Bush Tax Cuts - To Extend or Not to Extend for the "Fat Cats"

Ahhh….tax regulation reform. Everyone’s favorite time of year. Unfortunately, the current administration is wanting to let the Bush Tax Cuts expire – if not all of them, certainly the ones for individuals making $200K or married at $250K. Gang…this is a really, really, really, bad idea and will hinder further growth in the economy. Don’t think so? Let’s look at an example:


Let’s say for example, myself and a partner open an LLC business to build homes. We sell 1 house per month at $250,000. By any standards, this would be considered a small contracting operation.

Now let’s assume that all expenses (before taxes) are $180,000 for materials, subcontractors, and we both take a salary of $30,000 per year and will split the profits at the end of the year. Here’s what we have so far:

Annual Gross Sales: $3,000,000
Annual Expenses: $2,160,000
Annual Profit: $840,000

Sounds pretty good so far doesn’t it? $420,000 per year – each. But we forgot something. We want to have a 4 month supply of operating expenses. Let’s face it – we’re in home building and the market can be hit or miss right? The lumberyard also wants us to pay for our materials in 14 days – so we need the cash reserves.

So, 4 months of expenses - $720,000 in the bank. Let’s do the math again:

Annual Gross Sales: $3,000,000
Annual Expenses: $2,160,000
Annual Profit: $840,000
Cash Reserves: $720,000
Balance for distribution to owners: $120,000

So we both get $60,000 in cash from the company and are on solid footing – each making $90,000. But hold on…..we haven’t paid our income taxes yet.

What is not being realized in discussing the “Fat Cats” making $200K or $250K per year is that we have an LLC…….

In an LLC, you report your share of the income from the LLC on your personal income tax form. Ultimately, a K-1 form will be generated and given to the owners. So our K-1 will show $60,000 right? WRONG!

The K-1 will show $420,000. Why? According to the IRS reporting guidelines, the profits are to be reported WHETHER OR NOT THEY ARE DISTRIBUTED! So our cash reserves are FULLY TAXABLE! And taxed at the HIGHEST tax bracket which the administration seems hell bent on raising..oh, sorry, letting expire. See, LLC’s are not taxed as an entity. You pay the taxes on your personal return.

http://biztaxlaw.about.com/od/businesstypesincometax/f/llctaxprocon.htm

LLC Owners must pay taxes on their distributive share of the profit of the company, even if they have not received a distribution of those profits.

So in this example, I’m a “Fat Cat” taking home Gross income of $90,000 per year. BUT I report $450,000 in income.

There’s a great delusion that letting this tax expire is on Wages….It’s not…It’s based on AGI or Adjusted Gross Income. So what is the point of opening this business? I can’t see one. Not to put $45,000 a year or less in my pocket.

Now that seems like a really good stimulus to me. Kill the guy who is trying to make a living and creating jobs.

This is certainly change…but seems to be lacking the hope…..