Despite other hearings being held in Washington this week of a more political nature, its nice to know that the Ways and Means Committee is continuing to search for ways to make life easier for small businesses, at least as far as complying with the Tax Code. A hearing was held by the Subcommittee on Select Revenue Measures on Wednesday, May 15, on the Ways and Means Small Business Tax Reform Discussion Draft.
It was noted by Pat Tiberi, chairman of the Subcommittee on Select Revenue Measures, that with the addition of the 3.8 percent Obamacare tax, small business pass-through entities , which pay tax at individual rates, will have a top federal tax rate of 44.6 percent.
Corporate tax reform cannot be limited to an exercise of only lowering the corporate tax rate, as the president has suggested, he remarked. It must also lower rates for small businesses, who employ over 50 percent of the private sector workforce and whose tax compliance costs are 65 percent higher than for large businesses.
Roger Harris, the first witness to testify at the hearing, agreed. For many of our clients, the cost of complying with the Tax Code exceeds the taxes they pay each year. As someone who has spent an entire career working with small-business owners, I can tell you no group wants tax reform more than this countrys small-business owners.
Harris, president and COO of Padgett Business Services and former chair of the Internal Revenue Service Advisory Council, suggested two objectives to aid small businesses. A simpler code, and an improvement in cash flow so they can survive and grow.
For most small entrepreneurs, the business checking account is the focal point for their bookkeeping, he said. It is how they measure cash flow and profits, and to a great extent is the foundation for their tax accounting as well. Anything that moves them away from this simple, yet effective, approach creates complexity. Further, small start-up businesses live or die on their cash flow: Anything that creates a mismatch between taxable income and cash-on-hand is not only adding complexity but creates the practical problem of how do you pay the taxes when there is no cash in the till.
Among the proposals that Harris endorsed are the permanent section 179 expensing, including leasehold improvements and computer software. The current approach of annually extending -- many times retroactively -- provisions intended to spur investment and growth, such as Section 179, have had just the opposite effect, Harris said. For tax reform to truly stimulate economic growth it needs to engender confidence that we can count on the rules not changing every year. In short, volatility of the tax laws increases risk and risk dampens investment.
Harris agreed that increasing the cash basis threshold for small businesses to $10 million would ensure that most small businesses will be covered by the general cash basis exception. Cash accounting allows a business to operate on the simple principle that money received is income, money paid out is an expense, and whats left is profit. This also has the effect of making cash flow and profits the same, he said.
Today many small businesses have a hard time understanding why they must pay taxes on money they dont yet have or why they cant currently deduct money they just paid; therefore, resulting in a tax liability on money that is not in their bank account, he said. To make matters worse, the business owner is required to keep more records to calculate this liability. At the end of the day, the real difference between cash and accrual accounting is timing. Over time, the results are the same; it is just a matter of when it is reported.
Harris was optimistic that the hearings will set the stage for further progress on tax reform and tax simplification. There are multiple committees in the House talking about tax reform, and the Senate is starting to take on the issues, he said. There is an undercurrent of activity generated by lawmakers on both sides of the aisle, and it gives hope that tax reform has a real chance. A lot of people are looking at it and trying to do it the right way.