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Sunday, April 13, 2008

Modernizing the Tax Law for Small Businesses

On April 10, 2008, the House Small Business Committee held a hearing - “Modernizing the Tax Code: Updating the Internal Revenue Code to Help Small Businesses Stimulate the Economy."

The Committee also issued its own report - “Seven Ways to Stimulate the Economy by Updating the Internal Revenue Code." In addition to having witness testimony online in written form, the Committee has videos on YouTube about the hearing. This can all be accessed at this summary of the hearing.

I think the ideas presented by witnesses and in the Committee's report fall into two categories:

  • Tweaks to the federal tax law to make compliance and doing business easier for small businesses.
  • Changes that reflect the fact that most of the federal tax law was written before we entered our global, interconnected, knowledge-based economy and society and thus is in need of modernization.

Examples of Category 1 suggestions:

  • Repeal the AMT
  • Make the 2001 and 2003 tax cuts permanent
  • Allow greater choice of tax year for non-corporate businesses
  • Increase meals deduction for small businesses

Examples of Category 2 suggestions:

  • Allow non-resident aliens to be shareholders in S corporations
  • Stop treating cell phones and PDAs as listed property for depreciation purposes since these are not luxury items, but necessities of operating a business; detailed recordkeeping of use is not productive
  • Create a simpler tax systems, even with less incentives, due to the significant compliance costs small businesses face
  • Simplify the home office deduction to be a standardized deduction
  • Shorten some depreciation lives to be more in line with today's technology

The focus of the hearing was improving tax rules for small business to stimulate the economy, not just to modernize the tax law. However, there were several good ideas that remind us how out-of-date the tax law is (such as treating cell phones as questionable business items and giving personal computers a 5-year depreciation life).

What are your ideas to modernize the tax law to better help small businesses succeed in today's economy?

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