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.

With the election only days away, take this posting as an important reminder to cast your vote (if you didn’t vote early). Before you vote, consider the positions of candidates with respect to small business issues if these issues matter to you (and they should). Are the candidates going to be helpful in supporting legislation favorable to small business and owners?

Use resources to help you decide:

• National Federation of Independent Business’ How Congress Voted shows how members of Congress voted on issues related to small business. Lawmakers who voted with small business 70% or more of the time have been designed by NFIB with a Guardian of Small Business Award.
• Small Business & Entrepreneurship Council’s Congressional Scorecard for the 112th Congress shows how those in Congress voted on 20 key issues.

Should business owners suggest how employees should vote?

This is an interesting question that’s been raised recently. An Entrepreneur blog post discussed the issue.

While there’s nothing illegal about sharing your political views with your staff, I think making any suggestions about how they should vote is problematic. Just read the comments to the Entrepreneur blog to get a taste of how this action by an owner can be viewed.

There have been some instances recently where business owners have told employees that a particular election result would cause them to have to layoff workers. Is sharing this information with staff an unfair business practice?

My opinion on this: I’d be glad to share my views with anyone who asks and wants to debate the issues, but I wouldn’t go as far as dictating what employees should do with their vote.

Giving employees time off to vote

Whether you have to do so depends on where you’re located. Some states require employers to allow employees to take up to three hours off, with pay in some places or without in others; some states have no mandatory time-off rules. Check FindLaw for the rules in your state (the information here appears to be up to date even though it’s under a 2008 presidential election banner). You can always be more generous in giving time off than the law requires.

Final thought

Vote!

Some members of Congress have impressive voting records on small business issues and have been recognized by the National Federation of Independent Business (NFIB), the nation’s leading small business association, for this distinction.

The NFIB recently named 294 members of Congress as Guardians of Small Business for their outstanding voting record on behalf of small businesses nationwide. These members stood with small business on key issues at least 70% of the time in order to make the cut for the award.

The list is comprised of 47 senators and 247 members of the House, based on their record in the 112th Congress. Members have been listed without regard to party affiliation, although it is fair to say that there are more Republicans on the list than Democrats. The reason: The issues identified by the NFIB by surveying its members as those issues important to small business, such as repealing the healthcare law and putting a lid on government interference (such as the actions concerning Boeing in South Carolina by the NLRB); support for the issues was very heavily party-oriented.

Did your representatives make the cut? Read the complete report on the voting record of members of the 112th Congress to help you decide on how to cast your vote for in November.

Each year, the federal government celebrates small business. There are awards, speeches, seminars, and luncheons for the men and women who risk it all to innovate, employ, and serve the U.S. economy. This year’s Small Business Week — May 20-26 — is more of the same.

I think it’s great that we recognize the achievements of select businesses and honor them. However, it seems a little off base for the federal government to be participating in the celebration. More small businesses could be starting and growing were it not for some of the policies of the federal government.

A report from the Small Business & Entrepreneurship Council found that small business isn’t happy with Washington. The survey found an intense dissatisfaction with the overall direction of federal policies and what they meant to the economy, with 61% of small business owners saying they not satisfied with economic policies from Washington.

The National Federation of Independent Business (NFIB) found that taxes continues to be a top problem for small businesses because of uncertainty and looming hikes as well as the regulatory burden imposed by compliance. Key findings:

• It costs around 206% more (an estimated $74 per hour) for small businesses to comply with the federal income taxes than for larger companies.

• If changes in tax law are not made before the end of this year, the nearly $500 billion in new taxes will fall disproportionately on small businesses.

• Many of the most popular tax breaks for small business have expired or are about to expire.

• Family-owned businesses are threatened by the prospect of a rising estate tax, which is set to jump from 35% this year to 55% next year.

Getting back to the dream of owning one’s own business? Entrepreneurs want to innovate, hire, and thrive. To do this, they need a climate of certainty about the rules within which they operate. Taxes have to be fixed for the foreseeable future. Regulations have to be eased. Lending policy has to stabilize. Right now, we’re living the nightmare.

What can small business owners do? Congress should not wait until a lame duck session to address tax and other matters. Small business needs certainty now. Make your voice heard.

Taxes may already be a fond memory for you if you’ve filed your 2011 tax returns, but unfortunately there’s no time to rest. The clock keeps ticking as tax obligations continue unabated for this year and beyond. According to a recent NFIB survey, tax uncertainty continues to plague small business.

Here are some of the survey’s findings:

• 20% of small business cited taxes as the single most important problem facing them today.
• 22% said it is the single most important external impediment to growth.
• Small businesses spend on average $74 per hour to comply with the federal tax code, which is the most expensive paperwork burden imposed on small businesses by the federal government.
• 88% of small business owners use paid preparers to complete their tax returns.

What does this uncertainty do to small business and the economy? The NFIB fact sheet says that it

“hinders long term planning and create[s] uncertainty which prevents small businesses from making investments.”

It drains small businesses of valuable resources that could otherwise be spent on hiring, research, and other activities that would benefit the nation.

What’s up for 2012?

If Congress fails to take action now, the more than four dozen tax breaks that expired at the end of 2011 will not apply for 2012. This means:

• Many small business owners will owe the alternative minimum tax (AMT), especially those living in high-income tax states; higher taxes on owners means less money for hiring, etc.
• Businesses won’t be able to claim the research credit or many employment-related tax credits; the incentives won’t be there to incentivize.

What’s up for 2013?

If Congress does not make changes for 2013, it will be “taxmaggedon.” What to expect in the absence of any Congressional action:

• The Bush-era tax cuts will expire. This pushes the top tax rate up to 39.6%, the capital gains rate to 20%, and many other unfavorable tax rules.
• The Medicare surtaxes on earned and unearned income (as created by the Patient Protection and Affordable Care Act of 2010) will take effect for the first time.

What to do!

Become political. Whether you fall on the left or the right, you must urge your representatives to act. Just like a parent’s torment when a child goes missing, the uncertainty (not knowing what the tax rules will be) is killing us.

Small business owners know that not much has happened in Congress to help them access capital, hire new workers, or take any other steps to improve their bottom lines. Who are the key players in Congress that are in positions to help small businesses and what key actions are pending now?

Here’s a rundown so that you can contact key players to encourage action, as well as keep track of legislation:

Key players
The House’s Small Business Committee is headed by Rep. Sam Graves (R-Mo). The ranking member on the committee is Nydia Velazquez (D-NY). Other committee members include:

• Lou Barletta (R-PA)
• Roscoe Bartlett (R-MD)
• Jaime Herrera Beutler (R-WA)
• Steve Chabot (R-OH)
• Judy Chu (D-CA)
• David Cicilline (D-RI)
• Yvette Clarke (D-NY)
• Mike Coffman (R-CO)
• Mark Critz (D-PA)
• Renee Ellmers (R-NC)
• Janice Hahn (D-CA)
• Richard Hanna (R-NY)
• William Keating (D-MA)
• Steve King (R-IA)
• Jeff Landry (R-LA)
• Mike Mulvaney (R-SC)
• Bill Owens (D-NY)
• Gary Peters (D-MI)
• Cedric Richmond (D-LA)
• Bobby Schilling (R-IL)
• Kurt Schrader (D-OR)
• Scott Tipton (R-CO)
• Joe Walsh (R-IL)
• Alan West (R-FL)

In the Senate, the Small Business and Entrepreneurship Committee is headed by Sen. Mary Landrieu (D-LA); the ranking member on the committee is Sen. Olympia Snowe (R-ME). Other committee members include:

• Kelly Ayotte (R-NH)
• Scott Brown (R-MA)
• Maria Cantwell (D-WA)
• Ben Cardin (D-MD)
• Mike Enzi (R-WY)
• Kay Hagan (D-NC)
• Tom Harkin (D-IA)
• John Kerry (D-MA)
• Carl Levin (D-MI)
• Joseph Lieberman (I-CT)
• Jerry Moran (R-KS)
• Rand Paul (R-KY)
• Mark Pryor (D-AR)
• James Risch (R-ID)
• Marco Rubio (R-FL)
• Jeanne Shaheen (D-NH)
• David Vitter (R-LA)

Key bills
There have been a number of proposals in this Congress to aid small businesses. Key measures to keep an eye on are:

The Small Business Tax Cut Bill (H.R. 9) is a bill that would provide small businesses (up to 500 employees) with a 20% tax cut in order to bolster job creation. The bill would allow eligible businesses a tax reduction of 20% of their active business income. Unfortunately, the Senate is not expected to even consider the measure.

Extension of expired and expiring tax rules—to date, there has been no bill that would extend the tax breaks that expired at the end of 2011 and those set to expire at the end of 2012.

Final thoughts
While large corporations often engage lobbyists to push their agenda; small business owners can’t afford lobbying costs and need to do things on their own. Become more proactive and voice your opinion. Contact your representatives. Support small business advocacy groups, like NFIB and the Small Business & Entrepreneurship Council. If you do nothing, you have nothing to complain about!

States are in a grab for revenue, and taxing online, catalog, and “1-800” sales is one way to achieve their goal. It has been estimated that states in 2012 are expected to lose $24 billion in uncollected state and local sales taxes on Internet and catalog sales.

Background
In 1992, the U.S. Supreme Court, a case called Quill v. North Dakota, said that sellers should only be required to collect sales tax in locations where they have a physical presence in the customer’s state: a store, office, warehouse, or sales force. The court recognized the challenge of sellers to deal with the 45 state (and 7,600 local) sales tax systems in the country.

In response to the case, a number of states (24 to date) joined the Streamlined Sales and Use Tax Agreement, which was adopted on November 12, 2002. The Agreement creates some uniform definitions to simplify sales tax collections across jurisdictions.

Proposed legislation
Now, the Main Street Fairness Act (H.R. 5660), which was introduced in Congress on July 29, 2011, would sanction the ability of states to collect taxes, regardless of a seller’s physical presence. In effect, “remote sellers” (as they are called by the bill) would have to collect sales tax from customers based on the sales taxes applicable to the customers’ locations. However, the bill would exempt “small sellers,” a term that will be defined by the Governing Board of the Agreement. Small businesses would continue to do business as usual and would be exempt from sale tax collections in states in which they do not have a physical presence.

The bill would also require the Streamlined Sales and Use Tax Agreement to further simplify collection rules for sellers.

Impact on small business
The NFIB, in a press release issued on July 29, supports the bill on the grounds that it will “help present Main Street jobs by requiring Internet retailers to collect sales tax the same as local bricks-and-mortar stores.” The bill would end the unfair advantage that Internet sellers have enjoyed thus far. Other supporters of the bill include the Retail Industry Leaders Association (a trade group representing large retailers, including Best Buy, Apple, Old Navy, and Wal-Mart), and Amazon.

However, not all groups with the interest on small business at heart support the bill. For example, the Computer and Communications Industry Association, the Information Technology Industry Council (ITI), and NetCoalition (a trade group in which Google and Yahoo are members) oppose the measure. They argue that it would impose costly collection obligations on small businesses that are not exempted and that the Agreement is far away from simplifying multi-jurisdiction sales taxes. Also, eBay sellers have voiced opposition to the bill.

Bottom line
Who wins? Who loses? Besides the states that will boost their coffers, the biggest beneficiaries of the measure (if it is enacted) would be certified sales tax providers, which are companies authorized by the Agreement to automate sales tax collections. At present, certified providers include:

• Avalara
• ADP
• AccurateTax
• Exactor
• SpeedTax
• TaxCloud

Small online sellers who will not receive exemption will be the losers. They will have to shoulder increased administrative work to collect and remit the taxes.

Where do you stand on this bill?

Election Day on November 2 is critical to small business. Whatever your party affiliation, or even if you are an independent, your vote is important because this election cycle will help decide policies affecting small business for years to come.

Issues affecting small businesses

In casting your vote, small business issues may not be your deciding factor; social issues and other matters may be paramount for you. But if you want to factor in issues that concern small business, here are some to look at and determine where the candidates stand on them:

• Taxes. Will you face higher income taxes if the Bush tax cuts of 2001 and 2003 are allowed to expire? What about proposed hikes in payroll taxes? What will tax changes mean for your business? Will higher taxes prevent you from creating jobs? How will estate tax laws impact succession planning for your business?

• Health care. Does the “health care reform package” enacted last March reduce your premiums or increase your costs (now or in the foreseeable future)? Do you favor repeal or reform?

• Regulations. What is the cost of government regulations to your business? Do you favor increased or reduced regulations with respect to labor laws and other rules?

• Reporting requirements. What is it costing you to comply with current and new mandates for reporting to the IRS and other government authorities (e.g., the expanded 1099 reporting of business-to-business transactions of $600 or more starting next year)?

• Energy. How much of your budget goes to energy costs? Do policies support changes that could reduce or increase your costs?

Note: Most candidates claim to be pro-small business. The reality is that for many candidates, their policies may not be favorable to small business. It’s up to you to decide where you stand, where the candidates stand, and to cast your vote accordingly.

Resources

Learn which candidates support or oppose issues that are important to you. Here are some sites to help:

• NFIB. Find out about issues and elections, including a list of NFIB-endorsed federal candidates.

• Small Business & Entrepreneurship Council. Review a “scorecard” on how senators and representatives in the 111th Congress voted on key issues.

• U.S. Chamber of Commerce’ Vote for Business. Find candidate comparisons and voting resources.

The goal of the new law, which passed the Senate on September 16 and is expected to pass the House and then be signed into law any day now, is to help small businesses create 500,000 jobs.  According to the NFIB and to common sense, this likely won’t happen. But the new law does have $12 billion in tax breaks that could benefit certain businesses. Here’s a quick rundown of how you may be able to lower your tax bill: 

• Self-employed tax savings. Until now self-employed individuals could not reduce their self-employment tax by the amount of medical insurance premiums they paid to cover themselves, their spouses and dependents (although premiums for staff are a deductible business expense). Under the new law, for 2010 only, they can. For instance, if you are self-employed and pay $10,000 in premiums this year, you’ll save about $1,500 in self-employment tax.

• Increased write-offs for certain business investments. Under the so-called Section 179 deduction rule, if you buy new or pre-owned equipment and machinery, you can deduct up to $500,000 in 2010 and 2011 rather than depreciate the cost over a number of years. The dollar limit phases out when total equipment purchases for the year exceed $2 million. Eligible equipment includes off-the-shelf software and, for the first time, qualified leasehold, restaurant, and retail improvements up to $250,000 in 2010 and 2011. In addition, you can claim bonus depreciation on new equipment purchases, which amounts to an additional 50% deduction in excess of any Section 179 deduction claimed.

• Increased exclusion for qualified small business stock gains. If you invest in a small C corporation after the date of enactment and before January 1, 2011, you won’t pay any capital gains when you sell the stock as long as you’ve held it for at least five years.

• Increased write-off for start-up costs. Instead of being able to deduct up to $5,000 of start-up costs in the first year of business, you can deduct up to $10,000 for costs this year. The dollar limit phases out when total start-up costs exceed $60,000, but very few small business start-ups have initial costs that approach this figure.

To help pay for these tax breaks, businesses of all sizes (no small business exemption) that are recipients of rental income will have to report payments to service providers (e.g., painters, plumbers, accountants) of $600 or more in a year, starting in 2011.

Will any of these new tax breaks help you? Do any inspire you to create jobs? Please let me know.

The latest National Federation of Independent Business Index of Small Business Optimism showed a gain of 1.6 points in May, with a reading of 92.2. While it is the best reading since September 2008’s 92.9 index, it does not indicate that we’re out of the woods. 

Drilling a little deeper into the numbers finds the following unhappy results:

1. Employment: In May, companies still shed workers, with the average change in employment per firm at negative 0.5 workers, worse than the prior three months.
2. Capital spending: The frequency of reported capital outlays over the past six months was unchanged at 46% of all firms.
3. Sales and inventories: The net percent of all owners reporting higher nominal sales in the past three months improved four points to a net-negative 11%, 22 points better than a year ago, and up 14 points in the past two months. While it is the best reading since April 2008, the May reading indicates that more firms are still experiencing weakening sales trends than are enjoying sales improvements.
4. Earnings: Not seasonally adjusted, 17% reported profits higher (up three points), but 49% reported profits falling (down two points).

After more than two years of economic challenges, small businesses are still struggling to hang on. Nothing that Washington has done thus far has provided any substantial help to small businesses and their plight. Still, many owners have grown accustomed to operating within a tough economic climate and are holding their own—slow is normal now.