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In Politics, ‘Small Businesses’ are Bigger Than You Think

In Politics, ‘Small Businesses’ are Bigger Than You Think

This week marked the 51st annual National Small Business Week. Started in 1963, National Small Business Week is a series of events nationwide to recognize and celebrate small business owners. In his statement on Monday to kick off the week, President Barack Obama highlighted how small businesses are the backbone of the American economy, creating two out of every three jobs. He also pointed out the administration’s record of cutting taxes 18 times for small businesses and efforts to simplify the business tax code.

The President’s statement harkens back to images of family owned shops in local neighborhoods. This is the image that most of us think of when we think of a small business. The local grocer, the family that invested in the sandwich shop franchise, or the local mechanic “and sons” that has existed for generations. These are also the images politicians use when discussing policy or, more often, debating tax policy. They remind us that we must always remember the small businesses of America.

Except in politics, it depends on what the definition of “small” is.

Since the creation of the U.S. Small Business Administration in 1953, it has been an ongoing challenge to determine what constitutes a small business. The Small Business Act that created the SBA defined a small business concern as “independently owned and operated and which is not dominant in its field of operation.”  It also states that the definition of small business shall vary from industry to industry to reflect the differences.

It is within those industry differences where the numbers can vary dramatically.

There are some common technical definitions that apply to all small business, such as being organized for profit and independently owned and operated. The numerical definitions are based on the average number of employees over the previous year or the average annual receipts of the previous three years. The qualifying amounts represent the largest size a company can be to still be considered a small business. These size standards set by the SBA, which they use to determine eligibility for SBA financial assistance programs, and by all federal agencies for contracting purposes. While they are considered regulations, they are really just guidelines and carry no legal weight.

The standard is to define a small business as one with no more than 500 employees for manufacturing and mining industries, and an annual average of $7 million in gross receipts for all non-manufacturing industries. However, there are more exceptions than rules. Certain manufacturers are still considered small with as many as 1,500 employees. Small businesses in various industries can have anywhere from $10 million in annual receipts to grossing as much as $35.5 million per year to qualify as a small business contractor.

These are not your local mom and pop shops.

These definitions get even murkier when considering policy. In spite of the SBA’s definition, there has been no clear definition of what is a small business for the purposes of tax policy. A report issued in 2011 by the U.S. Department of Treasury’s Office of Tax Analysis found that after analyzing data from previous tax years, the definition used for small business was too broad, largely due to technical constraints of accessing data from various tax forms. With improved data collection, the OTA was able to more narrowly define a small business for tax purposes. To create their definition, they looked at data from six specific tax forms and set the threshold for income and deductions at $10 million.

With this new methodology, the number of small business owners fell from 34.7 million filers reporting $662 billion of net income to a little more than 9 million small business owners reporting $335 billion of net business income. Under the OTA’s more narrow definition, 8 percent of small business owners had an adjusted gross income of more than $200,000, which was the same under the previous methodology.

In politics, $200,000 is a magical number.

When politicians talk about tax cuts for small business owners, the tax cuts relate to personal income. During the contentious budget talks in 2012, there was great deal of discussion regarding the extension of the tax cuts put in place under the President George W. Bush’s administration. Democrats wanted to extend the tax cuts for those making less than $250,000 but end them for incomes above that. Republicans wanted them to remain in place, arguing that it would hurt small businesses the most.

Except as the OTA showed, only 8 percent of small business owners earned more than $200,000.

When the OTA’s report came out in 2011, two Republicans sent a letter to then Treasury Secretary Tim Geithner saying it was “not helpful to inject yet another definition into an already muddled field.” They felt that the Treasury’s new definition was “misguided.” Of course, the fiscal cliff and budget talks were looming and the mantra of “protecting small business” was going to be a very important talking point.

If 92 percent of small business owners earn less than $200,000, it would be difficult to argue for higher thresholds.

For their part, the SBA still holds on to the spirit of the true small business. On Friday, May 16, they honor several small businesses in various industries all across the country in the 2014 National Small Business Awards. The winners include a New York City coffee shop owner who used an SBA disaster relief loan to rebuild his business after Hurricane Sandy and a “management and medical administrative services” consultant who began her business in her bedroom 15 years ago and now has 122 employees.

In the end, Congress agreed to keep the tax cuts in place for those making less than $450,000. Still, whether its industry regulations or the Affordable Care Act, politicians often cite the harm caused to small business. When listening to them, it’s important to remember that when it comes to politics, small may be bigger than you think.

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54 comments

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1:34PM PDT on Sep 1, 2014

I try to do business with Mom and Pop establishments. They do better by you!

8:49PM PDT on May 23, 2014

How about we have a system of definition for small business that is like bracket creep?1 to 50 people would be small.50 to 150 would be the next step up and so on, then give the greatest tax breaks, lowest intrest loans, and flexable regulations to the smallest because they often deal with the lowest income people, take on the small jobs the big contracters won't, and some even hold other jobs and have employees that work only as needed during busy season.Think small town flower shops and greenhouses, handyman services, custom snow removal,small drive-ins, Portable saw mill operations,those who do bailing , plowing and planting for farmers, school bus drivers, thrift and antique shop owners who often are only open during the summer months. There are so many.Trying to make every level of small business do things the same way is obsurd, Lumping business with 1500 employees with what I'm talking about is bound to cause hardship for the smaller ones because it's always the big ones who NEED the regulations .

8:52PM PDT on May 21, 2014

multinational corporations are among those seen as "small" businesses. bull$$it is bull$$it!

11:15AM PDT on May 20, 2014

noted

7:09AM PDT on May 18, 2014

ty

3:55AM PDT on May 18, 2014

The definitions allowed under the SBA are insane; fortunately, they're equally meaningless. Still, I'm glad to see articles like this - judging by the comments, most people had no idea how big you could be or how much you could make and still be classified as a 'small business'. Most hedge funds fall under the umbrella. Romney's Bain Capitol was a 'small business', by definition. The term is so amorphous that it might as well not exist. The good news is that for most of the life of the SBA, that hasn't mattered, as the loans and services provided went almost exclusively to those we would think of as small businesses - the entrepreneur with a great idea, the restaurant with 20 tables looking to expand to 40, the successful craft shop looking to open another branch 20 miles away. The bad news is that since the advent of the ACA, these definitions have finally become important. If you have 60 employees and net receipts of $10 million a year, you shouldn't be asking yourself whether you should fire 10 of them so you don't have to provide health insurance. If even one owner decides to fire employees based on that, it's too much. The cut off should always have been based on profits, not the number of employed.

12:39AM PDT on May 18, 2014

Noted. Thanks.

8:37PM PDT on May 17, 2014

thanks

6:33PM PDT on May 17, 2014

Republican politicians are always pretending to wring their hands over the plight of small businesses and trying to fool people into thinking that they actually care about truly small businesses. Nonsense. It has been incredibly obvious for a long time now that the GOP only cares about bending over for large businesses, and the larger the better. If this means stepping on small businesses and everything else, so be it. Mom and pop had better mind their store because it is squarely in the crosshairs of large corporations and their Republican henchmen.

5:06PM PDT on May 17, 2014

If a business can be considered small, with 1500 employees.

Then maybe we need a Micro Business Adminiatration.

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