credits too.
5. Fair internet tax
Any item sold in a state or locality—whether online or from a brick-and-mortar store should be taxed exactly the same.
Finally, let’s insure that health care and child care are 100% deductible for the self-employed, gig workers, and small businesses, so we can all stay healthy and go to work.