Would a Cut in Corporate Tax Rates Be Bad for Small Business?

In recent weeks we have received mixed signals as to what the Obama Administration intends for corporate tax rates. The President has, on one hand, been a vocal advocate for a lower corporate tax rate that is more in line with our trading partners around the world. That rate is speculated to be in the neighborhood of 20 to 25 percent, a significant decline from the current 35 percent rate.

On the other hand, the President has stated that any reduction in the corporate tax rate would need to be revenue neutral, meaning that the decline in governmental revenue would require an offsetting revenue increase somewhere else. Furthermore, the President’s fiscal year 2012 budget proposal includes no such corporate rate reduction.

For small businesses, a lower corporate tax rate might not be all that great. Why not? Most small businesses operate either as S corporations or limited liability entities, neither of which typically pay tax. Instead, these entities pass through income to their owners, who are then taxed at their prevailing individual tax rates, rates that are set to go up after 2012. Small businesses that do operate as taxpaying corporations rarely earn enough income to be subjected to the highest corporate tax rate. Thus most small businesses and their owners would receive little, if any, benefit from a corporate rate cut.

Despite receiving little tax benefit, the revenue neutrality requirement may require small business owners to pay the price. Right now, small businesses are in a pretty good spot with respect to tax breaks. The ability for small businesses to claim first year deductions for capital expenditures is at an all-time high. Businesses also have access to potentially lucrative deductions and credits relating to hiring new employees, engaging in production activities, and investing in research and development. While President Obama is on record as supporting all of these provisions, a corporate tax rate reduction will require hard choices to attain revenue neutrality, and all of these tax breaks will be on the chopping block.

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