A Case of Mistaken Identity

At last week’s Pittsburgh Business Times Biz-Mix event an unsuspecting entrepreneur was trapped into listening to my advice on why she should structure her new business as a pass-through entity.  I’m sure it was just what she wanted to talk about over cocktails at the Savoy.  In addition to vowing to be a more effective networker, this experience also made me think differently about tax reform.  If it's supposed to help small business, that would mean everyone is clear on what tax policies really benefit small companies and that's not the case. 

Even the IRS is getting that more clarity is needed in terms of defining what a business taxpayer looks like.  Tax Vox did a piece on the IRS overhaul of their small business count.  Using criteria that say a small business has combined income or deductions of at least $10,000 but no more than $10 million and operates in a businesslike manner, the number of small businesses in the US is now pegged at 20 million.  (Prior to the study it was 35 million).  This isn’t a story about the recession closing down businesses, it’s just cutting out businesses that are so small that they’re not really supporting anyone and also taking out businesses with small numbers of employees but lots of income.  Both those types of businesses don’t really care about things like health care tax credits or bonus depreciation.

One other item that came out of the research is only 27% of small businesses pay any wages at all.  This does bring up a recession related story.  According to a new Kaufman Foundation  study the truism about small business being the main job creator in the U.S. is true -- and that's not necessarily good news. When you net out businesses that don’t employ workers beyond the boss, the US has a decline in new business creation. According to the report new businesses in the US have historically contributed 3 million new jobs a year to the economy.  Starting in 2009, that number has fallen to 2.7 million per year.  Worse yet, the average start up staff in the 1990s was 7.5 people.  Today that same number is 4.9 jobs.  So fewer start ups and fewer jobs per business.  

My takeaway from all this is that tax reform for small business could really make a difference in helping the economy improve.  The key is paying attention to what helps businesses that grow into job creators and can scale to the point they make a difference.  This isn’t an impossible task given the available data, but it does require paying attention to more than just good sound bites.