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How to Close the Opportunity Gap Between Latino and non-Latino Owned Businesses

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If you were the President or the Secretary of Treasury how would you help the Latino entrepreneur grow their business? 

Currently the average size Latino business is lower than the non-Latino business.  It is a $1.3 trillion opportunity gap.  Why aren’t Latino businesses growing at the same pace?

Close to half of Latino business owners are millennials (ages 18-35) and half hold at least a 4 year degree.  Data shows that the entrepreneurial spirit is alive and well.  About 70 percent of Latino firms are owned by US born Latinos.

Small Business in America

Small business is a vital part of the American economy, bringing in more than 50 percent of the U.S. gross domestic product and creating about half of all private-sector employment. However, they are forced to deal with a complicated tax code that has many laws that can negatively impact their productivity.

Small-business owners who distribute paychecks to their employees are also responsible for withholding federal income tax on those paychecks. The business owners must act as trustees for the federal government and must deposit the withheld amounts into a federal tax collection account.

This tax law forces the business owners to become tax collectors on behalf of the federal government. Business owners cannot use these funds for other necessary business expenses, such as payroll, rent or equipment purchases. If the owner does not make the scheduled deposit on time or if the deposit amount is less than the required amount, the company faces severe penalties.

We propose the following tax reforms:

First, Congress needs to enact a refundable credit for placing assets in service.  For example, if a small firm wishes to expand they will need to purchase computers, desks, copiers, fax machine, printers, etc.  There is currently IRS Code Section 179 which allows businesses to deduct up to $500,000 of qualified purchases as an expense.  We propose a refundable credit up to $100,000 for placing assets in service.  This helps the business owner’s cash flow and reduces the need to request a loan from a bank or other sources.  In fact, this refundable credit could be used to pay back a much larger loan for more scalability.  This refundable credit will go back into the economy because the business will hire more employees, make more sales, and pay more income taxes.

Second, a refundable payroll credit for hiring new employees.  The biggest challenge any business has is hiring and training new employees.  This credit will be refundable up to the cost of payroll for 10 to 25 NEW employees per year.  The impact will be significant on the underground economy of businesses paying employees in cash under the table and never reporting to the government or businesses that pay their employees as sub-contractors with a 1099-Misc.

The reality is business owners have no incentive to report employees, pay payroll taxes, workers compensation insurance, ACA insurance for larger employers, training or adding a Human Relations department to their company.  It is largely viewed as an expense, a burden and not an investment.

Lastly, the current administration’s proposal to lower corporate taxes to 15% is a great way to jump start the economy on several levels. For example, converting a sole proprietor to a C-Corporation will save the business owner 15.3% taxes immediately as self-employment tax is eliminated. This will lead to better cash flow, more investment opportunities, a higher level of profit, thereby making the business more credit ready.

Access to Capital

It has been our experience that banks and investors are more willing to lend or invest in a corporation because of the perceived sophistication of the owner. You cannot sell equity if you’re a sole proprietor. A C-Corp can easily raise capital by selling shares. A C-Corp can also recruit a board of directors to help scale the business.

The first two proposals will be non-taxable, refundable credits, to incentivize businesses to place assets in service and hire employees. The administration’s proposal of lowering C-Corp income tax to 15% will help businesses to show more profit thereby making it easier to access capital.

Conclusion

How does this affect the Latino business owner?  We believe the large gap is partly due to Latino business owners underreporting profits, sales, wages, asset purchases, which negatively impacts their ability to access capital and scale. Unfortunately, many Latino business owners are having difficulty accessing external funding due to lack of understanding the importance of tax compliance.

We believe that these proposals or similar government programs would be incentives for putting capital to work and help close the $1.3 trillion opportunity gap which will directly stimulate the economy.

Written by Carlos C. Lopez, EA and Antonio C. Martinez, EA