US Senator Rand Paul and leading member of the US Senate Committee on Small Business and Entrepreneurship warned that more than 8 million businesses are at risk of facing tax hikes. This is due to the proposed expansion of the Net Investment Tax (NIIT) as part of the Build Back Better Act.
More than 8 million small businesses at risk of tax hike
According to the Republican senator from Kentucky, small businesses organized as S-Corps or Partnerships could face a tax hike and hurt job creation. The NIIT is a surcharge of 3.8% on passive income (capital gains, interest, rental and royalty income and dividends). However, the proposal proposes to extend the tax to an active income of more than $400,000 individually or $500,000 collectively. According to the Tax Foundation, the proposed expansion of NIIT is expected to generate some $183.6 billion in tax revenue over the next decade.
What’s at stake for small businesses?
The bill proposes to extend taxation to all business income, regardless of whether the taxpayer has a material participation in the business, as long as that income is not already subject to payroll taxes. This translates into shareholders of S Corporation, limited partners and other owners of a forwarding company that were previously exempt. Now they would have to pay net income tax on investments.
In addition, the effect of the expansion could put 64% of small businesses, i.e. millions of small businesses, at risk of a tax hike. Affected small businesses employ 62% of small business employees or 76.25 million employees. And this would place more than 70% of small businesses in professional, scientific and technical services (74%); construction (70%); and accommodation and food (70%) face higher taxes.
“Small businesses everywhere are already experiencing record high prices for everything from gas and rent to labor and supplies needed to run their businesses. And with the U.S. experiencing historically high inflation, Senate Democrats seem completely content to amplify their fight by paying and spending one more tax,” Senator Rand Paul said.
Can Small Businesses Pay Additional Taxes?
With concerns about a possible recession, record high inflation and high fuel prices, critics of the NIIT say the expansion of the NIIT will put too much of a burden on small businesses. A recent survey by the National Federation of Independent Business (NFIB) found that more than half (56%) of small businesses are experiencing inflation and impacting their business.
Rising fuel costs are proving to be one of the biggest concerns for small businesses. While more than three quarters (79%) say the rising costs of petrol, diesel and heating oil are a major contributor to rising operating costs. It is feared that the expansion of NIIT will lead to more pressures, such as rent increases.
“Expanding the NIIT with active investments has the same financial effect on property owners as increasing operating costs. If Congress passes this bill, property owners will have no choice but to shift some, if not all, of the tax burden onto their tenants,” said Jerry Konter, president of the National Association of Home Builders (NAHB).
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