This interview with Tax Lawyer and CPA Brett Thompson is part of our Tax Expert Series. We encourage you to interact with these experts at TaxConnections AskTaxQuestion.com. You are also encouraged to make comments below this post.

Kat: What is the number one problem faced by small business owners and/or taxpayers today?

Brett: Actually, you could ask what the number one problem is faced by all Americans today.

The tax rate for small business owners is far too high and too few taxpayers actually know what the tax really is. It is draining the efforts of many small business owners and is a threat to us all.

For example, consider a single taxpayer with a small business that makes a profit of $100,000 and files a Schedule C, has no children and no itemized deductions. The taxpayer will pay an income tax of $16,415 and a Self-Employment Tax of $14,130, or $30,545 in total. Then the taxpayer is required to have health insurance or pay a penalty. For this taxpayer, lets guess that health insurance costs $500 each month, or $6,000 each year, which has been held by the US Supreme Court to be a tax.

In total, this taxpayer is paying a total “tax” of $36,545. Now add in a number for state income tax (estimate 5%), city earnings and income tax (estimate 3%), state and local sales taxes (estimate 6%), property taxes (estimate 1%) and this taxpayer could easily be paying a sum total average tax of 51.5%, that is (36.5% +5% +3%+6%+1%). This discussion sacrifices exact numbers for clearer presentation.This is an average rate. The incremental tax rate is higher, to that if the taxpayer happens to make $10,000 more, the incremental tax is $3,760 (Federal tax only), or a marginal tax rate of 52.6% on that $10,000.

I read somewhere that studies show government and countries become unstable or unsustainable, or both, if the tax rate exceeds 50%: “The power to tax is the power to destroy” Daniel Webster, John Marshall, McCulloch v. Maryland.

I won’t get into tax rates on taxable Social Security, gift and estate taxes, excise taxes, penalties, interest, double even triple taxation of corporations, etc.

Kat: What recommendation for a Tax Proposal would you give to Members of Congress today?

Brett: Abandon the income tax. Set up a Federal sales tax. How many sales tax returns have you done in your life? Because…

(1) To make almost every resident and citizen of the United States file an income tax return is ridiculous and was not that way when first enacted. Technologically it can be done, but why? …when far fewer tax returns would have to be filed? It is stupid to require a family of four to file a tax return when the income of the family wage owner is making just $24,000 per year.

(2) Enact a sales tax following the models enacted by the states. Do not assess a tax on medicine, groceries, housing etc. and you negate the argument of regressive tax system; Proponents using this argument don’t know what they are talking about. At least even the drug dealers will pay sales taxes whereas they wouldn’t pay an income tax because the illicit profits aren’t entered on a Form 1040.

(3) The concept of “net income” is very difficult to define; Taxable Income is even worse. The result of trying to define “taxable income” gives you the Internal Revenue Code, regulations, revenue procedures, rulings, pronouncements, tax court case, federal district court cases, Supreme Court cases, criminal tax acts,

(4) Limit who has to file income tax returns, say maybe any taxpayer whose income exceeds $250,000, for example.

(5) Drop the corporate income tax.

(6) Yes, the proponents of an income tax will say you will create an underground economy to avoid the sales tax, but that economy exists under income tax regimes already.

(7) Stop using the Federal tax system to influence social policies; Just make appropriations directly.

No one understands net taxable income anyway, including tax professionals, including me, but we know more than most, and taxpayers must hire us under current system. This is another “tax “and we tax professionals have dog in this fight. As George Bernard Shaw once said, “…the professions are a conspiracy against the laity.” The Doctor’s Dilemma

Drone on, Drone on..!

Kat: Can you tell us about your area of tax specialization and why you are so passionate about it?

Brett: Sorry, I am not passionate about this subject. If I ever become passionate about taxes, I am sure I can find a doctor who can give me a pill to cure it. One must be careful when selecting their “passion.” Look at what it did to Captain Ahab of Moby Dick.

Instead I concentrate on entity strategies that help minimize taxes, trying to avoid the “Ruinous” and the “Extortionist” contribution to the government. Besides, it is not in the best interest of our government or the country to arrange client affairs where the outcomes are excessive taxes.

I use the S Corporation, for as long as it is around, that is. See, “Trump’s Web of Companies May Have a Way to Avoid the Obamacare Tax” August 10, 2017.

The new entity termed as a “Series LLC” I am finding particularly interesting and I do not create an LLC without designating it as such, if the state has a Series LLC statute, that is: only 8 states have it so far.

This structuring tries to avoid the possible 3 levels of tax that a regular C Corporation might incur, that is, when a C Corporation first pays income tax on the sale of its goods, the tax at the corporate level on appreciate assets when it liquidates and again at the shareholder level, when the shareholder receives appreciated property.

Kat: The worst problem taxpayers are currently facing?

Brett: Several of my client’s had a good year in 2016, but did not pay fully the 2016 tax liability and so are in arrears. Then, for 2017, the effects of hurricanes, those occurring in August and September, 2017, and hoping that is all, has hurt their business revenues. So they owe for 2016 and 2017, but their revenues are down so paying is going to be a problem. The might not have the ability to pay off their 2016 and accruing 2017 tax liability, plus expenditures to make repairs to their businesses destroyed or partly destroyed. Their customers also face the same problem. All this means they will have tax problems for years to come.

Kat: Taxes make profitable businesses unprofitable, and unprofitable businesses profitable.

Brett: There probably is a point where the utility of infrastructures paid for by the government out of tax revenues does not exceed the benefit to business, but no one seems to know where that balance is. But there is a point where our tax laws become far too complex, have unforeseen and undesirable affects and the whole system needs to be scraped; analogues to some machine whose function is overly complex and fix after fix gets to the point that it’s better to start over. We might be there.

There should be a reboot button someplace.

Have a question? Contact Brett Thompson