Small Business and Taxes

Physician's Money Digest, December15 2004, Volume 11, Issue 23

America's small businesses (whichinclude most physicians' offices)have a big stake in extending the currenttax cuts, according to a recent studyfrom the Tax Foundation. As employersof more than 30 million Americans,small businesses can use the moneysaved on taxes to create even more jobs,according to advocates for extendingthe president's tax cuts. Critics say theeffect of lowering the top tax rate hadonly a marginal effect on the income ofsmall business owners.

The Tax Foundation report (www.taxfoundation.org) makes some tellingpoints. One is that the number of smallbusiness owners who file as individuals,either through an S corporation or as asole proprietor or partner, has nearlydoubled in the past 2 decades to morethan 25 million. For these taxpayers,changes in the individual income taxrates have a direct effect on how much oftheir income they are allowed to keep.

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The report also outlines the connectionbetween business activity and overallincome. The higher the taxpayer'sincome, the more likely that the incometax return will reflect some businessincome, either on Schedule C (ie, sole proprietor),or Schedule E (ie, S corporationsand partnerships). Overall, about 74% ofthe top 1% of taxpayers (ie, those with anadjusted grow income [AGI] of more than$317,000) reported business income ontheir tax returns. Of those with an AGIbetween $317,000 and $499,999, 68.2%reported business income, compared to82.7% of those whose AGI topped $1 million.Of the top 1% of incomeearners, 7.3% are physicians.

According to the American MedicalGroup Association's 2004 PhysicianCompensation & Production Survey, themedian annual gross charges for a groupfamily practice was about $490,000.Charges were about $470,000 for aninternal medicine practice, $1.3 millionfor a cardiology practice, and $1.4 millionfor a gastroenterology practice.

The report also estimates that businessowners will pay more than 54% ofall individual income taxes in this taxyear. More than two thirds of allincome tax revenues will come frombusiness owners with incomes of morethan $200,000.

The report also notes that, althoughprofits from business only account forabout 28% of the total income for thetop 1% of taxpayers, adding thesalaries that business owners pay themselvesas employees of the businessbrings the percentage of businessincome up to about 65%. With thatmuch income derived from business,extending the tax rate reforms canhave a major impact on small businesses,and, because of their tendency tocreate jobs, on the economy as a whole.