An Agenda for Small Business Tax Reform

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Tax matters are no fun.

Even if you have a qualified professional helping you (and you should), it’s still no fun. That’s because dealing with your company’s tax situation is confusing, time consuming and expensive.

But, what to do?

Well, tax reform, anyone?

With the economy still limping through a sluggish recovery, Washington seems to be more receptive than usual to calls for reforms, if not a complete overhaul, to the nation’s tax system.

But, as sometimes happens, the concerns of small business owners tend to be overshadowed by the demands of the big guys. That’s unfortunate, because meaningful, results-focused tax reform could potentially make your company – and the entire economy – bigger, better and more efficient.

Everyone’s tax reform wish list might look a little bit different, but here’s a starter agenda that most small business owners would support.So get involved, stay informed, contact your elected representatives, and start agitating!

Make Section 179 Deductions for Business Investment Permanent

As you’re aware, the tax code has generally dictated that investments in equipment be deducted over a period of years as defined by certain depreciation calculations. But recently, Congress introduced Section 179 to the tax code, with the hope of increasing capital investments made by small businesses.

Section 179 lets your business deduct the entire price of qualifying equipment (up to $500,000) purchased or financed during the tax year. So if your business purchases new machinery for $450,000, for example, the entire amount can be deducted from your company’s gross income.

Well, excuse us, but if it’s such a great idea (and it is) during periods of economic sluggishness, why isn’t it a good idea all the time? Making expenditures immediately deductible, rather than over a specified recovery period would dramatically spur investment and economic growth. A Tax Foundation study claims that throwing out the depreciation tables and allowing a 100% expensing option would grow US gross domestic product (GDP) by an additional 2.8%, and that benefits everyone.

Encourage Investment and Innovation HERE!

What a mess. The US tax laws actually carry disincentives for US-based international companies to invest and grow here.

The federal corporate tax rate has remained at 35%, while rates around the rest of the world have substantially decreased. The United States is the only large industrialized nation that taxes corporate income at a rate of more than 30%. (Yes, effective tax rates tend to be lower due to various loopholes, deductions, write-offs, and other complexities buried in the code…but is that productive? See Keep it Simple…Please, below.)

To make matters worse, a US-based international company is already paying taxes on profits made on sales offshore to the buyer’s country of residence. When remaining profits are returned to the US, the company is taxed for a second time. No wonder the more savvy companies are re-investing foreign profits in other countries.

At first, this might appear to be an issue for big companies to tackle, but reforming corporate tax rates and regulations to encourage the Apples and Ciscos to spend and invest profits here would substantially benefit the small companies they buy from and contract with, which creates jobs and provides incentives for innovation.

How did this get so out-of-whack in the first place?

Keep it Simple…Please

The tax code runs just under 74,000 pages. Ninety-one percent of small business owners use outside help to assist with tax compliance. They literally have no choice.

More than six billion hours a year are spent on tax preparation and compliance. A simpler tax structure would demand less time for business owners to comply, and free-up time for more productive tasks.

Perhaps a return you could file on the back of a postcard, as some have lobbied for, is unrealistic. But a tax code so cumbersome that it’s virtually impossible to navigate without making mistakes is unforgivable.

Permanently Repeal Estate Taxes

Eliminating the estate tax would make succession planning and the transfer of family-owned and closely-held businesses more efficient and help promote the long-term growth of these companies.

There is also a serious case to be made here for lost productivity, as business owners who want to pass along a family company devote time, money and other resources to ensuring it doesn’t end up in the hands of Uncle Sam. Those assets and resources could otherwise be directed toward innovation, expansion, and improving the company’s operations.

 

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