[House Hearing, 113 Congress]
[From the U.S. Government Publishing Office]



 
          SMALL BUSINESS TAX REFORM: GROWTH THROUGH SIMPLICITY

=======================================================================


                                HEARING

                               before the

                      COMMITTEE ON SMALL BUSINESS

                             UNITED STATES

                        HOUSE OF REPRESENTATIVES

                    ONE HUNDRED THIRTEENTH CONGRESS

                             FIRST SESSION

                               __________

                              HEARING HELD
                             APRIL 10, 2013

                               __________

                               [GRAPHIC] [TIFF OMITTED] TONGRESS.#13
                               

            Small Business Committee Document Number 113-009


              Available via the GPO Website: www.fdsys.gov



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                   HOUSE COMMITTEE ON SMALL BUSINESS

                     SAM GRAVES, Missouri, Chairman
                           STEVE CHABOT, Ohio
                            STEVE KING, Iowa
                         MIKE COFFMAN, Colorado
                       BLAINE LUETKEMER, Missour
                     MICK MULVANEY, South Carolina
                         SCOTT TIPTON, Colorado
                   JAIME HERRERA BEUTLER, Washington
                        RICHARD HANNA, New York
                         TIM HUELSKAMP, Kansas
                       DAVID SCHWEIKERT, Arizona
                       KERRY BENTIVOLIO, Michigan
                        CHRIS COLLINS, New York
                        TOM RICE, South Carolina
               NYDIA VELAZQUEZ, New York, Ranking Member
                         KURT SCHRADER, Oregon
                        YVETTE CLARKE, New York
                          JUDY CHU, California
                        JANICE HAHN, California
                     DONALD PAYNE, JR., New Jersey
                          GRACE MENG, New York
                        BRAD SCHNEIDER, Illinois
                          RON BARBER, Arizona
                    ANN McLANE KUSTER, New Hampshire
                        PATRICK MURPHY, Florida

                      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

                           OPENING STATEMENTS

                                                                   Page
Hon. Sam Graves..................................................     1
Hon. Nydia Velazquez.............................................     2

                               WITNESSES

Hon. Dave Camp, Chairman, Committee on Ways and Means, 
  Washington, DC.................................................     3
Mr. Sam Griffith, President and CEO, National Jet Company, Inc., 
  Cumberland, MD, testifying on behalf of the National Tooling 
  and Machining Association......................................     5
Mr. Steve Bearden, President and CEO, Linemark Printing, Upper 
  Marlboro, MD, testifying on behalf of Printing Industries of 
  America........................................................     7
Mr. Tim Watters, President and CEO of Hoffman Equipment, 
  Piscataway, NJ, testifying on behalf of Associated Equipment 
  Distributors...................................................     9
Mr. Roger Harris, President and COO, Padgett Business Services, 
  Athens, GA.....................................................    11

                                APPENDIX

Prepared Statements:
    Hon. Dave Camp, Chairman, Committee on Ways and Means, 
      Washington, DC.............................................    28
    Mr. Sam Griffith, President and CEO, National Jet Company, 
      Inc., Cumberland, MD, testifying on behalf of the National 
      Tooling and Machining Association..........................    40
    Mr. Steve Bearden, President and CEO, Linemark Printing, 
      Upper Marlboro, MD, testifying on behalf of Printing 
      Industries of America......................................    45
    Mr. Tim Watters, President and CEO of Hoffman Equipment, 
      Piscataway, NJ, testifying on behalf of Associated 
      Equipment Distributors.....................................    48
    Mr. Roger Harris, President and COO, Padgett Business 
      Services, Athens, GA.......................................    54
Questions for the Record:
    None.
Answers for the Record:
    None.
Additional Material for the Record:
    Chart - Annual Tax Liability on Manufacturing Entity & Owner 
      - Summary - New England Company............................    58
    AAFA - American Apparel & Footwear Association...............    59
    AdvaMed - Advanced Medical Technology Association............    60
    AGC of America - The Associated General Contractors of 
      America....................................................    68
    American Association for Homecare............................    73
    ADA - American Dental Association............................    75
    American Farm Bureau Federation..............................    76
    AIA - The American Institute of Architects...................    85
    APPA - American Public Power Association.....................    87
    ASSET - Americans Standing for Simplification of the Estate 
      Tax........................................................    98
    ATA - American Trucking Associations.........................   102
    Chamber of Commerce of the United States of America..........   104
    CompTIA - The Computing Technology Industry Association......   124
    ITA - Indoor Tanning Association.............................   131
    NATA - National Air Transportation Association...............   133
    NACD - National Association of Chemical Distributors.........   135
    NASE - The National Association for the Self-Employed........   137
    NFDA - National Funeral Directors Association................   140
    NGA - National Grocers Association...........................   141
    NPES The Association for Suppliers of Printing, Publishing 
      and Converting Technologies................................   159
    NRMCA - National Ready Mixed Concrete Association............   165
    National Restaurant Association..............................   167
    NRF - National Retail Federation.............................   177
    NRCA - National Roofing Contractors Association..............   179
    NSSGA - National Stone, Sand & Gravel Association............   181
    SBE Council - Small Business & Entrepreneurship Council......   183
    SEMA - Specialty Equipment Market Association................   186
    TechAmerica..................................................   188


          SMALL BUSINESS TAX REFORM: GROWTH THROUGH SIMPLICITY

                              ----------                              


                       WEDNESDAY, APRIL 10, 2013

                  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, Luetkemeyer, Mulvaney, 
Hanna, Huelskamp, Schweikert, Bentivolio, Velazquez, Schrader, 
Clarke, Chu, Payne, Meng and Barber.
    Chairman GRAVES. We will call this hearing to order. I want 
to thank all of you for joining us here today as we discuss tax 
reform and its importance on small business. I am very much 
looking forward to the testimony of our distinguished guests.
    Over time, our tax code has become more complex and 
temporary, with tax relief being extended for one year, months 
at a time, or even retroactively, taxpayers, and particularly 
small business owners, repeatedly complain that this 
uncertainty, coupled with new taxes, regulations, and the weak 
economy, have made it difficult to play or grow their 
companies.
    Small businesses are disproportionately affected by tax 
complicity. A study by the Small Business Administration's 
Office of Advocacy disclosed that small firms pay 67 percent 
more to comply with the tax code than large firms do, and a 
growing number of provisions, along with the fact that small 
firms frequently do not have an in-house account with their tax 
attorney means that small business owners must hire outside 
experts or add those duties to another employee's workload.
    For these and many other reasons, small business owners 
have urged Congress to address tax reform. But ``tax reform'' 
can mean different things to different people. And since I have 
been chairman, the Small Business Committee has held 10 
hearings dedicated to highlighting the negative impact the 
complex tax code has had on small firms. We have additionally, 
created an open mike web platform that allows small businesses 
from outside the beltway to communicate with our committee on 
any issues affecting their businesses. Nearly all those small 
businesses, whether they were here in this room or via the 
``Open Mic'' project, have consistently asked for 
simplification of the tax code and reduced tax rates both for 
corporations and individuals.
    For the past few years, many members of Congress and the 
administration have said that tax reform is an important agenda 
item, and since the beginning of the 112th Congress, the Ways 
and Means Committee chairman, Dave Camp, has held over 20 
hearings focusing on tax reform at all levels. He has also 
established 11 bipartisan working groups of members of Congress 
who have met with hundreds of associations, think tanks, and 
interested parties in an effort to put forth transparent, 
comprehensive, and truly bipartisan proposals to reform and 
simplify the tax code. And over the past few months, the Ways 
and Means Committee has released discussion drafts of 
legislation reform in corporate and individual rates, 
international taxes, and financial products.
    Which leads us to why we are here today. On March 10, 2013, 
Chairman Camp issued a discussion draft of a tax reform plan 
for small businesses. As part of the larger effort to reform 
various portions of the tax code, this draft would, among other 
things, make Section 179 expensing for equipment and property 
permanent, simplify and expand the use of cash accounting for 
certain small firms, create a unified deduction for start-up 
and organizational expenses, and provide two options for reform 
of the Federal Tax Rules applicable to pass-through businesses. 
This is truly an excellent place to start, and I commend 
Chairman Camp on his efforts so far. I am looking forward to 
hearing from all of our witnesses today and what they have to 
say about this draft legislation so we can offer further 
recommendations to our colleagues on the tax writing committee. 
This is really an open and transparent process.
    And with that I will turn to Ranking Member Velazquez for 
her opening statement.
    Ms. VELAZQUEZ. Thank you, Chairman Graves. And welcome.
    Chairman GRAVES. Thank you.
    Ms. VELAZQUEZ. The American marketplace is perpetually 
evolving, but while its vibrant nature has spurred growth and 
innovation, it has also managed to outgrow many tax policies. 
As a resort, we often come across provisions in need of 
reassessment. Such is the nature of our current tax code, which 
must be reviewed and redesigned to be made simpler and more 
effective for our nation's small businesses. While some of the 
existing tax policies provide critical small business tax 
breaks, much of the code is riddled with flagrant inequities 
and unnecessary complexities. For small firms, this creates an 
obstacle to success, rather than a means of encouraging growth 
and job creation.
    This Committee is well aware of the challenges created by 
the Internal Revenue Code and the major complications it has on 
business planning. Given that the last major reform of the code 
took place in 1986, it is clear changes are long overdue and 
that we cannot go forward without input from small business 
owners and entrepreneurs. With that in mind, it is important 
that we continue our progress towards comprehensive tax reform 
to spur innovation and stimulate small businesses. Failure to 
take any action, however, creates greater uncertainty and damps 
the outlook for small businesses.
    Comprehensive reform will have immediate benefits for small 
businesses, while also serving our nation's economic objective 
of promoting pro growth policies, devoting reform efforts on a 
complete overhaul of the code, support our nation's job 
creators by allowing them to continue hiring and expanding 
without worrying about annual changes. Most importantly, any 
agreed upon plan must ensure the extension of enhanced business 
expense and provisions. This will help to encourage small 
entities to make purchases now while also putting more money 
back in their pockets to invest and hire.
    One thing is clear. As we talk about tax 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 proposals will affect them. Small businesses are the 
drivers of the nation's economy and we cannot afford to put the 
costs of collecting taxes on them. Instead, we should be 
working together to help them thrive. This entails a complete 
restricting of the tax code rather than a piecemeal approach.
    A corporate-only method disregards the importance of pass-
through entities as drivers of the economy. It will be unwise 
to ignore their needs during the tax reform debates because 
when they do well, we all do well. It is clear that small 
businesses and our economy can come out winners if we approach 
tax reform in a comprehensive manner. It is my hope that we can 
address this issue immediately. If Congress acts quickly, small 
firms will see immediate benefits through a fairer and simpler 
tax code. The only reason for delay will be to keep a political 
issue alive.
    Today's hearing will hopefully start an ongoing dialogue 
between the small business community and policymakers regarding 
which tax proposals best support the success of small firms. I 
believe there exists an opportunity for this Congress to 
implement long-lasting reforms. Doing so will have immediate 
benefits for small businesses. It will also ensure the nation's 
long-term economic growth. I stand committed to working in a 
bipartisan way to revise policies that stifle entrepreneurship, 
innovation, and growth.
    With that, let me welcome Chairman Camp to this Committee, 
as well as the small business owners who have taken time from 
their busy schedule to be here today. Thank you. And I yield 
back.
    Chairman GRAVES. I am not going to make the introduction 
long, but obviously starting off the hearing is the Honorable 
Dave Camp, who is chairman of the Ways and Means Committee. 
Chairman, I appreciate you coming in. I know we are short on 
time, and I look forward to hearing from you.

   STATEMENT OF DAVE CAMP, CHAIRMAN, WAYS AND MEANS COMMITTEE

    Mr. CAMP. Thank you. Good afternoon, Chairman Graves and 
Ranking Member Velazquez and members of the House Small 
Business Committee. As a former member of the Committee, it is 
great to be back.
    I also want to take a moment to thank the small business 
owners who will appear on the next panel. Taking time away from 
their business is a big deal, and they have firsthand knowledge 
of just how broken our tax code is, how much time and energy it 
takes to comply with it, and what it means for them and their 
employees. That means fewer resources for them to hire new 
workers and provide benefits. They deserve a tax code that 
works for them in a better way. So I appreciate them coming to 
share their ideas and adding their voice to the dialogue.
    In preparation for today's hearing I did a little research, 
and the last Chairman of the Ways and Means Committee to 
testify before the Small Business Committee was Al Ullman in 
1979. So it was nearly that long ago that Congress reformed the 
tax code. Instead of making the tax code better, Congress has 
spent the last 27 years tinkering with the code, adding special 
provisions, making the code less effective and less efficient. 
That is something we must correct, especially for America's 
small businesses and their workers.
    Most Americans get their paychecks from a small business 
than any other type of business or government. And if we really 
want to strengthen our economy and put more money in the pocket 
of American workers and families, we must fix the tax code and 
how it treats small businesses.
    Last month, I released a discussion draft aimed at creating 
a simpler and fairer code for small businesses. The discussion 
draft is part of a broader comprehensive tax reform package 
that significantly lowers rates for individuals, small 
businesses, and corporations. The goal of the draft is to spur 
greater job creation and higher wages by reducing the burden of 
the tax code and the burden that it has imposed on small 
business.
    According to the National Federation of Independent 
Business, tax compliance costs are 65 percent higher for small 
businesses than for big businesses, costing business owners $18 
to $19 billion per year. In addition, nearly 9 out of every 10 
small businesses rely on an outside tax preparer to do their 
returns.
    So with about half of the private sector workforce employed 
by small business--nearly 60 million Americans--these costs, 
along with the Federal tax rate as high as 44.6 percent, are 
especially burdensome for a sector that has long been 
responsible for leading the nation out of economic downturns.
    The discussion draft includes a number of core provisions 
that are designed to simplify tax compliance for small 
businesses, whether organized as sole proprietorships, 
partnerships, LLCs, or corporations. These proposals are not 
partisan. Democrats and Republicans have championed these 
ideas, and small business organizations across the country have 
supported them. The core provisions in the draft would:
    Spur investment in equipment needed to grow business 
operations by providing permanent expensing of investments and 
property under section 179 of the tax code;
    Simplify tax accounting practices by expanding the use of 
simpler ``cash accounting'' method to businesses with gross 
receipts of $10 million or less;
    Provide relief for start-up organizational costs by 
establishing a unified deduction for these expenses; and
    Make tax compliance easier for partners and S corporation 
shareholders by reordering and simplifying the due dates of tax 
returns for partners and S corporations.
    In addition, the discussion draft includes two separate 
options designed to have greater uniformity between the two 
main types of pass-through entities: S corporations and 
partnerships.
    One option is an incremental approach that improves the 
ability of S corporations to compete, grow, and gain access to 
capital by modernizing current tax rules affecting S 
corporations and partnerships.
    Option 2 is a more transformative approach that simplifies 
the tax treatment of nonpublicly traded companies by repealing 
existing tax rules governing partnerships and S corporations 
and replacing those rules with a new unified pass-through 
regime.
    Since we released the draft, we have actively sought 
feedback from the small business community. The International 
Franchise Association, for instance, has said, and I am 
quoting, ``The proposal would reduce compliance costs and 
provide greater certainty to the more than 8 million employees 
across the country who wake up every day and go to work in the 
franchise industry and those Americans who aspire to become 
franchise business owners.''
    And Mr. Chairman, I will not read all the comments that we 
have received, but I do have a packet of feedback I am happy to 
share with the Committee Members, and I have included that in 
my formal testimony.
    Simply put, the tax code ought to be easier to understand 
and less expensive for small businesses to comply with--because 
every dollar they are not spending on taxes and tax compliance 
is a dollar they have to invest in equipment, start a new 
production line, hire a new employee, or provide more in wages 
and benefits. And that is my goal for comprehensive tax 
reform--a simpler, fairer tax code that leads to more jobs and 
higher wages.
    Thank you very much.
    Chairman GRAVES. I appreciate it, Chairman. And since we 
are obviously out of time and we have got a vote, which we will 
reconvene the hearing right after this, Chairman Camp does have 
to leave but he has said just submit questions in writing. His 
Committee would be more than happy to answer them. So just do 
it in writing and he will get those answered. So thank you very 
much for testifying. And we stand in recess at least for two 
votes.
    [Recess]
    Chairman GRAVES. All right. We will bring the hearing back 
to order. I apologize for the vote series in the middle of our 
hearing. It happens from time to time, but I do apologize for 
the delay.
    Our first witness on our second panel today is Mr. Sam 
Griffith, who is the President and CEO of the National Jet 
Company in LaVale, Maryland. National Jet is known for its 
micro hole drilling expertise and serves the aerospace, 
automotive, electrical, medical, and textile industries. Mr. 
Griffith purchased National Jet in 1992 and currently has 24 
employees. Today he is testifying on behalf of the National 
Tooling and Machining Association. I thank you for being here 
today and look forward to your testimony.

  STATEMENTS OF SAM GRIFFITH, PRESIDENT AND CEO, NATIONAL JET 
 COMPANY; STEVE BEARDEN, PRESIDENT AND CEO, LINEMARK PRINTING; 
  TIM WATTERS, PRESIDENT AND CEO OF HOFFMAN EQUIPMENT; ROGER 
      HARRIS, PRESIDENT AND COO, PADGETT BUSINESS SERVICES

                   STATEMENT OF SAM GRIFFITH

    Mr. GRIFFITH. Thank you for the opportunity to testify 
before you today on the impact of tax reform on small 
businesses. My name is Sam Griffith; I am president and CEO of 
National Jet Company in LaVale, Maryland. I am also a member of 
the National Tooling and Machining Association (NTMA) and I am 
testifying here today on behalf of both my company and the 
NTMA.
    I am also a Certified Public Accountant (CPA). I began my 
career practicing as a CPA with the international firm of Price 
Waterhouse Coopers.
    National Jet Company, which I purchased in 1992, was found 
in 1937, today is an internationally known expert in precision 
micro hole drilling technology. We can drill a human in a human 
hair to give you an idea of size. We service primarily the 
aerospace, automotive, medical, and textile industries.
    National Jet is structured as a subchapter S corporation, 
which means all income flows from the company to my personal 
return, which puts me into a much higher tax bracket than I 
normally would be due to the pass through.
    Given my combined training as a CPA and having worked in 
both the C and a S corporation provides me with a unique 
perspective on tax policy.
    The NTMA and I wholeheartedly support tax reform that 
includes real reform for both C corporations and pass-through 
companies. We desperately need lower rates, simplification of 
rules, and elimination of sunset provisions in the tax code. It 
is very difficult to play into the future when there is such 
uncertainty in the tax code.
    Why do most businesses use a pass-through entity? The 
reason is obvious. The double taxation of C corporation 
dividends which the owners pay when they take their earnings 
out of the business. No one wants to pay double taxes on their 
hard earned income. After all, when the owner pays a higher tax 
rate there is less revenue to buy equipment and hire employees. 
The fewer resources we have available, the more difficult it is 
to expand.
    Based on a December 2012 survey, the National Tooling 
Machine Association, 200 respondents identified the most used 
tax credits and deductions. They are section 179 Equipment 
Expensing; Bonus ``accelerated'' Depreciation; R&D Tax Credit; 
Section 199 Domestic Production Activities Deduction; LIFO 
inventory valuation.
    National Jet, in 2011, we claimed $400,000 in section 179 
equipment deduction; however, in 2012, the section 179 limit 
was $139,000, and a phase-out if you purchased over $560,000 in 
equipment. Our company needed a machine that cost $611,000, but 
if you purchased this equipment in 2012, we would lose section 
179 deduction because it exceeded the limit. This one piece of 
equipment exceeded the entire limit. Therefore, I only 
purchased $130,000 worth of smaller equipment to stay within 
the threshold of the tax provision. Then Congress, on December 
30, one day before year-end as part of the fiscal cliff, passed 
a provision increasing the section 179 to $500,000 and 
increased the phase-out to 2 million.
    Now, how could any small business react to this? One day in 
which to purchase a machine that weighs 36,000 pounds, 
transport it, have electrical lines installed, have airlines 
installed, and place it in service within 24 hours. No one 
could react to this. Small business did not get the benefit 
based on this last minute act of Congress.
    Another issue which received a lot of headlines in tax 
reform that is discussed is Alternative Minimum Tax (AMT). 
Because our business is captured under AMT, we cannot claim the 
R&D tax credit, which would be available to us because we are a 
leading-edge technology. In 2012, we could have received 
$30,000 in R&D credits. This was lost to us because the AMT 
limitation.
    In addition, when I hired a long-term unemployed person in 
my shop last year, I thought I could claim the $1,000 credit 
Congress passed under the hire act. Again, because I am subject 
to AMT, I cannot claim that credit. So you give us credits for 
R&D and employing workers who have lost their unemployment 
benefits, and then you take them away because of AMT. Why?
    As you can see, the current tax code is a maze of 
mismatched, complex provisions that provide disincentives to 
grow our businesses and hire new employees.
    We fully support Chairman Dave Camp's approach to push for 
comprehensive tax reform and applaud this Committee for holding 
this hearing to focus on the impact of small businesses. Our 
greatest concern is the seeming obsession with corporate-only 
tax reform--a path which leaves America's small businesses and 
manufacturers behind.
    I believe we must develop a reformed tax code which 
encourages manufacturing in America and helps our small 
businesses compete globally in the 21st Century. Small business 
has a stake in this great country and we want our voice heard.
    That concludes my testimony.
    Chairman GRAVES. Our next witness is Mr. Steve Bearden, who 
is the president of Linemark Printing, a full-service printing, 
graphics, and communication company at Upper Marlboro, 
Maryland. He participates in a variety of professional-related 
projects and associations such as serving as board member for 
the Printing and Graphics Association of the Mid-Atlantic. He 
is testifying today on behalf of the Printing Industries of 
America. Welcome to the Small Business Committee.

                  STATEMENT OF STEVEN BEARDEN

    Mr. BEARDEN. Chairman Graves, Ranking Member Velazquez, and 
members of the Committee, good afternoon, and thank you for 
inviting me today.
    I am Steve Bearden, president of Linemark, a private-owned 
union printing and graphics communications company 
headquartered in Upper Marlboro, Maryland. Linemark is a 27-
year-old company that employs 92 workers. I am also here as a 
member of the Printing and Graphics Association of the Mid-
Atlantic and of the Printing Industries of America.
    Despite tough economic times that saw our industry lose 
over 75,000 jobs in the past four years, printing companies 
like Linemark are ready to come back. It is critical tax 
policies that are in place that will us to do so.
    Chairman Camp's overall goal of simplifying tax rules 
concerning small business in order to reduce the impact of tax 
costs and complexity is one both Printing Industries of America 
and I personally can and do support.
    My comments this afternoon will focus on three specific 
provisions of the discussion draft.
    The first is making permanent section 179 expensing to 
allow Linemark and other small businesses to deduct investments 
in new equipment and property up to $250,000.
    This provision is vital to the future growth and job 
creation of my company and others like it. In the environment 
of a rapidly changing communications marketplace, it is vital 
that small printers be able to continually modernize their 
product and service offerings. When I say I am in the printing 
business, I am often asked if the Internet is killing off our 
profits. People are surprised to hear it is quite the opposite; 
there are tremendous growth opportunities in combining old 
school ink-on-paper printing with online and social media 
technologies. But it takes serious capital investment in order 
for small printers to evolve.
    For example, in 2012, Linemark had purchases over $2.5 
million. This included a $2.2 million printing press, a 
$174,000 router system, an $82,000 laminator, and a new $17,000 
VOIP phone system. By utilizing bonus depreciation, we did have 
an incentive and the additional resources to make the 
investments in our company's future growth. In the future, we 
will be upgrading our digital printing presses, which is the 
predicted growth area in the printing industry, and we will be 
adding new large format printers and expanding our bindery 
functions--both of which will allow Linemark to better compete 
in ancillary services that are critical to staying live in the 
new print marketplace.
    Small printers would benefit in their ability to grow if 
section 179 expensing was made permanent. The typical printer 
plans on spending $50,000 to $100,000 on capital equipment this 
year. Generally, higher profit printers are more likely to 
invest in capital equipment and to invest higher amounts than 
lower profit printers. These profit-leading printers are most 
likely to create new jobs. The impact is also positive for 
small suppliers that manufacture printing equipment, many of 
which are members of the Printing and Graphics Association of 
the Mid-Atlantic and the Printing Industries of America.
    The second is the provision that would simplify and expand 
the use of cash accounting for small business. The typical 
printing plant is small with around $3.3 million in annual 
sales and 20 employees. Many of these small firms would find 
new cash accounting rules helpful as Linemark would have when 
it was smaller. However, I should note that with this proposal, 
C corporations with gross receipts up to $10 million would gain 
the option of using cash accounting, but larger S corporations 
would lose it. More than 800 printing plants are S corporations 
and would fall into this category.
    Finally, the discussion draft poses two options to reform 
the rules for small business organized as partnerships and S 
corporations. Approximately, 20 percent of the industry is 
comprised of sole proprietorships and partnerships. Another 5 
in 10 printing firms are organized as S corporations. Linemark 
is a C corporation, but we do recognize that many other 
printing companies use the S corporation to simplify their 
structures.
    I would also like to briefly mention estate tax. The new 
exemption levels passed by Congress early this year are very 
helpful to companies like Linemark as I prepare for my children 
currently working with me to hopefully stay with the family 
business in the future.
    In conclusion, I urge this Committee and all Members of 
Congress to continue this important dialogue, maintain a strong 
focus on how the comprehensive tax reform legislation will 
impact America's small printers and small businesses in all 
industries.
    Thank you. And I look forward to answering any questions 
you may have.
    Ms. VELAZQUEZ. Mr. Chairman, it is my pleasure to introduce 
Mr. Tim Watters. Mr. Watters is the president and CEO of 
Hoffman Equipment Company located in New Jersey. The company 
was started in 1920 as the Hoffman Motor Transportation to 
deliver roofing material for installers, and it has been 
expanding ever since. Mr. Watters represents the third 
generation to run the business. He is testifying on behalf of 
the Associated Equipment Distributors, which represents over 
500 distributor member companies. Welcome.

                  STATEMENT OF TIMOTHY WATTERS

    Mr. WATTERS. Good afternoon, and thank you, Chairman Graves 
and Ranking Member Velazquez for organizing this important 
hearing and for inviting AED to participate. I also want to 
thank Chairman Camp for making tax reform a priority and for 
the transparent process he is created to gather the best ideas 
about how to improve the code. AED is looking forward to 
working with him and with all of you to achieve the objectives 
in the weeks and months ahead.
    AED's members are family-owned companies, like mine, that 
sell, rent, and service construction, energy, mining, forestry, 
and farm equipment. We are the critical link between machinery 
manufacturers and the local highway contractor, home builder, 
and farmer, and others who put equipment to productive use.
    The equipment industry is dominated by closely-held, pass-
through entities. Two-thirds of our entities are S Corps, LLCs, 
or LLPs. The average AED member who organizes a partnership has 
fewer than three owners. For that reason, we believe business 
tax reform should not only benefit big publicly-traded 
corporations. Tax laws affecting smaller companies and pass-
through entities must be improved as well.
    It is AED's position that tax reform should focus on two 
broad objectives. First, simplifying the code the reduce 
compliance costs and unintended consequences. And second, 
restoring long-term certainty to allow businesses and 
individuals to better plan for the future. The code's 
complexity has driven compliance costs through the roof. In 
fact, the IRS itself estimates that Americans collectively 
spend 6 billion hours per year on tax compliance, the 
equivalent of 3 million full-time jobs. Indeed, the code has 
grown so unwieldy that Congress cannot change it without 
negative unintended consequences.
    Let me give you an example specific to my industry. The 
Affordable Care Act established a new 3.8 percent tax on 
unearned investment income, which took effect January 1st of 
this year. The purpose of this new tax was to ensure that 
individuals who derive their income from passive sources, like 
stocks and beach houses, would not be able to avoid paying 
Medicare taxes. Unfortunately, the bill's drafters did not 
foresee the impact the law would have on legitimate, active 
construction equipment companies like my own. The people who 
wrote the bill certainly knew the tax code generally treats 
rental income as passive income but they did not consider that 
over the past 25 years there have been significant shifts in 
the construction industry towards the renting of construction 
equipment. This trend has accelerated in recent years as a 
weakened economy and uncertainty surrounding government 
infrastructure programs have made contractors more hesitant to 
buy new equipment. So despite the fact that this rental money 
is being earned by brick and mortar companies like my own that 
actively employ close to 47,000 people, the revenue is 
considered passive and it is therefore subject to the new 3.8 
percent tax, which in our own case will result in an 
approximately $400,000 tax increase.
    Basically, we have become entangled in the complex web that 
is the U.S. tax code and find ourselves ensnared by the new tax 
law we were never meant to pay. Not surprisingly, one of our 
top reform priorities is working to resolve this issue and we 
would of course appreciate any support this Committee can give.
    As I mentioned earlier, restoring certainty should be the 
second guiding priority for tax reform. Ninety-six percent of 
our members agree or strongly agree that the uncertainty 
surrounding the tax code is undermining the nation's economic 
vitality. Certainty means many things. It means making the good 
parts of the code permanent and ending the practice of having 
so many provisions like higher section 179 small business 
expensing levels expire on an annual basis. It means 
establishing a permanent tax code so we know that the things we 
are doing today and have been doing for years, like using 
``last in, first out'' accounting method and deducting business 
interest are going to be permissible not just a year from now 
but a decade from now as well.
    In conclusion, tax reform should be fair, encourage 
business risk taking and investment, and everyone should share 
in the benefits. AED and its members look forward to working 
with Congress to achieve these objectives. Thank you again for 
the opportunity to testify today and I am looking forward to 
any questions.
    Chairman GRAVES. Thank you very much, Mr. Watters.
    Our next witness is Roger Harris, President and CEO of 
Padgett Business Services in Athens, Georgia. He has been with 
Padgett for more than 40 years. After serving as president of 
its largest franchise in the organization he became president 
of the entire franchise system in 1992. He has served twice as 
chairman of the Internal Revenue Advisory Council and has been 
called to testify numerous times before both houses of Congress 
on small businesses, IRS, and tax issues. Thank you for being 
here, and I look forward to your testimony.

                   STATEMENT OF ROGER HARRIS

    Mr. HARRIS. Thank you, Chairman Graves and Ranking Member 
Velazquez. It is a pleasure to be here. Thank you for the 
opportunity.
    Padgett Business Services has been providing accounting, 
tax planning, tax preparation, and payroll services to small 
businesses for, as we said, almost 50 years. We define our 
customer as one with fewer than 20 employees. And to some 
people they consider those to be ``mom and pop'' businesses. 
However, when you look at them collectively, I think the last 
study I saw said that that group of people employs 90 percent 
of the workforce, so we think individually they may not be that 
large but collectively they are a powerful organization.
    The other interesting thing I think as I listen to my panel 
colleague and other small business owners is someone once told 
me that being a small business owner was the opportunity to do 
the one thing that you love and the 99 things that you hate. 
And probably the top two things on the 99 list would be paying 
taxes and tax compliance. And so anything that we can do to 
simplify our small business owners' lives would be welcome by 
then. And quite honestly as we sit here on April the 10th, five 
days from the filing season, I can assure you despite the 
comments that have been made about firms like ours benefitting 
from tax reform, we would be very happy to see a little simpler 
and more predictable tax system going forward. So we want to 
thank this Committee and, of course, Chairman Camp and his 
Committee for the work that they are doing and all of you are 
doing to simplify the tax code.
    We are particularly excited about the expansion of the cash 
method of accounting because for our marketplace that would 
make their lives terribly simpler because one thing they do 
understand is their checkbook. They understand when money comes 
in it should be income and when money goes out it should be an 
expense. And the closer we can stay to that method of 
accounting, the better it will be for all of us, so we are 
particularly pleased to see that included in Chairman Camp's 
proposal. We have, in fact, been trying to push that along with 
David Kautter from American University. In fact, we are a 
little more aggressive than Chairman Camp is, so we hope you 
would consider some of our ideas to even expand that. But we 
are particularly pleased to hear that that is a big part of 
what tax reform could look like.
    We are also happy to see the discussion on the business 
structuring part of small business because, you know, in many 
instances a lot of people assume, particularly in our 
marketplace, that people got to where they are through a lot of 
planning and taking advantage of how the tax code helps them. 
Really in our marketplace it does not work that way, and I 
would like to illustrate that by telling a short story. And 
that is that one day you are cutting your grass and the IRS 
views that as a hobby. The next day when your neighbor needs 
you to cut their grass. You became a sole proprietor. When more 
neighbors needed their grass cut you called your friend with 
his lawnmower and they came and helped her, you became a 
partnership. And then later on you talked to someone like us or 
an attorney and you became an S Corp or an LLC. All through 
that process your life got more and more complicated, but to 
the business owners they are still just cutting grass. And that 
is what they want to do and that is what they want to spend 
time doing so they can cut more yards and hire more people and 
do more things, and less time complying with a complicated tax 
system.
    So tax reform is very much needed for small business, for 
people like us. We are a big supporter of what the chairman and 
his bill proposes. Like anything, we have some ideas that we 
would like to see a little differently. We are a little 
concerned in one of the proposals about entity level 
withholding on income because that requires there to be a 
calculation of income that may or may not exist, and so we 
think perhaps we could do something with entity level 
withholding on payments that might work better. But again, this 
is a great step.
    I echo the comments of everyone. Predictability was a huge 
part of the problem we face today and anything we can do to 
make small businesses' life simpler we would all welcome it. I 
think we all recognize there is a compliance burden that has to 
be met but we have to be careful that that burden does not get 
into something beyond what it is intended to. And as we have 
heard here there can be unintended consequences that take away 
from that business owner focusing on that thing that got them 
in business in the first place because they can help this 
economy grow. Again, small businesses may not hire 100 people 
at a time but there are so many of them. If they could all just 
hire one new person over the next 12 months this country would 
be a whole lot better for that. So anything we can do. And 
again, I want to applaud the work of Chairman Camp and his 
Committee, and this Committee particularly, and I look forward 
to the opportunity of taking your questions. Thank you again 
for the opportunity to be here today.
    Chairman GRAVES. Absolutely. And thank you all for 
participating. We are now going to move into questions. And I 
do want to remind the Committee, too, that if anybody has any 
questions for Chairman Camp, just submit them and he will be 
happy to get those answered.
    We are going to start out with Mr. Hanna.
    Mr. HANNA. Thank you, Chairman.
    I have a question that may sound like a philosophical 
question but it is not. One of the conversations that goes on 
around this place a lot is what wealth is, what wealth means, 
what the accumulation of wealth, and how much of that wealth 
that you accumulate is the government supposed to take away 
from you. I have always maintained that being in small 
business, while we all want to make money, it is hard to grow 
your business if the government does not let you retain things 
because we all live in cyclical businesses, like even Mr. 
Watters, up and down, you do not know from year to year what 
you are going to do. And in a very real way it is hard to run a 
secure business unless you are allowed to retain your earnings. 
And if we are taxing you at a rate of 44 percent as Mr. Camp 
said, then add your state rates to that and then you have to 
live off of it, my point is a quarter of a million dollars a 
year may sound like a lot of money to a lot of people but I 
would like your view of what that means to you in terms of 
growing your business and hiring people, and how you view that 
kind of wealth in terms of your ability to raise your family 
and run your life and still grow. If that is not too abstract.
    Mr. WATTERS. Are you asking me specifically?
    Mr. HANNA. Yes, sir. Or anyone, really.
    Mr. WATTERS. Well, I will take a stab at it.
    Yeah. The cost of running a business is extraordinary and 
seems to grow all the time and from all angles, and it is 
really a very difficult world to operate a business. And in 
many regards $250,000 is a lot of money and there are a lot of 
people and our own employees that do not earn anywhere near 
that much. And you wonder in today's economy how they make it 
quite frankly.
    But in terms of operating a business, you know, it is a 
drop in the bucket. It is not a lot of money at all in terms of 
the various expenses they face on a day-to-day basis for sure.
    Mr. HANNA. Mr. Griffith?
    Mr. GRIFFITH. Well, you have a good point there when you 
said 44 percent to the federal and then you pay the state. That 
is about 50 percent of your money that goes away. That is a 
huge silent partner out there that is taking no risk. You know, 
we are taking all the risk of the business and we have got 50 
percent left that we invest in our business and live off that 
money, and that is very difficult. Two hundred fifty thousand 
dollars when you are a pass-through entity, you can get to that 
number very quickly. And also when you have two wage earners 
you can get to that number very quickly. And I think that is a 
pretty low number to say that it is a wealthy person.
    Mr. HANNA. Mr. Bearden.
    Mr. BEARDEN. I would agree with these gentlemen. Our 
business is very cyclical, so when we have good times we do 
need to put away some money for times that are not as good. And 
that happens. We went through a very steep drop in 2009 with 
our own business and we were very fortunate to make it through 
there but it got very, very tight. And through the better years 
if we had been able to keep a little bit more money in the 
business it would have helped out.
    Mr. HARRIS. Just to add to what others have said, and I 
will come back to the cash method of accounting again, it is 
one thing to owe taxes on money that you have earned; it is 
another thing to owe taxes on money that showed up on a piece 
of paper that you did not have. So I think what is critically 
important is whatever our tax rates are that it be based on the 
real money that the company generated, not some fabricated 
number due to some complicated tax law or accounting trick.
    Mr. HANNA. So you would like the accrual method to be an 
option and cash method to be an option also. You are at--what 
is it, 5 million now, so you raise it to 10.
    Mr. HARRIS. Ten. We would think that for the--and again, 
everything has got to have exceptions for certain things but 
for the most part, the closer we can allow businesses to track 
their cash inflows and outflows and let that be the determining 
factor of how much tax they owe, not that they will ever like 
paying taxes but at least it will be a little bit more 
understandable and a little more bearable because it will be 
based on the real money that they generated.
    Mr. HANNA. Mr. Griffith, if I have a moment left I want to 
ask you something. You said that you put off making certain 
decisions based on the uncertainty of the tax code. If you 
could clarify that. I would assume that that means that you buy 
what you need regardless of the tax code but the uncertainty 
changes kind of the dynamic and makes it harder to think about?
    Mr. GRIFFITH. Right. All your decisions are investments and 
are not necessarily affected just by taxes. But you have to 
have the cash to buy this equipment. And when you are sitting 
there and you see this deduction go away if you purchase too 
much in that year, then all of a sudden you have got less cash 
to put into that piece of equipment and it might make the 
decision of whether you can afford to buy it or not. And that 
is basically what I was getting at.
    Mr. HANNA. Thank you. I have no further questions. Thank 
you, Chairman.
    Chairman GRAVES. Thank you, Mr. Hanna.
    Ms. VELAZQUEZ. Mr. Watters, there is much talk about 
repealing certain tax provisions that are vital to small 
businesses, such as the AMT and the estate tax. However, there 
is a reluctance to have these taxes paid for which builds upon 
our national debt and further reduces the investment that can 
be made for transportation or infrastructure. Higher taxes do 
burden businesses but in order to control national debt also 
stifles overall growth in our economy. How do we strike an 
appropriate balance between the need for businesses to have 
lower taxes and keeping our government fiscally responsible?
    Mr. WATTERS. And I guess that is the million dollar 
question. And I wish I had the answer to that. And I do not 
think I have the answer but I do have some thoughts on that, 
some themes.
    Ms. VELAZQUEZ. Nor do we.
    Mr. WATTERS. So I think that the end of simplifying the tax 
code and creating certainty to the tax code is an end 
worthwhile in and of itself, irrespective of whether the 
changes are tax neutral or create tax revenue. I think that end 
is worthwhile and will benefit the economy, and ultimately will 
indirectly produce more revenue for the government down the 
road because of having greater certainty and businesses are 
doing better.
    In addition to that though, you know, we are very much in 
favor of any tax that would be directed towards infrastructure 
investment. We feel that investment in our infrastructure, 
which is in serious decay, is ultimately beneficial to the 
economy and we would actually be proponents of user fees, 
either increased gas taxes or miles driven taxes, that would be 
earmarked towards infrastructure investment, particularly our 
highways and bridges.
    Ms. VELAZQUEZ. Thank you.
    Mr. WATTERS. Thank you.
    Ms. VELAZQUEZ. Mr. Harris, the current tax code contains 
sections using various definitions of a small business, either 
using gross receipts or number of employees. Some experts have 
suggested that using only one definition for a small business 
will make the tax code simpler. How could the use of a single 
definition help or hurt small businesses if this is an approach 
that should be considered as we move forward with tax reform?
    Mr. HARRIS. Well, you are right. There are as many 
definitions of a small business. Depending on who you talk to 
they can all come up with a different one. We focused on 
employees because we thought gross receipts as a definition 
probably had more to do with what you sold than anything. Like, 
if you are selling Cadillacs it is going to be easier to get to 
10 million than if you are selling candy bars. And so we looked 
at employees as a measure of complexity in what we thought a 
small business should be and we thought if you have one 
employee it cannot be too complicated, and if you have 100, it 
cannot be too simple. But I am not sure there is a perfect 
definition of small business. Maybe it would be good to at 
least agree on what it is, whatever that is. But I think we can 
all make a strong case for whatever we want it to be.
    Ms. VELAZQUEZ. Mr. Bearden, there are a variety of business 
classifications that entrepreneurs can choose from when 
incorporating their firm. How do you choose your business 
entity classification? And what advantages does that form offer 
that the other structures do not?
    Mr. BEARDEN. Our company was started as a C corporation 
before I actually became the owner of the company, so we 
carried that on. Now what we would look at were the tax 
structure as far as being a pass-through or being a separate 
entity. And there are various advantages and disadvantages to 
it either way. If we go to sell the company as a C corporation 
we could run into an issue of double taxation. We cannot take 
dividends out of our company without paying taxes on them 
twice.
    Ms. VELAZQUEZ. So depending on how the tax reform is 
implemented, will you consider changing your classification?
    Mr. BEARDEN. We were considering changing just a couple 
years ago but now with the latest changes in the income tax law 
it is actually more expensive for us if we were an S 
corporation than a C corporation. So we are kind of stuck 
between are we trying to get a better tax advantage for when we 
sell? Or are we trying to get a better tax advantage right now 
as we run the business?
    Ms. VELAZQUEZ. Mr. Harris, the small business tax reform 
proposal will make numerous changes to the S corporation rules. 
The draft contains two options for pass-through entities. One 
of them keeps the current system and the other starts fresh. Is 
there a balance that can be struck between making changes to 
the S corporation rules while keeping an entity classification 
that caters to the small family-owned businesses?
    Mr. HARRIS. Oh, sure. I think there can. I think as a 
general rule we supported what I think was option one in 
Chairman Camp's white paper because it was a little easier to 
understand. It was more of a transition than a radical change. 
And again, in any of these instances there can be pluses and 
minuses. What I find interesting when we talk about entity 
classifications is in many instances what the small business 
owner wants is the entity that gives them the most protection 
from a legal standpoint that comes with the least burden of 
recordkeeping. And sometimes one drives the other.
    And to the comment made earlier, with the changing of the 
tax law you think you have picked the right entity and then the 
next time you turn around you need to change because the law 
has changed and now you are trying to go back and forth. So 
consistency would help tremendously. But I think, I do not 
know, maybe it is just that I have done this long enough, 
tinkering with the option one feels to me a little bit more 
than just a radical change and trying to understand what that 
transition would look like.
    Ms. VELAZQUEZ. Okay. Thank you. Thank you, Mr. Chairman.
    Chairman GRAVES. Mr. Bentivolio.
    Mr. BENTIVOLIO. Thank you very much, Mr. Chairman.
    Mr. Griffith, I think you said you are a CPA and you own a 
machine or tool and die company; correct?
    Mr. GRIFFITH. Yes.
    Mr. BENTIVOLIO. Now, let us see if I understand this right. 
Section 179, $500,000, if you purchase equipment you get a 
deduction; right? Is that right?
    Mr. GRIFFITH. Yes, sir.
    Mr. BENTIVOLIO. So the cost of this C&C machine?
    Mr. GRIFFITH. $611,000 machine.
    Mr. BENTIVOLIO. I think I read that in your testimony. 
There are more expensive ones, is there not?
    Mr. GRIFFITH. Oh, yes.
    Mr. BENTIVOLIO. And a small business can buy a 40-ton 
stamping press?
    Mr. GRIFFITH. Oh, yes.
    Mr. BENTIVOLIO. Do you have any idea how much those cost?
    Mr. GRIFFITH. Not off the top of my head but I would think 
they can range anywhere from probably in the hundreds of 
thousands to a million dollars.
    Mr. BENTIVOLIO. Over a million.
    Mr. GRIFFITH. It depends on the complexity of the machine 
and type.
    Mr. BENTIVOLIO. As well as the dye.
    Mr. GRIFFITH. Yes.
    Mr. BENTIVOLIO. You know, the dye can cause----
    Mr. GRIFFITH. Absolutely.
    Mr. BENTIVOLIO. And you need that die in order to stamp, to 
make a product that adds to, well, productivity.
    Mr. GRIFFITH. Right.
    Mr. BENTIVOLIO. Manufacturing.
    Mr. GRIFFITH. Right.
    Mr. BENTIVOLIO. Mr. Bearden, you said that a press, 
printing press can range, well, I bought one for $300 for my 
office, right? And they can go--commercial grade can cost----
    Mr. BEARDEN. You could go to $3 or $4 or $5 million.
    Mr. BENTIVOLIO. So this $500,000 deduction would not 
really, if you bought something like that, would not really 
make a difference, would it?
    Mr. BEARDEN. Well, not if I was buying a printing press.
    Mr. BENTIVOLIO. Right. Or, well, the printing. I do not 
know--do they call them presses now or are they just----
    Mr. BEARDEN. Yeah. They still have printing presses.
    Mr. BENTIVOLIO. Yeah, okay. Good. I know things have 
changed.
    Let us see. You touched on concept, Mr. Griffith? You 
touched on a concept not often talked about in your written 
testimony, how your tax liability impacts your ability to 
obtain financing. Could you expand a little on this issue?
    Mr. GRIFFITH. Well, yes. When you have to use your cash to 
pay your taxes, it leaves you a lot less capital to invest in 
the business. And so when you go out to borrow money they look 
at your liabilities, they look at your assets, and they 
determine whether or not you can repay the loan. And so the 
more cash that goes out the door for a nonrecurring asset or 
something that is a debt expense like that, the less you have 
to work with the more difficult it is to get the financing.
    Mr. BENTIVOLIO. And you noted in your written testimony, 
and I think I touched on this, written testimony that Congress 
passed a provision increasing the deduction allowance under 
section 179 to 500,000 and increased the phase-out provision to 
2 million. But that was done on December 30th of last year, 
giving a business no time to act. That is what you said; right?
    Mr. GRIFFITH. Yes, sir.
    Mr. BENTIVOLIO. So we had to move, for instance, if I 
bought a 40-ton press, I mean, they can be about, what, a third 
the size of this room?
    Mr. GRIFFITH. Right.
    Mr. BENTIVOLIO. It weighs more than an Abrams tank; does it 
not?
    Mr. GRIFFITH. Yes. And you cannot, you know, and the rule 
was you have to be placed in service, which means it has to be 
under power, ready to run. These are not plug-and-play 
machines.
    Mr. BENTIVOLIO. I understand.
    Mr. GRIFFITH. So in a day you could not react to that. That 
is correct.
    Mr. BENTIVOLIO. I was raised in manufacturing. I know 
exactly what you are talking about.
    So what would you recommend?
    Mr. GRIFFITH. Well----
    Mr. BENTIVOLIO. I want to get people back in my district 
working again. I am sick and tired of driving by industrial 
parks that say For Rent, For Lease, and Available. I like to 
see Help Wanted signs. So what can I do? Or what can we do? 
What would you recommend to Chairman Camp?
    Mr. GRIFFITH. Make it permanent so that we--in other words, 
set the 179 deduction and stay at $500,000. Raise the limit to 
more than $2 million. In other words, you know, do not phase it 
out at a low level and make it permanent so that we know year 
in, year out, what we are working with as opposed to one year--
it used to be $25,000 and then it went to $125, and then it 
went to $500,000. Then last year it was $139,000 with a phase 
out over $560. So if I bought it a $600,000 machine and it 
phased out the deduction to me, make it such that we can 
actually get this deduction when we do buy this equipment 
because when we buy a piece of equipment like you are talking 
about--a stamping press or in my case it was a tool grinding 
machine, I have to hire a person to run it. So not only do I 
add equipment to my shop, I add employment. So by not buying 
that piece of equipment I did not hire that person. So, you 
know, I think if you can make it permanent so we know what we 
are working with and it is not a moving target and it is not 
changing every year, it makes it a lot easier to manage.
    Mr. BENTIVOLIO. And I could buy, like, well, a small 
business could buy a 3 million C&C machine and have five people 
in the shop. Be actually employing five people; correct?
    Mr. GRIFFITH. Correct.
    Mr. BENTIVOLIO. Right. Great. Thank you very much.
    I yield back my time, Mr. Chairman. Thank you.
    Chairman GRAVES. My good friend, Mr. Barber.
    Mr. BARBER. Well, thank you, Mr. Chairman. Thank you to the 
witnesses. You provide us with real life accounts of what it is 
like to run a small business, and I appreciate that testimony 
very much. We need more of it on the Hill, I think.
    My wife and I ran a small business for 22 years and we have 
our own first-hand accounts of what it is like to meet the tax 
code challenges and the other regulatory challenges. And I am 
really proud to be on this Committee. I am a new member of the 
Committee. I asked to come on as a third Committee because I 
really wanted to do what I could to help small businesses not 
only back home but across the country.
    And I want to venture into an area that has not really been 
discussed today but I think is one that is really important as 
we think about simplification of the code, we always have to 
think about new taxes that have been imposed. You mentioned one 
or two of them earlier, the Affordable Care Act being one of 
the examples.
    Back home in my district we have a business called 
Syncardia. It manufactures the first and only FDA-approved 
total artificial heart, and it took Syncardia about 30 years to 
get where they are today, one small investment at a time. And 
now they are cash flow positive, they are paying taxes, and 
they are saving hundreds of lives every year. But one of the 
issues that they face and other businesses like them face are 
taxes that stifle innovation, creativity. One example of that 
is a tax that is now included in the Affordable Care Act, the 
medical device tax, a $20 billion tax that is going to be 
levied on total revenues of medical device manufacturers 
beginning this year. And for companies like Syncardia and many 
others across the country, the impact of this tax would be 
devastating to their future innovation and success. It is a tax 
I believe we must eliminate and I co-sponsored a bipartisan 
bill called the Protect Medical Innovation Act to do away with 
that tax.
    So this is one example, I think, of taxes that stifle 
creativity and innovation, and one of the great things about 
our country is that small businesses are the leaders in 
creativity, and they really, of course, drive our economy. So 
it is really a question for any and all of the witnesses who 
want to comment. Could you comment on what other taxes we ought 
to be looking at as we simplify the code or want to do that 
that are hurting small businesses, specifically when it comes 
to innovation? New ideas, new products, new kinds of assistance 
for people in the medical arena and every other place. I mean, 
I think we have them across this country. And could you each 
comment to your own experience on what other taxes are getting 
in the way of innovation?
    I thought Mr. Harris might be the first to jump in.
    Mr. HARRIS. I will go first, which will be a more general 
comment than specific to an industry that these gentlemen can 
speak to, is that I do not think anybody in this room likes 
paying taxes and would like to pay less, but what they want to 
know is they want to understand what they owe, be able to plan 
for what they owe. Clearly something like the Alternative 
Minimum Tax that traps people who tried to do the best they 
could and tried to plan and then they have this second tax 
level pop up and surprise them. So I think transparency in 
taxes, predictability in taxes, and not being picked on because 
you are in a certain industry or doing a certain thing. I think 
that as long as people feel like they are paying equally and 
they are all bearing the responsibility, but any time we target 
a particular business and say you are going to pay something I 
think it obviously leads to higher noncompliance because they 
are going to go ``why me?'' Why is it not someone else?
    Mr. BARBER. The issue of the medical device tax was first 
brought to my attention by a dentist in my district. He wanted 
to come see me and he said, ``I need to talk to you about 
this.'' He said, ``It is not only going to affect my business 
but my patients. They have to pick up additional costs.'' And 
this is why I am really concerned about how this might affect 
other industries. Any other comments from any of the other 
witnesses?
    Mr. BEARDEN. I would just say commercial printers are 
domestic manufacturers, and we qualify for the 9 percent 
deduction in our net income. And I would encourage the 
Committee to incorporate the domestic production activities 
deduction in their small business reform. That is something 
that is very helpful for us and I would agree with the other 
gentlemen. Just stabilizing and simplifying the taxes would 
help out tremendously.
    Mr. BARBER. Very good.
    Mr. GRIFFITH. You know, the complexity is a tough issue 
because you give us credits and then you take them away because 
of AMT. And that is one of the things I mentioned earlier, and 
the Alternative Minimum Tax, we need to get rid of that. We 
need to fix that because it is something that is hanging out 
there and the complexity--let us say if we bought assets in my 
business and I have let us say 1,000 assets. I have to do 
depreciation calculation for federal tax purposes. I do a 
depreciation calculation for state tax purposes because 
Maryland decoupled from federal. I have to do depreciation 
calculation for AMT purposes. And then I have generally 
accepted accounting principles, which is GAAP. I have to 
calculate depreciation four times on the same asset. That is a 
lot of work and a lot of busy work for no reason. So why are we 
not trying to look at simplifying and getting rid of some of 
the complexity so that we know what we are working with and it 
does not take a lot of time and effort away from our businesses 
to comply with these kind of rules.
    Mr. BARBER. Thank you, Mr. Chairman.
    Chairman GRAVES. Mr. Luetkemeyer.
    Mr. LUETKEMEYER. Thank you, Mr. Chairman. And thank all of 
you for being here today. It is always near and dear to my 
heart when I see small business guys in front of us.
    Just quickly, I did not see anything in the testimony and 
in the recommendations and information that Congressman Camp 
gave us today with regards to intellectual property. Do any of 
you have intellectual property and have some tax concerns about 
that? Probably Mr. Griffith may be the only one that actually 
would have something there. I do not know if you do or not, but 
just kind of curious if there is something in that area because 
it was not mentioned in Mr. Camp's testimony if we need to look 
at something like that.
    Mr. GRIFFITH. We do not. We do not have any intellectual 
property in our business.
    Mr. LUETKEMEYER. One of the other things I noticed, Mr. 
Bearden, you indicated or mentioned anyway that you support 
estate tax changes that were made earlier. And I was just kind 
of curious if there is any changes or anything else that you 
would like to see done differently with the state taxes and how 
it impacted you and your business. Perhaps a little firsthand 
anecdote here would be informational to us as a body.
    Mr. BEARDEN. Well, just as the business hopefully grows, 
knowing that I can plan for that in the future and that it is 
permanent now is very helpful. Under the other rules when it 
was running out it was kind of up in the air. We did not know 
where we would be. You almost had to pick your time, I guess, 
but going forward now that it is permanent it is much better 
and it is very helpful. Thank you.
    Mr. LUETKEMEYER. Mr. Harris, a lot of your customers and 
your clients, was this an issue big to them? And do you see any 
things that we need to tweak on this law as well?
    Mr. HARRIS. I think, again, as everyone has said, what they 
needed to know is what is the law?
    Mr. LUETKEMEYER. Does the company see uncertainty?
    Mr. HARRIS. Yeah. The moving and changing levels, I mean, 
it made planning impossible because, again, you had better 
years to die than others, which is not the way we want, you 
know, our tax code to push people. So consistency and 
predictability, I will keep coming back to that, is the key 
thing.
    Mr. LUETKEMEYER. Very good.
    It did not lend itself to a good business model, a good 
business planning, did it? In a management crisis you realize 
that, right?
    One of the things that is coming up shortly here that we 
will be discussing when we talk about revamping the tax code is 
perhaps doing away with some of the deductions that are in 
there and then on a revenue neutral basis lowering the tax 
rates and things like that. Are there some things in there, in 
the tax code that you would like to--that you would be willing 
to give up so that you could get a lower tax rate? Is there 
something there that would entice you to be interested in 
doing? It is going to be a hot button issue. I thought maybe 
you guys would like to jump in on it.
    Mr. HARRIS. Generally, we have to understand from a 
business standpoint that the calculation of taxes has two 
elements--the rate and what we are applying the rate to. And at 
the end of the day if those two numbers are moving equally, the 
amount you write the check for does not change. So anything 
that is simpler and easier to get to, small business would 
appreciate. And then we can argue about what the proper rate is 
at that point. But we do not even know. It takes so long to 
come up with a number, by the time we get there the rate is 
almost a secondary discussion. So I would like to see us focus 
on yes, there are plenty of things that we can get rid of; the 
problem with getting rid of them is we do not know what the 
rate is going to be applied to when we give it up. And at the 
end of the day, if you do not know both sides of the equation, 
it is hard to say I am for this or for that because I do not 
know what I am giving up and what I am getting in return. But 
as a general rule. Sure. Make it simpler and hopefully the 
rates will not cause it to go up.
    Mr. LUETKEMEYER. Does anybody else want to weigh in on it? 
Yes, sir. Mr. Watters.
    Mr. WATTERS. I would like to weigh in on that.
    As Mr. Harris says, it is hard to say what we are willing 
to give up without knowing what the rate would be.
    Mr. LUETKEMEYER. Well, let us assume it goes down. We are 
not going to raise it. Okay? Let us assume that if you take 
your deduction you are going to lower the rate from 35 down to 
whatever it gets down to.
    Mr. WATTERS. We absolutely think that restoring the highway 
trust fund to a reasonable level of investment is absolutely a 
worthwhile goal and should be part of any tax reform, and we 
would be willing to give up user fees and other types of things 
along that line to fund the highway trust fund for sure.
    Mr. LUETKEMEYER. Okay. Excellent.
    Did you guys want to weigh in on it?
    Mr. GRIFFITH. I do not know really what I would like to 
give up but I would like to give you a radical opinion on one 
thing, and that is I would like to see you abolish the 
inheritance tax. Just get rid of it because, you know, you have 
to sell the farm. If you ever saw the movie ``Secretariat.'' 
The horse won the race and now all of a sudden it is worth $6 
million and she had to syndicate, practically sell the horse to 
save the farm. That is criminal. And I think that we should 
just abolish the darn thing.
    As far as what I would give up, I would have to see the 
balance. I would like to see what is going on and what you are 
arriving at before I start giving up anything and see where we 
are going with everything because it seems like we do not have 
a revenue problem in this country; we have a spending problem, 
sir. I think you know that. And I think everyone else here 
knows that. And we need to look at where our monies are going 
and not really what we are doing with our expenses as much as 
we do revenue. I am talking about any business is faced with 
that and the government certainly should be faced with that.
    Mr. LUETKEMEYER. Very good.
    Mr. Bearden, do you want to weigh in on it? Okay.
    I see my time is up and I certainly appreciate all of you 
being here today. As a small business owner myself I know that 
you did build it. Thank you. Thank you, Mr. Chairman.
    Chairman GRAVES. Mr. Payne.
    Mr. PAYNE. Thank you, Mr. Chairman.
    Good afternoon, gentlemen. It has really been interesting 
to listen to your testimony.
    Mr. Bearden, we share a vocation. I was a printer by trade. 
My uncle started a computer forms manufacturing firm in 1969 
and ran up against quite a few challenges being the only 
minority firm in the United States doing what we were doing at 
that time. And had to overcome many obstacles. Some were biased 
and problems with him being the only minority in the field and 
overcame many challenges at that time. But, you know, from one 
printer to another it is good to see you here.
    Mr. BEARDEN. Thank you.
    Mr. PAYNE. Let me say in Mr. Watters's prepared testimony, 
you know, he stated that his members agree that balancing the 
federal budget requires spending cuts naturally, entitlement 
reform, and tax increases. How does the rest of the panel feel 
and what are your sentiments, Mr. Griffith?
    Mr. GRIFFITH. I think that definitely we need to look at 
tax reform and make it, you know, as we said before, make it 
simpler and balance the budget is very important. I think any 
business, any company, any government should balance budgets. 
And deficit spending does not work and where we are basically 
leveraging our children's future and our grandchildren's future 
when we do that type thing. So I think we really need to take a 
look at when you increase revenues--when you increase taxes 
rather I think the model that has been seen in the past is that 
the economy goes down and the government has less money to 
spend. When you reduce taxes oddly enough the economy grows and 
the government has more money to work with. I think you really 
need to take a look at that. I do not think tax increases is 
going to necessarily bring you more revenue. But I do believe 
that you need to take a look at a balanced approach, and that 
is, you know, what is revenue neutral, we need to get back to 
the old school of balancing a budget in all of our businesses. 
I certainly could not survive--deficit spending. And I think 
that is something we need to take a look at.
    Mr. PAYNE. Mr. Bearden?
    Mr. BEARDEN. One of the things I think would just help us 
in what we are looking at is just the simplification of the 
code and making the changes permanent. And that way we can do 
longer range planning. Right now some of the things that we 
have talked about here today, I mean, there are times, last 
year, for instance, when we did not know whether we were going 
to have bonus depreciation until the end of the year. So all 
during the year we really could not make any plans to use that. 
If those things are set and they are permanent, we can react 
from our business and that can be a positive factor to help us 
invest quicker and make quicker decisions. There is also a lot 
of time that we have to spend as business owners trying to 
learn the tax code and to keep up with our accountants and our 
CPAs. What is happening right now? What is going to happen six 
months from now? It is not three years out. It is on a weekly-
monthly basis on what we are doing today. So just the 
simplification and making that permanent would help out 
tremendously.
    Mr. PAYNE. Mr. Harris.
    Mr. HARRIS. Well, I think everyone would like to see the 
federal government's budget come to balance. I am not going to 
sit here and say I am smart enough to tell you exactly how to 
do that. It is a lot smarter than me. I have not figured it out 
quite yet.
    I would say this. I think that the way that I would prefer 
to see there be more revenue raised would be that the small 
businesses are paying more taxes because they are making more 
money as opposed to taking more of what they are making today. 
So I think if we can have them grow and expand then I think 
they would be happy to pay in more revenue to the government 
through that method.
    Mr. PAYNE. And, you know, Mr. Harris, you know, you 
detailed a proposal that, you know, since we are talking about 
making it easier and knowing, you know, what--keeping things in 
place, you know, your simplified cash method that you discuss, 
and under this method a business checking account would be 
essentially their books for a small business. Can any of the 
panelists speak to the benefit of such a method, that simple a 
method and any potential challenges with that and/or benefits?
    Mr. Griffith.
    Mr. GRIFFITH. Yeah. I guess it would definitely simplify 
for small business when you are dealing with a cash basis 
because as Mr. Harris has stated it is cash in and then 
expenses out. You can see where the money is coming and where 
it is going. You get rid of all of the transactions and you 
have to record--you have to book payables, you have to book 
accruals, or you have to depreciate assets and that type thing. 
When you know when you purchase it you expense it. And I guess 
it would maybe simplify considerable businesses on a certain 
size. And again, as we were talking earlier, how do you 
determine that size? But I think that it would have some merit 
for a small business.
    Mr. PAYNE. Mr. Bearden.
    Mr. BEARDEN. I would agree. It is simpler for a small 
business to use the cash accounting. Even in our business, for 
our internal statements we use cash accounting to look at how 
the business is operating. It is very important for the 
business to understand its cash flows and things like that and 
cash accounting takes you pretty close to that.
    Mr. PAYNE. Mr. Watters.
    Mr. WATTERS. Yeah. I agree as well. I think it is a great 
idea and would simplify things significantly for smaller 
businesses. Our business volume exceeds the cutoff so it would 
impact us directly, but it seems like a great idea to me for 
sure.
    Mr. PAYNE. Thank you. Thank you very much.
    Chairman GRAVES. Mr. Huelskamp.
    Mr. HUELSKAMP. Thank you, Mr. Chairman. Gentlemen, I 
appreciate your presence.
    A very broad question. A couple different themes we have 
heard here today. Obviously, one would be tax simplification as 
well as tax certainty. A pretty broad question to each one of 
you. Which of those would you consider most important and why 
between those two? I do not consider them separately but 
generally they are discussed separately around here as two 
different goals.
    Mr. Griffith.
    Mr. GRIFFITH. Well, definitely simplification is needed, 
and I would probably lean towards that direction. However, 
again, uncertainty is hard to play if you do not know how the 
law is going to react given in the future. In other words, if I 
make a decision today, what impact will it have on me 10 years 
from now? Will it still be the same decision and am I still in 
the same place? That does make it difficult, but I think the 
complexity of the issue you are dealing with on a day-to-day 
basis is probably something I would look more for as of right 
now.
    Mr. HUELSKAMP. The gentleman, Mr. Watters.
    Mr. WATTERS. Sure. Actually, I would disagree. They are 
both critical topics and we want both but I would rather have a 
complex law but that I know is going to be in place for many 
years and I can plan around and I will figure out a way to 
figure it out. I would have to hire a gentleman like Mr. Harris 
here to figure it out, but at least you have something you can 
plan around and make investment decisions around as opposed to 
having a simple law that is going to change every December 30th 
and you never know what you are going to get the following 
year.
    Mr. HUELSKAMP. How long would you need for certainty? How 
many years in your business? What are you looking at?
    Mr. WATTERS. Ten years. A generation. Always. Start with 
10.
    Mr. HUELSKAMP. Mr. Harris? Mr. Bearden?
    Mr. BEARDEN. I would agree with Mr. Watters. I think for 
our planning purposes certainty would be better. If it is 
complex we can figure that out and know what we are dealing 
with, but as long as we know what we are dealing with for some 
length of time we can plan properly. And so definitely 
certainty in my case.
    Mr. HUELSKAMP. Okay.
    Mr. HARRIS. Well, I guess I am either going to break the 
tie or tie it up here.
    I think first of all for it to be simple it has to have a 
certain element of certainty to it. I mean, if it is just 
simple and it can change tomorrow, it is not really simple. If 
I had to pick between the two, I guess I would pick certainty 
because one thing I have learned in this many years of doing 
this is complexity does not bother people near as much when it 
makes their taxes go down as when it makes their taxes go up. 
So there is some complexity people will accept because it helps 
them. So I guess I would pick certainty, but I am just not sure 
I could be simple if it is not certain.
    Mr. HUELSKAMP. Well, thank you, gentlemen. I appreciate 
that. I yield back. Mr. Chairman.
    Chairman GRAVES. Ms. Clarke.
    Ms. CLARKE. Thank you, Chairman Graves, Ranking Member 
Velazquez, gentlemen.
    I have a simple question. We talked a lot today about the 
whole idea of simplifying the tax code, especially with regard 
to our nation's small businesses given the complex nature of 
our overall global economy. Exactly what does simple mean to 
you?
    Mr. HARRIS. Okay. I will go first.
    I think it is predictable to go back to the earlier 
discussion, something that we can count on. Something that does 
not require a business to keep records and do things they would 
not do because it is necessary to run their business. When they 
are being required to do things only to comply with the tax law 
that they would not do to run their business, it has gotten too 
complicated. There are certain records we need to keep to run a 
business that we need to know to make sure our business is 
doing things properly, and to the extent that what we do as a 
natural part of running our business allows us at the same time 
to comply with the tax law, that is simple. If we are doing 
things only to comply, it is no longer simple.
    Ms. CLARKE. So let me just ask then. What you are asking 
then is that whatever you do to document the running of your 
business should be adequate enough to address the tax concerns 
of the United States' government?
    Mr. HARRIS. In a perfect world, yes.
    Ms. CLARKE. Okay.
    Mr. HARRIS. There are obviously exceptions to everything 
but we should focus on the idea that what can we use that 
already exists or is in the best business interest of that 
taxpayer to keep for themselves before we add something just 
for a compliance purpose.
    Ms. CLARKE. Okay.
    Does anyone else want to answer simplicity? Or do you all--
are you all in agreement with Mr. Harris's definition?
    Mr. WATTERS. I agree.
    Ms. CLARKE. You agree?
    Mr. WATTERS. I agree as well. In fact, I think Mr. Griffith 
cited earlier that he has to keep four separate depreciation 
schedules for one piece of machinery and I think that is a 
great example of what Mr. Harris was saying, where just because 
the tax code is such--it is so complex and it forces you to 
do--to keep four separate depreciation schedules is crazy. And 
there are lots of examples throughout the tax code.
    Ms. CLARKE. So to the extent that we can just distill that 
down so that that one depreciation schedule suffices for the 
purposes of the tax code, that simplifies things? Okay.
    Let me ask one further question of you gentlemen.
    Do you believe that the tax code is sort of like a living, 
breathing document? Is that sort of your experience?
    Mr. HARRIS. I will go first again. Certainly from my 
perspective it is definitely living and breathing but it is 
about time for it to take its last breath.
    Mr. GRIFFITH. It is certainly--if you have seen the tax 
code, it is a volume.
    Ms. CLARKE. Yeah.
    Mr. GRIFFITH. So there is a lot in there. So it definitely 
needs some simplification.
    Ms. CLARKE. So to the extent that your companies I guess 
maintain a certain stability, they are not--they are doing, you 
know, relatively the same year in and year out but the tax code 
continues to add more--I guess more regulation or more 
requirement of documentation, it is not meeting the needs of 
your companies. Well, it is becoming more burdensome to the 
companies with each passing year than, for instance, it would 
be more burdensome this year than it was in the preceding year. 
Is that your experience?
    Mr. GRIFFITH. Yes. If you take--for instance, just take 
Obama Care. When you have--they were going to allow small 
businesses to get premium reductions or credits back to help 
pay for the premiums and they benched it if you had more than 
10 employees and less than 25 it was a phase out. And if you 
had an average of $50,000, I mean, $250,000 average salary, 
phase that up to $50,000, you had a two-way computation. One 
was on number of employees and then the second one was on the 
average salaries. Taking those together, you had to add the two 
together and you have to do a very complex calculation to find 
out do I get any help? And there it is just a matter of what we 
are talking about is it is a lot of work and most companies in 
my industry did not get that because we are all over 10 and our 
average salaries are $125,000.
    So there again, we are trying to comply and find out do we 
comply. We do a lot of work to find out, okay, we do not get 
that. So I think if we can get rid of a lot of that nonsense it 
would help.
    Ms. CLARKE. Anyone else have any anectdotal--something that 
we can put on the record to sort of examine this or does that 
example suffice for all of you?
    Very well then. Mr. Chairman, I thank you. Gentlemen, I 
thank you. I yield back.
    Chairman GRAVES. Mr. Hanna. Make it quick.
    Mr. HANNA. I will. Thank you.
    I have a question. All of you are legitimate businesses. 
You pay your taxes. You are concerned or you would not be here. 
I want to ask about complexity and compliance in the 
underground economy. And Mr. Harris, in particular. What is 
your sense of that? I mean, mine is that it is growing daily 
for all the reasons that you are here, but there are a lot of 
people who do not have to fall within compliance. But I do not 
want to predetermine.
    Mr. HARRIS. I think, and again, part of my background is 
spending time with the IRS Advisory Council. I got to see it 
from kind of both sides and I do not think there is any doubt 
that there is an underground economy. And I think that 
unfortunately sometimes the efforts to catch that gets in the 
way of doing common sense things for the honest person. But I 
think the more complexity you add, the more taxes you add that 
are unhidden, you are just encouraging more of it to be honest 
with you. The more records you have to keep, the more things 
you have to do, again, we know it is out there. I have got a 
sense it is growing, but because where it is it is hard to 
measure.
    Mr. HANNA. Mr. Griffith, do you have a sense of that? 
People you know, businesses you watch? No names, you know.
    Mr. GRIFFITH. I kind of lost my train of thought there. 
What was that question again?
    Mr. HANNA. I am concerned that everything we do makes our 
laws harder to enforce and harder to comply with. Therefore, 
there is an incentive. I mean, Russia lowered their rates to I 
think it was 17 percent across the board. Compliance shot 
through the roof. It was easier to pay your taxes than go to 
jail or whatever. Do you have a sense in your own communities 
that that is growing? Or maybe you do not at all.
    Mr. GRIFFITH. No. I am not certain.
    Mr. WATTERS. Well, I am happy to say I do not know anyone 
who is participating in the underground economy, and we do not 
either, but it does seem that your logic is intuitive and makes 
sense. Yes. If there is one out there it is probably----
    Mr. HANNA. I have just seen estimates that are 30, 40 
percent of our overall economy. But that is okay.
    I am good, Chairman. Thank you for the time.
    Chairman GRAVES. Well, again. Thank you to all our 
witnesses for being here today.
    Tax reform is such a critical issue to our nation's small 
businesses, and it is important that we continue to try to move 
the ball forward and provide some certainty to the small 
business community.
    In addition to the testimony that we received here today we 
have had numerous trade associations that represent thousands 
of small businesses write letters to the committee expressing 
their ideas obviously on tax reform and simplification. We will 
be including those in the hearing record and also passing those 
on to the Ways and Means Committee as they move forward in this 
process.
    And with that I would ask unanimous consent the members 
have five legislative days to submit statements and supporting 
materials for the record. Without objection that is so ordered. 
And with that the hearing is adjourned. Thank you all very 
much.
    [Whereupon, at 2:52 p.m., the Committee was adjourned.]


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                           Written Testimony


                                   Of


                       R. Samuel Griffith, C.P.A.


              President & CEO, National Jet Company, Inc.


                                  And


 Member, Board of Trustees, National Tooling and Machining Association


                               Before the


       U.S. House of Representatives Committee on Small Business


                       Wednesday, April 10, 2013


    Thank you for the opportunity to testify before you today 
about the impact of tax reform on small and medium sized 
manufacturing businesses. My name is Sam Griffith; I have been 
President and CEO of National Jet Company in LaVale, Maryland 
for the last 20 years having purchased the company in 1992. I 
am also a member of the Board of Trustees and Chairman of the 
Audit Committee of the National Tooling and Machining 
Association (NTMA) and I am testifying here today on behalf of 
my company and also representing the NTMA members and industry.

    As further background, not only am I a manufacturer, I am 
also a Certified Public Accountant (CPA), and I remain involved 
with the Maryland Association of CPA's and American Institute 
of CPA's. I began my career practicing as a certified public 
accountant with the international firm of Coopers & Lybrand 
known today as Price Waterhouse Coopers. I practiced for 13 
years and I was an Audit Manager when I left the firm to join 
York Oil Company as Chief Financial Officer.

    National Jet Company was founded in 1937, and today is an 
internationally known expert in precision micro drilling 
technology. We have the capability to drill holes as small as 
two ten-thousandths of an inch in diameter. We can drill or EDM 
(electrically discharge machine) holes in any shape and we hold 
very close tolerances for our work. To give you an idea of 
size, we can drill a hole in a human hair. We service primarily 
the aerospace, automotive, electrical, medical, and textile 
industries. Some of the products we are involved with include 
extrusions dies for the production of man-made fiber for the 
carpet industry, AstroTurf for the athletic fields, injector 
plates for autos, spray nozzles and orifices. We are a small 
specialty shop with twenty-four employees and have added two 
new employees in the last four months.

    National Jet is structured as a subchapter S Corporation, 
which means all income flows into my personal return and I then 
pay taxes at the individual rate which puts me into a much 
higher tax rate than I normally would be due to the pass 
through of the corporate income into my personal return.

    As I mentioned earlier, prior to purchasing the company, I 
served as the Chief Operating Officer and the CFO of the York 
Oil Company in Hampton, Virginia, a subchapter C Corporation. 
Given my combined training as a CPA, and having worked in both 
a C and an S Corporation provides me with a unique perspective 
on tax policy.

    The National Tooling and Machining Association represents 
roughly 1,500 manufacturing businesses who average 35-50 
employees and are typically classified under the North American 
Industrial Classification System (NAICS) as 332 (Fabricated 
Metal Product Manufacturing) and 333 (Machinery Manufacturing). 
These classifications include 80,000 manufacturing 
establishments nation-wide according to the U.S. Census. We are 
normally referred to as contract machine shops.

    The National Tooling and Machining Association and I 
wholeheartedly support tax reform that includes real reform for 
both C Corporations and pass-through companies which make up 
the majority of small businesses in this country. We 
desperately need lower rates, simplification of rules and 
elimination of the sunset provisions in the tax code to allow 
us to compete globally. It is very difficult to plan into the 
future when there is such uncertainty in the tax code. No one 
likes a moving target and for the last ten years it has been a 
nightmare to plan.

    A recent survey of NTMA members showed that sixty-seven 
percent are structured as a pass-through business. Eighty-one 
percent of all manufacturing businesses are structured as pass-
throughs, further reinforcing the importance of including these 
types of companies in tax reform.

    Why Most Manufacturers are Pass-throughs

    The reason most small manufacturers structure themselves as 
pass-through, in part, because many are family-owned businesses 
who want to keep the company in the family when the current 
owners retire. This is particularly true with most NTMA members 
who are now planning the transition from the third to the 
fourth generation of manufacturers.

    The other reason is more obvious; the double taxation of C-
Corporations' dividends which the owners pay when they take 
their earnings out of the business. No one wants to pay double 
taxes on their hard earned income. After all, when the owner 
pays a higher tax rate, it really means the company is paying 
more in taxes and has less to buy equipment and hire employees. 
Furthermore, what many people do not know is a small business 
owner has to personally guarantee loans for the company when 
buying equipment which can cost in the millions--the fewer 
resources we have available to show our lenders, the more 
difficult it is to obtain financing to expand.

    To better understand the impact of various tax reform 
proposals on small and medium sized manufacturers, the 
Association worked with Michigan-based accounting firm Plante & 
Moran to develop a tax template to model different scenarios. 
Attached to these comments is Exhibit ``A'' for the record 
which is an example of a New England-based small manufacturing 
business structured as an S Corporation with five shareholders 
and two hundred employees. While larger than the average NTMA 
business, this company's tax template shown here demonstrates 
what happens to a manufacturer when Congress fails to stabilize 
tax policy.

    A pre-fiscal cliff calculation showed this New England 
manufacturer paying a combined federal, state, and local 
effective tax rate of 31.5% in 2011. An examination of the 
Fiscal Cliff scenario which went into effect for a few hours on 
January 1, 2013 resulted in a 46.91% effective tax rate for 
this company with virtually all deductions and credits 
eliminated or reduced and a 39.6% statutory individual income 
tax rate. This scenario showed the company would owe an 
additional $715,000 in federal taxes on $4.6 million in 
adjusted taxable income. This 15% increase in their effective 
tax rate means they have fewer resources to purchase new 
equipment and hire more employees in New England as would we in 
Maryland.

    Tax Credits and Deductions Manufacturers Use

    Every manufacturing business is different and each company 
serves a variety of industries which has varying needs and 
requires specialty equipment. Based on a December 2012 survey 
of the National Tooling and Machining Association and Precision 
Metalforming Association, the 200 respondents identified using 
the following tax credits and deductions:

     Section 179 Equipment Expensing
     Bonus ``Accelerated'' Depreciation
     Research & Development Tax Credit (R&D)
     Section 199 Domestic Production Activities 
Deduction
     Last-In-First-Out (LIFO) inventory valuation
     Interest Charge Domestic International Sales 
Corporation (IC-DISC)
     Net Operating Loss (NOL)

    We recognize that policymakers face many difficult 
decisions ahead in reforming the tax code. You will have to 
decide which deductions and credits you will eliminate or keep 
in place. However, to remain globally competitive, small 
businesses use several credits and deductions to free up 
resources to reinvest back in our business. While each year is 
different, in 2010, National Jet Company reinvested 137% of our 
net income into the company and in 2011 we reinvested 112% back 
into the company.

    While most of our industry is made up of small businesses 
with fewer than fifty employees, our capital equipment needs 
are significant and many machines are very expensive and start 
at a few hundred thousand dollars and range into the millions. 
To further emphasize the importance of capital equipment to 
these businesses, eighty-nine percent of survey respondents 
claimed Section 179 Equipment Expensing in 2012 while eighty-
eight percent used Bonus ``Accelerated'' Depreciation. This 
means that our members maxed out their Section 179 deduction 
and then still turned to accelerated depreciation to support 
their investments in the company. Remember, when you buy a 
machine, you usually need to hire someone to run it. Expansion 
equal jobs.

    At National Jet, in 2011, we claimed $400,000 in Section 
179 Equipment Deduction. However, in 2012, the Section 179 
limit was $139,000 with a phase out if you purchased over 
$560,000 in equipment. Our company needed a machine that cost 
$611,000 but if we purchased this equipment we would lose the 
Sect. 179 deduction because it exceeded the phase out 
provision. This one piece of equipment exceeded the entire 
limit. Therefore, I only purchased $130,000 worth of smaller 
equipment to stay within the threshold of the tax provision.

    Then Congress on December 30, 2012 passed a provision 
allowing a Sect. 179 deduction of $500,000 and increased the 
phase out provision to $2,000,000. Now how could any small 
business react to this? One day in which to purchase a machine 
that weighs 36,000 pounds, transport it, have electrical lines 
installed, run air lines to the machine and have it placed in 
service all in 24 hours? No one could do this. However, 
Congress pats themselves on the back for passing legislation to 
help small business and moves on to the next issue. Small 
business did not get the benefit because of the last minute 
action by an otherwise action less Congress. Thanks for 
nothing. This is exactly why I am here today.

    If it were not for the uncertainty surrounding the status 
of the Section 179 Expensing provision on Capitol Hill last 
year, I would have invested another $400,000 in equipment and 
hired two additional employees to run the machines. With all 
due respect, the failure of Congress to do its job should not 
prevent me from creating jobs.

    The Section 199 Domestic Production Activities Deduction is 
one of the few provisions in the tax code which directly 
incentivizes manufacturing in America. Roughly half of our 
members claim Section 199 which amounts to an effective three 
percent rate reduction for most domestic manufactures. We 
claimed $31,000 in 2012 nearly double in 2011 because of a 
rebound in business after the Great Recession that still 
lingers among some small businesses today, especially those who 
are still suffering under a Net Operating Loss.

    Another issue which receives many headlines when tax reform 
is discussed is the Alternative Minimum Tax, or AMT. Most 
members of Congress probably only think about the AMT in terms 
of its impact on the average ``middle class'' family. But its 
reach is far broader.

    Because our business is captured under the AMT, we cannot 
claim the Research and Development Tax credit which would be 
available to us and is to popular among politicians. In 
addition, when I hired a long-term unemployed person in my shop 
last year, I thought I could claim the $1,000 credit Congress 
passed into law to encourage this kind of action. Again, 
because I am under the AMT, I also cannot claim that credit. So 
you give us credits for R&D and employing workers who have lost 
their unemployment benefits and then you take them away because 
of the AMT. How does this make any sense?

    As Washington explores comprehensive tax reform, you will 
decide which tax credits and deductions you will eliminate 
along the way--whether to reduce the rates, raise revenues, or 
both. I ask that you keep in mind which of these provisions 
help stimulate growth in the economy and truly create jobs. For 
example, if it were not for the $400,000 in Section 179 we 
claimed in 2011, my effective tax rate would have been 
significantly higher and I would likely not have had the 
capital to purchase the equipment we needed to grow the company 
and hire employees.

    Conclusion

    As you can see, the current tax code is a maze of 
mismatched provisions which provide disincentives to grow our 
businesses and hire new employees. Good intentions by lawmakers 
often result in temporary tax provisions which do not allow a 
small business to plan, to secure loans, and to hire employees. 
While we are just starting 2013, I am already budgeting for 
growth and purchasing equipment in 2014--and hopefully hiring 
more employees.

    We can't just purchase a machine on December 31st by 
midnight based on a vote Congress just took. It takes time to 
place this equipment into service even if we had the free 
capital to make a last minute multi-million dollar purchase 
based on Congressional action, or inaction.

    We fully support Chairman Dave Camp's approach and efforts 
by others to push for comprehensive tax reform and applaud this 
committee for holding this hearing to focus on the impact on 
small businesses. Our greatest concern is a seeming obsession 
with corporate-only tax reform--a path which leaves America's 
small businesses and eighty-one percent of U.S. manufactures 
behind.

    Thank you for the opportunity to testify before you today 
on this important issue. I believe we must develop a reformed 
tax code which encourages manufacturing in America and helps 
our small businesses compete globally in the 21st Century. We 
have a stake in this great country and we want our voice heard.
                        STATEMENT FOR THE RECORD


                           MR. STEVEN BEARDEN


                                LINEMARK


                                  and


                     PRINTING INDUSTRIES OF AMERICA


                               BEFORE THE


                   HOUSE COMMITTEE ON SMALL BUSINESS


        ``Small Business Tax Reform: Growth Through Simplicity''


    Chairman Graves, Ranking Member Velazquez, and members of 
the Committee, good afternoon and thank you for inviting me to 
testify today.

    I am Steve Bearden, President of Linemark, a privately-
owned printing and graphics communications company 
headquartered in Upper Marlboro, Maryland. Linemark is a 27-
year old company that employs 92 workers. I am also here as a 
member of Printing & Graphics Association of the Mid-Atlantic 
and of Printing Industries of America.

    Despite tough economic times that saw the industry lose 
over 75,000 jobs in the past four years, printing companies 
like Linemark are ready to come back. It's critical that tax 
policies are in place that will allow us to do so.

    Chairman Camp's overall goal of simplifying tax rules 
concerning small business in order to reduce the impact of tax 
costs and complexity is one both Printing Industries of America 
and I, personally, can and do support.

    My comments this afternoon will focus on three specific 
provisions of the discussion draft.

    The first is: Making permanent section 179 expensing to 
allow Linemark and other small businesses to deduct investments 
in new equipment and property up to $250,000.

    This provision is vital to the future growth and job 
creation of my company and others like mine. In the environment 
of a rapidly changing communications marketplace, it is vital 
that small printers be able to continually modernize their 
product and service offerings. When I say I'm in the printing 
business, I'm often asked if the Internet is killing off my 
profits. People are surprised to hear it's quite the opposite; 
there are tremendous growth opportunities in combining old 
school ink-on-paper printing with online and social medial 
technologies. But it takes serious capital investment in order 
for small printers to evolve.

    For example, in 2012 Linemark had purchases over 
$2,500,000. This included a $2,200,000 printing press, a 
$174,000 Esko Kongsberg router system, an $82,000 Komfi 
laminator and a new $17,000 VOIP phone system. By utilizing 
bonus depreciation, we did have an incentive and the additional 
resources to make investments in our company's future growth. 
In the future we will be upgrading to digital printing presses, 
which is the predicted growth area in the printing industry, 
and will be adding a new large format printer and expanding our 
bindery functions--both of which will allow Linemark to better 
compete in ancillary services that are critical to staying 
alive in the new print marketplace.

    Small printers across the country would benefit similarly 
in their ability to grow if section 179 expensing was made 
permanent. The typical printer plans on spending around $50,000 
to $100,000 on capital equipment this year. Generally, higher 
profit printers are more likely to invest in capital equipment 
and to invest higher amounts than lower profit printers. These 
profit leading printers are the most likely to create new jobs. 
The impact is also positive for small suppliers that 
manufacture printing equipment, many of which are also members 
of Printing & Graphics Association of the Mid-Atlantic and of 
Printing Industries of America.

    The second is: the provision that would simplify and expand 
use of cash accounting for small business. The typical printing 
plant is small with around $3.3 million in annual sales and 20 
employees. Many of these small firms would find new cash 
accounting rules helpful as Linemark would have when it was 
smaller. However, I should note that with this proposal, C 
corporations with gross receipts up to $10 million would gain 
the option of using cash accounting, but larger S corporations 
would lose it. More than 800 printing plants are S corporations 
and would fall into this category.

    Finally, the discussion draft poses two options to reform 
the rules for small businesses organized as partnerships and S 
corporations. Approximately 20 percent of the industry is 
comprised of sole proprietorships or partnerships. Another five 
in ten printing firms are organized as S corporations. Linemark 
is a C corporation, but we do recognize that many other 
printing companies use the S corporation to simplify their 
structures.

    I would also like to briefly mention the estate tax. The 
new exemption levels passed by Congress early this year are 
very helpful to companies like Linemark as I prepare for my two 
children currently working with me to hopefully stay with the 
family business in the future.

    In conclusion, I urge this Committee and all Members of 
Congress to continue this important dialogue and to maintain a 
strong focus on how comprehensive tax reform legislation will 
impact America's small printers and small businesses in all 
industries.

    Thank you, and I look forward to answering any questions 
you may have.
                            Industry Numbers


     The average printing company employs 27 workers; 
60% are family-owned businesses. At the end of 2012, there were 
approximately 47,000 printing and related establishments in the 
US employing around 970,000 workers.

     Despite tough economic times that saw the industry 
lose over 75,000 jobs in the past four years, Printing 
Industries of America predicts on average 3.0% to 4.0% growth 
in 2013. But overall printing industry sales are forecasted to 
decline by about 1.0% due to the number of firms going out of 
business over the year.

     The typical printer plans on spending around 
$50,000 to $100,000 on capital equipment this year. Smaller 
printers plan to spend less--typically $50,000 and one-in four 
plans to spend less than $10,000.

     Although the printing industry is very large in a 
macro sense with over $156 billion in annual shipments, some 
47,000 plants and almost 970,000 employees it remains America's 
largest small manufacturing business with two-thirds of all 
establishments or more than 30,000 employing fewer than 10 
employees. Additionally, another 14 percent of printers employ 
10-19 employees. On average, the typical plant is small with 
around $3.3 million in annual sales and 20 employees.

     As an industry, printing is composed of very few 
public companies. While 32% are setup as C corporations, only a 
handful are publicly traded.

     In any given year there are perhaps a few hundred 
start-ups in the printing industry. As expected the vast 
majority of these start-ups are small firms--most with less 
than 20 employees and less than $3 million in annual sales even 
years after their business was started.
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                       Statement of Roger Harris


      Before the U.S. House of Representatives Committee on Small


                                Business


                 President and Chief Operating Officer


                       Padgett Business Services


                             April 10, 2013


    Good afternoon, I am Roger Harris, President and Chief 
Operating Office of Padgett Business Services.

    For nearly fifty years Padgett Business Services has been 
providing accounting, income tax planning and preparation, 
payroll and payroll tax services to thousands of small business 
owners through our network of 300 offices across the United 
States. Our clients generally have 20 or fewer employees and 
are what some people would consider ``mom & pop'' businesses. 
Based on recent studies almost 90% of all firms that have 
employees operate in our target market. In addition to my forty 
plus years with Padgett I also had the honor of serving on the 
Internal Revenue Advisory Council for four years and was its 
Chair for two of those years. I believe this experience gives 
me a balanced approach to small business taxation--I have had 
the opportunity to see what works and what doesn't work in the 
real world.

    A wise man once said tat owning your own business is about 
doing the one thing you love and 99 other things you MUST do 
but dislike. I can tell you with some certainty that for most 
small business owners at the top of that list is taxes and tax 
compliance. It is my experience that, while no one likes paying 
taxes, most hate the paperwork and time devoted to complying 
with the tax laws on an almost equal basis.

    Over the years it has become clear to me that for most 
entrepreneurs the business checking account is the focal point 
for their bookkeeping. It is how they measure cash flow and 
profits, and to a great extent is the basis for their tax 
accounting as well. First working with President Bush's 
Advisory Panel on Federal Tax Reform and most recently with 
David Kautter, Professor of Taxation and Executive Director of 
the Kogod Tax Center at American University, we have developed 
a legislative tax reform proposal--the Simplified Cash Method--
that we believe would provide significant simplification, 
improve cash flow, encourage entrepreneurship and improve 
compliance for the Nation's millions of small businesses.

    In a nutshell, the proposal is as follows:

     Qualifying taxpayers electing to use the 
Simplified Cash Method would be required to have a dedicated 
small business checking account (or accounts) associated with a 
single EIN.

     In order to take advantage of the Simplified Cash 
Method, all cash receipts and disbursements must pass through 
the dedicated account.

     Taxable income is based solely on amounts actually 
received

     Deductions would be allowed when made for cash 
disbursements for inventory, prepayments, capital assets and 
depreciable assets.

     Payments made for leasehold improvements would be 
deducted as cash disbursements are made. All other real 
property rules would be governed under current law.

     Banks would report annual gross cash receipts and 
disbursements to the IRS and IRS forms shall provide means on 
the tax return to reconcile any cash flows not income or a 
deductible disbursement.

    The Simplified Cash Method would have the advantage of 
making the business checking account the ``books'' for the 
small business. A tax practitioner would rely almost solely on 
it for preparing the tax return. The Internal Revenue would 
have the same information to decide on which businesses to 
audit or contact. The tax return would provide the flexibility 
for the taxpayer to explain differences between what is 
reported to the IRS and what is on the tax return. By 
comparison, today's rules require many small businesses to 
separately track and compute depreciation, amortization, 
inventory capital expenditures and other items, strictly for 
tax purposes. On the flip side, the IRS receives only parts of 
the information necessary for selecting taxpayers for 
compliance actions. We believe that both sides win from this 
proposal.

    We were pleased to find many of the same principles of our 
plan in Chairman Camp's Ways and Means white paper. I believe 
it takes a big step toward a more simplified tax world for 
small business, especially the following provisions:

     Permanent section 179 expensing, including 
leasehold improvements and computer software.

     Increasing the threshold for Cash Basis small 
business exception to $10 million and simplifying its 
application.

     Coordinating the new cash-accounting rules with 
the uniform capitalization rules generally to exempt small 
businesses from the capitalization rules that require the 
allocation to their inventory of certain direct costs (e.g., 
materials and labor) associated with the production of the 
inventory as well as indirect costs (e.g., overhead and 
administrative expenses).

     Combining three existing provisions for start-up 
and organizational expenses into a single provision applicable 
to all businesses and increasing the threshold to $10,000.

    It is my sincere hope that the Committee on Ways and Means 
will consider further simplifying the inventory rules to that 
most business with inventory and under the $10 million gross 
receipts would benefit from additional simplification.

    The white paper also provides an interesting discussion on 
reforming the rules governing tax structures, partnerships and 
S corporations. As a general rule, it is important to keep in 
mind that small businesses do not plan always their tax 
structure they simply evolve to the situation. I would like to 
illustrate that with a story I have told to many audiences.

    When a person mows his own lawn, it's considered a hobby. 
If the neighbor notices he does a good job and offers to pay 
him to mow his lawn, he becomes a sole proprietor. When he 
signs up enough neighbors, he brings in a friend and they 
become a partnership. At that point, the two of them realize 
that all the tax accounting and legal issues are too 
complicated and they seek out help and are advised to become an 
LLC. Without any planning their life got much more complicated 
but to them they are still just cutting grass. What we should 
all want for these people is for their business to continue to 
grow so they continue to hire more people to keep up with 
demand. The only way for that to happen is for them to keep 
cutting lawns instead of keeping unnecessary records.

    With this in mind, I would like to comment on the following 
issues in regard to option 1 of the white paper:

    The proposed changes in this section are very beneficial to 
businesses that operate as S Corporations. For our customers 
this is a very common business structure and these proposed 
changes would be welcomed. While few of our clients operate as 
a partnership those that do would also welcome most of the 
proposals. There are some proposed changes to payments made to 
partners that will require some change of thinking but as a 
whole these too would be beneficial for our clients.

    As to option 2, I think it is important to say that this 
represents more of a radical change from the current tax 
structure. As we all know, change can be a scary thing for some 
people. I do have some concern about the proposal to require 
entity level withholding on income for the smallest of small 
businesses. For this group, withholding on payments to the 
partners instead of income would be simpler for them to comply. 
Also, option 2 could generate more in the way of transition 
rule issues. But this option would still be an improvement over 
the current system.

    In conclusion, it is important to remember that 
policymakers should always try to strike a balance between tax 
compliance and taxpayer burden. For many small business owners 
that rely heavily on their business checking account for their 
basic books what might seem like good tax policy here in the 
halls of Congress will, and is, seen as needless burden to 
someone simply trying to make the next payroll. Chairman Camp's 
proposal definitely heads in the right direction for 
entrepreneurs looking for a simpler system that simplifies 
their life and lets them just focus on running and building 
their business. Thank you for this opportunity to testify today 
and Padgett Business Services looks forward to working with 
this Committee and the Committee on Ways and Means on this 
crucial issue.

    For additional information on the Simplified Cash Method 
proposal, please see the following:

    David Kautter and Donald Williamson, ``A Simplified Cash 
Method of Accounting for Small Business'' Tax Notes, February 
13, 2012, pages 863-867.

    General Accountability Office ``TAX GAP - A Strategy for 
Reducing the Gap Should Include Options for Addressing Sole 
Proprietor Noncompliance'' July 2007 GAO-07-1014

    The Report of The President's Advisory Panel on Federal Tax 
Reform, pages 94-96, 127-128
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                              Statement of


             The Associated General Contractors of America


                      Committee on Small Business


                 United States House of Representatives


                             April 10, 2013


    The Associated General Contractors of America (AGC) 
appreciates Chairman Graves for holding yet another hearing on 
the difficulties faced by small businesses when wading through 
the regulations and complexities of the Internal Revenue Code 
(IRC). Furthermore, AGC wants to commend the thoughtful 
progress that Chairman Camp, Ranking Member Levin, and the 
Members on the Ways and Means Committee are making towards 
comprehensive tax reform and welcomes the opportunity to 
comment on areas relating to small businesses as pass-through 
entities.

    As part of the Ways and Means Committee's goal to 
strengthen the economy, crate more jobs and increase wages for 
American families by making the tax code simpler and fairer, 
Chairman Camp has directed over 20 tax hearings, released three 
draft legislative discussions to enhance the feedback to the 
committee and most recently organized bipartisan working groups 
to address specific areas of the tax code and more 
specifically, focusing on the small business community.

    Since the beginning of his tenure at the helm of the 
Committee, Chairman Camp has exhibited a steadfast commitment 
to pursuing tax reform in a comprehensive manner. In fact, his 
first order of business was to chair a full committee hearing 
that addressed the complexity and broader cost to the U.S. 
economy of a tax system that fails to maximize job creation and 
impedes economic growth.

    Early in the debate, Chairman Camp laid down the ground 
rules that the rates should be lowered to 25 percent in order 
to make the U.S. more competitive, and that reform should 
address the structure of both individuals and corporations in 
tandem. This is important, since more than three-quarters of 
small business pay taxes on business income at the individual 
rate.

    AGC members are engaged in all forms of nonresidential 
construction and consist primarily of small businesses with the 
vast majority of our members (typically more than 70 percent 
when surveyed) organized as pass-through entities. When our 
members discuss tax reform they gravitate towards simplicity 
and permanency as being critical to tax policy. With a critical 
element of permanency being the indexing of income thresholds 
so that inflation is not the cause of tax policy changes.

    AGC is the leading association in the construction 
industry. Founded in 1918 at the express request of President 
Woodrow Wilson, AGC now represents nearly 30,000 leading firms 
in the construction industry through a network of 95 chapters 
throughout the United States. AGC members engage in the 
construction of buildings, shopping centers, factories, 
industrial facilities, warehouses, highways, bridges, tunnels, 
airports, waterworks facilities, waste treatment facilities, 
dams, hospitals, water conservation projects, defense 
facilities, multi-family housing projects, municipal utilities 
and other improvements to real property.

    While AGC and its membership continue to analyze the latest 
discussion draft released by the Ways and Means Committee on 
small businesses and pass-through entities; AGC would like to 
provide the following commentary on the impact of selected 
proposals on our construction company members and offer other 
areas for consideration.

    Predictability for Business Operations

    AGC appreciates the efforts by Congress to provide a 
significant amount of certainty to its membership through the 
passage of the American Taxpayer Relief Act (ATRA). The 
legislation that was signed in to law to avert the 2012 fiscal 
cliff permits companies to plan with the greater confidence 
that comes from cost predictability. AGC is particular pleased 
with the permanent extension of the 2001 and 2003 tax cuts for 
98 percent of Americans.

    AGC is also appreciative for the certainty provided for 
marginal rates for long-term capital gains and dividends set at 
15 percent for earnings below $400,000 ($450,000 for joint 
filers) and 20 percent taxable incomes above the aforementioned 
amounts; as well as the increase in the Alternative Minimum Tax 
(AMT) exemption amount, exemption phase-out threshold, and 
indexing for inflation.

    Another priority for AGC members if the planning for 
transfer of ownership after the passing of an owner. ATRA 
allows family-owned businesses within the AGC membership to 
focus on growth and business planning; which would grow our 
economy, create new jobs, and strengthen businesses. For this 
reason, AGC is grateful for the reasonable, permanent reform 
provided under the new law with a 40 percent tax rate for 
estates above the exemption value of $5 million indexed for 
inflation ($5.25 million for 2013).

                       Small Business Provisions


    179 Expensing

    While ATRA allows Section 179 expensing levels to increase 
to $500,000, the limit on what a business can deduct is slated 
to decrease to a meager $25,000 in 2014. AGC supports Chairman 
Camp's discussion draft provisions regarding the permanent 
nature of the Section 179 expensing of new equipment and 
property up to $250,000 phasing it out at $800,000 and indexing 
the amount to inflation. AGC continues to study the impact on 
the construction industry of phasing-down from the $2,000,000 
to $800,000 level.

    In addition, we recommend making two changes to current law 
that could provide additional flexibility and simplicity to 
construction industry tax compliance.

    Lookback Accounting

    The Tax Reform Act of 1986 revised the long-term contract 
accounting rules for contractors. These rules--contained in 
Section 460 of the IRC--require a construction contractor to 
file amended tax returns for every prior year in which a 
currently completed contract was in progress. For small and 
mid-size contractors, look-back computations are very complex 
and expensive, requiring inordinate amounts of time, resources 
and accounting fees to comply, with the results usually being 
confusing and immaterial to both the government and the 
taxpayer. Since this process is pushed down to the individual 
shareholder level, a company must go through each individual's 
returns to make the interest computation. These recalculations 
can go back a number of years. In the end, the same tax is 
paid.

    Currently, Section 460(b)(3)(B) provides an exemption from 
the look-back rules for contracts which are completed within 
two years and for which the contract price does not exceed the 
lesser of $1,000,000 or 1 percent of the average gross receipts 
of the taxpayer for the three preceding years. A legislative 
change to exempt long-term contracts spanning 36 months at a 
$25,000,000 threshold would exempt a significant percentage of 
the small and mid-size construction contracts currently subject 
o look-back. According to AGC data, approximately 95 percent of 
construction contracts are completed in two years or less. For 
construction companies, most contracts are fulfilled in under 
36 months.

    AGC believes that a legislative change exempting closely-
held pass-through entities under a 36 month timeframe would 
significantly reduce the compliance burden on these taxpayers 
by averting thousands of dollars spent on tax practitioners to 
make the interest calculations; as well as diminish the 
enforcement burden for the Internal Revenue Service, with no 
measurable effect on revenue. AGC advocates that this 
modification to lookback accounting should encompass business 
of all sizes and tax structures to include pass-throughs, as 
well as C-corporations.

    Employment Taxes

    There have been a number of proposals put forth to address 
the treatment of employment taxes currently afforded to pass-
through entities. S-corporation flow-through income has 
historically had an employment tax advantage over that of sole 
proprietorships, partnerships and limited liability companies 
(LLCs). An S-corporation shareholder's undistributed share of S 
corporation income is not treated as self-employment income. 
Alternatively, earnings attributed to a sole proprietor, 
general partner or many LLC members are subject to self-
employment taxes; although Section 1402 excludes from self-
employment income a limited partner's distributive share of 
partnership income. Some proposals that have been introduced 
would eliminate that exclusion for any partner with a higher 
adjusted gross income.

    AGC believes that proposals to modify or unify rules for 
pass-through entities should be fully vetted by the Ways and 
Means Committee in an open and transparent manner with 
continued significant input from stakeholders. A brash attempt 
to treat taxation of S-corporation shareholders the same as 
partnerships, thus exposing 100 percent of earnings to a 
potential Social Security or Medicare tax would be a 
significant departure from the current structure of these 
entities and it would distort the tax liability of certain 
corporate structures.

    Comprehensive Reform for Both Entities

    AGC believes that Congress should continue the dialogue of 
comprehensive tax reform at both the individual and corporate 
levels simultaneously. The individual and corporate codes are 
not mutually exclusive and they must be reformed while 
discussing the reactionary affect a policy change would have on 
each other structure. Pass-through entities account for some 90 
percent of businesses, employ more than 50 percent of the 
private sector workforce and report more than a third of all 
business receipts. Like corporations, pass-through 
organizations face nearly the highest rate among industrialized 
countries on business income. Under the individual code, pass-
through entities face a top marginal rate of 39.6 percent, even 
higher than the anti-competitive 35 percent rate faced by C-
corporations.

    Moreover, changes to the IRC under the Patient Protection 
and Affordable Care Act (PPACA) only exacerbate the tax burden 
on pass-through businesses. The law increases the Medicare Part 
A (hospital insurance) tax rate by 0.9 percent on unearned 
income on earnings over $200,000 for single filers or $250,000 
for joint filers, and imposes a 3.8 percent tax on investment 
income for taxpayers with a modified adjust gross income (MAGI) 
exceeding $200,000 for single filers or $250,000 for joint 
filers. Including the healthcare tax increase, marginal rates 
will be set at 40.5 percent for individuals earning over 
$400,000 and 40.5 percent for joint filers earning over 
$450,000.

    If Congress ultimately pursues a reform that eliminates 
deductions and credits for a lower corporate rate, many small 
businesses would experience an increase in the income taxes 
paid as individual owners of a pass-through business. For the 
aforementioned reasons, AGC strongly recommends that tax reform 
be pursued comprehensively, addressing both individual and 
corporate tax rates.

    Conclusion

    AGC thanks the Members of the Small Business Committee for 
the opportunity to submit comments on areas regarding small 
business/pass-throughs during this period of fact-finding for 
comprehensive tax reforms. We believe strongly that an overhaul 
of the IRC must deal with all business structures similarly and 
contemporaneously. We believe that simplicity and certainty 
should be the goal of tax reform and that provisions in the 
existing code that create a compliance nuisance with little or 
no change in tax liability should be eliminated especially for 
small businesses.

    AGC looks forward to ongoing consultation with Congress, 
the Committee, and Members of the Working Groups as this 
process continues to make improvements to the code in order to 
create an atmosphere that is increasingly pro-business and pro-
growth.
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          Small Business Tax Reform: Growth Through Simplicity


                     House Small Business Committee


                       Wednesday, April 10, 2013


                             Submitted by:


        The Computing Technology Industry Association (CompTIA)


                           515 2nd Street, NE


                          Washington, DC 20002


    Computing Technology Industry Association (CompTIA)
    515 2nd St NE
    Washington, DC 20002
    Introduction.

    Tax burdens and compliance costs consistently force small 
and medium-sized (SMB) information technology (IT) companies to 
divert needed resources away from their core businesses, 
restricting growth and innovation. Reducing the financial 
burden on these firms via tax reform would promote additional 
growth and opportunities for the SMB IT industry and eliminate 
hurdles within the tax code that are limiting the industry's 
ability to remain globally competitive.

    While the SMB IT industry strongly supports closing unfair 
loopholes and outdated deductions as a means of increasing 
revenue for broader reforms, there are several key tax 
provisions that incentivize growth and innovation. Removing 
these provisions would significantly hamstring SMB IT's ability 
to grow and strengthen the economy.

    This testimony provides an overview of the industry and 
highlights the key tax policies for the IT industry within four 
tax reform principles:

                  1. Simplify the tax code.

                  2. Reduce the tax burden on the SMB IT 
                industry.

                  3. Incentivize growth and innovation.

                  4. Protect SMB IT from new interstate tax 
                compliance burdens.

    The data compiled for this report are largely the result of 
an annual survey CompTIA conducts of its members.

    About CompTIA.

    The Computing Technology Industry Association (CompTIA) is 
the voice of the world's $3 trillion information technology 
industry. CompTIA membership extends to more than 100 
countries. Membership includes companies at the forefront of 
innovation along with the channel partners and solution 
providers they rely on to bring their products to market and 
the professionals responsible for maximizing the benefits that 
organizations receive from their technology investments. The 
promotion of policies that enhance growth and competition 
within the computing world is central to CompTIA's core 
functions. Further, CompTIA's mission is to facilitate the 
development of vendor-neutral standards in e-commerce, customer 
service, workforce development, and ICT (Information and 
Communications Technology) workforce certification. CompTIA is 
also the leading global provider of IT workforce vendor-neutral 
certifications. Currently there are over 1.4 million CompTIA IT 
vendor-neutral certification holders worldwide, and many of 
those are for IT security.

    CompTIA's members include thousands of small computer 
services businesses called Value Added Resellers (VARs), as 
well as nearly every major computer hardware manufacturer, 
software publisher and services provider. Our membership also 
includes thousands of individuals who are members of our ``IT 
Pro'' and our ``TechVoice'' groups. Further, we are proud to 
represent a wide array of entities including those that are 
highly innovative and entrepreneurial, develop software, and 
hold patents. Likewise, we are proud to represent the American 
IT worker who relies on this technology to enhance the lives 
and productivity of our nation.

    A Vital Contributor to the Economy.

    The IT industry in the United States remains a vital 
contributor to the domestic economy. Currently, the industry 
comprises about 26 percent (or $950 billion) of the $3 trillion 
global industry. Through innovation and growth, domestic IT 
firms have remained globally competitive and economically 
strong.

    SMBs within the IT industry employ some 1.8 million 
workers, while spending approximately $110 billion annually on 
payroll. Generally, these are high-paying jobs that rely on 
skilled workers who continually adjust their skills to meet 
market trends.

    Many of these SMB companies operate within what is referred 
to as the IT channel. The IT channel spans the IT marketplace 
between the vendor and the end-user and forms a bridge between 
distributors, resellers, integrators and consultants. Seventy-
five percent of all IT products and services, representing more 
than $350 billion, are sold to businesses through the channel 
as opposed to through retailers or direct sales. The vast 
majority of IT firms in the channel are small and medium-sized 
enterprises.

    Although the industry remains strong, there is significant 
potential for additional growth. According to January 2013 
statistics from Indeed.com, more than 265,000 IT-related jobs 
are currently available. While this reflects a clear skills gap 
among potential employees, it also highlights the current job 
growth in IT firms.

    While a range of policies may impact the state of the 
industry, few have a larger impact than the current tax code. 
Despite good intentions, too many outdated our unfair policies 
have proven to hamstring growth within the industry. Given the 
impact that SMB IT business has on the economy, ensuring the 
tax code promoters growth for domestic IT should be a key goal 
in any tax reform efforts.

    Principle 1: Simplify the Tax Code.

    The tax code has continued to become increasingly complex 
and complicated, especially for SMB IT companies that do not 
have the resources to maintain large internal accounting and 
legal departments. As the tax code has grown, the cost of 
compliance (and potential for mistakes) has increased rapidly. 
Both sides of the political aisle have identified the need to 
simplify the tax code as a key priority.

    A recent CompTIA survey found that 48 percent of IT 
executives identify complexity and the burdens associated with 
managing taxes as their primary concern with U.S. tax policy. 
Further, the survey found payroll tax filings to be the most 
costly and complicated tax requirements for businesses. In this 
survey, the SMB IT industry has identified a number of tax 
provisions that would clearly benefit from reforms that reduce 
the complexity of the tax code.

                   Recommendation: Payroll Tax Filing 
                Simplification. Employers are generally 
                required to file Form 941 on a quarterly basis 
                to report and pay federal income tax 
                withholdings, social security and Medicare tax. 
                Very small employers with an annual liability 
                of $1,000 or less are allowed to replace these 
                quarterly filings with a single annual Form 
                944. Increasing this $1,000 threshold would 
                allow more small businesses to file annually 
                instead of quarterly, which would significantly 
                reduce the cost of compliance and risk of 
                error. CompTIA recommends increasing this 
                threshold to $50,000, which will provide 
                compliance burden relief for the majority of 
                the 5.8 million \1\ small businesses employing 
                1-99 employees.
---------------------------------------------------------------------------
    \1\ According to the 2008 U.S. Census, there were a total of 
5,821,277 small businesses employing approximately 42 million employees 
with an annual payroll of over $1.5 trillion

---------------------------------------------------------------------------
    Principle 2: Reduce the Tax Burden on the SMB IT Industry.

    According to the U.S. Economic Census, 67 percent of IT 
services firms, including employer and non-employer businesses, 
pay taxes at individual rates as a sole proprietor or pass-
through entity. Therefore, it is important that tax reform does 
not adversely affect these small businesses. While a corporate 
tax rate reduction remains very popular among SMB IT companies 
(63 percent believe it would be an important policy), the 
direct impact to pass-through entities would be tangential. 
However, the economic implications of a corporate tax rate 
reduction (and its impact on adjacent industries) would likely 
have a positive impact on SMB IT companies depending on the 
broader tax policies adopted.

    We also note that SMB IT companies cite a reduction in 
payroll tax as a top issue. While income tax liability might 
fluctuate, virtually all of the SMB IT industry must pay 
payroll taxes, associated with its $110 billion annual payroll. 
The most direct way to lessen the burden on these businesses is 
to provide a reduction in the employer's share of these taxes. 
This would make it easier and less costly to add new workers.

                   Recommendations: Comparable Tax 
                Treatment for Sole Proprietor and Pass-Through 
                Entities. Within comprehensive tax reform, a 
                variety of tax provisions, including a 
                corporate tax rate reduction, will be on the 
                table. While the IT industry may be impacted to 
                varying degrees depending on the combination of 
                the various reductions, it is important that 
                any solution provide comparable rate reduction 
                for entities that are sole proprietors and 
                pass-through entities. Ignoring these important 
                economic engines--by simply reducing the 
                corporate tax rate alone--would continue to 
                hamstring the ability of the SMB IT to grow and 
                prosper. We also recommend a reduction in the 
                employer's share of payroll taxes; this will 
                encourage businesses to hire more workers, 
                which will in turn lead to economic growth for 
                our nation.

    Principle 3: Incentivize Growth and Innovation.

    The SMB IT industry relies on its ability to grow and 
remain innovative. Many of the largest IT companies in the U.S. 
started as small businesses that succeeded through constant 
innovation and investment. Unfortunately, many of these small 
start-up IT firms are economically unable to continue to make 
these innovation investments.

    The SMB IT industry believes the tax reform debate must 
include discussion of all tax provisions. In fact, executives 
surveyed indicated that certain deductions and loopholes were a 
major issue impacting tax policy. However, there are tax 
benefits that are meaningful to economic growth and provide a 
pathway to innovation for the SMB IT industry.

                   Recommendations:

                           R&E Tax Credit for Small 
                        Businesses: Most small start-up 
                        companies do not show a profit, and 
                        thus do not have an income tax 
                        liability against which to offset the 
                        traditional R&E tax credit. Therefore, 
                        some of the most vital and innovative 
                        companies cannot receive any economic 
                        benefit from the traditional R&E tax 
                        credit. Accordingly, CompTIA supports 
                        legislation that would allow start-up 
                        companies to offset a simplified R&E 
                        tax credit against payroll tax 
                        liability.

                           Bonus Depreciation: Bonus 
                        depreciation promotes investment and 
                        growth by businesses and has been 
                        especially important to small 
                        businesses. While the economy shows 
                        signs of improvement, small businesses 
                        need continuing support to grow their 
                        businesses. For 2011 and 2012, 
                        businesses were allowed an additional 
                        100 percent bonus depreciation. This 
                        limitation has been extended through 
                        2013, but will expire beginning in 
                        2014. CompTIA calls on Congress to 
                        permanently extend bonus depreciation 
                        at the 100-percent level.

                           Small Business Expensing: 
                        Section 179 allows small businesses to 
                        deduct the cost of certain asset 
                        purchases, as opposed to requiring the 
                        cost to be capitalized and depreciated 
                        over a period of years. This enables 
                        small businesses to invest in 
                        technologies that improve both 
                        productivity and the quality of goods 
                        and services. The current limitation of 
                        $500,000 per year will drop to $25,000 
                        after 2013. CompTIA strongly supports a 
                        permanent extension of the $500,000 
                        limitation.

    Principle 4: Protect SMB IT from New Interstate Tax 
Compliance Burdens.

    As state budgets face ever-increasing pressures to raise 
revenues, state tax authorities must become more creative in 
their collection efforts. While states should not be limited in 
their ability to tax transactions within their jurisdiction, it 
is important that this emerging regime of taxation not unfairly 
impact the IT and tech industries, especially SMBs. 
Additionally, it is important that new state tax laws do not 
create unfair and duplicative taxes on SMB IT companies, 
imposing additional compliance costs on sellers and their 
customers.

                   Recommendations:

                           Small Business Exemption for 
                        Internet Tax Collections: For any 
                        legislation that would require out-of-
                        state sellers to collect and remit 
                        sales taxes, CompTIA supports a robust 
                        small business exemption. Small 
                        businesses are less capable of bearing 
                        the costs of a new tax compliance 
                        requirement. CompTIA believes the 
                        debate should be refocused to balance 
                        the rights of states to collect sales 
                        taxes with the ability of small 
                        businesses to cover these new 
                        compliance costs. States have a right 
                        to collect sales and use taxes owed, 
                        but the costs associated with shifting 
                        this compliance burden onto small 
                        businesses also must be weighed. Small 
                        businesses that provide goods and 
                        services remotely are as vital to our 
                        economy as those small businesses that 
                        reside in and make sales within a 
                        single state.

                           Digital Download Taxation: 
                        Consumers, vendors and taxing 
                        authorities need a consistent rule to 
                        determine which state/jurisdiction is 
                        permitted to impose a tax on the 
                        purchase of a digital product or 
                        service. Currently, there is no 
                        certainty concerning which jurisdiction 
                        has the authority to tax these products 
                        among the location of the customer, 
                        seller's server and customer's home 
                        address. This creates the potential for 
                        multiple and discriminatory taxes on 
                        the purchase of digital goods and 
                        services. Therefore, CompTIA supports 
                        proposals that would restrict 
                        collection of sales taxes on digital 
                        goods and services to the jurisdiction 
                        encompassing the consumer's tax 
                        address, while also prohibiting 
                        multiple and discriminatory taxes. We 
                        believe this is a simple and objective 
                        criterion that will bring both 
                        certainty and lower compliance costs 
                        for taxpayers, vendors and taxing 
                        authorities.

                           Business Activity Taxation: 
                        While physical nexus (having an office 
                        or place of business in the state, or 
                        employing workers that operate within 
                        the state) continues to control sales 
                        and use tax collections, some states 
                        now are seeking to tax any transaction 
                        that has an ``economic nexus'' to that 
                        state. CompTIA supports enactment of a 
                        distinct physical presence requirement 
                        as a prerequisite for the taxation of 
                        business activities. That is, states 
                        should not be permitted to tax 
                        businesses that do not have a physical 
                        presence or workforce within that 
                        state. Permitting states to reach out 
                        to impose tax collections and reporting 
                        on non-resident small businesses that 
                        have no contact with that state would 
                        impose an unaffordable compliance 
                        burden, especially on the SMB IT 
                        industry.

    Conclusion.

    The strength of the IT industry relies on its ability to 
grow, innovate and adjust to market trends. SMB IT companies 
across the nation are providing services to all major 
industries from healthcare to agriculture. The success of these 
industries relies on the IT industry and the services they 
provide.

    The U.S. IT industry continues to add jobs and strengthen 
the economy. Additionally, we are remaining competitive in a 
rapidly evolving global marketplace. While the industry remains 
strong, we must continually identify ways to mitigate the 
burdens on these companies in an effort to increase their 
growth potential, which translates into sustaining and 
generating high-paying jobs.

    Therefore, tax reform should be a mechanism to promote 
additional growth and opportunity for the SMB IT industry and 
eliminate hurdles within the tax code that are limiting the 
industry's ability to remain globally competitive.
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