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.

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.

Can it be true that I’m in accord with the often-dreaded federal agency? Yes, with regard to recent remarks by Commissioner Shulman. He outlined various reasons why the agency has experienced various tax risks. However, these risks also apply to businesses. Here are some of these reasons (quoted from his remarks) and why I agree:

Impermanence. “In 2010, the Joint Committee on Taxation identified more than 130 tax provisions that were set to expire at the end of 2010, with approximately another 70 to sunset at the end of 2011. And 40 more tax provisions are set to expire at the end of 2012. This year, we actually had a tax provision [the payroll tax cut] that was set to expire in two months. A perfect example of uncertainty for business taxpayers caused by expiring provisions is the Research and Experimentation tax credit. Its purpose is to foster innovation and technological development while spurring economic growth and competitiveness. However, for the past 30 years, it has been extended 14 times, many of those retroactively, for periods ranging from six months to five years. Such persistent uncertainty about the future availability of the R&E credit diminishes its incentive effect as taxpayers often do not know if they can depend on the credit when making decisions on future investments in research and development.”

Why I agree. Right now it is impossible for small business owners to do any tax planning for 2012 or beyond. We don’t know whether dozens of tax breaks that expired at the end of 2011 will be extended for this year. We don’t know what the tax rules will be for 2013 when the Bush-era tax cuts expire at the end of this year. Impermanence is devastating to tax planning.

Retroactive reinstatement of tax provisions. “This creates confusion for taxpayers, and makes it very difficult for the IRS to implement. We have seen provisions expire for almost an entire year, only to be reinstated at the end of the year…. The most recent visible example of this was the expiration of the estate tax at the end of 2009, which was then reinstated at the end of 2010. Upon reinstatement, Congress gave taxpayers the option of using either the 2009 or the new 2011 rules for 2010. This kind of result is not optimal.”

Why I agree. It’s already the third month of the year and we don’t yet know whether the research credit and other business tax breaks will be effective this year. Again, planning under this scenario is impossible.

Legislation with immediate effective dates. This “adds operational risk to the IRS and makes it hard for taxpayers to plan properly to take advantage of tax benefits.”

Why I agree. In November 2011, a new law created two new targeted groups for the work opportunity credit for certain veterans. I venture to say that most employers didn’t learn of this new opportunity immediately and could not take optimum advantage of it. The law made good PR for law makers but poor tax sense for business owners who were in the dark (at least for some time) about the new break.

My suggestions
We need to do something about the tax system now. There should be dialog about what we want the tax system to do: Raise revenue? Implement social policy? Implement economic policy? We should also revert to the tax legislation procedures that operated in the past, when legislation was debated for some time before permanent changes to the tax laws were made.

An article from the Fox Small Business Center got me thinking about the ability of small business owners to take time off for the holidays, or at any other time during the year. For many owners (e.g., retailers; those in the hospitality industry), the holiday season is crunch time and they can’t afford to be away from their businesses. Many employees of these small businesses also have to work despite the holidays.

Time off policy
Are you required to give employees time off for Christmas or New Years? While these two days are federally-designated holidays and federal workers typically get time off (December 26, 2011, for Christmas this year since it falls on a Sunday and January 2, 2012, because New Year’s Day is also on a Sunday), you are not legally required to give employees days off for federal or state holidays. Employees usually can be required to work on holidays, but many companies give specific days off.

Caution: You must make a reasonable accommodation for the religious practices of your employees, unless you can show that the accommodation would result in undue hardship for your business. Take this into account during this holiday season.

There are 10 federal holidays each year. According to Salary.com, most companies give nine or 10 of these days as paid holidays to employees. Some companies also recognize state holidays (e.g., Patriots Day in Massachusetts). Now is a good time for you to think ahead about the paid holidays you plan to give your employees in 2012. Find a list of federal holidays here.

A great resource to help you in making vacation decisions for your staff is Inc.’s  “How to Set a Workplace Vacation Policy.”

Closing for the holidays
For some businesses, the holidays are slow business-wise and an opportunity for owners and employees to enjoy time off. Decide whether this works for you, and what pay policy to apply to employees. Continuing to pay wages during this period can be a very well-appreciated holiday gift (provided that you can afford it).

Owner’s concerns
Many business owners start out with the notion that they are free to set their own work schedules, but soon reality sets in and owners find that they work long and hard, and have difficulty taking time off. Consider the benefits that time off during this holiday season can have for you:

• Health—those who do not take vacations experience more health issues and, according to one study, reduced life expectancy.

• Rekindle relationships—owners often short-change their family and friends throughout the year, so spending time with them now can be a big plus.

• Creativity—time away from the company can help you refocus your thoughts and energies.

Final thought
Whatever you decide to do about your vacation policy and time off, let’s all look forward to a prosperous New Year!

Representative Robert Dold (R-Illinois), who ran a small business before coming to Congress, became the first new representative in this session to get a bill passed. The FHA Refinance Program Termination Act (H.R. 830), which passed the House on March 10 with some bipartisan support, would eliminate an ineffective (i.e., wasteful) mortgage restructuring program. The measure is now in the Senate.

It is a good example of how small business owners can identify wasteful spending and know how to get things done.

Rep. Dold’s background:

He ran Rose Pest Solutions, a small business founded in 1860, which is the oldest pest management company in the United States. Dold is one of 33 new members of Congress who are entrepreneurs and small business owners.

Find more information about other members from AOL Small Business.

Now that more members of Congress have a business background, it is hoped that government actions will be sensitive to and supportive of small business needs in particular, and helpful to the country in general.

Historically, most members of Congress had business backgrounds. According to one source: “In the First Congress in the House of Representatives [in 1789], 36% of the members were farmers or planters, 17% were merchants, 5% were ministers and 5% were officeholders…” and in the “Senate of the First Congress, 48% were planters or large landholders, 38% were lawyers and 14% were merchants.”

Support your representatives when they work to eliminate government waste, cut taxes, and reduce spending. Find your representative by zip code from Congress.org.

Small business owners can’t know everything and need help from others. There is a distinction, however, between help and advice. Help is information and assistance that you put into action as you see fit; advice is suggestions on how you should do things. Today, there is no shortage of advice.

Social networks
One of the main sources of advice today seems to be social networking sites such as LinkedIn, Facebook, and Twitter. Posting a question on a LinkedIn discussion group, for example, is sure to solicit responses. Some may be helpful (they provide resources you can check out); others tell you what they think you should do, which may be good or bad or bad advice.

Board of advisors
Small business owners may want to use a board of advisors to better run their companies. These advisors can be sounding boards for the owner’s ideas, or they can offer their own suggestions for improvement. There are also organizations that put business owners together to help each other; the groups are structured and led by a professional coach.

Resources:

• The Alternative Board
• Vistage

The experts
There is a wealth of information available from experts in every field you can imagine. You can, for example, find marketing information from Seth Godin, technology guidance from Ramon Ray and tax information from me. The information may be solid, but the value of it to you depends on how relevant it is to your situation.

Others
It seems that advice is easy to give; all you have to do is listen to your hair stylist, neighbor, or brother-in-law. There may be some value to some advice, but it’s up to you to look for needles in a haystack.

In the end, Edna St. Vincent Millay may offer the best advice of all: “I am glad that I paid so little attention to good advice; had I abided by it I might have been saved from some of my most valuable mistakes.”

There are both tax incentives and take hikes in the proposals, which tend to offset each other and result in zero sum for small businesses. The proposals are outlined in the Treasury Green Book.

Here are some of the proposals that would impact small businesses and their owners. 

Tax incentives

A number of provisions that had applied in 2009 or are set to expire in 2010 would be extended or made permanent, including:

• • First-year expensing up to $250,000 (for 2010, with the ceiling dropped in 2011).
• • 50% bonus depreciation (for 2010).
• • Research credit (make this permanent).
• • Empowerment zone incentives (through 2010).
• • 15-year amortization for certain leasehold improvements (through 2011).
• • New markets credit (for 2010 and 2011).

The proposals would also extend COBRA assistance by the federal government to employees terminated before January 1, 2011, which means more administrative work for employers subject to COBRA and that lay off workers.

The proposals contain a number of new incentives:

• • Doubling of the current $500 per year credit for small employers that start qualified retirement plans. Employers in business for more than two years and with more than 10 employees that do not have qualified plans would be required to adopt an automated payroll contribution system for employee IRA contributions. These breaks wouldn’t start until 2012.
• • Eliminate any capital gain tax on small business stock made after February 17, 2009, that is held for more than five years.
• • Remove cell phones from listed property, simplifying substantiation.

Tax hikes

The tax rates on individuals with income over $200,000 and joint filers with income over $250,000 would be increased, with a reinstatement of pre-Bush tax cut rates of 36% and 39.6%. Who would be subject to these rates, besides top sports figures, movie stars, and financial executives? The answer is many, many small business owners.

• The FUTA surtax of 0.2% of taxable wages, which first was imposed in 1976, would be made permanent.
• A LIFO inventory election would be repealed after 2011, eliminating the opportunity to effectively defer income when inventory costs increase over time.
• Various tax incentives for fossil fuels would be repealed after 2011, including expensing of intangible drilling costs and percentage depletion for coal and other hard mineral fossil fuels.
• The Superfund environmental income tax of 0.12% imposed on corporate alternative minimum taxable income over $2 million would be reinstated; this tax had expired at the end of 1995. This would apply after 2010 and through 2020.
• Information reporting would be required for payments of services to corporations of $600 or more; currently only payments to independent contractors and certain other parties are required to be reported after 2010.
• Information reporting would be required for rental income recipients making payments of $600 or more to a service provider, such as a plumber, painter, or accountant, in the course of earning rental income after 2010.
• A contractor receiving payments of $600 or more in a calendar year from a particular business would be required to furnish to the business on Form W-9 the contractor’s certified taxpayer identification number (TIN). The business would be required to verify the contractor’s TIN with the IRS.
• The IRS would be allowed to require prospective reclassification of workers who are currently misclassified as independent contractors.

What it all means

These are only proposals. It is unlikely that Congress will enact all, or even most, of these suggestions given that 2010 is an election year.

What is troubling about the proposals, however, is the fact that it includes tax hikes, temporary tax extensions, and other measures that impede small businesses and do not support job growth. The minor tax incentives for small businesses are more than offset by tax hikes.

The proposals do not include specific tax incentives for job creation, although there are already a number of bills before Congress in this regard.

Certainly, some of the proposals are welcomed and would be helpful to small businesses.  Bottom line:  We have to wait to see what Congress will do about taxes for 2010 and for the coming years.

On January 1, 2010, the federal estate tax is set to disappear, but come the following New Year, the estate tax rules that had been in effect prior to 2002 are set to reappear. This would mean a top tax rate of 55% and an exemption of only $1 million (it’s $3.5 million in 2009). This week the House will be voting on a bill (H.R. 4154) that would freeze the estate tax at 2009 levels (a top rate of 45% and an exemption of $3.5 million per person with no indexing for inflation). The key questions that Congress should be asking are whether we need a federal estate tax at all and what the impact retaining the estate tax will have on small business and the economy.

Revenue impact

The federal government is always in need of revenue, but how much revenue does the federal estate tax add to the coffers? According to the Office of Management and Budget  (tables 2.1 and 2.5), the estate and gift taxes account for only about 1% of total revenues, a rate that’s remained fairly constant for many years. Being a revenue raiser is a poor argument for retention of the estate tax.

Impact on small business owners

The estate tax can have an adverse affect on small businesses. When an owner dies, the federal estate tax on the value of his or her estate is due nine months after death. Some businesses are forced to sell off interests, often at fire sale prices, to raise the capital needed to cover the tax bill. Others carry costly life insurance to provide liquidity for the tax bill. There is some relief for estates consisting of certain business interests, where the estate can elect to spread over a period of up to 14 years. In any event, owners often incur considerable estate planning fees to devise tax strategies for passing on the business to the next generation.

Some experts, such as the senior policy analyst at the Heritage Foundation,  suggest that repeal of the estate tax would have a positive impact on the economy. The estate tax is viewed by some as a tax on capital and such tax impedes job creation and capital investments. If this is so, then now would seem the appropriate time to eliminate the estate tax entirely so that jobs can be created and capital investments made to spur the economy.

Bottom line

Those in favor of an estate tax maintain that it is only “fair.” The question should be asked: fair for whom? The families of people who create the businesses? The workers of these businesses who could lose their jobs?

Hopefully Congress won’t be guided by a misperception of fairness and will make law based on revenue and reason.

Caution: Small business owners should not be quick to cash in life insurance policies, tear up buy-sell agreements, or otherwise dash their estate plans. Many states continue to impose death taxes, and will probably do so regardless of any federal estate tax change.