Small business rhetoric

guest commentary by David Potts

Confession: I’m just an Arkansas boy. I attended Rogers Elementary School, Darby Junior High School, and I graduated from Northside High School in 1976. Go Bears. I graduated from the University of Arkansas with a bachelor’s degree in business administration in 1980. Go Hogs.

I’m not stupid, but I don’t pretend to be an expert in national tax policy or economics. But I am an expert in the difficulties of running a small business. I’ve run my own small business for more than 25 years.

The United States has record budget deficits. Everybody can agree that budget deficits, at least huge budget deficits, aren’t good. Experts tell us that unless you want to throw old people out on the streets and starve them or we want our country to become defenseless, we can’t cut spending enough to eliminate these budget deficits.

Large tax increases are oppressive and politically unacceptable. The only real path to reducing our huge budget deficits is economic prosperity. Strong economic growth equals low unemployment rates and higher revenues to the government from income taxes to  reduce the budget deficit since everybody is making more money, not because of higher tax rates.

Everybody seems to agree that small businesses need to hire more employees to reduce the United States unacceptably high unemployment rate. Employed people mean more consumer spending which in turn means economic prosperity. For small businesses to hire an additional employee they must need an additional employee. For small businesses to need an additional employee they need to grow. In order for small businesses to grow they must have money – positive cash flow and capital – to invest into their businesses.

From all the political rhetoric surrounding the elections you might believe extending President Bush’s income tax rate cuts is the answer. But alone, it ain’t going to cut it.

If a small business makes $100,000, paying an additional $3,000 or $4,000 isn’t going to make or break the company or greatly affect its hiring decision. If you want to excite small businesses to invest in their growth, growth that will result in higher employment and more tax revenues, you need to let them keep more money in their treasury. Here are a few of the ideas for income tax changes I believe would provide an incentive and help provide the means for small businesses to invest more money in the growth of their business.

Make the Section 179 election to expense the purchase of additional assets permanent with an annual limit of at least $250,000, then index this limit to increase with inflation. Having to wonder every two or three years whether Congress will extend this tax break makes planning difficult and increases uncertainty for the small business owners. This uncertainty has a negative impact on investment.

Income taxes on a company’s profits can be one of their largest expenses. Rather than tax small businesses or their owners on the business’ profit, tax the profits when they are distributed from the business to the owners. This will give small business owners the incentive to invest their business’ profits back into their business rather than buying a bigger house or a more expensive toy.

For really small businesses, say businesses that make less than $50,000 and are subject to the self-employment tax, give them a break on paying their self-employment tax. A 15.3% self-employment tax rate plus a 15% income tax rate plus a 7% Arkansas income tax rate equals an incremental tax rate of 37.3% for a whole lot of small business people struggling to just eke out a living.

These small businesses have a difficult time getting the banks to loan them money because they’re too small. So if the United States government is going to suck out one third of their profit into the U.S. Treasury, where are they going to get money to invest in their business? These are the same people who reflect our country’s work ethic and don’t contribute to the unemployment rate but are willing to work 60 hours a week to make a living.

Excuse me. I’m about to get on my soapbox. Let me get back to the subject at hand.

Many small business owners have significant funds accumulated in a qualified retirement plan such as a 401(k) or an IRA. The Internal Revenue Code lets you use these funds to buy Wal-Mart stock. Why not make it easy for small business owner to invest these funds to grow his or her own business?

There are many ideas for tax laws that would provide incentives for investment in small businesses. If we want our country to prosper again and to eliminate gargantuan size budget deficits, we need to focus on income tax policies that provide incentives to invest in small businesses. Our politicians give lip service to the importance of small businesses, but they need to put money where their mouths are.

One more thing politicians could do for small businesses: shut up. Has any politician recently inspired you to believe the future of our country is bright? How many of you after listening to political rhetoric have such a positive outlook on our economic future that you’re scrambling to come up with the money to invest in your business or to start a new business?

Your popular talk show hosts are just as bad. If we aren’t careful, we are going to talk ourselves into believing that the world is coming to an end. We will become prosperous again as soon as we believe we can be prosperous. Otherwise, why would you risk you money in investing in a business?

I believe we, as a country, will prosper again and small businesses will lead the way. I believe small business is worth investing in. However, I don’t believe our government will ride to the rescue. There are too many special interest groups, too many political action committees, too many complex regulations and overzealous regulators to overcome.

But small businesses have to overcome obstacles every day. It’s the nature of the beast. Many of our government’s laws, regulations, and policies are just obstacles to overcome. It’s always been that way. And small businesses have historically overcome these obstacles.

We’ve just had a shift in the balance of power in Washington. Maybe the stars have aligned and positive change is possible. Let’s roll up our sleeves and fight for beneficial and sensible laws. But don’t wait on things to change. Neither party is strong on keeping their promises.

In the meantime, let’s succeed in spite of our government.

About Potts
David Potts is a certified public accountant also accredited in business valuation. Owner of Potts & Company, Certified Public Accountants for more than 25 years, his practice focuses on small and medium size businesses and their owners in the areas of taxation, accounting and bookkeeping, business valuation and business advisory services. He is a Fort Smith native and a graduate of the University of Arkansas. You can follow more of his thoughts at ThePottsReport.com. Although every effort is made to provide you accurate and timely tax information, it is general in nature and not specific to your facts and circumstances. Consult a qualified tax professional to discuss your particular case.

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