Congress weighs tax reforms for small businesses
The House Ways and Means Tax Policy Subcommittee held a hearing Thursday to discuss how tax reform will affect small businesses, while a Senate Democrat introduced legislation to give new tax breaks to small businesses.
“In the Ways and Means Committee we are proposing a simplified tax code that works with, instead of against, small businesses,” said subcommittee chairman Peter Roskam, R-Ill., in his opening statement. “First off, we drop the tax rate from 44.6 percent to 25 percent. This means more money to hire employees, and this means more money to grow your business. Then we simplify the tax code in three main ways. We eliminate the nonsensical depreciation schedules and replace them with immediate expensing. So when you buy equipment for your business, you write it off, all of it, in that year. Then, we eliminate the AMT so that businesses can know exactly what they owe without having to worry about a second hidden tax code. Finally, we abolish the death tax so that families are never again forced to find a way to pay a 40 percent tax on their family business or worse yet, sell it off to pay the tax.”
Rep. Lloyd Doggett, D-Texas, thanked Roskam for convening the hearing, but pointed out it is the subcommittee’s first hearing this year, with only two more scheduled. “More than one full year after the announcement of the Republican self-styled ‘Better Way’ Tax Blueprint, it is rather late that we convene, if the true goal is to enact genuine comprehensive tax reform during the few legislative days that remain in the waning months of this year,” he said. “We do have agreement that small business is a good place for this committee to begin. So often this Congress has riddled in the many pages of the tax code with provisions that reward the giant enterprises that regularly fill this very room with lobbyists, and it often neglects the small businesses, whose owners are usually too busy to even come to Washington because they’re trying to make a go of their business.”
House Speaker Paul Ryan, R-Wis., referred to the hearing during remarks Thursday. “Today, the Ways and Means Committee is holding another hearing on tax reform,” he said. “This one focuses on the struggles that small businesses are facing under the current tax code. Under this crazy system we have, successful small businesses pay a top marginal tax rate as high as 44.6 percent. They cannot compete like that. This is one of the reasons this is so important that we reform our tax code: to level the playing field for more jobs and for more growth. This is essential if we’re ever going to get our economy growing at its potential.”
Over in the Senate, Sen. Debbie Stabenow, D-Mich., introduced the Growing Small Businesses Act, which would offer a tax cut to small businesses planning to grow and expand, providing a 25 percent tax credit for the cost of buildings and equipment for a business’s first commercial production facility.
“During my small business tour, I have met so many talented entrepreneurs who are working hard every day to grow their businesses and create jobs,” Stabenow said in a statement. “My bill provides a tax cut that will make it easier for bakers, brewers, software companies, and other small businesses across Michigan to take that next step to expand their business.”
During the House subcommittee hearing, lawmakers heard from a panel of small business owners about the tax issues they face. Teresa Meares owns DGG Uniform and Work Apparel in Jacksonville, Fla., and recently chaired the National Association of Women Business Owners. She talked about some of the tax difficulties she faced with an earlier business she ran. “The complicated nature of the tax code led to misunderstandings and confusion,” she said. “I lacked the ability to understand or use certain deductions in order to generate cash back into my company. As a result, I overpaid in taxes during those critical years when I needed cash flow to support the growth in my company. When I finally stopped and questioned why I had no cash, while having to pay so much back out, I had to spend $20,000 in legal and CPA fees to understand if I could or could not use certain items as a tax deduction. As a small business owner, I do not have the resources for expensive tax attorneys to guide me each year or the ability to have multiple CPAs review and give second opinions. Yes, I was able to go back and correct these incorrect filings, but the time, effort, energy and loss of the ability to use the capital when I needed it most had already passed.”
Scott VanderWal, owner of VanderWal Farms in Volga, S.D., is vice president of the American Farm Bureau Federation and president of the South Dakota Farm Bureau Federation. “Tax reform must be comprehensive and treat farm and ranch businesses that operate as individuals, pass-through businesses and corporations fairly,” he said. “While our farm functions as a family-owned C corporation, more than 95 percent of farms and ranches are taxed under IRS provisions affecting individual taxpayers. This is true across all farm sizes—from those earning less than $1,000 in revenues per year, all the way to farms earning more than $5 million. Tax reform that fails to treat sole proprietors, partnerships, S corporations and C corporations fairly will not help, and could even hurt, the bulk of agricultural producers who operate outside of the corporate tax code.”
He noted that tax code provisions such as expensing, bonus depreciation and cash accounting enable farmers and ranchers to match their income with their expenses to help them survive difficult financial times. “Provisions that allow agricultural producers to even out their taxable income—for example, like-kind exchanges, income averaging and installment sales—allow farmers and ranchers to pay taxes at an effective tax rate equivalent to a business with the same aggregate, but steady revenue stream.” However, he believes lowering the effective tax rate is the most important tax reform for farms and ranches.
Rebecca Boenigk, president of Neutral Posture, an ergonomic office seating maker in Bryan, Texas, testified about earlier tax problems. “In 1989, my mother and I started a business out of our garage,” she said. “We raised money to get started, worked hard, and developed an office chair based on my dad’s expertise in ergonomics. Two years later, as our business was gaining steam, we discovered an unwelcome surprise. We owed an additional $86,000 in taxes on top of what we had already paid. It wasn’t because of ill intent or carelessness. It was because our complex, outdated tax code appears engineered to prevent small businesses from starting and growing here in the United States. In our case, the tax bill was a penalty for taking the necessary steps to make our company successful. Instead of counting inventory as a deductible investment in our business, it was instead considered a taxable asset. We assumed that because we had spent the money to buy the inventory that it was expensed. Lesson learned, at a cost of $86,000.”
Boenigk wants Congress to lower the tax rate paid by small pass-through businesses. “The 35 percent rate the U.S. imposes on corporations is one of the highest in the world,” she said. “But S corporation like mine pay an even higher rate—39.6 percent or more. According to the Tax Foundation, on the federal level, pass-through businesses are subject to a top marginal tax rate of 44.6 percent. This means that, in most U.S. states, pass-through businesses can face marginal tax rates that exceed 47 percent.”
Chye-Ching Huang, deputy director of federal tax policy at the Center on Budget and Policy Priorities, argued that a special rate cut for pass-through businesses would overwhelmingly benefit the wealthy and tax avoiders, not small businesses. “This is a central element of both President Trump’s tax plan and the ‘Better Way’ tax plan,” said Huang. “Some proponents say it would be a boon for small businesses. In reality, it would mostly help wealthy filers—such as hedge fund managers, investment bankers, and real estate investors—as well as high earners who engage in tax avoidance by converting their salaries to pass-through income. Few typical Main Street small businesses would see a benefit. And domestic small businesses would not benefit from President Trump’s proposed ‘territorial’ corporate tax system and may be hurt by it.”