Small Firms Fret Over Higher Taxes

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Washington, December 6, 2012 | comments

The Wall Street Journal: Small Firms Fret Over Higher Taxes
December 6, 2012
By Emily Maltby

As President Barack Obama and Republicans in Congress debate how to address the nation's deficit and avoid the so-called fiscal cliff, some small-business owners are getting a chance to air their complaints.

On Wednesday, 15 business owners made a case against Mr. Obama's proposal to allow tax-cuts to expire for those making upwards of $250,000. The House Committee on Small Business, headed by Rep. Sam Graves (R., Mo.), released summaries of their gripes.

Because many owners of small businesses have business income "pass through" to their personal tax returns, they may appear on paper to be a high-income earner.

But owners often reinvest much of their profit in their businesses, generally either by hiring new employees or buying more equipment and inventory – rather than bolstering their own paychecks.

Chris Heitman, co-owner of Pegasus Auto Racing Supplies Inc. in New Berlin, Wis., said investments to his firm are made with after-tax income and that a higher tax rate would leave him with less cash to expand.

Pegasus sells racing helmets, plumbing supplies, brake pads and other items amateur and professional racers need. Net profits at the firm totaled roughly $700,000 last year, Mr. Heitman said in an interview. He set aside more than 30% for federal taxes and 6% for state taxes. Nearly all that was left after taxes was used to purchase new lines of inventory – his primary means of attracting more customers.

If taxes go up next year under Mr. Obama's plan, Mr. Heitman worries he won't be able to sustain the growth.

"I'm afraid that if our [tax] rates go up next year there won't be enough left after taxes to invest heavily in new product lines," he said. "We are typesetting our 2013 catalogue now. Because of the uncertainty about the tax rate, there are items we will have to leave out."

Kim Irwin said for the last nine months she has badly needed an employee to handle clerical and accounting tasks at her firm, Integrity Wire Inc., a wholesale distributor that sells wire and cables for transit and construction projects in Huntington, W.Va. The uncertainty over potentially higher taxes, however, has made her too nervous to hire.

"I don't want to hire anyone I may have to lay off next year," she said. "I want them to feel secure to work here."

The three-employee firm expects to hit $9 million in annual sales this year. A higher tax rate "won't be detrimental," she said. "We won't go out of business, but I won't be able to grow at the pace we've been growing because…we will be lean on cash flow."

About 300 comments have flooded the committee's website since Monday, when Rep. Graves emailed more than 23,000 small businesses, soliciting their opinion on the matter.

The submitted comments have been "overwhelmingly against the president's plan to raise taxes for those earning over $250,000," said Darrell Jordan, the committee's communications director.

Republicans have suggested a plan that increases revenues by closing tax loopholes, but not allowing tax rates to go up.

Ms. Irwin said in the interview that she has already informed her workers that some overhead expenses, such as business travel, may be scaled back next year if her taxes go up.

Other business owners, including Kathy Rainbolt, are considering turning down work to stay below the $250,000 threshold.

She and her business partner, Kim Willmott, run Pentecom LLC, a firm in Palestine, Texas, that converts publications and documents into digital formats.

As the firm grows, she needs more money to cover expenses. Being taxed at a higher rate once she hits $250,000 leaves her with a few options: "We can go out and borrow money, which we have never done before," she said, "Or we will increase our prices."

The final option, as she sees it, is to stay small. "We can control how much work we take. If it puts us right at $250,000, we may decide we don't want to go over."

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