Tax Rates, Timing and Damages II: Small Businesses

As a follow-up to yesterday’s post, I wanted to add that the same phenomenon of declining tax rates be observed for businesses that are eligible for the small business deduction. The following chart shows the small business tax rate since 2000:

 

In addition, the limit up to which a corporation can claim the small business deduction has also risen over the years, from $200,000 in 2000 to $500,000 in 2014. As a result, a business receiving a damages award in 2014 as opposed to 2000 will pay less corporate tax.

I underline the word “corporate”, because in many instances of business disputes involving small companies, the shareholder(s) of the plaintiff corporation are also named as parties to the suit. While there are no doubt different legal considerations that go into the decision to name individual plaintiffs, as a general rule when a dividend is declared to the individual shareholder, the combined taxes payable at both the corporate and personal level will be very close to the taxes that would have been payable had the income been earned by an unincorporated entity. In such situations, changes in the small business rate over time will (arguably) be largely irrelevant.