Today's Guest

Follow on Social:

Episode Summary

Whether you support him or not President Biden is a pretty savvy politician. He’s been waiting all of his political career to put forward proposals that will put him in the history books as making an impact for the social good of society. It is clear from his first 100 days in office that his plan includes a lot of spending, close to 5 trillion dollars. To pay for all this spending he is looking to increase taxes and deficit spending.

The tax increases that have been proposed will have an impact on small businesses directly and indirectly. The first area that will impact small businesses is the corporate tax rate. While the majority of small businesses are not corporate filers there is about 10% of small businesses are and will be impacted by the change in the corporate tax rate. The other way this tax increase could impact a larger percentage of small businesses is through the trickle-down effect.     

The vast majority of small businesses are pass-through tax entities. What that means is, say you have a partnership or S corporation you don’t pay the corporate tax rate but you pay the personal tax rate based on your 1040 return. Where President Biden’s tax plan will impact more small businesses is the limit he has proposed on qualified business income tax deduction. The qualified business income tax deduction was part of the 2017 Tax Reform Act and gave pass-through tax entities the ability to lower their reported taxable income by 20%. The proposed plan is to remove that deduction for filers reporting over a million in profits.

The other area that could impact small business owners is the capital gains tax increase. While most people think the capital gains tax only impacts the wealthy on Wall Street the impact for small business owners comes into play if they decide to sell their business. As the Baby Boomer population nears the retirement stage of their life they are looking to sell their businesses. We are seeing increased interest from the Millennial generation to start or buy businesses. However, the capital gains tax proposed could result in a 50% tax on the proceeds from the sale of your business depending on what state you live in.

The other topic that doesn’t always get brought into the tax conversation but certainly has an impact, is payroll taxes. The PRO Act was recently passed in the House of Representatives and it is part of the President's infrastructure proposals. The PRO Act does two primary things, it makes it much easier for employees to unionize but the big thing for small businesses is that it reclassifies independent contractors. If you are a small business that uses independent contractors the PRO Act would mean those contractors would have to be classified as employees for the time they work for you. This means the business would be responsible to pay payroll taxes on the amount paid to their contractors. Also, depending on the number of hours worked the business would have to offer their contractors benefits as if they were normal employees.

What I’ve learned from the pandemic and running a small business for the last 20 years. No one has a clue about what will happen in the future so the best you can do is to base your decisions today on what you can see. Today we see more taxes and regulations being proposed and the current administration is more pro-worker than pro-business. What I hear from my clients is they are losing their appetite to take risks and hire more people due to what they see today.

Resources Shared

• The Marks Group
  

Listener Reviews