Small Business and the Effects of the Tax Reform

Small business is the backbone of the economy, according to the President. However, many small business owners are concerned about the tax rate that is set for 2011. As the 2003 tax rates expire, it is not clear exactly how the new tax rates will affect small businesses. The National Association of Manufacturers (NAM) and the National Association of Home Builders (NAHB) report that many members of the organizations already pay at individual income tax rates. The top rates are projected to go from 35 percent to 36.5 percent at the beginning of 2011.

Small Business

The uncertainty about future taxation is reflected in the business dealings of small business owners, who provide roughly half of the nation's jobs. Rising tax rates will cause companies that are still struggling from the recession to make difficult financial decisions. Even companies that do not need to cut jobs will have a difficult time adding more. Over 60 percent of NAM members are extremely concerned about the end of the 2003 tax rates for small business owners.

President Obama is willing to extend the tax rates to single income families who make 200,000 dollars or less and joint income families who make 250,000 dollars or less. S-corporations and partnerships pay taxes file company taxes as individual income. Paying the highest tax rate will create undue stress on the already fragile job markets in certain industries. The manufacturing and building industry, for example, are still not operating at prerecession levels.

The manufacturing industry already has reduced it nine million workers by 850,000 since 2007. Over one million construction jobs were lost in 2007, and the market is not expected to resume its former stability until 2013. Raising taxes on small business owners, particularly when they are still struggling, will not help them provide jobs and reduce the unemployment rate. Officials argue that the raise in taxes will not affect a large number of small business owners. However, this does not appear to be the case for certain industries.

Both construction and manufacturing companies require great quantities of supplies as well as services in order to survive. They also rely on heavy capital to meet demand and stay in business. In the construction industry, for example, building an average home costs 150,000 dollars in labor, creates 85,000 dollars in income, and results in 90,000 dollars in taxes.

Current Trends

Members of both parties in Congress are considering ways to relieve small business owners from heavy taxation and the burden of paper work. The new law governing 1099 forms is one example of the change. Under the healthcare reform act, the rules governing 1099 tax forms will change in 2012. Contract workers already fill have to fill out 1099 forms for contract labor. The new law would also require small business owners to file the tax form for any person or business that they purchase over 600 dollars in goods or services from each year.

The purpose of the new measure is to increase tax revenue by making more people comply with the tax laws. However, the change will demand a drastic increase in paperwork. Millions of new 1099 tax forms will flood the business world, if this plan is put in place. The sheer hassle of filing so much paperwork is causing some members of Congress to term the 1099 ruling the job killing law. A National Taxpayer Advocate believes that the tax income created by the law will not be able to balance the burden of filing the extra forms.

Small businesses are still lobbying for the law to be changed, and President Obama has indicated that he is willing to support the future 1099 requirements being repealed. In September, two different versions of a bill have already lost the Congressional vote. One bill was a mere attempt to remove the legislation altogether, and the second simply tried to tone down the 1099 requirements.

The President has shown his support for the change since the debates in September. His support has created hope for the small business community that their efforts are paying off. However, there is not a clear date for when the legislation will be approached again.

The fact that both sides of the political spectrum recognize the importance of small business in the economy is encouraging to many small business owners. The National Federation of Independent Business predicts that the nation's best chance of creating more jobs is in protecting small business. Lowering unemployment and boosting the economy might be achieved faster, if both parties are willing to work together towards the common goal of improving the financial position of small businesses.

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