Given Obama’s obsession with increasing tax rates on the “millionaires & billionaires” making more that $250,000 … and, given the GOP’s rhetoric that they want to protect small businesses … I can’t figure out why they don’t just treat business income reported on 1040s differently than ordinary income.
Specifically, in a prior post we said:
- Separate business income reported on 1040s from all other income … then cap the business income portion at 25% … allow losses to offset ordinary income.
- Then, since Obama is obsessed with raising rates on “millionaires & billionaires” who make more than $250k, I add some brackets with high rates for folks making more than $500,00, #1 million, etc
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A loyal Homa Files reader – who is a part-owner of a relatively small business — that will have his company hammered by Obama’s proposed tax rate change.
Here’s a paraphrase of his real life perspective:
“Personal income” should be just that, the take-home pay and revenue received by the individual worker and should exclude income listed on the K-1 in the personal tax return.
- Note: Income from S-Corps, LPs, etc., is conveyed via K-1s. The “corporate income tax” is, in effect, paid by the equity-holders and partners as personal income.
Example: Say an individual “earns” $250,000 and owns 5% of an S-Corp that earns $5MM
The individual gets allocated $250,000 (5% times $5 million) of the S-Corp’s earnings via a K-! … that $250,000 is rolled into the individual’s 1040 return.
- Important: the individual didn’t get any cash from the S-Corp, just an allocation of earnings.
Having broken the magical $250,000 threshold, Obama’s tax scheme would certify the individual as a “millionaire or billionaire” and jack up his tax rates to 39.6% … plus 3.8% in ObamaCare taxes since the income is “unearned”.
Think about that.
The highest corporate tax rate is 35% … the average corporate tax rate is much lower. Think, GE’s zero-percent rate.
But, under Obama’s plan this small business owner gets slapped with a tax rate of over 44%.
Does that sound right to you?
To make matters worse, the individual didn’t get any cash … just an allocation of earnings.
To pay the tax bill, he has to reach into personal funds … which are probably limited since he’s thrown his dough into the company … or, the S-Corp will have to distribute dividends to partially cover the individual’s tax liability.
If the S-Corp pays out dividends to partially fund the owners’ tax liability, the company has less money to invest in the business.
Does that make any sense?
Thanks to ST for feeding the lead