Roundtable Discussion on Tackling Tax Complexity: The Small Business Perspective (Senate Small Business Committee hearing, June 7, 2023)
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The printed record of a joint hearing, S. Hrg. 118–671, titled Roundtable Discussion on Tackling Tax Complexity: The Small Business Perspective, held June 7, 2023 before the Senate Committee on Finance and the Committee on Small Business and Entrepreneurship and printed in 2025. Ron Wyden (Finance) and Benjamin L. Cardin (Small Business) opened, with Mike Crapo and Todd Young. Five small-business witnesses testified: Alicia Chapman of Willamette Technical Fabricators, Portland, OR; Avonette Blanding of Blanding Financial Solutions, Baltimore, MD; Stephanie Camarillo of Molly Maid of Boise, for the National Federation of Independent Business; Michael Norris of Warrant Technologies, Bloomington, IN; and Roger Harris of Padgett Business Services, Athens, GA. An SBE Council statement in the appendix urges that immediate R&D expensing be restored and made permanent.
Summary drafted by a model from the document's text below and checked by script against that text before publication. It is a navigation aid, not a reading of what the document proves. Where AI is used
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“Roundtable Discussion on Tackling Tax Complexity: The Small Business Perspective (Senate Small Business Committee hearing, June 7, 2023).”
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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
(
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)
CONTENTS
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, Com-
mittee 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, Port-
land, 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, Bloom-
ington, 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
(III)
IV
Page
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, Investiga-
tions, 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 Assist-
ant. 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 Commit-
tees. I also particularly want to recognize Chairman Cardin. He
has been an extraordinary member of the Senate Finance Com-
mittee. He tells me I should give up efforts to talk him out of re-
tirement.
I will tell you, it was his idea to bring together our two commit-
tees and discuss how small businesses could benefit from smart im-
provements to the Federal tax system. So, we want to begin with
big improvements to IRS customer services.
(1)
2
One of the key goals of the Inflation Reduction Act was improv-
ing customer service at the IRS. That had been clobbered over the
years by a decade of Republican budget cuts. The investment is al-
ready paying significant returns. The phone call response rate went
from 10 or 15 percent over the last few years, up to almost 90 per-
cent 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 reduc-
ing them for small business owners—are something Senator Crapo
and I have talked often about. A fully funded IRS also helps pre-
vent 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 Sen-
ator 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, Speak-
er 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 busi-
nesses 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 Amer-
ican people hear that Congress is debating tax cuts for small busi-
nesses, I do not think they envision huge benefits going to real es-
tate moguls or Wall Street investment firms.
So it is my view that Congress ought to do a better job of tar-
geting tax cuts to the real small businesses that drive the Oregon
economy and economies from coast to coast. Local shops, res-
taurants, 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 Repub-
licans we would support extending it, as long as Congress also
passed tax cuts for working families. That had been the bipartisan
3
approach—let me underline that—the bipartisan approach on deal-
ing with expiring tax provisions for many years. It also is a good
deal for a lot of small business owners who benefit from both re-
search and development expensing and the Child Tax Credit. Re-
publicans, however, refused to negotiate any agreement that in-
volved the CTC. It is my hope that Congress is able to break the
logjam on these issues in order to help families and small busi-
nesses 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 morn-
ing, 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 ap-
pendix.]
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 account-
ants and tax lawyers that can handle the challenges of our tax
code. And so, often they miss out on benefits that they would other-
wise 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 ex-
pand 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 dif-
ficult 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.
4
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 provi-
sions 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 provi-
sions, 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 corpora-
tions, which are our larger corporations—there is an issue of fair-
ness 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 bur-
dens or help they provide for small businesses.
We will hear about 1099–K reporting; the pass-through provi-
sions that were enacted in the 2017 tax bill; section 179 expensing;
start-up expensing; R&D changes that the chairman already men-
tioned. 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 effec-
tive 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 chal-
lenges?
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 Busi-
ness 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 busi-
ness 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 wel-
come 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?
5
OPENING STATEMENT OF HON. MIKE CRAPO,
A U.S. SENATOR FROM IDAHO
Senator CRAPO. Thank you, Mr. Chairman. Before I give my for-
mal 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 busi-
nesses, 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 de-
bate 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 state-
ment. Whatever side of that you are on, we need to hear that, be-
cause 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 Sen-
ate. 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 essen-
tial to Idaho’s economy. More than 99 percent of Idaho’s businesses
are small businesses, employing over 347,000 Idahoans and spur-
ring local innovation. Unfortunately, despite all that small busi-
nesses 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 evalu-
ated before misguided government policies are enacted. The finan-
cial 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 be-
come nearly impossible. According to the latest National Federa-
tion of Independent Business annual tax survey, nearly two-thirds
6
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 out-
side tax professional to prepare and submit their returns. Compli-
ance 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 crit-
ical 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 pro-
mote growth, increase investment, and encourage research and de-
velopment in the United States.
We need to get the government out of the way of the small busi-
ness 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 cus-
tomers.
Thank you to all of the witnesses participating. I look forward to
hearing from you.
[The prepared statement of Senator Crapo appears in the appen-
dix.]
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 sched-
ules 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, innova-
tive 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 fa-
cilitating growth, while cutting down on unnecessary complexity in
our tax code. In my lifetime, all net new job creation in this coun-
try has occurred through the creation of new firms and young
7
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 in-
novation. 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 fac-
ing 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 busi-
nesses of all sizes, it is particularly harmful to small businesses,
who cannot readily absorb the sudden, and in many cases unex-
pected, increased tax liability.
Amortization dramatically decreases small businesses’ cash on
hand, and it diminishes the amount of capital they are able to in-
vest in R&D in future years. I have personally heard from count-
less 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 amorti-
zation.
The shift to amortization comes at a time when our foreign com-
petitors, namely China, are continuing to increase their R&D in-
centives 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 mat-
ter of national security—and allow our competitors to surpass our
great Nation in the development of critical products and tech-
nologies. 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 sec-
tion 174 full and immediate expensing, thereby incentivizing small
businesses to continue to invest in R&D and propel the U.S. econ-
omy 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 busi-
nesses are struggling. It is critical that we pass my American Inno-
vation and Jobs Act this year—this year—to ensure we continue to
out-compete and out-innovate our international rivals.
Thank you, Mr. Chairman.
8
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 ex-
traordinarily important research and development tax credit issue.
Our committee has a history of working on big issues in a bipar-
tisan 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 legisla-
tion 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 in-
dustry partners for the Oregon Manufacturing Innovation Center.
Prior to that role, she worked at the Institute for Sustainable Solu-
tions, and she was recently appointed by the Governor to be on the
Commission for Women and the Oregon Transportation Commis-
sion.
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 op-
portunity 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 dif-
ference.
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 for-
mal 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
9
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 every-
thing 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 fi-
nancial literacy to increase access to capital.
She is an account subject matter expert with over 30 years of ex-
perience, and she has used that expertise as an instructor for Mor-
gan 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 op-
portunities to the traditionally underserved communities, the mi-
nority 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 Balti-
more 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 op-
portunity to say more about Stephanie. Stephanie Camarillo is the
owner of Molly Maid of Boise and the Treasure Valley, a residen-
tial 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 edu-
cation, helping employees learn how to make wise investment deci-
sions for their family’s future.
Molly Maid currently employs 42 people and has received numer-
ous 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 Spe-
cialist Master Chief. They do not give those away. Over the years,
10
Mike has carved a path for himself in the tech industry, with lead-
ership roles at NOVONIX corporation and Tristar Engineering, be-
fore 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 engineer-
ing.
I want to thank Mike for participating in today’s roundtable and
serving as an example here in Washington of Hoosier ingenuity, in-
tegrity, 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 Ad-
visory Council. He was Chair for 2002 and 2003, and he is active
in the National Association of Enrolled Agents, is entitled to prac-
tice 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 trans-
portation 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 Or-
egon 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 Depart-
ment 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 fi-
nalize our 2022 tax returns, and we were forced to file for an exten-
sion 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 re-
quire us to amortize these expenses over multiple years, especially
11
compared to our competitors, which are primarily in China, and
the substantial benefits that they are receiving from their own gov-
ernment.
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 quali-
fied 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 unex-
pected bill from the IRS 2 years later. They had provided an erro-
neous 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 specifi-
cally 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 per-
sonally. I have been trying to reach a person at the IRS. I am en-
couraged 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 con-
tinue 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 assist-
ance, both to file our taxes and to continue to follow up on these
overdue refunds. While we wait for these refunds, we are essen-
tially 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 appen-
dix.]
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 oppor-
tunity 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 21⁄2 years I have been supporting the BMB program
of Morgan State University.
12
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 larg-
er 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 to-
wards 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 busi-
nesses. Hopefully, it will increase benefits for minority-owned busi-
nesses, 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 ses-
sion 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 indus-
tries, related to small businesses and the taxes just for those indus-
tries, 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 appen-
dix.]
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 unaccept-
able, and we are going to be pushing them very, very hard to
change it.
13
It may be due to algorithms; it may be due to a variety of consid-
erations. 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 in-
strumental in creating section 199A, which I am going to speak to
here.
So, my name is Stephanie Camarillo, and I have owned a resi-
dential 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 num-
ber of employees—are single moms.
Some are from immigrant families. They are hardworking indi-
viduals, 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 intel-
ligent, 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,
14
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 sub-
stantial 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 appen-
dix.]
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 success-
ful 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 proc-
esses and tools; product development; developing technologies; im-
proving infrastructure; attaining compliance with required stand-
ards; 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 addi-
tional $500,000 this year to meet our critical costs of doing busi-
ness.
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
15
its cost is absorbed by the small business. Estimated cost: $50,000
conservatively; probably more accurately $150,000. CMMI accredi-
tation: 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. Es-
timated 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 re-
sulted 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 rep-
resents 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 dev-
astating. As a small business, I project our ability to do the fol-
lowing 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 ex-
penses 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 busi-
nesses and the role they play in our Nation and local economies,
our Nation’s defense, and our ability to continue to outpace our ad-
versaries 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 Busi-
ness 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 busi-
ness growth and participation in R&D.
I thank the Finance Committee and the Small Business Com-
mittee for the willingness to hear Warrant’s statement and act on
behalf of the interests of small business. In particular, I thank Sen-
ator Young for his active leadership and support of the American
16
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 cus-
tomers 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 busi-
nesses, 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 Inter-
nal 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, be-
cause 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 mis-
takes. I think we are all sitting here and suffering potentially from
a very well-intended piece of legislation that created the Employee
17
Retention Credit, and we are hearing problems about delays in get-
ting 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 prob-
lems—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 in-
vestment 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 op-
tions—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 won-
18
dering if Congress, if you could potentially work on rewarding em-
ployees 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 pro-
moted her. She is losing—by her promotion, she is losing $700 a
month in benefits by accepting this promotion. There is no incen-
tive 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 em-
ployee 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 appre-
ciate 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 im-
pacted by the criminal justice system, and like Ms. Camarillo, we
really invest all of our earnings back into our workforce and our
community.
19
So every dollar that I do not have to waste on taxes and pen-
alties 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 com-
petitive 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, col-
leagues, 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 can-
not figure out the tax code on their own. They have to hire profes-
sionals 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 Wom-
en’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 avail-
able.
How effective have they been in dealing with the tax issues? I
know they are stressed also on resources, but have they been use-
ful?
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 re-
sources for you,’’ they really do not know.
Most of them that I have—and my cohorts where I am teach-
ing—they need additional help. So they join the program because
20
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 busi-
ness 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 legal-
ese. 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.
21
Senator YOUNG. So you are basically, in order to pay your taxes,
you are having to starve future growth and future innovation asso-
ciated 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 inno-
vate 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 sleep-
less nights. A wrong step in this way could mean the end of War-
rant 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 expens-
ing. 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 an-
other 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 ac-
countant—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 rational-
ization. Would any of you disagree with that?
[No response.]
22
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, where-
withal 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 in-
novating 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 disadvan-
tage as well.
So, part of the rationalization of our tax code is, treat all busi-
ness income equally, so that businesses at the entity level are com-
peting 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 in-
come? 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
23
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 where-
withal 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; elimi-
nate 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 vis-
ual 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, be-
cause 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
24
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 ben-
efits 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 representa-
tive in the room with us today.
Senator HIRONO. I believe that you testified, you discussed the
importance of restoring the research and development tax deduc-
tion in your testimony?
Mr. NORRIS. Yes, ma’am.
Senator HIRONO. So, can you elaborate on why restoring this de-
duction 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 his-
tory, 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.
25
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’ Orga-
nization, 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 com-
pete. I have no idea what the time is. I may have gone over 5 min-
utes. 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 pri-
ority 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 chair-
men 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 ex-
emplify 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 Ida-
hoan like Ms. Camarillo, who had the tenacity and was allowed to
achieve the American dream. We really need to promote an econ-
omy 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 al-
most 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 Inde-
pendent 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, dem-
onstrates how the TCJA’s small business deduction, the 199A de-
duction, achieved Congress’s goal of facilitating growth and rein-
vestment. 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 ex-
tending 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 Con-
gress——
Chairman WYDEN. Off to backlogs.
Senator RISCH. So we are drilling down with the State Depart-
ment 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.
26
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 Judici-
ary. But how important is section 199A, the pass-through deduc-
tion, 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 impor-
tant. 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, be-
cause 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 im-
pact 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 some-
thing, 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 busi-
ness and be spent for things——
Senator TILLIS. We have a lot of small and medium-sized busi-
nesses 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 eco-
nomic 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 sim-
plified. I know it can work. We did it in North Carolina, back when
I was in the State legislature.
27
A lot of the opponents are really rethinking. I do not think we
have the balance right in terms of taxes on productivity versus con-
sumption. 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 frame-
work, 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 in-
come tax, and you can put a lot of small businesses back in busi-
ness.
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 de-
cided to remove all these irrational exceptions and exemptions,
tried to smooth it out, make it easier for small businesses to under-
stand.
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 discus-
sions 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 compli-
ance 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 prob-
ably 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 im-
pact 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 foun-
dation 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 Oper-
28
ating Plan, there are several areas of special interest to small busi-
ness.
I am going to work very closely with the chairman. We will do
it in a bipartisan way, the Small Business Committee and the Fi-
nance 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 ques-
tions 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 expe-
ditious sort of fashion.
So, Senator Cardin will close the hearing, and that will take
place after he and Senator Young have had their additional ques-
tions. 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 de-
cision 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
29
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 small-
er entities? We also learned—one last question, and I will let you
respond.
We also learned during COVID that there is a big difference be-
tween 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 cur-
rent 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 record-
keeping 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 de-
duction, 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 Represent-
atives, 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 fer-
30
vent belief that we needed to restore the Child Tax Credit as it pre-
viously existed.
They decided peculiarly to—I will indelicately say—‘‘hold hos-
tage’’ the R&D provisions to that policy objective. Now it is an un-
usual 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 grad-
uates 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 ben-
efits. 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 am-
ortization of R&D expenditures and helping the working people
who are in your employ.
31
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 pre-
sented the R&D. I am for fixing the R&D. It does affect small com-
panies, 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 pen-
sion 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 provi-
sions that Senator Portman and I worked on.
So we do this all the time, but I think it is not reasonable to ex-
pect 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 dis-
cussion. When I ask small businesses, as the chairman of the com-
mittee, 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.
32
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, deduc-
tions that they did not take, or all of a sudden they are being chal-
lenged 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 per-
manent 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 prob-
lems, because it gives us the predictability we need moving for-
ward. 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.]
APPENDIX
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 de-
veloped my initial tax literacy while completing my undergraduate degree in ac-
counting 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 in-
evitably 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 21⁄2 years, I’ve had the privilege of working as an accounting subject
matter expert and facilitator with Morgan State University’s Baltimore Means Busi-
ness (BMB) entrepreneurship growth program. In that role, I facilitate training and
provide business advice for aspiring and established minority small business own-
ers. I introduce participants to topics and practical information necessary for run-
ning the day-to-day operations of a growing business. I secure subject matter ex-
perts 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 hun-
dred 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 reg-
ulations apply to them, many minority business owners are unaware of the tax in-
centives 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 busi-
ness. 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 entre-
preneurs 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 Bowl-
ing, 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 exam-
ples 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.
(33)
34
In summary, small business owners want to comply with the tax code and under-
stand 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 INDE-
PENDENT 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 mean-
ingful 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 pres-
sures 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 prom-
ises 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, mil-
lions 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 per-
manent.
35
PREPARED STATEMENT OF ALICIA CHAPMAN, OWNER AND CEO,
WILLAMETTE TECHNICAL FABRICATORS
Dear Chair Wyden, Chair Cardin, and members of the Senate Committee on Fi-
nance 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 manu-
facturing, 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 pan-
demic 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 develop-
ment (R&D) throughout our startup years, and we were recently awarded a Small
Business Innovation Research (SBIR) grant from the Department of Energy to de-
velop proprietary robotic welding technology that will improve American competi-
tiveness and help our Nation become more resilient and energy-independent. Unfor-
tunately 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 capitaliza-
tion 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 de-
duct 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 anx-
iously 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, espe-
cially small businesses, hoping to take advantage of the ERC program, our account-
ants 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 some-
one promising to help me get my ERC refund faster, or offering to provide a preda-
tory 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 eli-
gibility 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 re-
sponse, 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 dol-
lars 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 busi-
ness 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 de-
laying even greater 2022 refunds, we are essentially financing the Federal Govern-
ment 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
36
the ever-changing tax codes, revise estimates while updated guidance is still pend-
ing, 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 inter-
est 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 ap-
plied for an increased line of credit to provide the necessary operating capital need-
ed 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) busi-
ness 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 crit-
ical. 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 re-
authorizing 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 de-
velopment 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 econ-
omy. 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 busi-
nesses to make sound financial decisions. When coupled with uncertainty about fu-
ture tax policy changes and Internal Revenue Service enforcement, those decisions
become nearly impossible.
According to the latest National Federation of Independent Business (NFIB) an-
nual tax survey, nearly two-thirds of small business owners reported that the ad-
ministrative 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 econo-
mies 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
37
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 regu-
lations 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 cus-
tomers.
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 ap-
proximately 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 con-
tributions 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. Individ-
ually 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
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 busi-
nesses 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 re-
source 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 Out-
reach 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 lan-
guage. Often, when the IRS releases changes or requirements on small businesses,
1 https://advocacy.sba.gov/wp-content/uploads/2022/08/Small-Business-Economic-Profile-
US.pdf.
38
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 mon-
itor tax regulations and help ensure the IRS and Treasury are considering potential
flexibilities for small businesses during the rulemaking process. SBA’s Office of Ad-
vocacy 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 ade-
quate 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 build-
ing 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 mis-
takes and harming the small businesses that hire them. There must be more over-
sight to ensure a basic level of competence and ethical standards among those pre-
paring 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 tax-
payer.
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 ac-
counting for small businesses, the more straightforward taxes will be for them. I ap-
plaud the change that was made in the Tax Cuts and Jobs Act that allows busi-
nesses 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 under-
stand 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 indi-
vidual 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 im-
pact 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 im-
portant 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 tre-
mendous 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.
39
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 ac-
complished 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 Ap-
proved 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 de-
fense. 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 con-
tinue this trend.
SBs reinvest their dollars on improvements in process and tools, product develop-
ment, 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 cap-
tured under overhead, G&A, or R&D.
With the dollars we reinvested as an SB, we developed our business in the fol-
lowing 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 man-
date 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.
40
Example: The impact on a small business with a net income of $2.5 mil-
lion dollars, in the 21-percent tax bracket is that in the first year their an-
nual 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 Tech-
nologies, 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 de-
mise of many small businesses.
I know these committees recognize the value our small businesses play in our Na-
tion’s and local economies, our Nation’s defense, and our ability to continue to out-
pace our advisories in technological development. The involvement of small busi-
nesses 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 busi-
ness, 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 Inno-
vation 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 will-
ingness to hear Warrant’s statement and act on behalf of the interest of small busi-
ness. 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 Indi-
ana 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 Fi-
nance and Small Business and Entrepreneurship Committees. I also want to recog-
nize 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 serv-
ice 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 im-
provements 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 Amer-
ican 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
41
the 2017 Trump tax law—a provision they claim was designed to benefit small busi-
nesses.
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 Con-
gress is debating tax cuts for small businesses, I don’t think they envision huge ben-
efits 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 busi-
nesses 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 equip-
ment and event rental industry are (1) the industry is very capital intensive, and
(2) equipment and event rental companies are constantly turning over their inven-
tories; 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 com-
pany. 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 con-
tractions.
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 equip-
ment or event rental inventory is complex and a large part of this is related to fi-
nancial 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 eco-
nomic 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 own-
ing and maintaining equipment that is underutilized by a single owner.
Tax incentives that have helped small equipment and event rental businesses ex-
pand 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
(43)
44
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 deprecia-
tion 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 equip-
ment 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 cov-
ered 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 (con-
struction 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 re-
ductions 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 cre-
ated by the sale of retired assets will not be offset by a tax write-off created by ex-
pensing 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 pro-
visions 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 con-
sequences 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-à-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 busi-
nesses 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 Asso-
ciation 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 Sec-
tion 199(A). This provision allows businesses that are organized as pass-through en-
tities 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.
45
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 sig-
nificantly 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 Sec-
tion 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 econ-
omy with negative impacts.
Conclusions
The equipment and event rental industry is a textbook example of a competitive in-
dustry. 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 decen-
tralized 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 Con-
gress does not act and 100 percent Bonus Depreciation and Section 199(A) are al-
lowed 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 per-
cent Bonus Depreciation and Section 199(A).
CENTER FOR FISCAL EQUITY
14448 Parkvale Road, #6
Rockville, MD 20853
Fiscalequitycenter@yahoo.com
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 Busi-
ness 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 em-
ployees. 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 pub-
lishing (I am the latter), gig workers and consultants. There are two types of con-
sultants 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 work-
ers 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 child-
care, 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.
46
Minimum wage, benefit and family support are best served with some form of gov-
ernment 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 other-
wise be paid in tax and then supporting a bureaucracy to administer both tax bene-
fits 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 infrastruc-
ture 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 man-
agers 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 trans-
action reporting are in comparison to the current regime. For some small busi-
nesses, 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 in-
formation 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 encour-
aging 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
47
$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 ac-
count 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 min-
imum 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 in-
come 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 perspec-
tive, 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 sub-
traction 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 trans-
actions.
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 enact-
ment 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
48
in the same range. Some will use corporations to avoid these taxes, but that cor-
poration would then pay all invoice and subtraction VAT payments (which would
distribute tax benefits). Distributions from such corporations will be considered sal-
ary, not dividends.
Invoice Value-Added Tax (I–VAT). Border-adjustable taxes will appear on pur-
chase 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. Inher-
ited assets will be taxed under A–VAT when sold. Any inherited cash, or funds bor-
rowed 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 con-
tributions, 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, es-
pecially 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 Committee on Small Business and
Entrepreneurship 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 res-
taurant 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 Res-
taurant Association (‘‘the Association’’) is the leading business association for the in-
49
dustry, 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 Amorti-
zation (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 expan-
sion; 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 ex-
pensive—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. Lim-
iting the deduction for depreciation or amortization serves as a tax on in-
vestment, especially amid higher interest rates, freezing budgets and cre-
ating 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 com-
monsense improvements in the tax code, especially those helping family-owned busi-
nesses.
Thank you for your consideration. We look forward to working with your Commit-
tees.
Sincerely,
Aaron Frazier
Vice President of Public Policy
STATEMENT SUBMITTED BY ANNETTE NELLEN, CPA
Professor of Accounting and Taxation
San José State University
http://www.21stcenturytaxation.com/ 1
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
1 This URL is to a website maintained by Annette Nellen for the purposes of promoting mod-
ernization 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 rep-
resented 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.
50
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 major-
ity of sole proprietors, I have no employees.2
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 soft-
ware 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 than nec-
essary or that have not considered simpler approaches.
Simplification is an important principle of good tax policy or tax system design. Sim-
ple 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 can-
not afford the assistance needed to take advantage of these provisions or if the pro-
visions 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
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 propri-
etors and passthrough entities relative to corporations. Some rules added for sim-
plicity have focused more on the needs of capital-intensive businesses rather than
ones where human capital and intangibles are more important. Some changes sug-
gested 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 sugges-
tions 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, wheth-
er the taxpayer will need to hire an expert to comply with the rule or take advan-
tage 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
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.
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.
51
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 sug-
gestions for simplification which are still relevant ten years later: 4
Simplify! If you cannot describe in a few simple sentences how a rule works or it
requires alternative calculations, the rule is not simple and either needs to be re-
vised 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 al-
lowed 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 ac-
quisition of a domain name.
d. Avoid new complexities disguised as small business benefits, such as a deduc-
tion 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 indi-
vidual’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 ex-
ceed 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
a. Allow all businesses to deduct state and local taxes rather than follow a 1944
rule that treats these business income taxes as 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 pass-
through entity are viewed as indirect taxes allowed as a deduction from AGI
rather than for AGI. For modernization and fairness, individuals should be al-
lowed to determine how much state and local income taxes were paid on busi-
ness 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 par-
ticipate 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
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.
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.
52
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 capitaliza-
tion 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 signifi-
cant 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 shel-
ters) 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 busi-
ness 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 am-
ortizing 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 infla-
tion.
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 percent-
age 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 require-
ment, 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 ex-
penses 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 de-
termine how much of their indirect expenditures (such as administrative costs)
are attributable to R&D activities. Instead, these costs are generally either de-
ductible under IRC Section 174 or Section 162 as ordinary and necessary busi-
ness expenses.
53
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 amor-
tized 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 record-
keeping 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 al-
lowed to create a questionnaire that leads to a result of contractor or employee.
Employers who properly use the questionnaire to classify workers cannot be re-
quired to amend past filings, but if the IRS determines that the worker is
misclassified, any reclassification would be prospective only (assuming the em-
ployer 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 de-
ductions for activities that generate revenues but not IRC Section 162 deduc-
tions. 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 sub-
ject 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 de-
ductible 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 in-
vestment and employee business expenses.6 The logic for this is that these ex-
penses 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.
Another benefit of reforming IRC Section 183 is that it may reduce the inclina-
tion 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 simplifica-
tion 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 sim-
plified 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
6 JCT, ‘‘Estimates of Federal Tax Expenditures for Fiscal Years 2022–2026,’’ JCX–22–22 (De-
cember 22, 2022), page 4; https://www.jct.gov/publications/2022/jcx-22-22/.
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/.
54
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 compli-
ance.
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 partner-
ship. The couple files two matching Schedules C rather than a Form 1065 part-
nership 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 includ-
ing 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 obliga-
tions.
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 par-
ticular industries.8 Other states might have similar workshops that are exam-
ples of ways to help business owners understand their tax obligations.
8 CDTFA, Tax Education Events; https://www.cdtfa.ca.gov/seminar/.
55
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 fund-
ed 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 entre-
preneurship, 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 Com-
petitiveness 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 near-
ly 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 Amer-
ica. 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 chal-
lenging. That is why Congress must identify practical solutions to help entre-
preneurs through this uncertain economic period, and beyond.
Small business owners and their employees across industries have had to continu-
ously 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 invest-
ments in the same year they occurred. This tax measure has helped to fuel hun-
dreds 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 effec-
tively utilize it. The stakes are quite high for this expensing measure.
56
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 de-
velop new products, from medical devices to everyday consumer products. For small-
er firms operating on thin margins and in a competitive and challenging environ-
ment, 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 busi-
nesses 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—‘‘Emerg-
ing Technology, Innovation and Small Business’’—we specifically explore the
small business impact of not restoring immediate R&D expensing. The results re-
veal 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 own-
ers who used this tax incentive but were unaware that it is was no longer available,
this was shocking news for many.
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.
57
The negative effects of ending immediate R&D expensing extends beyond the finan-
cial 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 em-
ployee benefits, laying off employees, and forgoing compensation for the owners or
founder.
58
Not surprisingly, small business owners that have utilized immediate R&D expens-
ing overwhelmingly support bipartisan legislation to restore and make it perma-
nent. Approximately 86% of small enterprises support a bill that aims to make im-
mediate expensing of R&D costs a permanent provision, with additional enhance-
ments for small businesses. Only 6% oppose this legislation, while 8% remain un-
sure.
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 me-
dian 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 be-
tween $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 pro-
mote 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 to-
gether 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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