Barbara’s Blog

The NFIB’s recent survey of small business owners found that 85% of them were in favor of tax reform. If I were able to unilaterally craft tax reform, here are five changes I’d make.

1.  Simplify, simplify

We get it; the Tax Code is complicated. There are an estimated four million words in it, and even tax experts (myself included) often disagree on what some of them mean. Let’s go back to square one when taxes were meant solely to raise revenue and were not designed to encourage or discourage certain activities (e.g., encouraging “green” activities with special tax credits).

The advantages:

a)  It would surely help to bring down the tax rates overall and eliminate the impact of lobbyists on tax law.

b)   It likely would reduce tax evasion; a low rate makes it less beneficial to engage in fraudulent activities that, if detected, could result in civil or even criminal penalties.

c)  It would give small business owners and other taxpayers more time to devote to their businesses and other activities rather than having to be concerned with the tax implications that their decisions may have.

d)  It would save taxpayers money on recordkeeping (e.g., there would be no need to track mileage for car use if no deduction for it were allowed) and tax preparation.

Simplification could be done with a flat tax, which has one or two low tax rates and only a limited number of permissible write-offs.

2.    A single tax

Right now, there are income taxes, employment taxes, and excise taxes. All of these taxes are funneled into the federal coffers to pay the government’s expenses (which include such things as promised Social Security benefits).

Why have separate taxes? Adopt a single type of tax and levy it. This would make it clearer to taxpayers exactly what they pay. Take the example of a self-employed person who is single and whose business nets $275,000. In 2013, he’s paying income tax (perhaps at the 28% rate if deductions bring taxable income below $225,050), self-employment tax of 12.4% on $113,700 and 2.9% on $275,000, and an additional Medicare surtax of 0.9% on $75,000 (earnings over $200,000). You tell me what his effective tax rate is!

3.    Eliminate different tax treatment based on marital status

The tax law treats single individuals differently from married couples. Some singles (e.g., heads of households and surviving spouses) have special tax breaks that most singles do not. When two spouses with substantial earnings file jointly, they pay a marriage penalty (they pay more than they would if they had been single).

On the other hand, when two spouses, one with high earnings and the other with little or no earnings, file jointly, they have a marriage bonus (they pay less than they would if they were single). And why should spouses in community property states have community property rules apply for most federal tax purposes (they are disregarded when it comes to “earnings” for IRA contributions, self-employment tax, and some other purposes). Why should disparate treatment remain?

4.    Make everybody pay something

At last count, 46% of Americans pay no income tax. This means they have no interest in whether taxes are high or low, fair or unfair; they have no skin in the game. Yet, many of these people vote for representatives who make tax law and impact the other 54%.

I’d make everyone, regardless of income (or even receipt of tax refunds) file an income tax return and pay at least a nominal amount (say $25). Non-profits could help low-income individuals with this perfunctory filing and payment.

5.    Collect from tax deadbeats

It was reported that federal workers owe $3.5 billion in back taxes for 2011. Federal workers aren’t the only taxpayers who are delinquent. The IRS offers various options for paying back taxes, including installment agreements and, when paying is a hardship, offers in compromise. And, let’s not forget that garnishment is a tool the IRS is allowed to use to collect unpaid liabilities and it could easily be applied for delinquent federal workers and other taxpayers.

Conclusion

I believe that tax reform can be accomplished. What needs to be done upfront is reaching an agreement on the goals for tax reform. Sweeping overhaul is needed for any meaningful changes from the status quo.

As the deadline for filing 2012 income tax returns for businesses and owners fast approaches, join Brother Online and me in a free webinar to discuss the changes implemented this year that will impact you now.

The discussion will cover:

• New laws from “fiscal cliff” legislation and what to look for on 2012 returns
• Inflation adjustments in tax rules impacting 2012 returns
• Tips and tricks for you and your tax advisor for 2012 returns
• Strategies for filing extensions
• Audit alerts
  

What you need to know about the clinic:

• Who: Brother Online and Barbara Weltman
• What: Discussion tailored to SMBs to provide tips and best practices for filing taxes this year
• When: Tuesday, March 12, 2013, from 2:00 pm ET to 3:00 pm ET
• Where: To join the discussion on March 12th, please use the following link promptly at 2:00 p.m. Eastern Time:  https://support.omnijoin.com/join?dn=TaxClinic

Also, you can follow the discussion on Twitter using #SMBTaxClinic.

If you would like to reserve a seat or have any questions, please e-mail Courtney Behrens from Brother at Courtney.Behrens @ Brother [dot] com.

We hope that you will be able to join us on March 12!

Will federal sequestration—the automatic budget cuts set to take effect on March 1—impact you? It depends on your business and on who you ask.

What is sequestration?

Sequestration is the name for federal budget cuts (primarily in defense spending) scheduled to begin on March 1 if Congress fails to find way to make required budget cuts to meet a pre-set level. The exact amount of these cuts is difficult to determine; it changes from source to source (I’ve seen mention of $85 billion in initial cuts). Overall, sequestration is supposed to make cuts of $1.5 trillion over 10 years. Also, sequestration means that the federal government is limited in the amount of additional borrowing. Details about the cuts from sequestration can be found in a Congressional Budget Office Report.

Sequestration was suggested by President Obama and agreed to by Congress in the Budget Control Act of 2011 as part of a compromise to raise the federal debt limit.

Which businesses will likely be impacted?

Entrepreneur Magazine said sequestration could result in a “dramatic decrease” in government contracts (how much is unclear). The Chairman of the House Small Business Committee agrees. Many small businesses receive contracts directly or as subcontractors of prime contractors.

A White House blog fact sheet sequestration could result in fewer SBA-guaranteed loans. These are commercial loans that receive government guarantees. The fact sheet pegs the cutback at $902 million.

The New York Times reported that a senior policy analyst with the National Federation of Independent Business thought it impossible to predict the impact of sequestration on small business and whether it would hurt the economy.

Final thoughts

Let’s be realistic about the specter of sequestration vis-à-vis small business. Not every small enterprise is in the market for a loan or is a government contractor. Little else has been discussed on the overall impact that sequestration would have on small business. The actual budget cut resulting from sequestration is only a drop in the federal budget bucket (probably about 2%). Many businesses I know would readily cut their budget by this amount if they didn’t have the funds to pay 100% of what they had previously expected. Why shouldn’t the federal government do the same?

What’s more, even if March 1 comes and goes without further Congressional budgetary action, nothing prevents some activity down the road. Let’s not panic. Let’s wait and see.

Legislation, the Marketplace Fairness Act of 2013 (H.R. 684; S. 336) was introduced in Congress last week. The bill would effectively impose state sales taxes on Internet purchases even though sellers are in different states from buyers.

More specifically, the law would allow a state to enforce its sales tax rules against Internet sellers in other states. The purpose of the legislation is to put bricks-and-mortar stores based in states with sales taxes on a more competitive basis with Internet-based sellers who, until now, have offered their customers a sales-tax free ride.

The challenge for Internet-based sellers is to deal with 9,600 sales tax jurisdictions (counting not only state but local sales tax rates). The bill addresses this problem by requiring states to simplify their sales tax rules on “remote sales.” Toward this end, states must set up a single agency for sellers to deal with for collections, filing returns, and audits. States must also make available to Internet-based sellers at no cost the software that can be used to make them sales-tax compliant. Sellers that use certified software providers (currently Avalara, ADP, Accurate Tax, Exacto, and FedTax) to figure collections would have no liability for any errors made by these companies.

Alternatively, states can work within the existing Streamlined Sales and Use Tax Agreement.

The bill would not necessarily change sales taxes, but would not bar any changes either.

Small business exception

Despite the simplification requirements in the bill, sales tax collection on remote sales, followed by remitted collections to multiple states, and filing sales tax returns in multiple states will be burdensome. The good news: The bill would exempt “small sellers” from collections and other related sales tax responsibilities. The exemption would apply to businesses with less than $1 million in gross annual receipts from domestic online sales.

Prospects for passage of the bill

The idea of requiring remote sellers to collect sales taxes is not new. The Main Street Fairness Act was a regular feature on the legislative calendar in recent years but failed to gain passage.

This bill is different and has a greater chance of success. It has extensive bi-partisan support and the support of a number of major business groups, including NFIB and the National Retail Federation. (It is opposed by the American Catalog Mailers Association and eBay, among others.) And, because a number of states are in a revenue crunch that could be somewhat alleviated by new sales tax collections, there is extensive support from state legislatures and governors.

Find out more about the bill and its progress in Congress here.

Valentine’s Day is a highly personal event for lovers, lovers-to-be, and those who want to share love with friends and relatives. But it also has a minimal impact on your business, unless you happen to sell holiday-related items, such as flowers, jewelry, greeting cards, and candy. For the rest of us, here are some issues of concern.

Supporting healthy choices

You want your staff to be healthy and your company supports healthy choices. How does the box of chocolates on the receptionist’s desk impact your goals? It doesn’t, but what can you do about it, and, even if you can do something, do you want to?

Okay — it’s one day, and displaying candy or pink donuts may not be the worst thing. While the calories may add up, so, too, will the benefits to the company from workers enjoying the day and bonding with each other on a common subject.

Consider sharing the treats with customers and clients — they, too, will enjoy the day.

Office romance policy

Many government agencies and large corporations have formal policies about dating co-workers; most small businesses do not. Should you?

Recognize the dangers of office romances. They can be distractions from the work at hand. And, if things go sour, they can create bad feelings and a chilling effect on the team. Perhaps the worst effect is the possibility of sexual harassment claims, which may lead to legal problems; relationships between supervisors or managers with rank-and-file employees should be a no-no.

Be careful about your dating policy. There’s a fine line between personal and business matters. It may simply be better to monitor activities relating to your staff (dating usually impacts more than just the couple) and react to problems if and when they arise.

Owner’s practices

What should you do (or not do) today? Give gifts? Best wishes? It depends on your company culture, your personal comfort level, and what you want to spend on the holiday. There’s nothing wrong with a little levity in the workplace. Whatever you decide, be fair and share your generosity with your entire staff.

A century ago this month (February 25 to be precise), the 16th Amendment to the U.S. Constitution was ratified, allowing for a direct tax on income:

“The Congress shall have power to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several States, and without regard to any census or enumeration.”

We call this the income tax. The following are some interesting factoids about our beloved tax (my sources are “Our Changing Tax Laws,” issued by CCH in 1988 on the 75th anniversary of the income tax, and the National Taxpayer Advocate’s Annual report released last month.

Then

• The federal tax law was 16 pages.
• Every citizen with net income of $3,000 or more was required to file a return.
• The return contained graduated income tax rates of 1% to 6%; the top rate applied to income over $500,000. The first 1% was a normal tax; the additional tax rates were a super tax.
• The tax return was three pages; another page was instructions.
• The return had to be signed before an officer authorized to administer oaths.
• The filing deadline for individuals and corporations was March 15th. (The due date changed after enactment of the Tax Code of 1954.)
• Tax was collected by the Bureau of Internal Revenue. (The Bureau became the Internal Revenue Service in 1953.)
• You can view the original income tax form, called Form 1040 even then, at the Tax Foundation.

Now

• Today the Internal Revenue Code is comprised of nearly 4 million words.
• 59% of taxpayers use paid preparers.
• Individuals and businesses spend about 6.1 billion hours and $168 billion each year filing returns and complying with the tax law.
• By my last count, there were at least 18 different definitions of “small business” (some dependent on income, some on assets, and some on the number of employees) and taxpayers must distinguish between a qualifying child, a qualifying dependent, and a qualifying individual (all who are the same in most cases) for different tax credits.
• The Internal Revenue Service (IRS) processes more than 133 million returns.
• The IRS collects taxes of more than $1.2 trillion.

Tomorrow

What is the future of the income tax? There is much talk about sweeping reform to eliminate “loopholes” (which are merely tax breaks created for special purposes, such as encouraging home ownership or charitable contributions) and, perhaps, reduce tax rates to a flat (or nearly flat) rate.

Personally, I don’t believe that today’s political climate would allow for real reform, no matter how much I think it is needed. There may be a new tax code in the offing, but likely it won’t be dramatically different from the one we have now.  However, a hundred years from now, there may indeed be a different tax landscape. For instance, down the road, the income tax may be scrapped for a national sales tax or other revenue raiser.

Whatever the change, it is certain that we will still be paying taxes. Oliver Wendell Homes, Jr. said (in a 1927 decision) that “taxes are what we pay for civilized society.”

Once a year, football titans meet in the Super Bowl. This year, the Baltimore Ravens meet the San Francisco 49ers in New Orleans. Whether you’re a football fan, this game will surely impact your business.

Increased business for locals

Some businesses directly benefit from the Super Bowl. Small businesses in New Orleans — restaurants, hotels, sign printers, transportation companies, and security firms — are sure to reap revenue from tourists attending the event. The tally on this pop won’t be known until after Sunday.

Local businesses outside of New Orleans

The National Restaurant Association reported last year that an estimated 48 million Americans were expected to order takeout or delivery for the Super Bowl. Of these Super Bowl viewers, 61% said pizza was a must-have.

Not everyone stays home. The same report estimated 5% would watch the game at a restaurant or bar.

Similar results are likely this year. Thus, small business owners of restaurants, bars (especially sports bars), taverns, and other establishments offering food, drink, and perhaps TV are sure to have a good day on Sunday.

Lost productivity

But not every business is necessarily happy about the Super Bowl. Office pools, lateness or absences on the Monday after the game, and other reasons add up to less work being done. A few years ago it was estimated that $820 million was lost in worker productivity. There’s no reason to expect different results this year.

As a business owner, what can you do? Probably not much, assuming you wanted to. The big game is part of the American fabric and putting a ripe in it would likely hurt morale, which could result in lower productivity for a longer period than this first week in February. Instead, it’s probably wise to acknowledge or welcome the camaraderie fostered by the event. A friendlier workplace is sure to attract and retain the best and brightest, and that’s ultimately what you want for your business.

On January 24, 1963, President Kennedy gave a special message to Congress, which included his proposals designed to continue to move the U.S. economy out of a recession that had started in early 1961. He proposed slashing the individual and corporate tax rates, which ultimately brought down the top marginal rate from 91% to 70%. He also reduced the top corporate rate from 52% to 48%. Despite political winds indicating that there wasn’t great support for his idea and that maybe it should be done on a temporary basis, he worked for this significant rate reduction on a permanent basis. Some (not all) of his proposals were eventually reflected in the Revenue Act of 1964.

The Heritage Foundation notes that as a result of lowering marginal rates, “tax revenues climbed from $94 billion in 1961 to $153 billion in 1968, an increase of 62% (33% after adjusting for inflation). A quote from Kennedy’s message 50 years ago:

“Our choice today is not between a tax cut and a balanced budget. Our choice is between chronic deficits resulting from chronic slack, on the one hand, and transitional deficits temporarily enlarged by tax revision designed to promote full employment and thus make possible an ultimately balanced budget.”

Another plank in his plan for tax reform was the expansion of the investment tax credit to encourage businesses to invest in certain capital acquisitions. Kennedy reasoned that the cost of the tax credit would be offset by the growth in businesses, which in turn, would lead to more tax collections on increased profits.

The first investment tax credit was enacted in 1962 in response to his call for such an incentive to make U.S. companies more competitive worldwide.  The credit was 7% of the cost of qualified property (essentially equipment and machinery). Once the property was no longer “qualified” (i.e., it was disposed of before the end of its useful life), the credit was recaptured (a portion was taken back into income in the year of disposition, depending on how long the property had been used).

But the credit as first enacted was a far cry from what Kennedy had wanted. The credit was dramatically liberalized in the Revenue Act of 1964 (the same law that cut the tax rates and made some other significant tax changes) by ending the rule that had required the basis of property subject to the credit to be reduced by the amount of the credit. By ending this basis reduction, depreciation could be taken on the full cost of the qualified property.

On a personal note, I recall very well Kennedy’s addresses to the nation and his explanation to the public of the investment tax credit. My dad owned a tool and die company in the Bronx (NYC), and he (a life-long Republican) was very enthusiastic about the proposal. My dad’s company was in a position to utilize the investment tax credit and benefit from it.

Ok, so we’ve had our tax moment for the time being, with enactment of the American Taxpayer Relief Act at the start of this year, making permanent many of the Bush-era tax cuts. However, listening to some members of Congress, I don’t think they get what Kennedy was driving at:  that lower rates and select tax incentives appear to lower revenues but ultimately will drive the economy, leading to greater revenues. With Congress poised to take up major tax reform (something not done since 1986), I hope that the words from 50 years ago are remembered!

Some sources say that the U.S. has started to run out of entrepreneurs.

The number of startups among American-born individuals is not growing as in the past.

For example, one study found that entrepreneurship among veterans has been declining steadily over the past two decades.

However, entrepreneurial talent is still abundant in foreign-born individuals. Some foreigners come to the U.S. for college and want to remain to launch businesses; others wish to move here to start businesses.

Still, the number of foreign-born entrepreneurs is slipping. A Kauffman Foundation report found that

“the proportion of immigrant-founded companies nationwide has slipped from 25.3% to 24.3% since 2005. The drop is even more pronounced in Silicon Valley, where the percentage of immigrant-founded start-ups declined from 52.4% to 43.9%.”

One of the main problems appears to be the current U.S. visa system. It is not friendly to entrepreneurs. Sure, there’s an H-1B visa for employees. Companies must prove that they control the worker, with the right to fire him or her (something an entrepreneur working for his own company can’t do).

Then there’s the E-2 visa for investors. It requires substantial investments in order to qualify (again, something that many entrepreneurs may not be able to do). But unlike in countries such as Canada and New Zealand, there is no special U.S. visa for entrepreneurs.

Bill to permit visas for entrepreneurs

Startup Act 2.0 is a bill introduced last year that would allow visas to be issued to entrepreneurs. The requirement for the visa: Invest $100,000 and create at least two jobs within the first year of the visa. The visa would last for four years. As long as the entrepreneur employed, on average, five full-time (non-family) employees during this period, he or she would then be eligible to obtain a green card (permanent residency). The bill calls for the issuance of 75,000 entrepreneur visas and eliminate per-country quotas.

The bill had bipartisan support from the likes of Sens. Mark Warner (D-VA) and Marco Rubio (R-FL). It remains to be seen whether the measure will be renewed in the new Congress.

Tax breaks to encourage entrepreneurship

The Startup Act 2.0 would go beyond visa assistance for foreign-born entrepreneurs. It would give every entrepreneur (native born or foreign born) access to the following tax breaks:

• 100% capital gains tax exclusion for stock in a C corporation held more than five years (a tax break that applied in 2011; currently the exclusion is only 50%). The break would apply only to qualified small businesses, such as tech companies and manufacturers.
• A special research credit for startups with less than $5 million in annual receipts and less than five years old.
• A tax credit to encourage employment. It would be up to $250,000 or 20% of W-2 wages, whichever is less.

Final thought

As the new Congress begins to consider the issue of immigration, let’s hope that attention is paid to the need to create a special entry process for entrepreneurs.

Now that Congress decided not to extend the payroll tax holiday that applied in 2011 and 2012, but did add a new tax bracket of 39.6% for high-income taxpayers starting this year, withholding rules for 2013 are a new ballgame.

Here’s what to do if you do payroll in-house:

• The IRS has released new withholding tables for 2013. Use them as soon as possible, but no later than February 15, 2013.

• If you used 2012 tables for any pay periods in 2013, you may not have withheld enough FICA tax from employees. (For 2013, the Social Security portion of FICA is 6.2% on taxable compensation up to $113,700.) You must make the appropriate adjustment no later than March 31, 2013.

Bottom line: Employees don’t have to do anything as a result of the new law. However, they may want to file new W-4s with you to adjust their withholding allowances.