Thoughts Before The Alarm Sounds

     (1) Large is small. According to the GOP definition, any business, e.g., a partnership or a Limited Liability Company, that passes its net income through to its owners for inclusion on their personal federal income tax returns is a small business. There is no limit to the amount of income such a company can earn! For example, privately owned companies Cargill and Koch Industries each had over $100B in revenues in 2011, yet qualify as small businesses under the GOP's definition!      While agreeing in principle that the tax code needs revision, the Democratic Party would limit the definition of small business to one that has a net income not exceeding $250,000. While that figure may be a bit low, it certainly makes more sense than basing it on how the paperwork is set up.      (2) The estate tax is killing small business. Through 2012, there is no estate tax on estates not exceeding $5M in value. Unless Congress extends...

     ...But it is going to last a long time for the rest of us. As I wrote on February 15th, “The conservative mantra that 'offering tax incentives and other perks to business will stimulate job recovery' is true, but the jobs will not be in the USA.” The tax incentives being offered today will exacerbate the problem in still another way.      The major offering to business is allowing the manufacturer to deduct up to $500,000 of new equipment in the current tax year. In the past the cost of such equipment had to be spread over the life of the equipment. (In the interest of being “fair and balanced,” this tax break has been available for several years, although on a smaller scale).      For example, suppose a manufacturer buys $500K worth of equipment that is estimated to last for 20 years. In the past he could deduct 1/20 of the cost each year for 20 years. If his tax rate was 35%, he would reduce his taxes by $8,750 each ye...

     In 2001 the Bush administration passed an income tax bill which lowered the tax rate for all taxpayers. The lowest tax bracket was decreased from 15% to 10%, and all other brackets were decreased by 3 percentage points except for the highest one, which decreased 4.6 points. In addition, all taxpayers that filed a return for the year 2000 received a rebate ranging from $300 for single filers to $600 for married couples. Capital gains taxes decreased from 10% to 8%. Child care credits were increased, and the exemption for the Alternative Minimum Tax was increased. Additional adjustments were made in 2003. In order to get the bills through Congress, President Bush agreed to let them expire on January 1, 2011.      Now there is a huge disagreement in Congress – Republicans want to extend the rates, etc. for all taxpayers, and Democrats want to extend them only for families with income of more that $250,000 ($200,000 for single taxpayers). The Republi...

     It seems there are two competing definitons for the term “small business”; to no one's surprise the Democrats are using one and the Republicans are using the other. For the convenience of anyone who doesn't know which party he prefers, here are the definitions: 1.) A small business is a business which is not very large, e.g., a corner grocery, a machine shop with a couple of employees, a mom and pop enterprise, etc. Most Democrats use the term in this context. 2.) A small business is a business which operates as a pass-through tax entity, e.g., most of the businesses in def. 1.) plus most mega-farms, some manufacturing firms, and practically all high-tech and professional firms. These organizations use the individual proprietorship, partnership, S-corporation, limited-liability company (LLC), etc. tax reporting format. Under this definition the business could have anywhere from one to thousands of employees. For example, with over 163,000 employees worldwide, t...

      It’s not often that I agree with George Will, but his column in Monday’s paper was an exception. It was headed, “If VAT, ditch the income tax.” So what is the VAT (Value Added Tax)?       VAT is a form of sales tax – but the tax is collected as value is added through production instead of on the end product. The result is the same. Here is an example:*       Suppose the end product is an agricultural product, and the VAT is 10%. 1) The farmer sells it to the packer for .50 per pound plus 10%, or .55. He remits the .05 to the government. He must show the VAT (.05) as a separate amount to his customer. 2) The packer sells it to the wholesaler for .90 per pound plus 10%, or .99. He remits the .09 minus the .05 paid previously, (net .04) to the government. His gross profit is .99 - .04 - .55 = .40, which is the same as if he had bought it for .50 and sold it for .90. He must show the cumulative VAT (.09)...