Roundtable Discussion on Tackling Tax Complexity: The Small Business Perspective
Summary
The printed record, S. Hrg. 118-671, of a June 7, 2023 joint roundtable of the Senate Committee on Finance and the Committee on Small Business and Entrepreneurship on small business tax complexity, with Chairman Ron Wyden presiding. Opening statements come from Senators Wyden, Benjamin L. Cardin, Mike Crapo and Todd Young, followed by testimony from five small business owners and advisers. Chairman Wyden says the IRS phone response rate rose from 10 or 15 percent to almost 90 percent, and that in 2019 half of the pass-through deduction's benefits went to individuals earning $820,000 or more. Chairman Cardin lists 1099-K reporting, section 179 expensing and R&D changes among the issues. The appendix includes prepared statements and communications, among them a Small Business and Entrepreneurship Council survey of 461 small businesses on R&D expensing.
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[Senate Hearing 118-671]
[From the U.S. Government Publishing Office]
S. Hrg. 118-671
ROUNDTABLE DISCUSSION ON TACKLING TAX COMPLEXITY:
THE SMALL BUSINESS PERSPECTIVE
JOINT HEARING
before the
COMMITTEE ON FINANCE
and the
COMMITTEE ON SMALL BUSINESS
AND ENTREPRENEURSHIP
UNITED STATES SENATE
ONE HUNDRED EIGHTEENTH CONGRESS
FIRST SESSION
__________
JUNE 7, 2023
__________
[GRAPHIC NOT AVAILABLE IN TIFF FORMAT]
Printed for the use of the Committee on Finance and the
Committee on Small Business and Entrepreneurship
______
U.S. GOVERNMENT PUBLISHING OFFICE
60-529--PDF WASHINGTON : 2025
COMMITTEE ON FINANCE
RON WYDEN, Oregon, Chairman
DEBBIE STABENOW, Michigan MIKE CRAPO, Idaho
MARIA CANTWELL, Washington CHUCK GRASSLEY, Iowa
ROBERT MENENDEZ, New Jersey JOHN CORNYN, Texas
THOMAS R. CARPER, Delaware JOHN THUNE, South Dakota
BENJAMIN L. CARDIN, Maryland TIM SCOTT, South Carolina
SHERROD BROWN, Ohio BILL CASSIDY, Louisiana
MICHAEL F. BENNET, Colorado JAMES LANKFORD, Oklahoma
ROBERT P. CASEY, Jr., Pennsylvania STEVE DAINES, Montana
MARK R. WARNER, Virginia TODD YOUNG, Indiana
SHELDON WHITEHOUSE, Rhode Island JOHN BARRASSO, Wyoming
MAGGIE HASSAN, New Hampshire RON JOHNSON, Wisconsin
CATHERINE CORTEZ MASTO, Nevada THOM TILLIS, North Carolina
ELIZABETH WARREN, Massachusetts MARSH BLACKBURN, Tennessee
Joshua Sheinkman, Staff Director
Gregg Richard, Republican Staff Director
COMMITTEE ON SMALL BUSINESS AND ENTREPRENEURSHIP
BENJAMIN L. CARDIN, Maryland, Chairman
MARIA CANTWELL, Washington JONI ERNST, Iowa
JEANNE SHAHEEN, New Hampshire MARCO RUBIO, Florida
ED MARKEY, Massachusetts JAMES RISCH, Idaho
CORY BOOKER, New Jersey RAND PAUL, Kentucky
CHRIS COONS, Delaware TIM SCOTT, South Carolina
MAZIE HIRONO, Hawaii TODD YOUNG, Indiana
TAMMY DUCKWORTH, Illinois JOHN KENNEDY, Louisiana
JACKY ROSEN, Nevada JOSH HAWLEY, Missouri
JOHN HICKENLOOPER, Colorado TED BUDD, North Carolina
Sean Moore, Staff Director
Meredith West, Republican Staff Director
(II)
C O N T E N T S
----------
OPENING STATEMENTS
Page
Wyden, Hon. Ron, a U.S. Senator from Oregon, chairman, Committee
on Finance..................................................... 1
Cardin, Hon. Benjamin L., a U.S. Senator from Maryland, chairman,
Committee on Small Business and Entrepreneurship............... 3
Crapo, Hon. Mike, a U.S. Senator from Idaho...................... 5
Young, Hon. Todd, a U.S. Senator from Indiana.................... 6
WITNESSES
Chapman, Alicia, owner and CEO, Willamette Technical Fabricators,
Portland, OR................................................... 10
Blanding, Avonette, CPA, MBA, owner, Blanding Financial
Solutions, LLC, Baltimore, MD.................................. 11
Camarillo, Stephanie, owner, Molly Maid of Boise and the Treasure
Valley, on behalf of National Federation of Independent
Business, Washington, DC....................................... 13
Norris, Michael, president and CEO, Warrant Technologies, LLC,
Bloomington, IN................................................ 14
Harris, Roger, president, Padgett Business Services, Athens, GA.. 16
ALPHABETICAL LISTING AND APPENDIX MATERIAL
Blanding, Avonette, CPA, MBA:
Testimony.................................................... 11
Prepared statement........................................... 33
Camarillo, Stephanie:
Testimony.................................................... 13
Prepared statement........................................... 34
Cardin, Hon. Benjamin L.:
Opening statement............................................ 3
Chapman, Alicia:
Testimony.................................................... 10
Prepared statement........................................... 35
Crapo, Hon. Mike:
Opening statement............................................ 5
Prepared statement........................................... 36
Harris, Roger:
Testimony.................................................... 16
Prepared statement........................................... 37
Norris, Michael:
Testimony.................................................... 14
Prepared statement........................................... 39
Wyden, Hon. Ron:
Opening statement............................................ 1
Prepared statement........................................... 40
Young, Hon. Todd:
Opening statement............................................ 6
Communications
American Rental Association...................................... 43
Center for Fiscal Equity......................................... 45
National Restaurant Association.................................. 48
Nellen, Annette, CPA............................................. 49
Small Business and Entrepreneurship Council...................... 55
ROUNDTABLE DISCUSSION ON TACKLING TAX COMPLEXITY:
THE SMALL BUSINESS PERSPECTIVE
----------
WEDNESDAY, JUNE 7, 2023
U.S. Senate,
Committee on Finance,
Committee on Small Business
and Entrepreneurship,
Washington, DC.
The hearing was convened, pursuant to notice, at 10:03
a.m., in Room SH-216, Hart Senate Office Building, Hon. Ron
Wyden (chairman of the Committee on Finance) presiding.
Present: Senators Hirono, Crapo, Young, Johnson, Tillis,
and Risch.
Also present: Senate Committee on Finance Democratic staff:
Ryan Carey, Chief Communications Advisor for Tax,
Investigations, and Oversight, Spokesperson; Ursula Clausing,
Tax Policy Analyst; Sarah Schaefer, Chief Tax Advisor; and
Tiffany Smith, Deputy Staff Director and Chief Counsel.
Republican staff: Amanda Critchfield, Communications Director;
Jamie Cummins, Senior Tax Counsel; Eric Fejer, Deputy Press
Secretary; Kate Lindsay, Tax Policy Advisor; and Gregg Richard,
Staff Director.
Senate Committee on Small Business and Entrepreneurship
Democratic staff: Sean Moore, Staff Director; Shivani Pampati,
Tax and Economic Policy Advisor; and Steve Chang, Legislative
Assistant. Republican staff: Meredith West, Staff Director;
Daniel Noonan, Research Assistant; Jessica Helmers, General
Counsel for Senator Young; and Burke Miller, Legislative
Assistant for Senator Young.
OPENING STATEMENT OF HON. RON WYDEN, A U.S. SENATOR FROM
OREGON, CHAIRMAN, COMMITTEE ON FINANCE
Chairman Wyden. The two committees will come to order. Let
me welcome everyone to this morning's roundtable, jointly
hosted by the Finance and Small Business and Entrepreneurship
Committees. I also particularly want to recognize Chairman
Cardin. He has been an extraordinary member of the Senate
Finance Committee. He tells me I should give up efforts to talk
him out of retirement.
I will tell you, it was his idea to bring together our two
committees and discuss how small businesses could benefit from
smart improvements to the Federal tax system. So, we want to
begin with big improvements to IRS customer services.
One of the key goals of the Inflation Reduction Act was
improving customer service at the IRS. That had been clobbered
over the years by a decade of Republican budget cuts. The
investment is already paying significant returns. The phone
call response rate went from 10 or 15 percent over the last few
years, up to almost 90 percent in the most recent filing
season.
Wait times dropped to just a few minutes. IRS staff worked
through the entire backlog of error-free individual returns,
which includes returns from small businesses that are
structured as pass-throughs. The IRS is taking important steps
to prevent future backlogs and make it easier for taxpayers to
resolve issues online.
Now, taken together, these improvements should help to
prevent a lot of headaches for our small businesses, and
particularly reduce the audit rate for small business owners.
Audit rates--and reducing them for small business owners--are
something Senator Crapo and I have talked often about. A fully
funded IRS also helps prevent tax scams, and I expect we will
hear more about that today.
I have also felt strongly about regulating tax preparers to
root out scammers making money off honest small businesses, and
Senator Cardin has been our leader on the Finance Committee,
trying to speed up the goal of improving preparers.
Unfortunately, Republicans have wanted to repeal the
funding that has made these improvements possible. Just last
week, Speaker McCarthy made clear that the $20-billion IRS
funding cut in the default agreement is not enough. He wants to
eliminate all of it. That would be a major setback for small
business taxpayers, who deserve a functional IRS.
Second issue: Democrats want to make sure that small
businesses and typical American families get a fair shake with
any tax changes. Republicans want to lock in tax breaks for
businesses. That includes the pass-through deduction that moved
as part of the 2017 Trump tax law, a provision where the claim
was that it was designed to benefit small businesses.
The nonpartisan Joint Committee on Taxation did the math,
and the reality is most of the benefits of the pass-through
deduction are going to people at the top. In 2019, fully half
of the benefits went to individuals who earned $820,000 or
more. That is less than 1 percent of the Nation.
Nobody, nobody wants to penalize success. Yet, when the
American people hear that Congress is debating tax cuts for
small businesses, I do not think they envision huge benefits
going to real estate moguls or Wall Street investment firms.
So it is my view that Congress ought to do a better job of
targeting tax cuts to the real small businesses that drive the
Oregon economy and economies from coast to coast. Local shops,
restaurants, garages, small manufacturers would be some
examples.
Finally, I expect the tax incentive for research and
development to be a significant part of today's discussion.
That incentive--and let me emphasize--has my very strong
support. It has support on both sides, and everybody knew that
full expensing for research and development was set to expire
at the end of last year.
With the expiration date approaching, Democrats told
Republicans we would support extending it, as long as Congress
also passed tax cuts for working families. That had been the
bipartisan approach--let me underline that--the bipartisan
approach on dealing with expiring tax provisions for many
years. It also is a good deal for a lot of small business
owners who benefit from both research and development expensing
and the Child Tax Credit. Republicans, however, refused to
negotiate any agreement that involved the CTC. It is my hope
that Congress is able to break the logjam on these issues in
order to help families and small businesses get ahead.
So, there is much to talk about this morning. I want to
thank all of our participants. There is a lot of bipartisan
willingness to come together on these issues. I think you will
hear that this morning, and let us go next to Senator Cardin,
and then we will have Senator Crapo and Senator Young.
Senator Cardin?
[The prepared statement of Chairman Wyden appears in the
appendix.]
OPENING STATEMENT OF HON. BENJAMIN L. CARDIN, A U.S. SENATOR
FROM MARYLAND, CHAIRMAN, COMMITTEE ON SMALL BUSINESS AND
ENTREPRENEURSHIP
Chairman Cardin. Well, Chairman Wyden, first, thank you
very much for cohosting and agreeing to this roundtable
discussion on the tax complexities, the small business
perspective. I think all of us recognize the importance of
small businesses, and I think this is an extremely important
opportunity.
I want to thank Senator Crapo for his help in arranging for
this hearing. I also want to thank Senator Young, who is a
valuable member of these committees, but he is also taking on
Senator Ernst's responsibility today, since she could not be
here. So, I want to thank Senator Young.
The Small Business and Entrepreneurship Committee works in
a bipartisan way. And we recognize that, as advocates for small
business, we need to find the sweet spot in order to help our
small businesses. Small businesses are the growth engine of our
Nation's economy. We know that. That is where jobs are created.
That is where innovation takes place.
But we also recognize that they do not have a team of
accountants and tax lawyers that can handle the challenges of
our tax code. And so, often they miss out on benefits that they
would otherwise be entitled to, or fall out of compliance of
the tax code because they just do not know about the changes
that are being made, or the expiration of a tax provision, or
the way that we decide to expand a tax provision.
So, the small business tax literacy issue is a real issue,
and we have to figure out how we can make our tax code and the
resources available to small businesses friendlier, so that
they can comply with the tax law, take advantage of the tax
law, and that our tax law is fair to small companies versus the
larger companies.
So, let me go over some of the challenges that small
businesses have told me about. First, the complexity of the tax
code. It is difficult for a small business owner to understand
the tax code, and we have surveys that show that the
overwhelming majority cannot figure out the tax code in dealing
with their businesses.
We have eligibility. There are different eligibilities for
different provisions. I want to thank the Joint Committee on
Taxation for their report, but if you will take a look on pages
50 through 71, they give examples of different definitions used
for different provisions for small businesses that are entitled
to it. How can a small business be able to get through all
that?
The planning process: when you have expiration of tax
provisions, it is so difficult for a small business owner to be
able to plan his or her future. The fairness of our tax code
for small business owners and sole proprietors and pass-through
entity businesses that use the individual tax code and rates,
versus the C corporations, which are our larger corporations--
there is an issue of fairness there.
And then there is the effectiveness of the business tax
provisions for small businesses, and I know we are going to
hear a lot about individual provisions in our tax code and
compliance as to the burdens or help they provide for small
businesses.
We will hear about 1099-K reporting; the pass-through
provisions that were enacted in the 2017 tax bill; section 179
expensing; start-up expensing; R&D changes that the chairman
already mentioned. I can tell you this: the IRS-determined
small companies are struggling in regards to the R&D
restrictions that are currently in law.
The last one I just want to bring up is the effectiveness
of the services that we provide today. The IRS does provide
services for small businesses. They have publications. How
effective are those publications? We have the Taxpayer Advocate
Service. How effective are their services?
And we have the pilot program for Direct File. Is that
helping? Is that the future or--as we hear from some who oppose
that--is that just not going to be a feasible way to deal with
those challenges?
Within the Small Business Administration, we have many
tools that are available, including the Money Smart for Small
Business curriculum that was created with the FDIC. How
effective is that then in helping small businesses?
We have our resource partners, the SBDCs, the Women's
Business Centers, the VBOCs, the SCORE, the STEP. How effective
have those programs been in helping small businesses get
through the challenges in our tax code?
And then lastly, the underserved communities. The small
business tax literacy is more challenging in underserved
communities. The tools of the MBDA, are they effective at
helping the minority communities in dealing with these issues?
So, there is a lot to talk about, and that is why I wanted
to welcome our panelists today, to try to help us in this
discussion as to how we can use the current tools that are
available, the current provisions in our tax code, and where we
need to put resources or changes in those codes to help our
small businesses continue to be the growth engine of our
economy.
Thank you, Mr. Chairman.
Chairman Wyden. Thank you, Mr. Chairman.
Let us go to now Senator Crapo and Senator Young.
Senator Crapo?
OPENING STATEMENT OF HON. MIKE CRAPO,
A U.S. SENATOR FROM IDAHO
Senator Crapo. Thank you, Mr. Chairman. Before I give my
formal statement, I do just need to respond quickly, because
the issue of taxes has come up--and tax policy--and that is one
area where we have some differences of opinion.
I will just say with regard to the IRS, I am glad they are
starting to answer the telephone, and there was never any
objection on the Republican side to the adequate funding for
the IRS to be able to have the employees necessary and the
technology necessary to be in the 21st century and answer the
phone, and to help taxpayers deal with the complex tax code
that we have.
That $80-billion IRS slug of money that we are fighting
over did allocate money for that. But less than $10 billion of
that $80 billion was for those purposes. The other $70 billion,
actually about $50 billion of the other $70 billion, went to
increased auditing.
And if you do not think that means more audits for small
businesses, I just--I do not see how that can be denied. That
being the case, the other issue that was brought up that I want
to focus on just quickly before I give my full opening
statement is the 20-
percent pass-through that small businesses got under the 2017
tax act.
That is going to expire in a few years, as everyone knows,
and if it matters to you, I hope you say so today, because
there is a debate going on here in Congress right now as to
whether or not that 20-percent pass-through provision is
helpful to the small businesses in our country.
So, I would just encourage you to maybe add that to your
statement. Whatever side of that you are on, we need to hear
that, because we are making those tax policy decisions today.
Now quickly to my opening statement. A big ``thank you'' to
both of our chairmen for putting this hearing together. It is
critical. I have a big ``thank you'' for Ms. Camarillo, who
flew in from Idaho to join us today. Stephanie and I go back a
long way. She actually served as a Senate page for me when I
was in the Idaho State Senate. She has been doing great things
for Idaho ever since. She has had a big impact on the small
business landscape in Idaho, and I am eager to hear her
perspective today.
Small businesses drive our economy and are particularly
essential to Idaho's economy. More than 99 percent of Idaho's
businesses are small businesses, employing over 347,000
Idahoans and spurring local innovation. Unfortunately, despite
all that small businesses do for America's economy, the Federal
Government does not always return the favor in kind.
Too often, the impact on small businesses is not properly
evaluated before misguided government policies are enacted. The
financial burden of increased taxes and compliance costs
resulting from a complicated tax system and regulatory
environment make it hard for small businesses to make sound
financial decisions.
When coupled with uncertainty about future tax policy
changes and the Internal Revenue Service enforcement, those
decisions become nearly impossible. According to the latest
National Federation of Independent Business annual tax survey,
nearly two-thirds of small business owners reported that the
administrative burden of the Federal tax code is significant.
Further, 90 percent of small business respondents hired an
outside tax professional to prepare and submit their returns.
Compliance and complexity were determined to be the leading
factors in a small business's decision to hire a tax
professional.
While the amount due is not the only tax concern, American
small businesses and workers continue to face elevated
inflation as well as workforce and supply chain challenges.
Therefore, it is critical that our tax system promotes U.S.
jobs, U.S. manufacturing, and higher wages for hardworking
families.
Pro-growth policies in the Republicans' 2017 tax law led to
one of the strongest economies in decades, low unemployment, a
low poverty rate, strong wage growth, high median incomes,
increased investment, and record tax revenues. I want to repeat
that: record tax revenues.
To give small businesses certainty and incentives to grow
and compete in the domestic and international economies, we
should preserve these policies and explore additional
opportunities to promote growth, increase investment, and
encourage research and development in the United States.
We need to get the government out of the way of the small
business engine of our economy. Removing the disincentive of
complex and high taxes and costly regulations will allow small
businesses to go out and do what they do best: create jobs and
growth in our economy by providing valuable goods and services
to their customers.
Thank you to all of the witnesses participating. I look
forward to hearing from you.
[The prepared statement of Senator Crapo appears in the
appendix.]
Chairman Wyden. Thank you, Senator Crapo. And I want my
friend to know that his kind words about Ms. Camarillo do not
mean he forfeits the right to have a more full-fledged
introduction as we go later on.
Senator Young?
OPENING STATEMENT OF HON. TODD YOUNG,
A U.S. SENATOR FROM INDIANA
Senator Young. Thank you, Mr. Chairman. I want to thank
both of the chairmen for holding this important hearing, and I
want to thank our witnesses for taking time out of your very
busy schedules to be here today to offer your thoughts on how
we can improve our tax system.
And a special thanks to Mike Norris of Warrant
Technologies, Bloomington, IN. You and your team are doing
amazing work to support our warfighters, and yours is the sort
of dynamic, innovative small business we need to cultivate and
encourage through our tax system and other means.
It is really imperative that we continue to evaluate how
our tax system impacts small businesses, so that we make sure
we are facilitating growth, while cutting down on unnecessary
complexity in our tax code. In my lifetime, all net new job
creation in this country has occurred through the creation of
new firms and young firms, traversing that proverbial Valley of
Death, and they are often operating on very thin margins.
So we need to be sensitive to that as we hear testimony
from our witnesses, and use that to inform our tax policy. I
think from my standpoint, the reason for today's roundtable is
quite simple: start-ups and small businesses not only drive
growth, they also drive innovation. We cannot expect to have a
dynamic economy if we do not support our small businesses and
their role in developing new products and new technologies.
Unfortunately however, our innovative small businesses are
facing crushing tax liabilities as a result of the expiration
of full and immediate expensing for research and development
expenditures under section 174 of our tax code.
Starting in 2022, businesses are now required to amortize
their R&D investments over 5 years. While this change impacts
businesses of all sizes, it is particularly harmful to small
businesses, who cannot readily absorb the sudden, and in many
cases unexpected, increased tax liability.
Amortization dramatically decreases small businesses' cash
on hand, and it diminishes the amount of capital they are able
to invest in R&D in future years. I have personally heard from
countless Hoosier small businesses that are being forced to
make some very difficult choices, such as cancelling planned
expansions or even laying off workers as a result of the tax
hit from R&D amortization.
The shift to amortization comes at a time when our foreign
competitors, namely China, are continuing to increase their R&D
incentives and invest in the development of critical
technologies. China already offers a so-called super-deduction
for research and development investments. If a company invested
$100 in R&D in the United States in 2022, they got to deduct
$10 for that year; $100 investment, $10 deduction in the United
States.
If that company invested $100 in China, they would be able
to deduct $200--$200--20 times as much their incurred benefit
as they would receive in the United States. And yet just last
week, it was reported that China is considering additional tax
incentives to encourage manufacturing companies to increase
innovation in an effort to counter the United States.
We cannot sit idly by--as a matter of economic growth, as a
matter of national security--and allow our competitors to
surpass our great Nation in the development of critical
products and technologies. To address this issue, Senator
Hassan and I introduced our American Innovation and Jobs Act
earlier this year.
This bipartisan bill--it is broadly bipartisan--would
restore section 174 full and immediate expensing, thereby
incentivizing small businesses to continue to invest in R&D and
propel the U.S. economy forward. I want to thank everyone here
who has supported and advocated for this legislation.
Time is of the essence, as we will hear today. Our small
businesses are struggling. It is critical that we pass my
American Innovation and Jobs Act this year--this year--to
ensure we continue to out-compete and out-innovate our
international rivals.
Thank you, Mr. Chairman.
Chairman Wyden. I thank my colleague. He has made a number
of important points. And to our guests, you have four members
of the Senate Finance Committee who have jurisdiction over this
extraordinarily important research and development tax credit
issue. Our committee has a history of working on big issues in
a bipartisan way.
We understand the urgency here. I believe we can get a
balanced package this year that includes the area that my
colleague just mentioned, and also provides the opportunity for
additional legislation that gives all Americans the chance to
get ahead. As chairman of the committee, I am committed to
working with Senator Crapo and all our colleagues to get that
done.
We are going to introduce our guests now. Our first guest
is Alicia Chapman, and she is an Oregonian, and she is the CEO
of Willamette Technical Fabricators. In addition to leading her
small business, she is somebody who has spent a long time
thinking about how government and the private sector can work
together.
Before starting her business, she led research for Boeing
and industry partners for the Oregon Manufacturing Innovation
Center. Prior to that role, she worked at the Institute for
Sustainable Solutions, and she was recently appointed by the
Governor to be on the Commission for Women and the Oregon
Transportation Commission.
I just want to tell a brief story about Ms. Chapman,
because I visited her company recently. It was a cold day this
winter, and I visited with the workers, to kind of have a
little sort of coffee hour that all my colleagues know about.
And so, I talked to a few, and one of them in the front
raised his hand, and he said if it was not for Ms. Chapman, he
would not have had the opportunity to start a new life coming
out of prison. That was his comment. He said because of Ms.
Chapman and this small business, he was having a chance to own
a home, provide for his family, to get ahead.
He pointed at Ms. Chapman, and he said, ``Without her, that
opportunity would not have been available to me,'' and we all
know the challenge so many face coming out of prison, getting a
family-wage job and being able to advance themselves. So, you
can talk about small business in the abstract; you can talk
about helping your community in the abstract. You are looking
at Exhibit A for my home State of somebody stepping up and
making a big difference.
So, we are very appreciative.
Let me turn it over to Chair Cardin to introduce our next
guest. And then in vintage Senate process, Senator Crapo will
give a formal introduction to Ms. Camarillo; Senator Young will
introduce Mike Norris; and then I guess I am supposed to swing
into action to introduce you, Mr. Harris, because, apparently,
you do not have a colleague on the committee. So we are going
to give you a good send-off.
Senator Cardin?
Chairman Cardin. Mr. Harris, I just want you to know, I
feel the same way about the people of the District of Columbia.
They do not have their representatives here. So I have sort of
adopted all the people from the District, so welcome. It is
nice to have you here, Mr. Harris.
It is my real pleasure to introduce Avonette Blanding. She
is a financial leader in the State of Maryland, and we
appreciate everything she has done for the State of Maryland.
She is the managing member and owner of Blanding Financial
Solutions, a business management consulting firm that aims to
positively impact the quality of life of small business owners
by strengthening their financial literacy to increase access to
capital.
She is an account subject matter expert with over 30 years
of experience, and she has used that expertise as an instructor
for Morgan State University's Baltimore Means Business
entrepreneur growth program. I say that because Morgan is one
of the great HBCUs in our State and Nation, and her work has
expanded opportunities to the traditionally underserved
communities, the minority communities.
I say that because 2021 was a record year. Mr. Chairman, we
should be very proud of the number of small business startups
in 2021; it was a record year. It was led by women and led by
women of color. I know that the work that Ms. Blanding has done
in Baltimore at Morgan has really contributed to those efforts.
So I want to welcome her here today--and thank you for your
service.
Chairman Wyden. I thank my colleague.
Let us go to Senator Crapo for another introduction for Ms.
Camarillo.
Senator Crapo. Thank you, Mr. Chairman. I appreciate the
opportunity to say more about Stephanie. Stephanie Camarillo is
the owner of Molly Maid of Boise and the Treasure Valley, a
residential cleaning franchise.
Fifteen years ago, Ms. Camarillo became an entrepreneur
when she purchased Molly Maid of Boise and the Treasure Valley
with her husband Enrique. Ms. Camarillo has prioritized
financial education, helping employees learn how to make wise
investment decisions for their family's future.
Molly Maid currently employs 42 people and has received
numerous awards, including multiple years as the top woman-
owned business from the Idaho Business Review, and was voted as
the city's best cleaning service.
She serves on the leadership council for the National
Federation of Independent Business, and as Idaho's immediate
past president for the Entrepreneurs Organization, where she
has also held both regional and global roles.
Again, Stephanie, I am pleased that you have joined us
today, and I look forward to your testimony.
Chairman Wyden. Senator Young?
Senator Young. Well, I alluded to it earlier, but today I
have the distinct pleasure of introducing Mr. Mike Norris. He
is a Hoosier in the world of systems engineering and program
management. He is president and CEO of Warrant Technologies in
Bloomington, IN.
Mike oversees a team of more than 50 employees serving DoD
and the State of Indiana in logistics software engineering and
Naval education training. Prior to this, he served in the
United States Navy for 21 years, achieving the rank of
Operations Specialist Master Chief. They do not give those
away. Over the years, Mike has carved a path for himself in the
tech industry, with leadership roles at NOVONIX corporation and
Tristar Engineering, before taking the helm at Warrant.
He holds several degrees: a bachelors in business
administration with technology management; and two separate
master's degrees: one in organizational management, the other
in software engineering.
I want to thank Mike for participating in today's
roundtable and serving as an example here in Washington of
Hoosier ingenuity, integrity, and grit.
Thank you, Mr. Chairman.
Chairman Wyden. Integrity and grit. It sounds like a law
firm, attorneys at law. All right.
Mr. Harris, we are glad you are here. Mr. Harris runs
Padgett Business Services, which is a national accounting
advisory and tax prep company with almost 200 offices around
the United States.
So, throughout his career, he has been engaged in
advocating for common-sense policies for small businesses. He
was on the IRS Advisory Council. He was Chair for 2002 and
2003, and he is active in the National Association of Enrolled
Agents, is entitled to practice before the IRS, and is an
accredited tax advisor.
So, we are very glad that you are here. We have a good
panel. Let us go forward in appropriate Oregon fashion,
starting with Ms. Chapman, whom I have visited at her company,
and you heard my remarks. We are glad you are here.
STATEMENT OF ALICIA CHAPMAN, OWNER AND CEO, WILLAMETTE
TECHNICAL FABRICATORS, PORTLAND, OR
Ms. Chapman. Thank you. Thank you, Chair Wyden. Thank you,
Chair Cardin and members of the committees. For the record, my
name is Alicia Chapman. I am the owner and CEO of Willamette
Technical Fabricators headquartered in Portland, OR. We are a
custom complex metal manufacturing company focused on
transportation and clean energy infrastructure, including
bridges and hydropower dams.
We are also a certified economically disadvantaged women-
and minority-owned business by the SBA and in our home States
of Oregon and Washington. Since I founded the company in 2020,
we have grown rapidly and provided high-skill, high-demand,
family-wage jobs to 42 employees. We have avoided layoffs
through the pandemic and the more recent recession concerns.
But in spite of our successes, right now we are honestly at
a crossroads, and that is in large part due to excessive delays
from the IRS. I will give some examples. My company has
conducted substantial R&D, research and development, through
our startup years. We were recently awarded an SBIR grant from
the Department of Energy to develop proprietary robotic welding
technology. This is going to help make our country more
competitive, resilient, and energy-independent. Unfortunately,
we have been unable to finalize our 2022 tax returns, and we
were forced to file for an extension because of delayed
guidance from the IRS on capitalization and amortization of
section 174, as Mr. Young described.
We were already struggling with the updated provisions that
require us to amortize these expenses over multiple years,
especially compared to our competitors, which are primarily in
China, and the substantial benefits that they are receiving
from their own government.
But while we anxiously await the passage of legislation
that will address this gap, it is holding up hundreds of
thousands of dollars in refunds that we need to continue to
invest in innovation and our workforce. In addition to the R&D
tax credits, my business qualified for over $125,000 in
Employee Retention Credits or ERCs, for maintaining and
expanding our workforce through the pandemic.
We have been waiting on that payroll tax refund for over 8
months now, and I am also personally waiting on a tax refund of
over $20,000 from the IRS, which I fully intend to reinvest in
my business. Because of an AI-generated response, I was able to
use the CARES Act to take out a loan against my 401(K) to have
start-up capital to invest in my business, and I received a
very unexpected bill from the IRS 2 years later. They had
provided an erroneous correction to my refund that charged me
over 10 percent of the penalties plus interest of this early
deduction that I had taken against my 401(K), which the CARES
Act 2022 provision specifically waived.
So again, I am waiting over 8 months for hundreds of
thousands of dollars in refunds from the IRS for my business
and for me personally. I have been trying to reach a person at
the IRS. I am encouraged to hear that the automatic response
that I typically get that the system is so overloaded I cannot
even be put on hold, that those are being addressed. I have not
had such luck, but I will continue to try. And when I actually
do get through to a person, I get nothing but apologies, that
they are overloaded, that they are short-staffed, and they wish
they could help me but they simply cannot respond directly.
So, these long wait times have forced my business to pay
double what we have budgeted in outside CPA and accounting firm
assistance, both to file our taxes and to continue to follow up
on these overdue refunds. While we wait for these refunds, we
are essentially financing the Federal Government at record-high
interest rates, and we have had to borrow against the refunds
that we have been waiting on, which is, I estimate, the
equivalent of a full-time engineer for my small business.
So, I appreciate the urgent need for reform and for funding
the IRS so that the people who are most qualified to actually
address these concerns can get back to me.
[The prepared statement of Ms. Chapman appears in the
appendix.]
Chairman Wyden. Thank you.
Ms. Blanding?
STATEMENT OF AVONETTE BLANDING, CPA, MBA, OWNER, BLANDING
FINANCIAL SOLUTIONS, LLC, BALTIMORE, MD
Ms. Blanding. Good morning, Chairman Cardin, Chairman
Wyden, and members of the committees. I appreciate the
opportunity to speak to you all for the record. My name is
Avonette Blanding, and I am a CPA from Maryland, as Senator
Cardin said. For the past 2\1/2\ years I have been supporting
the BMB program of Morgan State University.
In that role, I get the opportunity to engage other subject
matter experts on accounting, tax, and technology, and present
a panel discussion for small business owners and entrepreneurs,
so that they can ask questions to these experts. Quite often at
that panel discussion, most of the questions are regarding
taxes.
The small business owners that I am working with, many of
them are very small. They are just starting their businesses or
have been in business for 2 or 3 years. They do not have a
large amount of revenue, but they have aspirations for growing
their businesses. The challenges that they face often are the
complexity of the tax code, understanding the tax code, not
knowing about tax incentives that their businesses may be
eligible for, and finding trust partners.
The reality is that there are not a whole lot of CPAs who
look like me in our communities. There are approximately 2
percent Black CPAs in the United States. However, there are a
much larger number of minority business owners in the United
States. So quite often, finding a partner that can connect
with, that you can trust, that can understand your business,
understand your cultural environment, and be appreciative of
those differences, and work towards helping you to grow your
business, can be a challenge.
So, I applaud you all in wanting to work together in a
bipartisan way to find ways to improve tax policies that can
benefit all businesses. Hopefully, it will increase benefits
for minority-owned businesses, and the IRS can work with HBCUs
and minority-serving institutions to hopefully provide
resources that can support those small business owners in those
programs, possibly sponsoring webinars or in-person information
sessions where business owners can actually ask an IRS agent
questions specifically related to their business.
I, like Ms. Chapman, have called the IRS. And I have been
on hold, and then it hangs up on you, after being on hold for
about an hour. That is not a pleasant experience. In addition
to the tax literacy and finding ways for the IRS to provide
services that can help business owners improve their tax
literacy, I think if they can offer some type of small
business-focused question-and-answer session or some type of
chat option on the website--if you cannot get in touch with an
actual agent, maybe a chat option on the website specifically
for small business owners can help to reduce some of those
questions.
I also think that having pamphlets that address specific
industries, related to small businesses and the taxes just for
those industries, could help to improve some of that literacy
as well.
Thank you. I appreciate this opportunity, and I look
forward to your questions.
[The prepared statement of Ms. Blanding appears in the
appendix.]
Chairman Wyden. Thank you very much, Ms. Blanding, and your
suggestions are very good. And one I would add to it--you
probably have already seen the news reports about the fact that
the IRS has told us that they have found a discriminatory
pattern with respect to audits of Black Americans. That is
wholly unacceptable, and we are going to be pushing them very,
very hard to change it.
It may be due to algorithms; it may be due to a variety of
considerations. What we know is, it is totally unacceptable. We
are going to be working with you and others to get it fixed.
Ms. Blanding. We appreciate that.
Chairman Wyden. Great.
Ms. Camarillo?
STATEMENT OF STEPHANIE CAMARILLO, OWNER, MOLLY MAID OF BOISE
AND THE TREASURE VALLEY, ON BEHALF OF NATIONAL FEDERATION OF
INDEPENDENT BUSINESS, WASHINGTON, DC
Ms. Camarillo. Thank you, Senate committee members, for
this opportunity to be here. Thank you, Senator Crapo, as well.
I also want to recognize Senator Ron Johnson, who I understand
was instrumental in creating section 199A, which I am going to
speak to here.
So, my name is Stephanie Camarillo, and I have owned a
residential cleaning business in Boise, ID for about 15 years.
The small business deduction in section 199A has had a
significant impact on my business. Many of our 42 employees--we
share the same number of employees--are single moms.
Some are from immigrant families. They are hardworking
individuals, and it is easy to see how maybe working at a
cleaning company is sort of a dead-end job. But my small
business has had a unique opportunity to impact the lives of
our workforce and their families. It is what makes mine and
other small businesses like it unique and a vital part of our
economy.
We have learned that one of the most impactful and powerful
ways to grow our company and to retain the best talent is to
invest in our people. We noticed, for example, that our
employees were working hard, but they were not getting ahead.
When we dug under the surface a little bit, it was that while
they were intelligent, they were not financially literate.
So you know, we set our minds on bringing in experts to
help them understand credit card debt, how to manage their
finances, how to create an emergency fund--and it worked. Now
close to half of our employees--and these are house cleaners--
actually own their own homes. In 2018, the small business
deduction allowed us to make a specific impact on an individual
named Jasmine.
Jasmine is a single mom. She has worked for us for about 6
years. She started as a house cleaner, and then she would go
home at night to take care of her beautiful son and to also
work on her GED, which she did end up getting. Because of the
tax savings, we were able to use that money directly to promote
Jasmine, and now she is part of our management team. Not only
that, she keeps spreading her wings, and I am confident we will
be promoting her again soon.
But small businesses do not have the same access to
resources as large companies do. We were challenged recently
when Amazon opened a big facility just a couple of miles from
our office. We lost employees due to Amazon's high wages and
big signing bonuses. Wouldn't you know it though, several years
later now, Amazon has been scaling back that facility, but our
small business still remains, and those investments in our
workforce have actually resulted in over 10 percent of an
increase in our employee numbers.
I am not a tax expert, but I want to conclude by saying
that that small business deduction has had a great impact.
Unless Congress acts, millions of small businesses like mine
are going to face substantial tax increases in a few short
years. I urge you to make this deduction permanent.
Thank you so much.
[The prepared statement of Ms. Camarillo appears in the
appendix.]
Chairman Wyden. Thank you very much.
Mr. Norris?
STATEMENT OF MICHAEL NORRIS, PRESIDENT AND CEO, WARRANT
TECHNOLOGIES, LLC, BLOOMINGTON, IN
Mr. Norris. I would like to begin by thanking the committee
for the opportunity to speak today on behalf of Warrant
Technologies and other small businesses. Warrant Technologies
is a veteran-owned small business focused on system and
software engineering founded in 2013, headquartered in
Bloomington, IN.
We have three owning partners. We have employees in seven
States, totaling over 50 system software engineers,
logisticians, and structural designers. We are CMMI software
development level 3-accredited, we are CMMC-compliant, SPRS
score of 110, hold a top-secret facility clearance, DCAA-
approved accounting system, and we have made use of code
sections 174 and 41 expenses and credits from 2018 through
2022.
Warrant is a partner of our DoD customers and a provider
and supporter of our men and women in uniform. We are proud to
play an active role in our Nation's defense. We are considered
a successful small business, growing from one employee to a
company of 50 employees and projected to continue that trend.
Small businesses reinvest their dollars on improvements in
processes and tools; product development; developing
technologies; improving infrastructure; attaining compliance
with required standards; marketing; hiring corporate leaders
and managers, such as HR officers, operations officers,
information officers, and so on--all as an indirect cost
captured under overhead, G&A, or R&D. With the dollars we
reinvested as a small business, in 2022 we improved our
business in the following ways. We employed 11 interns in 2022;
competed for other work opportunities; hired legal, financial,
and tax consultants; sent six people through advanced training;
bought operational tools, furniture, software; leased office
space; paid utilities, insurance benefits; and brought on two
key critical corporate officer positions to help manage our
growth.
You may think, well, those are just costs of doing
business, and you would be right. Each of these costs are a
critical part of doing business, and they contribute to our
economy. At this point in our life cycle, I conservatively
estimate Warrant needs to find an additional $500,000 this year
to meet our critical costs of doing business.
To effectively manage our growth, we project we need this
year to complete our CMC accreditation. This is the cyber-
compliance with NIST 800, a government mandate, and for good
reason. But its cost is absorbed by the small business.
Estimated cost: $50,000 conservatively; probably more
accurately $150,000. CMMI accreditation: this is a software-
developed government NAVSEA-endorsed standard, which gives
evidence of a business's ability to meet DoD software design
and development needs. Estimated cost: $75,000 to $150,000.
Corporate office: additional corporate officers required.
We need a contracts officer. We need a Human Resources officer.
We need a financial analyst; we need a receptionist; we need a
recruiter. Estimated cost: $400,000. We need to train our
people on the new tools and equipment, estimated cost: $80,000.
With the dollars we reinvested as a small business in the
past, we conducted R&D of new technologies and product
development, one recognized by NASA as a new technology. We
purchased lab equipment, improved processors and
infrastructure. All of this resulted in the creation of a new
company, Thinker Labs.
As of December 31, 2021, expensing of R&D cost under
section 175, R&D credits under section 41, and the 20-percent
pass-through are no longer permitted. These must now be
amortized over 5 years. An example of the impact on a small
business with a net income of $2.5 million in the 21-percent
tax bracket is, in the first year of the annual tax burden, it
goes from $315,000 to $504,000, an increase of 38 percent. This
$189,000 difference represents a high-risk, high-impact
scenario for any small business.
An error in this case would mean getting a bill some years
later for upwards of $189,000 in back taxes, interest, and
penalties. That is just for the first year. If these tax
changes persist, the impact on small businesses like Warrant
Technologies could be devastating. As a small business, I
project our ability to do the following is severely diminished
or altogether lost.
We will be unable to meet our growth needs. We will be
unable to invest in R&D and product development. Out year
audits, risk about your audits, will result in small businesses
finding their expenses disallowed, owing penalties and payback
of expenses not amortized. This will result in the demise of
small businesses.
I know this committee recognizes the value of our small
businesses and the role they play in our Nation and local
economies, our Nation's defense, and our ability to continue to
outpace our adversaries in technological development. The
involvement of small businesses in R&D efforts should be
incentivized and rewarded through programs like Small Business
Innovation Research, Small Business Technology Transfer, and
legislation like the Small Business Innovation Voucher Act, S.
1739.
Fixing the tax burdens that start this year is in the
interest of every small business, our Nation's economic growth,
and the ability of our small businesses to continue to thrive
and pursue research and development efforts. Adoption of the
American Innovation and Jobs Act, S. 866, repeals these changes
and incentivizes small business growth and participation in
R&D.
I thank the Finance Committee and the Small Business
Committee for the willingness to hear Warrant's statement and
act on behalf of the interests of small business. In
particular, I thank Senator Young for his active leadership and
support of the American Innovation and Jobs Act, and his
unwavering support of Indiana small businesses.
[The prepared statement of Mr. Norris appears in the
appendix.]
Chairman Wyden. Thank you very much.
Mr. Harris?
STATEMENT OF ROGER HARRIS, PRESIDENT,
PADGETT BUSINESS SERVICES, ATHENS, GA
Mr. Harris. Thank you, Chairman Wyden, Ranking Member
Crapo, Chairman Cardin, and Senators Young and Johnson, for
holding this panel today and allowing me to be here. As
mentioned, I am president of a company called Padgett Business
Services.
Padgett is approaching its 60th year in business, and the
customers we target are businesses with fewer than 20
employees. Now, a lot of people look at that business and say,
``How important is that one individual small business?'' But
collectively, they make up a huge part of our economy, and they
are critically important, and many call them the backbone of
our economy.
So, we believe you take a risk if you ignore the importance
of these small businesses. When asked to describe the small
businesses, I think our panelists here are a great reflection
of this. The people who get into business at this level, I tell
you, they get into it for one thing that they love in exchange
for 99 things that they hate.
At the top of those things that they hate are the
complexity and the dealings of the tax system. So, anything we
can do to make their lives better and let them focus on what
they really are in business to do, we will all benefit greatly
from that.
It was mentioned that I served on the Internal Revenue
Service Advisory Council, and I continue to meet regularly with
the Internal Revenue Service. So I have had the ability to see
our system both from the inside and the outside--what works
well, what does not work well--and I look forward to sharing
those thoughts with you as well.
Our written testimony focuses on three areas, all of which
I think can benefit the small business community greatly.
Number one is the role the Small Business Administration
currently plays, and what it could do better. We take a hard
look at our profession, the tax professionals.
As mentioned, small business relies on us almost daily for
their questions and answers. You heard some of the comments
today, and yet we are not all performing equally. And at times,
with our responsibility, I think it is not unreasonable to
think that there needs to be some minimum standards that we all
adhere to, because we really do need to make sure that we are
all doing our job if we are going to be the primary advisor to
the small business community.
Lastly is the overall complexity of our tax code, and how
the IRS deals with it. And I think we have the opportunity,
coming out of the pandemic, to reflect back on how well some
things were done, how badly other things were done. We need to
learn from our mistakes. I think we are all sitting here and
suffering potentially from a very well-intended piece of
legislation that created the Employee Retention Credit, and we
are hearing problems about delays in getting money.
Now we've got fraudsters taking advantage of the system.
There were opportunities, I believe, where we could have
mitigated those damages and improved services. I think we are
never going to do our job properly if we do not look back and
learn from our past.
The last thing: there is one piece of advice I have given
to the Internal Revenue Service. I said, ``You are getting
better at solving problems, but you need to do a lot better job
at preventing them. I think we would all be better off if we
could prevent problems and not solve them.
So again, thank you so much for the opportunity to be here
today, and I look forward to the discussions going forward.
[The prepared statement of Mr. Harris appears in the
appendix.]
Chairman Wyden. Thank you, Mr. Harris. Preventing
problems--that is being way too logical for anything that goes
on around here.
Senator Crapo's on a very tight schedule, so we are going
to break colleagues out of our order to let Senator Crapo go
first, and then we will just pick up our regular process.
Senator Crapo?
Senator Crapo. Well, thank you very much, Mr. Chairman, for
accommodating me. I apologize to the panel and to my
colleagues. I do have a previous commitment that I have to get
to. I am glad I was able to be here for all of your testimony,
and I am glad I get this brief moment to at least ask one
question, which I will ask to my Idaho witness, Stephanie
Camarillo.
Stephanie, thank you for sharing your story. I was
particularly touched about how you were able to reinvest your
tax savings in that employee whom you could move forward and
help to build a stronger American dream in her life. This is
exactly the type of investment that Congress hopes to encourage
through our tax code. To deal with this complexity and other
issues is important, but to add additional and strengthening
investments through our tax code, helping our small businesses
do exactly what you described, is what we need to do.
Could you just give us another little further discussion
about what kind of investments you could make with additional
tax or compliance savings in your business, with regard to your
employees and your business in general?
Ms. Camarillo. Thank you, Senator Crapo. I certainly can.
We have wanted, for example, to open up a child-care facility
adjacent to our businesses. I think that that would save our
employees time and money, and allow them to come to work much
easier. So that is number one.
I always want to increase wages and incentives for them. I
would love to start a scholarship fund for them. Their health-
care options--we are always looking for health-care options
that we are able to afford, which is a big issue for small
businesses, and that meet the needs of our employees.
So that is what I would say. And, Senator Crapo, if I
could, I wanted to have the opportunity, while you are here, to
just address for me what is one of the biggest issues that I
face, and I am wondering if Congress, if you could potentially
work on rewarding employees a little bit better.
By this what I mean is that government assistance programs,
if they could phase out a bit more smoothly. So, my company
works to raise wages and create opportunities for our house
cleaners. But often when we give these raises and we promote
our people, it can end up being a net--NFIB helps me with this
terminology--but higher marginal cost to the employees.
For example, I have one house cleaner right now. We just
promoted her. She is losing--by her promotion, she is losing
$700 a month in benefits by accepting this promotion. There is
no incentive for them to take more responsibility, and they get
trapped in poverty. I do not think that--you know, I think
maybe we can all agree that that is an issue. So, thank you so
much.
Senator Crapo. Well, thank you so much for that and for
that observation. I think that something that we need to learn
here, as we deal with our assistance programs and our tax
policy, is that we need to make it so that the math always
works for the employee to take the new job or to take the
higher wage, or to stick with the advancement in the private
sector, rather than to say, you know, I just----
You know, they can do the math, and we need to make it so
that when they do the math, the math says, ``go for it and
build your future.'' So, thank you for that observation.
Chairman Wyden. Thank you for the point, Ms. Camarillo. We
will follow it up. As I was listening to it--and sometimes with
all the government lingo, it is hard to follow--it sounded to
me like it was out of the benefit structure as opposed to the
tax issue, but the principle is the same thing. You ought to be
rewarding people for hard work. So we will follow it up.
All right. Ms. Chapman, thank you again for being here. And
when I visited your company, and that young man took--in effect
he had a hand-held mic or some such thing--and basically said
he had a shot at a success for his family coming out of prison
because of you, and his home, and the fact that his kids are
now doing well in school.
That is the face of what small business is capable of, so I
appreciate it. I listened carefully and was scribbling notes
about some of the headaches that I had not heard about before,
because I knew some of them. As you know, we talked about that.
Give us your sense, because we always said that this effort can
improve service and IT and make sure that everybody is held
accountable.
It is just beginning. What do you think the next steps
ought to be in terms of--you have four members of the
committee; actually, now we have six, so you have 6 percent of
the U.S. Senate ready to hear you out. What do you think the
next steps ought to be in terms of the priorities and use of
the funds and the like?
Ms. Chapman. Thank you, Chair Wyden and Chair Cardin, for
the question. I really love that you highlighted this story of
one of our employees. We are a second-chance employer. Forty
percent of our employees are women and people of color who have
been impacted by the criminal justice system, and like Ms.
Camarillo, we really invest all of our earnings back into our
workforce and our community.
So every dollar that I do not have to waste on taxes and
penalties that I can reinvest in my workforce is critical to
those people. I mentioned that we need to properly fund the
IRS. I think that is the first step. I cannot get through to
the experts that I need to, to be able to get the guidance and
get the refunds that we have been waiting on. The tax credits
that are already available to us--we're absolutely taking
advantage of those tax credits for R&D and for pass-through
organizations, like Senator Crapo mentioned. Those would help
us.
But even more than I need tax credits for robotics and
software, I need to be able to support my workers, and we have
all heard ad nauseum about the dearth of skilled labor, because
we are not hiring enough women, especially post-pandemic, who
cannot afford the exorbitant cost or the complete lack of child
care.
So, if there are Child Tax Credits or benefits for working
families to be able to hire more women, train them and get
them, especially in manufacturing, to fill some of these gaps
so we can be more competitive as a Nation, that would be a
game-changer.
Chairman Wyden. Right. What we will do is, we will do this.
When I was doing events at home--and you probably picked up on
this--as we say, there are two tracks. We will have our staff
folks follow up with you on the headaches that you are up
against right now, and then we will work with you, particularly
on some of the steps for the future.
I happen to share your view with respect to child care.
Certainly Ms. Camarillo made the same point. We can tackle
this, and, colleagues, since we have so many on the Finance
Committee, we can tackle this in a bipartisan way. This does
not have to be another kind of food fight routine. So we will
want to follow that up.
Senator Cardin is next.
Chairman Cardin. Thank you, Mr. Chairman.
Ms. Blanding, Mr. Harris pointed out that small businesses
cannot figure out the tax code on their own. They have to hire
professionals or consultants or services. There was a survey
released in April of this year by Public Private Strategies and
the Tax Policy Center that showed that 87 percent of small
businesses cannot do their taxes without outside help. So there
is a need for services.
My question is one that is pretty simple, and that is, how
helpful have the SBA resource partners been in helping you get
the type of assistance you need in regards to the taxes? We
have the Women's Business Center, now located at Morgan State
University. We are very proud of that. We have our SBDCs, we
have the different resource partners that are available. MBDA
has programs available.
How effective have they been in dealing with the tax
issues? I know they are stressed also on resources, but have
they been useful?
Ms. Blanding. So, I often refer the business owners to go
to one of the SBA offices and seek resources and assistance
with them, and most of the time it is that the business owners
often just do not know. So, unless someone can tell them,
``Here are some resources for you,'' they really do not know.
Most of them that I have--and my cohorts where I am
teaching--they need additional help. So they join the program
because they are business owners. They have a great idea. Many
of them are working in technology, so they have these new
products. They could benefit from tax incentives, from special
programs, but they just do not know.
And once I tell them, they are excited, and they actually
connect with people who can help them. Most of the time it is
really just finding someone that they can get a referral for.
Even yesterday, I was talking to a business owner who has been
in business for over 30 years, and her challenge is finding a
trusted accounting and legal team.
Even though she has had many that she has worked with, they
have not provided the quality of services that she needs. So
having that referral network helps a lot.
Chairman Cardin. Thank you very much.
Mr. Harris, I agree with you and the chairman that we do
need standards for paid preparers, and I appreciate the fact
that you mentioned that. We heard about the IRS not being
responsive to the needs. Are there services that the IRS
provides? We know that they have the publications that they
provide. They have, in their strategy plans, helping small
businesses get through the tax code.
How effective has the IRS been in trying to fill the small
business literacy gap for taxes? How effective has the IRS
been?
Mr. Harris. I think I would give them an ``A'' for effort,
but not necessarily an ``A'' for its usefulness, because it
becomes too legalese. It is too much just ``this is the law,''
and unfortunately for any outside group to advise a small
business, the law does not always fit perfectly. You have to
take the law and apply the facts of the individual business
owner or the situation there.
So, it requires some interpretation, and I think the IRS
needs to--if they are going to continue to do this, which they
should, they have to speak more in plain English. They have to
talk to the more real-world situations that we find ourselves
in, not just quote the law--so, ``this is what the law says.''
They are trying, and they are trying to get better with
FAQs and other things. But again, it is the application of the
law through the particular circumstances of a business that
presents a challenge for them, and to some extent the SBA,
because they do not have those facts in their database.
Chairman Cardin. Thank you. Thank you very much.
Chairman Wyden. Thank you, Senator Cardin.
Senator Young is next.
Senator Young. Earlier, I brought up the unexpected tax hit
that our businesses are facing when filing taxes. Their
experiences in their 2022 tax filings due to the shift to
amortization--hopefully, I can get that word down there--of R&D
investments.
Mr. Norris, can you just quickly, hopefully concisely,
describe the impact amortization has had on Warrant
Technologies this year?
Mr. Norris. Yes sir, Senator. In 2021, we expensed $347,000
of 174 R&E cost. In 2022, we will be able to expense $27,000 of
$277,000 spent. It is going to delay and impact our ability to
meet our growth needs, improve our benefits for our employees.
We have had to shelve a product that we are in development on
and shelve an R&E project.
Senator Young. So you are basically, in order to pay your
taxes, you are having to starve future growth and future
innovation associated with that growth; is that accurate?
Mr. Norris. Yes, 100 percent. At our size, you would expect
a company--I would expect a company our size to have a full-
time HR officer, a full-time CIO, with what we deal with. Those
hats are shared amongst, like on a small ship, many people. We
are getting to a critical mass where we cannot have that, and
we need to be able to manage that growth, bring those resources
on. We simply cannot do it.
Senator Young. You bring efficiencies to the Pentagon. You
innovate in areas that are essential to our warfighters. We
have just gone through an episode here where there has been
much hand-wringing, a whole lot of sturm and drang on the floor
of the United States Senate about the difficult decisions we
are making related to our Pentagon.
You could help us with all those things if we provided some
relief through the tax code. Is that accurate?
Mr. Norris. It is 100-percent accurate. The restoring of
these tax expenses--we have had to hire not only a CPA full-
time, but we have had to hire outside tax authority and
expertise to manage this for us. The findings--what we are
finding is scary. It causes sleepless nights. A wrong step in
this way could mean the end of Warrant Technologies.
Senator Young. I am going to remember a lot of your
testimony. Let me assume that my colleagues remember one thing,
one thing. You have no more time to wait. Similarly situated
businesses have no more time to wait in order to restore full
and immediate expensing. It has to be done this year. What are
the implications for your business if it is not?
Mr. Norris. The decreased cash flow is paramount. It
impacts everything, and we have heard it across the panel. The
ability to take care of our employees is first and foremost.
That is critical, and that is part of the growth need. That is
the core of it. Putting the right benefits in place, putting
the right education, putting the right wages in place, we are
able to better manage that growth.
The R&E and the product are things we would love to do and
things that are important--and they create jobs. It has spun
off another company already, and that company is at risk with
all of this. So that is what is at risk.
Senator Young. Thanks for being here.
Chairman Wyden. I thank my colleague.
Senator Johnson?
Senator Johnson. Thank you, Mr. Chairman.
Just a general question to all of you. Anybody want to
defend the tax code?
[No response.]
Senator Johnson. I did not think so. From what we talk
about here from my standpoint, as a small business guy myself,
an accountant--literally putting band-aids on a dying patient.
So, rather than talking about tax reform, what we ought to be
talking about is dramatic--and I mean dramatic--tax
simplification and rationalization. Would any of you disagree
with that?
[No response.]
Senator Johnson. Based on principles, things like
wherewithal to pay--now, I appreciate the fact that you gave me
credit for the 199. That is not the way I would have fixed it.
I also would have made it permanent. But it does not come as a
surprise. I was not a big fan of what we did in 2017. We had an
opportunity, a generational opportunity, to dramatically
rationalize and simplify our tax code, and we did not.
We made it more complex, and we made the changes temporary.
Let me just tell you what we did. American businesses have to
be competitive; no doubt about it. But the OECD average tax
rate is about 25 percent. Now, we had a corporate tax rate of
35 percent for C corps, but that was only 5 percent of American
businesses.
That is right. To step into the world, we are going to
leave 95 percent behind, paying individual rates. Back then the
effective rate--and here is proof that our tax system is
broken. We had a nominal tax rate for corporations at 35
percent, but a marginal tax rate of about 21 percent.
That is absurd. That is all this social and economic
engineering through the tax code. Why not simplify it, based on
again, wherewithal to pay? Why not cash-based income? You can
do away with all this complexity. You know, when we did our R&D
tax credit in my business, the folder was so thick. You know
who had to prepare that folder? My engineering guys, which took
them away from innovating products and making things more
efficient.
So, what we did in 2017 then is, we dropped that marginal
tax rate for C corps from 21 percent for both large and small C
corps--it was very even--to about 10 percent for large C corps
and about 14 percent for small C corps. Unfortunately, because
we got the 199 deduction in there, we made sure the top
marginal tax rate for pass-throughs is a little under 30
percent.
Now again, I do not have the effective rate for pass-
throughs, but all of you, you are small businesses. You are
competing with C corps at the entity level; correct? So, you
are competing at the top marginal tax rate of 30 percent when C
corps have a marginal tax rate of 10 to 14 percent. That puts
you at a competitive disadvantage as well.
So, part of the rationalization of our tax code is, treat
all business income equally, so that businesses at the entity
level are competing equally. I do not like the double taxation
dividends. The fact of the matter is, only about a third of C
corp business income is taxed doubly.
So, Mr. Norris, you are the one that I think was talking
about the fact--you know, let us try and prevent problems. So,
would anybody here, maybe Mr. Harris, would anybody here not
want to see a dramatic simplification of our tax code, go to
cash-based income? Will somebody just talk about how simple
that would make things, and how it would equalize treatment?
Mr. Harris. Well, in our written testimony, we talk about
the importance of the cash basis, that the one book of record
that all businesses understand is their checkbook. They know
when things are going up, things are probably good, and when
things are going down, things are probably bad.
And tying tax expenditures to when the money is available
would always be better. So, the expansion of the cash basis is
something we have always supported anywhere that it is
possible, because, again, it makes it easier for the business
owner to understand.
Senator Johnson. There would be a short-term timing
difference, but in the end----
Mr. Harris. At the end of the day, you pay the same.
Senator Johnson. So again, Mr. Chairman, what I am really
begging you to do is let us sit down as a committee or in an
office, and let us go through the basic principles that we need
to achieve here: simplification, rationalization, based on
things like wherewithal to pay.
If we would do that, we could dramatically simplify our tax
code. It would be a lot easier to comply with. You know,
Senator Cardin said that businesses have to--the IRS has to
help businesses get through the challenges in the tax code.
Well, the solution there is not to have the IRS help them get
through the challenges; eliminate the challenges, simplify it.
So that is what I think this committee ought to focus on,
rather than, again, putting a band-aid on the dying patient.
Chairman Wyden. I thank my colleague. I want to go Senator
Hirono. I would just say to my colleague, before you were on
the committee, I devoted years putting together two major
bipartisan proposals, first with Senator Gregg, then with
Senator Coats. I am still interested in it, and the heart of it
ought to be simplification, no question about it.
Senator Hirono?
Senator Hirono. Thank you, Mr. Chairman. I thank both
chairs for this joint hearing. Clearly, the tax code is
complicated. There are whole law school courses figuring out
what is in the tax code. In fact, Mr. Harris, you help a lot of
small businesses with filing their taxes. If you were to bring
in the tax code, how high would the stack be----
Mr. Harris. If I had to----
Senator Hirono [continuing]. Of the provisions?
Mr. Harris. If I had to do what to the tax code?
Senator Hirono. No, the tax code that you represent--you
help a lot of small businesses with their taxes. I just want to
get a visual sense of how many pages the U.S. tax code now
covers?
Mr. Harris. Oh, I have no idea how many pages, but----
Senator Hirono. It is a lot.
Mr. Harris. There is a lot, and it is sometimes
overwhelming. I think that is why you have to focus on who your
customer is, because it is impossible to absorb the entire tax
code. You have to focus more on who you try to serve. So we try
to focus on the parts that impact small business.
Senator Hirono. And hope that you do not miss anything,
right, that may impact small businesses?
Mr. Harris. We do our best.
Senator Hirono. I mean, is there a section in the tax code
that says, these are the provisions that apply to small
businesses, with a definition of what a small business is?
Mr. Harris. No, it is everywhere. I mean there is not one
book. It is all over.
Senator Hirono. Yes. So, as you work with small businesses,
what is it that they are most concerned about, regarding making
sure that they are filing their taxes appropriately? Do they
say to you they have to come to you because they cannot even
make heads or tails of the tax code as it applies to them?
Mr. Harris. Sure. They have given up hope of trying to do
it themselves, because there are so many complexities. There
are benefits in the tax code. The Employee Retention Credit was
a benefit that they could have taken advantage of. They had to
know about it; they had to know how to do it. They had to know
all of those things.
They want to make sure that they are not paying any more
than they have to. They want to make sure they are paying what
their competitors are paying, and they expect fairness. So,
they want to do things the right way, but it is just beyond
their ability.
Senator Hirono. And that is why you are there, because they
had to figure out themselves----
Mr. Harris. That is why we have survived for almost 60
years, yes.
Senator Hirono. Mr. Norris, thank you so much for bringing
your own perspective to what you have to do. So, as you
indicated, you had to hire your own CPA and other people just
to help you. So you do not use a service like Mr. Harris's. You
do your own taxes?
Mr. Norris. No, ma'am. We have a CPA firm that we hire, and
then on top of that, to deal with this, we had to go outside of
that and then hire another tax specialty firm to help us work
through this. That is on the advice of our CPA, and they have a
representative in the room with us today.
Senator Hirono. I believe that you testified, you discussed
the importance of restoring the research and development tax
deduction in your testimony?
Mr. Norris. Yes, ma'am.
Senator Hirono. So, can you elaborate on why restoring this
deduction would be so important to your business in particular?
Mr. Norris. Absolutely. The operational funds, the cash
flow that is removed from Warrant--and I talked a little bit
about it; the whole panel has really. Again, first and foremost
is taking care of those employees. But with the dollars left
over--we have a history, and all small businesses in our line
do; this is not unique to Warrant. We have a history of
pursuing opportunities in product development. We have heard
that from the panelists today.
We have a history of pursuing new technologies, and
certainly that is true of Warrant. Those get shelved. As a
matter of fact, we have had to shelve the R&D project that we
have underway right now, because we just do not know what we
are facing, and we have had to shelve the product that we are
in development on right now.
Senator Hirono. Do the other panelists agree that we should
contemplate restoring the R&D tax deduction? Yes, I see at
least two heads nodding.
Ms. Chapman. I agree.
Senator Hirono. Yes.
Ms. Chapman. Absolutely. I think that would be critical for
many small businesses, especially those that are innovating to
make America more competitive. And advancing those credits to
be more competitive, specifically with China, is key.
Senator Hirono. Ms. Camarillo?
Ms. Camarillo. Ditto. I have a house cleaning business, so
it is not relevant to me, but I am president of the
Entrepreneurs' Organization, and it is vital to entrepreneurs.
Senator Hirono. So, for the two chairs, I think this is
definitely something that we should contemplate doing. It is to
enable our small businesses to keep up with things so they
effectively compete. I have no idea what the time is. I may
have gone over 5 minutes. I do not have any--have I gone over 5
minutes?
Chairman Wyden. Yes, but the fact is, in the broad sweep of
western civilization, this will not be a big problem for you. I
thank my colleague, and I want her to know, seriously, that it
is top priority business on the Finance Committee on a
bipartisan basis to resolve this and get it done this year.
Senator Risch?
Senator Risch. Well, thank you, and I want to thank both
chairmen and both ranking members for holding this roundtable.
It is certainly an important matter, as we have all heard
today. I want to thank all our guests for sharing their
stories. These stories exemplify the important role of small
businesses in driving economic growth and innovation.
In Idaho, 99 percent of our businesses are small
businesses, and their impact on the State is tremendous. Behind
each is an Idahoan like Ms. Camarillo, who had the tenacity and
was allowed to achieve the American dream. We really need to
promote an economy where these entrepreneurs can invest in
their business and employees.
Our tax code accomplishes the opposite. Small business
owners often fill several roles in their companies and have
neither the time nor the expertise to parse through the onerous
requirements. A survey from American University found that tax
complexity caused nearly half of small businesses to struggle
with their taxes, and almost 90 percent outsource these issues.
They should not have to.
This has driven compliance costs 67 percent higher for
small businesses, according to the NFIB, National Federation of
Independent Business. This is unacceptable. Congress must
support businesses by simplifying the tax code.
In addition, small businesses rely upon the Tax Cuts and
Jobs Act pro-growth policies. Ms. Camarillo's story, for
instance, demonstrates how the TCJA's small business deduction,
the 199A deduction, achieved Congress's goal of facilitating
growth and reinvestment. Many of these provisions, however,
expire in 2025.
In today's uncertain economy, Congress must take meaningful
steps to support our Nation's small businesses, beginning by
extending these policies.
With that, I am going to close, Mr. Chairman. I apologize
for not being here. We have a Foreign Relations Committee going
on. The backlog on issuing passports that every single member
of Congress----
Chairman Wyden. Off to backlogs.
Senator Risch. So we are drilling down with the State
Department on that. I may have some questions for the record
though.
Chairman Wyden. Absolutely.
Senator Risch. And thank you to our witnesses for showing
up.
Chairman Wyden. Very good.
Senator Tillis?
Senator Tillis. Thank you, Mr. Chairman. Thank you all for
being here.
Ms. Camarillo, can you speak to the importance--you may
have spoken before; I am sorry. I have dueling committees with
Judiciary. But how important is section 199A, the pass-through
deduction, for small business? Can you talk a little bit about
it applied to your business enterprise?
Ms. Camarillo. Yes; thank you. It has been extremely
important. I talked about how we used it. You know, my company
is small, so for us, it is around $15,000 a year. But that is
significant for us. So we were able to actually promote two
people with that savings.
Senator Tillis. What changes if it sunsets at the end of
2025?
Ms. Camarillo. You know, it will impact our ability to
grow, because I cannot--you know, where am I going to get that
money to make that investment in my business?
Senator Tillis. And I believe NFIB is fully supportive of
making it permanent?
Ms. Camarillo. Oh absolutely, and a shout-out to NFIB. They
have been fabulous, yes.
Senator Tillis. Mr. Harris, can you talk a little bit about
the impact that repealing the estate tax will have on small
businesses?
Mr. Harris. What do you mean? Taking it back to a lower
level?
Senator Tillis. Yes.
Mr. Harris. Well, certainly, any time you put a tax on
something, it has an impact. Any business that would be over
the threshold of whatever the new number would be--it would
mean that there is a cost of that transition in a business. It
could cause them to sell things.
Senator Tillis. What if we completely repealed it?
Mr. Harris. For businesses in our market, we do not have a
lot of people, unfortunately, who create enough wealth to be
burdened by it today. But certainly, for those who are--any
time you put a tax on an activity, be it death or whatever, it
impacts it.
So, for any business that currently would be subject to the
estate tax, removing that tax would allow that money to stay in
the business and be spent for things----
Senator Tillis. We have a lot of small and medium-sized
businesses that are maybe capital-rich or land-rich but cash-
poor, and it is one of the reasons why we actually repealed the
estate tax in North Carolina, the State component.
Mr. Harris. Any time you tax something when there is no
economic transaction to generate cash to pay it, it creates a
burden, because now something has happened that causes tax to
be due, and yet there is no cash being generated at the same
time to pay for it.
Senator Tillis. I am glad we are having this meeting in
this sort of setting, but what we are really talking about are
band-aids on what I believe is a tax code that needs to be
dramatically simplified. I know it can work. We did it in North
Carolina, back when I was in the State legislature.
A lot of the opponents are really rethinking. I do not
think we have the balance right in terms of taxes on
productivity versus consumption. I think you have to open the
aperture and modernize our tax code, and when you do that, you
can simplify greatly. Speaking for North Carolina, if you do it
right, you can have an enormously positive result.
Over a 10-year period, the economy has transformed. You
have to deal with all the hits. If you get into a consumption-
based framework, then you are going to get hits on the
regressive nature of a sales tax, for example. That can be
dealt with. We dealt with it. You can reduce the corporate tax.
You can reduce the personal income tax, and you can put a lot
of small businesses back in business.
Eighty percent of the job creators in North Carolina are
small businesses. But we started with the band-aid approach--
you know, making sure we got pass-through income done, seeing
what we could do on the estate tax, all those things, and then
we just decided to remove all these irrational exceptions and
exemptions, tried to smooth it out, make it easier for small
businesses to understand.
And so, I hope that, right now, we can fix some of these
band-aids, particularly the ones that are subject to a sunset.
But I hope we can get into a fuller discussion of how we should
rethink the entire tax code, and that will not happen quickly.
But the discussions of the possible really need to happen.
You know, small business--I do not know how many committees
I have been in where people are talking about a new regulation,
and then the witness will say, ``Well, it is only one more
form.'' And I say, that is fine if you are talking to the vice
president of compliance in a large corporation.
But when you are in a small business, the same person who
has to fill out that form and deal with that government agency
is probably the CEO, the CFO, from time to time the janitor,
and all things in between. And we have to understand that that
complexity hurts the very sorts of business enterprises that we
admire the most, because you create the most jobs and you have
the most impact on your local communities.
So hopefully, we can get to a point where we can start
having that discussion. The band-aids are important, but I
think fixing the underlying wound is more important, and that
is the complexity of our tax code.
Thank you all.
Chairman Wyden. Senator Tillis, you got me at ``hello'' on
the basic proposition: a more comprehensive tax reform with the
foundation being simplicity. And just to give you an idea of
the history, I wrote what is still the only comprehensive
bipartisan tax reform proposal in decades with the Senator who
sat where you now sit on the Finance Committee, Senator Dan
Coats. So let us go to it. I am happy to work with you on it.
What we are going to do now is, Senator Cardin and Senator
Young have one additional question. I am going to have to go,
with apologies to Ms. Chapman. I do want to make one quick
point, which is, in the IRS proposal, what is called the
Strategic Operating Plan, there are several areas of special
interest to small business.
I am going to work very closely with the chairman. We will
do it in a bipartisan way, the Small Business Committee and the
Finance Committee, as these go forward. But as I understand it,
they are looking at a system of online accounts, so that a
small business person could get everything they wanted about
their tax situation online, and apparently there will be some
people to answer questions from small business people as well.
So the point is, this is still in the development stage,
but I want it understood that the Finance Committee and the
Small Business Committee will work together in a bipartisan
way, cooperatively, to make sure that these issues which touch
on a number of things that you all have talked about this
morning, go forward in an expeditious sort of fashion.
So, Senator Cardin will close the hearing, and that will
take place after he and Senator Young have had their additional
questions. I want to thank all of our guests. This has been
very helpful, very constructive. Particular thanks to Ms.
Chapman, because I will never ever in my time in public service
forget the face of that young man just out of prison whom you
gave a shot to. You gave a shot to that young man, and that, I
think, is the best of small business.
So, Senator Cardin, Senator Young, all yours.
Chairman Cardin. Thank you, Senator Wyden. And before you
leave, I just really want to thank you for your attention to
small business as chair of the Finance Committee. I can tell
you, during the COVID experiences, when we were putting
together a package to help small businesses, Senator Wyden was
a great advocate on behalf of our smaller companies, and to
keep them alive during the pandemic. So, thank you so much for
your attention to the small business issues.
Mr. Harris, I want to try to get your view on the
inequities in our tax code. Let me tell you, I start with the
challenges small businesses have in compliance, and we have
already talked about that with the tax literacy issue.
I have always been concerned about the fairness of our tax
code for small businesses, because they are within the
individual tax structure rather than in the business tax C
structure. So, the 2017 tax bill--we have different views on
it. I thought it did not help the situation; I should have
thought it hurt the situation a little bit with the ways that
the rates were changed for C corporations and the pass-
throughs, for the entities.
I say that because there are a lot of pass-through entities
that I do not consider to be small businesses. They are making
their decision on what is in their best interest, and it is
much better for them to be individual taxpayers rather than
having the entity pay taxes, and they make that judgment, and
we give them the right to make that judgment.
I am not complaining about that. But the 199A, I did not
think was focused on really helping small businesses as much as
pass-through entities, which are not necessarily small
businesses. So, I guess my question to you--if we are
interested in helping small businesses, and we are interested
in giving them a break, we have special rules to try to help
small businesses.
Is there a better way to try to focus the 199A section or
other sections of the code to really target the small
companies, the smaller entities? We also learned--one last
question, and I will let you respond.
We also learned during COVID that there is a big difference
between a company that has 500 employees and a company that has
three employees. Is there a way that we can provide the help to
those companies that really need the help, the smaller of the
small businesses?
Mr. Harris. There is a lot there, and what is sad about the
current state of small business taxation is, they only
understand one number on their return, and that is the final
number.
Everything that got to there is beyond their comprehension,
and so when we talk about 199A or this or that, they just kind
of look at people like us and say, ``Tell me how I did.'' If I
can tell them that it saved them money, they are for it. If I
tell them it costs them money, they are against it.
So I go back to making their system of taxation and
recordkeeping tie to something that they do understand: how are
they doing monetarily in their business? And I think in the
simple world, if you take the money in, the money out, the
money left, and apply a rate to it, they could understand that.
It is everything getting to that that confuses them, and
they are left with just, at the end of the day, how much do I
owe or how much do I get back, and that is about all they
understand. They do not even want me to try to explain it to
them, because they still would not understand it.
So, at this smaller end of small businesses, we need to
just work in a world that they can comprehend. When we talk
about this deduction, that deduction--we have heard a lot about
the R&D credit. What is confusing is, I spent $100,000 and I
can only deduct $10,000, but I am out $90,000 more, you know?
Tie it back to where their world is and they can wrap their
brain around it, and I think they would all be thrilled.
Chairman Cardin. That is why I thought 179 expensing worked
well, because they could understand it dollar-for-dollar.
Mr. Harris. Exactly.
Chairman Cardin. So more of that type of----
Mr. Harris. More of that type, yes.
Chairman Cardin. Thank you.
Senator Young?
Senator Young. Thank you, Mr. Chairman. I want to thank you
and Senator Wyden for prioritizing our small businesses, and it
has been a very thoughtful hearing. Thank you to all of our
panelists.
In my closing time here, I just wanted to underscore a
point. Since there seems to be universal support among my
colleagues who appeared at this hearing for the R&D provisions,
eliminating amortization, what has happened? Well, in the House
of Representatives, there was an insistence from a clutch of
members. They happen to have been Democrats. We all have our
own politics and party affiliations, so they are good
Americans. But it was their fervent belief that we needed to
restore the Child Tax Credit as it previously existed.
They decided peculiarly to--I will indelicately say--``hold
hostage'' the R&D provisions to that policy objective. Now it
is an unusual thing to do, because the R&D has historically had
bipartisan support, as it still does. You would typically say,
you know, that Republicans are going to have to give on
something that tends to be a Republican-only imperative in
order to get your Democratic legislation moving, but that is
not what they have done. The mantra, typically uncontested,
that we are hearing from them and from some members in the U.S.
Senate, is, before we move on R&D, we need to do something for
working people.
Mr. Norris, you have 50 employees. Most of them work pretty
hard, by observation. I had an opportunity to visit with you.
They are working people. And for those who categorically think
that someone who has a Ph.D. or advanced degrees--does everyone
among your 50 employees have advanced degrees in your R&D-
intensive business?
Mr. Norris. No sir. We have everything from high school
graduates all the way through Ph.D.
Senator Young. Okay. So, to the extent we are able to
advance this provision, which is essential to the future of
your business, we also help those working-class people. Is that
accurate?
Mr. Norris. Every dollar we can keep, the first place it
goes is to help those people. What we do is, we increase our
education benefits. We increase benefits. We increase their
health care. If we cannot retain and attract that talent, that
talent from the interns, the high school graduates, through the
Ph.D., then we do not have a business.
Senator Young. Right. And some of that money that goes in
their bank accounts, goes in their pocket, Mr. Norris,
presumably goes to Ms. Camarillo to pay to clean their homes.
Has that been your experience? Is that maybe one reason why you
support the R&D provisions?
Ms. Camarillo. Absolutely.
Senator Young. To help those working people?
Ms. Camarillo. Yes, that is it.
Senator Young. The employee.
Ms. Camarillo. I do not even have more to comment other
than ``yes.''
Senator Young. Okay.
And, Ms. Chapman, your company specializes in custom
complex metal manufacturing. I do not even know entirely what
it does. I know you developed some proprietary welding
technology that sounds very impressive.
It also sounds kind of cutting-edge, which is why you
testified that you need the R&D provisions restored. Do you
have working people in your company too?
Ms. Chapman. Yes, of our 42 employees, we primarily employ
welders, machinists--so, trades craft people and also
engineers.
Senator Young. Okay. Well, we want your company to continue
to thrive. One of the ways we can do that is by eliminating the
amortization of R&D expenditures and helping the working people
who are in your employ.
So that is all I had. I just wanted to make sure that that
very obvious point, to so many, is not lost in the talking
points that are circulated in Washington. Thank you.
Chairman Cardin. First, to Senator Young, who is one of my
dear friends, and I mean that sincerely: we have partnered on
many bills. Many have been signed by the President of the
United States, because we have worked together in a very
bipartisan way in many, many different areas.
I just have to take exception to the manner in which you
presented the R&D. I am for fixing the R&D. It does affect
small companies, particularly SBIR and DTR companies. It is one
of the issues we hear the most about.
We've got to fix what was done in 2017. But to say that
this is a challenge because of other issues that may be
attached to it--why do we have the problem with the R&D? It was
put in the 2017 tax bill, which was a partisan tax bill, as a
way of saying we are paying for tax cuts when in reality it did
not pay for the tax cuts. But it was part of a package of bills
put in by the Republicans.
Now, I am for fixing the R&D credit. I think we need to do
it, and I am for working out a reasonable package to get that
done. But I think it defies the traditions of the U.S. Congress
and the way that we deal with tax bills, to say that it will
not be considered with other tax provisions.
We always do that, and we try to balance it. As you know, I
have many, many good bills in health care and in taxation and
in pension areas that I would love to see considered by
themselves on the floor of the United States Senate. It is not
going to happen. They are going to have to find a home within a
package of bills, because we do not have the time to bring up
individual bills.
We always put them into these larger packages. So I just
really wanted to set the record straight. I am for fixing the
R&D. It is a bipartisan bill. We need to get it done. We need
to find a home for it, and what is in that home, what is in the
package, I hope that our team can negotiate.
I have a lot of confidence in Senator Wyden and Senator
Crapo. They have worked together long and hard, and we have
gotten--the last Congress we got a great pension bill done
thanks to their leadership, and it was a good package that
included a lot of provisions that Senator Portman and I worked
on.
So we do this all the time, but I think it is not
reasonable to expect that we will have an individual bill on
the floor of the United States Senate on taxes. I do not think
that is going to happen. I could be wrong; I just do not think
that is going to happen.
Senator Young. Thank you all for coming.
That is all, right?
Chairman Cardin. No, I did not mean to--but thank you all.
I asked Senator Wyden and Senator Crapo to do this roundtable
discussion. When I ask small businesses, as the chairman of the
committee, what their top priorities are, we will hear access
to capital, yes. We will hear workforce issues, trying to get
workers. We will hear about supply chain issues. We will hear
about cybersecurity.
But we hear about the frustration of dealing with the IRS,
this frustration of trying to understand how these tax
provisions work. And, Mr. Harris, I could not agree with you
more: they look at the bottom line, but how they get to the
bottom line, they have no idea.
And when they get caught with a situation where they could
have gotten better benefits but they did not know about it,
deductions that they did not take, or all of a sudden they are
being challenged on what they did and they had no idea, or
where there is an expiration of a tax provision and they had no
idea that the tax provision expired, all that is extremely
frustrating to a business owner who does not really have the
resources to understand other than what the bottom line is to
that person.
So I think this has been extremely helpful, and I thank
each of you for your contributions. This will not be the last
time we are discussing this, and since this is very informal, I
see someone raised their hand. You are trying to add something
to this?
Mr. Norris. The 174 amortization will impact Small
Businesses this year. When will it be fixed?
Chairman Cardin. That is a very good point. And one of the
challenges we have in Congress is that our calendar on getting
tax changes done does not necessarily comply with the IRS
calendar for filing returns and when returns are started, et
cetera.
And it just cries out for predictability. The more we can
do permanent tax provisions rather than temporary tax
provisions, the more we can settle tax policy--bipartisan--so
it has a chance of surviving more than a few years. It is in
the best interest of the taxpayers of this country.
So that is why you are going to find that Senator Young and
I both very strongly believe in bipartisan solutions to tough
problems, because it gives us the predictability we need moving
forward. Your point that you raised is very valid, and
something that drives us to try to get this resolved as quickly
as possible.
Thank you very much, and with that, the roundtable
discussion will come to an end.
[Whereupon, at 11:45 a.m., the roundtable was concluded.]
A P P E N D I X
Additional Material Submitted for the Record
----------
Prepared Statement of Avonette Blanding, CPA, MBA,
Owner, Blanding Financial Solutions, LLC
Chairman Cardin, Chairman Wyden, Ranking Member Crapo, Ranking
Member Ernst, and members of the committees, I sincerely appreciate you
inviting me to share my perspectives on the tax literacy gap and how
the IRS and SBA can better coordinate and improve services. Tax
literacy, competence or knowledge of the tax code and laws, is a
challenge to many individuals and small business owners. I developed my
initial tax literacy while completing my undergraduate degree in
accounting and later demonstrated my competence when I earned my
Certified Public Accountant (CPA) license. When I meet people and share
that I'm a CPA, there inevitably is a reference to taxes, after which I
laugh and then reveal that I haven't been a practicing tax accountant
in decades but am fortunate to have many talented tax accountants in my
network. Like many other Americans, I have multiple roles, including
that of small business owner. I realize however that for many of my
fellow small business owners, especially minority owners, tax literacy
is not their comfort zone nor greatest area of expertise.
For the past 2\1/2\ years, I've had the privilege of working as an
accounting subject matter expert and facilitator with Morgan State
University's Baltimore Means Business (BMB) entrepreneurship growth
program. In that role, I facilitate training and provide business
advice for aspiring and established minority small business owners. I
introduce participants to topics and practical information necessary
for running the day-to-day operations of a growing business. I secure
subject matter experts to participate in a panel discussion of small
business accounting, tax, and technology issues. While supporting the
BMB program, I've met with over one hundred entrepreneurs and small
business owners and during each panel discussion, most of the questions
centered around taxes. One of my guest panelists, Albert Hurston, CPA,
shared that ``taxes are really complicated to a lot of small business
owners because they know that there are a lot of rules and regulations,
but they don't understand which rules apply to them.'' In addition to
not knowing which regulations apply to them, many minority business
owners are unaware of the tax incentives available to them. This lack
of understanding and lack of knowledge can have a significant and
direct impact on the success and financial health of the business. I
suggest that the SBA improve advertising and promotion of the tax
planning resources provided by SBDCs.
Many minority serving institutions (MSIs) and Historically Black
Colleges and Universities (HBCUs) have entrepreneurship accelerator and
business incubator programs. The IRS should consider coordinating with
those MSIs and HBCUs to provide resources to support tax literacy
workshops and seminars to the entrepreneurs and small businesses owners
participating in the programs.
Small business owners and tax practitioners who proactively call
the IRS to seek assistance often experience extremely long wait times.
The IRS should continue to implement changes to reduce the long wait
time for IRS customer service calls. In preparation for the roundtable,
I contacted fellow CPAs for input. Samantha Bowling, CPA suggested that
the IRS provide a small business supported hotline or chat option on
the IRS website. Mr. Hurston suggested that the IRS provide more
examples of ``important taxes to understand for service providers'' or
``important taxes to understand for restaurants'' or similar types of
information that could be helpful for many small business owners.
In summary, small business owners want to comply with the tax code
and understand their tax obligations but they also want to understand
and take advantage of the tax incentives that are available.
Thank you for your time, and I look forward to your questions and
answers.
______
Prepared Statement of Stephanie Camarillo, Owner, Molly Maid of Boise
and the Treasure Valley, on behalf of National Federation of
Independent Business
Thank you, Chairmen Wyden and Cardin, Ranking Members Crapo and
Ernst, and members of the committees, for taking time to listen to a
small business owner. The small business deduction, also known as
section 199A, has made a difference to our business, and I'm here to
tell you how.
My name is Stephanie Camarillo, and I have owned one of the largest
residential cleaning businesses in our region, Molly Maid of Boise and
the Treasure Valley, for over 15 years.
Many of our 42 employees are single mothers, some from immigrant
families. Most have never attended college or trade school. It's easy
to think that working for a cleaning company is a dead-end job. There
is a lot of dirty work, but my small business has had a unique
opportunity to impact the lives of our workforce and their families in
ways that can address underlying issues and create generational change.
It's what makes mine and other small businesses like it such a vital
part of a thriving community.
We have learned that one of the most powerful ways to grow our
company and retain the very best talent is to invest in our people.
There are the well-known ways of investing: paying well, providing
meaningful benefits, and offering a supportive environment. But there
are also other ways to invest that small businesses are uniquely able
to understand.
We noticed that our employees were working hard but not getting
ahead in their lives. When we got under the surface, we realized that
while our employees were smart, they did not know how to manage money.
Financial literacy was something we could tackle and teach our
employees. We set out to help them understand how to pay off debt,
create an emergency fund, improve credit scores, save for college and
retirement. It worked! Now, close to half of our workforce own their
own homes. These investments have also helped our bottom line and
resulted in low turnover and an engaged workforce.
In 2018, the small business deduction (section 199A) allowed us to
make a meaningful investment in an employee named Jasmine.
Jasmine is a single mom who felt trapped and unable to advance in
her life. She started working for us as a house cleaner about 6 years
ago. She cleaned during the day and at night she worked to finish her
GED. Because of the tax savings through the small business deduction
(section 199A), we were able to give Jasmine the raise and promotion
she had earned, and now she is on our management team. She has
continued to spread her wings and is bound to be promoted again.
Tax relief saves jobs and elevates working families.
I admire bigger businesses and corporations, but small businesses
don't have the same access to resources. Our business, like so many
others, continues to feel pressures in the economy: inflation, a tight
labor force, supply chain constraints.
We were challenged recently in our business when Amazon built a
large facility near our office. We lost employees due to Amazon's big
signing bonuses and promises of high wages. We really struggled with
staffing while Amazon was ramping up.
Wouldn't you know it! Amazon has since scaled back this facility.
My company remains. It's because Congress had the foresight to pass
the small business deduction (section 199A) that helped us to weather
this storm.
I am not a tax expert, but I will conclude by saying the small
business deduction (section 199A) has made a difference for our
business. Unless Congress acts, millions of small businesses like ours
face a substantial tax increase in a few short years, which will be
extremely problematic. I urge you to make this deduction permanent.
______
Prepared Statement of Alicia Chapman, Owner and CEO,
Willamette Technical Fabricators
Dear Chair Wyden, Chair Cardin, and members of the Senate Committee
on Finance and Senate Committee on Small Business and Entrepreneurship:
Thank you for the opportunity to provide written testimony and
participate in the Tackling Tax Complexity roundtable. My name is
Alicia Chapman, and I am the owner and CEO of Willamette Technical
Fabricators, based in Portland, OR.
My company is certified by the Small Business Administration (SBA)
and in our home States of Oregon and Washington as an economically
disadvantaged woman- and minority-owned small business. We specialize
in custom complex metal manufacturing, focused on transportation and
clean energy infrastructure such as bridges and hydropower dams. We
have grown rapidly and provided high-skill, high-
demand, family-wage jobs to over 40 employees, avoiding layoffs through
the pandemic and more recent recession concerns. In spite of our
success, we are currently at a crossroads, in large part due to
excessive delays within the IRS.
Willamette Technical Fabricators has conducted substantial research
and development (R&D) throughout our startup years, and we were
recently awarded a Small Business Innovation Research (SBIR) grant from
the Department of Energy to develop proprietary robotic welding
technology that will improve American competitiveness and help our
Nation become more resilient and energy-independent. Unfortunately we
have been unable to finalize our 2022 business tax return and were
forced to file for an extension while we await updated IRS guidance on
capitalization and amortization of section 174 for research and
experimental expenditures. We are already struggling with the updated
requirement for the first time in 70 years to amortize these
investments over time, instead of being able to immediately deduct our
R&D expenses. This is a stark contrast to the 200 percent R&D deduction
provided to our Chinese competitors by their own government. But while
we anxiously await the passage of legislation that would address this
gap, the delayed guidance is holding up hundreds of thousands of
dollars in tax credits and refunds that we need to continue to innovate
and invest in workforce development.
In addition to R&D credits, my business qualifies for over $125,000
in Employee Retention Credits (ERC) for maintaining and expanding our
workforce through the pandemic. We have been waiting on that payroll
tax refund for over 8 months now. When we've been able to get through
to someone at the IRS, which is rare, they have informed us that
processing of ERC refunds is taking up to 160 days, unless there are
any delays, in which case it could take much longer. Unfortunately no
one has been able to clarify what might constitute a delay, or offered
any suggestions for steps we could take to help expedite the process.
With so many taxpayers, especially small businesses, hoping to take
advantage of the ERC program, our accountants have told me that they
have been seeing long wait and processing periods for all of their
clients, and I have heard from many of our partners that this is sadly
the norm. I cannot go a day without getting a call from a blocked
number for someone promising to help me get my ERC refund faster, or
offering to provide a predatory loan against it, because this has
become such a pervasive problem.
Finally, in what I assume was an effort to supplement qualified IRS
agents with artificial intelligence, earlier this year I received
proposed corrections to my already accepted 2020 personal tax return,
related to a 401(K) distribution I was able to take via the CARES Act
to invest in startup costs for my business without the usual early
distribution penalties. I provided clarifying documentation and
verified my eligibility under CARES Act section 2022 within a few days
of receiving an unexpected bill from the IRS for these erroneous
corrections, but it took months to get a response, and then it was only
that the information was still being processed. Until this issue is
resolved, the IRS is withholding a refund of over twenty thousand
dollars for my 2021 personal tax return, which I have also been waiting
on for over 8 months. The agents I have spoken to about this have all
apologized that they are incredibly short-staffed and dealing with an
immense backlog. This refund is money that I would have undoubtedly
reinvested in my business, like so many small business owners who are
the first line of defense when their companies need a short-term loan.
While we wait for 2021 refunds and the long-overdue guidance from
the IRS delaying even greater 2022 refunds, we are essentially
financing the Federal Government for hundreds of thousands of dollars
that we have to borrow at record high interest rates, which has created
a cash flow crisis for my business. I have also had to pay our
accountants almost double what we budgeted for tax support, to navigate
the ever-changing tax codes, revise estimates while updated guidance is
still pending, and regularly follow up with the IRS on our missing
payments, since my staff and I have spent countless hours trying to get
through that would have been far better spent focusing on our core
competencies. I have estimated that between interest paid for capital
loans while the IRS withholds money we critically need now, and the
additional tax preparation and follow up fees we've incurred this year
alone, we could have hired another full-time engineer. On top of these
direct costs, I have applied for an increased line of credit to provide
the necessary operating capital needed to hire and train new staff, for
capital expense loans to purchase new equipment needed to take on
bigger projects, and we're planning to apply for the SBA 8(a) business
development program as soon as possible, but all of these are
contingent on being able to provide our finalized 2022 taxes, which
remain stalled. The indirect costs of these delays are difficult to
quantify, but they are significant.
In all of these instances, it is clear to me that the IRS lacks
adequate funding for taxpayer services. Clear and timely refunds and
guidance so that taxpayers can finalize our returns on time and
accurately budget for future tax payments is critical. This is
especially true for small businesses like mine that are investing in
risky and expensive R&D, which the Federal Government has otherwise
dedicated so many resources to supporting, such as SBIR. I commend our
elected officials for reauthorizing the SBIR program, and I would love
to be able to take advantage of other existing programs to support
small businesses, such as the 8(a) business development program. I need
the IRS to be a fully functional agency first, before that is a
possibility. I appreciate your attention to this urgent matter, before
it is too late for my business and so many others.
Thank you.
______
Prepared Statement of Hon. Mike Crapo,
a U.S. Senator From Idaho
Thank you, Chairman Wyden and Chairman Cardin, for holding this
roundtable.
And a big ``thank you'' to Ms. Camarillo, who flew out from Idaho
to join us today. Stephanie and I go back a long way--she actually
served as a Senate page for me when I was in the Idaho State Senate.
She's had a big impact on the small business landscape in Idaho, and I
am eager to hear her perspective today.
Small businesses drive our economy and are particularly essential
to Idaho's economy. More than 99 percent of Idaho's businesses are
small businesses, employing over 347,000 Idahoans and spurring local
innovation.
Unfortunately, despite all that small businesses do for the
American economy, the Federal Government does not always return the
favor in kind. Too often, the impact on small businesses is not
properly evaluated before misguided government policies are enacted.
The financial burden of increased taxes and compliance costs
resulting from a complicated tax system and regulatory environment
makes it hard for small businesses to make sound financial decisions.
When coupled with uncertainty about future tax policy changes and
Internal Revenue Service enforcement, those decisions become nearly
impossible.
According to the latest National Federation of Independent Business
(NFIB) annual tax survey, nearly two-thirds of small business owners
reported that the administrative burden of the Federal tax code is
significant. Further, 90 percent of small business respondents hired an
outside tax professional to prepare and submit their tax returns.
``Compliance'' and ``complexity'' were determined to be the leading
factors in a small business's decision to hire a tax professional.
While the amount due is not the only tax concern, American small
businesses and workers continue to face elevated inflation, as well as
workforce and supply-chain challenges. Therefore, it is critical that
our tax system promotes U.S. jobs, U.S. manufacturing, and higher wages
for hardworking families.
Pro-growth policies in Republicans' 2017 tax law led to one of the
strongest economies in decades: low unemployment, a low poverty rate,
strong wage growth, high median incomes, increased investment, and
record Federal tax revenues. To give small businesses certainty and
incentive to grow and compete in the domestic and international
economies, we should preserve these policies and explore additional
opportunities to promote growth, increase investment, and encourage
research and development in the United States.
We need to get the government out of the way of the small business
engine of our economy. Removing the disincentive of complex and high
taxes and costly regulations will allow small businesses to go out and
do what they do best: create jobs and growth in the economy by
providing valuable goods and services to their customers.
Thank you to all of the witnesses participating today. I look
forward to hearing from all of you.
______
Prepared Statement of Roger Harris, President, Padgett Business
Services
Chairman Wyden, Ranking Member Crapo, Chairman Cardin, Senator
Young, and members of both the Senate Finance Committee and Senate
Committee on Small Business and Entrepreneurship, thank you for the
opportunity to testify today on the struggles that small businesses
face when it comes to tax complexity.
My name is Roger Harris, and I am the president of Padgett Business
Services based in Athens, GA.
Padgett is a national accounting, advisory, and tax preparation
company with approximately 200 offices across the U.S. that has served
tens of thousands of small business clients for over 50 years. Prior to
becoming president of Padgett in 1992, I ran one of the largest Padgett
franchises with the company for 10 years. I have long been passionate
about the intersection of small business and taxation.
I had the honor of serving as chairman of the Internal Revenue
Service Advisory Council (IRSAC) in 2002 and 2003 and always welcome
the opportunity to provide feedback to Congress on how to improve our
tax system for small businesses. Throughout the pandemic, we saw
firsthand the positive impacts that many of the legislative changes had
on small businesses and other taxpayers as well as some of the
unintended consequences of those policies.
I want to thank both of the committees for putting together this
hearing and for all the work you have done and continue to do on behalf
of small businesses and taxpayers. I also want to acknowledge the
thousands of small businesses that Padgett has worked with over the
years for their hard work and invaluable contributions to the economy.
Our daily work at Padgett is primarily with what would be
considered ``mom and pop'' small businesses. Our clients on average
have less than 20 employees and come from a wide range of industries.
According the SBA's Office of Advocacy, there are currently over 5.4
million businesses with between 1 and 19 employees. Individually they
are small, but collectively they represent a major portion of our
economy and jobs. There are 61.7 million small business employees in
the U.S., comprising of over 46 percent of U.S. employees.\1\
---------------------------------------------------------------------------
\1\ https://advocacy.sba.gov/wp-content/uploads/2022/08/Small-
Business-Economic-Profile-US.pdf.
Small business owners get into business to do the one thing they
love and the 99 things they hate. Dealing with the complexity of our
---------------------------------------------------------------------------
tax system often ranks high on that list of 99.
I do think there are steps that can be taken by Congress, by the
SBA, and by the IRS that can help alleviate some of that complexity and
better meet small businesses where they are.
role of the sba
First, the SBA is a huge resource that we must continue to utilize
and leverage when it comes to communicating with small businesses.
While the SBA and its resource partners cannot replace the role of
accountants and trusted tax advisors, they can play a prominent role in
getting tax information out to small businesses that is both timely and
easy to understand. Whether a business is just forming or is trying to
survive a challenging time, the Small Business Development Centers,
Women's Business Centers, SCORE Business Mentors, and Veteran Business
Outreach Centers can provide invaluable counseling to small businesses
free of charge. They have a unique ability to meet businesses where
they are and speak their language. Often, when the IRS releases changes
or requirements on small businesses, it is written in a way that is
difficult for small business owners to understand. I believe SBA's
resource partners could play an even more robust role in delivering
information on tax changes and opportunities to small businesses in a
concise and comprehensible way.
The Office of Advocacy at the SBA also plays a key role in making
sure proposed regulations coming out of the IRS and Treasury fully
consider the impact on small businesses. SBA's Office of Advocacy has
an attorney specifically assigned to monitor tax regulations and help
ensure the IRS and Treasury are considering potential flexibilities for
small businesses during the rulemaking process. SBA's Office of
Advocacy can and should continue to play an important role in
preventing unnecessary regulatory burden and complexity on small
businesses by helping to stop it before it happens.
role of tax professionals
Most small businesses rely heavily on a tax professional or outside
advisor to help them navigate their taxes. However, our tax
administration system does not always make it easy for tax
professionals to represent small businesses. There are not adequate
digital tools at the IRS for tax professionals representing small
businesses and getting a power of attorney or other authorization on
file can be a long and time-consuming process. The IRS must prioritize
upgrading their systems and building more tools for tax professionals,
which in turn will have an outsized impact on small business as they
navigate the tax system. I have long advocated that there needs to be
adequate funding at the IRS for technology and customer service.
One area where Congress could help is giving the IRS the authority
to regulate tax preparers. Currently, anyone can hold themselves out as
a tax preparer and charge for their services. This often leads to
unqualified individuals making mistakes and harming the small
businesses that hire them. There must be more oversight to ensure a
basic level of competence and ethical standards among those preparing
taxes for businesses and individuals. I appreciate proposed legislation
in the past by Chairman Cardin and others to address this issue.
There is often no difference between ill intent and ignorance when
it comes to taxes--they both can have the same negative result on the
government and the taxpayer.
tax complexity for small businesses
With today's tax code, it is easy to stress the need for
simplicity, but the process of making that a reality is far from easy.
Nobody complains about complexity in the tax code when it saves them
money, they only complain when it costs them money. That said, the more
Congress and the IRS can support and allow cash basis accounting for
small businesses, the more straightforward taxes will be for them. I
applaud the change that was made in the Tax Cuts and Jobs Act that
allows businesses with average annual gross receipts of $25 million or
less to use the cash method of accounting, sparing many small
businesses from having to comply with a variety of burdensome
requirements. The one record that all businesses understand is their
checkbook. They know things are going well when their checkbook is
going up and bad when it is going down. The more the tax code can
follow that method of understanding the simpler it will be for small
businesses.
Despite the fact that most small business owners pay their taxes on
their individual return, another important issue for small businesses
involves the choice of business structure. Decisions on how to
organize, whether as a sole proprietorship, partnership, corporation, S
corporation, or Limited Liability Company (LLC), all impact the
complexity a small business will have to navigate. Nevertheless, these
are often choices that small businesses can leverage for their own
unique advantages, but they must be informed and receive good advice. I
think this is one area where SBA's resource partners can play an
important role in advising new businesses.
In addressing tax complexity for small businesses, however, I think
the most important thing for policymakers is learning from past actions
and examining what worked well and what did not. For example, with
policies that were implemented during COVID-19, there are innumerable
lessons to be learned as we contemplate future policy changes. It is
important to get all of the stakeholders at the table to examine if
there are choices we would make differently next time. The Employee
Retention Tax Credit (ERTC) is an example of a small business tax
policy with tremendous upsides and challenges that would be well-suited
for a thorough analysis to help inform future policy. Ideally, we could
get to a place where the IRS does not just get better at solving
problems, but gets better at preventing them.
In closing, I think this hearing today is a step in the right
direction. I applaud the committees for hosting it and was honored to
participate along with these accomplished small business owners.
______
Prepared Statement of Michael Norris, President and CEO,
Warrant Technologies, LLC
I'd like to begin by thanking you for this opportunity to speak
today on behalf of Warrant Technologies.
Warrant Technologies LLC is a veteran-owned small business focused
on system and software engineering. Founded in 2013, we are
headquartered in Bloomington, IN, and have 3 owning partners. We have
employees in seven States totaling over 50 system and software
engineers, logisticians, and instructional designers. We are CMMI
Software Development Level III-accredited, we are CMMC-compliant with
SPRS score of 110, hold a Top-Secret Facility Clearance, and have a
DCAA Approved Accounting System. We have made use of code sections 174
and 41 expenses and credits from 2018 through 2022.
Warrant is a partner to our DoD customers and a provider in support
of our men and women in uniform. We are proud of to play an active role
in our Nation's defense. Warrant is considered a successful small
business (``SB'')--we've grown from a company of one employee to a
company of 50+ employees and are projected to continue this trend.
SBs reinvest their dollars on improvements in process and tools,
product development, developing technologies, improving infrastructure,
attaining compliance with required standards, marketing, and hiring
corporate leaders and managers such as CFO, COO, CIO, HR, FSO, IT, CPA,
lawyers, consultants--all at indirect cost captured under overhead,
G&A, or R&D.
With the dollars we reinvested as an SB, we developed our business
in the following ways:
Employed 11 interns in 2022.
Competed for work opportunities.
Hired legal and financial consultants (lawyers, CPAs, etc.).
Sent six personnel through advanced training.
Bought operational tools, furniture, software.
Leased office space, paid utilities.
Insurances.
Benefits.
Hired two new corporate officers to manage growth.
You may think--well, those are just the cost of doing business--and
you'd be right. Each of these costs are a critical part of doing
business and they contribute to our economy. At this point in our life
cycle, I conservatively estimate Warrant needs to find an additional
$500K this year to meet growing critical cost of doing business needs.
To effectively manage our continued growth, we project that we
need:
CMMC Accreditation: Cyber compliance with NIST 800. A
government mandate and for good reason but its cost is absorbed
by the company--estimated cost $50-$150K.
CMMI Accreditation: Software development government
(NAVSEA)-endorsed standard giving evidence of a business'
ability to meet DoD software design and development needs--
estimated cost $75K to $150K.
Corporate Office: Hire a contracts officer, human resource
officer, financial analyst, receptionist, and a recruiter--
estimated cost $400K.
Training: On new tools and equipment--estimated cost $80K.
With the dollars we reinvested as a SB, we conducted R&D of new
technologies and product development (one recognized by NASA), we
purchased lab equipment, improved processes, and infrastructure. All of
this resulted in the creation of a new company, Thinker Labs LLC.
As of December 31, 2021, expensing of R&D cost under section 174,
R&D credits under section 41, and the 20-percent pass-through are no
longer permitted. These must now be amortized over 5 years.
Example: The impact on a small business with a net income of $2.5
million dollars, in the 21-percent tax bracket is that in the first
year their annual tax burden goes from $315K to $504K--an increase of
38 percent. This $189K-dollar difference represents a high-risk and
high-impact scenario for any SB--an error in this case would mean
getting a bill some years later for $189K in back taxes, interest, and
penalties--just for this first year.
If these tax changes persist, the impact on small businesses, like
Warrant Technologies, could be devastating. As a small business, I
project our ability to do the following is either severely diminished
or all together lost.
Unable to meet growth and growing cost of doing business
needs.
Unable to invest in R&D.
Outyear audits will result SB finding their expenses
disallowed, and owing penalties and payback of expenses not
amortized. This will result in the demise of many small
businesses.
I know these committees recognize the value our small businesses
play in our Nation's and local economies, our Nation's defense, and our
ability to continue to outpace our advisories in technological
development. The involvement of small businesses in R&D efforts should
be incentivized and rewarded through programs like Small Business
Innovation Research (SBIR), Small Business Technology Transfer (STTR),
and legislation like S. 1739, the Small Business Innovation Voucher
Act.
Fixing the tax burdens that start this year is in the interest of
every small business, our Nation's economic growth, and the ability of
our small business to continue thrive and pursue research and
development efforts. Adoption of the American Innovation and Jobs Act
(S. 866) repeals this change and incentivizes small business growth and
participation in R&D.
I thank the Finance Committee and the Small Business Committee for
their willingness to hear Warrant's statement and act on behalf of the
interest of small business. In particular, I thank Senator Young for
his active leadership in support of the American Innovation and Jobs
Act (S. 866) and his unwavering support of Indiana small businesses.
______
Prepared Statement of Hon. Ron Wyden,
a U.S. Senator From Oregon
Let me welcome everybody to this morning's roundtable jointly
hosted by the Finance and Small Business and Entrepreneurship
Committees. I also want to recognize Chairman Cardin, also an
invaluable member of the Finance Committee, whose idea it was to bring
our two committees together to discuss how small businesses could
benefit from smart improvements to our tax system. I want to begin with
the big improvements to IRS customer service.
One of the key goals of the Inflation Reduction Act was improving
customer service at the IRS, which had been clobbered by a decade of
Republican budget cuts. That investment has already paid big returns.
The phone call response rate went from 10 or 15 percent over the last
few years up to almost 90 percent in this most recent filing season.
Wait times dropped to just a few minutes. IRS staff worked through the
entire backlog of error-free individual returns, which includes returns
from small businesses set up as pass-throughs. The IRS has taken
important steps to prevent future backlogs and make it easier for
taxpayers to resolve issues online.
Taken together, all these improvements should help to prevent a lot
of headaches and reduce the audit rate for small business owners. A
fully funded IRS also helps prevent tax scams, something I expect we'll
hear more about today. I've also been a long proponent of regulating
preparers to root out scammers making money off honest small
businesses.
Unfortunately, Republicans want to repeal the funding that has made
these improvements possible. Just last week, Speaker McCarthy made
clear that the $20-
billion IRS funding cut in the default agreement isn't enough. He wants
to eliminate it all. That would be a major setback for small business
taxpayers who deserve a functional IRS.
Second issue: Democrats want to make sure small businesses and
typical American families get a fair shake with any tax changes.
Republicans want to lock in tax breaks for businesses. That includes
the pass-through deduction they passed in the 2017 Trump tax law--a
provision they claim was designed to benefit small businesses.
The nonpartisan Joint Committee on Taxation did the math, and the
reality is, most of the benefits of the pass-through deduction are
going to the top. In 2019, fully half of the benefits went to
individuals who earned $820,000 or more. That's less than 1 percent of
the country.
Nobody wants to penalize success, but when the American people hear
that Congress is debating tax cuts for small businesses, I don't think
they envision huge benefits going to real estate moguls or Wall Street
investment firms. In my view, the Congress ought to do a better job of
targeting those tax cuts to the real small businesses that power our
economy--local shops and restaurants, garages, and small manufacturers,
for example.
Finally, I expect the tax incentive for R&D to be a big part of
today's discussion. That incentive has support on both sides, and
everybody knew that full expensing for R&D was set to expire at the end
of last year.
With the expiration date approaching, Democrats told Republicans
we'd support extending it as long as Congress also passed tax cuts for
working families. That had been the bipartisan approach on expiring tax
provisions going back several years. It's also a good deal for a lot of
small business owners who benefit from both R&D expensing and the Child
Tax Credit. Republicans, however, refused to negotiate any agreement
that involved the CTC. It's my hope the Congress is able to break the
logjam on these issues in order to help families and small businesses
to get ahead.
So, there's a lot to talk about today, including those issues and
many more. I want to thank all the participants for joining us this
morning, and I look forward to our discussion.
______
Communications
----------
American Rental Association
1900 19th St.
Moline, IL 61265
309-764-2475
800-334-2177
https://ararental.org/
Background
This statement is submitted to the record of the June 7, 2023,
roundtable entitled: ``Tackling Tax Complexity: The Small Business
Perspective.'' The American Rental Association (ARA) represents the
equipment and event rental industry. ARA's 5,600 members operate
approximately 12,000 locations throughout the United States with
locations in every State and Congressional district. ARA members buy
equipment used in construction and related activities as well as
equipment used for staging events large and small. The vast majority of
ARA members are small independent businesses with less than $30 million
in annual revenues, and a majority of those have revenues of less than
$5 million. Moreover, most ARA members are organized as pass-through
entities.
ARA members rent the equipment in their inventories to other businesses
and to the public. ARA estimates that equipment rental companies own
approximately 55 percent of the construction equipment in the U.S. on a
value basis. In 2023, the equipment and event rental industry will
generate about $60 billion in aggregate revenues in the U.S.
Approximately 90 percent of those revenues will come from the rental of
construction equipment and tools used in the construction industry as
well as by small contractors and homeowners. Two general statements
about the equipment and event rental industry are (1) the industry is
very capital intensive, and (2) equipment and event rental companies
are constantly turning over their inventories; retiring older equipment
and replacing it with new equipment.
Equipment and event rental businesses can be characterized using the
concepts of stocks and flows. The inventory (fleet) is the stock of
equipment owned by the company. There is a constant flow of equipment
in and out of the fleet as old equipment is retired and new equipment
is added to the fleet. When flows of assets into the fleet are greater
than the flow of assets out of the fleet, the asset base is expanding.
When the opposite occurs, the fleet contracts. Over the past fifteen
years, from the beginning of the financial crisis through the COVID
pandemic, the equipment and event rental industry has experienced
cycles of significant fleet expansions and contractions.
Annual fleet turnover is necessary because rental equipment experiences
high levels of utilization. It is not uncommon for some assets to be on
rent for more than 60 percent of the time. When equipment is brought
back to the rental business it must be cleaned and maintained to get it
ready for its next rental. Managing an equipment or event rental
inventory is complex and a large part of this is related to financial
management.
Bonus Depreciation/Full Expensing
For more than twenty years, Congress has enacted provisions in the tax
code that created incentives for businesses to increase capital
expenditures that stimulate economic growth. This is one of the reasons
the equipment and event rental industry has essentially tripled in size
since 2000. Another reason is the growing cost of owning and
maintaining equipment that is underutilized by a single owner.
Tax incentives that have helped small equipment and event rental
businesses expand their fleets are Section 179 and Bonus Depreciation
provisions in Section 168. In 2017 the Tax Cuts and Jobs Act of 2017
(TCJA) made Section 179 permanent and indexed for inflation. In 2022,
businesses using Section 179 could expense up to $1,080,000 if their
aggregate investment in qualified equipment was less than $2,700,000.
Once the $2,700,000 limit is reached, the allowable expensing under
Section 179 is reduced dollar-for-dollar. Any amount of expenditures
between $1,080,000 and $2,700,000 could be fully expensed using the
100% bonus depreciation available in tax year 2022. The combination of
Section 179 and 100% Bonus Depreciation has meant that since 2017,
capital intensive businesses like equipment and event rental businesses
have been able to fully expense all of their equipment purchases in
fleets with very dynamic asset flows.
Another factor affecting the equipment and event rental industry is the
significant inflation in equipment costs and the residual value of
these assets on the secondary market. Price increases by as much as 60
percent for some pieces of equipment over the last few years, and the
already high cost of owning and maintaining this equipment has
significantly increased capital outlays for the equipment and event
rental industry. With investment rates equal to about 25 percent of
industry revenues, these price increases for equipment have driven
revenues higher because increasing costs have driven rental rates
higher. As revenues have increased, and the cost of owning and
maintaining these assets has increased, the demand for equipment has
also continued to grow because of the economic environment created by
increases in infrastructure spending as well as renewed spending on
events following the COVID pandemic. The result is that many small
businesses that were strictly covered by Section 179 are now being
pushed into a situation where they need both Section 179 and Bonus
Depreciation if they choose to fully expense their equipment purchases.
Inflated equipment prices mean other ARA members that are small
family-owned enterprises are now exceeding the limits of Section 179
and can only use Bonus Depreciation. Still other equipment rental
companies that are defined as small businesses according to the Small
Business Administration size standards have only been able to use Bonus
Depreciation for the past 20-year period. In 2022, the size standard
for an equipment rental business classified as NAICS 532412
(construction equipment rental) was $40 million in annual revenues.
Under TCJA, Section 168 Bonus Depreciation was set at 100 percent from
2017 through 2022. Beginning in 2023, Bonus Depreciation is reduced to
80 percent with additional 20 percent reductions in 2024, 2025, and
2026, respectively. If these reductions in Bonus Depreciation are
allowed to take effect, equipment and event rental companies will face
a two-edged sword. First, as retired equipment flows out of the fleet
and into the secondary market, the proceeds from those sales will be
subject to capital gains taxes which will be significant because the
assets have a tax basis of zero and used equipment prices are
relatively high. At the same time, new equipment is being purchased to
replace equipment that has been retired and this new equipment cannot
be fully expensed. Thus, the capital gains liability created by the
sale of retired assets will not be offset by a tax write-off created by
expensing the newly acquired assets. The aggregate result will be the
creation of a fiscal drag on the economy because businesses either must
curtail their purchases of new equipment or incur debt to pay the
capital gains taxes that are no longer offset by expensing their
purchases of new equipment. Moreover, if the current provisions of TCJA
go unchanged, the signal to small, capital-intensive businesses is do
not grow too much or you will fall off a tax cliff that could have long
term consequences for the business.
We note that this is not only true for small businesses, but for all
equipment and event rental businesses going forward. However, it will
make small equipment and event rental businesses less competitive vis-
a-vis their larger competitors because smaller firms do not have the
financial resources or flexibility that are characteristic of larger
firms. In addition, Section 1031 for like-kind-exchanges that allowed
businesses to forgo capital gains taxes on exchanges of like-kind
assets was eliminated for business personal property in TCJA. For this
reason, the American Rental Association supports a permanent extension
of the 100-percent expensing provisions of TCJA.
Section 199(A)
TCJA lowered the corporate tax rate from 35 percent to 21 percent. In
an effort to maintain tax rate parity between small and large
businesses the TCJA created Section 199(A). This provision allows
businesses that are organized as pass-through entities to have a
portion of their income taxed at a rate significantly less than the
ordinary individual tax rate. This has allowed small pass-through
businesses in the equipment and event rental industry to remain
competitive relative to their larger competitors with a traditional
corporate structure.
We believe Section 199(A) has been successful in maintaining robust
competition within the equipment and event rental industry. However,
under TCJA, Section 199(A) will expire in 2025 and every small business
using the deductions allowed in Section 199(A) will be subjected to a
massive tax increase. The result will be significantly less competition
in the equipment and event rental industry because small businesses in
the industry will be paying more in taxes instead of buying more
equipment and hiring more employees. In the aggregate, the expiration
of Section 199(A) will create an additional fiscal drag on the economy
causing economic contraction and increases in unemployment. These costs
will be primarily borne by small businesses and their employees but
will ultimately ripple through the economy with negative impacts.
Conclusions
The equipment and event rental industry is a textbook example of a
competitive industry. There are many firms participating in the
industry and barriers to entry are relatively low. While there are
large corporations in the industry, small firms still generate a
significant amount of industry revenues. Moreover, the industry is
decentralized because markets are local in cities and towns large and
small across the U.S. The TCJA created a tax environment that has
allowed the equipment and event rental industry to grow as the demand
for equipment has increased and as the ``sharing economy'' has become
prevalent throughout the U.S. economy. If Congress does not act and 100
percent Bonus Depreciation and Section 199(A) are allowed to expire
there will be a significant and negative impact of the equipment and
event rental industry in particular, but also on the entire U.S.
economy. That is why the American Rental Association fully supports the
permanent extension of 100 percent Bonus Depreciation and Section
199(A).
______
Center for Fiscal Equity
14448 Parkvale Road, #6
Rockville, MD 20853
[email protected]
Statement of Michael G. Bindner
Chairman Wyden and Ranking Member Crapo and Chairman Cardin and Ranking
Member Ernst, thank you for the opportunity to submit these comments
for the record.
The first question to consider is how is a small business defined? The
Small Business Administration standard is 500 employees or less. Of the
33.2 million small businesses, Twenty-seven million are sole
proprietorships with no employees.
According to the NAICS Association, there are more than 18 million
firms with employees. Thirteen million of these have between one and
four. Three million have between 5 and 49 (or 16 million from 1 to 49--
or 43 million businesses counting sole proprietors). There are about
276 thousand firms with between 50 and 500 and 43 thousand with over
500 employees.
What kind of businesses exist in the sole-proprietor/small business
community? Sole proprietors include hobbyists who do home-based sales
or small book volume publishing (I am the latter), gig workers and
consultants. There are two types of consultants or gig workers. One
kind takes small or large contracts from a variety of sources. The
other kind is tied to a single client or gig platform. These employees
have a job by any other name.
Small businesses fall along the same lines. Some are simply open for
business and have the power to negotiate each contract. Others exist in
a franchise system--such as a car dealership or fast food chain--or a
single supplier--for example, Monsanto.
The key question for both enterprises is how tax and economic policy
interacts with the well-being of these business owners and their
employees. Any tax reform should help small firms and consultants which
are not captive of a larger firm continue to do business, while ending
the incentives that larger businesses use to exploit workers and
business owners who are essentially employees, but without the benefits
of employment.
We have several concerns (we being both the Center and those who work
in the small business sector): minimum wages, benefits--especially
healthcare and childcare, family support for both owners and employees,
union rights, equal employment and business opportunity, costs of tax
compliance and the ability to exit a bad job or contract.
Minimum wage, benefit and family support are best served with some form
of government action. This stops bad actors from undercutting those who
would do the right thing by their families.
Benefits (both health and childcare) and family support are currently
provided through a confusing patchwork of programs, from the Earned
Income Tax Credit, Child and Dependent Care Credit and Child Tax Credit
to the Affordable Care Act and health insurance exclusion to corporate
income taxes. We can do better (this time we are the policy community,
both in and out of government and Congress).
Please see the attachment for our current tax reform proposals. We
propose that benefits and family support be provided as an offset to a
subtraction value-added (or net business receipts) tax with offsets for
these benefits.
The average firm should mostly break even--paying out most of what
would otherwise be paid in tax and then supporting a bureaucracy to
administer both tax benefits and government programs. This is where our
proposal is better than the Fair Tax (or should hijack the term)--as
the Fair Tax requires government infrastructure and underperforms in
distributing income (and thus reducing the need for abortions).
These reforms will change some of the calculus behind whether a larger
enterprise abuses employees (both 1099 and franchise) by shedding them
from the enterprise (often illegally) or brings them on as full-time
employees in order to claim the tax advantages of doing so.
If tax rates are high enough and benefits generous enough, this may
move some firms to end their battle with organized labor and their
practice of shunting managers of color to franchisee or subcontractor
status. A related reform would be to reduce small business contracting
requirements as long as fair opportunity exists in the prime
contracting firm (for example, hiring and promotion of all qualified
workers by random selection).
The tax compliance questions boil down to how complicated tax forms and
transaction reporting are in comparison to the current regime. For some
small businesses, little can be done to improve things without
automation--however most firms with any kind of revenue likely already
use advanced data processing.
These tools can be designed to output data files, such as value-added
tax paid for the proposed (credit) invoice goods and services tax and
family support payment information which would be provided to prevent
fraudulent reporting by both workers and employers. The vast majority
of employees in both small and large businesses would no longer be
required to file individual income taxes (those employees or
shareholders receiving less than $500,000 per year).
Capital gains taxes and estate taxes would be replaced by an asset
value-added tax, while graduated income tax payments from 6.5% to 26%
would be paid by employers as a surtax to their subtract VAT filing.
The asset VAT would expand benefits for selling assets to employee-
owned firms to public stock sales (rather than limiting them to private
corporations), thus encouraging more employee-ownership. Employee-owned
firms can expand their operations to pull in franchise holders and
farmers who are reduced to virtual peonage, thus ending their bondage.
Our proposed no-fault unemployment reforms would also help workers to
leave bad jobs.
Thank you for this opportunity to share these ideas with the committee.
Although this hearing was from a week ago, it is being submitted on the
same day as the next hearing of this series--Anti-Poverty and Family
Support Provisions in the Tax Code. Our comments to that hearing have
been submitted already under different cover. As always, we are
available to meet with members and staff or to provide direct testimony
on any topic you wish. Please contact us through the email above to
make this happen, as we have much to discuss.
Attachment--Tax Reform, Center for Fiscal Equity, March 24, 2023
Synergy: The President's Budget for 2024 proposes a 25% minimum tax on
high incomes. Because most high income households make their money on
capital gains, rather than salaries, an asset value-added tax replacing
capital gains taxes (both long and short term) would be set to that
rate. The top rate for a subtraction VAT surtax on high incomes (wages,
dividends and interest paid) would be set to 25%, as would the top rate
for income surtaxes paid by very high income earners. Surtaxes
collected by businesses would begin for any individual payee receiving
$75,000 from any source at a 6.25% rate and top out at 25% at all such
income over $375,000. At $450,000, individuals would pay an additional
6.25% on the next $75,000 with brackets increasing until a top rate of
25% on income over $750,000. This structure assures that no one games
the system by changing how income is earned to lower their tax burden.
Individual payroll taxes. A floor of $20,000 would be instituted for
paying these taxes, with a ceiling of $75,000. This lower ceiling
reduces the amount of benefits received in retirement for higher-income
individuals. The logic of the $20,000 floor reflects full time work at
a $10 per hour minimum wage offered by the Republican caucus in
response to proposals for a $15 wage. The majority needs to take the
deal. Doing so in relation to a floor on contributions makes adopting
the minimum wage germane in the Senate for purposes of Reconciliation.
The rate would be set at 6.25%.
Employer payroll taxes. Unless taxes are diverted to a personal
retirement account holding voting and preferred stock in the employer,
the employer levy would be replaced by a goods and receipts tax of
6.25%. Every worker who meets a minimum hour threshold would be
credited for having paid into the system, regardless of wage level. All
employees would be credited on an equal dollar basis, rather than as a
match to their individual payroll tax. The tax rate would be adjusted
to assure adequacy of benefits for all program beneficiaries.
High-income Surtaxes. As above, taxes would be collected on all
individual income taxes from salaries, income and dividends, which
exclude business taxes filed separately, starting at $400,00 per year.
This tax will fund net interest on the debt (which will no longer be
rolled over into new borrowing), redemption of the Social Security
Trust Fund, strategic, sea and non-continental U.S. military
deployments, veterans' health benefits as the result of battlefield
injuries, including mental health and addiction and eventual debt
reduction.
Asset Value-Added Tax (A-VAT). A replacement for capital gains taxes
and the estate tax. It will apply to asset sales, exercised options,
inherited and gifted assets and the profits from short sales. Tax
payments for option exercises, IPOs, inherited, gifted and donated
assets will be marked to market, with prior tax payments for that asset
eliminated so that the seller gets no benefit from them. In this
perspective, it is the owner's increase in value that is taxed. As with
any sale of liquid or real assets, sales to a qualified broad-based
Employee Stock Ownership Plan will be tax free. These taxes will fund
the same spending items as high income and subtraction VAT surtaxes.
There will be no requirement to hold assets for a year to use this
rate. This also implies that this tax will be levied on all eligible
transactions.
The 3.8% ACA-SM tax will be repealed as a separate tax, with health
care funding coming through a subtraction value-added tax levied on all
employment and other gross profit. The 25% rate is meant to be a
permanent compromise, as above. Any changes to this rate would be used
to adjust subtraction VAT surtax and high-
income surtax rates accordingly. This rate would be negotiated on a
world-wide basis to prevent venue seeking for stock trading.
Subtraction Value-Added Tax (S-VAT). Corporate income taxes and
collection of business and farm income taxes will be replaced by this
tax, which is an employer paid Net Business Receipts Tax. S-VAT is a
vehicle for tax benefits, including
Health insurance or direct care, including veterans' health care
for non-
battlefield injuries and long-term care.
Employer paid educational costs in lieu of taxes are provided as
either
employee-directed contributions to the public or private unionized
school of their choice or direct tuition payments for employee children
or for workers (including ESL and remedial skills). Wages will be paid
to students to meet opportunity costs.
Most importantly, a refundable child tax credit at median income
levels (with inflation adjustments) distributed with pay.
Subsistence-level benefits force the poor into servile labor. Wages and
benefits must be high enough to provide justice and human dignity. This
allows the ending of state-administered subsidy programs and
discourages abortions, and as such enactment must be scored as a must
pass in voting rankings by pro-life organizations (and feminist
organizations as well). To assure child subsidies are distributed, S-
VAT will not be border-adjustable.
As above, S-VAT surtaxes are collected on all income distributed over
$75,000, with a beginning rate of 6.25%. replace income tax levies
collected on the first surtaxes in the same range. Some will use
corporations to avoid these taxes, but that corporation would then pay
all invoice and subtraction VAT payments (which would distribute tax
benefits). Distributions from such corporations will be considered
salary, not dividends.
Invoice Value-Added Tax (I-VAT). Border-adjustable taxes will appear on
purchase invoices. The rate varies according to what is being financed.
If Medicare for All does not contain offsets for employers who fund
their own medical personnel or for personal retirement accounts, both
of which would otherwise be funded by an S-VAT, then they would be
funded by the I-VAT to take advantage of border adjustability.
I-VAT forces everyone, from the working poor to the beneficiaries of
inherited wealth, to pay taxes and share in the cost of government. As
part of enactment, gross wages will be reduced to take into account the
shift to S-VAT and I-VAT, however net income will be increased by the
same percentage as the I-VAT. Inherited assets will be taxed under A-
VAT when sold. Any inherited cash, or funds borrowed against the value
of shares, will face the I-VAT when sold or the A-VAT if invested.
I-VAT will fund domestic discretionary spending, equal dollar employer
OASI contributions, and non-nuclear, non-deployed military spending,
possibly on a regional basis. Regional I-VAT would both require a
constitutional amendment to change the requirement that all excises be
national and to discourage unnecessary spending, especially when
allocated for electoral reasons rather than program needs. The latter
could also be funded by the asset VAT (decreasing the rate by from
19.25% to 13%).
Carbon Added Tax (C-AT). A Carbon tax with receipt visibility, which
allows comparison shopping based on carbon content, even if it means a
more expensive item with lower carbon is purchased. C-AT would also
replace fuel taxes. It will fund transportation costs, including mass
transit, and research into alternative fuels. This tax would not be
border adjustable unless it is in other nations, however in this case
the imposition of this tax at the border will be noted, with the U.S.
tax applied to the overseas base.
______
National Restaurant Association
2055 L Street, NW, Suite 700
Washington, DC 20036
(202) 331-5900
(800) 424-5156
https://restaurant.org/
June 8, 2023
The Honorable Ron Wyden The Honorable Mike Crapo
Chairman Ranking Member
U.S. Senate U.S. Senate
Committee on Finance Committee on Finance
219 Dirksen Senate Office Building 219 Dirksen Senate Office Building
Washington, DC 20515 Washington, DC 20515
The Honorable Ben Cardin The Honorable Joni Ernst
Chairman Ranking Member
U.S. Senate U.S. Senate
Committee on Small Business and
Entrepreneurship Committee on Small Business and
Entrepreneurship
428A Russell Senate Office Building 428A Russell Senate Office Building
Washington, DC 20510 Washington, DC 20510
Re: ``Tackling Tax Complexity: The Small Business Perspective'' Joint
Roundtable (June 7, 2023)
Dear Chairman Wyden, Ranking Member Crapo, Chairman Cardin, and Ranking
Member Ernst,
On behalf of the National Restaurant Association, we appreciate the
opportunity to submit comments to the joint roundtable as it evaluates
tax code complexity and feedback from Main Street businesses. We urge
your support for Main Street restaurant operators struggling with the
rising cost of doing business.
The U.S. restaurant and food service industry is comprised of nearly
one million outlets with a workforce of more than 15 million employees.
The National Restaurant Association (``the Association'') is the
leading business association for the industry, and together with 52
state associations, we serve every restaurant through advocacy,
education, and food safety programs.
Almost every U.S. county has at least three restaurants, and 9 in 10
restaurants are small businesses. Restaurants are the backbone of their
communities, fueling local economic growth, creating jobs, and
promoting togetherness. However, most restaurants only see a profit
margin of 3 to 5% before tax. Rising food, labor and operating costs
cut into these slim margins. Due to the limitation of depreciation and
amortization starting in 2022, restaurant operators are facing a major
spike in their tax obligations.
The Association urges your Committees to advance the AIM Act (S. 1232)
to permanently restore the Earnings Before Interest, Tax, Depreciation,
and Amortization (EBITDA) calculation method for deducting interest on
business debt.
Restaurant operators need the AIM Act to bring back full:
(1) Depreciation to help finance renovations, equipment purchases,
and expansion; and
(2) Amortization to balance loan repayment obligations, some of
which will last 30 years.
To remain competitive, restaurant operators must regularly renovate and
remodel their dining rooms, kitchens, and buildings. Most operators
plan extensive--and expensive--updates every two to three years due to
the high activity of dining areas and heavy use of kitchen equipment.
During these projects, operators keep a close eye on how these expenses
affect cash-on-hand and year-end tax obligations. Limiting the
deduction for depreciation or amortization serves as a tax on
investment, especially amid higher interest rates, freezing budgets and
creating major long-term complexity.
Many restaurant operators took on sizeable loans during the COVID-19
pandemic to keep their businesses afloat. The ability to deduct
interest on business debt under the previous calculation (which
included amortization) is critical to offset the cost of debt financing
for businesses. As lawmakers know, small businesses are already
struggling to repay loans offered under the EIDL program, and losing
amortization worsens their long-term financial prospects.
Without the AIM Act, some restaurant operators will see their overall
tax liability rise by nearly 30 percent.
As an industry that prides itself on welcoming all guests, we encourage
the Senate to work in a bipartisan fashion to advance the AIM Act.
Previous successes, such as the job-saving Employee Retention Tax
Credit and the Work Opportunity Tax Credit, improved through bipartisan
collaboration. These achievements prove that a divided Congress can
still support Main Street economic growth by making commonsense
improvements in the tax code, especially those helping family-owned
businesses.
Thank you for your consideration. We look forward to working with your
Committees.
Sincerely,
Aaron Frazier
Vice President of Public Policy
Statement Submitted by Annette Nellen, CPA
Professor of Accounting and Taxation
San Jose State University
http://www.21stcenturytaxation.com/ \1\
---------------------------------------------------------------------------
\1\ This URL is to a website maintained by Annette Nellen for the
purposes of promoting modernization of tax systems and consideration of
the principles of good tax policy, with opportunity for readers to post
comments at the 21st Century Taxation blog listed at this site. Views
represented at this website and blog are Professor Nellen's views only
and may not represent those of her employer or professional
organizations of which she is a member.
---------------------------------------------------------------------------
Tackling Tax Complexity: The Small Business Perspective
Introduction
I am providing this written testimony for the record of the Roundtable
held on June 7, 2023, on tackling tax complexity for small businesses,
due to my strong interest in tax reform. For many years I have
researched, discussed, lectured, and written about how tax systems can
be improved to reflect how we live and do business today and to follow
principles of good tax policy. In addition to being a CPA and attorney
in the tax field as well as a professor teaching graduate level tax
courses for over 30 years, I am also a sole proprietor. I operate a
small business providing materials and instruction for continuing
education courses for tax practitioners, and editorial and authoring
work for four tax textbooks and other tax materials. Like the majority
of sole proprietors, I have no employees.\2\
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\2\ U.S. Small Business Administration, Office of Advocacy, FAQs,
December 2021 reports that 81% of small businesses in the U.S. have no
employees; https://advocacy.sba.gov/wp-content/uploads/2021/12/Small-
Business-FAQ-Revised-December-2021.pdf.
Complexity is a significant problem for taxpayers. Complexity results
from some types of transactions. It also stems from tax compliance
systems that do not include the best use of technology or uses
technology that is not compatible with other software and technology
used in business operations. Finally, a good deal of complexity stems
from federal, state, and local tax laws that are often more complex
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than necessary or that have not considered simpler approaches.
Simplification is an important principle of good tax policy or tax
system design. Simple tax laws better enable taxpayers to understand
tax systems and comply with them correctly and in cost efficient
manners. When tax rules are unduly complex, compliance costs increase.
In addition, complexity can cause many taxpayers to not take advantage
of provisions that might lower their tax liabilities because they
cannot afford the assistance needed to take advantage of these
provisions or if the provisions are too complex they might not want to
risk any error in claiming them.
Simplicity is closely aligned with the principle of certainty that
calls for clear rules that can be followed with high confidence levels
that they were followed correctly. Simplicity is also closely aligned
with the principle of neutrality that focuses on tax systems serving
the primary purpose of raising revenue for government operations and
minimizing the number of special rules that serve other purposes.
A simpler tax system supports transparency where taxpayers better
understand how tax rules affect them and others. A simpler tax system
is better respected by taxpayers and more likely to be followed
correctly thereby minimizing the tax gap.\3\
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\3\ For a listing of various formulations of principles of good tax
policy, such as from the AICPA, NCSL and others, see Nellen, Policy
Approach to Analyzing Tax Systems; https://www.sjsu.
edu/people/annette.nellen/website/
PolicyApproachAnalyzingTaxSystems.pdf.
In addition to simplicity and its related tax policy benefits, equity
and fairness are also important. Some tax rules relevant to small
businesses are not equitable for various reasons. Some tax rules apply
more harshly or less favorably to sole proprietors and passthrough
entities relative to corporations. Some rules added for simplicity have
focused more on the needs of capital-intensive businesses rather than
ones where human capital and intangibles are more important. Some
changes suggested in my testimony will address both simplification as
well as equity, such as where a simplification might also make the tax
---------------------------------------------------------------------------
system more equitable.
My testimony offers suggestions for reducing tax law complexity;
several of these suggestions will also make the tax system fairer and
more equitable. These suggestions are categorized as follows:
I. Make simplification a focal point in any tax reform activity.
II. Modernize tax rules to better reflect how small businesses
operate today.
III. Fix tax rules that are unnecessarily complex.
IV. Implement new approaches to simplify compliance.
V. Promote tax literacy.
I. Make simplification a focal point in any tax reform activity.
In making any tax law change, this question must be addressed:
Is a simpler approach possible?
To answer this, consideration must be given to whether the change
requires new recordkeeping by the taxpayer, multiple calculations to
identify a best result, whether the taxpayer will need to hire an
expert to comply with the rule or take advantage of a tax preference,
whether the IRS must issue guidance and if yes whether they are given
sufficient time to do so, and whether states are likely to follow the
rule or will taxpayers have different calculations and records for
federal and state compliance.
For a small business tax reform roundtable in July 2013, I offered the
following suggestions for simplification which are still relevant ten
years later: \4\
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\4\ Senate Committee on Small Business and Entrepreneurship, Small
Business Tax Reform: Making the Tax Code Work for Entrepreneurs and
Startups, July 17, 2013; see link to testimony at https://
www.sbc.senate.gov/public/index.cfm/2013/7/small-business-tax-reform-
making-the-tax-code-work-for-entrepreneurs-and-startups.
Simplify! If you cannot describe in a few simple sentences how a rule
works or it requires alternative calculations, the rule is not simple
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and either needs to be revised or repealed.
a. Recognize that for small businesses, simplification may trump
accuracy. For example, a standard deduction for home office expenses
may be warranted to simplify compliance. Or, tax forms may need to be
consolidated, such as is allowed for employers of household employees.
b. Avoid temporary provisions and numerous changes that complicate
the tax law and increase compliance costs.
c. Simplify depreciation by expanding Section 179 to a permanent,
inflation-
adjusted large dollar amount that also covers all intangible assets,
such as acquisition of a domain name.
d. Avoid new complexities disguised as small business benefits,
such as a deduction for domestic business income of qualified small
businesses. Lower tax rates and simplicity are the best tax benefits.
2023 update: With IRC Section 199A, Qualified business
income, enacted by the Tax Cuts and Jobs Act of 2017, for 2018
through 2025, a business income deduction exists. In effect,
this is a rate reduction but with more complexity than likely
would exist with a lower rate structure for an individual's
business income. The extension of Section 199A should consider
how it can be simplified.
e. Find ways to consolidate duplicative provisions, such as
multiple retirement plan options for sole proprietors.
f. Require administrative alternatives to compliance with
regulations found to exceed a minimum complexity tolerance level for
small businesses.
Another approach to increase the focus on simplification is to obtain
comments from tax practitioners who serve small businesses for advice
on how any proposal can be simplified.
II. Modernize tax rules to better reflect how small businesses operate
today.\5\
---------------------------------------------------------------------------
\5\ Several of the modernization and simplification suggestions in
this testimony are also listed in a 2019 AICPA position paper:
Recommendations for Tax Law Changes to Reflect How Small Businesses
Operate in the Modern World, https://us.aicpa.org/content/dam/aicpa/
advocacy/tax/downloadabledocuments/20190320-tec-small-business-
modernization.pdf. The author of this testimony was one of the drafters
of this 2019 position paper.
a. Allow all businesses to deduct state and local taxes rather
than follow a 1944 rule that treats these business income taxes as
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itemized deductions.
The Tax Cuts and Jobs Act added a $10,000 ``SALT cap'' for
individuals while corporations have no SALT cap. One rationale
for the cap for individuals is that since 1944 when the term
``adjusted gross income'' was added to the law, state and local
taxes that are not imposed directly on a sole proprietor or
passthrough entity are viewed as indirect taxes allowed as a
deduction from AGI rather than for AGI. For modernization and
fairness, individuals should be allowed to determine how much
state and local income taxes were paid on business income
reported on Form 1040 and deduct that amount for AGI.
For partnerships and S corporations, this will eliminate the
need for elective passthrough entity taxes (PTET) that most
states have enacted, as allowed by Notice 2020-75. This will
provide a good deal of simplification for the entities and
owners, as well as equity for sole proprietors who are not
eligible to participate in the state PTET regimes.
b. Modernize and simplify the term ``tax shelter'' as used at IRC
Sections 448 and 461(i).
Since the Tax Reform Act of 1986, the term tax shelter has
been relevant to determine the overall accounting method of
certain entities. The Tax Cuts and Jobs Act of 2017 made this
term relevant for accounting methods for inventory,
capitalization rules, and certain long-term contracts. One way
an entity might be a ``tax shelter'' is meeting the definition
of a syndicate as defined at IRC Section 1256(e). This
definition pre-dates state law changes that allow the LLC
business entity. A business that meets the definition of a
``tax shelter'' will not be allowed to use simpler accounting
methods but instead will be required to use the accrual method,
inventory accounting rules, and the uniform capitalization
rules of IRC Section 263A.
Today, a small business might be formed as an LLC with
financing provided by some owners who will not be involved in
running the business. If over 35% of losses are allocated to
limited entrepreneurs (inactive owners), the entity is a tax
shelter even though it is running a real business (and might
just have start-up losses or some bad years). The definition
needs to be modernized such as to only be defined as a tax
shelter per IRC Section 6662(d) (having a significant purpose
of tax avoidance or evasion).
c. Modify or remove rules that operate in conflict with recent
simplifications for accounting methods and expensing.
The Tax Cuts and Jobs Act allows most small businesses (other
than tax shelters) to use the cash method of accounting, avoid
capitalization rules of IRC Section 263A, and expense tangible
personal property and software up to $1 million per year
(adjusted for inflation) (IRC Section 179). However, if a
business acquires intangible assets, such as a customer list or
package design, or has IRC Section 195 start-up expenditures
greater than $50,000, it will be amortizing these items over 15
years.
Changes should be made to allow expensing of acquired
intangibles, and start-up costs under IRC Sections 195, 248 and
709, provided the total outlay for the year is within the IRC
Section 179 expensing limitation, adjusted for inflation.
d. Remove the exclusive use requirement for home office
deductions.
Modern life makes it unlikely that anyone uses a home office
only for business activities. Most people, for example, have a
smartphone in their hands and might get a personal call or text
message or use a weather app while in their home office.
An alternative would be to allow a home office deduction only
if the space is used over 50% for business and to reduce the
deduction based on the percentage of personal use of the space,
such as based on time. Offering a standard home office
deduction, such as allowed by Rev. Proc. 2013-13, would be
helpful, with the amount adjusted annually for inflation (and
no exclusive use requirement, but adjusting the standard
deduction for the percent of personal versus business use of
the space based on an average week of use).
e. Increase the $400 threshold for when self-employment taxes
start to apply.
The $400 threshold at IRC Section 1402(b) has been in place
for decades and is not adjusted for inflation. Today, a self-
employed entrepreneur might easily reach this threshold in
their first week of business but not yet be ready (or aware) to
make estimated tax payments (owed once taxes income and self-
employment taxes exceed $1,000). To simplify and reduce the
risk of owing penalties for failure to make estimated tax
payments, the $400 amount should be increased and adjusted for
inflation.
III. Fix tax rules that are unnecessarily complex or inequitable.
a. Restore IRC Section 174 on R&D expenditures to the rules that
existed from 1954 to 2021.
In 1954, IRC Section 174 was added to allow research or
experimentation expenses to be currently deducted. This is not
only an incentive to encourage R&D, but a simplification
measure. Without expensing, these expenditures would have to be
capitalized and amortized over their useful life (unless a life
is provided by statute). Expensing also eliminates the need for
taxpayers to determine how much of their indirect expenditures
(such as administrative costs) are attributable to R&D
activities. Instead, these costs are generally either
deductible under IRC Section 174 or Section 162 as ordinary and
necessary business expenses.
The Tax Cuts and Jobs Act changed Section 174 for tax years
beginning after December 31, 2021 to require R&D expenditures
to be capitalized and amortized over 5 years for domestic
research and 15 years for foreign research. This adds
considerable complexity for businesses of all sizes in
identifying all of their R&D costs (particularly indirect G&A
type costs) and increases recordkeeping requirements.
b. Simplify worker classification rules using a safe harbor
checklist.
It is not always easy to determine if a worker, particularly
one working part-time or irregular hours, is an employee or a
contractor. The IRS should be allowed to create a questionnaire
that leads to a result of contractor or employee. Employers who
properly use the questionnaire to classify workers cannot be
required to amend past filings, but if the IRS determines that
the worker is misclassified, any reclassification would be
prospective only (assuming the employer honestly answered the
questions).
This questionnaire can also remind the employer of the
relevant withholding and information reporting rules for the
answer reached, with links to the IRS website for further
information.
c. Reform ``hobby'' rules for equity and possible improved
compliance.
IRC Section 183, Activities not engaged in for profit,
imposes limitations on deductions for activities that generate
revenues but not IRC Section 162 deductions. Under this
provision, deductions are allowed up to the amount of gross
income from the ``hobby'', with gross income measured as
receipts less cost of sales. The allowed deductions though are
only deductible if the taxpayer itemizes deductions and are
treated as miscellaneous itemized deductions subject to the 2-
percent-of-AGI threshold of IRC Section 67. For 2018 through
2025, such deductions are not allowed at all.
IRC Section 183 should be reformed to treat the allowable
deductions as deductible for AGI, but still limited to gross
income without any carryforward if deductions exceed gross
income. The Joint Committee on Taxation defines the ``normal
structure'' of the individual income tax as including
deductions for investment and employee business expenses.\6\
The logic for this is that these expenses are incurred to
generate taxable income and a ``normal'' income tax would allow
such deductions. This argument also justifies allowing a
deduction for the reasonable expenses of producing hobby
revenues.
---------------------------------------------------------------------------
\6\ JCT, ``Estimates of Federal Tax Expenditures for Fiscal Years
2022-2026,'' JCX-22-22 (December 22, 2022), page 4; https://
www.jct.gov/publications/2022/jcx-22-22/.
Another benefit of reforming IRC Section 183 is that it may
reduce the inclination some taxpayers might have to treat a
---------------------------------------------------------------------------
hobby as a business in order to claim the deductions for AGI.
d. Simplify multistate rules involving commerce clause matters.
Businesses of all sizes face a good deal of variation among
states as to when they have income or sales tax nexus in the
state, or when they must start state income tax withholding for
an employee temporarily working in the state.
Congress should continue hearings on these matters and work
with states and businesses to develop uniform rules that will
provide certainty and simplification to businesses, and likely
improved tax compliance for the states.
IV. Implement new approaches to simplify compliance.
a. Make compliance as simple as online banking and buying goods
and services online.
As evidenced by many uses of technology today, tax compliance
can be simplified via better uses of technology by taxpayers
and the IRS. For example, a small business is likely to keep
records using software. It is also likely to use a debit/credit
card reader for customer payments. It is possible today for
most small businesses to have all of their revenue and
expenditures recorded and handled electronically. This approach
means digital records exist where tax compliance software can
use that data to calculate taxes at any moment in time.\7\
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\7\ See Nellen, ``Let's say `goodbye' to the April 15 due date,''
The Hill, April 17, 2021; https://thehill.com/opinion/finance/548831-
lets-say-goodbye-to-the-april-15-due-date/.
Software could also use the appropriate digital data to not
only prepare income tax returns, but also information returns
such as Form 1099-NEC a business needs to file with the IRS and
---------------------------------------------------------------------------
contractor if paid over $600 during the year.
All efforts should be made including appropriate funding for
the IRS and to help small businesses set up efficient digital
records to streamline tax compliance.
b. Allow co-owners of a start-up business to elect qualified joint
venture status for the first few years.
IRC Section 761(f) allows a married couple to elect to treat
a business they jointly own and operate as a ``qualified joint
venture'' rather than as a partnership. The couple files two
matching Schedules C rather than a Form 1065 partnership
return. This is simpler for the couple and enables both spouses
to pay into the Social Security system.
Filing two Schedules C is much easier than filing a
partnership return including a Schedule K-1 (as well as
Schedule K-3) to each partner.
The qualified joint venture option should be expanded to make
it available to equal owners of any business (perhaps limited
to two to four equal owners). Schedule C could include a box
for making the election. To avoid any concern about disclosure
of each owner's SSN to the other owner(s), each owner could be
required to obtain an EIN to enable the IRS to confirm that
each owner filed an identical Schedule C. Any concern about the
need to file as a partnership can be addressed by only allowing
qualified joint venture status for the first three years or
until gross receipts exceed a certain threshold.
Qualified joint venture status should also be allowed even if
the business is formed as an LLC. States should be highly
encouraged to conform to this broadened qualified joint venture
option to truly provide simplification to small business
owners. Also, the ease of this filing compared to filing a
partnership return should also improve compliance.
c. Broaden penalty waiver for the first year or two for a small
business that has exercised reasonable efforts to comply.
The compliance obligations under federal and state tax laws
and other laws a business may be subject to can be
overwhelming. While new businesses should take time to learn
about these obligations prior to starting their business, it is
easy to overlook certain rules or not be aware they don't fully
understand them. To encourage compliance and not set a new
business back or perhaps put them out of business due to
penalties, reasonable cause should be applied broadly to reduce
penalties while also providing information and assistance to
prevent a repeat of the inactions that led to the penalties.
For example, a new business owner might not be aware of the
need to file Form 1099-NEC if they pay a contractor $600 or
more. Also, in the early years, they might not be able to
afford to hire a tax adviser who can help them with all of
their tax obligations.
V. Promote tax literacy.
a. When a taxpayer requests an EIN for a new business, the IRS
should at that time also send (electronically and/or by the US Post
Office) information about tax obligations of a business in a form
understandable by a layperson.
b. Provide funding to the IRS and SBA to run live, online
workshops for new business owners on specific topics relevant to
helping the taxpayer understand their tax obligations and to ask
questions.
While there are numerous publications at the IRS website that
can help a new business owner understand their tax obligations,
they can be overwhelming and sometimes not specific enough such
as to explain estimated tax payments and information reporting
obligations.
An example of such workshops can be found at the California
Department of Tax and Fee Administration (CDTFA) website that
cover a multitude of topics such as recordkeeping, navigating
the CDTFA website, and ones specific to particular
industries.\8\ Other states might have similar workshops that
are examples of ways to help business owners understand their
tax obligations.
---------------------------------------------------------------------------
\8\ CDTFA, Tax Education Events; https://www.cdtfa.ca.gov/seminar/.
---------------------------------------------------------------------------
c. Find ways to promote and fund tax literacy activities.
Any federal funding of financial literacy activities should
be sure to include an introduction of federal tax obligations
of a new business. STEM activities funded by the government,
and similar ventures that reach high school and college
students, should also be encouraged or required to offer tax
education because many of these students will become self-
employed entrepreneurs.
______
Small Business and Entrepreneurship Council
800 Connecticut Ave., NW, Suite 300
Washington, DC 20006
(703) 242-5840
https://sbecouncil.org/
U.S. Senate
Committee on Finance
219 Dirksen Senate Office Bldg.
Washington, DC 20510-6200
U.S. Senate
Committee on Small Business and Entrepreneurship
428A Russell Senate Office Bldg.
Washington, DC 20510-6200
On behalf of the Small Business and Entrepreneurship Council (SBE
Council), thank you hosting the important roundtable on ``Tackling Tax
Complexity: The Small Business Perspective'' and for the opportunity to
submit a statement for the record. There is a long list of policy
measures that Congress can consider to promote tax code simplicity and
certainty for small businesses, which can help to fuel
entrepreneurship, innovation, small business growth and a vibrant
competitive economy. This statement will focus on immediate expensing
for qualified R&D expenditures, and our organization's support for
restoring, enhancing and making permanent this important measure. SBE
Council supports the bipartisan ``American Innovation and Jobs Act''
introduced by Senators Maggie Hassan (D-NH) and Todd Young (R-IN) in
the U.S. Senate, and the bipartisan ``American Innovation and R&D
Competitiveness Act'' introduced by Representatives Ron Estes (R-KS)
and John Larson (D-CT) in the U.S. House.
As background, SBE Council is an advocacy, research and education
organization dedicated to promoting entrepreneurship and protecting
small businesses. For nearly 30 years, SBE Council has worked to
advance a wide range of policy and private sector initiatives to
improve the ecosystem for strong startup activity and small business
growth. Our network of more than 100,000 member supporters, including
entrepreneurs and small business owners, state and local business
organizations, corporate partners and associations work with us to
strengthen the environment for entrepreneurship, investment, innovation
and job creation. Since our founding in 1994, SBE Council has helped to
strengthen the ecosystem for small business and entrepreneurial success
not only in the U.S., but across the globe.
Tax Certainty Is Critical During This Period of Time
Inflation and economic uncertainty continue to bear down on small
business America. On top of high prices, small firms are enduring labor
shortages and higher labor costs, a more difficult time accessing
capital, and an economy that remains challenging. That is why Congress
must identify practical solutions to help entrepreneurs through this
uncertain economic period, and beyond.
Small business owners and their employees across industries have had to
continuously innovate in order to survive and thrive over the last
several years. While the COVID economy imposed significant burdens and
restrictions on small businesses, digital tools and changing consumer
needs provided opportunities for innovation and new risk-taking. Many
entrepreneurs and new startups tapped into immediate R&D expensing to
support innovative investments and business growth.
For several decades, American businesses of all sizes have expensed R&D
investments in the same year they occurred. This tax measure has helped
to fuel hundreds of billions of dollars in R&D investments each year,
and by extension has powered U.S. innovative leadership in the global
marketplace. The tax credit's value to U.S. economic and technological
leadership alone should move Congress to not only restore the credit
but improve it so that more startups and new firms can effectively
utilize it. The stakes are quite high for this expensing measure.
Failing to restore immediate R&D expensing would put all American
businesses--but especially small businesses--at a competitive
disadvantage. If not restored, the change in R&D tax credits would
require companies to amortize their R&D expenses over five years. That
extended timeline significantly limits businesses' ability to develop
new products, from medical devices to everyday consumer products. For
smaller firms operating on thin margins and in a competitive and
challenging environment, the inability to expense R&D costs for a given
year means they cannot recover those costs in the same year. This makes
it even more difficult for small businesses to effectively compete,
invest, and take on bigger risks. Moreover, many small businesses are
now looking at an expensive tax bill that threatens the competitiveness
and innovative capacity of their firms, and the survival for a
surprising number of firms.
Costly Impact for Small Businesses
In a new SBE Council/TechnoMetrica survey that was released on June 6--
``Emerging Technology, Innovation and Small Business''--we specifically
explore the small business impact of not restoring immediate R&D
expensing. The results reveal harm and damage for our economy, local
economies, investment, employees, and to the small businesses who have
utilized this tax incentive.
The survey reveals that 29% of the small businesses we surveyed used
immediate R&D expensing, and that 72% of those business owners who
reported they used it knew that the write off was no longer available.
So, for 28% of small business owners who used this tax incentive but
were unaware that it is was no longer available, this was shocking news
for many.
[GRAPHIC NOT AVAILABLE IN TIFF FORMAT]
In terms of financial impact, the small business owners we surveyed
reported that the new (and unexpected for some) tax burden would be
significant (see following two graphs). The median ``tax hit'' for
small businesses is a 32% increase in their tax bill. The median dollar
estimate is $59,000. For some firms, the burden is much higher.
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
The negative effects of ending immediate R&D expensing extends
beyond the financial strain on businesses. Indeed, 35% of small
business owners report they will need to borrow money to pay the new
tax bill, and 19% report that their firm may go out of business. Other
impacts include: holding off profit sharing for employees, decreased
investment in future innovations, scaled-back hiring plans, reduced
employee benefits, laying off employees, and forgoing compensation for
the owners or founder.
[GRAPHIC NOT AVAILABLE IN TIFF FORMAT]
Not surprisingly, small business owners that have utilized
immediate R&D expensing overwhelmingly support bipartisan legislation
to restore and make it permanent. Approximately 86% of small
enterprises support a bill that aims to make immediate expensing of R&D
costs a permanent provision, with additional enhancements for small
businesses. Only 6% oppose this legislation, while 8% remain unsure.
As an important side note, I would like to add that the firms we
surveyed are true small businesses. Of the 461 small businesses
surveyed, only 11% are firms with between 51-100 employees. The
remainder have 50 employees and fewer. The median number of employees
on the payroll of small businesses surveyed was 11.5, and 36% have
between 2 and 5 employees. These are the small businesses that drive
innovation and local economies. Therefore, a new ``tax hit'' on the
magnitude of between $25,000-$50,000 or more is very significant. It is
likely why we see that 19% of the business owners we surveyed report
that they may need to close the business due to this new financial
burden. We anticipate that many of these businesses will also have a
more difficult time accessing the loans that are needed to pay these
new tax bills.
Challenging economic forecasts on top of the enduring pain points that
have kept small businesses reeling for several years demand a policy
response that will promote investment, certainty, and relief. Measures
that stand behind and support the innovative practices and investments
of American small businesses are especially important now--for boosting
the economy, moving to full recovery, and reaffirming America's role as
an innovation powerhouse.
Small business owners and their employees need our elected leaders to
come together on key issues such as this one. Immediate R&D expensing
must be restored, made permanent, and hopefully enhanced without delay.
Please let SBE Council how we can help the committee in advancing this
important issue, or answering any questions you may have.
Thank you for your consideration in submitting this statement into the
official record of this important hearing.
Respectfully,
Karen Kerrigan
President and CEO
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