The vast majority - 88 percent - of small employers used a tax professional to prepare their most recent federal tax return. For those employers who employ 20 or more people, the percentage using a tax professional increased to 95 percent, according to the National Federation of Independent Business.

The findings were contained in an NFIB-sponsored survey conducted by the Executive Interviewing Group of the Gallup Organization.

The two reasons that small-employer taxpayers most frequently cited for using tax professionals were to ensure compliance and the complexity of tax law.

For the purposes of the survey, "small employer" was defined as a business owner employing no less than one individual in addition to the owner, and no more than 249.

"These findings show that while small-business owners know that certain tax provisions apply to them, they have little to no understanding of how they apply," said Macey Davis, tax counsel at NFIB. "That's why they rely heavily on tax preparers to prepare their tax return and to explain the tax laws to them."

Key findings from the survey include:

* Sixty-one percent of small-employer taxpayers typically consult a tax professional prior to making a major financial decision for the business.

* Of the 15 major portions of the federal Tax Code evaluated, the provisions that small-employer taxpayers most frequently rely on their tax professional to understand for them are: depreciation, methods of accounting, amounts subject to self-employment tax, capital gains/losses, and the alternative minimum tax.

* Ninety-three percent of small employers thought that the methods of accounting rules apply to them, but just 16 percent thought they had a good understanding of the method of accounting requirements.

* Eighty-two percent of small-employer taxpayers reported that the AMT now applies to them, while another 6 percent did not know.

* The parts of the code most frequently applicable to small-employer taxpayers in their judgment are those relating to corporate dividends, pension plans/profit-sharing, the research and development tax credit, the home-office deduction, estate and gift tax, and independent contractors.


The survey found that professional tax preparers serve an important function for small-business owners in addition to preparing tax returns. They also advise small employers about the impact of taxes on their business and investment decisions. Sixty-one percent of small-employer taxpayers typically consult their tax professional prior to making a major financial decision for the business, with that figure rising to 72 percent among those employing 20 people or more.

"Obviously, most small-business taxpayers think the tax implications are so important and their knowledge of them so limited, that they cannot make a major financial decision without seeking the advice of a tax consultant first," the NFIB report stated.

"The risk of increased errors resulting from an overly complex Tax Code has forced small-business taxpayers to seek outside help to make decisions about their taxes," said William J. Dennis, executive director of the NFIB's Research Foundation. "The complexities in the Tax Code increase administrative costs and cause enormous frustration for small-business owners."

The survey found that 78 percent of small employers used a tax professional to prepare their most recent state tax return, 10 percent less than the federal return. The reason for this disparity, the report hypothesized, is that some owners might use information from their professionally prepared federal returns to prepare their own state returns, in order to save on fees.


Although 95 percent of small-employer taxpayers thought that the depreciation provisions applied to them, just 15 percent of them thought that they have a good understanding of depreciation. Most - 59 percent - rely on their tax professional for help in this area.

The rules that distinguish independent contractors from regular employees generated complaints across the board. Although the legal distinction is unclear and involves over 20 separate tests, just 30 percent of small-business taxpayers rely on their tax professional for help in this area. A possible reason for this, said Davis, is that use of an independent contractor in a business tends to be repetitious, so that it is unnecessary to continue to check if the relationship crosses the line.

One area that tax professionals should be aware of is the need for estate planning. Thirty-three percent of the owners said that they rely on themselves to understand the estate and gift tax, while 41 percent rely on a tax professional. However, those who rely on themselves admitted that they do not understand it very well. Just 9 percent thought that they had a good understanding of estate and gift taxes, while 14 percent judged themselves to have a "moderate" understanding of the subject matter.

"The survey is problematic on many levels, because when the small-business owner has only a surface understanding of tax laws and how they apply, they might put themselves at a disadvantage when it comes to record-keeping or operating business on a daily basis in a beneficial way," said NFIB counsel Davis. "Also, at a time when we're dealing with the tax gap debate, this is proof that we need to work on simplifying the tax code to help assist taxpayers to comply with the law."

Surprisingly, although the Internal Revenue Service has targeted small businesses as among the elements in the economy that are likely to contribute to the $290 billion tax gap, most small-business taxpayers thought that their association with the IRS over the past few years has been generally favorable.

However, it is irrational to discuss the tax gap without looking at tax complexity, according to the report. "The reason is that complexity breeds mistakes and mistakes swell the tax gap," it stated.

"Small businesses power our nation's economy and job growth, and yet high tax burdens and the complexity and inconsistency of the Tax Code are serious problems," said NFIB executive vice president Dan Danner. "And the looming threats of the alternative minimum tax and the IRS's rush to address the so-called tax gap are further cause for alarm."

It is essential for small business that the tax relief packages of 2001 and 2003 be made permanent, according to Danner.

"These tax reductions greatly helped small business, all taxpayers and the economy, and the failure to make them permanent inhibits planning and growth and leaves the threat of gargantuan tax increases just a few years down the road," he said. "Additionally, permanent relief from the death tax, which threatens small businesses and family farms, remains a top priority."

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