Tuesday, April 14, 2009

Taxes and your Family Owned Business

The SBA Office of Advocacy released a report where they examined the effective tax rates faced by small businesses. It found that the effective tax rate faced by small businesses varied by the form of organization of the company. The effective tax rate is calculated by totaling all income and dividing it by all taxes paid. So if your income was $100,000 and you paid $34,000 in taxes, total, your effective rate was 34%. Sole proprietorship's faced the lowest effective rate at 13.3%. Small business partnerships have an average effective tax rate of 23.6%, small S corporations have a rate of 26.9%. I think the numbers reveal a couple things. First, do not assume that choice of entity causes the different variation in rates. It's just that the distribution of the different form of entities follows a certain pattern. Sole proprietorship's tend to be smaller companies with less income, while larger enterprises tend to be partnerships and S corporations. The study just goes to show that progressivity in the tax code, at least in terms of small businesses, is alive and well.