[House Hearing, 108 Congress]
[From the U.S. Government Publishing Office]
S. Hrg. 102-000 deg.
ASSISTING SMALL BUSINESSES THROUGH THE TAX CODE: RECENT GAINS AND WHAT
REMAINS TO BE DONE
=======================================================================
HEARING
before the
COMMITTEE ON SMALL BUSINESS
HOUSE OF REPRESENTATIVES
ONE HUNDRED EIGHTH CONGRESS
FIRST SESSION
__________
WASHINGTON, DC, JULY 23, 2003
__________
Serial No. 108-29
__________
Printed for the use of the Committee on Small Business
Available via the World Wide Web: http://www.access.gpo.gov/congress/
house
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COMMITTEE ON SMALL BUSINESS
DONALD A. MANZULLO, Illinois, Chairman
ROSCOE BARTLETT, Maryland, Vice NYDIA VELAZQUEZ, New York
Chairman JUANITA MILLENDER-McDONALD,
SUE KELLY, New York California
STEVE CHABOT, Ohio TOM UDALL, New Mexico
PATRICK J. TOOMEY, Pennsylvania FRANK BALLANCE, North Carolina
JIM DeMINT, South Carolina DONNA CHRISTENSEN, Virgin Islands
SAM GRAVES, Missouri DANNY DAVIS, Illinois
EDWARD SCHROCK, Virginia CHARLES GONZALEZ, Texas
TODD AKIN, Missouri GRACE NAPOLITANO, California
SHELLEY MOORE CAPITO, West Virginia ANIBAL ACEVEDO-VILA, Puerto Rico
BILL SHUSTER, Pennsylvania ED CASE, Hawaii
MARILYN MUSGRAVE, Colorado MADELEINE BORDALLO, Guam
TRENT FRANKS, Arizona DENISE MAJETTE, Georgia
JIM GERLACH, Pennsylvania JIM MARSHALL, Georgia
JEB BRADLEY, New Hampshire MICHAEL MICHAUD, Maine
BOB BEAUPREZ, Colorado LINDA SANCHEZ, California
CHRIS CHOCOLA, Indiana ENI FALEOMAVAEGA, American Samoa
STEVE KING, Iowa BRAD MILLER, North Carolina
THADDEUS McCOTTER, Michigan
J. Matthew Szymanski, Chief of Staff and Chief Counsel
Phil Eskeland, Policy Director
Michael Day, Minority Staff Director
(ii)
C O N T E N T S
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Witnesses
Page
Pitrone, Thomas C., the National Small Business Association...... 4
Quick, Roy M., Jr., U.S. Chamber of Commerce..................... 5
Poppen, Janet K., Women Impacting Public Policy.................. 7
Sullivan, The Hon. Thomas M., U.S. Small Business Administration. 9
Olson, The Hon. Nina E., Internal Revenue Service................ 10
Mastromarco, Dan R., the Argus Group............................. 12
Battle, Dena, National Federation of Independent Business........ 13
Appendix
Opening statements:
Manzullo, Hon. Donald A...................................... 22
Prepared statements:
Pitrone, Thomas C............................................ 25
Quick, Roy M., Jr............................................ 31
Poppen, Janet K.............................................. 43
Sullivan, The Hon. Thomas M.................................. 49
Olson, The Hon. Nina E....................................... 58
Mastromarco, Dan R........................................... 72
Battle, Dena................................................. 83
(iii)
ASSISTING SMALL BUSINESSES THROUGH THE TAX CODE: RECENT GAINS AND WHAT
REMAINS TO BE DONE
----------
WEDNESDAY, JULY 23, 2003
House of Representatives,
Committee on Small Business
Washington, D.C.
The Committee met, pursuant to call, at 3:14 p.m. in Room
2360, Rayburn House Office Building, Hon. Donald A. Manzullo
[chairman of the Committee] presiding.
Present: Manzullo, Velazquez, Schrock, Akin, Beauprez,
Majette, and Sanchez.
Chairman Manzullo. Today, the Committee will consider
proposals for assisting small businesses through the tax code.
We will first briefly review recently enacted tax relief for
small businesses, but he primary focus of the hearing is to
consider additional proposals that could further aid America's
ailing small businesses.
Last May, the President signed into law H.R. 2, which
provides $320 billion in net tax relief to American taxpayers
over the next 10 years. A considerable portion of this relief
is directed towards small business.
H.R. 2 assists small businesses by increasing the small
business expensing provision and by lowering marginal tax
rates. In addition, the bill increase first year bonus
depreciation from 30 to 50 percent.
During the last Congress, Congresswoman Nydia Velazquez and
I introduced H.R. 1037, the Small Employer Tax Relief Act of
2001. In preparing to revise that bill for reintroduction into
the 108th Congress, it is important to solicit the very best
ideas available for assisting small businesses.
With us this afternoon are seven distinguished witnesses.
The panel is comprised of both government witnesses and
representatives of small business advocacy groups. We look
forward to hearing your recommendations.
We have got a problem on the Floor, and Ms. Velazquez and I
think that we have votes that have been rolled in the Financial
Services Committee, so what I am going to do is limit your
testimony to four minute period. I want to get through the
group here, and I want to start with the non-government
witnesses and the witnesses who have come from out of town so
in case we have to adjourn this in a hurry the people that have
come the farthest distances and have been inconvenienced the
most at least will have had an opportunity to get their
testimony heard.
Ms. Velazquez, did you have an opening statement?
Ms. Velazquez. Yes, sir.
Chairman Manzullo. If you could go ahead and do that, I
would appreciate that.
[Mr. Manzullo's statement may be found in the appendix.]
Ms. Velazquez. Okay, thank you, Mr. Chairman.
Small businesses are the engine of this economy. They are
key to our recovery. Unfortunately, they face many challenges
today, including inequities in federal contracting health care,
federal regulations and the U.S. Tax Code.
Small businesses account for 44 percent of all federal
revenue, yet they must deal with the up-front costs of taxes in
addition to high compliant costs. With regard to tax
compliance, there is a substantial gap between costs to large
and small firms. The cost per employee for small businesses
topped the cost for large firms by 114 percent.
The tax code does not have to operate in a manner to stifle
growth. It can be used as a tool to ensure that this nation's
small business are able to offer quality health care and
comprehensive retirement plans to their employees as well as
provide incentives to reinvest their cash back into their
businesses.
However, the current tax code has done more to impede small
business growth than encourage it. This stem from the
complexity of the tax code as well as the IRS continual failure
to address the impact its rules and regulations have on small
businesses. As a result, small businesses are left to outsource
their complex tax work which is extremely costly.
Earlier this year, this Committee looked at the ways the
IRS has consistently failed to comply with the Regulatory
Flexibility Act. Today, we will look beyond the regulatory
structure and examine how we can change the Internal Revenue
Code to account for the needs of small businesses.
Not only has the IRS failed to address the needs of small
businesses in ensuring the rules and regulations, but Congress
has also failed to consider the adverse effects that the tax
code has on small businesses. Too often our laws, though well-
intended, unfairly harm small businesses because of the one-
size-fits-all approach. We must hold ourselves accountable for
the burden that we place on small businesses and rectify these
inequities.
In 2001, the National Small Business United released a
ground-breaking report entitled ``The Internal Revenue Code:
Unequal Treatment Between Large and Small Firms.'' This report
brings forth what small businesses have been claiming for
years: the U.S. tax system fails them. This study showed how
the Internal Revenue Code unfairly put small businesses at a
disadvantage in comparison to large firms and outlined reforms
for fixing the system.
Whether it is deductibility of health care for the self-
employed, expensing meals and entertainment, or standard home
office deductions, small business aren't able to reap the same
benefits as their corporate counterparts. This tax report was a
tremendous step forward in exposing the unfairness this system
poses for small businesses today. I was so impressed that I
made sure every member of Congress received a copy.
However, to get the changes suggested in this report passed
into law, small businesses need the support of this
administration. In March 2002, President Bush released his
small business agenda, promising that he will simplify the tax
code and provide small businesses with the relief they need.
Although the administration voiced its commitment to
helping small businesses get the tax relief they have, long
been asking for, recent moves have shown just the opposite. The
2003 tax code is a perfect example.
The President had a $350 billion pie to provide at least
some tax relief to small businesses. Instead, the bulk of the
bill was aimed at providing tax relief to large corporations in
the form of a dividend tax cut. The small business relief that
was in the tax cut was completely inadequate.
The two provisions specifically aimed at small businesses,
the bonus depreciation and increased expansion, both expire
after only a few years, and not one of the proposals in the
NSBU report was passed into law.
Small business deserve better. Today's hearing is an
opportunity to assess the real impact of the U.S. Tax Code on
our nation's small businesses. The President claims that a
reduction in the top rate is a reduction in taxes for small
business owners. However, the 2001 cut failed to impact the
growth of small business and the acceleration of these tax
codes in the 2003 package will do little to enhance the
prosperity of small business owners and their employees.
So, Mr. Chairman, I look forward to the witnesses, and
thank you very much for giving me this opportunity.
Chairman Manzullo. Thank you.
We are going to go in this order: Mr. Pitrone, Mr. Quick,
and Ms. Poppen, because you are from out of state, and if we
have to inconvenience anybody, I want it to be the people that
hang around here and not the people that come to visit.
[Laughter.]
Chairman Manzullo. What I would suggest is I want to keep
the testimony to four minutes, go immediately into your
suggestions. The purpose of this is to gather suggestions, so
you do not have to take two minutes to say how nice it is to be
here. And then take your hottest issue. Several of you have
several suggestions you want to make, but give us your best one
or two so we can concentrate on that, and then, of course, we
have all of your written testimony.
And the first witness is Tom Pitrone. Is that Pitrone or--
--.
Mr. Pitrone. I'm Sicilian. It's Pitrone.
Chairman Manzullo. Oh, Pitrone. Well, I am Sicilian, we
pronounce the vowel, and I am the Chairman.
[Laughter.]
Chairman Manzullo. And you need to have the microphone
before you, Tom, and he is the principal of The Integrity Group
on behalf of the National Small Business Association. We look
forward to your testimony.
STATEMENT OF THOMAS C. PITRONE, THE NATIONAL SMALL BUSINESS
ASSOCIATION, AND PRINCIPAL, THE INTEGRITY GROUP, CLEVELAND,
OHIO
Mr. Pitrone. Thank you, Chairman Manzullo.
Well, I just want to thank you, and Ranking Member
Velazquez, for this opportunity to testify.
I am with the NSBA, which was formerly the NSBU. It is
National Small Business Association, and we representing small
businesses in all 50 states, 65,000 in all, and as
Representative Velazquez mentioned, we commissioned the
Prosperity Institute to provide the study that she referenced,
so I will not dwell on that. I will just go right into the
issues that we have selected as our priorities from that
report.
There was three that our members felt were the most
important. The first is pension parity, the second is Section
125 cafeteria plans, and the third is the tax on the money that
small businesses use to pay their insurance premiums, the FICA
tax on those dollars.
Pension parity is pretty simple. If you have a company you
want to provide a pension, there is quite a bit of government
regulation that impacts your ability to do that. Fixed cost as
got to be a minimum on the simplest plan of $1,500 a year to
$2,000. If you have 100 plus employees, that is easy to absorb.
If you have 10 or less employees, it is almost impossible to
absorb, and you cannot do it yourself.
Congress recognized that problem when they same with a
simple plan which does not really cut the cost to the small
businesses, just simpler. You still have to make mandatory
contributions to all your employees' accounts, which is
probably more than the cost of the administration, but it is
simpler.
However, a simple plan caps out at an $8,000 annual
contribution, a regular 401(k) plan caps out at $12,000, so
there is a bid disparity between what a small business owner
can put away using a simple plan and what a larger business
using a 401(k) can put away.
On the cafeteria plans, it allows you to pull money out of
your pay check pre-tax and set up flexible spending accounts.
They are great because they allow you to pay for things with
pre-tax dollars like day care for your children, but by
definition a small business owner is not an employee, and so
they cannot participate.
And if you cannot participate, you probably are not going
to set one up, and therefore your employees are not going to be
able to participate, which means that people lose the ability
to provide day care with pre-tax dollars, among many other
issues.
And the finally, small businesses, even though they now can
deduct the cost of their insurance premiums, it is after they
pay Social Security and Medicare tax. So for small business who
pay both sides of that, it is a 15 percent tax on the money
that they use to pay for their health insurance premiums, and
that has a disproportionate impact on small business who are
not making a lot of money because they are closer to the social
security cutoff of about $87,000.
So those are the issues that we feel are the top priorities
for correction in our tax code as being--we are not looking for
something special, we are looking for the same treatment that
large businesses have on these issues. And I just want to thank
you for the opportunity to testify.
[Mr. Pitrone's statement may be found in the appendix.]
Mr. Schrock. [Presiding]. Thank you, Mr. Pitrone. And
because I am only Subcommittee Chairman, you are Mr. Pitrone.
Mr. Pitrone. Thank you.
[Laughter.]
Mr. Schrock. Our next witness is Roy Quick, who is part
owner of the Quick Tax & Accounting Service, a small business
that is headquartered in St. Louis, Missouri. And I am told
that his very capable business partner and wife, Elizabeth
Quick, is in the audience today, and I welcome her.
Is she here? Welcome, it is nice to have you here.
Mr. Quick is appearing in front of the Committee today to
present the recommendations of the U.S. Chamber of Commerce.
Welcome, Mr. Quick.
STATEMENT OF ROY M. QUICK, JR., U.S. CHAMBER OF COMMERCE, AND
PRINCIPAL, QUICK TAX & ACCOUNTING SERVICE, ST. LOUIS, MISSOURI
Mr. Quick. Thank you. Good afternoon, Mr. Chairman and
Ranking Member.
I am Roy Quick, Principal of Quick Tax & Accounting
Service. We applaud your dedication and interest in reducing
the tax burdens faced by the nation's 24 million small
businesses. The following suggestions are from the written
testimony submitted.
In 2003, self-employed----.
Mr. Schrock. Mr. Quick?
Mr. Quick. Yes?
Mr. Schrock. Could you pull the microphone closer?
Mr. Quick. Sure.
Mr. Schrock. Thanks. We do not have a very good system
here.
Mr. Quick. Okay.
Mr. Schrock. We are trying to save tax-payer dollars, so we
are using the old system.
Mr. Quick. Okay. In 2003, self-employed individuals and
partners in a partnership will finally achieve 100 percent
deductibility of health insurance costs for federal tax
purposes. However, these small businesses are at a definite
disadvantage when it comes to the health care issue. They must
pay higher premiums to insurance companies due to their small
pool of workers. They also have the double whammy of also
paying self-employment tax on their health insurance premiums.
This tax fairness measure will have a collateral effect of
encouraging access for the three million self-employed
individuals who currently do not have health insurance. As a
matter of equity and fairness, the Self-Employed Health Care
Affordability Act, H.R. 1873, should be passed without delay.
As a matter of equity with other retirement vehicles, the
due date for the IRA contributions should be the same as the
tax filing date, including extensions. Many times a sole
proprietor does not have the cash to pay the balance due on his
tax return, the first quarter estimated tax payment, and fund
the IRA all at the same time.
This simple change should be revenue neutral while
benefiting small business and stimulate retirement savings as
well.
Also, small businesses are disadvantaged in the tax code
when it comes to marketing and selling their products and
services. Many large companies have on-site facilities suitable
for presentations, negotiations, and meals that are fully
deductible as an ordinary and necessary business expense.
For the small business owner, the kitchen table or shop
floor is unsuitable for marketing services or negotiating a
contract, and the best alternative is usually a meeting over a
meal at a local restaurant.
Currently, a small business can conduct 50 percent of the
meal cost. To me, there is no difference in utilizing a
restaurant to provide a presentation to a client than an in-
house corporate dining facility. The restoration of full
deductibility of restaurant meals as a business expense would
help the restaurant industry, which is made up of mostly small
businesses, and has been particularly hard hit over the last
two years.
We also feel that the increase in the expensing allowance
under I.R.C. 179 should be made permanent. Other areas needing
relief are that legislation should be enacted to treat
computers and peripheral equipment in the same manner as off-
the-shelf software, ensuring cost recovery prior to
obsolescence.
Second, small business owners often invest large sums
improving their store front's building, interiors or shop
floors to remain competitive. The recovery period for leasehold
improvements is 39 years is an unreasonable span of time.
And the term ``luxury car'' is a misnomer in the tax code
as the limitations are so narrow they restrict recovery of even
modestly priced vehicles. These constraints are sorely need of
updating.
The last White House Conference on Small Business ranked
worker classification as the number one issue facing small
business. The existing rules are too complicated, confusing and
subjective.
Mr. Chairman, H.R. 1783 and the Senate companion bill
introduced by Senator Bond in the 107th Congress contained
objective criteria to determine who is not an employee.
Included in this bill was anti-abuse language to avoid problems
of wholesale reclassifications and legitimate employees as
independent contractors.
In order to encourage long-term growth within the American
economy, providing continued small business tax reform must be
a top congressional priority. The small businesses to continue
to lead the economy additional tax reforms are warranted, and
those already enacted must be made permanent to encourage jobs,
savings and investment. Implementation of the recommendations
previously set forth will go a long way towards these ends.
And I thank you.
[Mr. Quick's statement may be found in the appendix.]
Mr. Schrock. Thank you very much.
This is obviously a St. Louis, Missouri day because our
next witness is Janet Poppen, who is the President of Poppen &
Associates in St. Louis, and she is appearing before the
Committee today on behalf of Women Impacting Public Policy. And
I understand that Congressman Todd Akin is your congressman.
Ms. Poppen. Yes, he is.
Mr. Schrock. And I am going to turn it over to Todd for a
more formal introduction.
Mr. Akin. Thank you, Mr. Chairman.
It is a pleasure to make the introduction. Janet, in fact,
is President of Poppen & Associates. That is a CPA firm that
she formed in 1995 with her son, Gavin, I believe. And Janet is
not only a dedicated advocate of small businesses in St. Louis,
but also nationally. She has received numerous awards for her
efforts, including the Missouri Society of Certified Public
Accountants Distinguished Service Award for the year 2000.
Janet has over 25 years of experience providing financial
and tax service. She is a member of the National Association of
Women Business Owners and a member of the Regional Commerce and
Growth Association Public Policy Council in St. Louis,
And it is a pleasure, Janet, to welcome you here. Thank
you.
STATEMENT OF JANET K. POPPEN, WOMEN IMPACTING PUBLIC POLICY,
AND CEO, POPPEN & ASSOCIATES, ST. LOUIS, MISSOURI
Ms. Poppen. Thank you, Representative Akin. I appreciate
your introduction.
Mr. Chairman, it is a pleasure to be here, and I am going
to talk really fast. I want to commend what you are doing here
today. It is so important to us, and there is a specific bill,
H.R. 1873, it is in my testimony. It allows the self-employed
individuals to deduct their health insurance expenses from
self-employment tax, before the calculate self-employment tax,
and this is so long overdue. It is an gross inequity; 15.3
percent tax right now is paid on the health insurance premiums.
Again, there are the inequities in the pension system and
the deductions that are available.
I guess our message from WIPP, Women Impacting Public
Policy, is that fringe benefits treatment in the tax code
should be the same no matter how you are organized. Whether you
are a C corp, an S corp, and LLC, a partnership or a sole
proprietorship, the amount of complexity that is in the tax
code based on form of doing business is outrageous. You know,
if you want to do something for small business, give us one set
of rules and let us stick to them, and a start is 1873.
Automobile expense is the next biggest boondoggle I think
most of us have ever seen, and this impacts small businesses
much more than the larger businesses, particularly in the
automobile leasing area. The rules are again extremely complex.
But what we want to bring to the table today is something
that we are going to call the simplified employee benefits
plan. The Section 125 plans that were talked about are very
expensive in terms of administration for small businesses, and
we would like to take this proposal using similar to a SEP
plan. You know, the government has an SEP prototype plan.
If there were for small businesses such a plan as the
simplified benefits plan, we could roll those benefits--the
child care expense that my employees have that I cannot afford
a special 125 plan and the monthly maintenance fees for that,
plus the--you know, long-term care insurance someone else wants
to purchase, or any other health costs that they may have,
their deductibles, this type of thing.
In a larger business, they can absorb the costs of the
various benefits administrators for all those types of plans,
but this is plan that has not been suggested before, and we
would like to put it before you and see if there is not
something that you could do for small business, and our
employees.
We employ over a third of the people in the--a third of the
employees belong to small businesses, and these people
typically do not have access to these tax-deferred salary
plans. We would like to see you do something for them, and it
could be done fairly simply.
We do have a benefits advisor in WIPP, and she would be
happy to work with you on details in fleshing this out a little
bit.
I would also like to talk about the MSAs and the HRAs and
the flexible spending accounts. We want to encourage you to
allow greater contributions by both employees and employees.
You know, one of the problems in lumping the plans together
under the simplified benefit plan is that we have only employer
contributions allowed. We need to have employee using a salary
tax deferred plan as well as the employer being able to put
tax-deductible monies into these plans for employees. It would
certainly open the benefits field for small businesses.
And I thank the Committee for taking its time and bringing
us to D.C. so that we can present this to you. Again,
Representative Akin, thank you for the kind introduction, and I
am out of time.
Mr. Schrock. You are and you did it right on time. That is
great. We thank you.
Ms. Poppen. Thank you.
Mr. Schrock. Thank you very much for coming.
Ms. Poppen. Thank you.
[Ms. Poppen's statement may be found in the appendix.]
Mr. Schrock. Now we are going to go back to the local
folks, or when I was growing up what we called the ``townies.''
And we are going to start with Tom Sullivan, who is the Chief
Counsel for Advocacy at the U.S. Small Business Administration.
Tom is no stranger to this Committee, having appeared
before us on several occasions during the past year and a half,
and he will briefly review the tax benefits for small
businesses contained in H.R. 2, the Jobs and Growth Act enacted
into law just two months ago. He will also provide us with his
recommendations for further assisting small business through
the tax code.
Maybe my colleagues can correct me here, but this is the
third day in a row we have been with Tom Sullivan, and I think
House rules say that he if he appears one more day, I am
allowed to claim him as a dependent.
[Laughter.]
Mr. Schrock. So we are going to look into that, and if that
is the case you belong to me after tomorrow. We are glad to
have you here, Tom. Thanks.
STATEMENT OF THE HONORABLE THOMAS M. SULLIVAN, CHIEF COUNSEL
FOR ADVOCACY, U.S. SMALL BUSINESS ASSOCIATION
Mr. Sullivan. Thank you, Mr. Chairman. Actually, I am here
because new rules allow for us to keep frequent flyer miles. I
was told that if I appeared here enough that those miles will
accumulate.
[Laughter.]
Mr. Schrock. He works two blocks away, so I do not know.
Mr. Sullivan. Mr. Chairman, Congressman Velazquez, Members
of the Committee, thank you for allowing me to testify this
afternoon.
The Office of Advocacy is an independent office within SBA,
so the views expressed here do not necessarily reflect the
views of the administration or the SBA. My statement was not
circulated within the administration for comment or clearance.
Advocacy promoted a number of the provisions in the
President's jobs and growth package, and we were pleased with
the bill's emphasis on small business. Many of the provisions
in the law received widespread support from small business
during congressional consideration. These provisions will have
a significant positive impact on small business.
First and foremost, the Jobs and Growth Act provided useful
changes in Section 179 expense and have been long sought by
advocacy, many of you, and the small business community.
Section 179 has been useful for small businesses. Using
1999 tax data, 69 percent of the businesses that elected to
expense their purchase were sole proprietors and individual
farmers. Expensing simplifies capital purchase and has the
effect of reducing the cost of purchasing capital goods.
Last night, I spoke with Paul Cunningham, who owns the
Schreiner's Restaurant, they are a National Restaurant
Association member in Fond du Lac, Wisconsin. Schreiner's is a
destination restaurant where, because of its tradition of home-
cooked meals, seven different pies baked every day, reasonable
prices and a friendly, family atmosphere, customers drive for
hours--often making the three-hour drive from Chicago--to eat
there.
Paul and his general manager, Michael, told me that the
average distance his customers travel to eat at Schreiner's is
60 miles, and he talked about--last night when we talked, he
talked about his long-term desire to update equipment. The
restaurant first opened in 1938 and Paul bought the restaurant
from Bernie and Regina Schreiner 10 years ago, and according to
Paul, in our conversation, the Jobs and Growth Act that just
passed two months ago comes at a perfect time because he can
now spend the amount necessary to buy new equipment, replacing
things that are 30 years old.
The Office of Advocacy study on the federal regulatory
burden in 2001 showed the tax compliance costs for small firms
was roughly twice as much as their larger counterparts. Tax
compliance costs are $1200 per employee for very small firms
versus $562 for larger firms. That is a significant handicap
for small business. Anything Congress can do to further
simplify tax compliance would provide relief to small
businesses from the burden of this disadvantage.
Research by my office that goes into greater detail in my
written statement shows that providing certainty in the tax
code gives small businesses the confidence to make decisions
for the long-term viability and growth. Giving small business
the ability to invest with confidence in their future is good
for business and good for our economy.
The specific recommendations that are in great detail in my
written statement are making increased expensing permanent,
permanently repealing the death tax and repealing the
alternative minimum tax.
I do apologize to the Committee that the example I used of
Schreiner's Restaurant was not in my written statement. I was
not able to reach Paul, the owner, until last night which was
after the deadline to submit it to the Committee.
Thank you.
[Mr. Sullivan's statement may be found in the appendix.]
Mr. Schrock. Next time bring him with his pies. That would
be most welcome, believe me.
[Laughter.]
Mr. Schrock. Our next witness this afternoon is--is it Nina
or Nina?
Ms. Olson. Nina.
Mr. Schrock. Nina. I had an Aunt Nina, so I thought I had
better ask. And since I am only the Subcommittee Chair, I will
do as you wish.
Ms. Olson. Thank you, sir.
Mr. Schrock. Ms. Olson is the National Taxpayer Advocate at
the IRS, and as the National Taxpayer Advocate Ms. Olson serves
as an advocate for taxpayers to the IRS and Congress. A number
of the recommendations included in past national tax payer
advocate reports to the Congress concern small businesses, and
we look forward to hearing your recommendations for assisting
small business through a very cumbersome tax code. Thank you.
STATEMENT OF THE HONORABLE NINA E. OLSON, NATIONAL TAXPAYER
ADVOCATE, INTERNAL REVENUE SERVICE
Ms. Olson. Thank you, Mr. Chairman, for inviting me here
today.
As you know, each December the National Taxpayer Advocate
submits a report directly to Congress in which I identify the
20 most serious problems facing taxpayers and make
administrative and legislative recommendation to mitigate those
problems.
One of our recommendations addresses a common problem
facing a husband and wife who co-own an unincorporated
business, such as a family farm. Under current tax law, this
couple must file a partnership return for the business which
can require very complex recordkeeping and reporting.
In practice, most of these businesses take a short cut. The
file a single sole proprietorship schedule reporting all income
to one spouse. Unfortunately, this results in only one spouse
accruing social security quarters and being eligible for Social
Security, disability, survivor or Medicare benefits. This
disparity can have devastating effects on the small business of
the ineligible spouse is disabled or dies. The couple does not
have the income to replace that spouse's labor.
We propose that married couple who co-own and operate an
unincorporated business be permitted to file a single sole
proprietorship or farm schedule, and then allocate the profit
or loss between them. That way each can pay self-employment tax
on his or her share.
Because this election would be only available to couples
who file joint income tax returns, it will not affect the
amount of income tax due, and for most taxpayers it should have
no impact on the amount of self-employment tax payable since
the vast majority of these businesses report income below the
social security wage cap.
We believe this proposal is a win/win situation. It
simplifies the tax laws, reduces burden on small taxpayers, it
eliminates an area of noncompliance that is completely
inadvertent, and helps protect small businesses from
potentially devastating losses.
We are pleased that the House of Representatives passed
this proposal as part of H.R. 1528 in mid-June of this year.
Our other proposals for what I call tax sanity for small
business take the same common sense approach. For example, we
believe that the current due date for electing subchapter S
corporation status is counterintuitive and leads to taxpayer
confusion and missed deadlines.
Our proposal aligns the active making the S election with a
significant due date of filing the first corporate income tax
return, and thus significantly reduces the changes of botching
the election.
Other proposals include permitting self-employed
individuals to deduct the cost of health insurance in computing
the net earnings of a sole proprietor from self-employment,
creating a de minimis threshold for applying passive loss
limitations, permitting income averaging for commercial
fishermen to the same extent it is available to farmers under
current law, repealing the AMT, and my personal favorite, the
one-time stupid act penalty waiver for the failure to pay and
failure to file penalties when the taxpayer is a first-time
filer or has a history of compliance.
My office is open to suggestions for improving the tax
system. We now have an e-mail address available at our web page
at IRS.gov for taxpayers, including members of Congress, to
submit proposals to improve the tax system.
Thank you for the opportunity to appear here today to
discuss these recommendations. I am please to answer any
questions you may have.
[Ms. Olson's statement may be found in the appendix.]
Mr. Schrock. Where have you been all my life?
[Laughter.]
Mr. Schrock. Gosh, a lot of people at the panel at the
table were shaking their heads yes, so obviously you struck a
responsive cord there. Thank you very much.
Our next witness is Dan Mastromarco who recently authored a
lengthy study for the National Small Business Association on
the unequal treatment in the tax code between large and small
businesses, and we are very much looking forward to having you
summarize the findings of what I am told is a very fascinating
study.
Thank you for being here.
STATEMENT OF DAN R. MASTROMARCO, PRINCIPAL, THE ARGUS GROUP
Mr. Mastromarco. Thank you. As you know, I authored the
study. I will try to keep this to four minutes because I know
that following somebody by the name of Quick and WIPP, you
know, helps keep your attention focused on that.
But let me ask just one small favor. I believe the
Committee hearing could more properly be named ``Removing
Penalties Against Small Businesses.'' Because if one were to
review the debates over the 10,000 code sections in the code,
one would find that each was haled as a victory by its
sponsors.
But in the 90 years since Teddy Roosevelt filed his two-
page return tax rules span 40,000 pages of interminable
sentence of very small type that when strung together occupy
five volumes of translucently thin paper that requires a lawyer
with an exceptionally high tolerance for boredom to read.
Albert Einstein said preparing his return was too difficult
for a mathematician. It takes a philosopher.
[Laughter.]
Yet the code grows. The greatest assistance, Mr. Chairman,
you can provide is repeal the misguided assistance of the past
100 congresses.
Free market economists----.
Mr. Schrock. We may be good, but we are not that good.
[Laughter.]
Mr. Mastromarco [continuing]. Should have but one
directive. This is the directive: Inflict the least amount of
harm.
Now, I will leave the reflections of past successes to
others, only to say really that the Jobs and Growth Act begins
the very long process of removing penalties that I refer to in
my study. Rather than listing all the inequities in the study,
causing the panel to miss the next vote, probably the rest of
the legislative year, I will mention just a few.
Consider the dysfunctional operation of the
nondiscrimination rules. Who could be against
nondiscrimination? It's kind of like the Patriot Act. Everybody
should be for it. But consider, for example, that Code Section
79 provides an employee may exclude group life insurance from
income. That is worth a lot. $50,000, that is worth if you
qualify. However, 85 percent of the plan participants--this the
law--must be other than key employees, which are employees who
own at least five percent of the employer.
Well, I have got a simplification proposal for the code.
Why not just take Section 79 and rewrite it to say that small
firms cannot provide life insurance until they have at least 10
employees, because that is precisely what that proposal says.
And it also says that cafeteria plans, dependent care
assistance plans, educational plans are not available if you
own two percent of the business.
Well, one might ask with all these nondiscrimination rules
who is being discriminated against? In this case, it is small
firms subsidizing tax breaks for their large firm competitors.
Let me skip to my recommendations, and I offer several
suggestions.
First, introduce a small business penalty relief act. Few
elected officials pass up the opportunity to criticize the
Internal Revenue Service, even though they are simply a
bureaucracy to implement the rules that Congress has passed.
The key to assisting small firms is to help tax writers see a
small business penalty relief act as a way of transforming
their rhetoric into action.
Second, look towards a systemic solution. One idea would be
to pass a law requiring members of Congress to actually own a
small business for five years. I am not sure that you would do
that.
Mr. Schrock. Stepping over the line a little bit.
[Laughter.]
Mr. Mastromarco. Well, another probably less problematic
suggestion might be to require Finance Ways and Means Committee
members to actually file their own tax returns.
But barring that, another way of doing it would be to
require the Joint Tax Committee, when they provide the revenue
estimates, to analyze the distribution of those benefits by the
size of firm.
And lastly, I will just add this because I am over my time,
consider fundamental tax reform. Look to fundamental tax
reform, and analyze it. Do not reject it because it is
politically risky. Consider the effects of what it would do to
for small business because, in my view, the income tax will
only be truly simplified when it resides in a paragraph in an
American tax book on history.
[Mr. Mastromarco's statement may be found in the appendix.]
Mr. Schrock. Thank you very much.
Well, our last witness, certainly not the least, you have
sat in the middle. You probably thought you would be done by
now I am sure, is Dena Battle, the Manager of Legislative
Affairs for the NFIB, the National Federation of Independent
Business, and the nation's largest small business group.
Ms. Battle is no stranger to this Committee, and we are
looking forward to hearing what she has to tell us for tax
priorities for small business advocated by NFIB.
Thanks for coming.
STATEMENT OF DENA BATTLE, MANAGER OF LEGISLATIVE AFFAIRS,
NATIONAL FEDERATION OF INDEPENDENT BUSINESS
Ms. Battle. Thank you very much. Thank you, Mr. Chairman,
Distinguished Members of the Committee, I am happy to be here
testifying on behalf of NFIB.
I would like to highlight a few of the improvements that
NFIB would like to see made in the tax code.
First and foremost, we would like to see finishing the job
of providing full deductibility of health care costs for the
self-employed. We are part of a coalition that is advocating on
behalf of H.R. 1873, the Self-Employed Health Care
Affordability Act sponsored by Chairman Manzullo, and I would
just echo what has already been said; that the self-employed
should not have to pay----.
Ms. Velazquez. Excuse me. And Congresswoman Velazquez.
Ms. Battle. I am very sorry.
Ms. Velazquez. Thank you.
Ms. Battle. Absolutely, and thank you for your work on
behalf of that legislation.
And I would just say that self-employed should not have to
pay Medicare and FICA taxes on health care costs.
The second change to the tax code that Congress should make
is establishing a standard home office deduction. If a small
business owner rents space in an office building, then the
owner simply deducts the rent and utilities from their taxes.
However, if the small business owner has an office in their own
home, the process is much more complicated.
In the case of a home-based office, the small business
owner has to depreciate the actual room in their home. Because
of the complicated process, many business owners never take
these legitimate deductions.
The third change to the tax code that we believe would
dramatically impact small business owners is updating
automobile expensing. Many of you might have heard during the
recent debate on the tax plan the SUV loophole.
Congress never intended to create an incentive for small
business owners to buy larger cars. However, changes in the tax
code sometimes come with unintended consequences.
Under the current law small business owners are allowed to
expense up to $100,000 of equipment in a taxable year. However,
Congress does not allow small business owners to expense
automobiles. There is one notable exception. Congress did allow
for the expensing of vehicles that were over 6,000 pounds for
farmers and construction equipment. Cars or vehicles under
6,000 pounds still have to be depreciated.
Not only are small business owners required to depreciate
vehicles under 6,000 pounds, Congress also decided to impose
further limitations to prevent the purchase of luxury vehicles.
This might seem reasonable until you realize that Congress
defines a luxury vehicle as any car over $15,300. The result of
this law is that there is a disincentive in the tax code for
small business owners to buy cars under 6,000 pounds. The NFIB
believes that Congress should allow all vehicles regardless of
weight to be expensed.
These are just a few examples of tax code improvements that
would have a significant impact on small businesses. There is
still much work that needs to be done. Our members are
constantly frustrated with the complexity of our tax code, and
they pay millions of dollars annually for accountants and tax
advisers. More and more of them face the nightmare of the
alternative minimum tax every year, and they are still paying
costly fees to attorneys and accountants to avoid losing their
business to the death tax.
But this hearing is a sign of the progress being made. Mr.
Chairman, Members of the Committee, Ranking Member Velazquez,
thank you for your efforts on behalf of small businesses.
[Ms. Battle's statement may be found in the appendix.]
Mr. Schrock. Thank you very much, and thank you all for
being here and for your statements today.
And yes, we do mean business, and you have the main
Chairman--who says Pitrone instead of Pitrone--who is very keen
on solving some of these problems, and I think there are many
members on this Committee on both sides of the aisle who want
very much to fix this problem. It is a huge problem and it
needs to be fixed.
I would like all of you to prioritize your recommendations,
and in your opinion what is the single most important
initiative for assisting small business owners through the tax
code, the one thing that you think would help the most?
We will start with Mr. Pitrone.
Mr. Pitrone. I would have to say the parity for pension
plans would be a big benefit for small businesses.
Mr. Schrock. Mr. Quick.
Mr. Quick. Mr. Chairman, I would say the ability to make
the health insurance premiums deductible for self-employed
from--eliminate them from payroll tax.
Mr. Schrock. Ms. Poppen.
Ms. Poppen. I would say the simplified benefits plan would
be our priority.
Mr. Schrock. Tom, do you have any thoughts on that?
Mr. Sullivan. yes, I would agree with Congresswoman
Velazquez, and urge for permanence, permanence in the types of
deductions that are available under the Jobs and Growth Act.
Mr. Schrock. Okay. Ms. Olson.
Ms. Olson. I would say clarification of the worker
classification rules.
Mr. Schrock. Mr. Mastromarco.
Mr. Mastromarco. All of the above.
Mr. Schrock. All of the above. You are too politically
correct, are you not?
Ms. Battle?
Ms. Battle. It seems to me that many of the issues that
were brought up today are merely examples of simplifying the
code.
Mr. Schrock. Yes.
Ms. Battle. And making the tax code simpler for small
businesses is really what we need to do.
Mr. Schrock. Okay. I think in the interest of time I am
going to defer to Ms. Velazquez and see if she has any
comments.
Ms. Velazquez. Sure. I want to thank all the witnesses.
This is an important hearing that will help us, well, discuss
and work hard to make sure that those issues that are important
to small businesses will--that we here in Congress and the
White House, also the administration will pay the kind of
attention that we put into some other issues, because I have to
tell you that when it comes to promoting economic recovery in
our nation and having the opportunity to pass a tax cut that
was supposed to create and stimulate the economy, what I saw
out of the $350 billion tax cut that we passed was that big
businesses were the winner.
And so that is my first question, and it will go to Mr.
Sullivan. As part of the President's small business agenda, he
promised small businesses that he will provide them with a
permanent tax relief that they needed. And one of the things
that he promised was increased expensing. And while the 2003
tax cut did increase the expensing limit, the administration
and the Republican leadership decided to sunset this provision
in 2005, to make room for the dividend tax cut.
So I am interested to see what is your opinion about that.
I know that you said that that is one of the issues that we
should make--you know, that you agree with me.
Mr. Sullivan. I agree with you in making the provision
permanent. I disagree with you that the President's small
business agenda implementation has been opposite of his March
statement in 2002.
Ms. Velazquez. Well, you know, last year the President
released his small business agenda in March. A year and a half
later we could go throughout the five important items that he
put into that agenda, and I could tell you that none of those
items has been addressed.
But I would like to hear from NFIB because I know that you
were quite active in making sure that small businesses were not
left behind, out of the $350 billion, and you are outraged that
instead of giving small businesses a permanent relief on
expensing, that at the end it was sunsetted.
Ms. Battle. Well, we certainly were very happy when the
President initially put out his plan that called for a
permanent Section 179 increases. And we would have liked to see
that pass through Congress.
We are sort of used to taxes sometimes sunsetting in
Congress. It happens because of rules in the Senate.
Ms. Velazquez. Especially for small businesses.
Ms. Battle. Well, that has certainly been the case with tax
repeal and also with Section 179, and with other things. But
ultimately we do feel that what passed in H.R. 2 will be very
beneficial to our members. The accelerated rate cuts were a top
priority for our members, and we are very hopeful that the
Section 179 expensing limits will be made permanent by
Congress.
Ms. Velazquez. I love your optimism.
I have a question for Mr. Mastromarco. I am an original co-
sponsor of H.R. 1873, the Self-Employed Health Care
Affordability Act of 2003. This bill is designed to remedy only
one of the many inequities in the tax code as described in Mr.
Mastromarco's report that unfairly impact the self-employed and
small businesses.
Although those solutions seem simple enough, my question is
this. How did this inequity ever make its way into the tax code
as well as many of the other provisions mentioned in your
report?
Mr. Mastromarco. It is a good question, Congresswoman. My
view is that they made it in there, and I do not want to answer
this in a philosophical way, but it is important to understand,
because in many cases in tax policy debates the interests of
small business are just after thoughts, and that was the reason
for my view and recommendation that the Committee really look
to speak with Chairman Thomas and others about systemic
solutions to the problem.
For example, go right into the Committee, that tax writing
Committees and ask the Joint Tax Committee to analyze the
disproportionate distribution of tax expenditures that exist.
For example, you will find that the R&E tax cut is taken by
the nation's largest pharmaceuticals, although the light bulb,
the six-axis robot arm, the large capacity computer, the
personal computer, and just about any innovation that we
cherish today was invented by small firms.
Ms. Velazquez. Thank you. My time is up.
Who is in charge?
Mr. Beauprez. [Presiding] Mr. Akin.
Mr. Akin. Thank you. I would just like to just thank the
entire panel. We see a lot of panels of witnesses and I do not
think that I have ever seen a big a one as you are and yet
people being more specific and very helpful in your comments. I
just wish that somehow I could wave a wand and let you go to
work on the tax code and see what you could come up with. I
think together you would come up with good stuff, and probably
a lot of simplification.
Some of the bills you have made reference to, we have
passed out of the House. We have some difficulty getting them
through the whole process, but certainly the couple that you
have mentioned we have gotten through the House. But thank you
all for coming. Thank you.
Mr. Beauprez. Thank you, Mr. Akin.
I am not really sure who I want to direct this question to,
but I guess I will ask a general question, and see who has got
an answer.
Does anybody among the panel have an estimate of the cost
of--you have all talked about the complexity of the tax code.
Anybody got an idea of what especially business pays to comply
with tax?
Mr. Mastromarco. There are many estimates out there, and
they range anywhere from $100 billion, from Joel Slemrod at the
University of Michigan, all the way to $400 billion on the top
end. If you take the estimate somewhere in the middle, it's
going to about 250 billion or so, the median estimate for the
entire compliance costs.
But it is important to understand, Mr. Chairman, that
compliance costs are fixed costs. That is, when small
businesses incur them, they cost more per employee in small
firms, more than they do in large firms. So when you have an
economy that contains many small firms, vertically integrated
businesses have a great advantage because compliance costs
cascade from one business to the next.
Mr. Beauprez. Yes, I am somewhat familiar with that. I am
actually one of the members of both Congress and this Committee
that has run a small business before, so I am quite familiar
with that.
Mr. Mastromarco. So you like my legislative idea?
Mr. Beauprez. Well, I would perhaps go--it is attractive.
Mr. Mastromarco. You would increase it to 10 years.
Mr. Beauprez. Let me follow that line of thinking so I do
not spend the entire afternoon here.
How many businesses, roughly, out there in America that are
burdened with this quarter of a trillion dollars?
Mr. Mastromarco. Well, depending on who you ask--and that
is because there are establishments and others----.
Mr. Beauprez. Sure. Wild guess.
Mr. Mastromarco. And Tom would probably answer that
question better----
Mr. Sullivan. There are approximately 23 million----
Mr. Mastromarco [continuing]. But, about 23 million----.
Mr. Sullivan [continuing]. Small businesses.
Mr. Beauprez. Okay, so we have got 23 and a half million
small businesses expending somewhere around $250 billion a year
to comply with the tax code that we wrote, and before I came to
Congress, frankly, still after I came to Congress, I consider
that essentially tax. It is an expense imposed on businesses by
the government, cost of compliance.
One question, and then I have got another one to follow up
with you, why do we not maybe consider a deduction for that
burden that we have imposed on them?
Mr. Mastromarco. I think that is a very good idea. If you
look at some of the fundamental tax reform ideas, for example,
the fair tax, national sales tax plan, that is exactly what
they do.
Mr. Beauprez. What is the fatal flaw? There is a couple, is
there something that is unfair or inappropriate or?
Ms. Poppen. Well, in terms of tax compliance at the
individual level, the cost of tax compliance is subject to the
two percent of adjusted gross income flow before it is
deductible. And so that would hit the small entrepreneur.
However, as a business expense, it is 100 percent
deductible, so in effect what you are charging them to comply
they are deducting for the most part.
Mr. Beauprez. Deducting the direct expense.
Ms. Poppen. Direct expense from business income.
Mr. Beauprez. But still there is a marginal--the marginal
effect of that.
Ms. Poppen. There could be a marginal effect when it is
reported at the individual level.
Mr. Beauprez. Right.
Ms. Poppen. And the expenses taken there.
Mr. Beauprez. Mr. Pitrone?
Mr. Pitrone. I think that that is not the whole picture. I
for one, I deduct the cost of taking my taxes to an accountant
for preparing, but I have, you know, probably close to 100
hours in the course of a year that I am doing other things that
go into being able to deliver----.
Mr. Beauprez. Yes, the last small business I ran, and my
wife runs, a little community bank, we had a whole department
that took care of stuff for the taxman; you know, a fairly
significant expense. And another one that we have not even
talked about is regulation, but we will do that another time.
Ms. Olson. Sir, the----
Mr. Beauprez. Go ahead.
Ms. Olson [continuing]. Fatal flaw in that is that if you
allow that for small businesses, as the taxpayer advocate I
would say you would need to allow that for individuals when you
look at the paperwork----.
Mr. Beauprez. And that would be okay with me too.
Ms. Olson. Okay. All right. You know, just figuring out
whether a child is your dependent----
Mr. Beauprez. You bet.
Ms. Olson [continuing]. Or entitled to head of household
deduction or whatever you----.
Mr. Beauprez. Which leads me to the place I really want to
go. You have all kind of talked around the complexity and I
think we all accept that. It is nightmarish on this side of the
tax code or that side of the tax code. I think we would all
concur.
Other than Mr. Mastromarco, have I pronounced it right?
Mr. Mastromarco. That is correct.
Mr. Beauprez. I did not hear anybody talk about kind of the
mega tax reform. There is two proposals out there; the so-
called fair tax, which is really a national sales tax and a
flat tax. And since my red light is on, if you have got an
opinion on that, I would be very curious as to what it might
be, and why do we not just go from my left to right real
quickly.
Ms. Poppen. I am not familiar with the fair proposal, but
the flat tax proposal still lacks some equity, and there would
still be the requisite amount of recordkeeping necessary. So I
do not see that it is a big savings, and perhaps some of the
other benefits in the tax code such as home ownership and so
forth would be--you know, the mortgage interest deduction, that
kind of thing--yes, go around.
Mr. Beauprez. Let us go real quickly if we could because I
do not want to monopolize.
Mr. Quick. Okay, on the flat tax or the fair tax, you have
to be very careful of unintended consequences because our whole
country's economic system is based on the current tax code. And
if you start telling people they cannot deduct their charitable
contributions, how is that going to affect not-for-profit
agencies?
You still have the same amount of recordkeeping no matter
what kind of tax you have.
Mr. Pitrone. National Small Business Association has
formally endorsed the fair tax, and I personally endorse the
fair tax, and have worked to get the Ohio Chamber of Commerce
to endorse it.
Mr. Beauprez. Okay.
Ms. Battle. Our members certainly support tax
simplification, but if you poll them on the methodology of it,
they are definitely split, so I think the jury is still out,
but we support overall tax simplification.
Mr. Beauprez. Okay. Mr. Mastromarco?
Mr. Mastromarco. You know, perhaps there could be another
hearing at this Committee, and a good one, but there are many
groups, including NSBA, state groups, American Farm Bureau and
others that support the fair tax, but nothing really could be
simpler than having small business pay zero tax and individuals
file absolutely no returns and exempting purchases up to the
poverty line, which makes it the fair tax.
So as a tax lawyer practicing for 15 years, I have come to
the conclusion that the only way the system can be resurrected,
and by the way, the economy is not based on the income tax, it
is based on entrepreneurship and business, is to eliminate
entirely the income tax from the face of this planet.
Mr. Beauprez. You are so subtle.
[Laughter.]
Mr. Beauprez. Ms. Olson.
Ms. Olson. Well, I get to dodge this because I am very
practical, and no matter what tax system you enact I will have
a job solving taxpayer problems.
[Laughter.]
Mr. Beauprez. What a nice dodge.
Mr. Sullivan.
Mr. Sullivan. Mr. Chairman, actually, the Office of
Advocacy is unique in the federal government in that we serve
as a channel for small business views up to the President and
to Congress, and so when Ms. Battle puts it the jury is still
out, we would try to work with the Committee and work with
small business groups to get more of a definitive finding, and
then we will pursue it aggressively.
Mr. Beauprez. I would encourage you to continue to pursue
it because it is at least my opinion that all of the
suggestions that you have raised, which I think have merit,
differing degrees of merit perhaps, but merit, kind of
underscore how we got where we are. We nibble here, and we poke
there, and the tax code continues to morph and create job
security for some people, but tremendous expense, confusion,
and complexity for others. And you said serious reform, that is
where we are at.
Ms. Majette.
Ms. Majette. Thank you, Mr. Chairman, and thank all of you
for being here today.
I would certainly agree with you that it would be very
helpful if we had more members of Congress who have been small
business owners. I happen to be one of those, although I did
not do it for five years, but at least for three, and my
husband continues to be a small business owner, but it
certainly has given me a very different perspective than the
one I had before I had that experience.
And I would also agree with all of you that the tax code
does need to be simplified, and certainly perhaps we will be
able to have another hearing on that issue.
I do have a couple of questions, one for Mr. Quick. You
talked about the increasing the amounts that small businesses
can deduct for meals and expenses, entertainment expenses, and
that whole issue does come up against some opposition.
Is there a way that you think that we can increase the
percentage that businesses can deduct for those expenses but
prevent the kind of fraud and abuse that sometimes is raised in
the context of giving that kind of a deduction?
Mr. Quick. Well, I feel that there is a lot of rhetoric on
that subject, but people raised the objection of the three
martini lunch talking about fraud.
To me, any small business owner that has a three-martini
lunch will not have a small business for long.
[Laughter.]
Mr. Quick. I personally feel that small businesses'
marketing expenses over a meal are no different than a
corporate dining room, and I am from St. Louis and Anheuser-
Busch billboard along the highway.
Ms. Majette. All right.
Mr. Beauprez. We have got 15 minutes, so if you want to
continue, go right ahead.
Ms. Majette. All right. Thank you for that.
And on the issue of the expensing provision, I think it is
a little bit frustrating that we did have some adjustments made
but that that is not a permanent situation. I think that makes
it difficult for businesses to plan.
What do you see as being a way that we can address that
issue, and are there particular industries or companies or
businesses that you think would gain the most from having a
permanent increase in the expensing levels?
Mr. Quick. All small business will benefit from the
permanent increase in the expensing levels. What they need is
the ability to plan so that they can have certainty when they
hire people, create jobs, invest in equipment which in turn
creates more jobs, I think, across the board. I do not think
there is any specific industry. Your technology industries and
your small manufacturers probably would benefit the most from
it, but all small business buys equipment. Thank you.
Ms. Majette. Thank you.
And with respect to the worker classification, Ms. Poppen,
you had address that issue, what do you think--if we can get
some of that done, some of that reclassification done, where do
you think we could focus those efforts so that we maximize the
benefit of that?
Ms. Poppen. There was a bill that did not make it out of
the Senate last year. It had a more objective standard to it.
And I think the viewpoint is when small businesses pair up to
do something, whether those are individual, sole
proprietorships, or two partnerships or two S corporations to
accomplish a contract, we end up in a position where we are
trying to blend those two companies into one, one must employ
the other, and this is a problem when it comes to the small,
particularly technology businesses where they may have one or
two employees in a particular thing pairing with another,
technology business, and one of them has to become an employee,
and this is not right because then we are dealing about benefit
plans, and we are taking everything away from those two
individual companies that they have developed, and forcing them
into one hat, if you will.
So that is why we need to get some good objective
definition so that these pairing arrangements can happen; that
someone can work for me five days or three days, and someone
else two days, that kind of thing. And it gets lost in the
whole big business kind of concept, you know, where there have
been abuses in the past.
Ms. Majette. Thank you. I see my time is up. Thank you.
Mr. Beauprez. Ms. Velazquez, do you want to recognize the
group that just entered the room? I think you know them.
Ms. Velazquez. Sure. These are students from my district,
lower Manhattan, and I want to thank them for being here today.
They are asking for the administration not to eliminate
resources for youth program, and that is the only way that we
can keep crime down in our nation. So I want to thank them for
being here.
[Applause.]
Mr. Beauprez. I want to thank all the panelists. I think
this too has been an exceptional panel, and you participated
with us or cooperated with us in getting a good hearing in, in
between our calls to vote. And you just heard what the Chairman
refers to as the bells of tyranny go off, so we will be on our
way.
I will declare this hearing adjourned. Thank you very much
for you input.
[Whereupon, at 4:17 p.m., the Committee was adjourned.]
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