Money Talk: How tax brackets affect small businesses

What small businesses are looking for in taxes from their presidential candidates

Election processes are filled with promises and ideas, many of which never see fruition, but they are a decent gauge of what can be expected from that candidate’s term.

Taxes and small businesses are mentioned constantly during election processes, but competition between small businesses and large companies are complicated. So complicated that even a tax bracket can put small businesses at a disadvantage, not only against larger companies, but even to make a profit.

According to the National Federation of Independent Business (NFIB), 50 percent of small businesses face regular cash flow problems, with 20 percent of businesses facing that problem continuously.

While cash flow problems affect both large and small businesses, the way these companies respond to this problem are very different.

Large businesses are able to layoff employees, outsource or downsize, where smaller businesses might have to make harder decisions.

Most small businesses are unincorporated pass-through entities – meaning the owner files the business’ income on their personal taxes – so they face one more layer of taxation than larger corporations, but individual taxes can be inversely related to capital investments.

NFIB found that just a 5 percent increase in individual tax rates results in a 10 percent decrease in capital investments.

Capital investments are the funds invested into a firm to further their business objectives, which can be wide-ranging.

Capital investments also take a hit when it comes to actually filing taxes as well.

With no accounting or human resources in-house, small businesses are forced to look outside of their firm, which accounts for 89 percent of businesses.

On average, tax compliance costs are 67 percent higher for small businesses, which come out to $19 billion in costs a year, according to the NFIB.

Add payroll taxes into the mix and you’ll find that the profits that small businesses are taking home are minimal, if they’re making profits at all.

Pass-through entities employ 54 percent of private sector employees, half of those employees are employed by businesses that make over $250,000 a year, putting them in a different tax bracket.

Tax codes in America are notoriously complex, forcing small businesses to outsource their tax needs.

These obstacles are a bane to entrepreneurship, which can be remedied by creating a new tax code for small businesses, or simplifying the current tax code.

Kenneth Kashif Thomas is the senior features editor and can be reached at and you can follow him on twitter at @KenUBSpec