Even if you limit yourself to the tax side of things, though, there are some pro-small business crumbs in the Obama budget: small business expensing is extended, a new jobs credit is created, and small business stock is exempted from capital gains.  Good things, all, to one degree or another.

 

But there is one bad--very bad--tax increase on the small business sector in the Obama budget.  Under his plan, the top two income tax rates increase from 33 and 35 percent to 36 and 39.6 percent.  Two-thirds of small business profits pay taxes in these bracket levels.  Small businesses pass their profits through to their owners, who pay income tax on them.  To raise taxes on "the rich" is a laser-beam tax hike aimed at small employers.

 

Small business owners also have to pay the Medicare portion of the self-employment tax at the high margin.  Furthermore, they will face a phaseout of their itemized deductions (Pease) and personal exemptions (PEP) under the Obama budget, unlike 2010 law.

 

What does that mean for the marginal tax rate on small business activity?  Assuming a 5 percent state income tax rate, the calculation is the following for a sole proprietor or general partner (S-corporation owners don't have to pay Medicare tax, so it will be slightly smaller for them):

 

Tax	Rate
Federal Income	39.6%
State Income	5.0%
Self Employment	2.9%
SE Deduction	(0.65%)
PEP and Pease	2.34%
Total	49.19%

 

So, the top marginal tax rate on small business income will rise to 49.19 percent by my reckoning, up from about 41 percent today.  This is a huge increase in the tax rate on most small business profits.  I wonder if President Obama will be sharing this with entrepreneurs today?

 

You guys conflate this all the time. When something is a *profit* in a small business then, by definition, it was NOT spent on employee salaries. You make it sound like *gross income* is being taxed; it's net income, or profits. So, raising the marginal tax rate on individuals who happen to own a small business and show a K-1 profit of over $192k or more cannot possibly threaten jobs; that's money they didn't spend on jobs in the first place. Indeed, if people were ATR-style lemmings as you suggest, they might *create* jobs in order to lower their end-of-year K-1 profits and, thus, avoid the 4% marginal tax increase.
>> Todd Stauffer Saturday, February 6, 2010 6:39 PM

And your top marginal rate (49.19%) kicks in on income OVER $375,700 on someone's individual or joint taxes; if we're talking "small business profits" then those are folks who are (a.) pretty comfortable and might want to chip in a little more for the General Welfare and Common Defense and (b.) might want to change their corporate structure from an S-Corp or sole proprietorship. Finally, "non-partisan" ATR seems to have missed an opportunity to mention of the *decrease* from 33% to 28% for folks making 172k - 192k single or 210-233k jointly. Very interesting oversight.
>> Todd Stauffer Saturday, February 6, 2010 8:38 PM

You might also want to learn how to "reckon" a little better. State and Local income taxes are deductible if you itemize (as most small business owners are almost bound to do.) That means you do not add the 5% state income tax rate to the 39.6% federal income tax rate in your example. Shouldn't you know that?? If you don't know such a basic fact about taxes, why are you advising anyone about anything?
>> Richard R. Wednesday, February 10, 2010 11:31 PM