How Joe The Plumber makes $250,000+

[cobra de capell]

Due to the complete lack of understanding by the Media and the Obama campaign on how small business owners are taxed is driving me a bit nuts.

You hear all the "There is NO WAY Joe the plumber is ever going to make $250,000 a year!" Or any plumber for that matter...

What people need to understand is that small business owners (small C Corp, S Corp and LLC) are going to be taxed on what they take home in their paycheck AND the money that the company itself makes during the year.

Why does that matter? Because the owner is being taxed this year for money he/she leaves in the company for next year and beyond. So you are taxed for money you never really get your hands on.

For example. Joe goes into business. Hires 5 plumbers. Pays himself a tidy $125,000 a year (pretty good, and not high enough to trigger Obama's huge new taxes). "See! no problem", they say and that is where everyone stops the analysis. The trick is... The company itself goes on to take in revenue of $600,000/year. Joe's margins are good. Let's say 25%. That means the company is going to clear $150,000 for the year. Joe being a wise business owner in these times wants to keep that $150,000 in the business so he can make payroll come Jan 1 and then plan for expansion in the coming year (hire more people, buy more trucks, train his workers).

But guess what? Joe can't do that. The $150,000 the company nets goes right to his taxable income which is now reported as being $275,000 once it's combines with his take home pay for the year and he has to come up with the 35% (and going up under Obama) even though he doesn't have that other $150,000 in hand.

And oh yeah, the inflated income for Joe also means he is WAY over any threshold for the myriad of tax credits being bandied about, he can forget about that.

So what is Joe going to do? He's going to have to pull a large chuck of profit out of the business to pay his taxes for the year, reducing what he can do in the following year. All of which will be taxed at the highest possible rate. So there goes $50K of the $150K. If joe is smart he's going to keep $50K on the side for payroll/expenses/rainy day, and then if he is lucky he has $50K for expansion. Well maybe because before long he will have to make his quarterly estimated tax payments for next year... The beast has to be pre-paid ya know...

Most of the people who frequent this forum may know this information. But the morons who prop up and promote Oba Mao either do not or they are being intentionally dishonest.

The bottomline, Joe would be paying 39% at Obama’s new highest tax bracket and would not see a dime of the credits other non-business owners who get.

It's even worse....

In the video clip (BO&Joe), Joe says that he is "buying" the business. When you buy a business, normally you take out a loan and pay it back over time. Sometimes the prior owner will hold the loan.

But the tax rules say that principle paid on the loan is not deductable. Therefore, those principle payments are TAXABLE even though you never see the money!

If Joe has to pay half a million dollars for this business (very possible), and he pays it to the prior owner over 5 years (typical deal), then on average each year he pays back $100,000 in principle (less in year 1, more in year 5). He only gets a fraction of that offset by depreciation in a business like his. Most of that $100,000 counts as his income, he owes taxes on it and if Obama gets his way at a much higher tax rate.

The effect? It actually makes just about every small business worth less. Buyers will take into account the tax ramifications of buying a business. If general taxes go up, the business is worth less. PLUS: Obama will raise the cap gains rate, making all small businesses AGAIN worth less money!

The bottom line: in several different ways, Obama's tax policies make it less profitable to start, buy, or own a small business. Small businesses create 2/3 of all new jobs.

You do the math.

If BO is elected, we are all screwed.