For most Americans, the month of April is synonymous with taxes. While partnerships and S corporations have already filed business tax returns, Tuesday is the deadline for individuals and the self-employed to file earnings for 2016.
The burden of taxes weighs particularly heavily on the minds of small business owners, according to the National Federation of Independent Business’s 2016 Small Business Problems and Priorities Report. Five of the top ten concerns for small business owners are tax-related: federal taxes on business income, state taxes on business income, tax complexity, property taxes and frequent changes in tax laws and rules.
For many business owners, tax season means managing stacks of paperwork, deciphering ever-changing tax codes and oftentimes, feeling financially strained. Small business owners feeling the tax season blues are looking to the Trump administration for relief. Though Republicans failed to push a health care reform bill through the House of Representatives last month, congressional leaders are rallying around another paramount initiative: tax reform.
While investors and business owners alike have been optimistic about the promise of tax reform since the November elections, President Donald Trump signaled last week that a plan for reform may not come until late in the year. The plan, which was tentatively set for release this August, is expected to cut corporate tax rates to increase profits for struggling businesses.
“We’re going to have a phenomenal tax reform, but I have to do health care first,” Trump said in an interview last week.
The discrepancy between corporate and individual tax rates is one of the biggest tax concerns for small business owners, according to the NFIB. The National Small Business Poll reports that 75 percent of small businesses are taxed at a higher individual rate, not the corporate tax rate, because of the way their businesses are structured. Referred to as pass-through entities, businesses set up as S corporations, limited liability companies, sole proprietorships or partnerships must pay taxes on their business income at the individual rate.
Trump’s preliminary plan would allow pass-through entities to elect a maximum rate for business income of 15 percent, though distributions from large entities would be taxed as dividends. This adds up to a potential 28.4 percent savings on business income for some companies.
As it stands, the top individual tax rate is 39.6 percent—this can rise upwards of 50 percent when state and local taxes are factored in—while the top corporate tax rate is only as high as 35 percent. The National Small Business Poll data also shows that these small businesses are holding back investments, growth, hiring and entrepreneurship as well as having trouble with keeping a steady cash flow due to tax-related concerns. Simplifying the tax code would ensure these small business owners don’t pay a higher rate than their larger competitors.