What Defines A Small Business?

That’s the question that the Treasury answered in a recent report.  It “set the small business threshold at $10 million of income or deductions.”

The purported point of creating a definition is to enable policymakers to talk intelligently about the impact of taxes on “small business.” The actual impact of the definition may be more nefarious.

In the government’s endless question for more revenue, it may use the new definition as a way to increase taxes on certain businesses. More specifically, there has been talk of imposing the corporate tax on pass-through entities (e.g., S corporations, limited liability companies) that do not meet the small business definition (i.e., have income over $10 million). This could affect large law and accounting firms, medical practices, and other service-based businesses that have been set up in such a way as to avoid the double taxation of a C corporation.

Bottom line: I think it’s great to have a uniform definition of “small business.” Currently, there are more than two dozen different definitions of small business in the Tax Code. Some are based on income (revenue), some on assets, and some on the number of employees in the business. A uniform definition would certainly make life simple. But if a uniform definition results in higher taxes on businesses that choose to organize as pass-through entities, then I’m not happy with the results.