Tax reform for business isn’t just about lowering the corporate tax rate. That’s what Patricia Thompson, chair of the AICPA’s Tax Executive Committee, told the House Ways and Means Subcommittee on Select Revenue Measures yesterday.
In a follow-up to January’s hearing on fundamental tax reform by the full Ways and Means Committee, the subcommittee heard testimony on the special burdens that the Tax Code imposes on small businesses and pass-through entities, and the need for comprehensive tax reform to address these problems.
Small businesses must be included in comprehensive tax reform, subcommittee chairman Pat Tiberi, R-Ohio, noted. “Reforming corporate taxes means only reforming roughly 10 percent of federal revenues,” he said. “That’s not comprehensive tax reform. Many small businesses pay taxes under the individual income tax rates, as pass-through entities. The last thing we want to do as a part of tax reform is create a situation where we are putting small businesses at a competitive disadvantage.”
Thompson, a tax partner at Providence, R.I.-based CPA firm Piccerelli, Gilstein & Company, LLP, agreed that because so many small businesses are not organized as corporations, tax reform must involve more than changes to corporate tax rates or other corporate provisions.
Thompson cited tax law complexity, uncertainty, and the need to expand corporate provisions to help non-corporate entities. She picked depreciation as an example of the complexities in the code that small businesses face.
“Methods to compute depreciation are different for tax and financial accounting purposes,” she observed. “Depreciation rates can vary depending on the method. There are special types of depreciation, such as bonus, special straight line, and Section 179. Plus, there is a different method for AMT. So, businesses have to maintain several different ‘books’ of depreciation and update them annually or each individual asset.”
“Let’s say a client places several pieces of equipment in service throughout the year,” Thompson added. “To determine the best depreciation method, they need to run a complex analysis. When was it purchased? Was it new or used? What was the total amount purchased? Depending on the purchase date, they may qualify for 50 percent or 100 percent bonus depreciation. If they purchased too much equipment, Section 179 isn’t available. If they don’t earn enough money, Section 179 is limited. The best depreciation method may not be clear without extensive analysis.”
Uncertainty in the tax law is especially burdensome for small businesses, Thompson indicated.
Many of the tax law changes that Congress passed last year were designed to employ more workers, she said. “For example, the HIRE Act that passed last March provided an incentive to hire unemployed workers,” she said. “This legislation was time sensitive. If taxpayers did not know of the new incentive, the tax saving opportunity was permanently lost.”
Thompson urged Congress to consider the expansion of corporate provisions to help non-corporate entities.
Although the Small Business Jobs Act, which Congress passed last September, expanded an existing provision to allow 100 percent gain exclusion on the sale of small business stock under certain conditions, the provision benefits only C corporations, Thompson observed. “So, it excludes many small businesses that are conducted as sole proprietorships or pass-through entities,” she said. “This is an excellent example of a provision that was intended to help small business that will likely not have the desired impact.”
Thompson thanked Chairman Tiberi for his effort in trying to repeal the two Form 1099 provisions, which she said were a significant burden on small business. Hours later, the House overwhelmingly passed H.R. 4, which would repeal the Form 1099 reporting provisions enacted last year. A similar provision has been approved in the Senate to the Federal Aviation Administration Air Transportation Modernization and Safety Improvement Act, S. 223.
The next step is to reconcile the House bill with the Senate bill, said Ed Karl, vice president of taxation at the AICPA. “The Senate bill repeals the health care expansion, while the House bill repeals both the health care expansion and the rental property provision,” he said.
Moreover, there are differences in the pay-fors in the two bills. “The administration opposes both pay-fors, and in its budget proposals it has a different view on a Form 1099 remedy. So it’s still up in the air even if there is a reconciliation,” Karl said. “The AICPA generally supports information reporting, but in these two cases we feel the burden on business outweighs any benefit the government would have, and we support the repeal of both provisions.”
