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Good news for GOP: Small businesses are hungry for tax reform

In Charlotte, North Carolina, mother-son duo Julie and Michael Chambers are watching their small business, Melt in Your Mouth, come to life. The cupcake store they opened more than two years ago now has four employees, and they’re hoping to open up additional locations. But chief among their concerns is the tax burden they face.

Structured as an LLC, the company files taxes at the individual rate, paying some 35 cents on each dollar they make, Michael said, adding he’s hoping for reform and lower rates under the new administration.

“We are in the process of trying to open up new stores, and just paying taxes on this one is taking capital away that we could be using on something else,” he said. “There is no clear-cut policy on where things are going right now. Compliance is extremely expensive for us, and it disproportionately affects us as a small business.”

Taxes have long ranked as a top issue for America’s small businesses, many of whom file as pass-through entities, combining business and personal income and, as a result, sometimes paying a higher effective rate. In the National Federation of Independent Business’ 2016 “Small Business Problems and Priorities” study, federal taxes on business income ranked as the No. 3 issue behind the cost of health insurance and unreasonable government regulations. The first-ever CNBC/SurveyMonkey Small Business Survey in June found that taxes were the No. 1 issue for 25 percent of the more than 2,000 businesses surveyed.

North Carolina, where Melt in Your Mouth is based, revamped its tax code in recent years to lower both corporate and individual rates, which had a positive impact on its business competitiveness. In fact, in 2017 the foundation’s “State Business Tax Climate Index” saw North Carolina jump from No. 41 to No. 11, the largest improvement ever recorded. The rate for individuals is currently 5.5 percent, while corporations pay 3 percent, but the state legislature is also working to lower rates even further in a pending budget deal.

“What North Carolina did is a good model for tax reform for the United States,” said Joseph Henchman, vice president for State Projects at the Tax Foundation. “Find a way to broaden the base of the tax system, lower rates for everybody, and make it more pro-growth.”

The Trump administration is proposing parity for both small businesses and corporations in its blueprint to overhaul the tax code, bringing the rates from a top rate of 39.6 percent for individuals and 35 percent for businesses to an even 15 percent. The idea has been met with enthusiasm from Main Street advocates.

House Speaker Paul Ryan also spoke out in favor of overhauling the tax code this week at the National Association of Manufacturers Summit Tuesday, pointing out the uneven playing field small businesses that file as pass-through entities find themselves on, compared to their corporate counterparts.

“Here in America, 8 out of 10 businesses file their taxes as individuals,” Ryan said. “In fact, most of our jobs come from these … small businesses. Real tax reform … means creating a new lower tax, specifically for small businesses, so they too can compete on a fair, level playing field.”

For some businesses, like Jeremy Wanamaker’s Waypoint Solutions Group, an IT services provider with locations in Charlotte and Albany, New York, it’s more than just high rates. It’s simply the complexity of complying with the federal tax code that’s challenging. Wanamaker strategizes with his CPA to maintain competitiveness.

“We want to be as aggressive as we can while staying within the boundaries of the law,” Wanamaker, CEO of the 30-person company, said. “The tax code is too complicated. I think that small businesses are not able to reinvest money easily. The way we are taxed on our profits makes it difficult to reinvest. If we have a profitable year, we pay taxes on all of our profits, whether we use that money to take home or put it back into the business.”

The Trump administration’s proposal for parity between large and small businesses would be a “very effective way” to encourage small businesses to hire and grow, he said.

“If the tax rate on pass-through income was reduced, I could then take that money and reinvest it back into the business. That means hiring more people, buying equipment and doing something that impacts the economy as a whole.”

While Michael Chambers of Melt in Your Mouth agrees, he’s unsure Congress will be able to take action to move on tax reform anytime soon.

“They’re pushing health care hard right now, and if they even manage to get that passed, I don’t see them having anything left to be able to get any sort of meaningful tax reform through.”

Source: cnbc economy
Good news for GOP: Small businesses are hungry for tax reform

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