Small Business Taxation - A Constant Worry

In the most recent survey of small business concerns, The National Federation of Independent Businesses found that the majority of small business owners placed Federal Income Taxes on Small Business Income as their fifth greatest concern. Now, if you are an employee of a business, you might be thinking to yourself "What do I care about small businesses?"

You may not care much about small businesses, but you should. Consider the following:

1. Of the nearly 23,000,000 businesses in the United States, approximately 99.7% are small businesses (firms with less than 500 employees). Nearly 75% of all U.S. businesses do not have any employees while ½ of the United States private workforce is employed by small businesses. Private payrolls comprise 44.3% of payroll dollars.


2. 60% to 80% of net new jobs were created by small business in 2001 and small business sales accounted for 50% of U.S. nonfarm, private gross domestic product.

Factoring in the income and payroll taxes paid by small businesses, it’s easy to see that the health of small business has a significant effect on the health of our economy, the employment of and services provided by the U.S. government to the average citizen (i.e. you, me and our fellow Americans) and our individual economic well-being.

Hopefully, I have convinced any skeptics that small businesses, and their health, are important to all of us, regardless of who writes our paycheck. If that’s true, it then goes without saying that a higher tax burden on small businesses is detrimental to us all.

You may wonder why high business taxes hurt the average consumer. The answer is in a business's cash flow. Every dollar in tax paid reduces a business's ability to purchase equipment needed to stay competitive in the domestic and international market place. Every dollar paid in taxes also reduces the available funds for wage increases or a company’s ability to repay trade and other creditors. Let’s look at an example.

Say you have a company with $9.9 million in taxable income and a 35% tax rate. After tax, the net cash retained by the company is $6.435 million. If you cut the tax rate to 20%, then you can afford to give raises to the tune of approximately $1.856 million and still manage to retain the $6.435 million. For no additional cash out-of-pocket cost, the company can give raises, enhance employee loyalty and create additional taxable income for the United States Treasury. Of course, this is not likely to happen given the Treasury’s need for revenue to pay for spending programs.

So what can the average business person do to about their individual tax burden? The simple truth is that not much can be done beyond simple tax planning strategies and support of organizations advocating reduced taxes on small businesses.

Small business tax planning strategies will be discussed in the tax section of this month’s articles. This article is more generalized in nature and deals with practical steps you can take to legislatively protect your business interests.

First and foremost, if you intend on protecting your business from high tax rates, you must commit yourself to keeping abreast of tax issues that directly affect your business. Aside from reading monthly articles like the one you are currently reading, search the internet for organizations that advocate for small businesses. Here is a short list for your convenience:

1. United States Chamber of Commerce


2. United States Small Business Administration


3. National Federation of Independent Businesses


4. National Association of the Self-Employed


5. National Small Business Association


6. Small Business & Entrepreneurship Council


7. American Small Business Association


8. Various industry groups

Please note that these are only examples. There are numerous industry groups and other small business associations that can help you with advocacy issues. Inclusion in this list is not to be considered an endorsement of any of these listed advocacy groups.

Each of the foregoing sites offers some level of education on current taxation issues affecting small businesses. Many of these organizations offer methods in which you can participate in helping shape tax policy, either directly or indirectly. Regardless of whether you choose to join any of these groups, take advantage of their free resources for reference material to help you educate your elected representatives on the real issues surrounding the success of your business.

The bottom line for your federal taxation concerns is this - get involved. Don’t stand around and bemoan the disadvantages of our current taxation system. In the end, your elected representative will vote to keep his job. Make sure your representatives will try to keep their boss (you) pleased.

Your concerns over the heavy price you pay for federal taxes is a very real concern. Give us a call and let's discuss the taxation issues you have and a) how to minimize those costs and b) how you might be able to have some effect on the your taxes by telling your congressperson or senators just exactly how you feel.

Have a great June.

These articles are intended to provide general resources for the tax and accounting needs of small businesses and individuals. Service2Client LLC is the author, but is not engaged in rendering specific legal, accounting, financial or professional advice. Service2Client LLC makes no representation that the recommendations of Service2Client LLC will achieve any result. The NSAD has not reviewed any of the Service2Client LLC content. Readers are encouraged to contact their CPA regarding the topics in these articles.

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