By Chandra Walker, Washington Staff Writer
U.S. tax laws hinder small businesses from competing effectively in the national and international marketplace, according to witnesses testifying in the House of Representatives on April 10, 2008.
The Small Business Committee hearing examined suggestions for changes to the tax code to improve small businesses' competitiveness, especially in light of the slowing economy. The committee also issued a report on updating tax laws to help small businesses stimulate the economy.
Tax Rate
"The long-term growth of small business is best promoted by a corporate tax system with the lowest possible rates so such businesses can focus on making profits," testified Andrew Lyon, principal of National Tax Services.
Rep. David Davis (D-Tenn.) mentioned his support of an economic growth package, which would lower the corporate tax rate to 25 percent.
Lyon noted that the corporate tax rate is out of line with the United States' trading partners and places American small businesses at a huge competitive disadvantage. "Most small businesses would say that lowering the tax rate to 25 percent would not be enough since businesses still have to pay local and state taxes, which add another 4 or 5 percent to the tax rate."
Last-In, First Out (LIFO)
"At this time of year, we (practitioners) see first-hand the complexity of the tax code and how difficult it is for small businesses to comply," remarked Jeffrey Hoops, chair of the Tax Executive Committee of the American Institute of Certified Public Accountants (AICPA).
One of the most complex issues for small businesses is LIFO recapture for S corporation conversions, Hoops noted. "It's a huge hurdle that prevents C corporations from electing S corporation status."
2001-2003 Tax Cuts
Drew Greenblatt, president of Marlin Steel Wire Products, testified that the 2001-2003 tax cuts, which lowered the top individual tax rate, were extremely beneficial. "Lower tax rates provide me with more money after taxes to create new jobs and expand the business."
Lyons added that 70 percent of the income in the top two tax brackets are business income and would be affected if the 2001-2003 tax cuts were to expire.
Business owners are plowing their money back into their businesses, Greenblatt explained, pointing out that small business employees are the immediate beneficiaries of this investment. "Small businesses are job machines and will get the United States out of the recession, but it will only happen if taxes are low."
Investment
Scott Mackey, partner at Kimbell Sherman Ellis, LLP, urged the committee "to do whatever is necessary to make sure investment remains in the United States" and to ensure small businesses are competitive. "The tax code should reward businesses that invest in the United States." If you make the tax environment "so good" in the United States, people will not consider doing business outside of the United States, Greenblatt remarked.
Rep. Todd Akin (D-Mo.) commented "we can get taxes off of businesses" through the dividends capital gain tax cut. "We need to get capital working in small businesses."
Compliance Burden
Another simplification would be to remove cellular telephones from the "listed property" requirements, Hoops said. The AICPA supports legislation that would reclassify cellular telephones from listed property to that of business property.
"A lot of time is spent complying" with the recordkeeping rules imposed upon businesses for the use of cellular phones, Mackey acknowledged. The requirements are very extensive and, if the IRS steps up enforcement in this area, the expense would be too huge for small businesses, he concluded.
Likewise, Fredrick Rosenthal, president of Jasper's Restaurants, testified that, in the last decade, "mortality rates for restaurants" have increased as the cost of compliance has "skyrocketed." "We pay more to our accountants than we do our general managers."
"I would eliminate all listed property classifications," Mackey stated. "It is a disparity that should not exist and would simplify the tax code."
Big Ideas
"What are the big ideas that can further drive the entrepreneurial spirit?" Rep. Jeff Fortenberry (D-Neb.) asked. Hoops replied that there are no big ideas in the sense that anything dramatic or revolutionary was needed to offer significant improvement. "We would make more progress by making relatively simple changes that would make it easier for small businesses to comply with the tax laws."
- Related items:
- Senate Kicks-Off Tax Reform Hearings
- Feds to Clarify Special Bonus Depreciation Rules for 2008
Posted May 15, 2008.
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