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A Small Startup Business Should Pay No Taxes For Two Years!

I’ve been think about this for a while, and I think that startup businesses shouldn’t have to pay taxes for at least two years after starting a new business.

If you read the statistics on small business startups, you’ll read that at least 80% of small businesses fail during the first five years!  Well, no duh!  Having to pay taxes right of out gate is like trying to run a sprinting race while carrying some fat bloated guy on your back.

If you haven’t already tried your hand at starting a business before, read about the grief that a small business owner in California has to go through to start one via the article at Untemplater: Taxes Suck And Make Me Want To Shut Down My Small Business.

Sidney (the main blogger at Untemplater) is a very sweet individual, and make me smile most of the time I read her articles.  So it was a rare pleasure reading a rant on a tax topic that I feel similarly about.

That said, after reading her article, I now realize that from a tax perspective I don’t want to every incorporate in California!  Here is a snippet of her article that I want to discuss about why I wouldn’t want to do business in CA:

Even if you don’t have your own business, did you know that if you get a California tax refund, you have to report that refund amount as income the following tax year so they can make you pay taxes on that?! WTF. I do not appreciate that.

Wha-Huh?  Sidney writes that CA folks have to pay taxes on their tax refunds???  What kind of bizarre logic is that?  Apparently logic is not a strong point of the CA government, which is quite ironic since many of the largest tech companies are housed in CA.  Quite the paradox, eh.

Actually, these days, computing is so incredible cheap and powerful, taxes should be incredibly easy, versus the mess it is today.

So I think that it’s totally reasonable to have an incubation period for small business to promote growth, where they can operate tax-free for their first two years of existence.  And then instead of paying the full rate all at once, the tax collect on small business startups should be eased into the full tax rates.  So the taxes collected should just slowly be stepped up to what the normal rates are during the first 5 years.  Then, only after five years of existence (with certain income exceptions), would those start-ups have to pay the normal business tax rates.

Now of course income exceptions would exist!  If the small business makes over 1 million in profit its first year out of the gate, well…  it’s going to have to pay taxes in year two at the normal rates, effectively bypassing the incubation period for years two thru five…  The reason being would be that if you are profitable enough to generate at least 1 million, then you can afford the professional help with the taxes and other professional services to get your taxes done…

Now for the twist…

If over 80% of small businesses fail during the first 5 years, aren’t some of those business owners going to go get food stamps and other government help to live?  After all, so are taking a risk and putting it all in, so it only makes sense that after the fail they’ll need temporary help, no?  So I have to wonder if the taxes they collect during those first two years are going directly back into the failed companies owners through the system?

And if those small business startup that needed large capital borrowing requirements fail, doesn’t that lessen the amount the banks have to pay because of the huge loss from a small business loan that failed?  I’m thinking that the current model of taxing to death small startups means less of a tax stream for the government?  You’d think that the government would people trying to start a business a break in the beginning infant stages…

Just my two cents to add to Sidney’s fire!




18 Responses to A Small Startup Business Should Pay No Taxes For Two Years!

  1. It is important to note that you only pay taxes if you are profitable. I paid taxes on two businesses in 2011, but one of them had a net loss.

    Only successful businesses pay taxes. I don’t complain about paying my fair share.

    • I thinking about it more as a bar from entering into business. I know a lot of smart people (many of whom are much smarter than I am) that are afraid to go into business because of the complexities of the tax system and the legal system. Some even feel like the systems are corrupt and gear to prevent entry…

    • Eric – all small businesses with employees pay a boatload of taxes, even if we are not profitable. We have to withhold income taxes, social security, medicare, and workers comp. Each of these is its own separate pile of asinine paperwork. Honestly, if the right amounts could magically disappear from my bank account, I wouldn’t mind so much, it’s the hours of my time that I have to spend fighting with Quickbooks to get the numbers somewhat correct that I really resent. I’m a lawyer; I don’t understand how untrained people can do it at all.

  2. I have never really given the idea any thought but I actually like it. That being said, I don’t think you did anything to make it easier. Even your exceptions will add 45 pages to the new bill lol

    • lol, actually was I was writing the post, I realize I just made the tax code more difficult. but it would be worth it!

  3. I think this is a really good idea. I mean, I would like to think that a lot of start up businesses are not leeching off the system during their start up – but like you said it is likely a reality and a tax break might make a world of difference. Good thoughts!

    • Thanks, considering 80% of startup die in the first five years, I think such a rule would give them a better chance…

  4. Thanks for the mention! Oh man do I wish there was a 2 year tax break for new businesses!! And yes – definitely don’t move to California if you want to incorporate!!!!! I completely understand now why so many individuals and businesses leave the state. Sure the weather is amazing, the food is great, and there is awesome diversity, but man do they make us pay for it. I was in shock when I found out I had to pay taxes on my state tax refund. Ridiculous! -Sydney

    • Yeah, that blew my mind when I read that CA citizens have to pay taxes on your refunds! That just doesn’t make sense to me…

    • yeah, it would have to be a 10 year study… If it didn’t make a difference then the idea would be scrapped…

  5. I think you’re right that small businesses shouldn’t have to pay the same taxes but I think a possible lower rate might be more appropriate than no taxes at all.

  6. The extra money from tax savings sounds good. But a failing business isn’t profitable to begin with, so a change in tax law wouldn’t help. Unless the state provided loans from tax revenue that had to be repaid after five years.

    • I don’t think that statistic is a failing business, it’s that businesses fail after 5 years.

      If I started a business that didn’t provide enough money for my family, but was still profitable and even if it had potential, my family still has to eat first! So it is my belief that some if not many businesses fail those first five years because it’s easier to become an employee for someone than starve 🙂

  7. I think startups should still be required to submit returns, but the tax they would have to pay has to be re-invested into the business.

  8. Actually, state tax refunds are taxable on your federal return only if you deducted them as state taxes paid in a prior year.

    So if you deducted state taxes withheld in 2011 on your federal return, you should report any state tax refund (received in 2012) on your 2012 federal return.

    If your state uses federal Adjusted Gross Income (AGI), there SHOULD be a line on your state income tax form to subtract out any refund of state taxes previously reported as federal income.

  9. I love the idea, and am blown away by CA tax laws. But not entirely surprised as they try and get all the money they can from their citizens:

    People talk about the ‘job creators’ and how we shouldn’t tax them more. Businesses are businesses and small tax changes probably won’t affect them. But small businesses drive the economy and I’m sure this change would help!