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The Tax Man and Small Business

"There are so many taxes, I have three different tax attorneys that have to advise me on them."

Good for tax attorneys.

Not good for Casey Lloyd, President of Cal Spas, one of the few small manufacturing businesses still based in California. Lloyd's few hundred workers make and sell backyard equipment, and he, like other small businesses, is figuring out what he owes the IRS by Thursday.

It's more than last year.

There were some tax breaks for small businesses in 2009. They can charge losses against profits going back to 2003, as long as their average gross sales over the last three years have been no more than $15 million a year. And investors in qualifying small businesses—those with assets worth less than $50 million—won't have to pay capital gains on 75% of profits when they cash in the stock.

Still, Lloyd and others say taxes are terrible, especially on the state level in California. "Property taxes kill us," he says. Workers comp is still very high. Soon he'll have to pay for healthcare for everyone. But the biggest gripe comes from the hike in sales tax. "They did that in the middle of the economy trying to come back to life...it made no sense." He said sales took a ten to fifteen percent dive.

"The sales tax was a big hit," says Ann Kinner, who owns SeaBreeze Books & Charts in San Diego. "It slowed things down" at least 25 percent at her store.

A study by Constant Contact of small business owners found that taxes were the third biggest increase in costs last year, behind materials and marketing. But it's not their own taxes concerning business owners so much. It's your taxes. If you pay more to the government, you have less to spend on their goods and services.

"Most small businesses are still having trouble making a profit," says Tom Dragotto, a veteran CPA in Thousand Oaks, CA, who specializes in small companies. He says many owners can't afford to pay themselves a salary, so they're dipping into retirement funds and paying the penalties and taxes that go with it. "The few companies that were able to expand their payrolls during 2009 were able to take advantage of the California hiring credit that was available."

Ann Kinner would like to hire, but won't. "Instead of five or six part time employees, I have two," she says. "I'd love to share what I do with people. I'd love to clone myself so I don't have to feel like I have to come in when I'm sick. But I can't afford to do it."

Tom Dragotto says small businesses are benefiting from the IRS and state Franchise Tax Board being slow to collect, and they are also "willing to work with small businesses when it comes to installment payment plans."

"Look, our government needs funding to function," says Cal Spa's Casey Lloyd. "We live in the finest country in the world. We're all going to have to pay some price for that." But at a certain point, the price kills the business. "I mean, if I can go to Mexico and build my product, not pay all these taxes, then ship it across the border without any penalty, what's to stop me from doing it, other than I love it here?"

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