The Obama plan will raise taxes on a majority of small business profits and hit those companies which employ a majority of Americans who work for small businesses.

Here’s how:

Unlike corporations, small businesses usually don’t pay their own taxes. Rather, business profits flow through to the business owner. The business owner pays taxes on her small business by adding the profits to her income tax form. Therefore, personal income taxes are the same thing as small business taxes.

The Obama plan to raise the top two marginal income tax rates (from 33 and 35 percent today to 36 and 39.6 percent, respectively) is a hike in America’s small business tax rate.  This does not include Obamacare’s 3.8 percent small business surtax.

According to the IRS, most small business profits face taxation in households making more than $200,000 per year. The IRS keeps track of two types of small business income: sole proprietors, and “pass-through” entities like partnerships and S-corporations.

A majority of small business profits will face a tax rate hike under the Obama-Biden plan.  There are 30 million tax returns reporting small business income. On net (profits reduced by losses), these owners report business profits of $590 billion.  A large chunk of this net profit--$477 billion—faced taxation in households making more than $200,000 per year. 

Sole proprietors: There are 22 million tax returns reporting sole proprietor income. On net (profits reduced by losses), these owners report business profits of $245 billion. A large chunk of this net profit--$80 billion—face taxation in households making more than $200,000 per year. 37 percent of sole proprietor profits will face a tax rate hike under the Obama plan.

S-corporations and partnerships: There are 8 million partners and S-corporation shareholders. On net (profits reduced by losses), these owners reported business profits of $345 billion. Virtually all of this profit faced taxation in households making more than $200,000 per year. Aggregate pass-through entity profits will almost entirely fall in households making more than $200,000 per year. These are real small businesses. For example, there are 250,000 doctor and dentist offices organized as S-corporations or partnerships. They employ millions of workers making less than $250,000 per year. These jobs are endangered by the threatened Obama tax rate hike.

The Obama tax hike plan will kill small business jobs. Obama often claims he wants to raise taxes on “millionaires and billionaires” but is actually targeting successful small companies. A oft-cited study by Ernst and Young projects that this tax rate hike will kill 710,000 small business jobs.

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Posted by John Kartch on Friday, November 9, 2012 1:57 PM EST

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