Small Business Tax Reform

There is a growing number of small businesses. According to the US Census Bureau, in 2002 there were 17,646,062 "non-employer" firms. That is, firms with no employees, such as a sole proprietorship with no employees. In contrast, there were 5,697,759 employer firms. In 2004, the number of non-employer firms had grown by 10.6% while the number of employer firms had dropped by 3.3%.

Per a 12/07 Small Business Administration report (p. 1):

"In 2004, the most recent year for which firm size data are available, small firms with fewer than 500 employees accounted for all of the net new jobs. According to the U.S. Department of Commerce, Bureau of the Census, firms with fewer than 500 employees had a net gain of 1.86 million new jobs, while large firms with 500 or more employees had a net loss of 181,000 jobs. Small firms employed just over half of the private sector work force and generated more than half of nonfarm private gross domestic product. More than 99 percent of American businesses are small, and the average small employer had one location and 10 employees, compared with 62 locations and 3,313 employees in the average large business."

Of course, there are many ways to define small: gross receipts, number of employees, asset size, and capitalization. Also, definitions, such as those used by the SBA, can vary by industry. But, despite the definitional approach, small businesses are viewed as growing and providing employment. So policymakers tend to pay attention to small businesses to see if they can help them to help the economy.

In April 2008, the House Small Business Committee issued a report and held a hearing on ways to modernize the federal tax law to help small businesses to stimulate the economy. There are also several bills to help small businesses with tax compliance. Ideas include:

1. Increasing the IRC Section 179 expensing election.
2. Removing cell phone and laptops from listed property to ease recordkeeping.
3. To increase the meals and entertainment expense deduction in recognition that this is how small businesses generate new business in contrast to large businesses that use fully-deductible advertising.
4. A standard deduction option for the home office deduction and easing of the exclusive use requirement so that more businesses take a deduction that is truly a cost of doing business.
5. Improving health care deductions to make them comparable to corporate employees who treat health insurance contributions on a pre-tax basis.

It is questionable if anything will happen in the remaining days of the 110th Congress. I think the focus on small businesses tax modernization will resurface in the 111th Congress, but most likely in the context of overall reform of the federal tax system. Most of the ideas would help move the tax law into the 21st century. Really - should we have to keep detailed logs on cell phone usage when it has become such a low cost necessity of business people?

For more ideas and information links, I've got a short article on this topic in the August AICPA Corporate Taxation Insider.

What do you think?