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Biden’s tax plan targets big business, so why are small businesses worried?

Several prominent political priorities in 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 at their scale, pundits on small business policy increasingly feel it may be too soon and Main Street may become. a financial victim in several important ways at a time when many operations are just recovering from the pandemic.

The data on the creation of new businesses is pointing in the right direction and this is a sign of confidence in the economic recovery.

“The groundwork is laid for a great economic recovery and a return to pre-pandemic levels, but playing around with tax rates at a time like this has a dampening effect,” said Karen Kerrigan, President of the Small. Business & Entrepreneurship Council.

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The most high-profile proposals include an increase in corporate tax to 28% at a time when companies like Amazon have paid an effective tax rate of zero in recent years. 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 making itself heard more about its targeting of the odd-job economy.

No big surprises on Biden’s politics, but questions

These proposals should come as no surprise – they were part of Biden’s platform during his presidential bid. And ambitious spending initiatives for 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 the spending could cause a loss. growth such as 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 certainly see infrastructure spending in a very positive light, but timing is everything, and coming out of a year of devastation, and just digging 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 the piper beyond what we know today, and that’s a big one. concern, ”she added.

Corporate and small business tax increase

Anthony Nitti, national tax partner at RubinBrown, said careful business owners should not wake up in shock after Biden’s latest tax policy was unveiled this week. There have been no big surprises in the latest tax proposals, but there have been some notable additions and omissions.

For many small businesses, it will be good news that the President has not pointed out any increase in payroll taxes for Social Security, where a doubling of the current level has been considered for higher income levels. “We didn’t see that in the last proposal,” Nitti said. “Business leaders will be relieved.

There were also no new discussions on changing the transfer deduction for businesses created as S corporations and partnerships, which could be phased out at higher income levels. But if the passed-on 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 in the way that small businesses would come together in the future, Nitti said. .

S bodies and partnerships could find themselves in a tax advantageous position over a C body if the corporate tax rate was 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 there were great concerns about the C corp issue for smaller companies, as the corporate tax hike is not being discussed in terms that would be progressive for small businesses with lower income levels. “The target here is the bigger companies, many of which don’t pay corporate tax, but the problem with that is that two-thirds or even more of that of companies are small companies,” Kuhlman said, noting that the majority of C corps have revenues of less than $ 1 million.

Capital gains taxes and business ownership

Eliminating the current rate on long-term capital gains for individuals with taxable income over $ 1 million means that it would rise to the same level as the maximum 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 sale of a business for an owner above the taxable income threshold.

In a recent analysis written by Nitti for Forbes, he concluded that for companies currently incorporated as C – and more have gone to this structure after the 2017 tax law changes – when coupled with the proposed increase. the corporate tax rate from 21% to 28%. , the maximum combined rate applied to shareholders would drop from around 40% to almost 60%.

“If I am a business owner, I leave this week with two thoughts: I don’t know if my business will be in the right structure and if I don’t intend to continue to own the business for the long term. , I’d better speed up my exit strategy if capital gains are really going to double in the future, ”Nitti said.

According to the Ewing Marion Kauffman Foundation, about 75% of the small business community believes the government is prioritizing large businesses over small ones, and many are in favor of increased taxation of large businesses. The Biden administration has said there will be protections for farms and family businesses passing from one generation to the next, but experts say it remains unclear what specific policy details will protect these entities.

“Tax policy is the biggest negative from my point of view. 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.”

The PRO Law and social benefits

Some of the high net worth tax proposals will be negative for the minority of small business owners in the highest income brackets, and many independent contractors might not have this as a major concern, but it is PRO law. , which seeks to classify more freelancers as employees, is Biden’s policy priority widely hated by this segment of the small business community. A recent Alignable poll found that 45% of small businesses said it would destroy their business.

“It seems that these policies are targeting large companies, but the problem is that the onus is on small companies,” Kuhlman said. He said the “ABC test” used to qualify employees under the PRO Act would hurt independent contractors and franchisees, as well as any business that requires the flexibility of using independent contractors.

There is also a push and pull 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 to $ 15, as well as sick and family leave which may place higher funding requirements on employers.

The latest proposals give a more complete picture of what the administration is looking for, but these multiple elements of fringe benefits that can trickle down to employers in the form of increased labor costs are leaving the employment sector. small businesses, at least for now, “with more questions than answers,” according to Kuhlman. While mainstream support for Biden’s policy may focus more on the infrastructure benefits of spending , small business owners are more used to looking at the cost side and being sensitive to it. “There is some concern about how the balance sheet doesn’t exactly line up and the government will have to come back for more,” a- he declared.

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