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Bloomberg BNA: Proposal to Raise Top Tax Rates Ignores Challenges for Passthroughs, Witnesses Say

Washington, Sep 14 -

Bloomberg BNA: Proposal to Raise Top Tax Rates Ignores Challenges for Passthroughs, Witnesses Say

September 13, 2012

Sept. 13 (BNA) - Allowing the top tax rates to rise on households earning more than $250,000 may sound appealing to those looking to reduce the nation's deficit without inflicting more pain on the economy, but witnesses before the House Small Business Committee said Sept. 13 that it may pose real problems for many businesses.

One issue is that many people seem to not understand that the taxable profits in a business incorporated as a passthrough entity do not necessarily translate into cash in the pocket of the owner, Theresa Kern, president of MA Steel Erectors, said at the hearing.

Kern said that even if the company turns a solid profit and she pays taxes on that money through her individual tax returns, requirements from her bank and under the company's surety bonds can prevent a large share of those profits from leaving the company.

“There is no relationship between the amount of profit a Sub[chapter] S or LLC entity shows on a financial statement and the amount of money an owner has actually withdrawn,” Kern said. “I am liable for payment of the income taxes due on this phantom income at the individual tax rate. Increasing the rate of this tax by even 10 percent will have a significant deleterious effect on my ability to grow my business.”