It's widely agreed that America's small businesses are worthy of support from the government. But in yet another perverse twist of the tax code, more than 100,000 "big" businesses reap billions in tax breaks designed to assist "small "companies, costing Uncle Sam hundreds of billions in tax revenue, according to the Center for American Progress.
The liberal think tank noted that these businesses each have annual revenue of more than $10 million and pay no corporate taxes. That's because they're organized as partnerships under "Subchapter S" of the tax code. That means taxes for these enterprises are "passed through" to their owners, who pay them through their individual returns.
So-called S Corps have surged from less than 25 percent of net business income in 1980 to more than half in 2012, the latest data available. Larger companies, such as those traded on the stock market are often organized under a different section of the tax code and are known as "C Corps."
"In fact, the United States is unique in this regard: No other country comes close to having such a large portion of business income that is not subject to the corporate income tax," according to the Center for American Progress.
Part of the problem is in defining "small businesses." According to the U.S. Small Business Administration, about 97 percent of all U.S. businesses are classified as "small," which means having 500 or fewer employees. The IRS defines small businesses as those with assets under $10 million.
"Indeed, several of the largest U.S. hedge funds are taxed as partnerships," the Center for American Progress said. "In part, because increasing numbers of businesses are adopting pass-through forms, the corporate income tax today contributes only about one-tenth of total tax revenues compared to one-third 60 years ago."
A recent study by economists from U.S. Treasury Department, the University of Chicago and The University of California, Berkeley, found that the growth of S-corps cost the federal government $790 billion in revenue from 2003 to 2012. To put that in perspective, it's more than double the size of Denmark's economy.
Owners of S-corporations pay federal individual income taxes (which have a top marginal rate of 39.6 percent), state and income taxes (as high as 13.3 percent) and are hit with limitations on deductions, which adds a 1.18 percent marginal tax rate, according to the Tax Foundation.
According to the National Federation of Independent Business (NFIB), about 75 percent of small-business owners in the U.S. are pass-through companies. A recent study from American Express found that the typical small-business owner earns about $67,000 a year.
"That's not a fat cat," said Jack Mozloom, an NFIB spokesman, adding that 90 percent of the organization's members have fewer than 20 employees. "I am sure there are corporations which are taking advantage of elements of the tax code to minimize their tax obligations," he said.
Mozloom said the NFIB supports taxing corporations and pass-throughs at the same rate.
Republican Presidential nominee Donald Trump has promised to provide tax relief to unincorporated small businesses and freelancers. Like many conservative economists, the former reality TV star wants to slash the 35 percent statutory corporate tax rate. His Democratic opponent, Hillary Clinton, has also promised to provide tax relief to small businesses, but she hasn't provided specifics.
The Center for American Progress wants an "entity-level" tax on these firms similar to the payments that "C corporations" make to the government. It also calls for policymakers to make sure the wealthy pay their "fair share" of taxes on pass-through income at the individual level.
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Theresa Todman, Managing Partner/CEO of B&M Financial Management Services, LLC . Theresa specializes in bookkeeping, accounting, QuickBooks solutions, small business tax issues and consulting.