I’ve been think about this for a while, and I think that startup businesses shouldn’t have to pay taxes for at least two years after starting a new business.

If you read the statistics on small business startups, you’ll read that at least 80% of small businesses fail during the first five years!  Well, no duh!  Having to pay taxes right of out gate is like trying to run a sprinting race while carrying some fat bloated guy on your back.

If you haven’t already tried your hand at starting a business before, read about the grief that a small business owner in California has to go through to start one via the article at Untemplater: Taxes Suck And Make Me Want To Shut Down My Small Business.

Sidney (the main blogger at Untemplater) is a very sweet individual, and make me smile most of the time I read her articles.  So it was a rare pleasure reading a rant on a tax topic that I feel similarly about.

That said, after reading her article, I now realize that from a tax perspective I don’t want to every incorporate in California!  Here is a snippet of her article that I want to discuss about why I wouldn’t want to do business in CA:

Even if you don’t have your own business, did you know that if you get a California tax refund, you have to report that refund amount as income the following tax year so they can make you pay taxes on that?! WTF. I do not appreciate that.

Wha-Huh?  Sidney writes that CA folks have to pay taxes on their tax refunds???  What kind of bizarre logic is that?  Apparently logic is not a strong point of the CA government, which is quite ironic since many of the largest tech companies are housed in CA.  Quite the paradox, eh.

Actually, these days, computing is so incredible cheap and powerful, taxes should be incredibly easy, versus the mess it is today.

So I think that it’s totally reasonable to have an incubation period for small business to promote growth, where they can operate tax-free for their first two years of existence.  And then instead of paying the full rate all at once, the tax collect on small business startups should be eased into the full tax rates.  So the taxes collected should just slowly be stepped up to what the normal rates are during the first 5 years.  Then, only after five years of existence (with certain income exceptions), would those start-ups have to pay the normal business tax rates.

Now of course income exceptions would exist!  If the small business makes over 1 million in profit its first year out of the gate, well…  it’s going to have to pay taxes in year two at the normal rates, effectively bypassing the incubation period for years two thru five…  The reason being would be that if you are profitable enough to generate at least 1 million, then you can afford the professional help with the taxes and other professional services to get your taxes done…

Now for the twist…

If over 80% of small businesses fail during the first 5 years, aren’t some of those business owners going to go get food stamps and other government help to live?  After all, so are taking a risk and putting it all in, so it only makes sense that after the fail they’ll need temporary help, no?  So I have to wonder if the taxes they collect during those first two years are going directly back into the failed companies owners through the system?

And if those small business startup that needed large capital borrowing requirements fail, doesn’t that lessen the amount the banks have to pay because of the huge loss from a small business loan that failed?  I’m thinking that the current model of taxing to death small startups means less of a tax stream for the government?  You’d think that the government would people trying to start a business a break in the beginning infant stages…

Just my two cents to add to Sidney’s fire!

Cheers,

MR