We need incentives for start-ups to hire with ease

March 30, 2012

There are lots of factors that impact the trajectory of a brand new business.  One that receives less attention than most, but which can have as powerful an impact as any, is tax.  In the case of any business, burdensome taxes can inhibit growth and effective tax incentives can provide a valuable boost.  But during a company’s early stages, the impact of tax is magnified, potentially determining whether a company succeeds or fails.

For better or worse, virtually every start-up avoids income tax during its formative stage.  This was the case for Consero Group, the event company that I co-founded, which lost quite a bit during its first two years, thanks to major investments in staff and other resources.  Despite our steadily growing revenues, the government has kindly cut us some slack, letting us carry forward a big loss to offset any income for the next year or so, as well as enabling our LLC’s ownership to offset some passive personal income.

Unfortunately, income tax is hardly the only tax that impacts a new business.  Whether companies reach profitability or remain in the red, they must pay other sorts of tax, including employment tax on every active employee, as well as unemployment insurance.  Virtually every business owner would acknowledge the value of these taxes.  But there is no question that they create more than a trivial drag on the flight to profitability, and that they serve as a disincentive to hiring.

In the current economic climate, the government should do everything it can to eliminate the tax drag for start-ups and make it easier for them to boost employment.  The HIRE Act created a great incentive for our company to onboard new staff during our first year, with encouragement to employ individuals who had been out of work for a while.  But the HIRE Act has expired, and with it some enticement to staff up.  We need a new HIRE Act, or similar tax modifications, that encourage start-ups to put people to work quickly with as little added cost as possible.

It is equally important that any new tax incentives must be structured clearly and in a way that can have an impact.  In the recent past, the federal government has implemented tax credits that were too limited in scope to benefit small business on a large scale.  One example was a health-insurance credit to boost subsidized access to group health plans, but which was too narrowly written for our company to benefit. There are other examples of tax incentives so complex that any benefit to a small business would seem to be outweighed by the burden of increased accounting fees needed to decipher the code.  Government should keep these considerations in mind; otherwise, it may not be worth spending the time and effort implementing new tax incentives.

Finally, to the extent that government is interested in giving a boost to start-ups, but concerned about a permanent loss of tax revenue, it can always make greater use of deferments.  Delaying some tax to which start-ups are subjected until they reach profitability would make life much easier during the most challenging part of the business-building process. 

This would incentivize more entrepreneurs to take the leap, and give their new business a better chance at success.

Paul Mandell is chief executive of Consero Group, an event development firm in Bethesda.

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