By Gail Buckner; Fox Business

What’s the most common form of business in this country?  (Hint: it’s not “corporation.”)  In fact, the United States is the only developed nation in the world where the majority of companies are not what the IRS calls “C” corporations -- the kind that make up the S&P 500.  Instead, according to Brad Close of the National Federation of Independent Business [NFIB], 75% fall into the category of  a “pass-through” entity.

They go by names such as “S Corp.,” “limited liability corporation [LLC],” “partnership” and “sole proprietorship.”  Though each has a different structure, all of these business forms have one thing in common: profits and losses show up on the tax return of their owner(s).  In other words, income from the business is taxed at “ordinary income” tax rates for an individual.

Jim Wordsworth, a small business owner in the Washington, D.C. area, has “eight distinct companies, most organized as sub-chapter S.”  He reports the profits his various restaurants make on his personal income tax return as if he had earned that money from a job.

Wordsworth takes his own salary from whatever is left after paying taxes.  The remainder is used to improve his existing businesses and to expand.  “That’s how I bought buildings, furnishings [for the restaurants] and how I hire more people.  Restaurants take a lot of capital.”

The likelihood of higher personal income tax rates on January 1st is going to have a direct impact on what, if anything, Wordsworth can reinvest in his businesses and how many employees he can afford.

Under both scenarios on the table right now -- the expiration of the lower Bush-era tax rates or the Obama administration’s proposal of higher tax rates only for those in the top two brackets -- Wordsworth’s individual income tax rate is headed higher as of January 1st.

“My salary’s been $82,500 a year since 1986.  I don’t consider myself  ‘filthy rich.’  Many on my payroll make more than I do.”  After 34 years of building his businesses, and paying income tax, he resents the negative stereotype democrats and the administration are pinning on so-called “wealthy” Americans.

Because his companies are “pass-through” entities, what shows up on his personal tax return is really the combined income of eight separate businesses. “That’s what Americans don’t realize,” says Wordsworth.  “That represents the productivity of a lot of companies and capital investment.”

“It’s only going to get worse,” says Bill Ahern of the Tax Foundation. Starting in 2012 upper income individuals will be hit with a higher contribution to Medicare. Single individuals earning more than $200,000 and couples earning more than $250,000 (talk about a “marriage penalty”) will have to kick in an additional 0.9%. Income above the threshold will be taxed at 2.35% instead of 1.45%, an extra $900 for every $100,000 in additional income. 

These individuals will also be subject to a higher tax rate on investment income -- dividends, taxable interest, rents, royalties.  Instead of the maximum being equal to the highest income tax rate -- 39.6% -- an additional 3.8% “Medicare surtax” will be tacked on, for a resulting tax rate of 43.4%.

On top of higher personal income tax rates, new health insurance regulations are also hitting small business owners hard.  The net result is less money left for reinvesting in and expanding their businesses.  Plus, government-mandated coverage is expected to be substantially more expensive.  As a result, companies both large and small will have to seriously weigh the cost of adding to their payrolls.

The fact that lending has been nearly non-existent for the past two years has also hurt small firms. “Liquidity for small businesses is gone,” says Wordsworth. “And liquidity is everything.  You  can’t run a small business without it.  I can’t sell stock to raise capital.”

According to Wordsworth, legislation aimed at supposedly helping struggling small businesses cope in this economy doesn’t measure up to how it’s advertised. “You hear the administration say it’s unleashing $30 billion to help small business.  But when you [look] into it, you find out you have to have equity and a strong balance sheet. That’s normal in a strong economy, but we’re not in one!”

Revenues at Wordsworth’s restaurants have declined because eating out is a luxury that many people forego when income gets tight. During tough economic times such as we’ve had over the past two years he has “personally funded payrolls” in order to avoid lay-offs and continue paying his staff.  And, he says he knows many other small business owners who have done the same thing.

Another issue on the watch list of business is the outcome of “cap-and-trade” legislation, which is aimed at reducing greenhouse gas.  You can bet that if utilities have to spend more to produce the energy we require, that extra expense is going to be passed down to the end users.  The problem is, no one has any idea how much this is going to cost.

According to NFIB’s Close, while the bill was passed by the House of Representatives it’s currently stalled in the Senate.  But even if it dies there, Close says the White House has made it clear that it will do an end-run around Congress and implement cap-and-trade via the regulatory agencies. Higher taxes (in the midst of a recession, no less), increased health insurance costs, tight credit, the prospect of higher energy costs -- is it any wonder that American businesses are in a holding pattern, unnerved and unable to plan for the future because they don’t know what their expenses are going to look like?  “We’re spending more time on survival than we are on [making our businesses a] success,” says Wordsworth.

“But wait!  There’s more!,” as the ad says. More bureaucratic red tape.  More time, money and staffing needed to comply with it. 

One measure, in particular, targets small business because the IRS believes billions of dollars in income is going unreported.  It requires that if a company (of any size) buys at least $600 worth of goods or services from another firm in a single year, it has to issue that firm a 1099 showing the total payments made.  Naturally, a copy also goes to the IRS which can theoretically compare the 1099s to how much income the business reports.

Good in theory.  Ridiculous in practice.

For instance, say you and a partner have a small accounting firm.  You buy your office supplies at Staples (SPLS: 20.40 ,0.00 ,0.00%).  You spend about $100/month on printer paper and office supplies.  You also buy a new computer. You hire Neil, the tech nerd, to install it.  The computer costs $900, Neil’s fee is $350.

Under current law, since Neil doesn’t operate as a corporation, at the end of the year you’re supposed to issue him a 1099 for $350.

Under the new law, which takes effect in 2012, you’d also have to issue a 1099 to Staples!  This means finding out Staples’ corporate tax I.D. number and keeping tabs on every pen, pad and printer cartridge you’ve purchased over the past year.

Imagine having to produce a 1099 for every single supplier or service-provider that you’ve done more than $600 in business with each year!  Think of the record keeping and paperwork.

“We’re being suffocated by all of the policies, plans, threats and proposals” coming out of Washington, says Wordsworth.

He adds, “Politicians say ‘We need to create more jobs.’  They’re wrong. They need to create the economic climate that will [enable us to] create more jobs.  That’s what businesses do.”