Area small-business owners are certain of one thing: The elimination of Kansas income tax on profits for owners in limited liability companies, or LLCs, subchapter S corporations and sole proprietorships amid a slowly recovering economy is welcome news.
“It’s not a bad thing at all,” said Brian Franz, an owner of Millennium Machine & Tool in Newton, which is an S corp. “Obviously, small businesses are struggling. It will help everything.”
On Tuesday, Gov. Sam Brownback signed into law one of the largest income tax cuts in the state’s history. The tax cut applies to individual wage earners as well as owners of LLCs, S corps and sole proprietorships, by eliminating the taxes paid on nonwage income received from business profits.
“The cost of doing business today is astronomical,” Franz said.
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At a signing ceremony in Topeka on Tuesday, Brownback touted the cuts as a way to make Kansas more competitive while generating thousands of new jobs.
Critics of the tax cuts cite state analysts, who project the cuts could mean $242 million in cuts in state programs in 2014 and cause more than $2 billion in cuts over five years.
Jerry Capps, vice president of state and local taxation for accounting and consulting firm Allen, Gibbs & Houlik, said there are a couple of potential downsides to cuts for business owners.
One is that any savings business owners realize from untaxed profits will also increase the amount they are taxed on their federal returns, Capps said. That’s because they will no longer be able to claim an income tax deduction on federal returns for taxes they previously paid on nonwage income.
And out-of-state owners in Kansas LLCs and S corps could now be subject to a tax on nonwage income in their home states. Capps said some states would not tax owners of a Kansas business on their profit if they had already been taxed on business profits in Kansas.
“Some states will pick up more tax revenue, now,” Capps said.
Incentive to invest
Franz and other small-business owners said the elimination of tax on business profits could prompt them to reinvest in their companies – such as buying new equipment.
“It’s going to put capital back in the small-business owners’ pockets, which is going to be available for a variety of reasons,” said Greg Sevier, managing partner of accounting firm Peterson, Peterson & Goss. Sevier also is an owner of the 20-employee firm, which is an LLC.
Brian Williamson, president and CEO of JCB Laboratories, a sterile pharmaceutical compounding company, said he was told by JCB’s accountants that they estimate the tax cuts will save him and the other partners in JCB 1.5 percent on their taxes.
“If we save a percent and a half on taxes, yeah, it’s going back to the company, whether it’s to (help) hire more people … (or) invest in equipment, a process or technology.
“From a business perspective, it definitely helps a small business.” JCB employs 17 and is currently seeking to hire two more workers.
But Williamson and other business owners said that a key selling point of the tax-cut plan — the creation of more jobs — is not an automatic product of lower taxes.
At least not at their companies.
“Tax policy doesn’t affect when we hire,” said Williamson, an owner in JCB, an LLC. “We’re hiring when the business dictates we need to hire.”
Tim Witsman, president of the Wichita Independent Business Association, said that’s probably true for most small businesses.
“Things like that also depend on economic conditions,” he said. “The underlying things are always the economy.”
According to Kansas Department of Revenue data for 2009, its most current complete tax year of processed data, about 88 percent of all LLCs, S corps and partnerships had business income, or profit, of less than $100,000.
Low profits and uncertainty among small business about what will happen with federal tax rates and the health care law – and how the costs of health care laws will affect them – will determine whether they hire or how soon, Witsman and other small business owners said.
Malcolm Harris, a Friends University professor and economist, said there can be an indirect effect of tax cuts leading to job creation, primarily through a lower tax structure that makes starting new businesses easier and less costly.
He said lowering the tax burden is one of the few ways a state can directly affect the kind of environment that makes starting a new business more attractive.
“What the state can do is somewhat limited,” Harris said, “but it seems they are trying to focus on the places they have most leverage.”
As far as administration projections that the tax cuts will help create 23,000 jobs in Kansas beyond natural growth by 2020, “The argument is plausible,” Harris said. “I don’t know how you estimate what the impact is.”
Witsman added that even while the cuts are helpful to small business, there are too many other variables, economic and otherwise, to be certain that the cuts will have a significant effect on the creation of more jobs.
“The question is, with this uncertainty are they (small businesses) going to act?” Witsman said. “Are our folks going to be pleased? I think so.
“(It’s) just the jury’s out on impact.”