Because many owners of small businesses have business income “pass through” to their personal tax returns, they may appear on paper to be a high-income earner.
But owners often reinvest much of their profit in their businesses, generally either by hiring new employees or buying more equipment and inventory – rather than bolstering their own paychecks.
Chris Heitman, co-owner of Pegasus Auto Racing Supplies Inc. in New Berlin, Wis., said investments to his firm are made with after-tax income and that a higher tax rate would leave him with less cash to expand.
Pegasus sells racing helmets, plumbing supplies, brake pads and other items amateur and professional racers need. Net profits at the firm totaled roughly $700,000 last year, Mr. Heitman said in an interview. He set aside more than 30% for federal taxes and 6% for state taxes. Nearly all that was left after taxes was used to purchase new lines of inventory – his primary means of attracting more customers.