A flurry of legislative activity focuses on small businesses

Congressional activity continues to focus on small business both as a potential source of revenue and as a sector that needs help. Three bills to aid small business have recently been introduced by members of both parties, while a number of proposals in pending legislation could well have a negative impact.

A bipartisan bill introduced in both the House and the Senate would direct the Treasury Department to create an optional standard deduction to encourage greater use of the home office tax incentive. In addition to instituting an optional home office tax deduction, the Home Office Tax Deduction Simplification and Improvement Act of 2009 would require the Internal Revenue Service to streamline its reporting requirements to clearly identify the portion of the deduction devoted to real estate taxes, mortgage interest and depreciation in order to further reduce taxpayer burden.

Although 53 percent of America's small businesses are home-based, the U.S. Small Business Administration says that few actually take advantage of the deduction due to the complex reporting requirements.

The bill, introduce by Senators Olympia J. Snowe, R-Maine, and Kent Conrad, D-N.D., along with Rep. Charles A. Gonzalez, D-Texas, would also update the Tax Code to ease the burden of proof in claiming the deduction. It would allow the home office deduction to be taken if taxpayers use part of their home to meet or deal with clients, regardless of whether the clients are physically present, and would allow for de minimis use of business space for personal activities so that taxpayers would not lose the deduction if they make a personal call or pay a bill online.

The Small Business Jump Start Act, introduced by Sen. Jeff Merkley, D-Ore., increases the start-up tax deduction for new small businesses from $5,000 to $10,000.

"Most new small businesses face significant start-up costs, including advertising, obtaining licenses, permits and fees, paying rent, hiring business and financial consultants, and providing employee training," said Susan Eckerly, senior vice president of federal public policy for the National Federation of Independent Business.

Senator Chuck Grassley, R-Iowa, ranking member of the Committee on Finance, introduced the Small Business Tax Relief Act of 2009. Its provisions would increase the amount of capital expenditures that small businesses could expense from $250,000 to $500,000; allow more small C corporations to benefit from the lower tax rates for the smallest C corporations; take the general business credits out of the Alternative Minimum Tax for sole proprietorships, flow-throughs and non-publicly-traded C corporations with $50 million or less in annual gross receipts; extend the one-year carryback for general business credits to a five-year carryback for small businesses; provide a 20 percent deduction for flow-through business income for small businesses; lower the potential tax burden when a C corporation becomes an S corporation; and expand the net operating loss provision in the stimulus bill from its current limit to corporations with $15 million or less in gross receipts to those with $50 million or less.


Meanwhile, provisions passed earlier in the American Recovery and Reinvestment Act have already begun to help small businesses.

"The extension of bonus depreciation certainly helps small businesses as they look to expend capital dollars and use new assets in their business," said Greg Rosica, tax partner at Ernst & Young. "It gives favorable tax treatment through 2009 where a business can write off 50 percent of the cost of property that otherwise would be depreciated over several years."

"Similarly, the extension of the increased expensing limits under Section 179 has given business larger write-offs," he added. "And for businesses that might not be doing well, net operating losses can now be carried back five years instead of two years. These are all having a stimulative effect right now."

Matt Becker, tax partner at BDO Seidman, agreed. "The largest impact has come from the five-year NOL carryback," he said. "And the bonus depreciation for property placed in service in 2008 and 2009 benefits small businesses by allowing them to currently deduct half the cost of the new property they place in service. Property placed in service in 2009 creates a large deduction because of the bonus depreciation, which in turn creates a tax loss for the company, which can now be carried back five years."

A recent hearing of the House Small Business Committee highlighted the tax relief provided in the Recovery Act. Witnesses said that the bonus depreciation changes and enhanced expensing limits allowed them to make new purchases immediately, so they could grow.


Cindy Hockenberry, tax information analyst at the National Association of Tax Professionals, sees both potential positive and negative impacts from proposed legislation. "The Grassley bill would apply the lower 15 percent bracket to small corporations with gross receipts that aren't in excess of $1 million. Currently it's set at $50,000," she noted. "That provision is long overdue - it would take a fair number of small businesses off the tax rolls, but those are the ones that are struggling."

"But health care legislation might hurt small businesses, especially for employers that can't afford to provide health care to their employees," she commented.

BDO Seidman's Becker likewise noted the potential negative impact of proposed legislation. "America's Affordable Health Choices Act of 2009 has a component that creates a surtax on higher-income individuals to fund health care," he said. "Most small businesses are structured such that the business is taxed at the individual income tax rate of the owner, so the surtax could significantly increase taxes on small business operations."

The possible repeal of LIFO is another item that could negatively affect small businesses. "This has been proposed by the Ways and Means Committee," Becker said. "Lots of small businesses use LIFO to account for inventory. This proposal would require them to recapture the tax benefit associated with LIFO over an eight-year period, which would damage their cash flow and make it more difficult to invest."

Small businesses will also have to cope with greater enforcement, according to Becker. "The IRS has funding specifically to increase enforcement with respect to small businesses and sole proprietorships," he said. "Even for a compliant taxpayer, an examination is an expensive proposition."

Health care legislation is the big issue that will affect small businesses, said Bill Rhys, legislative counsel at the National Federation of Independent Business. "It can have a number of impacts," he said. "One is how do you pay for it, and what kind of tax policies will be included in it. The surtax will hit some small business owners, and the payroll tax will affect them if they don't offer coverage to their workers."

Rhys doesn't foresee passage of the home office deduction bill or the small-business tax relief bill in their proposed form. "If any of these move ahead, it would be as an attachment to something else," he said. "The legislative agenda is full for the rest of the summer and into the fall."

(c) 2009 Accounting Today and SourceMedia, Inc. All Rights Reserved.

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