Rep. John Boehner (R-OH) was a guest on Face the Nation (September 12, 2010).  He took the position that letting the tax cut to the wealthiest of Americans expire would be detrimental to the 2-3% of small businesses that would be subjected to the higher rate.  I found his claim to be contrary to my own experience in having built a successful small business in the 1990’s and certainly contrary to the stronger jobs creation we experienced in the 1990’s when the additional 3.6% surtax was in place for taxable personal income above $250,000.  I issued the following comment to Face the Nation.

September 15, 2010

Rep. Boehner’s claim that the 3.6% surtax on taxable personal income above $250,000 is detrimental to small business is largely myth; it speaks to greed and scare tactics.  I’m speaking from the perspective of having built a successful, regionally recognized business in the 1990’s that placed me in the 2-3% of small business owners that was affected by the additional 3.6% surtax.  I began with a single contract and built a multi-million dollar entity employing almost 50 individuals.  A successful business owner does have options.

First, all business growth activities are paid for with pre-tax dollars (I could even expense my healthcare benefits against the business with the exception of FICA, the firm was an S-corp).  I grew my business on the strength of backlog and cash flow, not post-tax dollars.  The surtax never hampered my ability to hire or grow the business.  The ability to get money for growth is based on a strong balance sheet and cash flow, and it is the obligation of the business owner to keep the business sound.  But once tax is paid (as in the case of an S-corp or LLC) the owner has the ability to pull the profits from the business without additional taxation and become the banker for the business, charging a fair interest rate more than offsetting the surtax the owner paid on those monies.

What Mr. Boehner failed to point out is that a successful business owner does have the option to change the filing status of the corporation to a C-corp where the owner and the business are taxed separately, thus potentially giving the opportunity to markedly reduce the tax paid by the corporation.   In a C-corp, the personal income of the owner is expensed against the corporation thus lowering the overall taxable amount of the business; whereas in the case of a LLC or S-corp the business income flows through the personal tax return thus making it a quicker route to the surtax.  All levels of corporate tax are less than the 39.6% rate on personal taxable income above $250,000.  Of course, the owner must do the math and figure out what best meets their needs and objectives.  A S-corp or LLC would be more favorable if the owner is interested in taking draws once taxes are paid, but that would seem to be contrary to keeping the business strong for growth.

I must add that small business did quite well during the 1990’s when the surtax was in place and job creation during the 90’s was stronger than either of the two tax cut periods (Reagan/Bush41, and Bush 43).