US Senator Rand Paul and ranking member of the US Senate Small Business and Entrepreneurship Committee 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 Income Tax (NIIT) as part of the Building Better Act.
More than 8 million small businesses at risk of increased taxes
According to the Kentucky Republican senator, small businesses organized as S-Corps or Partnerships could face increased taxes and hurt job creation. The NIIT is a 3.8% surcharge on passive income (capital gains, interest, rental income and royalties and dividends). However, the proposal suggests expanding the tax to apply to active income above $400,000 individually or $500,000 jointly. According to the Tax Foundation, the proposed NIIT expansion is expected to raise about $183.6 billion in tax revenue over the next decade.
What’s at stake for small businesses?
The bill proposes to expand taxation to include all business income, whether the taxpayer materially participates in the business or not, as long as that income is not already subject to payroll taxes. This translates to S Corporation shareholders, limited partners, and other owners of a pass-through business who were previously exempt. They would now have to pay Tax on Net Investment Income.
In addition, the effect of the expansion could cause 64% of small businesses, which are millions of small businesses in danger of a tax hike. Affected small businesses employ 62% of small business workers or 76.25 million employees. And that would put more than 70% of small businesses in professional, scientific and technical services (74%); construction (70%); and accommodation and food services (70%) which face higher taxes.
“Small businesses everywhere are already struggling with record high prices on everything from gas and rent to the labor and supplies needed to run their businesses. And now, as the U.S. faces at historically high inflation, Senate Democrats seem perfectly content to add to their struggles by passing yet another tax and spend,” said Sen. Rand Paul.
Can small businesses pay additional taxes?
With worries about a possible recession, record inflation and high fuel prices, NIIT’s critics say the expansion will add undue burdens to small businesses. A recent survey by the National Federation of Independent Business (NFIB) shows that more than half (56%) of small businesses are struggling with inflation affecting their businesses.
The rising cost of fuel is proving to be a major concern affecting small businesses. While more than three-quarters (79%) say the rising cost of petrol, diesel and fuel oil is a significant contributor to rising business costs. It is feared that the expansion of the NIIT will increase further pressures such as rent hikes.
“Expanding the NIIT to include active investments has the same financial effect on owners as increasing operating costs. If Congress moves forward with this proposal, owners will have no choice but to shift some, if not all, of the tax burden onto their renters,” said Jerry Konter, president of the National Association of Home Builders (NAHB).
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