QUIZ: You are a small business with $250,000/year in profit

[cthulu2016]

Last edited Thu Jul 12, 2012, 06:57 PM - Edit history (3)

QUIZ ONE:

You are a married small business owner whose income is the profit from the business, and taxed at the individual rate—precisely the type of small business that Republicans cite as being hurt by Obama's tax proposals.

Each year you have $250,000/year in net profit, taxable as income.

Under Obama's tax proposals, how much will your annual income tax go up?


QUIZ TWO:

You are the same business, but you have an extra good year and make $300,000 in net profit.

What is the percentage increase in your income tax paid that year, under the Obama tax proposal, versus the status quo?

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QUIZ ONE ANSWER: Zero. There is no rate increase in taxable income up to $250,000.

QUIZ TWO ANSWER: Your taxes would be 0.76% higher. Under Bush you would pay $105,000. (35%) Under the Obama proposal you would pay $107,300. (35.76%) The 4.6% marginal rate increase only applies to the amount over $250K. (35% of $250K plus 39.6% of $50 K)

Feel free to share these quizzes with your Republican acquaintances. None of them will get it right. (And none of them will care.)

[taught_me_patience]

1. If you are a sole proprietorship making 250k in profit

you should change to an s-corp or llc. Having a sole proprietorship is dumb dumb dumb.

[Ikonoklast]

3. I gross 250K a year, and have been an LLC since Day 1.

But I do know a few guys that are s/p's and gross far beyond what I do, and they won't change even when I tell them it's to their advantage to do so.

Inertia, I guess.

[DCKit]

7. Honest question: Is there a certain level of income where it makes sense?

I did some research some time ago and seem to remember that there was an income threshold below which it didn't make sense.

[taught_me_patience]

9. You can incorporate for nearly free with legal zoom

but it is not recommended... any good lawyer will easily pierce that corporate veil. Incorporating with a lawyer will cost $1k and state fees vary. California corporation fee is approx $800. It is then essential to NOT co-mingle funds in any way, or the veil can be pierced and you lose all liability protection. If you're making 10k/yr, it doesn't make sense, as fees eat into your profits. If you're making 50k/yr, it completely makes sense to incorporate. If you've got a lot of assets to protect, you should incorporate regardless of income.

[Egalitarian Thug]

29. Or do it here. They've been trying for going on a century to get around our incorporation

laws with no success.

[Ikonoklast]

11. A lot of it has to do with the valuation of your assets and physical plant

and potential exposure of personal assets to liability.

It was a no-brainer to me, as I needed to keep personal assets shielded from any potential liability claims against the business.

Personally, any business venture I am involved in now, or the one I am contemplating doing in the next year will be probably be an LLC from the get-go, even if revenues are minimal at the outset.

I am considering converting my current LLC into an S Chapter organization if I decide not to split off the other venture into a free-standing entity, but the reporting requirements for the S Chapter are somewhat more rigorous than what I have now, and I already hate paperwork as it is.

If you had little to lose in personal assets in a liability claim loss, it wouldn't be worth being an LLC instead of a S/P.

But, owning just about any paid-for asset is worth shielding, at least to me.

[DCKit]

12. Thanks to both of you.

Guess I'll be going there. My assets are all I've got.

But I'll bet the taxes are going to be a biotch.

[wandy]

34. +1

[DCKit]

2. Also, the difference between "Gross" and "Net" profits is lost on them.

Your business could well make over a million a year, but after the expenses are deducted, the profit is likely to be $250K or less. That's the income that would be taxed, not the gross profits.

It's just one more example of willful ignorance.

[FreeJoe]

5. Lots of terms

If a business sells $1,000,000 worth of goods that cost them $500,000 to make and they also spent $250,000 on other expenses like their office and utilities, the would have:

$1,000,000 in revenue
$500,000 ($1,000,000 revenue - $500,000 cost of good sold) in gross profit
$250,000 ($500,000 gross profit - $250,000 expenses) in net profit

[DCKit]

8. Thanks for your effort and the clear explanation. I'm lazy today. nt

[taught_me_patience]

10. They deliberately confuse gross revenue and profit

In order to make it seem like a lot of small business will get hit with higher taxes.

Gross revenue = sales
Gross profit = sales - COGS
Net profit = Gross profit minus all other costs.

In many small businesses, net income = Owner salary + net profit because s-corp profits are treated as personal income. Very few small businesses have net income greater than 250k.

[ErikJ]

20. Also they are most likely millionaires

I think its safe to say that most people making $250,000 net profit per year are worth more than a million $, probably much more. This is lost on the T-baggers.

[Marrah_G]

33. Bingo

People don't understand how it works and the R party takes advantage of that constantly.

[DCKit]

36. Thanks for the save. nt

[FreeJoe]

4. Are you sure?

OK, assuming that we extend the tax cuts for people earning $250,000 and below, then their federal income taxes won't go up. In fact, even if they earn more than $250,000, their taxes will still be lower because the cuts on the sub-$250,000 portion will remain.

I also understand that the 0.9% medicare tax increase only applies to income in excess of $250,000, to there is no tax increase for a $250K earner there.

The one that I'm not sure about is the new 3.8% tax on unearned income. It kicks in at $250,000, but I think it applies to all unearned income, not just that in excess of $250,000. So if our business owner had some income in the form of dividends or capital gains, his tax would increase, wouldn't it?

It should also be clear that we're talking about a married business owner. For a single business owner, his tax would definitely be higher if he earned $250K because the single filer's tax increases for the ACA start at $200K.

[cthulu2016]

6. Fair points

I ammended the OP to specify married, and specified income tax, so as to not complicate the question.

Thanks.

[Spoonman]

13. The point being is that it won't hurt the rich, correct?

OK, we know that to be true.

What we have lost sight of in this emotionally charged tantrum is the fact that in the grand scheme of things it won't help a damn thing either!

Now don't misread me, because I agree the Bush tax cuts should be eliminated for the wealthy.

But lets look at this situation in unemotional terms.

Eliminating the cuts will generate roughly $56 billion the first year, and will average around $85 billion a year over the next 10 years.

That may sound like a lot of money, but it ain't!!!!!!!!!

We are pissing away $3.94 billion EVERY DAY, and $56 billion gets us a WHOPPING 14.2 days of debt free operation!!!!!!!

$85 billion buys us 21.6 days!

Yea, problem solved! (WRONG)

Everyone wants to rant and rave about this issue as if it's going to solve all our problems. Are you fucking kidding me?

We cannot keep spending the way we are spending.

Like it or not, facts are facts and you cannot spend more than you make without eventually going bankrupt.

We must ALL pay taxes at some percentage, the wealthy must pay MORE in taxes, and we must cut expenditures to the bare minimum by retaining ONLY critical programs.

The whole country is beginning to sound like two school children arguing about which one got more ice cream on their cone!

[cthulu2016]

14. re: "cannot spend more than you make without eventually going bankrupt"

This is not true for the USA, though it is true for you and me.

Optimally, the US should be running a modest annual deficit, and that can be done in perpetuity. There is no benefit to balancing the budget ot having a surplus.

A very large annual deficit, however, cannot be sustained in perpetuity. We cannot have a string of 100 years like 2010.

I do not know that anyone claims that a 4.6% raise on income over $250K will solve all fiscal problems, but that isn't a reason to not do it. No single thing will fix anything, but that doesn't argue for doing nothing.

[Egalitarian Thug]

31. Don't buy the entirely specious "household budget" argument. It's a lie to distract

you from reality.

[seabeyond]

15. the profit is not the income. nt

[cthulu2016]

16. Yes, it is.

For income tax purposes gross revenue is irrelevant. Only profit is taxed.

Buy a book wholesale for $8. Sell it for $10. You deduct $8 as cost of goods sold. Taxable income remaining is $2.

[seabeyond]

18. i do not know if the limit he is putting on is about business along with personal income

i do know the profit hubby made in the business was taxed high, but had nothing to do with our income. he had a salary. it was not the profit the company made. that stayed within the company.

[cthulu2016]

19. When Republicans claim the tax increase would hurt small business

they are talking about small businesses that are not incorporated where the profit is the same as the owner's income, and visa versa.

An incorporated business, which I assume yours was, will sometimes pay a salary to the owner (which counts as his income) and profits the corporation makes after expenses (including after salary is paid) are then taxed at the corporate tax rate.

The Republican claim that letting the Bush tax cuts expire on income over $250K hurts small businesses applies only to those small businesses that pay the personal income tax rate on profits, and have over $250K in profits.

As your example shows, very few actual small businesses met those criteria.

The "small businesses" that Republicans talk about that pay the personal tax rate are mostly "self-employed" rich people, and self-employed professionals—doctors, lawyers, etc., various types of "independent contractor"... ironically, a class of people who tend not to have employees. ("the job creators&quot

Real small businesses, like a hardware store or something, making that kind of money tend to incorporate.

The whole thing is a Republican lie, of course, as your example demonstrates.

[seabeyond]

21. thank you for taking the time to explain this to me. half a year ago, i heard someone talking about

this. i heard that really the small businesses are a particular type of HUGE corp that files in a way that they can claim small, but they are anything but. i obviously do not remember enough to explain it on this post.

but, i was pretty damn sure it was not about most of us, and most of the "small" business.

[lastlib]

30. Big companies will often set up "small" companies....

... as "shells" to take advantage of certain legal rules. i.e., "small" companies can take advantage of SBA loans, govt programs, etc., or get certain tax benefits.

[seabeyond]

32. thank you.... i will try to find what he was talking about. this may have been it, i do know about

this. but, i am thinking this was not what he was saying.

maybe.

thanks.

[rufus dog]

17. Actually if I would take the extra 50k and place it in a SEP IRA

Max for 2012 is 50k or 25%. (smaller of two) So in your scenario I would not pay a dime more in taxes.

This is another benefit that is often overlooked. If I make 300k salary and have access to a 401k I can put away 17k, but as a SBO I get to put away 50k.

[L0oniX]

22. You only pay taxes on net. I'd reinvest anything over 250k back into the business.

A restaurant @ 2 1/2% net profit would have to do 5 million to net $250,000. Most restaurants run at a minimum 2 1/2 and as much as 5% net profit "IMO".

[cthulu2016]

25. Net, of course.

Since we are talking taxes, gross profit wouldn't mean anything -- as you note.

I edited the OP to avoid that ambiguity.

[Bolo Boffin]

23. You know? With $300,000 in profit, you could afford to hire one or two more people.

That would get your profits back under $250,000 and you wouldn't get hit by the old tax rate.

[Aerows]

24. In truth?

c) I have an excellent accountant. Even if I followed the law, I'd still be paying about the same and taking home more.

[kentuck]

26. What would be the actual rate for someone making $500,000 dollars...

Would it still be under 39.6%? Is there someone good at math?

[Aerows]

27. It would still be under it

Because they aren't exactly filing 1040EZs.

[cthulu2016]

28. Since the first $250K is at a lower rate

nobody's total income tax rate can ever reach 39.6%. If your income is ginormous you could probably reach 39.599%

[1StrongBlackMan]

35. Now ...

You are a married small business owner whose income is the profit from the business, and taxed at the individual rate—precisely the type of small business that Republicans cite as being hurt by Obama's tax proposals.

Each year you have $300,000/year in net profit, taxable as income.

Now ...

QUIZ 3

What should your accountant be absolutely screaming at you ... at the top of his/her lungs?

Answer: DISBURSE (a minimum of) $50,001 TO YOUR EMPLOYEES AS A ONE TIME BONUS, before December 31st, and realize no change ... except higher productivity, higher employee morale, decreased turn-over and absenteeism.