Barbara’s Blog

The election is behind us and Congress will hopefully focus on fixing the tax mess we’re in. According to the Heritage Foundation, the U.S. is facing taxmageddon, which is a one-year $494 billion tax increase slated to strike the economy on January 1, 2012. What will the tax fix mean for small businesses?

Our tax survey
In mid-October, we conducted an entirely unscientific survey of subscribers to our Big Ideas for Small Business newsletter. We wanted to know whether taxes really matters to you, and in which way. We learned the following.

More than four-fifths (80.6%) of responders said taxes influence their business decisions; only 13.1% said taxes had no impact on their business decisions while the balance was not sure.

For those who said that taxes influenced their decisions, here is how:

• Hiring and firing/outsourcing: 56.1%
• Purchasing/leasing equipment: 66.1%
• Buying/leasing vehicles: 44.6%
• Fringe benefits (including retirement plans, health insurance coverage, etc.): 64.6%
• Legal business structure: 54.6%

When asked “what is the most important tax issue on your mind right now,” the answers were evenly divided among uncertainty, high rates, and complexity. One person noted that complexity with compliance has a huge impact on his decisions to hire and grow. Another person said that he is not hiring now due to unknown pending tax changes. Others said that spending, particularly at year-end, is dependent on tax laws.

Of course, not everyone plans their activities on tax results. Some said taxes are only an influence, not a deciding factor. One person indicated that dreams, goals, and self-realization are his driving factors, not taxes. Another person indicated that she focuses on generating income, not worrying about taxes.

If only Congress could know what my readers think!

If you have a qualified retirement plan for your business, determine whether your plan is meeting your objectives and complying with the law. If you don’t yet have a plan, consider adopting one now.

Is your current plan the best one for you?

There are several types of retirement plans that a small business can use; the one to choose depends on your personal situation.

Factors to consider in plan selection (or in changing from an existing plan to a new one) include:

1. Profitability of the business (how much can you afford to put into the plan each year).
2. Number of employees (which affects the cost of company contributions and whether to use a plan that places the contribution on owners entirely or primarily on your staff).
3. The number of years to your retirement (how anxious you are to sock away as much as you can for your own retirement).

Review your plan options in IRS Publication 560, Retirement Plans for Small Business. Talk things over with your tax/financial advisor or consult with a retirement plan expert for guidance in choosing a better plan and terminating your existing one.

Are your investment choices satisfactory?

The stock market remains volatile and interest rates are at historic lows, which may make your returns look anemic. In view of these factors, do your plan’s investment choices continue to meet your needs? Work with a financial advisor to realign your plan portfolio.

Is your plan in compliance with tax laws?

Tax laws on retirement plans have changed over the past several years, particularly since the Pension Protection Act of 2006. Are you up to date? Use a checklist for your particular type of plan (e.g., SEPs, 401(k)s) to see whether you’re in compliance.

If you discover problems (e.g., you’re not covering all of the employees you should), you may be able to correct the problems with little or no penalties or other IRS charges using the Employee Plans Compliance Resolution System (EPCRS). Talk to your tax advisor about this option if needed.

You can stay up-to-date on future changes and other retirement plan developments by subscribing to Retirement News for Employers. This free quarterly newsletter reports on plan law changes, new forms, and other plan-related items you’ll want to know about.

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.

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.