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.
Earlier this month, U.S. Sen. Pat Roberts (R-KS) and U.S. Sen. Chris Coons (D-DE) introduced bipartisan legislation that would enable small businesses to take advantage of a new research and development (R&D) tax credit.
The Support Small Business R&D Act would require the Small Business Administration (SBA) and the IRS to collaborate on training materials that explain how entrepreneurs who invest in research could be eligible for the R&D tax credit to offset business expenses.
“The goal of the 2015 legislation is to make sure that small businesses and innovative startups, the major job creators in our economy, are able to easily access the R&D credit,” Roberts explained. “The R&D credit is complicated, so it is critical that small businesses and startups interested in the R&D credit have access to basic assistance from the Small Business Administration and the IRS to put them on the right track to claiming the credit. The bill we introduce today directs the federal government – at no new cost to taxpayers – to help our job creators to utilize the R&D credit, which will provide long-term benefit to the economy.”
Under the bill, the newly-drafted materials would be supplied to SBA programs as well as business development groups that partner with SBA programs throughout the United States to help make information about the tax credit more accessible to small businesses and startups.
“By including our proposal to expand the R&D credit to startups and small businesses in bipartisan tax legislation, Congress took a big step towards encouraging our small companies to innovate,” Coons said. “But our responsibility does not end now that this proposal is law. I am proud to work with Sen. Roberts to make sure that our startups and small businesses have the tools they need to take advantage of the R&D credit and continue to invest in advanced research.”
In 2015, Congress acted to expand access to the R&D tax credit and to make it permanent. However, small businesses currently lack the necessary information to use the credit to offset research costs. The Support Small Business R&D Act is intended to close that gap.
According to the nonpartisan Tax Foundation, New York’s business tax climate remains one of the worst in the nation.
New York State ranked 49th in the country for the competitiveness of its tax structure, with New Jersey being the only state ranking lower.
“Our overall ranking of 49 is simply unacceptable,” said New York State Business Council President Heather Briccetti. “No economic development program in the world would allow us to overcome the systemic faults in our tax system that makes us uncompetitive in relation to our fellow states.”
The latest report from the Tax Foundation marks the third consecutive year that New York’s tax climate ranked next to last in the country. At the same time, the foundation did give New York credit for passing corporate tax reforms two years ago that lowered rates on businesses from 7.1 percent to 6.5 percent. However, the state still received poor grades for high property, sales and personal income taxes.
The Tax Foundation report indicates that South Dakota and Wyoming are the states with the most competitive tax climates in the nation.
“Our goal with the State Business Tax Climate Index is to start a conversation between taxpayers and policymakers about how their states fare against the rest of the country,” said Tax Foundation Policy Analyst Jared Walczak. “While there are many ways to show how much a state collects in taxes, the Index is designed to show how well states structure their tax systems, and to provide a roadmap for improvement.”
In response to the report, a spokesperson for Governor Cuomo defended the administration’s tax policies.
“New York has a fair and progressive income tax structure that this conservative leaning organization fundamentally disagrees with,” said Cuomo spokesperson Rich Azzopardi. “Thanks to Governor Cuomo’s reforms, we also have the lowest middle class tax rates in 70 years, the lowest manufacturing tax rate since 1917 and the lowest corporate tax rate since 1968, and a tax cap that broke the cycle of skyrocketing property tax hikes on businesses and property taxpayers alike.”
Hillary Clinton’s presidential campaign recently released details about some of the ways she would support U.S. small businesses if elected.
Clinton’s plans include establishing a standard tax deduction that has previously only been available to individuals. Her campaign explained that a standard tax deduction would allow small business owners to easily obtain tax relief without filing additional forms that document equipment and transportation costs.
Additionally, if Clinton is elected, she would expand healthcare tax credits in the Affordable Care Act for small businesses that employ up to 50 workers, as well as create new federal incentives for local and state governments to streamline the business licensing process. Clinton also said she wants to guarantee that small businesses with questions about U.S. government regulations are able to receive answers to their queries within 24 hours.
These proposals illustrate some details about how the Democratic nominee would fulfill promises to improve access to financing and minimize regulatory burdens that make it difficult to launch small businesses in the United States. Since first launching her campaign in April 2015, Clinton has said she aims to be the “small business president” if she wins in the November 8 election.
“Way too many dreams die in the parking lots of banks,” Clinton said during her Democratic National Convention speech. “In America, if you can dream it, you should be able to build it.”
The Internal Revenue Service (IRS) estimates that it collects $458 billion per year less in taxes than the amount that is actually due. Perhaps surprisingly, the agency says $125 billion of this “tax gap” is individual business income.
Taxpayers in this category are primarily sole proprietors, and therefore pay taxes on the money their operations make through their personal returns, which can make it difficult for the IRS to detect.
The primary method for the IRS to uncover unreported income is through audits, but it is a time-consuming and imperfect tool. Due to limited resources, the agency collected only $7.3 billion from audits last year, which is its lowest total in 13 years. Of course, the IRS wants business owners to voluntarily pay all of the taxes they owe, but the agency explains that 63 percent of “low visibility” income, the type that isn’t captured by outside parties on tax information documents, is not disclosed on tax forms.
For the past four years, the Taxpayer Advocate Service, an independent office within the IRS, has been conducting studies to try to find methods to persuade small business owners to accurately report their earnings. Interestingly, the studies found that self-employed individuals who went through an audit and were found to be clean reported less income in subsequent years. In fact, three years after their audits, the study’s test group of taxpayers reported 35 percent less in taxable income than a control group of similar taxpayers who had not been audited.
It’s not entirely clear why this is the case. Researchers believe it’s possible that the experience of an audit may have been discouraging and sapped the subject’s “tax morale,” or perhaps the audit inadvertently offered insights into previously unknown methods for legal tax avoidance.
The IRS is said to have a secret algorithm that it uses to calculate how likely each taxpayer is to have unreported income. And it appears to work well, because out of the 1.2 million individual returns that the agency audited in 2014, including sole proprietorships, only 13 percent emerged without any tax adjustments.
However, studies have found that only a minority of those who are audited and require adjustments actually intended to cheat. The majority of small business owners who run into problems in an audit simply didn’t keep accurate records or didn’t understand all of their tax obligations.
These findings illustrate the importance of keeping accurate business records in order to avoid problems, as well as the need for many to seek the assistance of professional tax experts to ensure that business filing is conducted correctly.