Barbara’s Blog

Small business owners may complain throughout the year about taxes, government regulations, and the economy; I know I do. On this day of Thanksgiving, it is a good idea to remember all of the things we have to be thankful for in the United States. Here are some you may have overlooked:

Taxes could be higher
We gripe about our current tax rules and the Medicare additional taxes poised to start for high-income individuals on January 1 of next year. Sure, these will be a burden on successful business owners and may impede their ability to hire more people, invest in equipment, and make capital improvements. And corporate tax rates in the U.S. are the highest of any of our leading trading partners.

But rates on individuals could be higher. According to one source, France’s top rate is 48% (with a proposed “supertax” of 75% on those making more than one million Euros), and Spain’s top rate is 52%. Western Europe on average has a top individual income tax rate of 46.1%. This compares with our current top rate of 35% (which could rise to 39.6% in 2013 unless Congress maintains the status quo).

And the top corporate tax rate may come down in the near future. President Obama has, from time to time, supported a reduction in this rate to 28% (and even lower for manufacturers). This could become part of comprehensive tax reform undertaking in 2013.

Regulations could be worse
Over the past decade, the federal government has issued about 38,000 new final regulations to govern not only businesses but virtually every other aspect of daily activity. Many small business owners complain that some regulations are choking the life out of their companies. But it could be worse. The WEF Global Competitiveness Index survey ranked the United States in the middle of Organization for Economic Co-operation and Development (OECD) countries in terms of regulatory burden.

For a report on 2013 regulations on small and mid-size businesses worldwide, go to DoingBusiness.org.

And there are some in Congress who are speaking out against regulations that lack common sense (i.e., those that impose heavy fines for violations without first issuing warnings). Hopefully the regulatory climate will improve.

Interest rates and inflation are low
Two of the key killers to business growth are high interest rates and high inflation. Fortunately, neither exists at the present time. Of course, deficit concerns could result in inflation heating up (which is a way for the federal government to resolve its debt problem), but that probably won’t happen anytime soon.

Freedom to pursue dreams is still alive and well
November is Entrepreneurship Month and a good time to remember that the U.S. is still the land of opportunity. Anyone, regardless of age, sex, national origin, religion, or education, can start a business and achieve success.

According to the Global Entrepreneurship Monitor (GEM), the U.S. continues to display the environment supportive for business startups. While there are countries with better startup-rates and more business-friendly environments, there are many where things are worse. All in all, we don’t have it so bad.

Happy Thanksgiving to all!

On October 3, President Obama and Governor Romney met in a 90-minute debate focused on the economy. Questions touched on the economy, taxes, the deficit, energy, and education.

Each candidate talked a little about small business. How much is a little?

If my count is correct, President Obama mentioned the term “small business” six times, while Governor Romney did so eight times. But it was not the number of times small business was mentioned, but the substance of the comments that caught my ear.

I usually don’t get political when it comes to discussions about small business. However, I think some reasoned analysis is called for now.

Here’s my takeaway:

The President referred to Tax Code changes that helped small businesses, stating he lowered taxes for small businesses 18 times (while it is true that there have been some targeted tax breaks for small business, I couldn’t find those 18 separate times).

While saying he would not raise taxes on 97% of small business owners, he also referred to Donald Trump as a rich “small business owner.” This statement is perplexing and I’m sure that Trump would probably disagree with the President’s characterization of him. But if the President was basing his remark on the fact that the Small Business Administration (SBA) defines a small business as a company with up to 500 employees, then technically Trump might fit the bill (I haven’t seen his payroll).

What bothers me about the statement is that he could fit the bill. If so, then the President’s agency, in my opinion, should revise the definition of a small business to look at more than just the number of employees and take into account revenues and assets when classifying a company as a small business eligible for SBA-guaranteed loans and other programs.

Governor Romney noted that small business startups are down to a 30-year low and that this is a reason why jobs are not being created to the extent that they should (note that historically small businesses have created 60% to 80% of all new jobs).

He also pointed out that 54% of Americans work for small businesses in which owners pay taxes on profits on their personal tax returns (i.e., at personal income tax rates and not at the corporate rate); raising taxes on “wealthy” owners would further stymie job creation.

Small business owners I’ve talked to have indicated that they are staying on the sidelines when it comes to hiring because they don’t know what it’s going to cost them for doing so—in health care, taxes, and regulations.

Bottom line: It’s easy to say you support small business. It’s like mom or apple pie; no one is against it. But let’s see which candidate can walk the talk! I think that the debate provided an answer, but I’ll be watching to learn what others are concluding.

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.

An estimated 40,000 new laws have already taken or will take effect in 2012. Many rules apply exclusively to consumers, but many other new rules affect businesses. Businesses will have to familiarize themselves with the new laws and comply so that they avoid penalties and other problems. Some rules may exempt small businesses; often the definition of what constitutes a small business varies, so it’s not easy to determine whether your company is exempt.

Learning about new laws
It’s a challenge for small businesses to keep up with changes in government rules—be they statutory (new laws) or regulatory (issued by government agencies such as the IRS and EPA). I monitor numerous government sites daily and I’m certain many changes slip by me.

While you’re busy running a business, how can you also stay up on new rules you need to know about? Here are two ways:

1. Be a reader. Find the sites, blogs, and other resources that can help you stay abreast of new rules from the government. Industry associations and trade groups can help. My Idea of the Day® and Big Ideas for Small Business® present many of the changes you need to know about. Following these resources won’t cost you any money, but there is a time commitment you’ll need to handle.
2. Work with a proactive attorney. Many law firms send their newsletters to alert clients to relevant changes. Working with an attorney may cost you billable hours, but save you penalties and hassles with the government.

Cost of compliance
In 2010, the SBA’s Office of Advocacy released a report showing the cost of compliance on small businesses. At that time, the cost of compliance was $1.75 trillion annually. The largest burden falls on small firms (those with fewer than 20 employees), which represent 89% of all small businesses in the U.S. On average small firms pay 36% more than large firms (those with 500 or more employees), but the cost for EPA compliance is four times as much for small firms as large one.

In round numbers, regulatory compliance costs small businesses more than $10,000 for each worker each year. How can this continue? The cost is still rising (remember the cost does not even reflect the increased burdens of Obamacare which are yet to take effect).

Any hope for change in 2012?
Last year the President issued an executive order to improve regulation and regulatory review. The intention is good; the results so far have been questionable.

Small businesses have yet to see any significant results from government on this issue. What’s needed is not just an executive order; we need more common sense from government officials. A small business should not be shut down (because of onerous fines) for a minor, unintentional, infraction. Regulations certainly have their place to protect the public, but overregulation doesn’t help anyone but the bureaucrats who are authorized to enforce them.

You’re a small business on the rise. You need to hire more employees to help you grow. Think hard before you add to your payroll. That’s what Peter Schiff should have done; it would have saved him a half a million dollars in legal fees and fines.

Schiff owns a small brokerage firm in Connecticut called Euro Pacific Capital Inc. In 2008, he wrote a book about the coming problems in the stock market that proved to be popular.

The book was so popular in fact that he garnered more and more clients and needed to hire additional brokers to service them. He hired about 50 or 60 brokers and his business continued to grow.

Then he faced the wrath of the federal government. The Financial Industry Regulatory Authority (FINRA) said he didn’t have its permission to hire. (FINRA is a self-regulatory agency funded by the brokerage industry; membership in FINRA is mandated for brokerage firms by the SEC.)

In 2011, he was fined $15,000. FYI: the originally-hired brokers have been terminated.

Earlier this month Schiff talked about testifying in Congress (a clip worth viewing). He discussed his hiring experience and the onerous impact of regulations on running a business.  Bottom line:  He’s now outsourcing offshore rather than hiring domestically because it’s the only way he can afford to get things done!

Do you have a regulatory story to share?  I’d love to hear it – send to Info [at] BarbaraWeltman [dot]com.

There isn’t just one description of the current economic condition for all small businesses today.

Some are thriving and hiring new employees, adding locations, and venturing into new activities. One restaurant owner is working with a suburban municipality near me to open a second location and hopes to have the red tape behind him for an opening by January 2013!

Others, however, are hanging on by a thread, trying to survive until sales picks up. Another restaurant owner in the same county is in the process of moving into a new line of business and is trying to sell his place; he’s tired of the struggle.

How are you coping in this economy?

The NFIB Small Business Optimism Index last month declined for the fifth straight month. The report on optimism for August should be out this week.

Key findings for July include:

• 11% expect to reduce their workforce over the next three months
• Sales are trending downward for many businesses
• Capital outlays are expected to be weak for most businesses

Still, the report shows growth for some businesses:

• 10% expect to hire new employees
• 29% reported higher sales
• 20% expect to make capital outlays within the next six months

What does this duality mean for the small business community? Now that Congress is back from its summer vacation, there is sure to be considerable discussion about what to do to help grease the wheels of this economy.

Unfortunately, with the split in the community, there may not be a unitary voice about what should be done to better the lot of small business. Some businesses might appreciate government assistance in some form, including government-sponsored programs that they can benefit from. Most, however, would agree that government is part of the problem, not the solution. Taxes, regulations, and the general uncertainty that government has created by its discord, has contributed to the plight of the economy in general, and small business in particular.

From my perspective, politics should take a back seat to doing what government can do to help, which is primarily to get out of the way and let the marketplace get back to normal. Micro-initiatives that last a short time and benefit just a segment of the economy, such as last year’s cash for clunkers, don’t work in the long run.

Whether businesses are prospering or suffering, all could benefit from lower taxes on all levels of government and fewer regulations. Let’s hope politicians see the light.

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.

No one wants a repeat of the financial catastrophe experienced in the last couple of years, so for the most part Washington regulation is a welcome development. 

In the course of regulating these large companies, there may be some good news for small businesses (the law isn’t final yet, so details are not firm): 

• Merchants would not be charged “swipe fees” when customers use debit cards.
• Small businesses would be exempt from the regulatory umbrella of a new consumer financial protection bureau created under the new law if they meet certain conditions, including that they do not sell financial products, they do not securitize consumer debt, and they meet accepted definitions for a small business. Thus, businesses that offer customers financing, such as mom-and-pop stores that have house accounts, wouldn’t be subject to the new regulation.

But don’t celebrate just yet. In the course of regulating the big banks and financial institutions, there are some negatives that could result:

• Retailers could face pricing complications. Merchants would be permitted to charge customers different amounts depending on the type of credit card used. Sounds reasonable since merchants may pay more to American Express than to MasterCard. But this entails more administrative work for merchants; it’s unclear how customers could react. Merchants could give discounts for customers paying in cash or with debit cards. Again, this would present a challenge for merchants to compute what the discounts should be.
• Banking fees for small businesses may rise. Because of changes in bank regulation, the era of free checking for small businesses could be at an end.

Bottom line: The law isn’t final yet. The Senate passed Restoring American Financial Stability Act of 2010  on May 26. It must now be reconciled with the House’s Wall Street Reform and Consumer Protection Act of 2009 that passed last December. It could be a while before the true impact on small business of the new law is determined.

With tax day not yet a distant memory, it’s wise for business owners to face the hidden tax they have to deal with every day: government regulations. A new report entitled 10,000 Commandments from the Competitive Enterprise Institute shows that regulations are burdensome to all business, but particularly to small businesses that have fewer resources to deal with them. Some key findings:

1. Of the 4,043 regulations now under consideration by federal agencies, 758 affect small business.
2. Of the regulations being considered, 44% of them are generated by the Departments of the Treasury, Agriculture, Commerce and the Interior, along with the Environmental Protection Agency.
3. Regulatory costs are the equivalent to 63% of all 2007 corporate pretax profits of $1.89 trillion.
4. Nearly 60,000 rules have been issued since 1995.

Significance of regulations

Shifting the responsibility for making rules from Congress to federal agencies essentially means that non-elected people are governing your business life. The report notes: “Congress can escape accountability by blaming the agency that issued the unpopular rule.”

Regulations hit small businesses hardest. The report says “per-employee regulatory costs for firms of fewer than 20 workers can be more than 40% greater than for larger firms.”

What to do?

Entrepreneurs and small companies can’t opt to ignore government regulations; such action risks fines and penalties as well as hours of hassling with bureaucrats. Here are some actions that can be helpful:

• Watch the size of your payroll. Many government mandates and rules apply only to companies with more than a certain number of employees. For example, the Family and Medical Leave Act, which requires employers to give up to 12 weeks of unpaid leave time, applies only to companies with 50 or more employees (for more details, see What Happens When You Add to Your Staff?).
• Tell government what you think about regulations. For example, as part of the Open Government initiative, the Department of Labor has created a page where you can share your ideas. Your comments can relate to DOL research, OSHA, Project GATE (Growing America Through Entrepreneurship), and some other matters.
• Follow efforts by the SBA Office of Advocacy. As part of its mission, the office of Advocacy “works to reduce the burdens that federal policies impose on small firms.” It also posts regulatory alerts on proposals affecting small businesses.

With the election of Barack Obama as President and increases on the Democratic side of the aisle in the House and Senate, what’s in store for small business?  In the short term, until inauguration, probably little will occur.

I’m keeping my eye on a few key things that could be seen within the first 100 days following the inauguration:

1. Increased taxes (in the form of higher personal income tax rates affecting many small business owners as well as higher payroll taxes);
2. Increased regulation (more rules for businesses to follow, which can be very costly);  and,
3. Hopefully, increased consumer confidence that the economy will improve (which would help to get customers to spend money).