Elimination of a tax cut may affect small businesses

4/17/2011

President Barack Obama recently announced that he plans to eliminate a Bush-era tax cut that benefits households generating more than $250,000 annually. However, as the Washington Post notes, the elimination of this provision may negatively affect small businesses.

Small companies and sole proprietorships organize themselves differently than larger companies. Instead of the businesses themselves paying taxes, the earnings or losses are covered by the owner or shareholders, who are taxed individually. The elimination of the tax cut may negatively impact entrepreneurs who have their companies set up this way.

"Large businesses thus account for a large share of the economic activity pass-through entities undertake," Donald Marron, director of Urban-Brookings Tax Policy Center, told the source. "Policymakers should therefore take care not to equate pass-throughs with small business."

Businesses potentially affected by this change in policy should consider taking out commercial loans to cover the losses. If they have to pay more taxes, they will need more capital to continue to grow and expand, with which commercial loans can help.