US Senator Rand Paul and ranking member of the U.S. Senate Committee on Small Business and Entrepreneurship warned that more than 8 million businesses are in danger of facing tax hikes. This is due to the proposed expansion of the Net Investment Income 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 increase and hurt job creation. The NIIT is a 3.8% surtax on passive income (capital gains, interest, rental and royalty income, and dividends). However, the proposal suggests expanding the tax to apply to active income over $400,000 individually or $500,000 jointly. The proposed expansion of NIIT is expected to raise some $183.6 billion in tax revenues over the next decade, according to the Tax Foundation.
What’s at stake for small businesses?
The bill proposes to expand the taxation to include all business income, whether or not the taxpayer materially participates in the business, as long as that income is not already subject to payroll taxes. This translates into S Corporation shareholders, limited partners, and other owners of a pass-through business who were previously exempt. Now they would be required to pay Net Investment Income Tax.
Additionally, the effect of the expansion could result in putting 64% of small businesses, which is millions of small businesses in danger of a tax hike. The affected small businesses employ 62% of small business workers or 76.25 million employees. And this would put more than 70% of small businesses in the professional, scientific, and technical services (74%); construction (70%); and accommodation and food services (70%) facing higher taxes.
“Small businesses everywhere are already struggling with record high prices on everything from gas and rent to labor and supplies needed to run their businesses. And now, as the U.S. faces historically high inflation, Senate Democrats seem completely content with adding to their struggles by passing yet another tax and spending spree,” said Senator Rand Paul.
Can small businesses shoulder additional taxes?
With concerns of a possible recession, record high inflation and high fuel prices the expansion of NIIT critics say will add undue burdens on small businesses. A recent survey by the National Federation of Independent Business (NFIB) shows that more than half (56%) of the small businesses are struggling with inflation and affecting their businesses.
The rising cost of fuel is proving to be one of the biggest concerns impacting small businesses. While over three quarters (79%) say the rising cost of gasoline, diesel, and fuel oil is a significant contributor to rising business costs. The expansion of NIIT is feared to increase more pressures such as rent hikes.
“Expanding the NIIT to include active investments has the same financial effect on property owners as increasing operating costs. If Congress moves forward with this proposal, property owners will have no choice but to pass some, if not all, of the tax burden onto their tenants”, said Jerry Konter, Chairman of the National Association of Home Builders (NAHB).
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