Corporate Law Blog

Is US Tax Policy Pitting Corporate Giants Against Small Business?

The federal government shutdown may have put federal tax reform efforts on hold officially, although lobbying no doubt continues behind the scenes. Unfortunately, lack of official information makes longer-term business and corporate tax planning a bit more challenging.

Any tax reform effort inevitably ends up treating some groups more favorably than others, but recent rounds of argument appear to be pitting large corporations against small ones -- and both, perhaps against non-corporate entities such as partnerships, LLCs and sole proprietorships.

According to a contributor to Forbes, big business currently favors lowering the corporate tax rate by eliminating certain tax breaks that apply to all businesses -- it makes taxation simpler, and they would be receiving one benefit while giving up another.

Unfortunately, there is no exchange of benefits for non-corporate entities, who aren’t subject to the corporate tax rate. Moreover, that tradeoff in tax benefits may not affect all corporations equally because, while the profits of large corporations end up subject to both corporate and individual taxes, most small business profits end up being subject only to the individual tax. Therefore, the No. 1 priority for small businesses, according to the National Federation of Independent Business, is to cut individual tax rates.

How will this be resolved? The Forbes writer, a former economist for the Treasury Department and the congressional Joint Committee on Taxation, Congress appears likely to favor the position of the large corporations. After all, that’s what happened in the most recent situation where the question arose.

In the deal announced on Jan. 1 to avoid the fiscal cliff, Congress, knowing that lowering individual taxes was top on the list of small business owners, raised the top individual income tax rate from 35 percent to 39.6 percent. That deal, according to press reports, was brokered by Wall Street.

Keep this in mind: trying to read Congress’s tea leaves is hardly practical in business and corporate tax planning, although it’s certainly useful to have professionals on your side who are keeping an eye on any upcoming proposals for tax changes. Good tax planning begins with an analysis of your goals and an informed discussion of what tools are available to meet them.

Source: Forbes Tax Analysts blog, "Should Small Business Have Veto Power Over Corporate Tax Reform?" Martin Sullivan, Oct. 7, 2013