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Where Do My Profits Go?

I own a business in Lebanon, NH, just across the town line from Hanover: the River Valley Club. It is an important part of people’s lives — our members work out about eight times per month, which is twice the national average for health clubs — and for a club our size we have the largest personal training program in the nation by a multiple of about five. The health club business is tough, particularly due to the expense of having a large staff, but we make a decent profit for a small business — until we have to pay the various taxes that all levels of government extract from us.

Economics Professor Meir Kohn likes to use the phrase “predatory government,” and it is apropos in our case: federal, state and local governments take two thirds of our profits, a full 66% of what is left after we have paid the staff and vendors we need to operate on a day-to-day basis (note: I draw no salary):

Taxation of Profits.jpg

In the expense area, first off we pay our employees’ wages and our contribution to their health insurance. We have always been generous with health care (unlike most health clubs), and Obamacare’s new obligations won’t change anything for us. We also pay our vendors for equipment, utilities, outside maintenance, supplies, etc. After all those costs, in 2014 we were left with profits of 13.4% of our total sales. Not great, but not bad in a year when we plowed a lot of money back into the business.

Then various governmental entities take their deep cut of our profits:

— Payroll taxes on employees’ salaries amount to about 9% on top of our total compensation bill. That is, every time we pay out a dollar of wages, we pay a total of $0.09 to Social Security, Medicare, Medicaid, Unemployment Insurance and so on. With over 150 employees, that figure adds up to a lot of money.

— The Club is an LLC, a transparent entity, so profits are taxed to us as personal income. Fortunately, payroll taxes, real estate taxes, and state income taxes are deductible. On what’s left, our federal income tax rate is in the high 30%’s.

— Real estate taxes in Lebanon run at about 2.5% of the assessed value of land, buildings and equipment. Not cheap — nor easy to stomach, given that municipal employees are better paid and have more generous benefits than our own employees.

— Though New Hampshire levies no tax on personal income, transparent entities pay a Business Profits Tax of 8.5%, and companies pay a Business Enterprise Tax of 0.75% of wages and interest paid out.

The way that I figure it, from New Year’s Day until the end of August, I work for the government; only starting in September do I begin to work for myself. Of course, were I to sell the Club and invest my money in the stock market, my capital gains tax rate would only be about 20%. Anyone want to buy a health club?

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