The results of a recent CNBC/SurveyMonkey Small Business Survey indicated that over 25 percent of the more than 2,000 respondents consider tax reform to be the most important issue facing them in the coming period.
The Trump administration is proposing parity for both small businesses and corporations in its plans to overhaul the tax code, which would bring the current top rate of 39.6 percent for individuals and 35 percent for businesses down to an even 15 percent.
House Speaker Paul Ryan also recently spoke in favor of overhauling the tax code, pointing out the uneven playing field for small businesses that file as pass-through entities, in comparison to their corporate counterparts.
“Here in America, 8 out of 10 businesses file their taxes as individuals,” Ryan said. “In fact, most of our jobs come from these … small businesses. Real tax reform … means creating a new lower tax, specifically for small businesses, so they too can compete on a fair, level playing field.”
It appears that while many small business owners agree with these statements, they also believe that the complexity of complying with the federal tax code is another challenge in addition to high tax rates. Jeremy Wanamaker, CEO of the 30-person IT services provider Waypoint Solutions Group, explains that he strategizes with his CPA in order to maintain competitiveness.
“We want to be as aggressive as we can while staying within the boundaries of the law,” Wanamaker said. “The tax code is too complicated. I think that small businesses are not able to reinvest money easily. The way we are taxed on our profits makes it difficult to reinvest. If we have a profitable year, we pay taxes on all of our profits, whether we use that money to take home or put it back into the business.”
Wanamaker believes that the Trump administration’s proposal for parity between large and small businesses would be a “very effective way” to encourage small businesses to hire and grow.
“If the tax rate on pass-through income was reduced, I could then take that money and reinvest it back into the business,” Wanamaker explained. “That means hiring more people, buying equipment and doing something that impacts the economy as a whole.”
President Donald Trump’s recent tax reform proposal is being seen by some small business owners as having the potential to help them prosper moving forward.
Trump’s plan would lower corporate tax rates to 15 percent from the current 35 percent. Additionally, it would reduce the business income rates paid by so-called pass-through businesses, which includes many small businesses formed as partnerships and limited liability companies as well as some larger entities like hedge funds, to 15 percent. These businesses’ incomes are then “passed through” to owners, who subsequently pay taxes based on the individual income rates, ranging from 10 percent to 39.6 percent.
Small business owners have continued to lobby for being treated equally in corporate tax reform, and Trump’s proposal may hold the potential to satisfy their interests.
“We’re pleased to see the 15% business rate,” said Brad Close, senior vice president of public policy and advocacy for the National Federation of Independent Business (NFIB). “We think it’s a great way to kick-start the small business economy.”
At the same time, will Trump’s proposal come to fruition? Experts point to the fact that tax cuts for pass-through businesses alone could increase the deficit by hundreds of billions of dollars, while Trump hasn’t provided details on how the government would handle this increase.
“It’s a whole issue sitting out there,” said Dean Zerbe, national managing director for tax advisory company alliantgroup. “This will be a case where you’re going to have a significant issue with tax revenue.”
Zerbe called the 15 percent proposal for pass-through businesses “ambitious,” and he believes that it will end up being negotiated to a higher rate. “It’s more aspiration than realistic,” Zerbe said. “But it’s good for the administration to put a strong marker. Why not be aggressive with the opening bell?”
Others point out that tax cuts for pass-through businesses will benefit wealthy individuals as well as small business owners. “The very wealthy are doing pretty well in America,” explained Sen. Chuck Schumer (D-NY). “They don’t need another huge tax break.”
New York Gov. Andrew Cuomo has proposed new regulations that would force “online marketplaces” with a value over $100 million to collect and remit sales taxes.
Research indicates that approximately 80 percent of Americans are online shoppers, so these regulations would result in new tax obligations for the majority of the country’s citizens. Additionally, this policy would affect many small businesses in New York who sell items on these platforms.
In the governor’s proposal, marketplace providers, including eBay, Etsy and Amazon, will become the ones playing tax collector. By requiring these companies to collect sales tax on every sale made to a New Yorker through those platforms, even if the seller has no property or employees in the state, it will result in complex tax-collection rules, which may make them less likely to want to sell to New York residents.
Additionally, the burden of being forced to play tax collector for the state would be cumbersome, while these platforms have helped open worldwide opportunities for New York-based small sellers.
Although those lobbying for the policy say it would “level the playing field” and aid struggling small businesses, others say that the playing field is already level. Under the current rules, all businesses with property or employees in New York state, whether they are brick-and-mortar or web-based, already collect the state’s sales tax.
It’s a complex situation. If Cuomo’s proposal is successful, New Yorkers who sell online could be subject to audits from states where they have never stepped foot. This could cause significant problems for local businesses who take advantage of convenient sales platforms like Amazon and Etsy.
Some analysts believe that this internet sales tax expansion would punish sellers and shoppers, and could result in small sellers avoiding using these platforms, in addition to new platforms choosing to not be located in New York.
President Donald Trump’s moves to undo and redo the trade deals that the U.S. has forged with other countries has been a cause for concern for many American businesses.
Trump’s specific proposal to encourage more production in the U.S. by implementing a border-adjusted tax on imports has stirred trepidation among retailers and small businesses that rely on imported goods to be competitive.
“I am expecting disaster if they actually implement this plan,” Richard Woldenberg, CEO of Learning Resources, told The Wall Street Journal. Learning Resources is a company with 150 employees, which sells educational toys, most of which are made in China.
Woldenburg told The Journal that even with a lower corporate tax rate, which has been proposed alongside the tax, the new cost of imports would increase his tax bill by four or five times. Under the proposal, businesses would not be allowed to deduct the cost of imports, while exported goods would be exempt.
“Under a border-adjusted tax, a company that imported $200,000 of foreign made toys, spent $100,000 on domestic costs and sold the toys for $350,000, would only be able to deduct the $100,000 in local costs,” The Wall Street Journal reported. “It would then pay taxes – at a proposed lower tax rate of 20% – on $250,000. So its tax bill would be about $50,000. The same company could currently deduct the costs of imports as well as local expenses, and then pay 35% in taxes on $50,000. That results in a tax bill of about $17,500.”
However, proponents of the plan have argued that a strengthening U.S. dollar would compensate for changing tax bills, as a stronger dollar would mean that companies paid less to import goods. At the same time, if that strengthening fails to happen or doesn’t happen quickly enough, large companies that rely on foreign inputs would suffer, as would smaller businesses that typically have less power to negotiate deals or otherwise adjust to cost changes.
According to standards set out by the U.S. Small Business Association, companies in the wholesale or retail trade count as small businesses if they have 250 or fewer employees. According to 2014 Census data, over 95% of U.S. importers have fewer than 250 employees.
It’s a complex situation. Some small businesses see a higher barrier for imports as a welcome change, because it would make their products more competitive against imported goods, while the proposal is a cause for concern for others.
“We do not have the cash cushion to absorb this kind of tax,” Katherine Gold, whose company, Goldbug Inc., employs over 100 people distributing accessories like children’s shoes, told The Journal. “It would put us out of business if we can’t pass it on immediately.”
A study by the U.S. Public Interest Research Group Education Fund indicates that small businesses in the United States on average pay an extra $5,128 in taxes to make up for revenue lost due to the use of offshore tax havens by multinational corporations.
Results of the study show that the federal government loses $128.5 billion in corporate tax revenue due to tax haven abuse. Every small business in the U.S. would need to pay an additional $4,481 in federal taxes to cover this lost revenue.
Additionally, offshore tax havens cost state governments an estimated $18.5 billion in lost tax revenue, according to the report, with U.S. small businesses needing to pay an average of an extra $647 to make up for the lost state tax revenue.
“The amount of cash corporations book to offshore tax havens is only growing, and it’s not because these businesses are conducting prolific amounts of business in the Cayman Islands,” explained U.S. PIRG tax and budget associate Alexandria Robins. “Our tax code is balanced in favor of big multinational corporations, and that means here at home we’re losing out on lower tax rates, more funding for public programs, or cuts to our national debt.”
The report referred to the use of foreign tax havens by some of the largest multinational corporations. For one, Microsoft is said to have five tax haven subsidiaries, while keeping $124 billion offshore, on which it would otherwise pay $39.3 billion in U.S. taxes. The report says that General Electric maintained 20 tax haven subsidiaries last year, and kept $104 billion offshore. Another example is drug maker Pfizer, which operates 181 subsidiaries in tax havens, holding $193.6 billion in profits abroad for tax purposes.
It’s a complex issue and one that many believe requires attention. Clark Gascoigne, deputy director of the advocacy group FACT Coalition, noted that the report comes at a time when the new administration and Congress are set to consider significant tax reforms.
“For too long, lawmakers in Washington have used the tax code to pick winners and losers,” Gascoigne said in a statement. “Sadly, the ‘winners’ have been multinational companies that shift jobs and profits overseas, while the ‘losers’ are small businesses and middle-class Americans who are stuck with the bill. We are about to have a very public debate on corporate taxes. It’s important to remember that fixing the problems should include changes that level the playing field between domestic businesses and multinational companies. Real change must not, as we have seen in some proposals, double down on a two-tiered system that favors multinational over wholly domestic companies.”
Many small business owners believe that the current situation is unfair, and that major tax reforms are necessary in order to fix these problems.
“Corporate tax dodging is a triple whammy for small business owners like me,” said ReShonda Young, owner of Popcorn Heaven in Waterloo, Iowa, and a member of the small business advocacy group Main Street Alliance. “First of all, along with all other taxpaying citizens, we have to fill the gaps when corporations avoid paying their fair share. That means paying more ourselves, suffering inferior services, watching the national debt climb – or some unfortunate combination of those options.”
Results from the Staples National Small Business Survey indicate that 67 percent of American small business owners believe that business tax reform should be the top policy priority for 2017.
The survey was designed by Staples and conducted by Wakefield Research, among 502 U.S. small business owners in December 2016. The survey defined small business owners as those who had up to 10 full-time employees.
In addition to indicating that the majority of respondents are interested in business tax reform, the survey showed that 85 percent of small business owners are “optimistic” about the small business climate in 2017. Another sign of both short- and long-term positivity is that 67 percent of respondents plan to hire employees in 2017, while 91 percent would be likely to encourage their children to start their own business given the current state of the small business environment.
Overall, it appears that small business owners are very optimistic about the year ahead. Other interesting results include:
- 93 percent of respondents believe that running a business results in the best kind of job satisfaction possible.
- 97 percent of small business owners plan to increase investment in their companies in the coming year.
- 72 percent of respondents plan to increase staff compensation in 2017.
“We’ve been a small business champion for more than 30 years, and are pleased that small business owners are hopeful and confident as we head into the new year,” said Frank P. Bifulco, Jr., executive vice president of global marketing, Staples. “We conducted the survey to better understand the pulse of small business owners and to further identify those priority product and service areas in which we can help our customers achieve success in 2017.”
Donald T. Williamson, a professor of taxation at American University’s Kogod School of Business in Washington, D.C., believes that the I.R.S. disproportionately targets small business taxpayers for audits.
“Most audits are not random, i.e. the I.R.S. has a secret algorithm for determining how likely each taxpayer is to have unreported income,” Williamson wrote in testimony submitted to the United States House of Representatives’ Committee on Small Business.
The committee is currently investigating issues that small businesses encounter when they are audited by the I.R.S.
“Employing this calculus, the I.R.S. has concluded that small businesses are less likely to be paying their fair share of taxes relative to much larger enterprises, a surprising conclusion in light of frequent press reports of multi-national corporations allocating billions of dollars of profits to no or low tax jurisdictions to avoid U.S. income taxation,” stated Williamson in his testimony.
Williamson believes that small businesses are targeted disproportionately for tax audits because they receive most of their income in cash, which can be both difficult to identify and easily misreported.
Being audited can have a profound effect on small businesses. In his testimony, Williamson cited a National Taxpayer Advocate study that estimates that each year, small businesses spend approximately 2.5 billion hours preparing tax returns or responding to I.R.S. inquiries about the preparation of their returns.
“In meeting these requirements, 70 percent of small businesses employ tax professionals just to prepare their returns and represent their interests before the I.R.S. at a cost of more than $16 billion for the services of attorneys, accountants and other professionals,” wrote Williamson in his testimony.
He further explained that it is impossible for small business owners to be knowledgeable in all aspects of the country’s complex tax laws, which can impede their operations and get in the way of their ability to grow their business and create jobs. Williamson concluded his testimony by urging the I.R.S. to streamline and simplify the small business audit process to reduce the time and cost for owners.