Of small businesses and taxes

By Courtney Sherwood, Columbian freelance writer

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When Keith Scott read the comments other small-business owners delivered to U.S. Rep. Jaime Herrera Beutler, R-Camas, on Aug. 8, he was puzzled.

The statements seemed to imply that small businesses have special tax disadvantages, and that proposed increases to personal income tax would make things even worse.

Scott, who owns Northwest Utility Sales Inc. of Vancouver with his wife, Susan, said his experience suggests otherwise.

These details are taking on political significance because some Democrats have proposed income tax hikes on people earning more than $250,000 per year. Opponents say this would stifle small-business job creation.

That seemed to be dentist Jared Franson’s worry when he said he’s taxed as though he earns more than $250,000, but more than $100,000 of that goes to pay off his three Southwest Washington offices.

Eric Golemo, owner of Vancouver-based SGA Engineering & Design, said a larger business might be able to write off reinvestments, but small companies don’t have the know-how to do so.

“Does he have a tax accountant?” Scott asked. “We are currently a company of only two employees and we can do these things.”

Just as individuals lower their IRS burdens by deducting mortgage interest and charitable donations, business owners can use deductions to pay less at tax time.

Franson acknowledged on Monday that he deducts the interest payments on his dental offices. He should also be able to deduct the cost of those offices — not all at once, but a little at a time across many years, according to IRS depreciation guidelines.

Do small-business owners pay more in taxes than the rest of us? Yes and no.

Imagine two simplified businesses that make $250,000, after deductibles, and that pay their owners $100,000.

• If one is an S corporation, the owner pay taxes on all of her company’s income on her personal IRS form. She’ll pay about $43,700 more in federal income taxes than a person making $100,000 who works for somebody else, according to a rough estimate from paycheck-calculator.org. If she decides to take home $10,000 this year from money she paid taxes on last year, there’s no additional tax.

• If the other is a C corporation, its owner pays $43,700 less in personal taxes, but $41,750 more in corporate tax, according to IRS schedules. If he decides to take home $10,000 this year from money he paid corporate taxes on last year, he’ll have to pay about $2,800 in income tax.

Many small-business owners are better off as S corporations because it gives them flexibility with their cash without the double tax risk, said Bill Dudley, an attorney with Vancouver’s Landerholm law firm.

But if individual tax rates climb, they won’t necessarily have to pay more — they’ll just have to decide whether to keep that flexibility, or make the switch to a C corp to keep taxes down.

Scott does not buy the idea that higher individual income taxes will affect job creation.

“If you raise taxes on business, it could be a deterrent to hiring people,” he said. “Taxing personal income has nothing to do with it.”

Courtney Sherwood is The Columbian’s business and features editor. Reach her at 360-735-4561 or courtney.sherwood@columbian.com.