[House Hearing, 112 Congress]
[From the U.S. Government Publishing Office]
HOW TAX COMPLEXITY HINDERS SMALL BUSINESS: THE IMPACT ON JOB CREATION
AND ECONOMIC GROWTH
=======================================================================
HEARING
before the
COMMITTEE ON SMALL BUSINESS
UNITED STATES
HOUSE OF REPRESENTATIVES
ONE HUNDRED TWELFTH CONGRESS
FIRST SESSION
__________
HEARING HELD
APRIL 13, 2011
__________
[GRAPHIC] [TIFF OMITTED] TONGRESS.#13
Small Business Committee Document Number 112-010
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HOUSE COMMITTEE ON SMALL BUSINESS
SAM GRAVES, Missouri, Chairman
ROSCOE BARTLETT, Maryland
STEVE CHABOT, Ohio
STEVE KING, Iowa
MIKE COFFMAN, Colorado
MICK MULVANEY, South Carolina
SCOTT TIPTON, Colorado
CHUCK FLEISCHMANN, Tennessee
JEFF LANDRY, Louisiana
JAIME HERRERA BEUTLER, Washington
ALLEN WEST, Florida
RENEE ELLMERS, North Carolina
JOE WALSH, Illinois
LOU BARLETTA, Pennsylvania
RICHARD HANNA, New York
NYDIA VELAZQUEZ, New York, Ranking Member
KURT SCHRADER, Oregon
MARK CRITZ, Pennsylvania
JASON ALTMIRE, Pennsylvania
YVETTE CLARKE, New York
JUDY CHU, California
DAVID CICILLINE, Rhode Island
CEDRIC RICHMOND, Louisiana
GARY PETERS, Michigan
BILL OWENS, New York
BILL KEATING, Massachusetts
Lori Salley, Staff Director
Paul Sass, Deputy Staff Director
Barry Pineles, Chief Counsel
Michael Day, Minority Staff Director
C O N T E N T S
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Page
OPENING STATEMENTS
Hon. Sam Graves.................................................. 1
Hon. Nydia M. Velazquez.......................................... 2
WITNESSES
Ms. Nina E. Olson, National Taxpayer Advocate, Washington, DC.... 3
Steven J. Strobel, Executive Vice President and Chief Financial
Officer, BlueStar Energy Solutions, Chicago, IL................ 5
Robert Kulp, Founder, Co-owner and Business Development Director,
Kulp's of Stratford, Stratford, WI............................. 7
Monty W. Walker, CPA, Walker Business Advisory Services, Wichita
Falls, TX...................................................... 8
APPENDIX
Prepared Statements:
Hon. Yvette Clark................................................ 70
Statements for the Record:
The Corporation for Enterprise Development....................... 77
HOW TAX COMPLEXITY HINDERS SMALL BUSINESS: THE IMPACT ON JOB CREATION
AND ECONOMIC GROWTH
----------
WEDNESDAY, APRIL 13, 2011
House of Representatives,
Committee on Small Business,
Washington, DC.
The Committee met, pursuant to call, at 1:00 p.m., in room
2360, Rayburn House Office Building. Hon. Sam Graves (chairman
of the Committee) presiding.
Present: Representatives Graves, West, Walsh, Barletta,
Velazquez, Schrader, Altmire, Clarke, Chu, Cicilline, and
Keating.
Chairman Graves. Good afternoon. I call the hearing to
order. I want to thank our witnesses all for being here today.
I know some of you have come a long way and we appreciate it
very much.
The U.S. economy appears to be strengthening and the labor
market appears to be improving slowly. But energy prices are
volatile and months of rising food, clothing, and fuel has also
caused wholesale prices to rise. Small businesses continue to
be affected by the uncertainty of more mandates, higher taxes,
and additional regulations. It is difficult for our nation's
job creators to do what we are expecting them to do and that is
create jobs and spur investment. Against this backdrop and
during the week prior to tax day, we meet to examine the
federal tax code complexity and its impact on small businesses.
In our 2010 Report to Congress, the National Taxpayer
Advocate, who is with us today, identified tax complexity as
the top problem facing taxpayers. She also reported that U.S.
taxpayers and businesses spend about 6.1 billion hours per year
to comply with filing requirements. The tax code continues to
expand--it is now 3.8 million words and there have been over
4,428 changes to it in the past 10 years, an average of more
than 1 per day.
It is no secret that tax complexity has a disproportionate
impact on small firms. The Small Business Administration's
Office of Advocacy reported that small firms spend more per
employee than large businesses to comply with the tax
paperwork, recordkeeping, and reporting requirements. Surveys
by the National Federation of Independent Business consistently
rank federal taxes as one of the top five issues of concern to
entrepreneurs. At a time when every added expense can mean the
difference between a small entity's success or failure, clearly
tax simplification is needed.
I am encouraged by Chairman Ryan's budget proposal, which
recommends lowering the top individual and corporate tax rates.
According to the NFIB, nearly 75 percent of small firms are
organized as pass-through entities such as sole
proprietorships, partnerships, or LLCs where business income is
passed through and taxed at the individual rate. In other
words, most small businesses file their taxes on an individual
return. Consideration of corporate tax reform without also
considering individual rates would leave many small business
owners out of the debate.
Again, I want to thank all of our witnesses for being here
today and I will now turn to Ranking Member Velazquez for her
opening statement.
Ms. Velazquez. Good afternoon, everyone.
With tax day fast approaching, filing taxes is on the minds
of many Americans, particularly small business owners. This
Committee is well aware of the challenges created by the
Internal Revenue Code. Over the past decade, businesses have
repeatedly expressed to Committee members that tax complexity
has become a major obstacle to job creation. While this issue
has been recognized for some time, the problem seems to be
getting worse, not better. As the Chairman stated, there has
been approximately 4,428 changes to the tax code, an average of
1 per day. These changes compound an already burdensome tax
system creating confusion and higher compliance costs. In fact,
individuals and businesses spend about 6.1 billion hours per
year complying with the filing requirements.
These burdens can hurt small businesses as they seek to
compete both domestically and abroad. Small firms now spend up
to 67 percent more on tax compliance than their corporate
competitors. And on the global front, the U.S. ranks an
embarrassing 65th worldwide for time spent complying with
business tax filings.
This hearing will hopefully offer insight, not only on the
problem but also on potential solutions. After all, as we look
at policies to promote growth, tax reform should be a top
priority. A fairer and simpler tax code can encourage
entrepreneurship, promote investment, and lead to job creation.
One thing is clear as we talk about reform. The needs of small
businesses must come first. We cannot move forward without
their input, and we must fully recognize the impact of how any
changes will affect them. At a time when the economy is
starting to exhibit sustained job creation, small firms cannot
have new obstacles to expansion.
Fundamental tax reform obviously poses its own challenges.
Back in 2005, this Committee heard testimony from the Tax
Reform panel appointed by President Bush, but his
recommendation, its recommendations went nowhere. The latest
2010 Deficit Commission similarly recommended a major overhaul
to the tax code but the report did not gather enough support to
force a vote in Congress.
Today's hearing will hopefully start the process of
crafting solutions to our overly complex tax code. It is clear
that small businesses and our economy can come out winners if
reform is done right. Small businesses are the drivers of the
nation's economy and we cannot afford to put the cost of
collecting taxes on them. Entrepreneurs do not want
preferential treatment; they just want equal treatment.
I look forward to today's testimony and I thank the
witnesses for their participation. With that I yield back.
Chairman Graves. If the other Committee members have
statements for the record I would appreciate you submitting
those.
I would also like to take a real quick opportunity to
explain the timing lights. Each of you has five minutes, and
please try to stay within the five minutes. The light will be
green and then it will turn yellow when we have one minute left
and red when the time is up.
STATEMENTS OF THE HONORABLE NINA E. OLSON, NATIONAL TAXPAYER
ADVOCATE; STEVEN J. STROBEL, BLUESTAR ENERGY SOLUTIONS ON
BEHALF OF THE NATIONAL SMALL BUSINESS ASSOCIATION; ROBERT KULP,
KULP'S OF STRATFORD ON BEHALF OF THE NATIONAL ROOFING
CONTRACTORS OF AMERICA; MONTY W. WALKER, WALKER BUSINESS
ADVISORY SERVICES
Chairman Graves. I will now introduce our first witness,
Nina Olson. She is the National Taxpayer Advocate, an
appointment she has had since 2001. She leads the Internal
Revenue Service's Taxpayer Advocate Service. The office is
dedicated to assisting taxpayers with their IRS problems. And
again, thank you for coming.
STATEMENT OF NINA E. OLSON
Ms. Olson. Thank you, Mr. Chairman, Ranking Member
Velazquez, and distinguished members of the Committee. Thank
you for inviting me to testify today about the impact of tax
complexity on small businesses.
My office estimates that small businesses alone spend at
least 2.5 billion hours each year complying with income tax
filing requirements. This is not a trifling matter because
small businesses are the creators of most new jobs and the
employers of about half the private sector workforce. To state
the obvious, the more time and resources a small business
spends on tax compliance, the less time it has to grow and hire
employees.
In my 2010 Annual Report to Congress, I identified the need
for Tax Reform as the number one most serious problem facing
taxpayers and the IRS. The tax code is filled with special
breaks helping taxpayers who can afford tax advice and
discriminating against those who cannot. This complexity
confuses taxpayers and creates a sense of distance between
taxpayers and the government, which undermines taxpayer morale
and leads to lower levels of voluntary compliance. The
complexity of the tax code is also burdensome for the IRS,
making it more difficult for the agency to meet taxpayer needs
and probably resulting in more audit and enforcement actions
than a simpler code would require.
My report advocates for comprehensive tax reform, which I
believe is ultimately a necessity. But there are smaller steps
we can take right now to ease the compliance burden of small
businesses. I will briefly highlight several tax requirements
that impose unnecessary compliance burdens on small business
and require simplification or at the very least, more guidance.
First, the home office business deduction is unnecessarily
complex and requires time-consuming recordkeeping by many small
businesses. We recommend the creation of an optional standard
home office business deduction.
Second, the S corporation election process is confusing and
causes many taxpayers to make inadvertent errors. As a result,
some businesses inadvertently become classified as C
corporations and their shareholders cannot deduct operating
losses on their individual tax returns.
To address these problems, we recommend simplifying the
election process to allow small business corporations to make
an S election by checking a box on a timely filed Form 1120S.
Third, business owners need greater flexibility under the
Trust Fund Recovery Penalty, which can apply against a person
responsible for filing or paying over a business's employment
taxes. Currently, the strict application of the penalty's
willfulness component requires the responsible person to use
all available funds to pay the delinquent tax and prohibits the
use of any funds to pay operating expenses of the business even
to keep the business going. We recommend the IRS not assess
this penalty where there was an intervening bad act such as
embezzlement and the taxpayer makes payment arrangements and
remains current with payment and filing obligations.
Fourth, the IRS has long acknowledged that taxpayer service
and enforcement both play important roles in maximizing tax
compliance, but the IRS's compliance initiatives these days are
rooted exclusively or primarily in enforcement measures.
Particularly when it comes to small business taxpayers, I
believe outreach initiatives that educate taxpayers about the
bewildering array of income and employment tax requirements
they face are critical. Several years ago the IRS conducted an
extensive series of surveys and research studies to better
understand the service needs and preferences of individual
taxpayers. We have recommended the IRS replicate this process
to better understand the service needs and preferences of small
business taxpayers as well.
Finally, I want to close with a word about IRS collection
policies and procedures. The IRS does not do enough to work
proactively with small business taxpayers that have emerging
collection problems, particularly those who fall behind on
their employment tax obligations. The IRS should provide early
assistance, including calling the taxpayer and discussing and
utilizing flexible collection tools, such as installment
agreements, partial payment installment agreements, and offers
in compromise. Further, the IRS should develop a better
understanding of the reasons for noncompliance among small
business taxpayers so it can apply appropriate collection
techniques. Toward that goal, it should develop a definition of
economic hardship for small businesses that balance tax
collection and promotion of a level playing field on the one
hand with the government's and taxpayers' interest in helping
small businesses remain viable and contributing to the
country's economic growth on the other.
I appreciate your interest in these issues and would be
happy to respond to collections--questions. Thank you.
Collections, too. [Laughter.]
Chairman Graves. Thank you, Ms. Olson.
Our next witness, and I will be introducing on behalf of
Mr. Walsh, but our next witness is Steven Strobel, the
executive vice president and chief financial officer for
BlueStar Energy Services, which is a retail energy supplier in
Chicago, Illinois. He is testifying on behalf of the National
Small Business Association. Mr. Strobel, we appreciate you
being here. Thanks for coming.
STATEMENT OF STEVEN J. STROBEL
Mr. Strobel. Thank you, Chairman Graves, Ranking Member
Velazquez, Committee members. Thanks for the opportunity to
testify today.
Although NSBA's members operate a wide variety of
businesses, they all consistently rank reducing the tax burden
among their top issues Congress and the administration needs to
address. While the actual out-of-pocket cost is a huge issue,
the sheer complexity of the tax code has been an ever-
increasing administrative burden on America's small businesses,
which unlike big corporations do not have large staffs of
accountants, benefit coordinators, attorneys, personnel
administrators, et cetera, at their disposal to deal with the
regulatory and paperwork demands of the federal government.
According to NSBA's 2011 Small Business Taxation Survey, 87
percent of small business owners hire outside help to handle
their tax reporting and filing requirements. The complexity of
the current tax system forces small businesses to spend
valuable time and financial resources on tax compliance instead
of using these resources to do what they do best--grow the
business and hire people. When asked in the NSBA Taxation
Survey how much time and money per year is spent just on the
administration of taxes, 50 percent of small businesses said
they spend more than $5,000, and more than a third spend more
than 80 hours on tax filing preparation. At BlueStar, we spend
about $25,000 annually on our tax preparation.
As Congress and the administration grapple with a
downturned economy, banking failures, and skyrocketing deficit,
it is natural to look for ways to offset spending and raise
revenues. However, it would be unwise for Congress to do so on
the backs of small business owners, the very entrepreneurs who
create jobs. To grow their businesses and hire new employees,
small business owners need dependable and sufficient access to
capital and public policies that boost investment and encourage
entrepreneurship.
Reducing the U.S. deficit has a real benefit to small
business growth in the U.S. and is something America's small
business owners feel should be a national priority. Federal
spending in 2010 amounted to approximately 24 percent of GDP, a
level not seen since World War II, and in part due to an
economic downturn. Even with an economic recovery and the
ensuing increase in tax revenues and decrease in spending,
without major changes federal spending will continue to outpace
revenues. If we continue to run high deficits, increase
interest, and constrict credit, it will negatively impact small
businesses' ability to garner financing, and 80 percent of
small businesses use credit.
Congress and the administration over the coming years must
address the nation's budget deficit and the associated long-
term debt. In addition to reducing the size and pay of the
government workforce and overall entitlement spending, one way
to do that is to implement real tax reform. Tax reform is one
of the NSBA's top 10 priorities. Based on a 2011 NSBA Taxation
Survey, small businesses express support for tax reform that
simplifies the tax code, broadens the base, lowers all
individual and corporate tax rates, and makes the corporate tax
code more competitive for U.S. businesses.
The current tax code is comprised of more than 10,000 pages
of laws and regulations that, in their complexity and
propensity for frequent change, serve as a disadvantage to
small businesses. NSBA's members believe it is imperative that
the U.S. move toward a simpler, fairer tax system that is
designed to tax only once, is stable and predictable, is
visible to the taxpayer, is simple in its administration and
compliance, and is comprehendible using commonly understood
finance and accounting concepts. And finally, is fair in its
treatment to all citizens. These reforms can spur economic
growth.
Another factor to consider is the international
competitiveness of U.S. firms. Congress and the administration
must ensure that our tax code does not impede our international
competitiveness of U.S. companies, nor disincentivize domestic
investment. One way to accomplish this is by enacting the fair
tax.
In the 112th Congress, legislation has been introduced into
the House and Senate, the Fair Tax Act of 2011, which the NSBA
proudly supports. But whether it is the fair tax or any of the
other tax reform recommendations that are currently on the
table, any reform must be built around internationally
competitive tax rules that result in a simpler, more efficient
and less costly tax system that provides powerful incentives
for businesses to invest and produce in the U.S. The economics
of small businesses in all sectors would be strengthened by
their ability to save and invest in this country and thus hire
additional workers.
The NSBA believes efforts to reduce the regulatory and
administrative burdens on small businesses must focus on
overall simplification, eliminating inequities within the tax
code, and enhancing taxpayer education and outreach. A simpler
tax code that is more easily understood by taxpayers would have
many benefits, not the least of which would be reduced cost of
compliance and reduced unintentional errors. Accurate tax
reporting and compliance is extremely important to small
businesses but vague rules and poorly defined regulation
understandably result in mistakes.
The more assistance offered to taxpayers and the simpler it
is to understand and comply with tax laws, the more taxpayers
will accurately meet their tax obligations, and with the
complexity facing many taxpayers, NSBA believes that
development and implementation of initiatives to improve IRS
guidance and assistance is important.
In conclusion, the NSBA is confident that fiscally
responsible policies and entrepreneurially supportive tax
simplification will lead to the long-term prosperity of the
U.S. economy. It is critical that lawmakers avoid any move that
would stymie the moderate economic growth we are starting to
see in the U.S. economy and the growth in our small business
community.
Thank you.
Chairman Graves. Thank you, Mr. Strobel.
Ms. Velazquez.
Ms. Velazquez. It is my pleasure to introduce Mr. Robert
Kulp. He is the founder of Kulp's of Stratford, Wisconsin. His
firm is a roofing and insulation company that has been in
business since 1985 and employs over 40 people. Mr. Kulp is
testifying on behalf of the National Roofing Contractors of
America with over 4,000 members worldwide. Welcome.
STATEMENT OF ROBERT KULP
Mr. Kulp. Thank you. Chairman Graves, Ranking Member
Velazquez, and members of the Committee, thank you for the
opportunity to testify today.
I am Bob Kulp, co-owner of Kulp's of Stratford. We are a
small roofing and insulation company doing residential and
commercial roofing. We have also moved into installing and
building integrated solar photovoltaic roofing. We employ
between 30 and 50 people and we do about $6 million in annual
volume.
I am testifying today on behalf of the National Roofing
Contractors Association, and I serve as a director, as well as
chairman of the Government Relations Committee. Established in
1886, the NRCA is one of the nation's oldest trade associations
and a voice of professional roofing contractors worldwide.
As the national unemployment situation continues to slowly
improve, unemployment in the construction industry remains at
an alarming 20 percent. Clearly, it is time to take steps to
improve this situation. Reducing complexity in the tax code is
a good place to start. NRCA urges Congress to take immediate
action to simplify taxes in order to help spur job growth
within the construction industry.
First, Congress should facilitate the creation of an
estimated 40,000 jobs by reforming tax depreciation for
commercial roofs. Depreciation reform would also enhance the
energy efficiency of our nation's commercial buildings and
simplify taxes for many small businesses. Depreciation reform
is necessary because between 1981 and 1993, the depreciation
schedule for commercial roofs was increased from 15 to 39
years. However, the current 39 year depreciation schedule is
not a realistic measure of how long commercial roofs last,
which is about 17 years. The large disparity between that 39-
year depreciation schedule and the 17-year average lifespan of
a commercial roof is an incentive for building owners to delay
the replacement of failing roofs. This slows economic activity
in our industry because many building owners choose to just do
piecemeal repairs rather than replacing a failing roof in its
entirety.
Several bills have been introduced in recent years to
rectify this situation by reducing the depreciation schedule to
a more realistic 20 years. This would facilitate the creation
of an estimated 40,000 jobs in the roofing industry and add one
billion dollars to the taxable annual revenue to the economy.
Depreciation reform also would provide savings to small
businesses of all types by simplifying their taxes and lowering
energy costs. NRCA welcomes the opportunity to work with
members of the Committee on legislation to create jobs by
simplifying taxes through depreciation reform.
Second, the NRCA calls for the immediate repeal of the 3
percent withholding on government contracts. Repeal of this
law, which adds a new layer of complexity to a contractor's tax
filing, is vital to job creation and economic growth in our
industry. If the withholding law is not repealed, many roofing
contractors will face serious repercussions. Cash flow and
operating capital disruptions will be a tremendous burden
particularly for small businesses. The bookkeeping systems of
many small businesses simply are not set up to account for
those large amounts that are withheld from invoices and
withholding will complicate tax filings. Additionally, many
roofing contractors will be simply forced to stop bidding
government contracts in order to avoid those costly tax
complexities. NRCA strongly urges Congress to quickly repeal
this law that further complicates tax filings due to the 2012
implementation date that is fast approaching.
Third, NRCA supports legislation to reduce tax complexity
by reforming how construction contractors can utilize the
completed contract method of accounting. Under current law,
contractors cannot use the completed contract method if the
annual average gross receipts exceed $10 million, a threshold
that has not been adjusted for inflation since 1986.
Contractors who cannot utilize a completed contract method must
use a percentage of completion accounting method, which often
does not accurately reflect results due to the required use of
cost estimates. This is a major paperwork burden for many small
and midsize contractors because of the need to estimate the
percentage of a completed project and then retroactively amend
those filings in subsequent years based on the actual numbers.
This is another example of the complexity in the tax code that
is an impediment to business growth and job creation, and
increasingly more time and resources must be devoted to tax
compliance rather than more productive forms of economic
activity.
To conclude, NRCA urges Congress to address the alarming 20
percent unemployment rate in the construction industry by
reducing tax complexity for contractors in our industry. Thank
you for your consideration of the NRCA's views and the
opportunity to testify today.
Chairman Graves. Our next witness is Monty Walker. Mr.
Walker is a principal of Walker Business Advisory Services in
Wichita Falls, Texas. He advises start-ups and established
small firms on business transactions and tax matters. Mr.
Walker, I appreciate you coming.
STATEMENT OF MONTY W. WALKER
Mr. Walker. Chairman Graves, Ranking Member Velazquez, and
members of the Committee, thank you for the opportunity to
appear before you today.
My name is Monty Walker. I am a certified public
accountant. I have a national advisory practice with a practice
focus in the support of entrepreneurs, primarily in the area of
business ownership transition planning and related support
services.
Small businesses face many obstacles. Buying or starting a
small business is often one of the most significant financial
events ever experienced by an entrepreneur. Entrepreneurs
approach the process of owning a small business with a hope and
desire of creating something better for their future while
often exposing themselves to a large investment and debt. For
many entrepreneurs, their small business is the center of their
family's financial infrastructure providing the majority, if
not all, of their family's current and future income.
Because of the importance small business plays in the life
of a small business owner, the division between the small
business and the small business owner often becomes blurred
because every business decision has a direct and often
significant impact on the small business owner and the small
business owner's family. Additionally, almost every decision
made by a small business owner has some form of tax
implication.
Small business owners often start their business on a
passion-based foundation doing something they enjoy, only to
quickly learn that running a small business has many complex
and confusing compliance requirements. Mail received from the
various regulatory bodies becomes overwhelming. Unfortunately,
many small business owners get out of compliance simply due to
a failure to interpret correspondence being received from the
IRS. This is especially true for small business owners who
cannot afford the services of a tax professional.
For most small business owners, understanding the tax
compliance requirements is beyond their reach. The complexity
of the tax system is as perplexing as a foreign language. Due
to limited discretionary cash flow, many small business owners
do not have the ability to retain the services of a tax
professional on an ongoing basis. As a result, many small
businesses are attempting to maintain a substantial amount of
required compliance through the efforts of untrained and
unknowledgeable tax advisors, these advisors being themselves.
A lack of funds for ongoing professional assistance and a
misinterpretation of the regulations often lead to failed
compliance. The ever growing tax code, along with the temporary
provisions and interpretations, make it increasingly difficult
for small business owners to do any substantial long-term
planning. This leads to small business owners being placed in
the position to make decisions in a vacuum due to the unknown
results which may occur. Since the tax system directly impacts
so many decisions, small business owners will stand by on
making business developments and new hire decisions when they
have a lack of confidence in what will occur due to the
unknowns in the tax system. This in part has added to and is
currently adding to the soft business expansion and a lack of
new hiring which is desperately needed as a part of the United
States' economic recovery.
Small business ownership is wrought with risk and burdens.
The burdens of owning a small business expand exponentially
when the confusion and complexity of the tax system is
introduced to the small business ownership equation.
Maintaining compliance with the various governmental regulatory
bodies is extremely time consuming and this is especially true
for tax compliance. Additionally, maintaining tax compliance
comes at a cost. The cost to properly maintain regulatory
compliance is really the small business owner's opportunity
cost associated with expending the same resources on business
operations and business development. These resources include
both money and time. Between the money spent on tax
professionals and time focused on maintaining compliance as
opposed to spending the same time running the business, a small
business owner's opportunity cost can be quite significant.
Small business owners compliance time plus their compliance
fees equals a small business owner's total opportunity cost.
In preparation for this hearing, I polled 20 small business
owners with businesses ranging in revenue from 1 million to 5
million to determine their level of business opportunity cost.
I learned that the average amount of time and fees expended by
these business owners to maintain their tax compliance is time
of 104 to 156 hours per year and professional fees ranging from
$5,000 to $15,000 per year. When considering penalties and
interest associated with the failure to maintain compliance,
business opportunity costs can grow extremely large.
Understanding that this business opportunity cost exists is
of utmost importance because the business opportunity cost
correlates with the lost resources that could have been used
for business development which in turn leads to the creation of
new jobs. Thank you.
Chairman Graves. Thank you very much, Mr. Walker.
We will now move into questions. Ms. Olson, I have to say
that it is refreshing to hear you talk about your position and
the Office of Advocacy and that you are advocating for
taxpayers. Do they listen to you?
Ms. Olson. I think that the IRS understands the complexity
that taxpayers need to live with. They are doing some research
now but they are not doing the kind of comprehensive research
on taxpayer needs and preferences for small business taxpayers
that I need to see.
On the collection area, I think that they really feel the
need to collect, collect, collect. They make very few phone
calls out to taxpayers outbound to find out what is really
going on in their situations. They often use levies as the
calling card and get the call back in from the taxpayer saying
what are you doing? I cannot make payroll. And there is
generally a lack of sympathy in the employment tax area, which
is why we are focusing so much on that area.
One thing we learned was that for an account to get
assigned to someone, an employment tax account get assigned to
someone to actually make a face-to-face call with a taxpayer,
there is usually two years of arrearages. And as I think the
representative down there, Mr. Walker would say, the sooner you
can get to the taxpayer when the dollars are low, you have a
greater chance of solving the problem and keeping them in
compliance in the future and keeping the business going. But
when it gets so large, like two years' worth of employment
taxes, that is the kiss of death for a business.
Chairman Graves. My next question is--and I will start with
Mr. Walker. And you can answer it from, obviously from your
client's point of view; and Mr. Strobel, from your
association's point of view; your members, Mr. Kulp. I do not
know if it will pertain to you and I would like to hear Ms.
Olson at the end. The administration is proposing higher taxes
for pass-through small businesses that file their income taxes
on an individual tax return--higher taxes for couples with
incomes over $250,000 and individuals over $200,000. Can you
tell me how that would affect your clients that fall into that
area?
Mr. Walker. The area of practice I am in really shows the
misnomer in this concept of excess of 250. Small business
owners spend years developing a business, and many times they
are developing it so that they can have it for retirement.
They, on paper, are worth a lot of money but they may not make
a lot during the time. So they are below 250 possibly while
they are operating, then all of a sudden the economic event
occurs and they may sell that business for a million dollars,
which is designed to be their retirement. All of a sudden, now
under the excess of 250, that is a wealthy individual. So it
has a significant adverse impact on their willingness to even
sell and they hold out. But it will be an adverse impact,
especially on their ability to have retirement funds. It goes
well beyond just normal operating taxes. This is a life event
that can be adversely impacted by decision to increase above
the 250.
Chairman Graves. Mr. Kulp, does it pertain to you?
Mr. Kulp. I would agree with what he said but, no, it does
not really directly.
Chairman Graves. Mr. Strobel.
Mr. Strobel. I would talk about it in the context of
BlueStar. We are a sub S corporation so all of our income goes
straight through to our two owners. And so any increase in tax
would be a direct impact on the resources available in our
company to invest, do marketing, understand other investments
that we could make to actually grow the company. So it would be
a diminution in the resources available to grow the company.
Chairman Graves. Ms. Olson.
Ms. Olson. Well, I get to pass on commenting about rates
because that is really the, you know, the jurisdiction of the
Office of Tax Policy in Treasury. But I would say, you know,
our recommendation has been that you really simplify, you know,
reduce the complexity of the code, really think long and hard
about what is running through the code. And if you do that, you
would have a broader base and be able to reduce rates for
everyone involved. And that is sort of our position. We did it
in 1986. I do not see why we cannot do it again.
Chairman Graves. Mr. Kulp, you mentioned already some
things, some specifics on simplification, which I appreciated,
3 percent withholding and some other stuff. Just out of
curiosity, Mr. Strobel or Mr. Walker, do you have any
specifics? You mentioned a few, too, Mr. Walker, but other
specific things when it comes to complexity? Are you talking
total overhaul? You know, changing, you know, it is obviously
very complicated now but any other ideas and thoughts? You
know, coupled onto what Mr. Kulp said, too, about depreciation?
Mr. Kulp. Depreciation is a significant problem. It is very
complex. People do not know whether they should take a period
expense or expense something immediately. So it is far beyond
depreciation. If somebody is going to repair a vehicle, is that
a depreciable event or is that a period expense? They spend--
you can spend hours just trying to determine how that applies.
So that is a great example. Capitalization versus expensing.
The issues that are a problem, especially when it comes to this
depreciation matter, currently it does not matter if a business
has been think long and hard about what is running through the
code. And if you do that, you would have a broader base and be
able to reduce rates for everyone involved. And that is sort of
our position. We did it in 1986. I do not see why we cannot do
it again.
Chairman Graves. Mr. Kulp, you mentioned already some
specifics on simplification, which I appreciated, 3 percent
withholding and some other stuff. Just out of curiosity, Mr.
Strobel or Mr. Walker, do you have any specifics? You mentioned
a few, too, Mr. Walker, but other specifics when it comes to
complexity? Are you talking about total overhaul? You know, the
code is obviously very complicated now, but any other ideas and
thoughts? You know, coupled onto what Mr. Kulp said, too, about
depreciation?
Mr. Strobel. Depreciation is a significant problem. It is
very complex. People do not know whether they should take a
period expense or expense something immediately. So it is far
beyond depreciation. If somebody is going to repair a vehicle,
is that a depreciable event or is that a period expense? They
spend--you can spend hours just trying to determine how that
applies. So that is a great example. Capitalization versus
expensing. The issues that are a problem, especially when it
comes to this depreciation matter, currently it does not matter
if a business has been in existence for 50 years. You can
recapture all this depreciation and it can all of a sudden
create ordinary income passing out of a S corporation when they
sell those assets. That makes very little sense to me why that
would happen. So complexity added with something like that is
significant.
Mr. Walker. I will ask the NSBA to follow up after the
hearing with their specific recommendations.
Chairman Graves. Please do.
Ms. Velazquez.
Ms. Velazquez. Thank you, Mr. Chairman.
Ms. Olson, there seems to be broad consensus that we should
eliminate a number of deductions and credits and use those
revenues to lower tax rates. However, when the recent deficit
commission outlined a tax plan to accomplish this, it was
blocked from being brought or considered in the House.
So my question to you is how can comprehensive reform move
forward if bipartisan recommendations like this never receive a
vote?
Ms. Olson. Well, I am not going to comment on the
procedures of the House or the Senate. I am wiser than doing
that. But I will respond by saying we have believed for a long
time that there needs to be a dialogue and leadership, both in
the House and in the administration, and also from the
taxpayers themselves, that there has to be tax reform. And to
up a plan, such as the Bipartisan Commission or the 2005
Presidential Commission, all are a good start. There are lots
of good ideas out there. And what we need is the political will
to be willing to work through those ideas. And whether it is
just slugging it out in the Ways and Means Committee and the
Senate Finance Committee, and with the White House, we
absolutely need this to go forward.
Ms. Velazquez. Thank you.
Mr. Walker, we would like to hear specific areas that we
could simplify the tax code so that we could help small
businesses do what they do best. So firms, based on your own
experience, firms generally fund their business operation by
taking on debt or through equity financing. Both have
advantages and disadvantages, but it is clear that the tax code
favors debt financing since interest is deductible.
So can you talk to us, when you advise firms, do you
advise--and they finance their business--do you believe that we
should address how the tax code treats debt versus equity
financing as one area that maybe this Committee should be
looking into?
Mr. Walker. If anything has changed in the area of debt so
that a small business is incapable of deducting the interest
expense, that would be an adverse blow. Small business owners
do not have the benefit of getting equity players. I think we
could all walk outside and say that we do not see a long line
of people wanting to take risk in small business investment.
That is why entrepreneurs become entrepreneurs. They risk their
own investment in themselves. So anything to change the debt
structure that would eliminate or lower the interest--the
ability to take an interest deduction is an adverse. It should
only be looked to enhance some benefit that they could get.
Ms. Velazquez. Mr. Kulp, you spoke about the depreciation
schedule that is set at 39 years. If we look at our economy,
one area where still it is very fragile is the housing
construction area.
Mr. Kulp. Sure.
Ms. Velazquez. And so you said that the depreciation
schedule for commercial roofs will have a positive impact. How
is that the case that it will benefit other small businesses?
Mr. Kulp. Great question. The NRCA did an extensive study a
number of years ago that actually said that it would spur
economic growth to the point where there would be 40,000 new
jobs added to the roofing industry alone. And when you look at
that along with, you know, that much more money flowing into
the economy, one of my issues is static scoring versus dynamic
scoring on the CBO. And I know I am not going to change that
but it seems to me that if you look at how it plays out,
enhancing owners' ability to move with roofing will definitely
spur jobs and reduce the unemployment rate.
Ms. Velazquez. Thank you. Mr. Strobel, the Fair Tax Plan
will impose a national sales tax and eliminate the income tax,
as well as all current deductions and credits, yet this will
mean that carrying tax incentives for renewable energy and
energy efficient products will no longer exist. As someone in
the energy industry, do you believe that these industries can
remain viable without such policies?
Mr. Strobel. I think they can. Just to be clear, as an
executive with BlueStar I am not advocating the fair tax that
is an advocate position of the National Small Business
Association. I think there is a place for some incentives. We
see that with a lot of energy efficiency customers that there
is an opportunity for them to take advantage of incentives. But
there are real economic gains in our energy efficiency
businesses where we go in and do a lighting retrofit, for
instance, in a facility. Part of it is the incentives that are
available but more importantly, it is the economic benefits of
actually using less energy. So in the grand scheme of things I
think there are some incentives and some rationale to the
incentives but we find that many of our customers are more
driven by the overall economics whether or not there are
incentives.
Ms. Velazquez. Thank you, Mr. Chair.
Chairman Graves. Mr. West.
Mr. West. Thank you, Mr. Chairman and Ranking Member.
We sat here and the question to the panel, we have all
agreed that the tax code as it stands now is pretty complex,
onerous, and I guess there are many with a loophole in there.
So my question would be there are two reform perspectives out
there: one is a flat tax and one is a fair tax. I would like to
get your assessments on how those two reform systems, would it
benefit or hinder the small businesses? And then maybe your
estimation on what would be good rates for those respective
systems. So flat tax, fair tax.
Ms. Olson. Well, my office has written this past year or a
year ago about a value-added tax and the administrative
challenges for the Internal Revenue Service doing something
like a sales tax that would be proposed in the fair tax. And we
have concluded that it is doable. You would have to deal with
the states, many of whom have their own and there are a lot of
transition issues. Most of the countries around the world do
not just have a sales tax alone because it would have to be so
high. They have some kind of low level income tax and then a
sales tax as well. So I think it is doable. It is just whether
people will step up to that.
I would note one thing. What some commentators have said is
the sales tax sort of disappears how much tax you are really
paying depending on how it is reported on your receipt. In some
countries around the world you never see it broken out. It is
in the broken price that shows up on your receipt at the end
and you have to think do you really want that disappeared or do
you want people conscious of what they are paying.
Mr. Strobel. Congressman, I would say I do not know if
there is--it is a binary choice. There is probably going to be
a mixture of some sort of rate reduction, hopefully, and I
think that is the key as far as we are concerned. I think the
lower the taxes, the better for the business. The more
investment we can make in the business the faster we can grow
and the more people we can hire. So I think the notion of
reduced tax rate, which implies a reduced level of government
expenditure, I think is the key to the long-term prosperity of
our economy.
Mr. Kulp. As a small business owner I would say that
anything that takes away the complexity and gives a long-term
view is a good thing. It is so difficult with the complexity
that we have now, you do not know really until the end of the
year what we owe in taxes. I am an LLC. Money all flows through
to me. I claim it on my personal income. The NRCA I do not know
has taken a stance on this per se and I am here testifying on
their behalf, but as a small business owner myself I would see
that as an excellent alternative to a tax code that is miles
thick.
Mr. Walker. I concur with Ms. Olson. I do not see how we
can level off with one sales tax and I am also concerned that
eliminating all tax levels and going to a single sales tax
demotivates capital improvement. You have got to provide some
incentive for people to invest. And so this is a tough
situation but I know we can minimize the impact to small
businesses by lowering the complexity of the code, just
removing it completely, and going to some single layer tax,
that could be very tough.
Ms. Olson. If I might add, I think some advocates of a
sales tax, forget how complex the state sales tax are with all
of their exemptions and what constitutes a service versus a
product and things like that. So you might find that you just
have added a new volume of the International Revenue Code when
you, you know, enact a sales tax. So it can be complex.
Mr. West. And a follow-up question for Mr. Kulp and Mr.
Strobel then. What type of incentives do you think could be
provided as far as our tax code to, you know, help you to grow
your businesses?
Mr. Kulp. That is a good question.
Mr. West. Well, I try to think of good questions.
Mr. Kulp. Well, and that is a stalling tactic. Good
question.
Mr. Strobel. At least for our business, clearly in the
energy efficiency business I think there is some room for
promoting more energy efficiency, more rationale allocation of
resources, at least in the energy industry. And so I think
there is room for that in our industry. There is no doubt about
it.
Mr. Kulp. And probably more on a global level, I guess,
from my own, the way I think is I do not like when the
government chooses winners and losers so I have a hard time in
articulating that well. But the NRCA staff I am sure would be
delighted to work with you on that.
Mr. West. Thank you very much. And I yield back, Mr.
Chairman.
Chairman Graves. Mr. Schrader.
Mr. Schrader. Thank you, Mr. Chairman.
Briefly, to Mr. Walker and Ms. Olson. Last Congress passed
a small business health care tax deduction and we all do these
wonderful things trying to help small business. But my question
to you two is have you gotten any calls on that and how easy is
that actually?
Ms. Olson. Well, it is a very complex deduction and my
office has been working very hard to actually develop a
calculator that we can roll out on, you know, we are going to
test it internally with some fact patterns and then try to get
it ready to roll out so that people can calculate how many
full-time equivalents they have and how they meet that because
it is a very complex provision. And if we do not do that, we
will probably have a lot of inadvertent noncompliance. And more
importantly, people not benefitting themselves, you know,
achieving, receiving the benefits of a provision.
Mr. Schrader. They will not take advantage.
Ms. Olson. They will not take it. Mr. Walker, do you
concur?
Mr. Walker. I concur. I am glad Ms. Olson mentioned the
calculator. In all of the calls that I have received on this I
have been saying I hope somebody comes out with something to
calculate this. So that is the answer we are all looking for.
Mr. Schrader. All right. Very good. Very good.
Pretty much everyone here has testified about the
complexity of the tax code and there is a proposal out there.
The only one I know of has gotten great bipartisan support on a
national level and that was put forward by the Fiscal
Commission. It does not get much simpler than eliminating every
single tax expenditure and lowering all the rates to a
mythological figure that no one in America could ever believe
possible again of 814 and I think it is, what 25 percent or
something like that? And corporate tax rate drops down to where
we are almost competitive with the rest of the world. If you
talk about the global competitiveness piece, to me, and of
course you could add back targeted things to encourage
investment at certain points in time when this Congress or the
next Congress feel it is warranted or to take, you know, some
disadvantaged populations.
To me, I think if we had the political courage to do
anything that is simple that even I could understand in my
veterinary practice, it would be to do that type of proposal.
Could you comment on whether or not you are for that proposal
and what you think your members might be interested in?
Mr. Walker. I believe moving down to a simpler tax
structure will work. I will go back to a prior comment. When we
removed all the barriers and create simplification, there still
has to be something there to incentivize. And so what will
occur inevitably is it will create--we will go down to a simple
process and it will begin to re-expand itself with complexity
because we have to provide incentives to invest. So I think
that would happen.
Chairman Graves. Mr. Kulp.
Mr. Kulp. The overall tax code is not a part of this thing
but back to the 3 percent withholding for government contracts.
To me that is something that is so easy to eliminate and it
just does not make sense. I know it is one small step but,
again, that is, I guess, the only input I have on that.
Chairman Graves. Mr. Strobel.
Mr. Strobel. There is a lot of attractiveness in the
simplicity of what you have just described. I like that a lot.
I think that as far as targeted incentives for investment, I
think the fact that companies would have more capital available
to let them figure out what they would invest in.
Chairman Graves. Good point.
Mr. Strobel. I mentioned before, we talked a little bit
about potential targeted investment in energy efficiency. I
think that has a larger policy aspect to it, an energy self-
sufficiency, energy independence, element to it that is
attractive to us as a company and to me personally.
Chairman Graves. Ms. Olson.
Ms. Olson. I think that, you know, we have recommended that
we start with zero-based budgeting, that you just eliminate
everything and then go piece by piece and say does this need to
come in through the code? And that goes to the compelling
public policy. Is there a public policy reason for putting
something in the code? And then you ask what would it do to
taxpayers who are the target of this public policy? Will they
be able to comply with it? What will it do to the IRS? Will
they torment taxpayers? Will the IRS not be able to administer
it?
If I could talk for a minute about the withholding
requirement, one thing that we have recommended instead of the
3 percent is to require federal contractors, you know, the
federal agency that is contracting, to get a response from the
IRS whether that contractor is in compliance with their federal
tax obligations before the contract is awarded? And in that way
you are doing it in a proactive way as part of a qualification
process, a procurement process, rather than doing withholding.
And you get to the same results. You are only giving contracts
to contractors who are compliant with their federal taxes.
Mr. Schrader. I think that is a good idea but simplicity is
the key. I mean, the reason why we have all these gyrations
with 3 percent is the government is trying to make money off of
us at the bottom line and you pick winners and losers to your
gentleman's comments and I think the beauty of what is being
proposed by the Fiscal Commission allows us to do targeted or
specific periods of time that I think Congress should review.
And when that has outlived its usefulness and we moved to
something else. It is energy maybe right right now. Maybe it is
something else later on. I think I have a lot of confidence,
believe it or not, in this Congress and in the Congress that is
coming down the line but we have got to get small business some
relief right now.
Thank you. And I yield back.
Mr. Barletta. Thank you, Mr. Chairman.
My wife and I, we are small business owners and we were a
subchapter S corporation so I understand how raising taxes on
businesses and people earning over $250,000 will affect--have a
direct effect on small business. Since I am here, I am a
freshman, you know, all we have talked about was jobs and how
we create jobs. And there is not a better committee than this
Committee right here. When we talk about putting Americans back
to work, seven out of ten jobs created are created by small
business. So I understated how regulation and uncertainty
affects small business.
My question is to Mr. Walker. Can you please provide more
details about the impact of Congress constantly reauthorizing
expiring provisions of the tax code on your small business?
Mr. Walker. It was evident in this last session when it was
unknown whether the current regulations were going to be
extended. Many small business owners sat on the sideline and
many budding entrepreneurs sat on the sideline simply waiting
to see what was going to happen. We saw a downturn in any
movements, pretty much any movements of businesses
transitioning ownership, new ones coming in. So when the
regulations are constantly changing, long-term planning becomes
essentially impossible and a small business owner, if they
cannot get their hands around it, they will sit idle. And it
happens. So it is a negative to the economy when that goes on.
Mr. Barletta. So you would agree that, you know, passing a
tax code for one year, two years, an extension of one or two
years is not really doing anything to remove the uncertainty
that small businesses are looking for to be able to invest and
create jobs. And I am going to follow that up with the
environment that we have created here in Washington with the
overregulation and the uncertainty and government-run health
care. All the obstacles that small businesses look at. Do you
believe that we are stopping the entrepreneurial spirit of
American right now by our own doing here in Washington?
Mr. Walker. I know for a fact that buying--not allowing
extensions or regulations to be for periods of 8 years and 10
years. By not having that it does not motivate people to be
willing to expose themselves to the kinds of debt and the risks
it takes to really spur small business. I know that for a fact.
So yes, doing these one- or two-year things are good for short-
term savings tax deductions but they do not serve long-term
planning needs.
Mr. Barletta. Thank you. I yield back, Mr. Chairman.
Chairman Graves. Ms. Chu.
Ms. Chu. Thank you, Mr. Chair.
I would like to ask a question about the issue of
classifying an employee as an employee or as an independent
contractor. The IRS has a 20-factor test to determine
classification and it's confusing and unclear from what I read
from the testimony that you have submitted. And there are small
businesses that fear the penalties that will ensue if a worker
is misclassified. In addition, of course, workers can be
cheated if they are misclassified because they do not receive
benefits and could lose the protection of employment and labor
laws. So it is to the benefit of everybody to be accurately
classified as either an independent contractor or an employee.
I know Mr. Walker and Ms. Olson, you both addressed this?
Mr. Walker, what would we have to do to simplify the
classifications so that both workers and employers could
benefit?
Mr. Walker. It would be a very definitive break to say the
least. An employee falls into a particular category or a
contractor falls into a particular category. Unfortunately,
that is not the case right now. You simply have to make a
decision based on what you think is applicable to that person.
At present, if somebody is going to step up and be a
contractor, if they were providing services to three or four
other people doing similar type work, you can get comfortable
with their contractor. But if they are only working for that
one entrepreneur, then they may be an employee.
Now, unfortunately, that puts the onus on the employer, the
entrepreneur, to have to figure out what is going on in that
person's life. And that is difficult. So there needs to be some
very definite definitions put in place as to what is an
employee versus a contractor.
Ms. Chu. Do you have any suggestions?
Mr. Walker. The type of work that they will be rendering. I
think they have done a great job right now in saying does this
person provide their own equipment? Are they controlled by the
entrepreneur? That is a good way of doing it. But when you come
in and look at the type of services that are being delivered,
that is one way of breaking it down. It could be broken down
into an industry. Make it very clear that the contractor, if
they are going to place it with a contractor, has to submit
something to the employer giving information about their
background. Right now that is not required and it is simply a
service agent uncovering something they find was not compliant
and the entrepreneur is in trouble. So there has to be a bridge
between the people who are being hired and the entrepreneur.
But the code does need to come up somehow. The only thing
that is there is the 20-point test and it is just designed to
say is there much control. That is the only thing that is in
the code right now, how much control is there? That needs to be
somehow expanded.
Ms. Chu. Ms. Olson.
Ms. Olson. We have had lots of discussions with the
business and small business community and their concerns are
where we are with the status quo, that the IRS is not allowed
to issue guidance other than what we have got out there. It is
that they do not trust the IRS and what kind of guidance it is
going to issue. So what we have proposed to break the logjam is
that the IRS be instructed to engage with the business
community and talk through just the very issues that Mr. Walker
is raising, come up with some proposed guidance to submit to
the tax writing committees, and that would form a basis. And
then Congress could react to that if they felt that the IRS had
not listened sufficiently to small business, et cetera.
I think that, you know, where we are is that there does
need to be change for all the reasons that you have mentioned.
And I will say once we come up with the clear sense of where we
want to go with this, I had visited the United Kingdom and they
actually have on their website a question and answer process
for the employer to go through and answer these questions and
it will get an answer back. If they do not--if you are an
employer or, you know, you have independent contractors, if you
do not like the answer it is not binding you of appeal rights.
But if you like the answer, then unless you have
misrepresented, you can rely on that as a safe harbor. And I
think that is what businesses need. You know, a safe harbor.
They need certainty. They need to know one way or another so
they can proceed and plan.
Ms. Chu. Thank you. And could you also just say a few words
about the business tax forms? You recommended two changes to
business tax forms to improve reporting and tax compliance,
just simply adding a line to Schedule C and adding check boxes
to business tax returns. Could you elaborate on this?
Ms. Olson. Well, actually, the IRS is actually going
forward with this. One thing we had suggested was just that
businesses be required to break out, you know, here are our
receipts from 1099s that have been reported to the IRS. And
here are our receipts other than what is being reported. And
good accounting systems you just back out what your 1099s are.
And we thought that would help drive some people who are in the
cash economy to sort of report a little bit more.
And then the other question was a lot of people do not know
that they have to do this information reporting so we really
wanted to jog people's memories and say, you know, if you are a
small business person and you have paid people over $600 for
services provided in the course of business, you know, have you
filed your 1099s? And both of those are little behavioral
reminders but would generate some additional income.
As a former preparer, I have seen what my taxpayers have
done, my clients did, you know. They would add up their 1099s
and then they would add a couple thousand dollars and say that
is the additional amount we made. But maybe they add up and say
more than a couple thousand dollars if that question were
there.
Ms. Chu. And this is being implemented?
Ms. Olson. The IRS is implementing a version of this now.
Ms. Chu. Thank you. I yield back.
Chairman Graves. Mr. Walsh.
Mr. Walsh. Thank you, Mr. Chairman, and thank you to each
and every witness for coming in today, especially you, Mr.
Strobel, from close to home in Chicago. Thank you.
Let me throw maybe a couple softballs your way. Expensing.
Right now you have got to calculate depreciation and deduct
that from your taxes. Would it be a heck of a lot easier if you
could just write off the full cost of expenses in the first
year? What would that do? What would that do, good or bad?
Mr. Strobel. Well, from a tax perspective you would be
better. I mean, there would be less tax to pay, more money
available for investment.
Mr. Walsh. And what would that lead to? Less tax to pay
would lead to what?
Mr. Strobel. More money to invest in the business. More
money to grow the business. More money to market. More money to
understand our customers. It should lead to growth. It should
lead to us be more competitive, help us be more differentiated
and be more profitable. But also be able to employ more people.
We need people to grow the business.
Mr. Walsh. Mr. Kulp.
Mr. Kulp. I would agree with that. If the Section 179 I
think it is called. I am not an accountant myself but my
accountant tells me this, it is obviously put there for a
reason by Congress because it does exactly what you are
thinking it should do. It simply makes sense to be able to
expense as much as possible. It makes you invest in the
business, hire people, and buy goods and services that you
otherwise would not.
Mr. Walsh. Mr. Walker.
Mr. Walker. I concur. If you are able to write off 100
percent of your equipment costs, you lower income, lower tax,
increase discretionary income. That is what allows somebody to
actually make an investment and bring in people. I know on one
occasion that I can think of right off the top of my head, a
new business owner was coming in, had plans to hire five
people, had to cut that down to three because they could not
deduct a number of the items that they had projected they could
once their accountant told them what they were actually going
to be able to take as a deduction. A lot of it was equipment
investment. So I know that that happens.
Mr. Walsh. Ms. Olson, would that be a good thing?
Ms. Olson. Well, I think you would also have to address the
issue of recapture that Mr. Walker spoke about because in our
office that is where we see problems for taxpayers. It is a
gotcha. You know, they do not know it exists and then suddenly
they have disposed of an asset that they depreciated fully
under 179 and then the liability is all back to them. So you
have to deal with that.
Mr. Walsh. You know, thankfully, it looks like Congress is
repealing the 1099 that was part of the health care legislation
from last year. 1099s, though, are still an issue, even prior
to this edition with the health care legislation. You still
have to fill out 1099s and I am guessing that costs money and
that is still a headache. Any sense as currently constituted
they are an undue burden? Mr. Strobel? Mr. Kulp?
Mr. Strobel. I guess I would say: Is it an undue burden?
Filling out 1099s for us is not an undue burden.
Mr. Walsh. Mr. Kulp.
Mr. Kulp. For us I guess we have gotten used to it to the
point where, you know, it is like a frog thrown into the frying
pan. You do not really know. But I believe the repeal of the
1099 within the health care provision is absolutely necessary
because that would just proliferate them and make it very, very
onerous and complex.
Mr. Walsh. Mr. Walker.
Mr. Walker. The 1099 reporting as it currently is without
the additional, it needs to be there. And I happen to come
across many people who believe that if they have been paid less
than $600, they are not even supposed to pay income tax on
that. So they even misunderstand the regs. But without having a
1099 reporting, absolutely income tax collections would go
down. People would find ways to hide that money because they
would believe nobody knows they made it. So it is necessary
with our current structure.
Mr. Walsh. Ms. Olson, quick question. Is the IRS planning
at all on implementing any sort of substantive e-filing system
for business taxes?
Ms. Olson. You know, I have not seen those plans and we
have advocated for that for years. Even they used to have a
system just for employment tax where you could use your
telephone and they eliminated that. We did a study last year
that said you need to reinstitute that. That is the only free
electronic method for employment, you know, businesses to file.
Mr. Walsh. Why do not you think there has been movement on
that?
Ms. Olson. I think it is a combination of both the concern
on the part of the software developers, that the IRS is
intruding on their environment, as well as it is not going to
be a capital investment on the part of the IRS. You will need
to fund the IRS to be able to do that.
I just, I feel it really is a necessity. We have an
obligation to do that, particularly for small businesses.
Mr. Walsh. Thank you, all. Thank you, Mr. Chairman. I yield
back.
Chairman Graves. Mr. Altmire.
Mr. Altmire. Thank you, Mr. Chairman.
Mr. Walker, I want to follow up on the 1099 question. If
the President signs as expected the repeal that the Congress
sent him for the health care $600 1099s, what would the law
then revert to? What is the threshold for filling out 1099
forms?
Mr. Walker. Six hundred dollars. It is right now $600 and
greater. Now, there are different levels of 1099s but we are
talking about just a general miscellaneous 1099 is a $600
amount. And that is an appropriate amount. That should not go
away.
Mr. Altmire. Above that.
Mr. Walker. Anything at that or above.
Mr. Altmire. Thank you. Mr. Strobel, regarding the fair
tax, I am glad you are here because I wanted to catch you with
some questions on this or have a conversation. Is it your
understanding under the Fair Tax proposal, what happens to the
FICA tax, the Medicare and Social Security?
Mr. Strobel. We are going to have to follow up with you and
the National Small Business Association. We will follow up on
that question. All right?
Mr. Altmire. Okay. My concern on that would be what happens
to the way we fund Social Security and Medicare under that.
Where did that number come from, the 23 percent with regard to
the fair tax proposal? It is budget neutral according to the
proponents of the Fair Tax? Who is the determinant of that? Who
scores it?
Mr. Strobel. The NSBA will follow up with you on that.
Mr. Altmire. Okay. What about the percentage--do you
generally know as a small business what is the percentage of
small businesses that comply with sales tax currently?
Mr. Strobel. I do not know. That is another--we can follow
up with you.
Mr. Altmire. That would be a concern that I believe the
number assumes 100 percent compliance and under current law
there is certainly nothing close to 100 percent compliance on
the sales tax. So if you could have somebody from the
association follow up with us.
Mr. Strobel. Yes, we will.
Mr. Altmire. Ms. Olson, the IRS Commissioner recently
stated that he would like to overhaul the tax, as you know,
administration process by focusing on third party reporting,
and namely he wants to move to a system where the IRS would
already have third party information when taxpayers file their
returns. And as we were discussing, the 1099 reporting is an
example of third party reporting. Do you believe that there is
a way to implement such a program without creating the same
sort of situation that we had with the 1099 regulations under
the health care bill?
Ms. Olson. Well, first, a couple of years ago we
recommended that Congress force the IRS to look at the issue of
getting income data in real-time during the filing season so
taxpayers could download it into their software programs or the
IRS could make it available to taxpayers in another way. So I
welcomed, you know, the Commissioner's, you know, remarks in
that regard.
I am concerned with the recent love of 1099 reporting. As
much as I recognize and am an advocate for appropriate 1099
reporting because it does change taxpayer behavior. Once they
know that we know the information, 96 percent of the time they
report it on their returns. But there is a point of diminishing
returns where the IRS gets so much information or the burden is
being imposed on taxpayers who do not normally keep track of
that information that you just create a real headache, which is
what we saw with the expansion of information reporting.
So I think as we go out with information reporting we
really have to think about that point of diminishing returns. I
do not think the IRS should ask for information that it cannot
do anything about or that the information itself is not really
going to give us a clear picture of what is going on with
taxpayers. Having said that, you know, we can tell the taxpayer
a lot. We can tell them what their wages are. We can tell them
what their interest is. We can now tell them what their capital
gains or losses are because we have basis reporting. And all of
those are really beneficial things for the taxpayers and will
minimize errors.
Mr. Altmire. Great. Thank you. Thank you, Mr. Chairman.
Chairman Graves. Mr. Owens.
Mr. Owens. Thank you, Mr. Chairman.
Mr. Walker, there is some information that we have gotten
that says there is about $160 billion a year that is spent in
tax compliance work. Now, if we simplified the code, would we
not put folks like you out of business in large numbers?
Mr. Walker. It very well could be. Because I am here
advocating that I will probably get some phone calls.
Mr. Owens. From your colleagues I suspect.
Mr. Walker. From my colleagues. It will not eliminate the
profession; it will just change the dynamic of the services
delivered.
Mr. Owens. But certainly it will shrink it if we see a
decrease in those kinds of dollars diverted, right?
Mr. Walker. It would need to. Right.
Mr. Owens. I just always am curious about the unintended
consequences of what we do here.
I want to raise one other question. We talked a little bit
about the 179 deduction and there was some discussion about
recapture issues, but there is also another issue that creates
tax consequences and that is not matching up the amortization
of the debt used to acquire the piece of capital equipment and
the loss of the deduction because you have taken it in one
year. Does that create any issues and do you see any way around
that issue that we could implement?
Mr. Walker. Is that for me?
Mr. Owens. For you, yes.
Mr. Walker. So your question is to the deduction on the 179
that is compared to the actual cash outlay that has occurred?
Mr. Owens. Correct. Well, not cash--if you do a cash outlay
I agree it is not an issue.
Mr. Walker. Okay.
Mr. Owens. Because then it is a wash. But if you finance,
which most small businesses do, capital acquisitions, then you
are in a situation where unless you can repeat the process
every year you are in a position where you are creating a tax
where there is no income.
Mr. Walker. You have got a deduction where there is no
income?
Mr. Owens. Right.
Mr. Walker. Well, the deduction then can be moved. So once
you have taken the deduction, the deduction goes up to zeroing
out your income and then it flows over into the next year. So
the carry forward could allow that to happen. I do not see a
problem with people getting a full deduction. The problem I
have is limiting the benefit that they can get from that
deduction. Under current 179 regulations, if somebody owns five
different S corporations and they all take advantage of the
deduction, you will--that deduction goes to the individual tax
return. And if the same person owns all businesses that person
can only have one 179 deduction. So right now that is 500,000.
But if you had 5 businesses maxing that out, there is 2.5
million. That business owner could lose $2 million worth of
deductions the way the code is written right now. So allowing
the deductions is not the problem; it is making sure that you
can benefit from that and moving it forward if you lose the
ability to take a deduction in the year that you have actually
done the 179 election.
Mr. Owens. And we have also had a lot of conversation today
about the issue of tax expenditures and whether or not we
should eliminate all of those or whether, as you are
suggesting, we should be doing targeting or targeted either tax
deductions or tax credits. Does not that put Congress in the
position of selecting winners?
Mr. Walker. I do not know if it puts them in the position
of selecting winners because it would apply across the spectrum
of all the business owners. It is a targeting effect. Even if
we simplify, just completely simplify, we will still have some
targeting that will need to be done within the system over
time. So it is the people who can take advantage of it and all
these small business owners and the things at least we have
talked about today, it applies to all of them. So it is not
going to be one particular person or one particular sector.
Mr. Owens. But it will be a particular--potentially a
particular industry. Like, if you created an R&D credit for
solar energy you would be solely focused on that particular
industry.
Mr. Walker. That would be accurate. But a 179 issue----
Mr. Owens. Oh, I am sorry. I may have confused you because
I was not just talking about 179. I was talking about the
panoply of various credits we have in the tax code now.
Mr. Walker. Right.
Mr. Owens. If we eliminated all of those, and then you are
suggesting we build them back up over time, you would be
selecting winners to some degree, like we have now.
Mr. Walker. Like we have now. Correct.
Mr. Owens. Mr. Chairman, I yield back. Thank you.
Chairman Graves. Ms. Clarke.
Ms. Clarke. Thank you very much, Mr. Chairman, Chairman
Graves, and Ranking Member Velazquez. And I want to thank the
panel for testifying before us today.
I would first like to just say that over the course of this
Congress much has been said about our nation's deficit as it
should be. I agree that we must aggressively tackle the debt.
Unfortunately, I do not believe that we have been having an
honest conversation with the American people about why we are
in this deficit and how we can get out of it.
Again, while I agree that we must address our deficit, it
must be done responsibly. However, I disagree with the constant
refrain of the majority that says that we do not have a revenue
problem and I think that is at the heart of what small business
is trying to address here today is the complexity of our tax
system. The refrain is that we have a spending problem. The
fact of the matter is that we have both.
And at the beginning of the last decade we were operating
with budget surpluses. Now we are operating at staggering
deficits. And while we have two undeclared wars and an economic
downturn have played a considerable role in increasing our
debt, it is crystal clear that we began our sprint down this
road due to what I believe were irresponsible tax cuts for
those who could have most afforded them and robbing the
Treasury of that much-needed revenue.
The majority is now using this lack of revenue as a
justification to cut programs for the most vulnerable
Americans. And many of my colleagues on the other side have
sort of echoed Mr. Strobel's testimony lamenting the 35 percent
corporate tax rate as the world's most expensive and it limits
our global competitiveness, yet on March 24th of this year The
New York Times published a story on how General Electric, one
of our nation's largest corporations paid absolutely 0 in taxes
after posting 14.2 billion in profits, 5.1 billion which was
made right here in the United States of America.
So while I agree that we need to work hard to limit the
burdens on our small businesses, and I agree in principle with
President Obama about the need to reform the tax code, it seems
to me that through our panel's testimony the goal here is to
apply a tax code to our extraordinarily complex global economy
that reflects little to no nuance or complexity. The attainment
of the American dream is what makes our country and its civil
society one of the greatest in the world. Our nation offers an
opportunity for financial success and prosperity that cannot be
found anywhere else on the planet. However, unfortunately, due
to a number of factors, the attainment of the American dream
has become elusive, so much so that many people, many small
entrepreneurs are finding it hard to gain footing, access to
capital, access to lending.
So my question to the panel is what do you believe is the
responsibility of those who have been successful to this
country that has made their success possible? It is for the
entire panel.
Ms. Olson. I do not know how to answer that question other
than to say that every person and entity owes an obligation to
the United States to pay their fair share of taxes under our
laws. And if our laws are structured in a way so that as
Congress has enacted them so that those with the assets and the
ability to retain advisors who can find ways to structure their
affairs so they pay less tax than the person or the entity that
cannot afford that, then we have a tax system that is out of
whack. And our testimony has been--my testimony has been, and
my writing have been to that point. I think that it is not
possible to get pure simplicity in a code. We are human beings,
and as you say, we live in a very complex world. But we can do
a much better job than the environment that we have today.
Ms. Clarke. What I find ironic is that we do not hear
anyone speak out when, for instance, GE pays no taxes. I have
not heard from all of the business councils, all of the small
business councils. And it would seem to me that if we are
talking about fair tax and fair share, that it should go both
ways.
And so I just wanted to put that on the table, Mr.
Chairman, because I think we need to look at what is happening
in its entirety. And I yield back.
Chairman Graves. Any more questions? Well, I want to say,
as this Committee continues to focus on job creation we
certainly appreciate hearing from all of you on the complexity
that small businesses deal with when it comes to following the
tax code and the problems that creates when it comes to job
creation.
I wanted to let everybody know following today's hearing we
are going to be sending a letter to the chairman and ranking
member of the House Ways and Means Committee to share with them
what we heard today. We want to make sure that small business's
voice is being heard loud and clear when they are dealing with
fundamental tax reform.
So with that I would ask unanimous consent that members
have five legislative days to submit their statements and
supporting materials for the record. And again, I appreciate
all of you coming out today and sharing with us your thoughts
and ideas and concerns. The hearing is adjourned.
[Whereupon, at 2:20 p.m., the hearing was adjourned.]
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