CO-04 (Special Election)
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(R) Greg Lopez
(R) Trisha Calvarese
90%
10%
President (To Win Colorado)
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(D) Joe Biden*
(R) Donald Trump
80%
20%↓
CO-01 (Denver)
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(D) Diana DeGette*
90%
CO-02 (Boulder-ish)
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(D) Joe Neguse*
90%
CO-03 (West & Southern CO)
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(D) Adam Frisch
(R) Jeff Hurd
(R) Ron Hanks
40%
30%
20%
CO-04 (Northeast-ish Colorado)
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(R) Deborah Flora
(R) J. Sonnenberg
30%↑
15%↑
10%↓
CO-05 (Colorado Springs)
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(R) Dave Williams
(R) Jeff Crank
50%↓
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CO-06 (Aurora)
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90%
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(R) Gabe Evans
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60%↑
35%↓
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DEMOCRATS
REPUBLICANS
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20%
State House Majority
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DEMOCRATS
REPUBLICANS
95%
5%
July 17, 2009 11:15 PM UTC
58 Comments
It’s not gross income, it’s AGI, so expenses have already been deducted and what’s left is essentially take-home pay or profits, plus or minus…
And it doesn’t kick in right away, unless the provisions have been changed, so it’s not going to affect us during the recession.
what I was thinking. Suppose I purchase a server and RAID to expand my business. That knocks down business income because of this investment.
So let’s make it equitable. If S-corps have to pay 39.6% and 45% for income over $1M, let’s make that the same for multinational corporations.
If we’re somehow collecting more than is needed to pay for real healthcare, maybe we can get back to paying down the debt Reagan, Bush, and Bush have saddled us with.
The main issue is the income tax disparity in which successful S-corps (typically smaller, community-based, or family-held businesses)would be paying 45% and directly competing against multinationals that are taxed at only 35%. It’s hard to compete if your competition is paying a quarter less tax, and this would work to the detriment of community businesses.
To get the amount of revenue needed, you wouldn’t have to raise the corporate rate all the way to 45%. Rather you would just have to calcuclate what blended rate with both corporate and S-corp income in the pool would result in the right amount of revenue. That number will be somewhere between 35% and 45% and the disparity would be solved.
One correction to Pols, this issue is not about “wealthy individuals who file their taxes as a type of corporation” but rather the converse “companies who filed their taxes as individuals (their owners).”
Can you (or you and Rep. Degette together) work to introduce a change to include larger corporations in the tax changes? I know Ways and Means is supposed to be doing the primary financial markup…
Also, is it too late to work on communicating this kind of change to that committee?
but the markup in W&M is done (it wrapped last night). Jared can introduce an amendment on the floor. While floor amendments are always a risky path to take, since Jared is on the Rules Committee (which handles the structure of how a bill is handled in the House, among other things), I can’t imagine that he’d let one of his amendments linger in limbo.
While we’re at it, Representative, will you commit here to voting for the bill on the floor as it currently stands – especially since you’ve already expressed your “strong support” for reform and a strong public option, which the bill contains?
be the enemy of the perfect.
Agreed.
Wrapping this objection up in Schedule Cs (which I file yearly) and S-Corp 1120s confuses the objection – which I hope isn’t the point. Money from these types of small businesses is taxed as though it’s personal income – because it IS PERSONAL INCOME.
If we want to get into the 35% C-Corp tax rate, then that’s reform that can come at a later date without a tie-in to health care reform, should a floor amendment fail.
At the end of the year, all the money I make, and all the expenses I incur, in my sole proprietorship are filed on a Schedule C. That money, whether it sits in a business checking account or under my mattress, is mine, mine, all mine!
Similarly, at the end of the year, any money left in the bank accounts of an S-corp is treated as profit to be distributed to shareholders. Keeping the money in the S-corp’s account is still taxed as potential shareholder distribution, because it can be…
In trade for this somewhat fungible situation – and the higher tax rates that can go with it – these business filers get flexibility in their tax filings (and for S-Corps, some corporate immunity and tax benefits like Medicare tax exemptions…).
Is there’s nothing in your release that explains any of this. All it talks about is how horrible it would be for the Bush tax rates to expire and how health care reform as written will “discourage entrepreneurial activity.”
How does this not, whatever your intentions may have been, play perfectly into the hands of those opposing any meaningful health care reform? Did you not just enable every Blue Dog, not to mention Republican, who is only interested in scuttling the whole plan?
And we appreciate your correction, but we’re not sure what the distinction you’re making really is–then again, we’ve never had enough money in one spot to know these differences, like most voters.
I’ve never been mistaken for a wealthy individual, by anyone. I don’t live in poverty, and I have even made above the median personal income in the U.S. for a short time. That said, I now find myself in the position of having a small business that files its taxes as an individual (i.e., me). This isn’t because I’m rich; it’s because with the economy as it was in January, I wasn’t able to find a job, but I was able to find a company I used to work for that was about to throw in the towel and sold me rights to the software product that I once developed for them.
Given my personal position, I find it rather disingenuous to lump me in with some small minority of people who have “enough money” to know about these things. I’m just trying to pay my mortgage month to month, just like everyone else.
Now, I don’t know anything about what Rep. Polis is talking about. I’m just smart enough about that stuff to have realized that I needed someone else to handle bookkeeping for me. It’s just a little… okay, blatantly and obviously, a dishonest characterization of who is affected here.
When someone who runs Pols only makes about $3 per month as they/you have suggested. They/you don’t pay taxes. They/you just want everyone else to pay taxes.
What is the old expression about becoming 40 and/or making $40,000 per year? Pols must be just young and broke while hoping everyone else carries the load.
The web site is a side gig for people who have other jobs which presumably pay income.
Even people making minimum wage pay FICA taxes and sales taxes, both of which are the most regressive taxes we have. Earned income credit, even if you qualify for it, is not nearly enough to make up for those.
But hey, whatever insults make you imagine your penis is larger, go with those.
While C corporations do pay no more than 35% of their profits in corporate income taxes (the marginal rate can be as high as 39% to take away the benefit of lower tax brackets), that isn’t the end of the story.
Once the profits have been taxed at the corporate level, they are taxed again before the shareholder who owns the business gets that profit, either as a dividend, or by making a profit on the sale of stock in the company (a capital gain). Under current law, that dividend or capital gain in a C corporation is usually taxed at a 15% tax rate. When you do the math, the effective tax rate on corporate profits to shareholders in big businesses is 44.75% by the time that they get their hands on the money.
In contrast, an owner of an S corporation or partnership pays no additional taxes when profits are actually distributed to the owner. And, if the owner’s stake in the business is sold before all of its profits are distributed to the owner, the portion of the aales price attributable to undistributed profits is tax free.
So, under the proposal, the top effective tax rate paid by business owners on business profits is very nearly the same.
I am not a great fan of the way that C corporation taxation is structured. But, the double tax on distributed profits does mean that thhe 35% tax rate on corporate profits paid at the corporate level understates the total tax burden involved.
Maybe there’s a whole other level that I don’t understand but I don’t see how you can call capitol gains taxes, taxes on corporate profit. A corporation has investors who buy shares of that company. The purchase of those shares is what allows a corporation access to cash for capitol and other types of investment to grow the business. At the end of the year, a certain portion of earnings are returned to the shareholders as a bonus for being those investors. Capitol gains taxes aren’t assessed on the corporation, they’re assessed on this transfer of wealth to those shareholders. This is similar to how sales tax is assessed on the purchaser. This doesn’t affect the company who sold the product, so I don’t see how capitol gains taxes affect a corporation either.
The entire issue is getting profits from the corporation to your pocket book. And from the government’s point of view, it’s getting their piece of the action.
For a chapter S corporation it occurs in a single step. For a chapter C corporation it occurs in two steps, with the government taking it’s piece in each step.
As an example I can make my company either S or C. And the only significant reason to pick either is the effective total tax rate. I do S because it is a lower effective tax rate. I’d guess 99% of the S corps out there choose S over C for the same reason.
instead of distributing them as dividends. Cash inside a corporation increases the of the corporatioon as a whole, dollar for dollar. If you control the corporation, you can force it to distribute the cash as a dividend.
Assuming that corporate manages its affairs so that its investments maintain their value as well as cash does the same holds true if money not distributed as cash is reinvested in the business.
While not all capital gains are a result of retained earnings (there is a speculative component as well) retained earnings should, in theory at least, increase the value of a corporation dollar for dollar or better.
like now, for instance.
Ain’t getting passed by the recess.
just blow into town on her umbrella.
Welcome back LB. Good to read your misguided analysis again.
..it will?
BTW, thank you. Nice to read you again.
I’ll just repeat what I said about this earlier. What really places an onerous burden on small businesses is trying to cover their employees – or even the owners.
Mr. Polis; you are being an ass. People are dying out there because they can’t get healthcare. Have a little empathy and think about what it is like to be working class and un- or under-insured. People having to pay marginal rates like they were under Clinton aren’t the victims needing your compassion here.
to dying in line waiting for all of the layers of freshly minted bureaucracy to unfold. From bad to worse, in my opinion.
But Polis IS choosing an odd issue to take a stand on.
than for profit insurance companies. They won’t even accept the people who need healthcare most. And there will still be private health insurance. In France, for instance, everyone has access to public health care and if you want something more you can purchase private insurance. They have longer healthier lives on average than we do, as is the case in all other developed western nations, and a lower infant mortality rate.
Heard an American working in France on the radio. He and his wife recently had a baby there and loved the French healthcare system.
You can push all the phony scare stories about bureaucracies you want but the cruelest bureaucracies are the the ones in charge of health care decisions right now in our private insurance companies. Those bureaucracies leave cancer survivors out in the cold if they get laid off or can’t work anymore to keep their benefits and leave millions with no choice but to get sicker and sicker until they wind up in very expensive ER care we all pay for. All, that is, except the insurance companies.
No matter how great your for profit insurance is today, you could lose it in a heartbeat and have no alternative that doesn’t involve losing everything. No western European system is as scary or barbaric as that.
For profit insurance companies do NOT ration healthcare.
They identify efficiencies and synergies and develop cost-containment and risk-reduction strategies for the 21st Century by maximizing share performance.
That is TOTALLY different from rationing, you communist!
My tongues is now bleeding. Will my insurance cover that?
I was also an amateur bike racer then, and to get on the local team I needed signoff from a doctor. I got an appointment for one I had never seen before (obviously) that was a week from when I called. Try that with a doctor you’ve never seen before here. And the cost? For me, with a student visa? Nothing. He gave me my clean bill of health and I was on my way.
Nobody actually “files their taxes as a type of corporation,” although I can see how one might think so from the awkward way that the press release is worded. It says:
“While the Ways and Means Committee states that the proposed surcharge will only impact 4.1 percent of small businesses, the Internal Revenue Service’s 2002 Statistics of Income show that 64 percent of households filing individual tax forms with AGI (Adjusted Gross Income) above $250,000 filed as an S-Corporation or partnership or filed a Schedule C sole proprietor tax form.”
What Polis means to say is that, while 85.9% of small business people do not have high incomes, 64% of people with high incomes own small businesses. So, anything that impacts high income people generally is very relevant to successful small businesses (something he knows from experience). He doesn’t say precisely that, but that is what he means and that is the truth of the matter.
What really happens is that people who own all or part of an S-Corporation (the S is for subchapter S and was chosen to imply “small”), and partners in partnerships (including most limited liability companies also called LLCs) get a form called a “K-1” every year. A K-1 is like the W-2 that wage and salary earners get, and the 1099 that independent contractors and people with interest and dividend income get. It tells you how much income from the business that you own you have to report on your income tax return for the year.
Owners of S corporations and partners in partnerships pay tax on their share of the business profits of the company for the year, whether it is distributed or not. Single member LLC owners and people who run businesses by themselves outside a company, file Schedule C as part of their taxes (which is used to determine how much of a profit the business made and thus how much income from the business has to be reported for tax purposes).
Many people have both wage and salary income, and also income from an S corporation, a partnership or a sole proprietorship. For example, if your day job is as a physician at $250,000 a year, and on the weekend you sell shoes on eBay through “Denver Shoe, Inc.,” a business you co-own 50-50 with your sister organized under subchapter S that makes $5,000 of profit a year that is reinvested in the business, then you would get a K-1 from the business telling you to report your $2,500 share of the profits for the year. A person like you would be counted as a small business owner in the “64%” statistics cited by Polis.
An S corporation is not a tax dodge in the ordinary sense. It may allow you to modestly reduce your FICA taxes, if you are an employee-owner, by allowing you to call some of your return profit rather than salary, but that’s about it.
In practice, closely held businesses with any significant economic existence are almost always organized either as S corporations or as limited liability companies (which are usually taxed as partnerships if they have multiple owners).
Big businesses owned by members of the general public (Fortune 500 companies, for example) are organized as “C corporations” instead of “S corporations.” Owners of C corporations pay taxes only when they actually receive dividends or sell their stock (usually, in either case, at a maximum tax rate of 15%). Historically, C corporations have paid higher taxes than closely held businesses like S corporations on comparable income, but C corporations are also much more useful for tax shelter purposes than S corporations, because you can do so many more complex things to “massage” their income for tax purposes.
Really devious tax cheating inclined people organize what are known as “personal holding companies” or “foreign personal holding companies” which are C corporation stuffed with passive assets (like investments) in an effort to defer income taxation. These aren’t what Polis is talking about either, however.
“while 85.9% of small business people do not have high incomes” should have read “while 95.9% of small business people do not have high incomes.”
A number of wealthy people register as S-Corps because it also affords some measure of corporate immunity from lawsuits. They sign their contracts through their S-Corps, and if they’re sued, they only lose the S-Corp and whatever money they’ve decided to leave in the corporation’s coffers…
Good solid write-up, though.
A person can own an S corporation. A person can run a business as an S corporation and receive compensation from the S corporation in connection with that business. One cannot “be” an S corporation.
At concrete operational level, what that means is that if you have enough income that you must file your form 1040 no matter what. You might get a W-2 (wages) and a K-1 (profits) from an S corporation that shows how much income you must report from that business on your own form 1040. But, an S corporation is property that you own, not something that you become.
No, you can’t BE an S-Corp. But you can do all of your business – in some cases most of your public interaction – through an S-Corp, and shield yourself from a lot of crap.
Didn’t mean to offend with the sloppy choice of words.
All very useful information, and we’ve updated that particular line to read “wealthy individuals who pay taxes through a type of corporation.” In terms of the net political conclusions to be drawn from this, it’s not really very different, and not dependent on whether these kinds of arrangements are themselves unethical. If you had helped him write this release it would likely have been clearer, but the bottom line is the same.
Without passing further judgment, let us just say that “anything that impacts high income people generally is very relevant to successful small businesses” is an argumentative premise whose (GOP crib sheet) origins most people will recognize.
And hence the problem. We are now talking about taxing S-Corps at a significantly higher rate than C-Corps.
What this means is that a successful, locally owned business (likely to be an S-Corp), like a chain of eight restaurants will be paying 45% on income above $1mm whereas Mcdonalds and other large corporations who are direct competitors will be paying only 35%. It is very hard to compete, raise money for expansion and capital investments, etc, when your competiton is paying far less in taxes.
But it’s profit, not income. So if a locally owned business makes a profit of over $1mm then the profit over $1mm (and just that part) will be taxed higher.
As to investing in say a 9th restaurant, that comes before taxes and so would not be impacted by this. I will agree that taking profit out to put in the bank to save up for a larger investment is impacted by this.
But if that is a problem, I’d estimate 99% of the S corps can convert to be a C corp and the only difference is how taxes are handled.
There would be a stronger incentive for S-corps to elect to be C-corps if this current proposed surcharge passes, which would also mean the revenue we contemplate raising wouldn’t be raised leaving our healthcare reform shortchanged or our deficit enlarged.
Saving for investment over more than the same fiscal year is what would be impacted.
so it works out to be about the same.
The 35% v. 45% comparison isn’t apples to apples.
“It may allow you to modestly reduce your FICA taxes”. Ha ha. I don’t know who your tax accountant is but if your FICA taxes are only modestly reduced by filing as an S Corp. you should sue. Huge tax savings result as a dodge of the FICA tax. This is one of the keys to paying for health care reform. It was one of Hilary’s proposals to pay for reform 15 years ago. There should be a bright line test established.. you should have to pay out FICA on certain percentage of S Corp earnings.
If an employee-owner classifies too much of the enterprises fruits as profit, and too little as salary, the company will be audited and the IRS will reallocate some of the profit to salary. This is particularly true if the employee-owner’s choice isn’t restrained by third parties with some power in the business whose only interest is as an owner and not an employee, and there is no easy comparable to estimate the contribution of capital investments to the enterprise.
But I told you all so. Should have stuck with me and elected Joan FitzGerald. You think we would be having a problem with her? This guy is the arrogant, self-centered ass I’ve said all along. Hopefully someone will challenge him in a one-on-one primary to get rid of him.
Read below, carefully, after you’ve had a nap (you were up very late last night according to C-SPAN):
You are making the same mistake about health care reform that Republicans have made, by not considering the overall economic relief small business will get from reform. At the very least you could have expressed your concerns differently, without using Republican buzzwords like “Bush tax cuts!”
JeffcoBlue – You have hit the nail on the head. I have a small business with 4 employees. Health insurance for my employees is killing me. And I promise you that I am in no danger of making enough money to face a surtax.
According to the SBA there are approximately 30 million small businesses in the US. On his website – quoting the WSJ – Polis complains that the surtax would impact 500,000 small businesses. If I have done the math correctly, this is 1.7% of the wealthiest small businesses in the country. (That’s right he is one of them.)
No sympathy here.
I strongly support the expiration of the Bush tax cuts. That is a good thing, and something that I ran on and support.
That increases the rate paid by successful small businesses from 35% to 39.6%. The current health care tax, however, increases that rate to 45% over $1mm without changing the corporate tax, which remains at only 35%.
The above material is great, I am helping our caucus construct some of it.
To date I have never seriously disagreed with anything Jared proposed. And so I knew when it did happen, and I knew it would, it would break my heart. And now it’s happened.
Speaking as one of those chapter S company owners, I understand the various impacts this can have firsthand. I think there are issues with how chapter S companies are taxed, especially not being able to carry profit from one year to the next (when you see the economy headed South).
This is totally wrong-headed. For a number of reasons.
First, healthcare is killing small business. Many cannot afford it which limits who will work for them and impacts productivity with employees who have time & effort devoted to health issues. And for companies that can afford it, the escalating costs will soon drive it out of range for most.
Second, the present healthcare funding approach makes companies less efficient. Companies have to spend time & effort on what plan to get, how to set it up, etc. where that time would be better spent improving their productivity.
Third, tax rates on income have if anything an inverse effect on investments a small company makes. The tax is on profit after all expenses made by the company. If I invest more into the company, that reduces my profit and therefore reduces my taxes.
This does impact profit pulled from a company that can then be invested in another company. But if we are going to fix healthcare, then some of us need to pay a bit more. If everyone says tax someone else then we’ll never fix anything. I’ll take the larger tax bill if it means fixing our present mess.
And saying don’t tax this group without proposing a credible alternative is not contributing toward a solution. It’s just playing the normal political game of more services, lower taxes.
This proposal will favor a very small group of people – those with small companies that produce a lot of profit. The same people who benefit greatly from the political & economic system these taxes provide.
This is bullshit.
One of the victories that I wish got more coverage (maybe we should have done our press release on that instead) is that we passed a Kucinich amendment, with my support, that allows for states to implement a single-payer program if they choose and opt out of the national program if they do. This was over the objection of our own leadership, but as a single-payer supporter I thought it was critical and it now moves forward with the bill out of Ed and Labor.
I agree with your first and second points above, and have often made them myself.
The third I disagree with:
Lots of Sub-S companies might have to save several years worth of earnings to expand, whether it’s buying a new machine or opening a new branch. The money is taxed each YEAR on the profits, so they can only save money for expansion after paying a 45% federal tax. C-corps can accumulate and save up money after paying only a 35% federal tax. This is a bigger deal for capital intense industries, light manufacturing, retail, etc than it is for “new economy” companies.
I dislike how taxes hit S corps. We had a nice profit last year and I could see that this year would be a mess. I would have preferred that we could roll all of the profit into this year to cover any bad months. Instead we had to pay taxes and I was left with the remainder. (And that difference was 2 fewer people hired.)
But here’s the big thing – funding this will require more taxes from somewhere. Just saying “not this group” not only is not solving the problem, but it encourages everyone to protect their sacred cows which leaves no one to pay. If instead you had proposed a change, maybe a slight drop in the S corp rate and an increase in C corp to match the S corp rate – then you would have been proposing a solution, just one you felt was more equitable.
I personally will benefit from a lower S corp rate (although there’s no way I’ll hit $1mm profit this year). But the country will benefit greatly from a sane, funded healthcare system. And if that means in good years I pay a bit more in taxes, I’ll take that trade-off.
ps – I know we won’t always agree and I do appreciate your talking about the issues we disagree on.
to solve problems. Instead what we often get is a constant, continuing barrage of obstacles to solutions. The growing problem of lack of access to health care in the U.S. is both complex and simple at the same time. We can allow politicians and lobbyists to get us lost in the weeds over and over (such as by picking at the details of a funding mechanism), OR we can demand that the elected politicians solve the problem, and solve it now. This country has waited long enough, the increasing numbers of children in poverty have waited long enough, and small businesses have waited long enough. The uninsured, underinsured and people-who-thought-they-were-insured have waited long enough. The private sector has collectively chosen to not solve the problem – we need the federal government to take care of it this year.
.
I thought that Subchapter S Corporation profits were only taxed once, and profits earned by other corporations were taxed as income to the corpus and then again as income to the owners when distributed as dividends.
If so, wouldn’t S Corps taxed at 45% still be a better deal than other corporations get ?
Even at the current rate of 35%, a second tax at 15% yields an effective rate of
(1 – 0.35) X (1 – 0.15) =
. 0.65 X 0.85 = 0.5525
=> taxed at 44.75%
That 35% rate doesn’t have to go up much to make the effective rate exceed 45%.
Of course, David’s gripe about S Corps not being able to retain earnings is legit, noting that retained earnings aren’t distributed, so they don’t get taxed the second time.
………
On another note, the SBA’s definition of a “small business” is not my intuitive idea of a small business.
In some industries, a company can have 1,500 employees and still be considered “small.”
.
…I have reached an important conclusion: it sounds like Polis has seized upon an opportunity to scuttle the proposed health care reform plan. But why? I don’t know.
The House proposal isn’t what Obama called for or what is in any of the Senate versions, either of those methods of paying for it is fine by me.
Jared
…of the bill, nothing will pass, right? That’s another way of killing reform, it seems.
You can always find some excuse to oppose any legislation. Congress…especially the House, isn’t about getting YOUR way. It is about doing what is best for the American people.
listen to famed R pollster, consultant and spinner, Frank Luntz. He has always claimed that the most important reason for the GOP to fight universal healthcare tooth and nail is that if the Dems succeed in giving this great gift to the American people the Rs will not win them back in the foreseeable future. He’s very good at what he does. Lets get a civilized healthcare system and make the Luntz nightmare come true.
And again, the easy thing to do is to point out what’s not perfect in a bill. If enough Congresspeople point out what’s not perfect in a health care bill, it’s guaranteed we won’t get anything this year to address the problem. Solve the problem — it’s not new, and it’s not that complicated if you focus on a few key issues to start with: (1) Provide access to basic health care for everyone; (2) Work in multiple arenas to slow the relentless increases in health care costs; (3) Increase and broaden efforts at prevention and healthy living; (4) Re-think the U.S. health care formula which says insurance companies get to make health care decisions, instead of doctors with their patients.
His (phony) worry is that it will harm S-corporations and sole proprietorships where $250,000+ passes through personal accounts over the course of the tax year. Like the nerds say on Mythbusters, “Well, there’s your problem.” In these cases, the businesses have outgrown the S-corp and sole-prop forms, and it’s time to visit your local tax attorney and work out a more advantageous way to take money out of the business. So, pace Polis, it’s not “small business” that will be impacted so much as lazy or gormless small business people. Frankly, a tax on stupidity has a nice Darwinian ring to it.
This whole discussion has the same sort of campy concern that surrounds discussions of inheritance taxes. If grandpa has an estate of $1+ million, he can afford competent estate planning–unless he’s callous or wants to snicker at the relatives from his casket.