Laura Pedrick for The New York Times Jed Horovitz, left, with employees: “If you’re making money and paying taxes, it’s a good thing.”
The Agenda
How small-business issues are shaping politics and policy.
Beginning in November, just after the election — and a thorough debate over how higher taxes might affect small businesses — we started inviting readers to share the intimate details of their businesses’ financial conditions. We are particularly interested in exploring the relationship between income taxes and investment.
Now, with a “fiscal cliff” deal in place that preserves tax rates for most Americans but raises them for the very wealthy, we present the first of what we hope will be a series of small-business tax profiles — posts that look at how tax policies affect specific businesses. Our first owner, Jed Horovitz, believes — contrary to the claim advanced by many small-business owners — that higher taxes encourage more investment. He made this point in a comment to our October examination of claims Mitt Romney made at the first presidential debate. (We have sought owners with differing view points through such organizations as the National Federation of Independent Business and the S Corporation Association, both of which strongly opposed any income tax increase.)
THE OWNER AND HIS COMPANY Mr. Horovitz, 62, is president and chief executive of Internet Video Archive, which supplies streaming film trailers to the Web sites of 85 clients (including, as it happens, The New York Times). The company employs 19 people and is based in Haddon Heights, N.J., near Philadelphia.
THE FINANCIALS Mr. Horovitz estimates that the company will have $2 million in revenue in 2012. Its biggest expense — or investment — is employee salaries: about $1.1 million, he said, which does not include Mr. Horovitz’s pay. (He said he took his own payment as a draw of profits from the company, which is organized as a limited liability corporation.) To do much of its work, the company uses cloud computing. Storing videos and delivering them to clients in 2012 cost about $200,000. Leased software and other Internet services costs came to $100,000. Given this reliance on Internet-based services, capital expenditures on hardware and owned software was just $50,000. Sales and marketing expenses were $150,000. Rent and other office expenses amounted to $100,000. Insurance and legal costs were $50,000.
Those expenses totaled about $1.75 million in 2012, leaving Internet Video Archive with a taxable income of about $250,000. However, Mr. Horovitz owns the company’s building, so the rent it pays goes to him. And his wife draws a salary as the company’s director of marketing and communications. All told, Mr. Horovitz expects his taxable income will reach $450,000 to $500,000.
THE TAX BITE For the past few years, Mr. Horovitz’s household income has landed him in the top two tax brackets. “My effective rate has been 25 percent,” he said. Using the Tax Policy Center‘s ever-useful Tax Calculator, we can estimate how much federal tax he would pay in 2013, assuming his (and his company’s) financials do not change a lot. If the Horovitzes take a standard deduction off income of $450,000, then according to the Tax Policy Center calculator, they will pay $121,576 under the newly enacted American Taxpayer Relief Act, a few hundred dollars more than if the Bush tax cuts had remained in place. (Even though the tax rates remain the same for the Horovitzes, the new law phases out the personal exemptions for married couples making more than $267,200, which adds nearly $3,000 to the couple’s regular income tax liability. However, with the Bush tax cuts still in place, they would also be subject to the alternative minimum tax, which nearly evens things out.)
If, on the other hand, his household income is $500,000 in 2013, he will pay $140,815, according to the calculator, almost $4,500 more than if the Bush tax cuts had remained in effect. “The marginal difference is not very much, especially as a percent of our expenses or income,” Mr. Horovitz said. “Since my particular bracket is right on the edge of this divide, it isn’t that big a push to make me spend or save. If a business is deeply impacted by a tax rate of a few percent, it has other, more pressing problems!” (In fact, the Horovitzes itemize their deductions, which further reduces their taxable income and would presumably result in lower taxes under either situation produced by the tax calculator.)
As far as tax breaks go, Mr. Horovitz said, “I take what’s available.” But, he added, “I don’t devote too much time to it, in terms of planning ahead. My accountant once said to me, ‘If you’re making money and paying taxes, it’s a good thing.’ You don’t want to waste your life figuring out how not to pay more taxes. Spend your time trying to make more money.”
AND THE IMPACT ON INVESTMENT In Mr. Horovitz’s view, small-business owners are being disingenuous when they claim that higher taxes would discourage further investment in their companies. “It’s true if you wait until the end of the year, and you’re talking about the money that’s been taxed, then of course you have less after taxes. But if you spend it before it’s taxed, it reduces the taxes you pay.
“They’re not really thinking long term, and they’re not thinking sustainably,” he continued. “That’s not a very aggressive way of running a business. It’s a timid way of running a business. And I don’t think it’s what they really do — they’re not timid.”
Mr. Horovitz said that he is eager to expand Internet Video Archive because the company is finally able to take advantage of economies of scale. “We’ve just gotten to a tipping point in the last couple years,” he said. “Because our expenses have really been the same, but our revenues were $1.5 million, or one-and-a-quarter million.” Before 2012, when he drew up a budget, he estimated his pretax income would come to about $300,000. “We grew more than I expected,” he said. “I wish that I had come up with more ways to invest in my company over the year. And as I’m doing the budget for next year, I’m planning on spending more.”
In 2013, Mr. Horovitz plans to spend an additional $100,000 to $200,000. “We’re spending more on marketing travel, to reach out and find new customers,” he said. He plans to hire two additional people — “people who aren’t necessary to service the business I’ve got, but to grow the business.” And, he added, “I’ve given people raises because we grew more than expected and I think part of that is their productivity went up.”
Mr. Horovitz said: “People say higher taxes are a disincentive to investment — yes, if this is your last year in business. But if it’s not your last year in business, it’s an incentive to investment.”
If you’re a business owner and an employer, and you’re willing to talk openly about your finances, your taxes, and your investment plans, we’d like to hear from you. Please e-mail The Agenda and let us know you’re interested.
Article source: http://boss.blogs.nytimes.com/2013/01/09/higher-taxes-they-make-this-owner-want-to-hire-more-employees/?partner=rss&emc=rss