Small business and $250,000 "income"

[daenku32]

Since this $250,000 figure is used to describe small business owners, there are some questions that I have.

For example, is the small business person actually putting down $250,000 as personal income on the tax form? If you pay someone wages from your $250,000 of income, doesn't that count as deduction? or if you use it to build up inventory, and then sell that inventory, only the profit portion should be counted as taxable income.

I'm willing to accept that small business codes are messed up in this department, but to me you wouldn't or shouldn't have $250,000 in taxable income if your are using that money for running the business.

I keep thinking of a scenario where I would buy and sell $100,000 worth of goods in $10,000 batches using my credit cards, which I could potentially do if I kept my margin low enough. But it certainly shouldn't increase my annual taxable income by $100,000.

To me, if your home business has $250,000 worth of revenue from sales it wouldn't automatically be considered income. It's not how corporations are treated, so why small business?

 

[icerat]

Since this $250,000 figure is used to describe small business owners, there are some questions that I have.

For example, is the small business person actually putting down $250,000 as personal income on the tax form?

If you pay someone wages from your $250,000 of income, doesn't that count as deduction? or if you use it to build up inventory, and then sell that inventory, only the profit portion should be counted as taxable income.

I'm willing to accept that small business codes are messed up in this department, but to me you wouldn't or shouldn't have $250,000 in taxable income if your are using that money for running the business.

I keep thinking of a scenario where I would buy and sell $100,000 worth of goods in $10,000 batches using my credit cards, which I could potentially do if I kept my margin low enough. But it certainly shouldn't increase my annual taxable income by $100,000.

To me, if your home business has $250,000 worth of revenue from sales it wouldn't automatically be considered income. It's not how corporations are treated, so why small business?

I'm not 100% familiar with the US tax codes, but in a typical small business tax return elsewhere you would include both your income (revenues) and expenses.

Only the net income is ultimately relevant for income taxation purposes.

A 2009 estimate put the number of "small business owners" earning over $250K in the US at a little over 663,608. Many of them would be farmers or professionals (eg lawyers etc) collecting dividends. Assuming you're interested because of "obama tax changes", Factcheck had this to say in 2008-

we judge that the actual number of small-business employers who would face higher tax rates under Obama is probably far below 663,608

That's out of a total of nearly 27 million "small business owners", of which over 20 million are people running small home businesses with no employees.

 

[lomiller]

For example, is the small business person actually putting down $250,000 as personal income on the tax form?

I’m not intimately familiar with US tax codes (who is lol) but I believe there are some people for whom there is a tax advantage in lumping personal and business income together. Personally I wouldn’t because it probably means your personal assets could be placed at risk to cover business losses.

If you pay someone wages from your $250,000 of income, doesn't that count as deduction? or if you use it to build up inventory, and then sell that inventory, only the profit portion should be counted as taxable income.

If business income is being placed on your personal tax return then you should be eligible for more or less the same deductions the business could claim. If you ran into this $250K bracket your take home would probably be about the same as someone earning that much as employment income, or possibly even a little higher. (Higher because presumably you are only doing it this way because there is a tax advantage over keeping the business separate and paying yourself a $250K salary.)

 

[mhaze]

I’m not intimately familiar with US tax codes (who is lol)....

Quite a few people are. I deleted the rest of your post because it was all wrong.

Small business in the US, if they are incorporated they file 1120, pay themselves wages, those are reported on 1040 tax return.

OR....

Many doctors and lawyers, or other professions, use the 1120S "subchapter S" corporate form, pay themselves wages, report those on the 1040 tax return.

OR....

The business operations may be in a LLC, which has some tax implications but is a "disregarded entity" so it simply goes on the 1040 schedule C.

OR....

The business operations are a "sole proprietorship", in which case they are simply listed on the 1040 schedule C.

In the last two cases, there is nothing such as "paying a salary". An abbreviated income sheet is on the schedule C and computes net profit which is taxable.

The argument against taxing small business higher rates under the ruse that those making over 250K are "the rich" is very simple.

It is out of those "excess profits" over and above the minimum needed to continue operations that business expansion can occur. Thus, when you place negative tax consequences on profits, you directly restrict business expansion.

It's a liberal delusion to think that some government can have a focus on "creating jobs". It is private industry expanding that creates jobs....

 

[icerat]

It is out of those "excess profits" over and above the minimum needed to continue operations that business expansion can occur. Thus, when you place negative tax consequences on profits, you directly restrict business expansion.

That makes no sense to me. If you're investing the money back in to the business then it's not profit is it?

 

[lomiller]

The argument against taxing small business higher rates under the ruse that those making over 250K are "the rich" is very simple.

It is out of those "excess profits" over and above the minimum needed to continue operations that business expansion can occur. Thus, when you place negative tax consequences on profits, you directly restrict business expansion.

"Simple" only if you mean simple minded (much like you )

If the money is actually used to expand the business it’s a business expense, or in the case of capital equipment it’s covered under depreciation. IOW, if you use the money to expand the business it's not taxed so the tax rate is irrelevant.

The rest if your idiotic post pretty much regurgitates what I already said about different ways to structure business income.

 

[daenku32]

It is out of those "excess profits" over and above the minimum needed to continue operations that business expansion can occur. Thus, when you place negative tax consequences on profits, you directly restrict business expansion.

But you can still take out a loan to pay for the expansion. And looking at schedule C form it does have lines for items that you'd likely spend during expansion of business. So if you spend money on expansion it would reduce your taxable income.

 

[icerat]

right, so based on Iomiller's and daenku32's posts, the US is no different to anywhere else and higher taxes on profit should actually *encourage* reinvestment, not discourage it.

 

[Dr. Keith]

right, so based on Iomiller's and daenku32's posts, the US is no different to anywhere else and higher taxes on profit should actually *encourage* reinvestment, not discourage it.

Yes, to some extent.

The flip side is that a business owner will only make investments in the company that are likely to improve the bottom line. For example, I would only hire another employee if the money I make off that employee is greater than the cost of that employee. If that is true, then the profit off the new hire will be taxed at a higher rate if my overall profits are over $250k.

The first problem with that argument is that it assume employers only make investment that increase profitability. Many employers will make investments that decrease risks, decrease worker fatigue, decrease turnover, increase safety, or even increase long term value of the company. For instance, I may hire an employee that will cost me a bit for a few years in the hopes that she helps me get the business in a position that is more attractive to buyers. Or I may make a marginal hire that costs me a bit if it increases my freedom to take time away from work. Or, I may hire an employee that doesn't increase my profit much if I think there is chance that employee will land me windfall accounts that will totally change my business from small to medium.

The second problem with the argument is that no rational business person would pass up a profitable hire just because they will have to pay 39.6% tax on that profit rather than 35%. Let's say the new hire adds $100k to my profitability, that would be the difference between a $65,000 net and a $60,400 net. What person who would make a new hire to earn an additional $65,000 would not make a new hire to earn an additional $60,400?

Apparently, most of the GOP.

 

[icerat]

Yes, I am a business owner so I can confirm that's how it is in real life

Indeed if I was earning $260,000/yr profit in a small business I might go out of my way to invest $10,000 in something to skip any extra tax.

In otherwise, the tax could act as an economic stimulus.

 

[psionl0]

Business law is probably too complex to do it justice here.

Basically, if you are a sole proprietor or in a partnership, then any profits the business makes is your income and any expenses of the business are legitimate tax deductions for you.

If you run a LLC or other corporation then any profits that corporation makes are its own and unrelated to your income. Wages paid (including to you) are a tax deduction for the corporation but I'm not too sure about the situation with dividends.

 

[Tippit]

"Simple" only if you mean simple minded (much like you )

If the money is actually used to expand the business it’s a business expense, or in the case of capital equipment it’s covered under depreciation. IOW, if you use the money to expand the business it's not taxed so the tax rate is irrelevant.

The rest if your idiotic post pretty much regurgitates what I already said about different ways to structure business income.

Go figure, you don't know what you're talking about. CapEx is typically funded by (after tax) profits, debt, or equity. It involves the purchase of an asset which is depreciated (and deducted) each tax year following the year it was purchased. The higher the tax burden, the less retained earnings will be, and fewer capital expenditures will be made.

You do get to amortize the cost over the period of the life of the asset, and you can deduct this from future taxable income, but this is distinctly different from your claim that money used to "expand the business" is not taxed. If the CapEx is self-financed, it comes from after tax income.

 

[balrog666]

That makes no sense to me. If you're investing the money back in to the business then it's not profit is it?

Wrong. You can first declare the profits, pay taxes on them, and then you can use what is left to "re-invest" in your business or leave any capital in the business (and/or invest it in capital expansion) and that means that it is taxed as profits anyway.

"Simple" only if you mean simple minded (much like you )

If the money is actually used to expand the business it’s a business expense, or in the case of capital equipment it’s covered under depreciation. IOW, if you use the money to expand the business it's not taxed so the tax rate is irrelevant.

The rest if your idiotic post pretty much regurgitates what I already said about different ways to structure business income.

Not at all. Capital expansion (unless you are a really small business that doesn't make a 250K profit) must be depreciated, so you don't get the full deduction except spread out over 5, 7, 15, or 25 years, which leaves your current costs taxed as income.

But you can still take out a loan to pay for the expansion. And looking at schedule C form it does have lines for items that you'd likely spend during expansion of business. So if you spend money on expansion it would reduce your taxable income.

Only the "interest" on that loan is deductible and your balance sheet reflects that. And expanding your business in a declining market is a rather stupid thing to do.

Business law is probably too complex to do it justice here.

Basically, if you are a sole proprietor or in a partnership, then any profits the business makes is your income and any expenses of the business are legitimate tax deductions for you.

If you run a LLC or other corporation then any profits that corporation makes are its own and unrelated to your income. Wages paid (including to you) are a tax deduction for the corporation but I'm not too sure about the situation with dividends.

Wages paid to you are subject to the 15.3% FICA tax bite (up to the current semi-limits).

If you can make enough to matter, you can pass through a majority of your profit as dividends and avoid the FICA tax bite of 15.3% off the top (before income taxes) and pay the lower capital gains tax on the rest instead of the income tax rate. That is not often seen unless your business is not exactly "small".

And LLC profits always fall through as wages, dividends, or "direct income" - nothing goes untaxed. Ever.

But the intangible benefits of business ownership usually make up for all that tax-accounting nonsense.

 

[Tippit]

That makes no sense to me. If you're investing the money back in to the business then it's not profit is it?

First there is profit, and then dividends are paid and capital expenditures are made. The assets go on the balance sheet, and get amortized over their useful lives. Operational expenses, or OpEx, get deducted from revenue to get operating income. Capital expenditures (like factory equipment) are assets which are paid from after tax dollars, or possibly financed.

This is why certain corporations have remarkably different valuations even though they may "earn" a similar amount. Software companies don't need nearly as many capital expenditures as say, automotive companies to generate each dollar of earnings. This is why most skilled investors don't care about earnings, but focus instead on free cash flow.

 

[psionl0]

Capital expenditure is generally not tax deductible because you acquire an asset with the expenditure (although governments often give special tax breaks for certain types of investments they believe need to be increased).

Depreciation on assets is deductible but the problem is that you need to spend the money first before you can claim on the depreciation.

 

[ngc6205]

Business law is probably too complex to do it justice here.

Agreed. Also, tax law is probably too complex to cover all of the minutiae here as well.

Basically, if you are a sole proprietor or in a partnership, then any profits the business makes is your income and any expenses of the business are legitimate tax deductions for you.

Yes, the above, in general terms, is correct.

If you run a LLC or other corporation then any profits that corporation makes are its own and unrelated to your income. Wages paid (including to you) are a tax deduction for the corporation but I'm not too sure about the situation with dividends.

That is not quite correct. A C-Corp is indeed an entity that is taxed separately from its owners. However, an S-Corp has a choice at its inception to be taxed in the same manner as a C-Corp or to pass through its income to its shareholders. The shareholders must then report the income or loss on their individual tax returns.

For an LLC, the answer is, it depends. By default, an LLC with a single member is not treated as a separate entity and its income and expenses must be listed on the member's tax return (Schedule C). An LLC with two or more members is treated as a partnership by default. However, an LLC may file form 8832 to elect to be treated as a corporation for tax purposes.

On to business income. A business entity cannot simply eliminate all income by spending all of its profit back into the business. The matching principle of accounting requires that, whenever possible, expenses must be matched to the revenues that they generate. For example, (a very simple example) if a business buys $100,000 in inventory, but only half of the inventory is used
during the period to create product that is sold, the inventory expense for the period is $50,000. Labor to produce finished product is also included in inventory and is not expensed when paid but only when the finished product is sold.

Depreciation expense is similar, which is why depreciation is spread over the life of the capitalized equipment. So, machinery that is expected to have a 10 year life time (and meets the 10-year depreciation category requirements), is expensed over the time that it is used to create product. Therefore, if a company uses its entire $100,000 profit (after all other expenses) to buy $100,000 of machinery and it elects to use straight-line depreciation (and the machinery was bought early in the year), only $10,000 is deductible as an expense for that year. Therefore, the company would still have $90,000 in income for that year unless other expenses can be deducted. Note: depreciation rules vary depending upon the capitalized equipment and other conditions. Also, a company can sometimes elect to take an accelerated depreciation which effectively transfers a portion of the profit into later years.

Now, on to the original post...

Since this $250,000 figure is used to describe small business owners, there are some questions that I have.

For example, is the small business person actually putting down $250,000 as personal income on the tax form? If you pay someone wages from your $250,000 of income, doesn't that count as deduction?

Yes.

or if you use it to build up inventory, and then sell that inventory, only the profit portion should be counted as taxable income.

In general, yes. However, simply spending money on inventory is not an expense. For example, beginning of the year inventory value is $10,000. Inventory purchases for the year is $100,000. Ending inventory value is $30,000. Only $80,000 is allowable as an inventory cost expense. Note: as I mentioned earlier, labor utilized to build finished product is also a part of inventory expense.

I'm willing to accept that small business codes are messed up in this department, but to me you wouldn't or shouldn't have $250,000 in taxable income if your are using that money for running the business.

The $250,000 in income mentioned by Obama is most likely the net income that is passed through to the owner. However, as you might have already figured out, net profit is not always in the form of money.

I keep thinking of a scenario where I would buy and sell $100,000 worth of goods in $10,000 batches using my credit cards, which I could potentially do if I kept my margin low enough. But it certainly shouldn't increase my annual taxable income by $100,000.

To me, if your home business has $250,000 worth of revenue from sales it wouldn't automatically be considered income. It's not how corporations are treated, so why small business?

Gross revenue is not income. Wages, cost of good sold, other expenses are all deducted from revenues to get to net income.

 

[mhaze]

...Capital expansion (unless you are a really small business that doesn't make a 250K profit) must be depreciated, so you don't get the full deduction except spread out over 5, 7, 15, or 25 years....

Hell, commercial buildings are 37.5 years and that excludes the land. So basically you get completely screwed on any of these "depreciation rules" because you buy with today's dollars, but the depreciation is then-dollar values, which are less.

Computer equipment, like PCs and notebooks, is A SEVEN YEAR DEPRECIATION. I figure they are actually good for 2 years.

I'm glad there are at least SOME people on this forum who are familiar with small business.

 

[Skeptic Ginger]

Since this $250,000 figure is used to describe small business owners, there are some questions that I have.

For example, is the small business person actually putting down $250,000 as personal income on the tax form? If you pay someone wages from your $250,000 of income, doesn't that count as deduction? or if you use it to build up inventory, and then sell that inventory, only the profit portion should be counted as taxable income.

I'm willing to accept that small business codes are messed up in this department, but to me you wouldn't or shouldn't have $250,000 in taxable income if your are using that money for running the business.

I keep thinking of a scenario where I would buy and sell $100,000 worth of goods in $10,000 batches using my credit cards, which I could potentially do if I kept my margin low enough. But it certainly shouldn't increase my annual taxable income by $100,000.

To me, if your home business has $250,000 worth of revenue from sales it wouldn't automatically be considered income. It's not how corporations are treated, so why small business?

As a person who has owned and run my small business for over 20 years, let me clarify something. One's income is after you pay all your costs of goods sold and business expenses.

Employee wages are not paid out of any owner's income. Employee wages are deducted from gross profits. One's income is NET profits, not gross profits. The whole concept one is taxing income that would pay an employee is a BIG LIE!!!!

 

[Skeptic Ginger]

... Only the net income is ultimately relevant for income taxation purposes.

A 2009 estimate put the number of "small business owners" earning over $250K in the US at a little over 663,608. Many of them would be farmers or professionals (eg lawyers etc) collecting dividends. Assuming you're interested because of "obama tax changes", Factcheck had this to say in 2008-

we judge that the actual number of small-business employers who would face higher tax rates under Obama is probably far below 663,608

That's out of a total of nearly 27 million "small business owners", of which over 20 million are people running small home businesses with no employees.

I would love to be making $250,000 and if I did, I could easily afford higher taxes.

 

[Skeptic Ginger]

Hell, commercial buildings are 37.5 years and that excludes the land. So basically you get completely screwed on any of these "depreciation rules" because you buy with today's dollars, but the depreciation is then-dollar values, which are less.

Computer equipment, like PCs and notebooks, is A SEVEN YEAR DEPRECIATION. I figure they are actually good for 2 years.

I'm glad there are at least SOME people on this forum who are familiar with small business.

What? Clearly you don't know Jack!

I think it's 29 years depreciation but regardless, it begins when you put the property into use. I have a large home office. It makes a very nice deduction on my taxes. As for the computers lasting 2 years. Yeah, they do. So I have a depreciation deduction for the computer I no longer use and an additional deduction for the new one I bought. The deductions are very generous regardless if the land is excluded. I still own the land, it's not like it actually depreciated.

The idea the depreciation deduction ends up in devalued dollars is an outright false claim.

I also got a nice deduction for child care and when that ended I had the child tax credit, then I added the education credit when my son went to college. My taxes have been extremely low for a decade compared to years past.