There are many factors that individual voters will take into this consideration this November before casting their ballots for president. Israel. China. Ukraine. School choice. Abortion. Government services. Worker protections. Age. Personality. The list goes on. We all have our priorities.
But if you’re a small-business owner like me, the amount that you pay in taxes every year is also a very big consideration.
I see some of my clients paying anywhere as much as 30 percent of their income in taxes, between federal, state and local requirements. Regardless how you may feel about social issues or whether or not you support Ukraine, tax policy is an issue that directly affects us.
And regardless of how you may feel about likely Democratic nominee Kamala Harris, there is one thing that cannot be disputed: small-business owners will pay a lot more in taxes if she is elected.
Harris, like President Biden, supports the expiration next year of many key elements of former President Trump’s signature piece of legislation: The 2017 Tax Cuts and Jobs Act, or TCJA.
If the provisions that are part of this legislation are allowed to expire, the biggest impact on small business owners will be the loss of the Qualified Business Income Deduction, which has been a huge benefit to the tens of millions of small-business owners that file “pass-through” tax returns like S-Corporations and partnerships.
Currently, most small businesses can deduct as much as 20 percent of their business income before it passes through to their individual tax returns. To put this in real terms, let’s assume a small business generated $100,000 in income and the business owner has a tax rate of 20 percent. With the QBI deduction, he would pay $16,000 in taxes. Without this deduction, his tax bill goes up to $20,000.
Regular corporations won’t avoid higher rates either. For those business owners who file “C-Corporation” tax returns, their income tax rate would return from the current 21 percent to 28 percent (Donald Trump and the GOP want to lower that rate to 20 percent).
Business owners will also lose their ability to get first-year tax advantages for investing in capital equipment. The “bonus depreciation” provision of the TCJA allowed us to immediately deduct approximately $1.1 million of these costs for assets placed into service. This deduction began phasing out in 2023 and will completely phase out after 2025. If it expires, then business owners will have to depreciate (or spread out) the deduction for capital assets over their useful life instead of taking the entire deduction in the first year. So a business owner that could take a $500,000 deduction in the first year for a piece of equipment with a five-year useful life would only be able to deduct $100,000 each year over the five years.
The same goes for research and development costs. Already, the ability to deduct those costs in the first year has expired. Now, when a business spends money on materials, workers and services to develop new products, they have to spread those costs over five years.
When you run a small business, you take many, many risks on your investments. The good news is that, assuming you’re good at what you do, you may be able to earn significant returns on your investments. The bad news is, not all of that money is cash. I have many clients that earn more than $400,000 per year on paper but take much less of that in cash because they’re reinvesting that money back into their businesses. Unfortunately, Harris’s tax plans — which mirror Joe Biden’s — don’t take that into consideration.
So what does that mean for “high-earning” small-business owners?
For starters, their individual tax rates would go up to a maximum 39.6 percent, from the current 37 percent. Their capital gains tax rate could be as high as 44.6 percent compared to the current 20 percent. Medicare taxes could increase from the current 3.8 percent rate to 5 percent. The individual standard deduction would fall from $12,400 to $6,200, which would result in smaller deductions for many.
Individual estate tax exemption exclusions would drop from $13 million to about $6.5 million, putting more of their assets at risk of a 40 percent estate tax when they die. And the IRS has publicly announced that it’s pursuing more audits on higher earners too, which will increase the costs for business owners selected for audits, regardless of whether they have have done anything wrong.
In Harris’s defense, there are reasons for these tax increases. She and the Democrats more broadly want to focus on wealthy earners (there are proposals to implement an unrealized gain tax on individuals whose assets exceed $100 million, for example) in order to fund their initiatives and pay down deficits. Trump and the Republicans believe that lowering taxes will spur growth and therefore generate more revenues that can be used for similar purposes.
Each side has an army of economists that they say supports their view. Who’s right? Who’s wrong? For the typical business owner like me, it’s impossible to know. But one thing’s for certain: We’ll definitely pay more in taxes if Harris is elected president.
Gene Marks is founder of The Marks Group, a small-business consulting firm.