The administration is using questionable legal authority in its attempt to change the definition of small business, a move which could skew the impact of current tax policy discussions, top congressional Republicans said in a Sept. 6 letter to Treasury Secretary Timothy Geithner.
Since 1953, the Small Business Administration has set the government's definitions of small businesses, with the Small Business Act expressly prohibiting federal agencies from creating or adhering to another definition that is not established in law. But in August 2011, the Treasury Department's Office of Tax Analysis issued a report seeking to redefine “small business.”
In its paper, Treasury said the Small Business Administration's definition was so broad that it included a lot of partnerships and S corporations that are not traditionally considered small businesses. Treasury would end those businesses from being classified as small businesses by setting a $10 million threshold for income or deductions.
“We are concerned about the effect of the Report's definition on current policy discussions, and believe it is not helpful to inject yet another definition into an already muddied field,” wrote House Small Business Committee Chairman Sam Graves (R-Mo.) and Senate Small Business and Entrepreneurship Committee ranking member Olympia Snowe (R-Maine).
Graves and Snowe asked Geithner to inform them of how much time and resources were spent on the report and whether or not the IRS and Treasury are using the new $10 million threshold to determine how many small businesses would be impacted by tax increases on individuals over $200,000 ($250,000 for couples). President Obama has proposed allowing the 2001 and 2003 tax increases to expire for the top earners at those income levels. Using Treasury's definition, approximately 3 percent of small businesses would face a tax increase. Conservatives say that figure is closer to 28 percent using the SBA's definition.
“Chairman Graves and Ranking Member Snowe wrote the letter because they believe that not only is the Obama administration ignoring the law, but also that the Treasury's misguided definition of a small business will be used by the administration as Washington debates the fiscal cliff and its effects on small companies,” said D.J. Jordan, spokesman for the House Small Business Committee. “Tax policy will be one of the main subjects of debate for the next several months, so Graves and Snowe believe that we should look to what the law says is a small business, not make up new definitions for political convenience.”