“Millionaire’s Tax” Hurts Small Businesses

The Tax Foundation views state enactment of “millionaire’s tax” as a bad omen for small businesses.  This tax causes numerous problems for small businesses organized as pass thru entities (i.e. S Corp. or L.L.C.).

A “millionaire’s tax” is a state tax levied on a individual after their earnings exceed a certain threshold (i.e. an extra 2.6% tax on every dollar earned over $500,000 as enacted in the State of New Jersey).  California has recently adopted a version of the millionaire’s tax following other states like New Jersey, New York, Vermont and Ohio.  (From Inc.com)

The problem for small businesses is that their predominant legal form is that of a pass thru entity.  Lacking a separate taxing entity for business profits causes the business profits to be susceptible to “millionaire’s tax.”  This problem is even more alarming when one considers that the nature of most small business profit trends is that of great profits in a good economy and little to no profits in a struggling economy.  Therefore, small businesses organized as pass thru entities may be forced to pay millionaire’s tax when the business is thriving but yet receive no additional tax benefit when the business is struggling.  This uneven tax treatment is unfair to those small businesses organized as pass thru entities.