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Complexity, Changing Language of Tax Code Plague Small Businesses, New Study Says» Contracting Bills

Complexity, Changing Language of Tax Code Plague Small Businesses, New Study Says» Contracting Bills
By Marc Heller and Casey Wooten, Bloomberg Government

Key Development: Small businesses report that the time and money spent complying with the tax code drags down their bottom line.

Next Steps: Congress works on a tax code overhaul, while a separate bill to renew certain tax breaks advances.

April 9 (BNA) -- A majority of small businesses surveyed recently said that the complexity of the tax code, not the amount of taxes they pay, poses their most significant challenge, according to a study conducted by the National Small Business Association.

More than half of businesses surveyed said they spend more than 40 hours per year dealing with federal taxes. Forty percent reported spending more than 80 hours, or two full work weeks, and more than a quarter of respondents said they spend more than $10,000 a year on accountants or other administrative costs of tax compliance.

In addition, the percentage of small businesses that said they hire a tax professional to prepare their returns ticked up to 86 percent in 2014, up from 84 percent a year earlier. Just 12 percent reported that they handle taxes internally, compared to 15 percent in 2013, the NSBA said.

The survey comes as Congress continues work on legislation to lower tax rates while broadening its base. Many business groups and lawmakers also say the effort should include a simplification of the tax code as well. The House Committee on Small Business held a hearing April 9 on the most pressing tax problems for small businesses.

“Small business owners consistently tell us that they are impacted by higher taxes, new taxes, increasing tax code complexity, uncertainty, and the additional time required to resolve issues with the Internal Revenue Service,” Committee Chairman Sam Graves (R-Mo.) said during his opening statement at the hearing. “All of this means they have little ability to plan with confidence, and less time to grow their companies.”

As a practical matter, the number of businesses filing taxes electronically appears from the survey to be climbing sharply. A total of 3 percent said in 2013 that they filed electronically, and that grew to 23 percent—nearly one in four—in 2014, the study added.

Among tax deductions, the survey revealed that businesses mostly claim tax code Section 179 expensing, the home mortgage interest deduction, the home office deduction and bonus depreciation. Sixty-two percent said the deduction most helpful to stimulating small business growth would be a full deduction for health insurance for the self-employed.

Similar Story in Hearing

In the Small Business Committee hearing, David Kautter, managing director of the Kogod Tax Center at American University, said the two biggest tax challenges facing small businesses are the complexity and the constantly changing nature of the tax code.

“Constantly changing tax law means constantly changing tax filing requirements, which means constantly changing record keeping requirements, which means constantly growing uncertainty, inefficiency and frustration” Kautter said.

Kautter's answer is twofold: a simplified cash method of accounting and a unified tax rate schedule for all businesses.

Under Kautter's simplified cash method of accounting, the derivation of taxable income would be based only on cash actually received or paid during the tax year for businesses with less that $10 million in gross receipts.

Additionally, Kautter suggested that income from all businesses, no matter the type or size, be taxed at the same rates. Currently, businesses organized as sole proprietorship, S corporations and partnerships are taxed at a maximum rate of 39.6 percent, and C corporations are taxed at a maximum individual rate of 35 percent.

Kautter said that it made little sense that the tax rate for unincorporated businesses, which are often small business, are taxed at a higher rate than large C corporations.

Kautter added that he was open to the idea of a graduated tax rate schedule, though one that spanned all types of businesses.

All-Inclusive Reform

Committee Ranking Member Nydia Velazquez (D-N.Y.) asked the witnesses whether they would support a corporate tax overhaul alone, without touching the individual side, if that were the only option.

Tim Reynolds, president of Tribute Inc. of Hudson, Ohio, an S corporation, said that rewriting only the corporate portion of the tax code would put his small software company at a disadvantage compared to large C corporations.

“If you do just C-corporation reform, what happens then is the companies such as mine lose the many tax incentives that would be struck during that reform, but then ends up not benefiting from the lower rates,” said Reynolds, who is also vice-chairman of the NSBA.


Additionally, Reynolds said many of the dozens of tax breaks that expired at the end of 2013, collectively known as extenders, are critical to many small businesses' bottom line. Some 73 percent of NSBA members use one or more of the extenders, Reynolds said.

Work on renewing extenders continues in Congress, with a floor vote on the Senate floor coming soon (68 DTR G-3, 4/9/14).

Reynolds noted what he called the uncertainty over the expired Section 179 tax extender, which lets business expense the cost of certain acquisitions upfront instead of depreciating over time. It is one of the more popular provisions for small businesses, according to the NSBA study.

More than one in three NSBA members take advantage of Section 179, but relying on the expensing provision can be difficult, Reynolds said.

“The annual termination, change in limits and delay in extensions of this and other tax extenders disrupts this planning, interferes with business efficiency improvements and harms the economy both for buyers and sellers of capital goods,” Reynolds said.