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.
During a recent hearing of the U.S. House of Representatives Small Business Committee, the National Taxpayer Advocate Nina Olson said the IRS is failing to help entrepreneurs navigate tax rules and regulations in the sharing economy.
Olson noted that 4.2 percent of American adults, or 10.3 million people, earned income from the sharing economy, including from sites such as Uber, Etsy, Lyft and AirBnB, during the period from October 2012 to September 2015. This marks a 47-fold growth over the three-year period.
However, despite that massive growth, Olson pointed out that “surprisingly little has been done to understand the tax compliance challenges this new frontier presents, or how it impacts Treasury and IRS’ ability to fairly and efficiently administer the U.S. tax code. Most of these new entrepreneurs do not have any experience with the relevant tax record-keeping and business filing obligations.”
A recent survey illustrated that people who earned income on an on-demand platform in 2015 are largely unaware of their tax obligations. The data showed that 34 percent didn’t know whether they were required to file quarterly-estimated payments; 36 percent were uncertain of the type of records they needed to keep for tax purposes; and 69 percent received no tax guidance from the company with which they worked.
Both Olson and Small Business Committee Chairman Steve Chabot (R-Ohio) believe that the IRS needs to do more to provide information to those earning income in the sharing economy.
“When the IRS is behind the times, it puts small businesses behind the eight ball,” said Chabot. “This failure has left on-demand platform companies and their workers confused and frustrated as they try to do the right thing and pay the taxes they owe.”
“If a person working in the sharing economy called the IRS toll free line today, he or she would hear a recording saying the IRS is not answering any tax law questions after April 15th, so please check [the IRS website],” Olson testified. “The same message is given to people asking questions at IRS walk-in sites. For a tax agency to not answer questions from taxpayers trying to learn what they need to do to comply is beyond unacceptable, it’s absurd.”
At the hearing, Olson provided some recommendations on how the IRS could assist these citizens in meeting their tax obligations. “The IRS should expand its education and outreach to sharing economy participants, including by developing a publication on sharing economy tax issues,” Olson said.
Ohio congressman Steve Chabot says that a “confident America” depends on small businesses unburdened by taxes and regulations.
Speaking at a weekly Republican address to mark the end of National Small Business Week, the chairman of the House Small Business Committee stated his belief that top-down regulations and higher taxes don’t inspire the confidence required for a burgeoning economy.
“Times have changed, business models have changed, but the enduring spirit of American innovation continues to breathe life into our economy and create the jobs no government program can,” Chabot said.
He argued that tax credits, ending the oil export ban and waiving upfront loan fees for veterans who want to be entrepreneurs would all be beneficial to small businesses in the United States.
Chabot said that in 20 years in Congress he has never encountered a person who approves of forcing excessive regulations and complicated tax burdens on small businesses. “Still, that’s what happens,” he said.
“If we want a confident America, we need confident Americans,” Chabot said. “Top-down regulations and higher taxes don’t inspire confidence. Job creation, innovation and the courage to try and fail until you succeed – those are the building blocks of a future we can all get excited about.”
National Small Business Week has recognized entrepreneurs from small businesses since 1963. According to the U.S. Small Business Administration, 28 million small businesses in the United States account for 54 percent of the country’s sales and provide 55 percent of all jobs, making them a very significant portion of the nation’s economy.
In an effort to ensure that small businesses receive an equivalent tax rate cut in any future reform of corporate taxation, Vern Buchanan, a senior member of the House of Representatives Ways and Means Committee, has introduced the Main Street Fairness Act.
If passed, the Act would establish that businesses filing taxes as pass-through income will never pay a higher rate than a C corporation. As an example, if the U.S. Congress reduces the corporate tax rate to 25 percent, that would also be the pass-through rate. The profits of pass-through entities, such as sole proprietorships, partnerships, and S corporations, which account for over 90 percent of all businesses in the U.S., are passed directly to their owners and are taxed on their individual tax returns.
Under the current law, corporations pay a maximum tax rate of 35 percent, while small business owners pay up to 39.6 percent under the federal individual income tax code, on top of additional taxes on earnings and investments. In some states, these small businesses pay more than 50 percent of their income in taxes.
“Local mom and pop stores and medium-sized businesses should not be burdened with a higher tax rate than multinational corporations with billions of dollars in earnings,” Buchanan said. “America has the highest corporate tax rate in the developed world – and small businesses face even higher rates.”
Buchanan’s proposed bill is co-sponsored by Charles Boustany, Chairman of the Ways and Means Tax Policy Subcommittee. “This Act simplifies the code for small businesses and gives them the confidence they need to invest and provide more jobs for American families,” Boustany said.
Several business groups and organizations are showing their support for the measure. Carolyn Lee, Senior Director for Tax Policy at the National Association of Manufacturers, stated that the bill is “a viable plan for reducing taxes on pass-through businesses that can be part of a larger tax reform effort.”