Family-owned small businesses would be hit hard by President Biden’s “small business surtax,” according to a recent letter by the National Federation of Independent Business, the leading trade association of American small businesses.
As NFIB writes:
“NFIB opposes efforts to raise taxes on small businesses. The Build Back Better Act broadens existing passive income taxes and applies them to active income, creating a true ‘Small Business Surtax.’
“Specifically, the legislation substantially expands the 3.8% net investment income tax (NIIT) on pass-through business income and applies it to all business income above $400,000 (individual filers) and $500,000 (joint filers). The threshold is even lower for family businesses held as trusts, with the surtax applying to income above $13,000. These thresholds are not indexed for inflation, so the ‘Small Business Surtax’ will impact an increasing number of businesses and an increasing percentage of business income every year.”
Key Takeaways:
- Three-quarters of small employers are organized as pass-through entities (S corporations, LLCs, sole proprietorships, and partnerships).
- Biden’s “Small Business Surtax” would negatively impact more than 750,000 pass-through businesses and over half of pass-through business income.
- When combined with the other surtaxes on certain pass-through businesses, Democrats’ tax changes create a 48.8% federal effective tax rate on pass-through business income before even considering state and local taxes.
Small business owners say that federal income taxes are the most burdensome tax they face. Worse, the permanent tax increases are used to pay for temporary spending programs, meaning additional tax hikes will be necessary if the spending programs are extended.