Business leery of Obama’s tax plans

By Kent Hoover
New Mexico Business Weekly

The nation’s most successful small business owners could pay higher taxes under President Obama’s budget plan.

The income of most small businesses is taxed at the individual level. The budget plan calls for increasing the top two tax rates to 36 percent and 39.6 percent in 2011, up from the current rates of 33 percent and 35 percent.

These higher-income taxpayers also would not receive the full value of their itemized deductions, and they would see their capital gains and dividends taxed at a 20 percent rate instead of 15 percent.

That’s bad news for small business owners who report more than $200,000 in income as individuals or more than $250,000 as joint filers.

Only 9 percent of taxpayers who report small business income make this much money, however, according to the Center on Budget and Policy Priorities. Plus many of these taxpayers are passive investors in small businesses, not owner/operators.

Most small business owners are middle-income individuals who would receive tax cuts under Obama’s budget and would benefit from his proposal for health care reform, said Robert Greenstein, the center’s executive director.

“In fact, small businesses would win under this budget,” Greenstein said.

Small business owners who make the most money, however, also are the most likely to invest in their businesses and hire additional workers, according to the U.S. Chamber of Commerce.

“If we take away their incentives to take risks, grow and succeed — as this budget does — we will be unnecessarily shooting ourselves in the foot,” said Bruce Josten, the chamber’s executive vice president for government affairs.

The effects of higher tax rates on business decisions “are almost theological questions,” said Clint Stretch, managing principal for tax policy at Deloitte Tax. Some business owners might decide not to expand as a result of higher taxes, but others might invest even more in their businesses so they can earn extra money to make up for the increased tax burden, he said.

The president’s budget plan also includes provisions that could hurt residential and commercial real estate. The limit on itemized deductions for upper-income taxpayers would reduce the value of the mortgage interest deduction for many homeowners, particularly in high-cost areas such as the Northeast and California.

The National Association of Realtors contends the proposal would hurt not only these taxpayers, but also home values across the board.

“There is never a good time to propose something that undermines the basic foundation of homeownership, but given our current housing crisis, this has to be the worst possible time,” said NAR President Charles McMillan, broker of record for Coldwell Banker Residential Brokerage in Irving, Texas.

Commercial real estate investors are concerned about Obama’s proposal to tax “carried interest” — a share of profits paid to managers of investment funds — as ordinary income instead of as capital gains. As a result, taxes on these payments could jump from the current 15 percent to as high as 39.6 percent. This change would apply not only to private equity firms and hedge funds, but also to 1.2 million real estate partnerships that own everything from office buildings to rental housing.

U.S.-based multinational corporations also would see higher taxes under the budget plan. The president proposes reforming laws that allow U.S.-based businesses to defer taxes on income earned abroad until they bring that money back to the U.S. Obama pledged to “end tax breaks for corporations that send jobs overseas.”

That’s “a great one-liner,” said Martin Regalia, chief economist for the U.S. Chamber of Commerce. The proposal, however, would make U.S.-based multinational corporations less competitive against their global rivals, he said. Most foreign-based companies are taxed only once, in the country where the income is earned. U.S.-based companies, on the other hand, are taxed twice on foreign profits — overseas and in the U.S. Allowing corporations to defer their U.S. taxes until they bring the money back to this country takes some of the sting out of this double taxation.

Ending this deferral “could really hurt businesses that are trying to expand outside of their current client base” into other countries, said Mike Metz, executive vice president of tax services at RSM McGladrey.

Tax plan for businesses

Under the budget plan proposed by President Barack Obama, business owners would see the following changes:

Tax increases
• Individual income tax rates would be increased for taxpayers with incomes above $200,000 (single filers) or $250,000 (families)

• The value of itemized deductions for these taxpayers would be reduced

• The tax rate for capital gains and dividends earned by these taxpayers would increase from 15 percent to 20 percent

• Carried interest earned by managers of investment partnerships would be taxed as ordinary income instead of as capital gains

• A company’s ability to defer U.S. taxes on income earned in other countries would be limited

Tax cuts

• The Making Work Pay tax cut ($400 for individuals, $800 for families) would be extended

• Capital gains on investments in small businesses would not be taxed beginning in 2014

• Middle-class taxpayers would get relief from alternative minimum tax

• Research and development tax credit would be made permanent

• More companies would be allowed to carry back net operating losses for five years Sphere: Related Content