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Small biz to Biden corporate tax hike plan: 'Just leave it alone'

·7 min read

U.S. small businesses, already battered by COVID-19, could face yet another threat to the bottom line in the form of tax proposals championed by the Biden administration — with some advocates warning higher taxes could be a drag on Main Street.

The Small Business Administration defines small businesses as having fewer than 500 employees, and over 99.7% of employer corporations have fewer than 500 employees.

Currently working its way through Congress, the American Families Plans and American Jobs Plan may increase the tax bill of small businesses, some observers say, which could hit Main Street with unintended consequences meant for reform.

According to the White House, the plan seeks to “grow the middle class, expand the benefits of economic growth to all Americans, and leave the United States more competitive,” which are worthy goals to achieve as the economy slowly recovers.

The draft tax plan currently circulating Congress aims to raise the nation’s tax rate on corporations to 26.5 percent, up from the current 21 percent— short of the 28 percent level proposed by Biden this year. However, key Democrats are pushing back on some measures like corporate income and capital gains tax hikes.

Lawmakers plan to vote this week on the proposals, which would raise trillions of dollars from corporations and high-income households to pay for President Joe Biden's massive partisan infrastructure and social spending bill.

“The president has been very clear from the beginning that he's open to compromise,” Gina Raimondo, U.S. Secretary of Commerce, told Yahoo! Finance Live this week.

“The important thing is that the President's Build Back Better package is good for business,” she added.

Under the proposal, the corporate rate would be lowered to 18% for small businesses earning less than $400,000; all other businesses would continue to pay the current rate of 21%.

“It's crystal clear that this package is good for business and makes investments that will improve businesses ability to compete,” Raimondo said.

“We need investments. We need a better trained workforce. We need workers who have digital skills. We need every American to have broadband and to be digitally literate. We need childcare that is affordable,” she added.

Democrats in Congress are also imposing a 3% surtax on earnings for more than $5 million per year — which would target the most affluent Americans households. Biden has not backed such a surtax.

‘Just leave it alone'

Co-owner Jonathan Katz talks to new members about a membership form outside Risky Business, that was once The Other Door but closed during the Covid-19 pandemic in the North Hollywood neighborhood of Los Angeles, California on May 21, 2021. - In order to go inside Risky Business, members must present their original vaccination card after being fully vaccinated, paying a small membership fee, signing a risk release form with penalties for lying, and waiting a full two weeks after competing their shots. While the policy is strict, once inside customers can enjoy an experience knowing that everyone else has been 100-percent vaccinated with an lively pre-pandemic atmosphere with people up close and personal - talking, hugging, playing pool and drinking without rules for masks or social distancing. (Photo by Patrick T. FALLON / AFP) (Photo by PATRICK T. FALLON/AFP via Getty Images)
Co-owner Jonathan Katz talks to new members about a membership form outside Risky Business, that was once The Other Door but closed during the Covid-19 pandemic in the North Hollywood neighborhood of Los Angeles, California on May 21, 2021. (Photo by Patrick T. FALLON / AFP) (Photo by PATRICK T. FALLON/AFP via Getty Images)

However, Raimondo's sentiments were at odds with several small business analysts who spoke to Yahoo Finance. Previously, the administration cited an analysis from the Treasury Department that claimed “the President’s agenda will protect 97% of small business owners from the income tax rate increases.”

But Raymond J. Keating, chief economist for the Small Business & Entrepreneurship Council (SBEC), argued that those figures are misleading, because numerous small businesses are organized as C-corporations, which pay taxes based on income.

And roughly 1.4 million small businesses organized as C-corporations will face a tax hike under President Biden’s corporate income tax hike, according to a U.S. Chamber of Commerce (CoC) analysis of IRS and Census data.

“They're looking at one subset of data a year and you have to look at the entire picture,” Keating said in an interview with Yahoo Finance.

And according to Ben Johnston, COO of Kapitus, a small business lender, approximately 25% of Main Street businesses “are structured as C-corps and will feel that tax increase.”

Yet separate data published by the Brookings Institute show a majority of businesses in the U.S. are not C-corporations subject to the corporate tax. Rather 95% of small businesses are “pass throughs,” which have their income routed to their owners to be taxed as individual income.

Yet any sort of hike would come when small businesses can least afford it, after months of shutdowns, restrictions, and increased costs associated with the recovery from COVID-19.

“Just leave it alone,” Keating said.

“Let investors, entrepreneurs and small business owners and big businesses, quite frankly get back on track and get the supply chains back up and running and jobs being created and all the things that we want,” he added.

Tax increases are always negative, but tax increases when you're trying to recover from a pandemic are just really ill-advised.Raymond Keating, chief economist, Small Business & Entrepreneurship Council

As noted by the CoC, Biden’s corporate income tax hike will hurt small businesses in every sector of the economy: “agriculture, construction, health care, real estate, finance, and more.”

Recently, a Small Business for America’s Future survey of over 1,000 small business owners, showed that 76% of small businesses say they are harmed when large businesses or corporations use loopholes to avoid paying taxes.

A majority say they do not believe raising taxes on Americans making over $400,000 a year would harm small businesses.

Biden has called for treating inheritances like a sale, requiring heirs to pay taxes on death, with gains over $1 million for single filers and $2.5 million for married couples. However, this measure would create a new layer of taxes on trusts, property, or assets — including inherited small businesses or farms — that have been passed down from generation to generation.

Someone who could potentially be impacted by the new proposals is Mike Gilmartin, CEO of Commercial Creamery, a family-owned business that started in 1908 in Spokane, Washington.

“To hit this generation with a change in the tax rules...I haven’t planned for that, and there’s no way my kids are going to be able to come up with that money,” Gilmartin said in a new video series from the National Federation of Independent Business (NFIB).

The ‘stepped-up basis’ allows family members to pay capital gains only on the property’s increase in value since the business was inherited, not on the full increase in value since it was purchased by the parents or grandparents.

“I acquired my first shares in 1977, when I started I was given shares, I purchased some shares that year so the capital gains is large, not just because we have performed great every year just over time it's grown,” Gilmartin explained.

Meanwhile, in a recent study from the NFIB, 78% believe retroactive capital gains on assets passed on to the beneficiaries following a business owner’s death will have crippling consequences for small businesses.

Although Biden has promised protection for family owned farms, there has been pushback from industry groups, like the American Farm Bureau Federation.

By eliminating that tax break — known as a “step-up in basis” at death — the federal government would raise $113 billion over a decade starting in 2022 when coupled with a higher tax on capital gains, according to data from the University of Pennsylvania’s Wharton School.

And the anticipated capital-gains proposal would cost the U.S. $33 billion over that period if it doesn’t get rid of that step-up, according to the analysis.

For some small businesses opposed to the tax proposals, Biden’s plan is seen as just the start — and may even get more eye-popping if it doesn’t cover all the additional federal spending. Amid fears that the post-pandemic growth bump is slowing, the likelihood of Washington looking for more revenue will likely get more acute.

“Tax increases are always negative, but tax increases when you're trying to recover from a pandemic are just really ill-advised,” the SBEC’s Keating said.

Dani Romero is a reporter for Yahoo Finance. Follow her on Twitter: @daniromerotv

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