Taxing treatment of small businesses

Many individuals joined in on November 27, 2010 to support Small Business Saturday. Some 85 percent of working adults in Massachusetts are employed by small businesses. It is no doubt that we need these small businesses to lead the state and the nation out of the economic downturn and lower the unemployment rate. It is reasonable to expect that our elected leaders would try to nurture these businesses to help the difficult employment situation.

However, reason does not always rule the day. Last year, the Department of Revenue issued a directive that can only be characterized as discriminatory against small business owners. Massachusetts Directive 08-3 states the following: “partners and self-employed individuals are denied any deduction for contributions to their 401(k) plan”. It is noted that this directive is an interpretation of the existing Massachusetts general law. So both the Department of Revenue and the Legislature share blame in this.

Here is how it works. A small business owner maintains (at his cost) a 401(k) plan for his / her employees. In many cases, the owner even provides a matching contribution to the employees’ account. The employees contribute to the 401(k) plan and receive a deduction for Massachusetts income tax purposes. However, the owner that provides the job, provides a matching contribution, and pays for the costs of the plan is not allowed a comparable deduction.

All other classes of workers including; state employees, those working at a not-for profit, those working at large businesses, even the Governor himself are allowed a tax deferred deduction for retirement savings. The only one exempt from this tax benefit are the self-employed / small business owner. If there is a rationale argument for this, I am waiting to hear it.

The Massachusetts Commission Against Discrimination defines discrimination as follows: “Discrimination is unfair treatment because of an individual's membership in a particular group.” It certainly would appear that the self-employed are being unfairly treated as compared to other workers.

The tax code says a lot about the way the government treats the various interests in the state. Looking at this, one can only assume that Massachusetts does not look very favorably toward small business owners, regardless of the lip service afforded them.