While talk of reforming the U.S. tax structure has been going on for decades, there has been a lot of work done on the issue at the committee level recently in Congress, and it’s getting the attention of small business owners around the country.
As accountants, you are likely getting questions from your small business clients on the subject, asking for more information about what changes could be on the horizon.
According to a recent survey Paychex conducted of startup businesses with fewer than 50 employees, taxes and the U.S. tax structure were identified as the biggest issue impacting businesses this year. Forty-seven percent of respondents identified this as the most important issue, with health care reform (25 percent) and government regulations (20 percent) rounding out the top three.
To help you stay on top of this issue and better serve your clients, Paychex has highlighted the top tax issues being considered by Congress as they work on the reform package. Here are the four key components of reform you need to be aware of:
1. Pass-throughs: One potential change that is frequently discussed as part of tax reform is alterations to the rates paid by “pass-through” entities such as partnerships, S corporations and LLCs, which pay taxes at the personal tax rates and are often small businesses. These pass-through changes would dilute existing tax advantages popular with small businesses. If this were to happen, small businesses would not benefit from reductions solely in corporate tax rates, which is another possible aspect of reform to keep an eye on.
2. Tax Extenders: Several popular tax breaks, including some particularly attractive to small businesses, were typically extended by Congress each year, but not for 2015. One example is “Section 179” expensing on certain purchases of equipment and other capital items. Small businesses took advantage of this to lower their taxable income and capital gains breaks for investments. While it’s unknown if tax reform will be passed this year, many observers think that some of these tax extenders will eventually be retroactively reinstated by Congress, even if broad tax reform isn’t accomplished. Accountants should know that there is also support for permanently adopting these measures, which would eliminate the uncertainty around tax planning that small businesses face under the current situation.
3. Simplification of the Tax Code: This is a primary theme of most reform proposals as many small businesses find the complexity of the current tax requirements daunting and would likely welcome a streamlined approach and lower compliance costs. According to a survey conducted by the Small Business Administration on federal taxes, small business owners are more concerned about the complexity of the tax law than the actual amount of taxes they pay.
Respondents to the SBA survey also identified income taxes and payroll taxes as the two most burdensome taxes from a financial and administrative perspective. Here are some additional statistics of interest from the survey:
• More than half of small business owners spend more than 40 hours a year handling federal taxes;
• 40 percent spend more than 80 hours;
• More than 25 percent spend more than $10,000 annually on tax preparation; and
• Only 12 percent do their taxes themselves.
4. Corporate Tax Rates: Another possible component of reform is the streamlining of corporate tax rates. Based on what has been discussed so far, this could result in only a handful of rates and an offsetting reduction in “loopholes” available to corporate taxpayers. For small businesses that are organized as traditional “C corporations,” this could be risky because the streamlined rate they would pay would not be low enough to offset the loss of the tax breaks available to corporations.
While tax reform is still very much a work in progress and it is unknown what components could be included in a final reform bill if the process gets that far, this is important information to keep in mind when providing counsel to your clients. Knowing what they think and what help they need from you will position you as the advisor your clients can trust.
Mike Trabold is director of compliance risk at Paychex, Inc.