Sunday, August 8, 2010

Business Investment Deferral - A tax compromise idea

I watched a discussion on the "to extend or not extend" debate regarding the Bush tax cuts on "Meet the Press" this morning. If I understood it correctly, one of the major arguments is over the democratic position of 'let taxes go up for people over $250K' and the republican position of 'many or even most small businesses would be affected and thus dampen growth'.

What I propose is a new tax deferral I call the 'Business Investment Deferral', which would allow small businesses to defer a portion of their profits (over $250k) for future investment without being taxed. Sort of a section 175c capital expense in reverse. I would propose that this deferral must be spent within 2 years, or be taxed at the then current rate.

Example: Let's suppose I have profit from a sole proprietorship of $400k. This is my only income, and I need $250k to support my family lifestyle. This option would allow me to defer tax on $150k of the income for up to two years so that I can accumulate enough capital to grow the business. I take the $150k into the next year purchase some additional capital equipment and hire 2 new employees. The capital equipment is purchased for 75k as a section 175c investment and is paid for with the BID money. The net is 175c = $0 and the deferred amount is now 75k. My business income profit for the next year shrinks to $250k but I am still whole. Everyone is happy.

Something like this might work. I won't begin to argue that $250k is way to low a number to call someone rich, but that's a whole different argument. What it does is differentiate the difference in a small business with profits over $250k, and an individual or family with total taxable income over $250k.

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