The truth is, small business owners who are S-corps (or small business corporations), don’t pay ANY corporate income tax. Any profit their business makes “flows through” to their personal tax return. If the owner knows basic tax law, or hires someone who does, most, if not all profits, are paid out of the business in expenses, including compensation to the owner(s) and there is no “business” tax payable.
The main way this is accomplished is by the owner paying herself compensation in an amount that will “payout” all “profit” to her, or even by paying herself more than the profit. By doing this, ½ of the social security tax is paid by the business (same as C-corps). If the owner is lucky enough to be able to pay herself more than $110,100 annually (the maximum wage base for social security), every dollar over this wage base is basically paid out with a 12.4% tax subsidy. In addition, every dollar paid for compensation, even those in excess of the wage base, are 100% tax deductible, even if it creates a loss. This creates an environment that makes paying excessive executive compensation tax beneficial.
Losses can be carried over to decrease future profits, further reducing the likelihood the small business owner will ever owe taxes on profits.
The argument of the GOP and their Presidential candidate, that our President is somehow raising taxes, and thereby hurting, small business by saying that the Bush era tax cuts should be allowed to expire for those making over $250,000 is nonsensical.
First, the Bush era tax cuts have, and have always had, an expiration date. They were never meant to be long-term, and certainly not permanent. Despite the GOP efforts, the Democrats were able to ensure they were temporary.
Third, allowing a tax CUT to expire is NOT increasing taxes. (Even Grover Norquist agrees)
This notion the GOP keeps pushing, that tax cuts will create jobs is simply wrong. The only way the government can create jobs is through stimulus. Growth is created by spending. The conservative supply-side, voodoo economic theory that counts on trickle-down simply does not work.
And I believe the GOP leadership knows this. The cuts to education, health and welfare, who do they impact? The truth is there, it is basic math.
Small business, by and large, will not be hurt by increasing the tax rate on those earning more than $250,000, and there are other simple ways to make it tax detrimental to pay excessive salary and benefits., or to use corporate resources to pay for travel & entertainment:
Limit tax deduction for salary & benefits to average employee pay & benefits
Limit tax deduction for travel, meals & entertainment to Federal Per Diem
Simple, and every corporation just became profitable. And now, it is tax beneficial to use those funds to create jobs, rather than giving the money to executives. The balance of these payments are truly a distribution of profits and therefore taxable as a dividend. This is how it was done for decades. CEO’s can certainly be paid millions, just not subsidized by taxpayers. And corporate jets to $10,000 lunches or $20,000 football games in stadiums they “named” for $20,000,000. Nope, no more tax deductions for those either.
Democrats need to fix these and other tax loopholes. And progressive and liberal voters need to make sure they do. It is up to us to tell legislators what we want. And then to make sure they act on it. The truth is, only we can change our government, and we get the chance every November.