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Question re: taxes on small business profits and adding workers -are they an expense?

LordSegan

Diamond Member
Nov 6, 1999
7,674
1
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Every conservative I know claims that "small businesses are pass-though tax entities" and "increasing income taxes on income over $250K" will ruin small business in America. They primarily claim that small business won't have the cash to hire more workers.

Isnt it true that a worker's wage is an expense? Therefore, if you hire another worker, your business's (net profits) tax basis goes down because you have added an expense?

So let's say you have a profit of 250K. You add a worker that costs 50K a year. Now your profit is 200K.

But let's say the worker adds 100K of profit. So now your profit is back up to 300K. You are taxed on 300K (at the various marginal rates staggered up to that amount). But you are not taxed at 350K, because that worker is a 50K expense.

So taxes should not stop a person from adding workers... or am I missing something?
 

nehalem256

Lifer
Apr 13, 2012
15,670
6
0
Hiring a worker does not yield immediate profits or revenue.

The hope is that adding a worker will yield FUTURE profits.

Higher taxes decreases the amount of money available for investment in future profits. At least that would be the theory.
 

LordSegan

Diamond Member
Nov 6, 1999
7,674
1
0
Hiring a worker does not yield immediate profits or revenue.

The hope is that adding a worker will yield FUTURE profits.

Higher taxes decreases the amount of money available for investment in future profits. At least that would be the theory.
Business entails risk? Or do you want to privatize profits and socialize risk? lol...
 

LordSegan

Diamond Member
Nov 6, 1999
7,674
1
0
What you are saying has nothing to do with Businesses needing cash up front in order to take risks.
I'll admit I was being a smartass.

But in a way its true. If you are making 250K in profit, and want to make more, then yes, you have to take a risk. And it's not guaranteed.

But I don't see how taxes really have an impact. Could you show me the math?
 

Matt1970

Lifer
Mar 19, 2007
12,321
2
0
Hiring a worker does not yield immediate profits or revenue.

The hope is that adding a worker will yield FUTURE profits.

Higher taxes decreases the amount of money available for investment in future profits. At least that would be the theory.
Some workers never yield a profit, they just reduce the work load of other people.
 

LordSegan

Diamond Member
Nov 6, 1999
7,674
1
0
I think it's rather telling that this topic dropped down the page so fast.

Conservatives seem to hate it when I ask them to come back with facts and numbers.....
 

Fern

Elite Member
Super Moderator
Sep 30, 2003
26,916
172
106
Every conservative I know claims that "small businesses are pass-though tax entities" and "increasing income taxes on income over $250K" will ruin small business in America. They primarily claim that small business won't have the cash to hire more workers.

Isnt it true that a worker's wage is an expense? Therefore, if you hire another worker, your business's (net profits) tax basis goes down because you have added an expense?

So let's say you have a profit of 250K. You add a worker that costs 50K a year. Now your profit is 200K.

But let's say the worker adds 100K of profit. So now your profit is back up to 300K. You are taxed on 300K (at the various marginal rates staggered up to that amount). But you are not taxed at 350K, because that worker is a 50K expense.

So taxes should not stop a person from adding workers... or am I missing something?
No, and yes.

The one HUGE factor that many non-finance/tax professional always seem to overlook is that profit /= cash in about 99.999% of cases.

Example:

I purchase a business worth a $1,000,000 on a five year note and make a $200k profit how much cash do I have left at the end of the year?

Answer before taxes -0- ($200K profit less $200K principal part of loan payment)

After taxes, even less. (The 'paper' income is taxed by Uncle Sam even though net cash received was zero.)

BTW: The amounts I used above fairly accurately reflect an actual purchase/sale of a biz, both in business valuation models and loan pay-off period. Unless there is a significant down payment, the seller is going to want about $200K per in payment (not including interest if charged).

That's just one reason why this discussion isn't as simple as many make out.

Moreover, there is a theoretical problem with taxing flow-thru business profits at higher rates. From what I've seen economists suggest taxing business profits at low rates. Well, why should the large corporations operated as (regular) C-corps (non-flow thru entities) pay less tax than businesses operated under S-corp status (flow thru entities)? It makes no sense, at least from the economic theory.

BTW: When a business invests it uses after-tax profits. The more you tax, the less there is of 'after-tax' money. And when most businesses expand they don't just 'hire a person'. Most often there is substantial investment in tangible property required (new building, production line equip, whatever) before you even think about adding the employees.

If you ask someone high enough in management so they'll understand cost accounting and budgeting, they'll generally tell you that a $50K hire costs much more than that, even for an office job. There are payroll taxes, unemployment insurance, employee benefits such as HI, paid vacation, paid sick time, they need a place to sit, a phone, a PC, maybe an auto etc etc. When I say "more" I don't mean a fraction, I mean a multiplier.

Fern
 

Fern

Elite Member
Super Moderator
Sep 30, 2003
26,916
172
106
I think it's rather telling that this topic dropped down the page so fast.

Conservatives seem to hate it when I ask them to come back with facts and numbers.....
So when you don't know what you are talking and ask others for answers it reflects badly on them if they don't respond quickly enough for your satisfaction?

Fern
 

Matt1970

Lifer
Mar 19, 2007
12,321
2
0
I think it's rather telling that this topic dropped down the page so fast.

Conservatives seem to hate it when I ask them to come back with facts and numbers.....
We already did but you don't seem to want to see it. More examples: Some business owners also have to save up to buy better equipment for thier business or to hire those employees sometimes takes money up front for a while untill those investments yield a profit. Government taking money out of the pockets of the business owners can delay or even stop it from ever even happening.
 

Bowfinger

Lifer
Nov 17, 2002
15,776
392
126
[ ... ]
If you ask someone high enough in management so they'll understand cost accounting and budgeting, they'll generally tell you that a $50K hire costs much more than that, even for an office job. There are payroll taxes, unemployment insurance, employee benefits such as HI, paid vacation, paid sick time, they need a place to sit, a phone, a PC, maybe an auto etc etc. When I say "more" I don't mean a fraction, I mean a multiplier.

Fern
28% is the figure we use for taxes, benefits, facilities costs, and corporate overhead. That does NOT include short term (5 years or less) capital costs like PCs and cell phones, nor does it include discretionary operating expenses like travel and training. They are budgeted separately.
 

Fern

Elite Member
Super Moderator
Sep 30, 2003
26,916
172
106
28% is the figure we use for taxes, benefits, facilities costs, and corporate overhead. That does NOT include short term (5 years or less) capital costs like PCs and cell phones, nor does it include discretionary operating expenses like travel and training. They are budgeted separately.
That's about as low as I've ever heard/seen. My father was a Director at the FL DOT. They used a figure of basically double the salary at a minimum IIRC. Then again, you guys are leaving out cap costs, training and travel etc. and I don't think they did. Being employees of state govt they likely had excellent/expensive HI and other bennies too, typically more than those in the private sector.

Fern
 

Bowfinger

Lifer
Nov 17, 2002
15,776
392
126
That's about as low as I've ever heard/seen. My father was a Director at the FL DOT. They used a figure of basically double the salary at a minimum IIRC. Then again, you guys are leaving out cap costs, training and travel etc. and I don't think they did. Being employees of state govt they likely had excellent/expensive HI and other bennies too, typically more than those in the private sector.

Fern
My intent was not to contradict you, but to reinforce what you said. Non-salary employee costs are indeed a significant additional expense. Our 28% is perhaps a bit low but in the same general ballpark as other large corporations from my private sector experience. I can see how the ratio in government would be higher based on my tenure there many years ago. At that time, salaries were low compared to the private sector while benefits were better.
 

Jhhnn

No Lifer
Nov 11, 1999
61,112
13,049
136
I purchase a business worth a $1,000,000 on a five year note and make a $200k profit how much cash do I have left at the end of the year?

Answer before taxes -0- ($200K profit less $200K principal part of loan payment)

After taxes, even less. (The 'paper' income is taxed by Uncle Sam even though net cash received was zero.)
And if you paid yourself a $200K before profit salary, you came out smelling like a rose.
 

CLite

Golden Member
Dec 6, 2005
1,726
7
76
BTW: When a business invests it uses after-tax profits. The more you tax, the less there is of 'after-tax' money. And when most businesses expand they don't just 'hire a person'. Most often there is substantial investment in tangible property required (new building, production line equip, whatever) before you even think about adding the employees.

If you ask someone high enough in management so they'll understand cost accounting and budgeting, they'll generally tell you that a $50K hire costs much more than that, even for an office job. There are payroll taxes, unemployment insurance, employee benefits such as HI, paid vacation, paid sick time, they need a place to sit, a phone, a PC, maybe an auto etc etc. When I say "more" I don't mean a fraction, I mean a multiplier.

Fern
Regarding the first point, capital expenditure is written off with a depreciation schedule. If you buy a new building you will get tax relief based on what you spent over a period 3 to 7 years'ish (exact period subject to fluctuating IRS rules). The second paragraph is correct, there is a higher cost to have someone employed that what their salary is, but that is all pre-tax or items that can be written-off so I'm not quite sure how it relates to the OP.

The OP is correct, changes in tax rates would not directly force a company to fire employees or stop hiring because employees are essentially a complete write-off.

I would agree with Fern that if something like Obama's proposed reduction (from Feb, 2012) in corporate taxes goes through, reducing the rate from 35 to 28, that we need to give S-Corps some additional thought. Of course, at lower levels of income due to progressive nature S-Corps will be lower rates even with the disparity in top rate. However, if S-Corp income reaches a high enough point it will pass C-Corps (which is proportionally taxed) in marginal rate.
 

LordSegan

Diamond Member
Nov 6, 1999
7,674
1
0
So far nothing I have read in response to my original post substantiates any argument that higher taxes have a meaningful impact on employment growth. A worker is either needed, or not. If needed, they should pay for themselves.
 

drebo

Diamond Member
Feb 24, 2006
7,040
1
81
Which just means that they're not properly managed.
Or it means they're not involved in production.

IT, for instance, has dick all to do with revenue generation, however they are integral to the operation of the business.

Or were you playing a six-degrees game?
 

Matt1970

Lifer
Mar 19, 2007
12,321
2
0
So far nothing I have read in response to my original post substantiates any argument that higher taxes have a meaningful impact on employment growth. A worker is either needed, or not. If needed, they should pay for themselves.
Think of it like this. You need to hire someone to build a house so you can sell it and make a profit. It may be weeks before you see the money from that sale. Paying for that employee is usually done from out of pocket funds (profit from your last sale). A higher tax rate would leave less money in your pocket to hire someone so you may have to borrow money to pay that employee which adds to your expenses. You are now cutting into profit margins.
 

mshan

Diamond Member
Nov 16, 2004
7,869
0
71
When I hear CEO types talk on tv, and they are talking about their actual businesses, not politics or idealogy, what they all say they want are 1) increased consumer demand, and 2) predictability / certainty going forward.

Predictability (removal of uncertainty) obviously includes what taxes will be, evolution of Obamacare, and who will be president, but the biggest concern is always the fiscal cliff*, specifically risk of extended gridlock causing a temporary shallow recession early next year.

Even if taxes go up, certainty / predictability of what the business environment is going to be forward will allow them to decide, rather than just putting everything off as they appear to be doing now, whether or not it makes sense to expand their business or hire new workers.







* Bottom of this article suggest fiscal cliff might (hopefully) be quietly being resolved behind scene as we speak now:
The Fiscal Cliff a Non-Issue?

"The storm clouds are clearing, one by one. The ECB and Fed have taken tail risk off the table for now. Even the much feared fiscal cliff may not be a problem. The Washington Post reported last week that the Republican Senate's leadership conceded that they may have to compromise on taxes should Obama win the election:

Senior Republicans say they will be forced to retreat on taxes if President Obama wins a second term in November, clearing the biggest obstacle to a deal with Democrats to defuse a year-end budget bomb that threatens to rock the U.S. economy.

Republicans have long resisted tax increases of any kind. But taxes are a major battleground in the campaign between Obama and Republican Mitt Romney, Capitol Hill veterans say, and the victor will be able to claim a mandate for his policies.


"This is a referendum on taxes," said Rep. Tom Cole (R-Okla.), a senior member of the House Budget Committee. "If the president wins reelection, taxes are going up" for the nation's wealthiest households, and "there's not a lot we can do about that."



http://seekingalpha.com/article/883171-not-time-to-get-nervous-yet
The Chinese Banks as the Canaries in the Coalmine


"This isn't going to end well for China, but these kinds of things have way of not mattering to the market until they matter. I am closely watching the price behavior of the Chinese banks listed in HK for signs of that the stress is becoming too much:

Agricultural Bank of China (1288.HK)
Bank of China (3988.HK)
China Merchants Bank (3968.HK)
ICBC (1398.HK)

None of the shares of Chinese banks are showing signs of panic. Take, for example, the price chart of China Merchants Bank. I am watching for signs of price weakness. In particular, signs of the violation of multi-year support. Should the stresses in the financial system become serious by falling to all-time lows, then it will be the market's signal that the systems is either on the verge of, or undergoing, a Lehman/Creditanstalt style implosion.



In the meantime, both the Fed and ECB are hosting a gigantic block party. There's lots of free food and drinks. I am sure that even the Chinese will be there. Go on and enjoy yourself. Just don't get so drunk that you get caught flat-footed when the cops raid the place."


http://humblestudentofthemarkets.blogspot.com/2012/09/watch-for-storm-clouds-on-horizon.html
 
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Anarchist420

Diamond Member
Feb 13, 2010
8,649
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Collecting sales taxes costs businesses money, so the larger the business is the less of a burden it is on them.

Businesses also have to budget around the corporate tax and that makes things worse too.

Finally, those that are sitting on cash are doing us a favor because if all of that cash went into circulation, then prices would go up more. Uncertainty is definitely a problem because they don't know whether there is going to be deflation or if they should gamble it away to make more money. The larger businesses don't need to worry about it either way because of the Fed and because of regulations, especially labor laws, patents, and anti-trust regulations (businesses need to be very aware and spend resources to make sure they don't suffer from anti-trust legislation). I've argued that the tax code is less of a problem in terms of job creation than the other things the state has been doing. Yet another problem is the govt spending and awarding so many contracts has reduced employment even if it has brought up wages for a few... look at all of the contracts awarded to big businesses, how relatively few they employ, and how much they pay those they employ, especially the CEOs... CEOs aren't always paid in cash, but companies with govt contracts are worth more, at least in the short term. Also, those who are not awarded the contract or those who don't even seek it are at a disadvantage in terms of getting a profit. I have a friend (although he's my oldest brother's friend) who has a contract with VDOT and patents (he's licensed them out) so he could probably retire before he's 40 (he's 35 now). Last I heard, he stopped doing work for anyone but VDOT and he's always been a pro-business mercantilist... and VA's roads have sucked for most, if not all of the time he's had a contract with Virginia Dept of Transportation so that's a good reason to auction the roads off to the highest bidder and have the state not regulate them at all. It will be painful in the short term, but we're going to suffer one way or another.
 

EagleKeeper

Discussion Club Moderator<br>Elite Member
Staff member
Oct 30, 2000
42,599
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Which just means that they're not properly managed.
You ever call a CSR?

Contact HR?

both are overhead - contribute nothing to the bottom line - a pure unneeded expense from your POV
 

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