Reforming Treatment of Business Start-up Expenditures

Today, once a business starts carrying on business (when it is no longer getting ready, but is instead ready to serve customers), it can start amortizing its start-up expenditures as defined under IRC Section 195 over 15 years. If the total is $55,000 or less, up to $5,000 can be expensed immediately and this amount phases down as the aggregate expenditures range from $50,001 to $55,000.

S. 5204, Tax Relief for New Businesses Act, would increase the expensing amount from $5,000 to $50,000 and the phaseout point to $150,000. The bill sponsors note that the average small business spends about $40,000 to get their businesses from getting ready to carrying on.

Those with over these amounts today or per S. 5204, are amortizing expenses over 15 years. Meanwhile, we allow use of the cash method of accounting by most businesses, and have Section 179 expensing of over $1 million. Why not just allow the small business to expense up to the Section 179 amount along with other eligible section 179 property? This sounds like simpler and would truly help small businesses. That is why amortize something over 15 years when Section 179 expensing is over $1 million?

This proposal is in a list of proposals from several years back from the AICPA Tax Division on modernizing the tax law for small businesses. I hope that upcoming tax reform will not just extend expiring or expired TCJA items but also take a look at reforms that would help businesses and make sense given other provisions in the law.

I've offered additional tax reforms to help small businesses in this blog. One of my favorites (beyond what is in the AICPA paper which I'm pleased to say I was able to assemble with other volunteers and staff when I was chairing the AICPA Tax Executive Committee), is allowing co-owners of a new business to elect to be a Qualified Joint Venture something which today is only available to spouses (where both file identical Schedule Cs). This would be very helpful for a start-up run by two or more people because while they are getting started, they don't have to deal with setting up an LLC or filing a partnership return - which is a lot of work when unfortunately, they might not survive. After a few years, they would be required to shift to a partnership or C or S corporation.

I'm sure many people have ideas to truly help simplify tax rules for small businesses. 

What do you think?

Tax Reform Ideas to Reflect How Small Businesses Operate in the Modern World

The Tax Cuts and Jobs Act brought several improvements for small businesses, most notably, favorable accounting methods such as use of the cash method and not having to deal with the Unicap rules. The AICPA Tax Section recently posted a position paper noting 13 more changes that would further help modernize the Code to reflect how small businesses operate. Some of these would more completely simplify what Congress started with the TCJA.

For example, the TCJA increased the Section 179 expensing amount to $1 million, adjusted for inflation annually. But, despite the fact that intangibles are important to all sizes of businesses today (and for the past two decades), it only applies to tangible assets (and off-the-shelf software), not intangible assets, such as acquisition of a patent or domain name.

The TCJA also allows for use of the cash method by businesses with average annual gross receipts in the prior 3-year period of $25 million or less ($26 million starting in 2019). Yet, despite the higher Section 179 amount and the use of the cash method, a small business might still be amortizing such items as acquired intangibles, start-up expenditures and organizational expenditures.

Here is the list of the 13 items from the AICPA Tax Section:

1. Expand section 179 to also include intangible assets
2. Further simplify accounting method rules for small businesses (such as allowing completed contract accounting).
3. Increase the deduction thresholds under sections 195, 248 and 709 and adjust them for inflation.
4. Simplify retirement plan options and rules for self-employed individuals.
5. Modernize the definition of tax shelter (the one used in the TCJA is from 1986 before we had the passive activity loss limitation rules and before LLCs were used in all states as a common business vehicle).
6. Repeal the individual and estate and trust AMT - the corporate AMT was repealed; this should have also have at least been done with respect to business preferences for all taxpayers.
7. Relax the exclusive use requirement for a home office deduction (anyone taking their smartphone into their home office likely has violated the exclusive use requirement).
8. Allow a deduction for health insurance of self-employed individuals in computing self-employment tax.
9. Increase the current, longstanding $400 self-employment earnings threshold.
10. Provide similar treatment for all businesses with respect to deducting state and local income taxes - corporations can deduct all of their taxes, all businesses should be allowed the same treatment. Today, the $10,000 SALT cap also applies to income taxes attributable to an individual's sole proprietor, partnership or S corp income.
11. Limit section 461(l) and the 80% limitation on NOLs of section 172 for start-up businesses.
12. Repeal section 465.
13. Require all estimated tax payments to be due on the 15th day after quarter end.

For details, see the complete position paper here.

I think it's a great list of ideas (truth in writing - I proudly chair the AICPA Tax Executive Committee who assembled this list with help from other tax section volunteers and staff). Blog posts are my own.

What do you think?

Tax Reform - A few provisions in track changes

I often find it helpful to see how tax legislation changes existing Internal Revenue Code sections. So, I took a few and made the modifications called for in P.L. 115-97 (12/22/17) (the Tax Cuts and Jobs Act), and show how they change the relevant Code section using track changes.  I also include the effective date information.  For the changes to 448, I also include a caution about how the favorable methods changes don't apply to "tax shelters" which could include some limited partnerships and LLCs even though they don't act like a typical tax shelter.

Here are the ones I modified:

Section 1 - tax rates including kiddie tax change

Section 62 - changes to AGI

Section 163 - changes to mortgage interest and the new interest limitation for non-small entities (and tax shelters - see comment above)

Section 164 - changes to limit the Schedule A deduction for state and local taxes for 2018 through 2025. This track changes includes the text of the 1944 Cumulative Bulletin reference that is at footnote 168 of the PL 115-97 committee report (click Section 164 for all of this). And, thanks to attorney Libin Zhang for finding and improving a copy of these 1944 CB pages you can find here.

Section 274 - changes to entertainment, meals, travel and awards

Section 448 - changes to broaden availability of the cash method of accounting as well as similar changes to unicap (263A), inventory (471) and certain construction contracts (460(e))

Section 451 - changes to timing of income for accrual method taxpayers

Section 1031 - restricts like-kind exchanges to non-dealer real property

Hope you find this useful.  Note, these are just a few of the many changes in P.L. 115-97!

Also see historical links here.

What do you think?

Testimony to Senate Small Business Committee for AICPA

On June 14, 2017, I had the privilege to testify on behalf of the AICPA before the Senate Committee on Small Business & Entrepreneurship. The title of the hearing - Tax Reform: Removing Barriers to Small Business Growth. A goal of the hearing was for this committee to help the Senate Finance Committee know that they want to be sure tax reform helps small businesses and that such businesses are not forgotten in efforts to reduce the corporate tax rate.

The AICPA's written testimony is at the hearing page and AICPA website. There is a good summary of the hearing in Accounting Today, "AICPA tells Senate corporate tax cuts should also go to small business," Michael Cohn, 6/14/17.

In my 5 minutes, our AICPA testimony focused on:

• Any rate reduction should apply not only to C corporations but also to other entity types (sole propreitors and passthrough entities).
• The cash method of accounting should not be limited.
• Small businesses should be allowed to continue to deduct interest expense.
• The Section 195 start-up expensing amount should be inccreased.
• The AMT should be repealed.
• IRS should be modernized and a new executive-level practitioner services unit formed.
• S. 540, mobile workforce legislation should be enacted (note that HR 1393 passed in the House on 6/21/17)

There is a video of the hearing at the committee website. It was an enjoyable experience and a nice opportunity to discuss tax reform and small business and hear of the concerns of the committee members.

What do you think about tax reform and small businesses?

Guest Post - Four Factors That Can Help Business Tax Compliance

Here is a guest post from Jayson Mullin, a partner at the tax debt resolution company Top Tax Defenders, offering helpful tips for small businesses to reduce tax headaches and feel more comfortable dealing with complex taxes which likely won't get much easier for businesses even with tax reform.

Whew! Tax Day is more than a month behind us. For many small business owners, that's a huge weight lifted. For others, it means playing the procrastination game against a filed extension, or continued concern that taxes weren't filed correctly, sparking the dread of a potential audit.

There are four things small business owners can do for a more stress-free tax experience (no, that's not an oxymoron):

•  Be financially prepared.
• Be organized enough to file on time.
•  Have a decent understanding of complicated tax laws, rules and the paperwork required.
• Understanding differences between federal and state reporting.

According to Rep. Tim Huelskamp, R-Kan, chairman of the House Subcommittee on Economic Growth, Tax and Capital Access, small businesses that employ between 1-5 employees spend an average of $4,308 to $4,276 per employee in order to comply with the United States tax code. That's a notable financial burden.

4 Factors to Protect Your Business's Tax Compliance & Bottom Line

Filing incorrectly can mean sizable penalties. Even if you opt not to use a certified tax professional to file your taxes, it's a good idea to consult with one to make sure that you are filing taxes correctly. Let's take a look at each of the above factors in greater detail.

Get Tax Finances in Order

In almost all cases, small business owners should be filing quarterly taxes. While that may seem like just one more thing to do, there are several benefits to this method. First, it works as a budgeting tool for small business owners, allowing them to get money sent in to the IRS in the hopes that they will not owe anything more, or that the amount they owe will be significantly reduced when taxes are due.   Also, being faithful about paying quarterly taxes is a good way to "be prepared" as the old Boy Scout Motto goes. Accurate tax filing requires organization and preparation. Ideally, if you're doing your homework to get accurate quarterly tax figures, you will have less to contend with as tax day approaches.

Be Organized Enough to File on Time

Yes, certain small businesses (primarily partnerships) can file for a tax extension but we never recommend this route. The goal for tax compliance is to be on time. Filing an extension usually translates to "more time to procrastinate," and this isn't helpful when you're scrambling a few months down the road.   It's much better to consider tax compliance as a year-round event. Pay attention to small business tax updates provided by the IRS. Keep your paperwork in order. Work with a CPA to determine which things your business can deduct and which you can't. Then, keep individual files for deductions so they are easy to itemize later.   Make sure you:

• Separate personal and business expenses.
• Track mileage and relevant car expenses (check the IRS publication pertaining to Car Expenses).
• Don't exaggerate deductions; the IRS has a good idea of which expenses make the most sense for specific industries.
• Keep payroll records up-to-date (it's often worth the expense of hiring a payroll company to make sure this item is taken care of).
• Reconcile, track and support expenses with a receipt.

The more organized you are, the easier it is to do your own taxes, or streamline the work you'll do with a professional.

Have an Understanding of Current Tax Laws and Relevant Paperwork

That's simple enough, right? It's no mystery that small businesses have it rough when it comes to tax compliance. The U.S. Tax Code contains more than 10 million words! It's impossible for a small business owner to keep up with each and every code included there. 

Should you choose to go it alone, there are helpful IRS tools you can access, like the Small Business & Self-Employed Tax Center or IRS-Hosted Webinars and Tax Workshops.   While there are some new breaks, such as Section 179, which allows small business owners to write off equipment purchases and leases (up to $500,000), the tax code is a very complicated web to navigate.

This is the most compelling reason to work a tax professional is so important, ideally a CPA or licensed tax professional with experience and an impeccable reputation. At the end of the day, you are ultimately responsible for any discrepancies in compliance.

Variances Between Federal, State & Local Compliance

That segues to the fourth factor: knowing the variances between the federal and state tax codes. Then there are the other local taxes you're responsible for. Many business owners get so caught up in the stress of federal tax compliance that they forget about their other tax obligations such as self-employment, property, payroll, local and excise taxes. 

Again, even a series of consultations with the right tax professional will help you remain organized and ahead of the curve with small business tax compliance.

Conference June 18 - IRS/SJSU Small Business Tax Institute

The second annual IRS-SJSU Small Business Tax Institute will be held on Wednesday June 18, 2014 on the San Jose State campus. The theme this year is Assisting New and Growing Businesses.  This all day event offers continuing education credit to CA CPAs and tax preparers, Enrolled Agents and CA attorneys.

Topics include forms of entity, start-up expenses, worker classification, ethical consideration in serving the new business, and a small business tax update. Also, a venture capitalist will talk about what it takes to be a successful entrepreneur today. Speakers include IRS agents, practitioners and academics.

Registration is open now; fee includes meals, parking and materials. This is also a great networking event.

See the registration link here and additional information - http://www.tax-institute.com.

It is also listed on the IRS offerings on small business taxation.

Small business tax reform

On July 17, 2013, the Senate Committee on Small Business and Entrepreneurship held a roundtable on "Small Business Tax Reform:  Making the Tax Code Work for Entrepreneurs and Startups."  I was pleased to have been invited to participate along with ten others.  Senators present for the roundtable included Landrieu (Chair), Risch (Ranking Member), Shaheen, and Enzi; several staff members were also present.

The roundtable format seemed to lend itself to more interaction among the Senators and participants compared to a formal hearing. Some of the ideas suggested included:

• The need to simplify so that small business owners can better understand the rules and not spend as much time and dollars complying as they do today.
• Expensing of assets allows for simplification and a possible boost to the economy.
• A representative of the Angel Capital Association would like to see the current (temporary) 100% exclusion of capital gains of qualified small business stock (Section 1202) made permanent and the holding period of the stock reduced from five to two years. 
• A representative of the Cato Institute thought the rate on all capital gains should be reduced.
• A representative of the ESOP Association wanted to be sure incentives for employee ownership were continued.
• A few of us, including Senator Landrieu, noted the need to modernize some of the rules.

A video of the roundtable is available. I think written comments of the participants will also be posted. I have included mine below (or pdf) and I plan to submit a longer explanation of these items that includes suggestions for modernizing the tax law (moving it into the 21st century). One example I noted was the need to expand Section 179 expensing to include intangible assets, such as acquisition of software or a domain name. It doesn't make any sense today to have this simplification and investment incentive only apply to tangible property.

One purpose of the hearing was to get ideas for the Senate Finance Committee's "blank slate" project where all Senators have been asked to tell the Committee what special tax deductions, exclusions, credits and rates should remain in a reformed Tax Code. Their comments are due by July 26, 2013. My suggestions are my #9 below.

Committee press release summarizing the roundtable (7/18/13).

What do you think?

---------------------------------------------------------------------------------

Small Businesses Tax Reform Roundtable

U.S. Senate Committee on Small Business and Entrepreneurship

Introductory Comments of

Professor Annette Nellen
San José State University
http://www.21stcenturytaxation.com/[1]
annette.nellen@sjsu.edu

July 17, 2013

Thank you for discussing tax reform and small business and the invitation to participate in today’s roundtable. I’ll offer a few points briefly at the start. I’d be glad to elaborate further today and submit detailed written testimony on these items as well as others raised today.

1. What is a “small” business? Too many parameters and bases are currently used to define this term. Use the easy ones, such as gross receipts rather than full-time equivalent employees and consider that many small businesses have no employees.
2. Consider trends to help modernize our tax system. These include growth in numbers of self-employed entrepreneurs, working out of your home, greater focus on intangible assets, and the reality that today, any size business is likely involved in international and multistate operations.
3. Consider appropriate use of technology to ease compliance. Why can’t filing of a return, W-2s and 1099s be as easy for a small business as ordering something from Amazon?
4. Improve equity among rules such as allowing self-employed to deduct health insurance in computing self-employment tax, and enabling similar funding access among entity types, such as through Sections 1202 and 1244. Be sure the research credit includes R&D on cloud computing solutions and helps start-ups with a partially refundable credit.
5. Improve certainty for inherently complex rules, such as worker classification, by allowing use of a safe harbor Q&A checksheet.
6. Include measures to reduce the tax gap to help reach revenue-neutral reform and improve fairness among taxpayers.
7. Encourage and help states to join in tax reform to ensure small businesses don’t continue to face complexity at the state level.
8. Simplify!  If you cannot describe in a few simple sentences how a rule works or it requires alternative calculations, the rule is not simple and either needs to be revised or repealed.
1. Recognize that for small businesses, simplification may trump accuracy. For example, a standard deduction for home office expenses, may be warranted to simplify compliance. Or, tax forms may need to be consolidated, such as is allowed for employers of household employees.
2. Avoid temporary provisions and numerous changes that complicate the tax law and increase compliance costs.
3. Simplify depreciation by expanding Section 179 to a permanent, inflation-adjusted large dollar amount that also covers all intangible assets, such as acquisition of a domain name.
4. Avoid new complexities disguised as small business benefits, such as a deduction for domestic business income of qualified small businesses. Lower tax rates and simplicity are the best tax benefits.
5. Find ways to consolidate duplicative provisions, such as multiple retirement plan options.
6. Require administrative alternatives to compliance with regulations found to exceed a minimum complexity tolerance level for small businesses.
9. For the Senate Finance Committee’s “blank slate” approach to tax reform, let them know that key tax expenditures for small businesses include use of the cash method,[2] Section 179 expensing, retirement plan provisions, and the self-employed medical insurance deduction. Improvements should be made to these areas though.
10. Once you have draft legislation, get input from small businesses and tax practitioners.
11. Pursue multistate tax reforms that will help small businesses such as ones to simplify and clarify payroll requirements for virtual and mobile employees, as well as income and sales tax nexus rules.
12. Evaluate all proposals for change against the principles of good tax policy.[3]

Thank you. I look forward to the discussion.

---

[1] This URL is to a website maintained by Annette Nellen for the purposes of promoting modernization of tax systems and consideration of the principles of good tax policy, with opportunity for readers to post comments. Views represented at this website are Professor Nellen's views only and may not represent those of her employer or professional organizations of which she is a member.

[2] Note that the Joint Committee on Taxation treats use of the cash method as a tax expenditure, but OMB treats it as part of the normal income tax structure.

[3] See http://www.cob.sjsu.edu/facstaff/nellen_a/TaxReform/PolicyApproachToAnalyzingTaxSystems.pdf.

Picture of the roundtable (I'm in the burgundy jacket).

C Corp Preference Even Before Possible Rate Reduction?

A Wall Street Journal article published this week - "Small Businesses Puzzle Over Tax Riddle," by Emily Maltby (2/20/13), states that some small business owners are considering converting to C corporation form now.  Today, the top C corp rate is 35% and the top individual tax rate is 39.6% (20% on capital gains; or really 23.8% on capital gains with the Medicare tax).

So, if your sole proprietorship, S corporation or partnership or LLC generates over $400,000 of income, the C corp rates look good. They look even better than the 35% top corporate tax rate because that doesn't kick in until the corporation has over $10 million of income. With $400,000 of income, the C corp is in the 34% bracket with the first $50,000 taxed at 15% and the next $25,000 taxed at 25%.

The WSJ article also refers to a recent WSJ/Vistage International poll of 848 small businesses where 35% said they would consider the C corp form if the corporate rates were reduced from the current top 35%.  Remember that Congressman Camp wants a 25% top rate and President Obama has called for 28% and even lower for advanced manufacturers.

But, there are downsides of the C corporate form, namely double-taxation of income. That is, when the corporation issues a dividend, the shareholder pays tax on that income (which was already taxed to the C corp when earned).

Policy considerations:

• Should all businesses be taxed similarly?
• Why have double taxation for C corporations? (an integrated tax system can be complicated to get to)
• Can/should Congress lower the corporate tax rate while leaving the top rate 39.6% for all other businesses?  While few businesses have income in excess of $400,000 for each individual owner, it is still the possibility of that higher rate that would leave a significant tax discrepancy.
• Is elimination of most tax preferences to get to a 25% corporate tax rate helpful to businesses and the economy?  Preferences that likely would go would be rapid depreciation, expensing research expenditures when incurred and the research tax credit.

What do you think?

H.R. 9, small businesses and complexity

On April 12, 2012, the National Small Business Association released results of a survey on taxation. Per NSBA's press release, "when asked to rate the most significant challenge posed by the federal tax code to their business, the majority (56 percent) picked administrative burdens while 44 percent said financial burdens."

This is not really news.  Tax law complexity affects everyone with the worst impact on small businesses and low-income taxpayers who face high compliance costs in relation to taxes owed.

Despite this longstanding concern and a growing deficit and debt, the House has passed legislation to add a new, temporary complex tax cut for small businesses, as very broadly defined.

H.R. 9 (112th Congress), the Small Business Tax Cut Act, passed in the House Ways and Means Committee on March 28, 2012 and in the full House on April 19, 2012 (235 - 173). H.Con.Res. 112 (the budget passed in the House in March 2012) also includes a 20% small business deduction but it is not clear if temporary or permanent.

H.R. 9 would add Code Section 200 to allow all small businesses, regardless of entity form, a special deduction only for the first tax year beginning after 2011. A small business is one with fewer than 500 full-time equivalent employees in either calendar year 2010 or 2011. Per House Report 112-425 accompanying H.R. 9, the purpose is to "help free up additional resources allowing small businesses to create more jobs" (page 5).

H.R. 9 increases complexity for many businesses. The dissenting views included in House Report 112-425 note that the special deduction applies to 99.6% of all businesses (page 38). H.R. 9 includes, though, a deduction limit tied to W-2 wages paid. Thus, the 99.6% applicability rate seems high as sole proprietors without employees appear to be ineligible for the Section 200 deduction.The dissenters note that the break is "available to partnerships of highly paid professionals, including lawyers and lobbyists. It is available to hedge fund and private equity fund managers. ... [And] many professional sports teams would get the tax break."

Section 200, which operates in similar manner to the Section 199 manufacturing deduction, is 2,000 words long and includes interaction with several other Code sections most notably those that define "modified AGI." Any gross receipts considered in computing the Section 200 deduction may not be considered for Section 199 purposes. Thus, many small businesses will have multiple calculations to determine which is more advantageous – Section 199 or Section 200.

The 20% small business deduction also raises the complexity issue of the many ways that "small" is defined in the tax law. The dissenters to H.R. 9 note that using measures of revenues or assets, many of the covered businesses would not be labeled as small. 

Why doesn't tax reform include eliminating multiple definitions for the same term? (See Nellen, "The Many Sizes of Small," Corporate Taxation Insider, 10/28/10.)

H.R. 9 not only violates the simplicity principle of good tax policy, it also violates the transparency principle in that the deduction does not represent any expenditure, but instead is intended to lower tax liability. It is a disguised rate reduction that will make it difficult for businesses to know their marginal tax rate for planning purposes.

If there is a desire or need to provide a lower than 25% rate for small businesses, why not provide for it via the rate structure for individuals and corporations?

Congressman McClintock (R-CA) offers some budgetary concerns with H.R. 9 (April 19 Cong Rec H2015):

Also see http://mcclintock.house.gov/2012/04/the-tax-cut-illusion.shtml.

What do you think?

New Perspectives on "Small" Business

The Treasury Department issued a study on how to better define "small" business. One purpose seems to be to get a better understanding on how many small businesses would face higher rates if President Obama is able to convince Congress to keep the lower rates for all but individuals with more than $200,000 of income ($250,000 if married). Only 2% of individuals have higher income than that. But some point out that a good portion of this 2% are small businesses and why should their rate be increased when President Obama and Congress want to lower the income tax rate for corporations.

Treasury uses two tests to better identify what is a true business (so tries to knock out those that may really be a hobby) and that operate as a traditional business (for example, have employees and depreciation, rather than just being an independent contractor). A business is small if gross receipts are $10 million or less. For sole proprietors, the Treasury approach finds that a little over 50% don't meet the "business" definition.

But once it identifies the small business, it matches it to the individual owner. Then it knows other characteristics of the individual. For example, does the individual have large sources of other income in addition to the small business income?

I have a short article in the AICPA Tax Insider explaining how Treasury defined "small" - "New Definitions of "Small" Business and Possible Relevance."

One finding from Treasury:

"For taxpayers reporting any flow-through income, eight percent of taxpayers reporting 75 percent of new flow-through income reported AGI over $200,000 (mean AGI of $760,000, median of $325,000). ... Taxpayers owning any business too big to meet the broad definition of small business ... are more concentrated in the upper income groups (49 percent reported AGI over $200,000, with mean AGI of $1.7 million an median over $500,000) and reported more than 100 percent of the net income from larger businesses (because of net losses and small amounts of positive income reported by lower AGI classes)."

It will be interesting to see how this data gets used.

For an analysis of the data, see Marty Sullivan's article, "Should We Raise Tax Rates on Wealthy Employers?" in Tax Notes and on his blog - here.Followed by his "The Myth of Mom-and-Pop Businesses" (9/12/11) - here.

It is a lot to sort through. I wonder if the fact that Treasury gave a "non-business" label to so many businesses if Congress will question if less favorable tax rules should apply. We'll see.

Tax Reform and Small Businesses

I'm pleased to be guest blogger at Franchise Help for a few posts that will address the current tax reform discussions as relevant to franchisees. Here is my first, introductory post from June 6 - here.

Tax reform and small business

There have been a few hearings this year in both Senate and the House on tax reform. For one of them, I submitted testimony for the written record - the House hearing on Small Business and Tax Reform. I hope it gets looked at. I've posted it to my 21st Century Taxation page - here. Here are the points I made and further explain in the written testimony:

1. Define "small."


2. Recognize trends including the growing number of self-employed individuals (part-time and full-time) and modernize the tax law to tie to today's ways of living and doing business.


3. Use principles of good tax policy to identify weaknesses and how to address them.


4. Simplify (and don't continue to complicate such as with numerous changes and temporary provisions).


5. Consider integration of the corporate tax system before making rate changes.


6. Consider administrative improvements including use of technology.


7. Clarify worker classification rules.


8. Resolve state tax issues that need to be addressed by Congress such as because the commerce clause is involved (nexus issues).

What do you think?

The Many Sizes of "Small"

It is amazing, and perhaps odd, that small businesses are defined in so many different ways in the federal tax law. The recently enacted Small Business Jobs Act illustrates this well. The special credit carryback rules apply to small businesses with average annual gross receipts of $50 million or less. The Section 1202 qualified small business stock gain exclusion refers to a C corporation with $50 million or less of assets. The allowance of a medical deduction in computing self-employment tax refers to small as being a sole proprietor (regardless of gross receipts or asset value).

I've got an article in the 10/28/10 AICPA Corporate Taxation Insider on this topic with several illustrations of "small" in the federal tax law. I contrast this non-systematic approach with that of the Small Business Administration that has a system and recognizes that "small" may vary from industry to industry.

In addition to relevance for federal tax incentive rules or rules to relieve small businesses from some burdensome rule, "small" is also under consideration for some multistate bill, such as H.R. 5660 and the MTC model sales tax notice proposal.

I've got more information and links in the article - "The Many Sizes of "Small"".

Helping Small Businesses

Congress have a variety of bills it has been working on that are supposed to help small businesses. These include:

• H.R. 4849, the Small Business and Infrastructure Jobs Tax Act - it passed in the House in March and is similar with respect to tax provisions to H.R. 5297
• H.R. 5297, the Small Business Jobs and Credit Act - it passed in the House on June 17. It includes some lending provisions as well as tax provisions such as increasing the expensing amount for start-up expenditures and increasing the gain exclusion for Qualified Small Business Stock under Section 1202
• H.R. 5486 - there was debate on June 15 and postponement
• H.R. 5893, the Investing in American Jobs and Closing Tax Loopholes Act - there was debate in the House on July 29 and hearings were postponed

There is concern over whether these bills really help. The Small Business and Entrepreneurship Council issued a letter to the Senate (7/28/10) saying that H.R. 5297 misses the mark in helping small businesses. They also note that small businesses need relief from continued regulation of them. Per the Council - "Legislative measures that will help small businesses includes tax relief in the form of making existing rates permanent, a time-out on various legislative initiatives and regulatory efforts that will drive their costs higher, and an end to excessive spending that is adding to our debt and eroding economic stability."

An article in the Washington Post - "Republicans block small business lending bill," 7/29/10 describes some of the problems in getting any bills passed with lending relief and tax breaks for small businesses.

My questions:

• What is the best stimulus and relief for small businesses? Congress has already tried a few measures such as increased expensing election, a payroll tax exemption for hiring new employees. Perhaps they need customers to get a stimulus so they will buy goods and services from small businesses.
• How did Congress select some of these measures? Is a larger start-up expenditure deduction really needed? I'd guess that a new business would not likely make a significant profit in its first year so why push more expenditures into that first year could instead be amortized over the first 15 years? Look for something of greater impact. Perhaps a refundable credit for starting a business?
• Why so many bills? Can't Congress just start with one and modify it during debate? It is confusing to the public in knowing what to provide input to Congress on.

What do you think will stimulate small businesses and do you think stimulus directed that way is what is needed? How might it be done without further complicating the tax law?