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Saturday, September 17, 2011

New Perspectives on "Small" Business

The Treasury Department issued a study on how to better define "small" business. One purpose seems to be to get a better understanding on how many small businesses would face higher rates if President Obama is able to convince Congress to keep the lower rates for all but individuals with more than $200,000 of income ($250,000 if married). Only 2% of individuals have higher income than that. But some point out that a good portion of this 2% are small businesses and why should their rate be increased when President Obama and Congress want to lower the income tax rate for corporations.

Treasury uses two tests to better identify what is a true business (so tries to knock out those that may really be a hobby) and that operate as a traditional business (for example, have employees and depreciation, rather than just being an independent contractor). A business is small if gross receipts are $10 million or less. For sole proprietors, the Treasury approach finds that a little over 50% don't meet the "business" definition.

But once it identifies the small business, it matches it to the individual owner. Then it knows other characteristics of the individual. For example, does the individual have large sources of other income in addition to the small business income?

I have a short article in the AICPA Tax Insider explaining how Treasury defined "small" - "New Definitions of "Small" Business and Possible Relevance."

One finding from Treasury:

"For taxpayers reporting any flow-through income, eight percent of taxpayers reporting 75 percent of new flow-through income reported AGI over $200,000 (mean AGI of $760,000, median of $325,000). ... Taxpayers owning any business too big to meet the broad definition of small business ... are more concentrated in the upper income groups (49 percent reported AGI over $200,000, with mean AGI of $1.7 million an median over $500,000) and reported more than 100 percent of the net income from larger businesses (because of net losses and small amounts of positive income reported by lower AGI classes)."

It will be interesting to see how this data gets used.

For an analysis of the data, see Marty Sullivan's article, "
Should We Raise Tax Rates on Wealthy Employers?" in Tax Notes and on his blog - here.Followed by his "The Myth of Mom-and-Pop Businesses" (9/12/11) - here

It is a lot to sort through. I wonder if the fact that Treasury gave a "non-business" label to so many businesses if Congress will question if less favorable tax rules should apply. We'll see.

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