What Tax Overhaul Means for Small Business
President Obama and the Treasury Department [on Feb. 22] introduced a 23-page outline that seeks to overhaul the corporate tax code, which, in its present iteration, is an unwieldy legal document that hasn't been modified since the Regan administration. The plan seeks to reduce the corporate tax rate from 35 percent to 28 percent, eliminate accounting loopholes, improve transparency, and simplify the document for small businesses.
"Our business tax system is not just outdated," noted Treasury Secretary Timothy Geithner in a statement. "It is unfair and inefficient."
Tax boon for manufacturers
The framework for the proposal puts American manufacturers in the spotlight. The plan calls to cut the top corporate tax rate on manufacturing income to 25 percent in an effort to succor American manufacturing. The framework also seeks expand the current domestic production activities deduction to 10.7 percent (from 3 percent).
Businesses that deal in the production of renewable energy should also take note: The framework would make the tax credit for the production of renewable electricity permanent, "in order to provide a strong, consistent incentive to encourage investments in renewable energy technologies like wind and solar."
Special perks for small business and entrepreneurs
Secretary Geithner and President Obama hope the proposed framework will ease the burden of taxes on American small businesses.
"We want to cut taxes on investment in and by small businesses, and we want to simplify the tax system for small businesses so that they can devote more of their earnings to investment and job creation and less to tax compliance," Geithner said.
So far, experts seem optimistic about what the plan could mean to small businesses in America.
"The president's tax reform plan announced today is exactly what small business owners have been asking for," says John Arensmeyer, founder and CEO of Small Business Majority, a small-business advocacy nonprofit. "It will create a more level financial playing field for small and large firms, promoting healthy competition that stimulates the economy."
Specifically, here's what the plan proposes:
"Allow small businesses to expense up to $1 million in investments." Right now, small businesses can expense company-related investments of up to $500,000. But under the proposed framework, small businesses would be allowed to expense up to $1,000,000.
"Allow cash accounting on businesses with up to $10 million in gross receipts." Under current tax code, small businesses that make less than $5 million in gross receipts are allowed to use a cash accounting system, as opposed to an accrual accounting system, which is notoriously complex. The president suggests raising the threshold for cash accounting to $10 million.
"Double the deduction for start-up costs." Currently, entrepreneurs can deduct $5,000 from their start-up expenses. The president proposes doubling that deduction to $10,000.
"Reform and expand the health insurance tax credit for small businesses." Initially, businesses could qualify for the Affordable Care Act credit if it had less than 25 employees. Many saw that as a job-killing rule. The new proposal raises the number to 50 employees.
Making the tax code simpler
For many small businesses, the cost of tax compliance is extremely expensive. In 2004, for example, nearly one out of ten small businesses spent over $5,000 in tax compliance and more than 11 percent devoted upwards of 500 hours to compliance. A recent National Federation of Independent Business (NFIB) study that found that four of the top 10 small-business problems were tax-related.
The framework seeks to simplify the tax process. "Tax reform should make tax filing simpler for small businesses and entrepreneurs so that they can focus on growing their businesses rather than filling out tax returns," the proposal said.
Rep. Sam Graves, chairman of the House Committee on Small Business, has been a vocal critic of the impact tax complexity has on small business. In a recent speech, Graves noted that the more time and resources that spent on tax compliance issues, the less an entrepreneur has to hire employees and grow.
"During a time when job creation is a top priority, it is discouraging that our burgeoning tax code constrains small-business growth," he said. "Complexity weighs heavily on small employers, because they often lack the resources to hire expensive accountants or legal assistance."
Does it matter for your business?
Still, plenty of entrepreneurs are skeptical, and with good cause.
First, the obvious question is whether Congress could even pass such a proposal in an election year. Republican candidates have already suggested their own plans (Mitt Romney wants to reduce the corporate tax rate to 25 percent; Rick Santorum wants to cut the rate to 17.5 percent and cut taxes for manufacturers; Newt Gingrich wants to cut the rate to 12.5 percent).
For particularly fast-growing companies, a tax overhaul like this does little to address what really matters: access to capital.
Zalmi Duchman, owner and CEO of The Fresh Diet, a Miami-based company the delivers healthy foods to customers, says: "Cutting tax rates or changing that tax code is only important if you're making money and if your company is profitable, but if your company is a growing company, you don't really care. You care about saving things like payroll tax. This doesn't help fast-growing companies; it doesn't help us on the Inc. 5000. We just need capital. For me, that's the most important thing."
In the coming weeks, Geithner will meet with Senator Orin Hatch and Senator Carl Levin in the hopes of building a bipartisan consensus.
"In order to make us more competitive and create jobs here at home, we must reform our corporate tax code," Geithner. said. "The president's framework would boost growth and provide American companies with incentives to invest in the U.S. while simplifying and cutting taxes for our small businesses."