Rea's Bernard Suggests Tax Deferral for Small Business

Rea's Bernard Suggests Tax Deferral for Small Business

Rea & Associates’ Tax Strategist Sees Opportunity for Businesses to Grow, Create Jobs

Columbus, Ohio - Small business owners should be able to defer taxes on the earnings that they reinvest in their businesses to help them grow and expand. That’s the idea of Rea & Associates Inc.’s Tax Strategist and Shareholder Bruce Bernard, JD, CPA, ABV, CBI. He believes Congress could be doing more to help the backbone of our country - small businesses - expand and create more jobs through changes in the tax law.

Bernard developed his tax plan after working with thousands of clients. “I saw how business owners’ hands are tied because of the taxes they incur when they want to reinvest their earnings in order to grow their business,” he said. “Currently a business owner must give $22,000 of the first $100,000 of taxable earnings to the government before they can reinvest the remaining $78,000 back into their business. Then 39 percent of the next $235,000, or $92.000, goes to the IRS before the business can reinvest another $143,000. These are the tax rules for regular ‘C’ corporations for taxable earnings retained in the business.

“I propose if a small business reinvests, they should not be taxed, but if they take the money out of the company, the tax man cometh,” says Bernard. “This is far better than incentives like bonus depreciation, asset expensing elections, the investment tax credit, production deduction or the research and experimentation credit.”

Bernard proposes no current taxes on the first half million dollars of C corporation earnings reinvested to grow and expand a business, and a 15 percent current tax on the second half million. The IRS would receive taxes when the earning reinvestment in the business stops. Deferred taxes of up to 34 percent would be triggered if prior tax-free income is distributed to the owners.

He notes that deferring tax allows tax-free reinvestment in working capital and the ability to more rapidly pay down debt that has been incurred to grow and expand. “The traditional tax incentives only focus on part of the balance sheet,” says Bernard. “Deferring tax allows the owners to better manage the whole balance sheet.”

He noted that many types of businesses could benefit from a deferred tax system. “I believe we want to encourage the growth of retail, wholesale, manufacturing and construction businesses in this country,” he said. “We want these businesses to remain strong and bring more jobs and more opportunities to our communities.”

Bernard says his deferred tax provision would be easy to implement in the C corporation tax system, where regular corporate tax rules already include provisions to allow a tax deferral incentive without it being abused. “Tax deferral would be provided only to the extent of the needs of the business to grow and expand,” he said.