Obama's plan also would phase out the personal exemption and gradually reduce itemized deductions for individuals making more than $200,000 and married couples making more than $250,000. The top capital gains tax rate would rise from 15 percent to 20 percent. Qualified dividends, which are now taxed at a top rate of 15 percent, would be taxed as ordinary income for top earners, or at a top rate of 39.6 percent.
That, some business owners complain, would leave them with less money to hire new workers or keep the ones they have.
"We're trying to encourage people to go out and hire and take risks," said Brian Reardon, executive director of the S Corporation Association. "If you are reducing the marginal value, you are reducing the incentives for folks to take that risk."
An S corporations is a common business structure in which profits flow directly to shareholders who report the income on their individual tax returns.
Business owners note that they often pay taxes on profits they don't necessarily receive. For example, if you borrow money to start or expand your business, you can use some of your profits to repay the loan, but only the interest portion of the loan payment is tax deductible.
When business owners use profits to buy new equipment or make other upgrades, it often takes several years to write off the cost of those upgrades, depending on depreciation rules.
Dan McGregor, chairman of McGregor Metalworking Companies in Springfield, Ohio, said he and the other six shareholders in the business are looking at a tax increase of $250,000 to $300,000 next year under Obama's plan.
Under Obama's plan to increase the top two income tax rates, a taxpayer would have to have an income of around $4 million — depending on how it's structured — to face a tax increase of $250,000.
McGregor's company, which has 365 employees at five locations, does about $80 million a year in sales, McGregor said. Each year, a portion of the profits are distributed to shareholders, along with money to pay taxes. The rest, he said, is invested back into the company.
If taxes go up, distributions to shareholders must go up to pay the higher taxes, leaving less money to reinvest in the business, McGregor said.
"I feel a $40,000 reduction is the loss of one job, so if it's a $200,000 tax increase, that's five jobs," McGregor said.
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