about the soon to expire Bush tax cuts......

[tulsakatz]

I was watching yesterday's Hardball and Chris was talking to a democrat (I forget who that was) and a republican from Wisconsin named Jack Ryan.
So they were talking about the Bush tax cuts to the very wealthy and whether or not they should expire. Of course, Ryan said we should not let them expire......nothing new about that. But he said something else that seemed odd to me. He said 75% of those recipients are small businesses who file as a person instead of as a business and if the tax cuts expire those businesses would be hurt.

This sounds fishy to me for a couple of reasons. First of all, if they're a business, why aren't they filing as a business? What advantage is there in filing as a single person instead of a business? I'm sure as a business, they could get better breaks especially related to taxes. And secondly, why are such a large percent of small businesses doing this? And even if the tax cuts do expire, couldn't they still file as business and get some tax breaks like that?

So what do you guys think?

[DailyGrind51]

1. They have very bad accountants!

A tax accountant will tell you what filing status will prove most advantageous. If they had the opportunity to file at corporate status, yet chose to file as individuals, it is THEIR fault.

[nradisic]

2. It's a lie....

Very, very few small business owners have take home pay and make over $250,000....like most things coming out of any Republican's mouth...it is a lie...

[DailyGrind51]

6. When my cousin and her husband opened a small computer store, they survived on $150/week "take home"

for the first year!

[Atman]

3. It's basically b.s., playing with the term "small business."

They know that you'll think of a "small business" just as you stated, as a mom and pop operation. When I was self-employed, I was officially a "business" according to the town. I had a business license, I had to pay business rates for utilities, etc. But as a sole proprietor, I had the option of filing the much simpler Schedule C, etc. I "real" business has crazy paperwork to file, and most sole proprietor don't make enough money to warrant the added expense of accounting firms and lawyers to do their taxes. BUT -- the government defines "small business" much differently. I'm not sure what the current number is, but I recall not too long ago when you could 500 employees and still be considered a "small" business. If you have that many employees, you're probably already making a fairly substantial income, and if you're actually filing as a person instead of a business, you're getting bad advice from your accountant (and the Republicans).

Essentially, it's just another Republican lie/scare tactic, an attempt to confuse and frighten the guy running the ice cream stand who employs two high-school kids part-time during the summer. He's not making $250,000 (the cut-off for the return to pre-Bush era tax rates), and wont be impacted, but the Republicans want to make him think he'll be taxed to death. It's a lie.

As usual.

[MAcciard]

12. I think you are confusing "take home" pay, with revenue

You are taxed on your revenue. That is much more than what you actually get to keep. My business had gross receipts last year of $176,452. After my expenses: materials, supplies, equipment, temp. labor, etc. I had a net of only $37,945. I had $6,000 in taxes on that income.

It is very easy to have a lot of revenue, but not a lot of income.

My brother in law is a master plumber. He has his own business. Gross revenues last year; $493,559. Net income: $83,000. Taxes owed: $ 12,000.

My experience is that small business, whether it is the self employed plumber, or the guy who employs 1-50 people, it is very easy to earn more than $250,000. Most of these businesses do.

[RockaFowler]

13. Uh What??

You're not taxed on what your gross reciepts are. I think you need a new accountant.

[Atman]

17. Thank you

I was equally baffled by that explanation.

[MAcciard]

18. Look at your 1040

If you are a sole proprietor you fill out schedule C to declare your income. You start with your gross receipts. You are allowed to take certain business expenses, not necessarily ALL your expenses. Therefore there is usually a difference between what you end up being taxed on as income, and what you actually pocketed.

That is before you pay the self employment taxes, which ARE based on your receipts, less certain expenses, however you can still owe self employment taxes if your business shows a loss.

Even if it is just you, self employed as a plumber, electrician, etc. Usually your costs to operate your business exceeds the deductability of those expenses. It is not the same as looking at the difference between gross and net on your paycheck stub.

[Warren Stupidity]

4. partnerships, LLCs, self employed individuals

pass through business income to their 1040 as personal income.

The argument is stupid anyway. So what if 75% of people making more than 250K are 'small business owners'? They are earning 250,000 after expenses. That is a good income. They were earning 250K before the bushcuts too. This is a classic argument non sequitur. Did anyone ask why that matters? Are these small business owners going to quit and get a salary job because their marginal tax rate went from 35% to 38%? Why would they do that?

[Raspberry]

5. Jack Ryan?

Could it have been Paul Ryan? He's the author of that Roadmap thingy that some on the right have been touting. I have mixed feelings about it. All this spending cannot be good. It really scares me. Supposedly, Ryan's Roadmap (which includes sacrifices on ALL sides) is the only thing that the CBO (or some other agency) has said can for-sure get us out of this mess. I don't know about that, but I do know that even some Dems are getting really nervous about the deficit. Scary stuff. We've never been this deep in the hole, probably not even during WWII.

Anyway, businesses can organize in different ways (DBA, LLC, etc.) and it only makes sense that an accountant, for instance, who works out of his own home may choose to file one tax form, rather than personal and business forms.

[sinkingfeeling]

10. If you can ever consider approval of Ryan's Roadmap for America's Future, then you're on

the wrong site!

He wants to eliminate Social Security, medicaid, Medicare, and SCHIP, along with all corporate income taxes, capital gains and estate taxes, and ATM. He's for increasing all tax rates for the middle and lower classes while further reducing income taxes paid by those making over $633,000 a year!

http://www.truth-out.org/rep-paul-ryan-turns-american-enterprise-institute-build-support-his-roadmap61710

[econoclast]

7. Actually it makes perfect sense.

It is the flip side of the statistic that most corporations pay no income taxes. What others above have correctly noted is that the corporate tax structure is preferable. So lots of small businesses are organized as corporations. So, how does the small business owner get paid? They list themselves as "president" or "CEO"and pay themselves a salary. If the corporation is showing a profit, the CEO raises their salary. If they leave the money in the business it gets taxed twice ... Once as corporate profit and again as personal income once the money is taken out later. Why do that? Just pay yourself a bonus to zero out the corporate books and just pay taxes once on the money as personal income. So the corporation pays no income taxes. (we know that from long history) but the owner pays personal income tax on that money.

Yeah. It makes sense.

Maybe we don't care. Hey, 250,000 IS a lot of money. But let's not pretend we are "helping small business" either.

[WonderGrunion]

8. That would only be true if their business had no employees

In which case, those tax cuts don't help our economy (at least the employment numbers) anyway.

He's probably counting private practice doctors, lawyers and accountants in those figures.

[Lil Missy]

9. He made that up. It's bullshit.

[MAcciard]

11. It is actually very simple

As a small business owner myself, I am not incorporated. I am a sole proprietorship, as are most small businesses. As a sole proprietor I must file all of my business income on my 1040. I get to deduct certain business expenses, like my cost of materials, labor, equipment, etc. but it is all on my personal income taxes.

And on top of my personal rate, I have to pay BOTH my portion of FICA/MEDI, AND the employers portion. These are "self employment" taxes, that even if my business loses money, as it did last year, I STILL owe the IRS tax money!

So, yes, it is very easy to a small business to have gross revenues of $200,000- $300,000/yr. but the owner may only have an actual income of $50,000 or less. ALL of it is subject to tax at a personal rate, PLUS self employment taxes.

[spanone]

14. kill the cuts

[alc]

15. I have owned a couple of small businesses and worked for others.

I never made close to $250k/year but I worked for owners who did and know some others who do.

First of all, if they're a business, why aren't they filing as a business?

If you are an S corporation, the corp doesn't pay taxes. All corporate income is reported on owners' personal taxes. One alternative is the C corporation. In those, the corporation pays taxes on all income (after salaries, etc). But you have to pay personal taxes on dividends (transferring income to the owners). That's a pretty significant double taxation for a small company. Lots of small businesses have friends and family who invested $10k so you can't pay them a salary to avoid the double tax. You can pay working owners a higher salary, but you don't know the net until the end of the year so you don't know how much to pay. Plus, messing with salaries of "owners" can get you in trouble so you want to pay yourself a reasonable amount.

Some businesses are pretty consistent in revenue. In other cases (e.g. mine) I made $70k one year then $35k the next and one year I didn't make anything because I lived off savings to try to get the company going. My employees always got their salary but I didn't pay myself many months. I would have loved to quadruple my customers and employees (3 to 12), but I wasn't a good salesman and never did grow like some of my friends. Assuming I had grown 4x, I could make $280k one year and $140k the next. I didn't do any questionable deductions but would have started doing whatever I could to go over the limit on "good" years. I had years with $0 or %50 income and always less than I could have made working for someone else but I can't average all of those years once I hit the $250k number.

When you're making $50k with potential to grow to $100k,$200k,... you do consider taxes and personal post-tax dollars when deciding how much effort you are willing to put into growing. I decided family, and being happy with my job (i.e. not focusing on sales) were more important that dollars but I know others who made different decisions. I don't know how many owners will decide growth isn't worth it if taxes go up, but I'm sure some will.

[EC]

16. He's talking about the 1099's

people that are hired as independant contractors...very few make over $250,000. so he's being cute. His name is Paul by the way...I've always called him Eddie Munster, because of his widow's peak.

[econoclast]

19. How few are very few?

I was curious so I went to IRS.gov and found data for 2008. Waaayyyyy over on the right was individual income from S corporations and Partnerships.
Total number of taxable returns with this type of income was about 4.1 million. Total with income over 200,000 was about 1.3 million. Apparently the IRS doesn't have a category for over 250,000.

So figure about 30% taxpayers with income from partnerships and S corps fall into the over 250000 bucket. These are pretty clearly small business people. I have to go back to check the sole propriotor numbers. Should have written them down.