Grassley Introduces US Small Business Tax Reduction Bill

by MIke Godfrey, Tax-News.com, Washington

01 July 2009

Senator Chuck Grassley, ranking member of the United States Senate Committee on Finance, has introduced a bill he says will strengthen small businesses by lowering their tax burden.

Noting that small businesses create 70% of all new jobs in the United States, Grassley lamented that the Obama administration has done little so far to alleviate the tax burden they face.

“My bill will leave more money in the hands of small business owners so they can hire more workers, keep paying the salaries of their employees, and make additional investments that will lead to new jobs,” Grassley said.

“Unfortunately, the White House seems to see a lot of small business owners as a cash cow for other priorities and wants to raise their taxes. My point is, if we raise taxes on the one segment of the economy that creates the majority of new jobs, we’ll be in even worse economic shape than we are now,” he added.

Citing new data from the Joint Committee on Taxation, Grassley said that 55% of the tax from the higher rates proposed by President Obama will be borne by small business owners with income over USD250,000. This he called “a conservative number,” because it doesn't include flow-through business owners making between USD200,000 and USD250,000 that will also be hit with the 2010 budget's proposed tax hikes.

Obama has proposed increasing the top two marginal tax rates from 33% and 35% to 36% and 39.6%, respectively.

Also, the President has called for fully reinstating the personal exemption phaseout, or PEP for short, and the limitation on itemized deductions, which is known as Pease. Under the 2001 tax law, PEP and Pease are scheduled to be completely phased out in 2010. However, like other provisions in the law, PEP and Pease are scheduled to come back in full force in 2011 should Congress fail to take further action.

“With PEP and Pease fully reinstated, individuals in the top two rates could see their marginal effective tax rate increased by 20% or more,” Grassley said. “For example, a family of four that is in the 33% tax bracket in 2010 could pay a marginal effective tax-rate of 41% after 2010 – or even more if they had more children – because of PEP and Pease.”

“However, this means that many small businesses will be hit with a higher tax bill,” he observed. “These small businesses that are taxed as sole proprietorships, S corporations, and partnerships — including LLCs — whose owners make over USD200,000, or USD250,000 if married, would get hit with the President’s proposal to raise the top two marginal tax rates.”

“In addition, there are just under 2 million C corporations that are not publicly traded, and all C corporations are subject to double taxation," he continued. "To the extent these C corporations’ owners that make over USD200,000, or USD250,000 if married, pay themselves a salary, they would get hit with the tax increase on the top two marginal tax rates proposed by the President.”

Furthermore, he noted, owners of C corporations that receive dividends or realize capital gains and make over USD200,000, or USD250,000 if married, would pay a 20% rate on these dividends and capital gains after 2010 under the President’s tax proposals, instead of paying the current law rate of 15%.

“Do we really want to raise taxes on these small businesses that create new jobs and employ two-thirds of all small business workers?” Grassley asked.

Grassley said that tax relief for small business is especially important, given an “expensive stimulus bill that has had little to no measurable effect on job retention or creation.”

Grassley’s Small Business Tax Relief Act of 2009 includes provisions that would:

• Increase the amount of capital expenditures that small businesses could expense from USD250,000 to USD500,000. This would encourage businesses to invest in new equipment.
• Allow more small C corporations to benefit from the lower tax rates for the smallest C corporations.
• Take the general business credits out of the Alternative Minimum Tax for those sole proprietorships, flow-throughs and non-publicly-traded C corporations with USD50 million or less in annual gross receipts.
• Extend the 1-year carryback for general business credits to a 5-year carryback for small businesses.
• Provide a 20% deduction for flow-through business income for small businesses, which are defined as flow-through entities with USD50m or less in annual gross receipts.
• Lower the potential tax burden when a C corporation becomes an S corporation. Under current law, there is no tax on built-in gains of assets within a C corporation that converts to an S corporation if those assets with built-in gain are held for 10 years by the S corporation. The stimulus bill reduced this 10-year period down to 7 years for sales of assets with built-in gain that occur within 2009 and 2010. The Grassley bill reduces this time period to 5 years for all S corporations that have converted from a C corporation.
• Expand the net operating loss provision contained in the stimulus bill. Current law provides that net operating losses from any size business may be carried back 2 taxable years before the year that the loss arises and carried forward twenty years. The stimulus bill amended the carryback provision by expanding the carryback from 2 years to 5 years if a small business had gross receipts of USD15m or less. The Grassley bill expands this USD15m or less requirement so that small businesses with USD50m or less in gross receipts can get the benefit of the 5-year net operating loss carryback.

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