Fact Sheet: Will business owners pay state income tax?
NOTE: An updated version of this blog post and related fact sheet is now available at: http://washingtonpolicywatch.org/2010/06/22/initiative-1098-will-business-owners-pay-state-income-tax-updated/
Short Answer: Very few business owners will pay state income tax under the provisions of I-1098. A person claiming business income on their personal tax return would only be taxed if his/her Adjusted Gross Income, net of allowable business expenses/losses under IRS rules, exceeds $200,000 for single filers or $400,000 for joint filers – and then only on the amount exceeding that income threshold.
Background: Of the 452,533 income tax returns reporting business income in 2007, 94% stated an adjusted gross income (AGI) of less than $200,000. All of these business owners would be completely exempt from the income tax proposed by Initiative 1098. Moreover, since 85% of high-income returns are filed jointly, and I-1098′s income tax threshold for households is $400,000, a substantial proportion of those tax filers reporting business income and an AGI above $200,000 will also be exempt from paying the income tax.
Contrary to recent assertion by the Association of Washington Business, only 25% of all returns over $200,000 filed in Washington in 2007 included any business income (not 68%). And only 3.4% of income earned by those over $200,000 came from business income (not 21%). The average business income for filers reporting an adjusted gross income of greater than $200,000 was $78,458 – meaning the majority of their income is derived from sources other than their businesses.
From EOI’s fact sheet: Initiative 1098: Will business owners pay income taxes?
Learn more about how Initiative 1098 will affect Washington State: http://www.eoionline.org/tax_reform/I1098.htm
Filed under: state economy, tax and budget , budget, business, I-1098, income, income tax, public policy, revenue, taxes
You miss partnerships, Sub S, and LLCs in your analysis. http://www.washaceblog.com/2010/06/understanding-how-i1098-will-hurt-the-economy-and-the-state-budget.html
You’re right that we didn’t include S-Corp/Partnership income in our initial analysis, and I’ve updated our fact sheet accordingly. (See first link below.)
But your own analysis above is incomplete, in that you address only business income for taxpayers with an AGI above $200,000. A more comprehensive approach would include all tax filers claiming net business income.
Our updated fact sheet reflects that broader perspective, noting that of all WA tax returns claiming net business income (from a sole proprietorship, S-corporation and/or partnership), only 10.6% show an AGI of more than $200,000. And since 85% of high-income returns are filed jointly, under I-1098 a substantial proportion of those tax filers would be exempt from paying state income tax on AGI up to $400,000 per year.
Most business owners will also see a tax cut under I-1098. According to analysis by the Department of Revenue, I-1098 would exempt 81% of Washington businesses from B&O tax payments, and reduce B&O tax payments for another 12%. Every business that owns property would also see a 20% cut in the state portion of their property taxes. (See second link below.)
Links:
http://washingtonpolicywatch.org/2010/06/22/initiative-1098-will-business-owners-pay-state-income-tax-updated/
http://www.eoionline.org/tax_reform/fact_sheets/PropertyTaxReductions-Jun2010.pdf
~Aaron Keating
Communications Director
Economic Opportunity Institute