Small businesses say lost tax cuts would hurt

If middle-class taxpayers are worried about the threat to the George W. Bush-era tax breaks, some business owners are paralyzed.

A hike in income tax rates for the top brackets, where some of them reside, would not only hurt their personal bottom lines. They say it would crimp their ability to hire workers, which in turn would slow down America's economic recovery.

Across metro Atlanta, businesses await Congress' action before the end of the year on a list of tax cuts and tax credits and whether to extend them, modify them or let them lapse. One idea backed by the White House is to continue the breaks for all but the highest earners, meaning couples with more than $250,000 or perhaps even $500,000 in income.

But the uncertainty over  where taxes rates will fall has some business owners stalled, said Mike Sullivan, president and co-owner of Southeast Sealing Inc.

The 37-year-old Conyers company seals concrete floors in large warehouses, manufacturing facilities and retail shops across the country.

"How do you budget for something you don't know?" Sullivan asked. "You can't. The easiest thing to do for a guy who doesn't know what to do is to not do anything different."

That means not hiring. Sullivan, for one, said he's not budging off his 20-employee workforce, although not solely because of the uncertainty over taxes. There is also the matter of the economy. His business has been off since the recession and demand hasn't fully returned.

Metro Atlanta accountants who work with business clients said they are receiving plenty of calls for guidance. Generally, they say they have been advising that owners take a wait-and-see approach.

Small business owners stand to be affected by any tax changes. According to the National Federation of Independent Businesses, three-quarters of businesses are organized as pass-through entities. That means that they pay taxes on their business income at individual tax rates, said L. Eddie Brown, owner of Brown Enterprises, an accounting, tax and financial services firm in Fayetteville.

Not everyone supports an extension of the current tax cuts for higher income individuals, nor is there a consensus that an extension of the lower tax rates would result in businesses adding employees.

Extending the tax cuts to even the top brackets would add billions or even a trillion dollars in deficits to the ballooning national debt.

Critics also say the number of business owners who would be affected if the tax cuts are not extended to the top brackets is relatively minor. Exactly how many would be affected is difficult to determine. Not all taxpayers who report receiving small business income run what are generally considered to be small businesses, such as small factories and shops.

The Congressional Budget Office in a January 2010 report said, "Increasing the after-tax income of businesses typically does not create much incentive for them to hire more workers in order to produce more, because production depends principally on their ability to sell their products."

There is also a possibility that even if Congress stalemates on the issue, the IRS has the flexibility to leave current tax rates as they are, assuming the issue will be settled when Congress reconvenes next year.

But business owners like Sullivan say the problem is a real one.

"It's taking away from what you could do," he said. "You're almost afraid to hire people."