Tax Lawyer's Blog

The great majority of American small businesses are operated in either the LLC or S Corporation form. These entities generally do not pay federal tax themselves, but, rather, their net income is passed through and taxed at the shareholder/owner level.

Thirty one states impose a state tax on the net income of LLCs and S Corporations.

Nineteen states, including Florida, do not tax or only nominally tax the operations of these pass-through entities.

Michael Mazerov of the left wing think tank, the Center on Budget & Policy Priorities (the Center), proposes that these 19 states raise additional (and much needed) revenues by imposing a tax on the net income of these S Corporations and LLCs: 

Nineteen states impose only nominal taxes on businesses organized as subchapter S Corporations (S-Corps) or Limited Liability Companies (LLCs) even though these entities — which generate about one-fourth of all business receipts — benefit from state services just as businesses that are subject to state corporate income taxes do. In addition, many of the states that do impose meaningful taxes on S-Corps and LLCs would benefit by updating their tax laws in this area, such as by equalizing their tax treatment of the two kinds of entities. By reforming their policies toward S-Corps and LLCs, states can strengthen their revenue systems to help deal with budget problems states now face.

If Mazerov’s proposal were followed it would mean that the owners/members of these small businesses would be subject to a double tax on their business profits (i.e. once at the corporate level and then again at the shareholder level when the profits are distributed).

The Center’s website describes the organization this way:

The Center on Budget and Policy Priorities is one of the nation’s premier policy organizations working at the federal and state levels on fiscal policy and public programs that affect low- and moderate-income families and individuals.

The Center conducts research and analysis to help shape public debates over proposed budget and tax policies and to help ensure that policymakers consider the needs of low-income families and individuals in these debates. We also develop policy options to alleviate poverty.

I understand that because of the poor economy states are in dire need of funds, but I think its a mistake to increase the tax burden of small business owners at this time.

These are the job creators and the prime movers of the economy. 

In a recession we should be making it easier not more difficult for them to retain current employees or hire new ones. Increasing their tax burden increases their cost of doing business and that makes it more difficult for them to grow.

And growth means an increase in employment, the very thing this economy most needs.

The Center says its mission is to formulate and propose tax policies that will help the middle-class and the poor.

We think increasing the tax burden of small business owners in a time of record unemployment and business bankruptcies will have a deleterious effect on the middle-class and the poor by taking money out of the hands of enterprising, motivated entrpreneurs who hire most of the lower income workers.

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