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Proposed Tax Changes Could Affect Some Small Business Owners

Possible Tax Changes for Small Businesses
Sulaiman Abdur-Rahman
Sulaiman Abdur-RahmanUpdated September 17, 2021
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A proposal in the U.S. House of Representatives calls for corporate tax changes that would provide relief for some small businesses while hiking taxes on many larger-sized businesses.

Proposed Corporate Tax Changes

The U.S. corporate tax rate currently stands at 21%, but House Democrats this week have unveiled a plan that would lower the rate to 18% on corporations with taxable income up to $400,000.Starting a small business can cost tens of thousands of dollars, so a lower tax burden on corporations with less than $400,000 in taxable income could promote small-scale entrepreneurship. However certain small businesses do exceed the $400,000 income threshold.Congressman Richard E. Neal, a Massachusetts Democrat who chairs the House Ways and Means Committee, explained that the Democratic plan would preserve the 21% corporate tax rate on corporations with incomes between $400,000 and $5 million.Meanwhile, the corporate tax rate on corporations with incomes greater than $5 million would be raised to 26.5%, according to the legislative proposal released Sunday, Sept. 12.

Proposed Changes to Personal Income Tax

House Democrats are also proposing to increase the federal top individual tax rate from 37% to 39.6% and to impose a 3% surcharge on anyone with an adjusted gross income above $5 million. This would affect individuals with taxable income over $400,000 and married couples with taxable income over $450,000.

Potential Impact of the Tax Proposals

The proposal largely reflects the campaign promises President Joe Biden made last year when running for office. Biden, a Democrat, promised that  he would “require corporations and the wealthiest Americans to finally pay their fair share” and that he would cut and not raise federal taxes on individuals making less than $400,000 per year.Corporations are taxed differently than other business structures. Depending upon revenue and profits, the cost of operating a sole proprietorship or limited liability company could be more cost-effective than operating an S-corporation or C-corporation. The House Democratic plan could potentially change the calculus on what legal structure you should consider when starting a small business.The corporate tax changes as floated by House Democrats would help fund the Build Back Better Act, a comprehensive package of Democratic initiatives targeting physical infrastructure and health and human services.If signed into law, the Build Back Better Act would specifically deliver a $3.5 trillion investment that promotes green and renewable energy while expanding healthcare benefits in Medicare and reducing prescription drug costs through negotiation. The plan would also provide 12 weeks of paid family and medical leave benefits for all American workers, among other things.

Repercussions From the Proposed Tax Changes

House Republicans have slammed the Democratic tax proposals, saying they violate Biden’s pledge to impose no new taxes on individuals earning less than $400,000 per year.“Raising the individual rate raises the rate on small businesses, most of whom file as individuals,” U.S. Rep. Kevin Brady of Texas, the top Republican on the House Ways and Means Committee, said in a committee statement. He noted that the Democratic plan calls for additional tax hikes on tobacco products, which primarily “falls on Americans making less than $400,000,” he said.The U.S. Small Business Administration has a multifaceted definition of what qualifies as a “small business” based upon size standards in terms of total income or employees. In some cases, a business with $30 million in total income or receipts could qualify as a small business, as could certain businesses with hundreds of employees.A proposal to raise corporate taxes on corporations with incomes greater than $5 million could adversely impact some SBA-qualified small businesses.

Prospects for the Tax Proposals

Democrats control the U.S House of Representatives by a slim majority and are expected to pass a bill that would impose a variety of tax hikes to pay for the Build Back Better Act. But the legislation would also need to pass the U’S. Senate before reaching Biden’s desk for signing, and at least one Democrat in the evenly divided Senate has voiced reservations about the $3 trillion investment plan. U.S. Sen. Joe Manchin, a West Virginia Democrat, has given high-profile interviews on CNN and MSNBC in recent days suggesting he will not vote for the $3.5 trillion spending plan. With House and Senate Republicans appearing united in their opposition to corporate tax hikes and the Build Back Better Act, congressional Democrats may need to introduce a more modest tax-and-spending plan to win Manchin’s vote.Given the Senate’s 50-50 split along party lines, Democrats would need Manchin’s support to pass any legislation raising taxes on individuals or corporations if Republicans remain united in their opposition.Congress also must consider raising the debt ceiling to “avoid causing irreparable harm to our economy,” Democratic Senate Majority Leader Chuck Schumer of New York said on the Senate floor on Monday, September 13.Without suspending or increasing the debt limit in the very near future, the federal government could default on its legal obligations to provide Social Security and Medicare benefits in October 2021, U.S. Treasury Secretary Janet Yellen said in a letter to Democratic Speaker of the House Nancy Pelosi dated Sept. 8, 2021.Congress bears the great responsibility to “protect the full faith and credit of the United States,” Yellen said in her letter. 

The Takeaway

House Democrats have an ambitious tax-and-spend plan that calls for changes to the corporate tax rate. Some small businesses could benefit from the changes, but a plan to raise the rate from 21% to 26.5% on incomes greater than $5 million would also increase the cost on many firms that meet the SBA’s “small business” standard. The potential impact of the proposal may force Democrats to reconsider their options if they hope to craft a green infrastructure and human services bill that can pass both chambers of Congress and reach President Biden’s desk for signing into law. Whatever happens, it is highly likely Republicans, as well as some Democrats like Sen. Manchin, will continue to sound the alarm on any proposal that could raise taxes on some small businesses.When your small business faces unexpected expenses, a small business loan may be the way to go. Lantern by SoFi can help. Fill out one simple form to receive multiple small business loan offers from our network of lending partners. 
Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.In our efforts to bring you the latest updates on things that might impact your financial life, we may occasionally enter the political fray, covering candidates, bills, laws and more. Please note: SoFi does not endorse or take official positions on any candidates and the bills they may be sponsoring or proposing. We may occasionally support legislation that we believe would be beneficial to our members, and will make sure to call it out when we do. Our reporting otherwise is for informational purposes only, and shouldn’t be construed as an endorsement.
Photo credit: iStock/PeopleImages

About the Author

Sulaiman Abdur-Rahman

Sulaiman Abdur-Rahman

Sulaiman Abdur-Rahman writes about personal loans, auto loans, student loans, and other personal finance topics for Lantern. He’s the recipient of more than 10 journalism awards and currently serves as a New Jersey Society of Professional Journalists board member. An alumnus of the Philadelphia-based Temple University, Abdur-Rahman is a strong advocate of the First Amendment and freedom of speech.
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