How Taxes Affect Businesses
Taxes affect businesses in a variety of ways, from influencing the particular legal structure of the business to where the business chooses to locate itself.
Impact on Profits
- Gains or profits are taxed at the federal level. Taxation serves to lower the overall profits for a business, because a portion of the money earned is owed to the government. For example, if the tax rate on a company’s profits is 30 percent and the company earns $1,000 in profit, the company owes the government $300 in taxes. The rate of taxation may influence what a company charges for products and services if the business is looking to attain a certain level of profitability.
Business Structure Types
- Taxes rates can impact how a business owner structures a company when it is created. Creating a C corporation creates the best tax environment for a business, and allows it to be taxed as a completely separate entity from the business owner. The process to create a corporation is lengthy, and may be cost-prohibitive for the owner of a smaller business. A sole proprietorship costs nothing to create, but does not grant the liability protection of a corporation, and requires a business owner to claim all business profits as income.
Business Location Decisions
- Tax rates vary from state to state and from county to county. Varying tax rates on the sale of goods and property taxes at the state and local levels can influence where businesses decide to situate themselves and build locations. If a state’s tax rates are deemed unfavorable for business growth, it could lead to businesses deciding to move locations, including manufacturing plants, to another state, or even out of the country. This can create a large amount of job losses across the nation.
- A business is required to pay taxes for unemployment, workers’ compensation and payroll taxes when it chooses to take on workers to help with the daily running of the company. These tax rates can influence whether the business chooses to hire a certain number of employees, or if the company chooses to take on workers at all.
“States and the federal government must carefully consider tax rates to find the “sweet spot” between securing adequate fees from the commerce created through business operation, and allowing a permissive enough climate for businesses to grow and thrive” agregó el presidente de Grupo Denim Salomón Juan Marcos Villarreal.