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



 
             THE BIGGEST TAX PROBLEMS FOR SMALL BUSINESSES

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

                                HEARING

                               before the

                      COMMITTEE ON SMALL BUSINESS
                             UNITED STATES
                        HOUSE OF REPRESENTATIVES

                    ONE HUNDRED THIRTEENTH CONGRESS

                             SECOND SESSION

                               __________

                              HEARING HELD
                             APRIL 9, 2014

                               __________

                               [GRAPHIC] [TIFF OMITTED] TONGRESS.#13
                               

            Small Business Committee Document Number 113-065
              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 LUETKEMEYER, Missouri
                     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

Mr. David Kautter, Managing Director, Kogod Tax Center, Kogod 
  School of Business, American University, Washington, DC........     3
Mr. Tim Reynolds, President, Tribute, Inc., Hudson, OH, 
  testifying on behalf of the National Small Business Association     5
Mr. Rick Endres, President, The Washington Network, Inc., 
  Alexandria, VA, testifying on behalf of the ASCII Group........     6
Mr. Donald Marron, Institute Fellow and Director of Economic 
  Policy Initiatives, The Urban Institute, Washington, DC........     8

                                APPENDIX

Prepared Statements:
    Mr. David Kautter, Managing Director, Kogod Tax Center, Kogod 
      School of Business, American University, Washington, DC....    27
    Mr. Tim Reynolds, President, Tribute, Inc., Hudson, OH, 
      testifying on behalf of the National Small Business 
      Association................................................    39
    Mr. Rick Endres, President, The Washington Network, Inc., 
      Alexandria, VA, testifying on behalf of the ASCII Group....    50
    Mr. Donald Marron, Institute Fellow and Director of Economic 
      Policy Initiatives, The Urban Institute, Washington, DC....    55
Questions for the Record:
    None.
Answers for the Record:
    None.
Additional Material for the Record:
    The National Association for the Self-Employed (NASE) 
      submitted by Katie Vlietstra, Vice-President of Government 
      Relations & Public Affair..................................    67
    Sageworks submitted by Brian Hamilton, Chairman & Co-founder.    70


             THE BIGGEST TAX PROBLEMS FOR SMALL BUSINESSES

                              ----------                              


                        WEDNESDAY, APRIL 9, 2014

                  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, Chabot, Luetkemeyer, 
Tipton, Hanna, Schweikert, Bentivolio, Collins, Velazquez, 
Schrader, Chu, Hahn, Payne, Meng, Schneider, and Barber.
    Chairman GRAVES. Good afternoon. I call this hearing to 
order.
    Next Tuesday, April 15, Americans will once again file 
their annual income tax returns. For small business owners, Tax 
Day is yet another reminder of the many burdens of the tax 
laws. They bring a never-ending parade of higher rates, 
increased complexity, and ever-changing regulations.
    If you talk with small business owners often, as members of 
the Committee do, you know that individually they may be 
affected by one particular part of the tax law or another. But 
taken together, small business owners consistently tell us that 
they are impacted by higher taxes, new taxes, increasing tax 
code complexity, uncertainty, and the additional time required 
to resolve issues with the Internal Revenue Service. All of 
this means they have little ability to plan with confidence, 
and less time to grow their companies.
    One tax preparer for small businesses recently called this 
cumulative effect ``death by a thousand cuts.'' We know that 
small businesses face unique tax challenges, because research 
have shown that it is more costly and time consuming for small 
firms to comply with the tax code. But while most Americans may 
think about taxes once a year, entrepreneurs cope with multiple 
tax issues each day in operating their businesses.
    In connection with today's hearing, the National Small 
Business Association (NSBA) is releasing its annual Tax Survey 
of Small Businesses. The survey confirms that entrepreneurs are 
spending scarce resources on federal tax compliance. About half 
(49 percent) are spending $5,000 or more per year on tax 
compliance--not including tax owed. Forty percent more spend 
more than 80 hours per week dealing with federal taxes, and 86 
percent pay an external tax preparer to handle their taxes. The 
overwhelming majority (73 percent) said federal taxes have a 
significant impact on the day-to-day operation of their 
businesses. We are going to hear more about the survey results 
shortly form Tim Reynolds, who is one of NSBA's members.
    Today, we hope to learn more about all of these tax issues. 
I want to thank all of our witnesses for being here. We look 
forward to hearing your testimony. And I now turn to Ranking 
Member Velazquez for her opening statement.
    Ms. VELAZQUEZ. Thank you, Chairman Graves.
    With April 15th just around the corner, most Americans are 
wrapping up their paperwork. Yet, for many small business 
owners, the process never really ends. Constant changes to the 
tax code make compliance a year-round challenge for small 
employers.
    This is not the first time our Committee has discussed tax 
challenges facing small firms. The Small Business Committee has 
held numerous hearings examining how specific provisions like 
bonus depreciation and estate tax affect entrepreneurs. Yet, 
the most frequent complaint we hear from small employers is how 
our current tax system creates uncertainty, hindering long-term 
business planning and growth.
    This uncertainty is the product of a complex and outdated 
tax code. As we all know, complexity adds significantly to the 
cost of tax compliance for small firms. Modernizing this system 
will provide simplicity, fairness, and predictability to 
businesses of all sizes. That is why I am glad that the Senate 
has taken measures to actively extend almost all 55 extenders 
that expired last year. Now, we must give small firms some 
certainty that they will operate under this rule for the 
foreseeable future. More broadly, tax law operates best when 
small businesses have long-term certainty and stability. This 
is why fundamental tax return is imperative.
    One tax reform goal should be promoting growth and job 
creation. Small businesses are a vital part of that equation. 
Too often, entrepreneurs' tax reform priorities are drawn out 
in the larger debate. I expect today's discussion will yield 
recommendations that will be helpful as we work together to 
improve the tax environment for small firms.
    Although some existing tax policies provide critical relief 
to small firms, much of the code is riddled with inequities and 
unnecessary complexities. For small entities, this creates 
obstacles to success rather than encouraging economic growth. 
It is important that we continue working toward a comprehensive 
overhaul of the tax code rather than a corporate-only approach. 
Doing so supports our nation's job creators by allowing them to 
continue hiring and expanding without warning about annual 
changes. Most importantly, any agreed-upon plan must ensure the 
extension of critical business expenditures.
    One critical provision is enhanced business expensing, 
sometimes called Section 179. The majority of small firms we 
have spoken to insist that this specific item must be retained. 
It encourages small entities to make purchases now while also 
putting more money in their pockets to invest and hire.
    One thing is clear about tax reform--small firm needs must 
come first. No matter the approach taken, the small business 
community wants their voice to be heard. We cannot move forward 
without their input, and we must recognize the impact of how 
any proposals will affect them. I believe there exists an 
opportunity to implement long-lasting reforms. Doing so will 
have immediate benefits to small businesses.
    With that, I just want to take this opportunity to thank 
all the witnesses for being here today and providing insightful 
information regarding the tax code and small businesses.
    Thank you, Mr. Chairman.
    Chairman GRAVES. All right. Our first witness is David 
Kautter, who is the managing director of Kogod Tax Center at 
American University here in Washington, D.C. Kogod Center 
provides research on the tax problems of small businesses. 
Previously, Mr. Kautter was the national director of tax for 
Ernst & Young.
    Thank you for being here.

   STATEMENTS OF DAVID KAUTTER, MANAGING DIRECTOR, KOGOD TAX 
  CENTER, KOGOD SCHOOL OF BUSINESS, AMERICAN UNIVERSITY; TIM 
REYNOLDS, PRESIDENT, TRIBUTE, INC.; RICK ENDRES, PRESIDENT, THE 
 WASHINGTON NETWORK, INC.; DONALD MARRON, INSTITUTE FELLOW AND 
            DIRECTOR OF ECONOMIC POLICY INITIATIVES

                   STATEMENT OF DAVID KAUTTER

    Mr. KAUTTER. Chairman Graves, thank you very much. Ranking 
Member Velazquez and members of the Committee, thank you for 
the opportunity to testify today. My name is David Kautter, and 
I am the managing director of the Kogod Tax Center located at 
American University. The Kogod Tax Center is a tax research 
institute dedicated to nonpartisan research on tax matters 
affecting small businesses, entrepreneurs, and middle income 
tax payers.
    I have been a tax practitioner for over 40 years. As the 
chairman mentioned, prior to joining the Kogod Tax Center, I 
was director of National Tax for Ernst & Young. Over the course 
of my career, I have watched with great disappointment as the 
Internal Revenue Code has grown increasingly complex in its 
structure, incomprehensible in its nature, and pervasive in its 
effect on business decision-making. There is little doubt that 
the nearly paralyzing complexity, overwhelming length and 
constantly changing nature of our federal tax laws are having a 
profound effect on small business decision-making and impeding 
their ability to grow and create jobs.
    Based on surveys we have conducted over the past three 
years, discussions with small business owners and personal 
experience as a tax account, it is clear to me that the two 
biggest tax problems facing small business today are one, 
complexity, and two, the constantly changing nature of the tax 
law. These two forces show up in many ways, but there are seven 
particularly critical problems they are creating for small 
businesses today.
    First and foremost, most small businesses have given up 
trying to understand the tax law, and they have outsourced 
their tax planning and their compliance. It is estimated that 
close to 91 percent of small all businesses hire a tax return 
preparer at a cost of around $16 billion a year.
    Second, because the tax laws changes so often, small 
businesses are making decisions without full knowledge of their 
economic consequences. According to our surveys, the single-
most important area of tax uncertainty for small businesses 
involves that mentioned by Ranking Member Velazquez, how much 
equipment can be immediately deducted, and what has to be 
depreciated. These rules need to be settled.
    Third, constantly changing tax laws mean constantly 
changing tax filing requirements, which means constantly 
changing recordkeeping requirements, which means constantly 
growing uncertainty, inefficiency, and frustration. The number 
one factor cited in Kogod Tax Center surveys that is 
contributing most to increased cost is the constantly changing 
rules and regulations.
    Fourth, increasing tax recordkeeping, tax compliance, and 
tax reporting requirements are diverting increasing amounts of 
time away from operating and growing small businesses.
    Fifth, internal costs. Despite spending $16 billion a year 
on outside tax return preparation, it is estimated that 
annually small businesses spend more than 2.5 billion hours of 
their own time on federal tax matters. This is not a healthy 
state of affairs.
    Sixth, tax compliance is becoming a year-round activity, 
requiring more interaction with the IRS. Yet, many small 
business owners say it is difficult to get answers from the IRS 
and solving problems takes more time.
    Finally, there are several specific areas of the tax law 
that are particularly challenging for small businesses. The top 
six are the rules governing accounting methods, depreciation, 
inventory, employee independent contractor determinations, the 
healthcare law, and retirement plans. Simplification of these 
rules is critical.
    Given all this, I would like to put forward two proposals 
that will not solve all the problems of small business but they 
will help a lot when it comes to taxes. The first is called the 
simplified cash method. This proposal would allow businesses 
with up to $10 million in revenue to immediately deduct all 
amounts they spend to run their business. That would include 
amounts they spend for inventory, capital equipment, wages, 
materials, supplies, everything. You could think of it as a 
checkbook method of accounting because taxable income would be 
based on cash received and cash paid. No inventory rules. No 
depreciation rules. No capitalization rules. Just cash flow. It 
is simple and it could work.
    My second proposal is not so much as simplification 
proposal as an equity proposal. It makes little sense to me 
that corporations are taxed at 35 percent and small businesses 
are taxed at rates as high as 39.6 percent. My proposal is that 
all business income be taxed under a single business tax rate 
schedule, no matter whether it is earned by a sole proprietor, 
a partnership, or a multinational corporation. It could be a 
graduated rate scale, but I would propose that it be the same 
rate scale for all business income. This could be easily 
implemented because small businesses already report the 
information needed to compute tax on a unified business tax 
rate scale on their existing tax return.
    Mr. Chairman, that concludes my prepared remarks. Thank you 
for allowing me to testify today, and I would be delighted to 
answer any questions.
    Chairman GRAVES. Thank you very much.
    Our next witness is Tim Reynolds, who is the president of 
Tribute, Inc., in Hudson, Ohio. Prior to purchasing Tribute, 
Mr. Reynolds held several positions with British Petroleum and 
BP America. He is a first vice president of the National Small 
Business Association, and he is testifying today on its behalf.
    Thanks for being here, Mr. Reynolds.

                   STATEMENT OF TIM REYNOLDS

    Mr. REYNOLDS. Good afternoon. I would like to thank 
Chairman Graves and Ranking Member Velazquez, and the members 
of the Small Business Committee for inviting me to testify 
today.
    I am Tim Reynolds, owner and president of Tribute, Inc., a 
software company located in Hudson, Ohio. Our 38-employee 
company develops and markets software for industrial 
distributors. We provide a fully integrated distribution 
management system supporting virtually all of the distributors' 
business system needs.
    I am proud to be here representing not only my own company, 
but also the National Small Business Association. NSBA is the 
nation's first small business advocacy organization. NSBA is 
uniquely member driven and a staunchly nonpartisan 
organization. I serve as vice chair.
    I would like to focus my remarks this afternoon on two of 
the major themes that emerged from a recent survey of our 
members at NSBA--the need for consistency and the importance of 
predictability.
    Our 70,000 page tax code has become disorganized by its own 
complexity. This complexity has real world implications. Nearly 
one in three small businesses spend more than $10,000 per year 
on the administration of federal taxes. This is just the 
accounting fees and so on before they pay their tax 
liabilities. This money would be better spent toward hiring a 
new employee or growing the business.
    The tax code is a patchwork quilt of internally 
inconsistent and often conflicting measures and objectives. For 
example, as a software development company, Tribute spends a 
significant amount of time, money, and resources each year on 
research and development. As such, we are entitled to take 
advantage of the R&E tax credit, which can produce significant 
tax savings and allow innovative companies such as mine to 
increase their R&D efforts. However, because we are a sub S 
corporation, like the majority of small businesses, the income 
of the business passes through to my personal income taxes. I 
am almost always subject to the Alternative Minimum Tax. This 
effectively prevents my company from taking the R&E credit.
    Small businesses are often America's greatest innovators, 
and yet the complicated tax code steps on its own foot in this 
area. Even if I wanted to take the R&E tax credit, I cannot 
because on December 31st of last year it expired, along with 55 
other tax provisions commonly referred to as tax extenders. 
Seventy-three percent of our members report using one or more 
of these incentives. While most of these tax incentives have 
been extended several times in recent years, it often has been 
done retroactively and in a rushed manner, leaving many small 
businesses scratching their heads on how to plan for the 
upcoming year. By Congress continuing to further delay the 
extensions, it punishes our work, investment, risk-taking, and 
entrepreneurship.
    Another important example of this problem is the 
uncertainty around Section 179. 179 expensing is of vital 
importance for smaller firms, particularly those involved in 
more capital-intensive industries. More than one in three NSBA 
members take advantage of this break as it encourages small 
businesses to invest in new equipment by letting them expense 
much of the cost up front instead of depreciating it over time.
    For Tribute, it has its largest impact on my sales. The 
software we sell is typically my customers' second largest 
investment behind only that of their inventory, and as such, it 
is eligible for the benefits allowed under Section 179. This 
deduction is often the difference between affordable and not, 
and our customers often plan several years in advance for this 
very significant purchase and implementation. The annual 
termination, change in limits, and delayed extensions of this 
and other tax extenders disrupts this planning, interferes with 
business efficiency improvements, and harms the economy, both 
for buyers and sellers of capital goods.
    In conclusion, the complexity, unpredictability, and 
inconsistency within the tax code poses a significant and 
increasing problem for small business. The ever-growing 
patchwork of credits, deductions, tax hikes, and sunset dates 
is a rollercoaster ride without the slightest indication of 
what is around the next corner. The tax code is unfair to small 
businesses, biased against savings and investment, and 
impossibly complex. We need a tax system dedicated to 
investment, savings, and small business growth.
    Again, I would like to thank Chairman Graves and Ranking 
Member Velazquez, and the members of the Small Business 
Committee for the opportunity to speak today. I would be very 
happy to answer any questions that you have.
    Chairman GRAVES. Thank you, Mr. Reynolds.
    Our next witness is Rick Endres, who is the president of 
The Washington Network, Inc., in Alexandria, Virginia. Mr. 
Endres founded his company in 1987 to design and implement 
computer network systems for small- and medium-sized 
businesses. He is testifying today on behalf of ASCII Group.
    Thanks for being here.

                    STATEMENT OF RICK ENDRES

    Mr. ENDRES. Good afternoon, Chairman Graves, and Ranking 
Member Velazquez, and distinguished members of the Committee.
    I am Rick Endres. I appear on behalf of my company, The 
Washington Network, Inc., and a member of the ASCII Group, 
which is the nation's oldest community of small- and medium-
sized IT companies.
    Thank you for holding this hearing on tax issues that face 
small business and gives me the opportunity to share my 
company's experience with the tax code. This topic resonates 
with me because of the increasing complexity of the tax code 
and the difficulty we have in complying with it. These are 
challenges that we, small business owners, face on a regular 
basis.
    Now, my company, The Washington Network, is an IT 
consulting firm that installs and supports computer systems and 
computer networks, telephone systems in businesses throughout 
the Washington, D.C. area. And during our 27 years in business, 
we have provided IT technical support to hundreds of companies 
and employed dozens of people. Yet, I have found that the 
complexity of the tax code has had a very negative effect on 
both my firm's growth and my hiring ability. This is true even 
for areas of the code that were meant to stimulate job growth. 
Tax credits designed to help businesses like mine often go 
unused because of the time and cost required to take advantage 
of them.
    Now, I should point out that I am not a tax authority. I am 
not a CPA, nor do I wish to be. But I am sitting before you 
today just telling you a few tales from the frontlines of 
business, describing some of the skirmishes that I have had 
with the tax code.
    The first skirmish was with the Veterans Hire Tax Credit, 
which encourages us to hire unemployed veterans. That is a 
really worthy incentive; however, this little known credit 
takes a number of billable hours to comply with, and then if 
you do not file its Form 8850 within 28 days of hiring the 
veteran, you are disqualified from the credit. Now, this 
unrealistic compliance timeframe makes pursuing the Veteran 
Hire credit really unworkable, and so we have to pass. Not that 
we would not hire veterans, but we would not take advantage of 
the credit.
    Now, the Small Employer Health Insurance Credit and its 10-
page Form 8941, is my poster child for needless complexity. The 
amount of information that I have to assemble to even see if I 
qualify for this credit is mindboggling. In 2007, the IRS 
calculated over 30 hours to comply with this credit. In tax 
year 2013, they said it would be less than 15 hours. Now, my 
accountant can do it in 10 hours, but why would I pay him 
$1,500 for a $500 tax credit? Why not just say if you are a 
small business under 25 employees and the people you hire you 
supply health insurance for them, you give a 10 percent credit? 
That is easy to understand and the credit would help. But when 
you study the form, the pages and pages of complexity, you 
realize--the term Rube Goldberg comes to mind, which is a very 
complex machine that you put $1,500 into and $500 comes out the 
bottom end. The only beneficiaries of this credit are the 
accountants.
    Now, if you are a sub-chapter S corporation, like my 
company is, the tax code does not allow keeping any retained 
earnings in the business, which can be used for rainy day or to 
fund future growth. This is a capital formation disincentive. 
It does not make any sense. There needs to be a portion of the 
K-1 that is not taxed at the highest rates.
    There are unintended consequences in the tax code that have 
a chilling effect on the number of employees that I will hire. 
Although our employee count has varied over time, we never 
planned to grow beyond 30 employees in an effort to stay under 
the regulatory and tax code radars. I know a number of 
companies have taken a great deal of time and money to split 
their companies in two to avoid head counts over 50. The money 
that they have spent to avoid these punitive thresholds adds 
nothing to these companies' ability to improve their products 
or increase their competitiveness.
    So as you can see, because of the punitive tax code, I have 
to siphon off vital time and capital out of my company simply 
to comply. From my experience, if we had a simpler, less 
complicated tax code, it would allow an entrepreneur, such as 
myself, to invest more of my time, more of my resources into 
the company, to grow the business, and create more jobs.
    Thank you.
    Ms. VELAZQUEZ. Yes. It is my pleasure to introduce Dr. 
Donald Marron. Dr. Marron is the director of Economic Policy 
Initiatives at The Urban Institute. Since joining The Urban 
Institute as director of the Urban Brookings Tax Policy Center, 
his work has focused on tax reform and America's fiscal 
challenges. He has previously served as a member of the 
President's Council of Economic Advisors, acting director of 
the CBO, and executive director of Congress's Joint Economic 
Committee.
    Welcome, Dr. Marron, and thank you for being here.

                   STATEMENT OF DONALD MARRON

    Mr. MARRON. Thank you so much. Hi, everybody. Chairman 
Graves, Ranking Member Velazquez, members of the Committee. 
Thank you for inviting me to appear today to discuss the tax 
challenges facing small business.
    America's tax system is needlessly complex, economically 
harmful, and often unfair. Despite recent revenue gains, it 
likely will not raise enough money to pay the government's 
future bills. The time is thus ripe for wholesale tax reform. 
Such reform could have far-reaching effects, including on small 
businesses. To help you think about those effects, I would like 
to make seven points about the tax issues facing small 
business.
    First, as everyone on the panel here has mentioned, tax 
compliance places a large burden on small businesses, both in 
the aggregate and relative to large ones. The IRS estimates 
that businesses with less than $1 million in revenue bear 
almost two-thirds of business compliance costs and compliance 
costs are much larger relative to revenues or assets or any 
measure of firm size for small firms and for big ones.
    Second, small businesses are also more likely to underpay 
their taxes. Because they often deal in cash and engage in 
transactions that are not reported to the IRS, small businesses 
can understate their revenues and overstate their expenses, and 
thus underpay their taxes. Some underpayment is inadvertent, 
reflecting the difficulty of complying with our complex and 
ever-changing tax code, and some is intentional. High 
compliance costs disadvantage responsible small businesses, 
while the greater opportunity to underpay taxes advantages less 
responsible ones.
    Third, as also mentioned here, the current tax code offers 
small businesses several advantages over larger ones. 
Provisions such as Section 179 expensing, cash accounting, 
graduated corporate tax rates, and special capital gains tax 
benefits benefit businesses that are small in terms of 
investment income or assets.
    Fourth, several of those advantages expired at the end of 
last year, and thus are part of the current tax extenders 
debate. These provisions include expanded eligibility for 
Section 179 expensing and larger capital gains exclusions for 
investments and qualifying small businesses. Allowing these 
provisions to expire and then retroactively resuscitating them 
is a terrible way to make tax policy. If Congress believes 
these provisions are beneficial, they should be in place well 
before the start of the year so businesses can make investment 
and funding decisions without needless uncertainty.
    Fifth, many small businesses also benefit from the 
opportunity to organize as pass-through entities such as S 
corporations, limited liability companies, partnerships, and 
sole proprietorships. These structures all avoid the double 
taxation that applies to income earned by C corporations. Some 
large businesses adopt these forms as well, and account for a 
substantial fraction of pass-through economic activity. 
Policymakers should therefore take care not to assume that all 
pass-throughs are small businesses.
    Sixth, tax reform could recalibrate the tradeoff between 
structuring as a pass-through or as a C corporation. Many 
policymakers and analysts have proposed revenue neutral 
business reforms that would lower the corporate tax rate while 
reducing tax breaks. Such reforms would likely favor C 
corporations over pass-throughs since all companies could lose 
tax benefits while only C corporations would benefit from the 
lower corporate tax rate.
    Finally, tax reform could shift the relative tax burden of 
small and large businesses. Some tax reforms would reduce or 
eliminate tax benefits aimed at small businesses, such as 
graduated corporate rates. Other reforms, for example, 
lengthening depreciation and amortization schedules for 
investments or advertising but allowing safe harbors for small 
amounts, would increase the relative advantages that small 
businesses enjoy. The net effect of tax reform will thus depend 
on the details and may vary among businesses of different 
sizes, industries, and organizational forms. It also depends on 
the degree to which lawmakers use reform, a much needed 
opportunity to reduce compliance burdens on small businesses.
    Thank you. I look forward to your questions.
    Chairman GRAVES. Thank you all very much. We are going to 
start questions with Mr. Hanna.
    Mr. HANNA. Mr. Marron, you mentioned vaguely the 
underground economy. Has anyone here done any measurements on 
what that might look like knowing that complexity cost 
associated with complying, all of the things are a very direct 
incentive for people to run their businesses under the radar as 
much as possible?
    I am curious. There are other countries around the world 
that have huge problems with underground economies, and yet 
they still have lower rates than us. Maybe, Mr. Marron, you 
could talk about that a little bit, or anyone.
    Mr. MARRON. Certainly. I would be happy to take first 
crack.
    The IRS periodically does studies where it tries to 
estimate the size of the tax gap, and one of the things that 
they try to include in that is the informal economy. If you 
think about it, the informal economy in broad strokes has two 
pieces to it. One is otherwise legitimate activities that 
people may do on a cash basis in order to avoid taxes. A 
canonical example would be a contractor that you pay in cash 
rather than having anything that is traceable, but then also 
caught up in that are things that are the illegal parts of the 
economy. And, obviously, one would I think feel about them 
quite differently from the legal parts.
    Other nations face similar problems. As you say, they often 
have lower rates. In part that is because we, as a nation, 
focus quite heavily on income taxes as a basis for our overall 
tax system, while many other nations have things like value-
added taxes. They raise some different compliance issues, but 
often allow them to have----
    Mr. HANNA. Do the value-added taxes tend to be more 
efficient and more collectible, if you will?
    Mr. MARRON. So value-added taxes tend to be a more 
efficient way of raising tax revenue, and I think that is one 
of the reasons why you see nations that have larger governments 
tend to rely on them for a significant portion of revenues.
    Mr. HANNA. Because it is harder to escape.
    Do you have an estimate on the size? What is the last 
estimate you saw by anyone on the size of the underground 
economy? The reason I ask that is there is a lot of class 
conversation about, you know, who makes a lot of money and how 
much they should pay. And I am not weighing in there for the 
moment, but there is also the possibility there are a great 
many people who should pay something who are paying nothing. 
And that is equally unfair. And I know we are making the 
problem worse, but the burden falls on the people that are in 
your businesses.
    I was in business for 30 years. I worked, strived to be 
legitimate, paid everything I had to pay legally. And there is 
within that, I would say personally, you begin to have a 
certain resentment when you look around you and so many people 
are working in cash and employees are working under the table 
and that kind of thing. And you see it growing because we are 
actually incentivizing it.
    Does anybody want to talk about that?
    Mr. KAUTTER. Congressman, I will respond to that briefly.
    At one point I tried to find any data on how much 
noncompliance is intentional, how much is unintentional. It 
does not exist. I think a lot of the mistakes that are made, 
the tax gap, are people that genuinely want to comply but 
cannot figure it out. And second, the Taxpayer Advocate Service 
recently did a study on small business and underpayment of 
taxes, and one of the critical factors that the Taxpayer 
Advocate Office found is norms; that different parts of the 
country have different cultures. And when you get a small 
business culture where folks are complying, other small 
businesses tend to comply.
    Mr. HANNA. Sure. It looks like, too, that people whose W-2s 
are reportable and they cannot avoid it, I mean, they are 
really the victims in this. I know as a business guy you have 
opportunities with depreciation and all the things we talked 
about to kind of move things around legally. But yet the 
people, like a school teacher or someone who works in any job, 
right, they have none of those capacities. Well, that is right. 
They are not breaking the law; that is a good thing. But it is 
not just unfair to upper class and middle class people; it is 
unfair to reporters, and to people who report and have no 
choice. And I wonder if anecdotally you hear what I do on the 
ground and people are just sick of it.
    Mr. KAUTTER. I do hear that frankly a lot at the Tax 
Center, and when it comes to information reporting, the 
percentage of wages that are reported is over 99 percent 
because the IRS gets a W-2, usually gets it electronically.
    Mr. HANNA. Or 1099 or whatever.
    Mr. KAUTTER. And the 1099 is very high as well. It is in 
the 90s. It is the transactions that are not reported that tend 
to create the gap.
    Mr. HANNA. So yes or no. I am going to run out of time. 
Have you had a chance to look at the Ways and Means, Mr. Camp's 
proposals? It is a great attempt at kind of cleaning out a lot 
of things. It is a starting point; right?
    Mr. KAUTTER. I would say that it is. It broadens the base 
and lowers the rate. It is not simple. It is not simple.
    Mr. HANNA. Not as simple as what you talked about when you 
opened up.
    Thank you. My time is expired.
    Ms. VELAZQUEZ. Dr. Marron, there has been a movement away 
from organizing C corporations in favor of pass-through 
entities. Today, corporate tax revenue makes up less than 10 
percent of our federal revenue. What is it about pass-through 
entities that make them such an attractive business structure?
    Mr. MARRON. Oh, wow. I suppose I should lead off by saying 
that I think in my time I, myself, have formed three of them. 
And one thing that is very attractive about them is just how 
easy it is relative to other forms, in particular for myself 
setting up an LLC. You know, there is some paperwork involved, 
but relative to the standards of setting up a C corp or 
something it is very simple. You can get in business quickly.
    And another major thing is the tax treatment. The ability 
to be structure as a pass-through, pay the taxes on your 
individual income tax, and thereby avoid the double taxation of 
the corporate tax is very attractive and very beneficial for 
small businesses.
    Ms. VELAZQUEZ. Thank you.
    Mr. Kautter, it is pretty hard to argue, and I made the 
statement in my opening statement, that the system is not just 
overwhelmingly complex. One of the main problems for businesses 
is deciding which tax structure offers the most advantages. Do 
you believe businesses simply have too many tax options on the 
table which make tax law more complicated?
    Mr. KAUTTER. You know, that is a good question, 
Congresswoman. And I think the law is complicated by the range 
of options that are available. Now, those options have grown 
out of more illegal concern on how to protect assets and do it 
flexibly, but for tax purposes, we do not have to recognize if 
we did not want to all those different structures. We could 
come up with some basic ways in which any form of business 
would be taxed, and that could simplify things.
    Ms. VELAZQUEZ. Okay. So one of the distinguishing features 
of our system is affording businesses to option to choose how 
to organize themselves based on what best suits their capital 
requirements and their management needs. Why is it that this 
flexibility is so important to the health of the U.S. economy?
    Mr. KAUTTER. Well, I think that from a legal point of view, 
being able to structure your affairs in an efficient manner is 
very important. The tax consequences become part of that 
equation. And the ability to avoid two levels of tax is 
absolutely critical in most discussions when it comes to small 
business. The idea of operating a corporation, having to worry 
about the C corporation rules, dividends, two levels of tax, it 
is just impractical. Very, very few small businesses.
    Ms. VELAZQUEZ. You, yourself, you are one of the proponents 
of suggesting moving to an integrated tax system. Would you 
explain how such a system will work? And in transitioning to 
such a system, will we add more complexity?
    Mr. KAUTTER. I think the greatest single thing that can be 
done for simplicity for small business is a simple cash method 
of accounting. And I think you can institute that without 
integrating corporate and individual taxes.
    My second proposal is that no matter which business form a 
business decides to use, maybe we should just have a single tax 
rate schedule for all business--sole proprietors, partners, 
corporations. It is one business rate schedule, and so you do 
not have corporate income taxed at 35 and income from a sole 
proprietorship taxed at 39.6. And it is easy because the 
information is already on the tax returns. Schedule C is sole 
proprietorships. Schedule E is S corporations. You just add 
them together.
    Ms. VELAZQUEZ. Thank you.
    Mr. Reynolds, my last question. I have to go to the floor 
now.
    Experts agree that to make the U.S. more competitive we 
need to lower our corporate tax rate, and some have suggested a 
piecemeal approach to tax reform. However, I am hesitant to 
enact corporate-only reform because small businesses are so 
passionate about finally enacting tax reform. If corporate-only 
reform were the only option, would you consider it or would you 
insist on a comprehensive tax plan?
    Mr. REYNOLDS. For the vast majority of small businesses, 
including my own company, they are pass-through entities. And 
as was pointed out earlier, if you do just C corporation 
reform, what happens then is that a company such as mine loses 
the many tax incentives that would be struck during that 
reform, but then ends up not benefitting from the lower rates. 
As a result, we would be put at a disadvantage relative to 
larger corporations and frankly, small businesses have enough 
disadvantages. So it would be very difficult for us to support 
that.
    Ms. VELAZQUEZ. Thank you.
    Thank you, Mr. Chairman.
    Chairman GRAVES. Mr. Bentivolio.
    Mr. BENTIVOLIO. Thank you very much, Mr. Chairman.
    Every year around this time it seems like my wife and I are 
spending a lot of time together going through receipts and 
documents and files and bank statements, credit card statements 
to put everything together so we can take it to the accountant. 
It seems to me it should be simpler and more fair.
    Just yesterday, coincidentally, a colleague of mine on the 
floor of Congress, we were talking about the variable added 
tax. A colleague from New York.
    Dr. Marron, you know, it was my understanding the VAT 
basically taxes every stage a product will go through. For 
example, from the farmer who buys the wool, to the sweater 
maker, to the retailer, and then to the consumer. There is a 20 
percent or 10 percent, whatever that rate is is added. Is that 
right? Is that how it works?
    Mr. MARRON. It works like that but the tax only applies to 
the value-added added at each stage. So it is the incremental 
value along the way that gets that rate.
    Mr. BENTIVOLIO. Okay. Now, according to my colleague, he 
said all we would have as far as taxes--we would eliminate gas 
tax, we would eliminate income tax, inheritance tax, all these 
other taxes--we would eliminate if we had a VAT. Is that right?
    Mr. MARRON. Obviously, sir, it depends what the VAT rate 
is, but most of the scenarios I have seen would have the VAT 
and the income tax continue in some form. You would continue to 
need multiple tax streams most likely.
    Mr. BENTIVOLIO. Okay.
    Mr. MARRON. Except, unless we have a very, very large VAT.
    Mr. BENTIVOLIO. Okay. I think that is where I am going to 
stop and yield back. Thank you.
    Chairman GRAVES. Ms. Hahn?
    Ms. HAHN. Thank you, Mr. Chairman.
    Mr. Marron, I am glad we are having this hearing today. I 
think we can all agree that the tax code is excessively 
complicated. Small businesses with profits just high enough to 
keep them above water should not be spending thousands of 
dollars and hundreds of hours wading through a sea of 
paperwork. But a lot of the complications that we are talking 
about come from tax incentives aimed at incentivizing or 
assisting small businesses.
    So Dr. Marron, are there ways that we can simplify the tax 
code for small businesses that encourage tax compliance but do 
not eliminate the advantages that small businesses have built 
into the tax code?
    Mr. MARRON. Certainly. So I would like to second the call 
for expanding firms' ability to use cash accounting; that if 
you have a relatively small business that does not have any 
reason to do fancy financial accounting because they do not 
have outside shareholders or whatnot, there is no reason to 
force them to think about the world a different way from the 
one in which they run their business, and cash accounting can 
let them just have simpler things, run it out of their bank 
account, fits much more naturally into the way they run their 
businesses and could eliminate a lot of the compliance issues 
that we face.
    Ms. HAHN. Thank you.
    Anybody else want to comment on that idea?
    Mr. KAUTTER. Well, I would, Congresswoman.
    I think one of the problems, having worked at one point in 
my career on Capitol Hill, one of the problems is when 
legislation is drafted, simplicity is never considered. Right? 
The whole goal is to just draft the provision the way the 
members want it, and nobody says is there a simpler way to do 
that? Similarly, when the IRS gets a hold of the project, their 
goal is to weave a net that is so finely knit that not one 
person could get through it. And it is like a fisherman who 
weaves their nets so tightly that when they push the boat out 
from shore the boat sinks. So I honestly believe you could get 
to the same point or close to the same point with a lot less 
complexity.
    And over the years I have done a number of studies in 
different parts of the code, and you can get 95 percent of the 
way there with probably 5 percent of the complexity. It is that 
last 5 percent that really creates the mind-numbing complexity 
that we see.
    Ms. HAHN. Yes, Mr. Reynolds?
    Mr. REYNOLDS. I guess what I would add, our survey, one of 
the things that showed up in our survey is that small 
businesses ranked the cost of compliance to the code as their 
number one issue with the tax code. Number two was the 
financial burden associated with the code. And I think what 
that clearly says is that simplicity is really the objective 
here.
    Ms. HAHN. I am going to follow up with you, Mr. Reynolds.
    The Harbor Maintenance Tax is something that we collect at 
our nation's ports, and the point of it is it is to go back 
into keeping our ports and harbors maintained. And we have not 
done as good a job back here in Congress of actually 
appropriating that money for the purpose for which it was 
collected, which is one of my big fights back here. And I hope 
to one day convince my colleagues that we ought to be spending 
that tax for the purpose for which it was created, and in turn, 
that would be an investment in our infrastructure and the 
shipping companies that pay that tax would appreciate that 
because that means a lot to them that these ports are 
maintained and dredged so that they can come in and out of 
there efficiently.
    Consequently, have you ever found in your survey or 
anything there would be any better feeling about paying taxes 
for small businesses if they felt like some of the tax was 
going back to help promote the small business economy?
    Mr. REYNOLDS. I can only speak anecdotally. I do not think 
we have survey data on that, but I come from roughly the city 
of Cleveland, and I am very familiar with the Port Authority of 
Cleveland. That is a very important economic development 
organization within northeastern Ohio, and I think that from a 
small business perspective and an economic development 
perspective, there is no question that that would be a very 
positive thing if the money that was collected for the benefit 
of that port was able to be deployed by that port.
    Ms. HAHN. Right. But do you think small businesses would 
appreciate or would feel better about taxes----
    Mr. REYNOLDS. Certainly. Yeah.
    Ms. HAHN.--if we devised a way to redirect some of those 
revenues to actually creating a better environment and economy 
for small business?
    Mr. REYNOLDS. It is always good to see the results of your 
contributions.
    Ms. HAHN. Yeah. Okay. Thank you.
    I yield back.
    Chairman GRAVES. Mr. Schweikert?
    Mr. SCHWEIKERT. Thank you, Mr. Chairman.
    I have picked up bits and pieces as we have gone around, so 
I would actually like to go take one gigantic step backwards to 
sort of where the basis of the hearing was hopefully heading.
    What do you consider to be the optimal tax system for what 
you and I would define as a small business? And within that, I 
would like you to state the--share with me is it cash 
accounting? Is it cash accounting with the caps that are in 
sort of the Ways and Means proposal in regards to 179? What 
would be the optimal tax system to maximize efficiency, 
maximize compliance but also maximize small businesses doing 
what they are supposed to do, which is business?
    Mr. KAUTTER. Well, Congressman, what I would propose is 
what I call a simplified cash method of accounting. And when I 
say that, what I mean is inventory would be immediately 
deductible. Assets, capital assets purchased would be 
immediately deductible. Wages paid would be immediately 
deductible. You would not have to worry about the inventory 
rules, the depreciation rules. A lot of the complexity in the 
Internal Revenue----
    Mr. SCHWEIKERT. But is that not almost just classic cash 
accounting?
    Mr. KAUTTER. It is exactly right.
    Mr. SCHWEIKERT. In the Camp proposal, is it not cash 
accounting, is it up to----
    Mr. KAUTTER. Ten million dollars.
    Mr. SCHWEIKERT. Ten million?
    Mr. KAUTTER. But what Congressman Camp does is while he 
raises the limit from five to 10, he makes no other changes in 
the cash method of accounting.
    So, for example, if you are a small business and you have 
inventory, you have got to use accrual. And so----
    Mr. SCHWEIKERT. So you would make sure the cash accounting 
was for all categories?
    Mr. KAUTTER. It was real cash.
    Mr. SCHWEIKERT. Okay.
    Mr. Reynolds?
    Mr. REYNOLDS. Well, first, I guess what I would like to 
tell you is our position with respect to Camp's work, we are 
very appreciative at how inclusive he has been and how much 
input he has taken from all quarters in putting it together. We 
think it is a good start.
    In our written submission, you will see the NSBA has 
developed a set of nine principles around what we think an 
optimum tax system should be. I do not have a specific position 
on cash accounting.
    Mr. SCHWEIKERT. How about something like the 179 caps?
    Mr. REYNOLDS. Our biggest issue with 179 is the 
unpredictability of it and how it has been expired and----
    Mr. SCHWEIKERT. Okay. But if it was permanent, you are 
comfortable though with the capital purchases of, what, 
250,000?
    Mr. REYNOLDS. Yeah, I am comfortable with it.
    Mr. SCHWEIKERT. Okay, please. Yes, please.
    Mr. ENDRES. The SBA tells us we have something like, in 
their definition, 27 million small businesses. And I think of 
all those owners when they set foot into the business world, 
they had lots of dreams of what they wanted to accomplish--
their business, their expertise, whatever they are leveraging 
off of. But having a head for accounting and these rules 
probably was the last thing they considered. And so the 
simplicity really cannot be overstated because you either make 
a real study of this and commit immense amount of resources or 
you just, as we have done, is just opt out to go right down the 
middle of the road, take advantage of virtually none of these 
things for fear of raising your spectra of compliance issues 
later, and you miss out on some opportunities but you can focus 
more on the business. So the simplicity and real world impact 
on companies cannot be overstated. I do not know what the 
measure or how you run it through a filter of real world 
considerations when legislation is proposed, but it has immense 
impact and has to be carefully considered.
    And then sunsetting a number of these rules that stack on 
top of rules and stack on top of rules, I do not know how you 
do that because it there is just never enough time or energy to 
do it.
    Mr. SCHWEIKERT. Okay. So those are the externalities even 
outside the tax system, now it is the enhanced regulatory 
system?
    Mr. ENDRES. It is described when the IRS gets involved and 
puts in their layers and tries to build in their protections, 
it becomes unworkable. It is understandable why they would do 
it, but that is why when we try these set asides, these 
cutouts, the law of unintended consequences kicks in and 
ultimately is a negative, I believe, in the aggregate.
    Mr. SCHWEIKERT. Okay.
    Doctor?
    Mr. MARRON. So the one thing I would add to that then is 
once we have this optimal small business tax system is to make 
it stable. Because if you think about it, for all these 
provisions, there is a learning curve in figuring out how to 
incorporate them in your business practices and your accounting 
practices and your tax paying practices, and that has an 
opportunity to become much more efficient and much less painful 
if it is the same rules from year to year. And if they change 
from every year it just adds significantly to the pain.
    Mr. SCHWEIKERT. Okay. So sort of a tax stability, cash 
avoidance of accrual. Okay.
    And Mr. Chairman, I will throw you one other that is a 
little more ethereal to talk about is designing a tax system 
that also looks at the very aggressive changes in sort of what 
a small business is in the economy and the peer-to-peer 
economy, and the use of technology. Many things are 
microbusinesses with high rates of turnover because technology 
allows them to do that. And my fear is some of the caps, like 
in the 179, others creates some interesting distortions and 
change sort of the design of the business you would actually 
create.
    So with that, Mr. Chairman, thank you for your patience. I 
yield back.
    Chairman GRAVES. Ms. Chu?
    Ms. CHU. Yes, thank you, Mr. Chair.
    Dr. Marron, I agree that our tax code is complicated for 
small businesses to navigate, and I saw this firsthand as a 
member of the Board of Equalization in California, our 
country's only elected tax board. And I saw many 
microbusinesses that were in trouble. Nine out of every 10 
small businesses in this country is a microbusiness with five 
employees or less. And according to the U.S. Census, only one 
in three self-employed entrepreneurs earns more than $25,000 
per year from their business.
    Considering the fact that a tax reform bill could be some 
years away, I introduced the Entrepreneur Startup Growth Act to 
help ease the tax compliance burden on small businesses. It 
would establish a self-employment tax initiative grant program 
at the Internal Revenue Service in consultation with the Small 
Business Administration to provide individuals with affordable 
tax preparation and business development assistance. Local 
organizations, higher education institutions, and local 
governments could run programs locally.
    What are you thoughts on this idea and other similar 
efforts to relieve the tax compliance burden on the 
microbusiness without having to reform our tax code?
    Mr. MARRON. So there seems to be a lot of evidence from the 
taxpayer advocate and other folks that if you have a sincere 
person who wants to comply with the tax code and they reach out 
to the IRS to get assistance, they find it frustrating and 
unproductive, and often unsuccessful, and sometimes get the 
wrong answer. And that is on top of just the challenges of 
complying with the tax code once you know what it is. So I 
think we have identified a very important issue, which is can 
you do things to help people to understand exactly what their 
requirements are and the easiest way for them to comply with 
them, and we are nowhere near best practices at that at the 
moment.
    Ms. CHU. I was thinking about the Small Business 
Development Centers. They are very valuable entities. Of 
course, one of the most effective programs of the Small 
Business Administration, and they allow small business owners 
to consult face-to-face with somebody who can help them with 
all kinds of assistance. What are your thoughts about using the 
SBDCs to provide tax preparation assistance to small business?
    Mr. MARRON. I will confess that I do not have a lot of 
familiarity with them. My apologies.
    Ms. CHU. Yes?
    Mr. ENDRES. Let me speak to that briefly. I have found the 
SBDC in our area to be inordinately helpful. They have not only 
helped our company but other companies they have helped they 
have sent to us and we have been a resource, too. But I would 
not look to them for any tax support or help because 
ultimately, we have got to turn to the IRS. And many times we 
have an expression in our accounting circles when working that 
it is often dealing like with a snowflake at the IRS; you get a 
different answer every time.
    We just went through an audit where they were looking at 
the issues of what is a contractor? And we had someone who 
worked for five other companies and was a contractor for those 
five, but it was a 1099 but still ruled that person to be an 
employee because we wrote our check directly; she did not bill 
us directly. That one out of the eight criteria the IRS decided 
that was still an employee. And yet, I could not get the SBDC 
to give me guidance. I should not look to them. It is hard 
enough for the IRS. And now with their overload, getting 
answers out of them or doing an amended return could take 
months to get it back. They are so overwhelmed. It is difficult 
to figure how we can do anything without just simplifying and 
making it simpler for everyone. Complexity is just ruining the 
process.
    Ms. CHU. Well, let me ask for anybody on the panel, each of 
you expressed the need for broad tax reform, the Section 179, 
expensing cash accounting and various recommendations for rate 
reduction. But since it may take time for that to occur, 
perhaps even years, what do you think would be the most 
important thing to do in the short term?
    Mr. KAUTTER. Well, Congresswoman, I think the single, most 
important thing that can be done without broad tax reform is to 
simplify the cash method of accounting. There are too many 
businesses that get forced onto the accrual method.
    And with respect to getting taxpayers' help, if I can go 
back to that for a second, I was with one of the big accounting 
firms, and I used to say at the end of the day that if the IRS 
audited every piece of advice we gave nationwide, we would be 
broke. But that assumes the IRS could figure out the answer as 
well. And they cannot. And so I think the real core, you have 
got to go back. Just do some things that would make it very 
simple for small business because the complexity in the 
Internal Revenue Code comes from trying to compute taxable 
income. And if you make that simple, you make a lot of 
progress.
    Thank you.
    Mr. REYNOLDS. I would say recognizing the possibility that 
the tax reform is on the horizon somewhere. The thing you can 
do most is not change much for a while, just to give us a 
period of stability and predictability so that we can adjust 
our businesses and be able to plan in advance would be a big 
help.
    Ms. CHU. Okay. Thank you. I yield back.
    Chairman GRAVES. Mr. Collins?
    Mr. COLLINS. Thank you, Mr. Chairman.
    Thank you all for coming. I agree. Fundamental tax reform 
is the one thing that I believe can get this economy moving 
again.
    I own a number of small businesses, and just so you know, I 
do my own taxes. I have read the tax code. I know it inside 
out. My tax return was 69 pages. I have eight sub Ss and four 
LLCs in all types of industries. So I do know, and we will talk 
about cash accounting in a second.
    First of all, the one thing that hits me when I do this is 
every dollar I send to the government is a dollar I cannot 
invest in my business. So those who say on the other side let 
us just tax corporations more--tax, tax, tax--every dollar I 
send to D.C. to be wasted is a dollar I do not reinvest in my 
business to grow and create jobs. That is the fundamental 
thing.
    The other rhetorical comment I will make is it is insanity 
that we are taxes all my companies and small businesses at 39.6 
percent, but it is more than 39.6 percent. I need to remind the 
folks on the other side. Under the tax code this year, I lost 
every exemption. I get no personal exemptions, no family 
exemptions, and because this income is flowing through my 
personal tax return, I lost 20 percent--no, 80 percent of my 
itemized deductions. With the complicated tax return I have of 
69 pages, I took the standard deduction because I lost 80 
percent of my itemized deductions. So my tax rate is not 39.6. 
It is 39.6 plus what happened with the loss of exemptions, 
every one, zero, and losing 80 percent of my itemized 
deductions. That is how crazy the tax code is and how it 
disincentivizes or penalizes us. We cannot invest in our 
business. So that is my rant.
    But by doing my own taxes, a couple of questions. First of 
all, and I am assuming you all agree--you can give me a quick 
yes or no. It does not make sense to do sub S and LLCs at 39.6 
and big corporations at 35. Do you agree?
    Mr. MARRON. It is complicated.
    Mr. COLLINS. I kind of asked for a yes or no.
    Well, let me ask you a yes or no. Let me ask you. Are we 
not the only country in the United States--in the world without 
a VAT?
    Mr. MARRON. Only significant country, yes.
    Mr. COLLINS. In fact, the only three that are not are 
African countries that do not have a GDP? I mean, every 
developed country, every industrialized country has a VAT?
    Mr. MARRON. Except us. Yes.
    Mr. COLLINS. And if there was a country that could 
completely replace their taxes, income taxes with a VAT, would 
it not be the country where we are 4 percent of the world's 
population and 25 percent of the world's GDP? Is it not the one 
scenario where it could work? Four in 25.
    Mr. MARRON. So I have not seen a VAT proposal that would do 
that.
    Mr. COLLINS. But would you not agree we are the one country 
that could at four and 25? You cannot do it--if you are 2 
percent of the world's population and 1 percent of the world's 
GDP--if you are China you could never do something like that. 
Four in 25, that math is staggering, which makes you wonder how 
it is we are not churning money left and right. Maybe you do 
not like yes or nos. But anyhow, let us move on.
    Mr. MARRON. The curse of being in think tanks.
    Mr. COLLINS. The deductibility, one thing I have noticed is 
you cannot offset passive losses unless you have passive 
income. And a lot of companies generate what you could call 
passive losses or R&D tax credits, and an investor and owner 
cannot take credit. Would you suggest eliminating that 
requirement? That is something simple we could do to say the 
requirement that you have to have passive income to offset 
passive losses? It makes no sense to me.
    Mr. KAUTTER. It is something simple that could be done. In 
fact, it was put in the law in 1986 to raise revenue. At the 
time it was enacted, it really departed from the concept of tax 
expenditures because it says we understand you have got a loss; 
we are just not going to let you claim it.
    Mr. COLLINS. And if you cannot claim it, then you are 
paying higher taxes and you cannot reinvest the money in your 
business?
    Mr. KAUTTER. And you have got a loss. You have got a real 
loss.
    Mr. COLLINS. That is right. And you cannot use it.
    Mr. KAUTTER. Yeah.
    Mr. COLLINS. All right. So cash accounting. Be careful. I 
mean, because here is the nuance there. If I am a small 
business and I use cash accounting and I write off my 
equipment, if I write off my inventory and I have got a 
contract that is going to cross the year, so I just had a huge 
write-off because the inventory is in my shop. I am not going 
to bill it until next year. I am not going to get paid until 
next year. And I have a huge loss. And there are restrictions 
on how--so I have no income. So if I have no income, I do not 
take advantage of any of the marginal brackets. None of them.
    So now I go to the next year. I ship this thing out. I make 
all this money. And again, depending on how your carry-forwards 
work, you could find yourself you lost those marginal brackets 
forever. Now you go into 39-6. You lose all your exemptions. 
You lose 80 percent of your deductions. I could see where cash 
accounting would not be good.
    Mr. KAUTTER. And I think, Congressman, what you are 
describing is why you would not want to manipulate your income 
particularly from one year to another.
    Mr. COLLINS. It is not manipulating to have a big contract.
    Mr. KAUTTER. I understand that. But if you want to take 
advantage of the brackets, you would have to make sure that you 
did not spend every year trying to zero out your income. And 
that is what people get concerned about in the cash method is 
somebody at the end of the year----
    Mr. COLLINS. You cannot change when your customer needs the 
product, and if you are shipping it in January and you are 
building it in December, I mean, that is not manipulation. That 
is just called it takes me two months to build it so my 
inventory cost is in December, my revenue is in January. That 
person loses all the benefit of their marginal brackets.
    Mr. KAUTTER. They do.
    Mr. COLLINS. Thank you, guys. I could go on and on, by the 
way.
    Mr. KAUTTER. I am impressed. And you are forcing me to 
reconsider my line. Since 81 percent of small businesses tend 
to hire tax preparers, another 10 percent use both software and 
a tax preparer, the other 9 percent of the returns are 
completely wrong. So I have got to amend that now that you are 
doing your own return.
    Mr. COLLINS. And I do not use software either.
    Mr. KAUTTER. I am impressed.
    Chairman GRAVES. Mr. Schrader?
    Mr. SCHRADER. Thank you, Mr. Chairman.
    I am proud I do not do my own tax returns. I have better 
things to do.
    I guess a question generally. I do not know if it is 
possible for you to answer, but the discussion on the value-
added tax is interesting. The comments by my colleagues I think 
are on point. So what would be the rate that you would have to 
have for a VAT to completely replace all business taxes, both 
corporate and sub S, LLC, partnerships, all that? What would 
that rate have to be?
    Mr. Marron, do you have any clue?
    Mr. MARRON. I hesitate to make up a number on the fly, but 
I suspect it would be a two-digit number beginning with a one.
    Mr. SCHRADER. Okay. Mr. Endres?
    Mr. ENDRES. Well, one of the points of the VAT tax is not 
what it is, what it is going to become because it is hidden and 
moves below public awareness many times. But what I do like 
about anything that is somewhat consumption based is this vast 
underground economy that pays zero taxes. And when you consume 
and you buy whatever you buy, you are paying in. It has got to 
have some unbelievable effect of broadening the tax base to get 
the consumption. But the slippery slope of VAT taxation, I 
understand the arguments against it, but there has got to be 
something. In our life, in our business, I just see if you are 
a business, you either have to play by the rules or you do not 
at all. Just consumers or business, there are wonderful ways of 
just living under the radar and paying nothing. And it is a 
travesty. It is a very expensive one.
    Mr. SCHRADER. To your point, the Oregon Department of 
Revenue, when I was in the state legislature, did some work and 
was able to model with some sort of consumption tax, how much 
revenue reducing income tax is dramatic, corporate included, 
capital gains, how much money they were able to gain from that 
underground economy. It was pretty staggering actually to your 
point.
    Second, a follow up then would be what business types would 
object to that? It would not matter if everyone was treated the 
same, I assume. So what businesses, however, might object 
because they end up paying a little bit more under VAT than 
their current forms? What businesses would object to that, 
particularly small businesses?
    Mr. Kautter?
    Mr. KAUTTER. Well, the thought that comes across my mind is 
it would depend on the amount of effort to comply. If the forms 
were relatively straightforward then I think most small 
businesses could handle it. But if it got complicated they 
would not.
    The other point I would make on the value-added tax, and I 
am sure Mr. Marron is more knowledgeable about this than me, 
but I think many countries that have implemented a value-added 
tax still maintain an income tax. And so----
    Mr. SCHRADER. Well, I was talking with regard to 
businesses.
    Mr. KAUTTER. I know.
    Mr. SCHRADER. These businesses, to simplify that, make it 
straightforward, avoid the underground economy, everyone pay 
their fair share, if you will ostensibly. I just did not know. 
We pick winners and losers all the time here with different tax 
credits, deductions and stuff, and we are probably not the 
smartest group in the world to pick winners and losers, so it 
would be smart I think just to simplify things. And that is 
one.
    The other way to go about it is look at a set rate. Say you 
got rid of all the deductions. Say you got rid of every single 
deduction, tax credit. I know sometimes it is tough to tell if 
it is a deduction or a change in whatever practices. Say you 
got rid of all that. Is there an appetite in the small business 
world, big business world for that matter, business world in 
general or a set tax rate for all business income and avoid all 
this deduction, save a ton of money in compliance. Simplicity 
would be the name of the day. What would that rate end up 
being?
    Mr. Reynolds?
    Mr. REYNOLDS. I would say that there is some appetite for 
it. Our organization supports, for example, what is referred to 
as a fair tax, which is essentially that, a flat rate. Very 
simple.
    Mr. ENDRES. It has also become evident to me in my years in 
business that businesses really do not pay taxes. You know, it 
is all paid through the consumer and it is just passed on. It 
is an interesting discussion but we really do not. It is a flat 
deal. It affects everybody equally. It is a little more fair 
than those who can play the tax system better, put more energy 
into that as opposed to growing the economy and growing jobs. 
Fair, simple. What is not to like?
    Mr. SCHRADER. Mr. Marron?
    Mr. MARRON. So a lot of folks have taken a crack at writing 
down tax reforms like that. So Bowles-Simpson, Domenici-Rivlin, 
other folks. In a room of well-meaning people who are not 
constrained by the political process too much, it looks like 
you can write down plans where you get down to about a 28 or 27 
percent rate across both corporate income and individual income 
which then applies to pass-throughs. As we saw from Chairman 
Camp's effort that if you try to do it in a way that faces more 
political constraints, you start ending up with rates that 
begin with threes and that have some of the preferences 
maintained.
    Mr. SCHRADER. Very helpful. Thank you, gentlemen. I yield 
back.
    Chairman GRAVES. Mr. Luetkemeyer.
    Mr. LUETKEMEYER. Thank you, Mr. Chairman.
    Mr. Collins, well done. I am impressed. I was in the 
banking business for about 35 years. I did our bank's taxes 
myself for about 25 years and I finally got to the point that 
this is not going to work very much longer. But just so you do 
not fulfill the old adage about the lawyer who has himself for 
a client.
    Gentlemen, thank you for being here today. Yesterday I had 
in my office a gentleman who has a string of Taco Bells, I 
think 25 of them as a matter of fact, and he was talking about 
the definition of full-time employee and how that is impacting 
his business from the standpoint of what goes on with the 
Affordable Healthcare Act and how he manages the rest of his 
employees and other things. And of course, the Affordable 
Healthcare Act has been deemed a tax by the Supreme Court in 
their enlightened wisdom. And so I was just kind of curious as 
to your thoughts about that, the impact of the tax implications 
that you see, positive, minus. I know it was something that was 
top of mind to this gentleman.
    Mr. Reynolds, I know you are a small business guy. What 
would be your comments?
    Mr. REYNOLDS. Speaking just from my own small business, I 
have 38 full-time employees. We are in the software business, 
and that, for us, has not been a specific issue associated with 
it. It does have significant impacts speaking from an SBA's 
perspective. It has very significant impact particularly on 
businesses that are in retail and food service which are 
perhaps not the majority but a very large segment of small 
business. And to have to be forced to rearrange your workforce 
in order to deal with that is suboptimizing the business and 
hurting the economy.
    Mr. LUETKEMEYER. One of his concerns was he had a group of 
employees that were in the management area and then he had 
another group that was in basically the 28 to 34 hour per week 
range that were very important to him. They were the 
supervisors. They were the shift supervisors, the folk who made 
sure the rest of the folk did their job. They were the ones who 
were teaching the ones who were in the 12 to 25 hour range, and 
it was very important. And now this group of people he relies 
on to actually manage his operations so to speak of his 
business were going to have to be tinkered with their hours and 
it is really made a hardship on him.
    Any of you other folks on the panel have a comment with 
regards to that?
    Mr. ENDRES. Over the last 15 years, we have paid 100 
percent of our employees' health insurance and probably had too 
many bells and whistles going back to the dot-com era. But we 
have our insurance firm, just through having to--just the way 
things are structured and being able to--they have explained to 
us that they have had to raise our rates 40 percent just 
because of the fact of the other obligations they have to now 
hit. That hits us where we have to start scaling back what we 
were once doing at 100 percent and dropping off many of the 
dental, the vision, all the things that we had before. We are 
not big enough to be hit, and we do not have the part-time 
labor issues, but that was one practical impact on our company.
    Mr. KAUTTER. And I would say Mr. Endres's comments are 
similar to comments we are getting at the Tax Center. Small 
businesses, many of whom had traditionally paid 100 percent of 
the healthcare costs are dropping the programs. They are going 
to raise the compensation, which will be taxable to the 
employees, send the employees to the Exchange, and just get out 
of the business of providing healthcare. It has gotten too 
expensive and too complicated, even though technically the 
Affordable Care Act does not apply to employers with under 50 
employees.
    Mr. LUETKEMEYER. Another quick question for you. It is kind 
of interesting. The SBA has a definition of small business as 
anybody 499, basically less than 500 employees, yet the 
healthcare law, their definition is under 50. Where do you see 
this playing out? Is this a problem? There is no consistency 
here. Anybody have any comments on that?
    Mr. REYNOLDS. There are dozens of definitions of small 
business sprinkled throughout the law, not only the Affordable 
Care Act but the law in general. For NSBA, I would say that 
while that is our definition, in terms of our membership, well 
over 90 percent I think are under 50 employees.
    Mr. LUETKEMEYER. Would you support something, for instance, 
that changed to the healthcare law that would raise it to 500 
so that it would be consistent with everything else?
    Mr. REYNOLDS. I am not sure I can answer that knowledgably 
at this point.
    Mr. LUETKEMEYER. Okay.
    Mr. REYNOLDS. But I can certainly get back to you on it.
    Mr. LUETKEMEYER. I see my time is expired. I will yield 
back. Thank you, Mr. Chairman.
    Chairman GRAVES. Mr. Schneider?
    Mr. SCHNEIDER. Thank you, Mr. Chairman. And thank you to 
the witnesses for being here.
    Professor Kautter, like you, I started my career at 
PriceWaterhouse, not Ernst & Young, but I started on the 
consulting side. And after 30 years, or almost 30 years of 
working with clients, I understand one thing in business in 
strategy or in operations, complexity has associated costs. And 
I think it is the complexity of the tax code that leads us to 
an urgent need for comprehensive tax reform. But within that, I 
introduce a resolution, a bipartisan resolution calling for 
Congress, the House of Representatives, to make sure that we 
deal with both corporate and individual. Because 90 percent of 
our operating entities are these pass-through entities.
    If, however, Congress chooses to focus strictly on the 
corporate side and lower the rates in such a way to get to the 
point as the Camp proposal does of eliminating so many of the 
tax expenditures--so-called expenditures--and small companies 
have to move from their old structure, LLC, S corp, whatever, 
to a C corp, what is going to be the cost on those companies to 
do that?
    Mr. KAUTTER. Well, I think the restricting cost would be 
substantial and frankly, very frustrating.
    But, you know, Congressman, the proposal I talked about a 
little bit earlier of a single business tax rate schedule is 
designed to deal with this issue. In other words, if all you 
wanted to do was reform business taxes, right, and you did not 
want to worry about the mortgage interest deduction and state 
and local tax deductions and the phase-out of the personal 
exemptions, change the rules for all businesses with respect to 
depreciation, inventory, whatever you want, and then apply a 
single business rate schedule. So a sole proprietor would pull 
out of their individual return their Schedule C and subject 
that to tax at the business rate schedule, not at the 
individual rates. And that way you could get corporate business 
reform. Change all the business tax rules and tax all 
businesses at the same rate without having to work your way 
through the complexity and the difficulty of dealing with all 
the individual changes.
    Mr. SCHNEIDER. Any others?
    Dr. Marron, do you have thoughts on this issue?
    Mr. MARRON. I view it as politically unlikely because the 
bumper sticker will be so terrible of reducing taxes on 
multinationals and raising them on small businesses. But 
hypothetically, what you describe, which is that you would have 
higher tax burden on the pass-through entities. Some of them 
would choose to bear that and remain in the system as it is, 
and then some would bear the change cost as just described.
    Mr. SCHNEIDER. Mr. Endres, I will turn to you for a second. 
You talked about making the choice to stay below 30 employees 
because of the complexity of the tax code. If we had a more 
simple system that allowed you to grow your business, how big 
would you have grown? What would have been the impact over your 
business?
    Mr. ENDRES. Well, it is difficult to say that. It is more 
because of the uncertainty of the tax code and what the next 
rule is going to be and the next threshold. We have got 
limitations on the definition of a small business that 
sometimes it is 11 people, sometimes it is 22 or 30, 50. And so 
you never quite know what the rules will be. It is safest to 
stay around 30 and then outsource the rest, leverage off of 
other resources. Just be less people-intensive. And it is 
unfortunate because it has a real impact on hiring. And I think 
a lot of our tax law has built a huge offshore industry of 
offshoring a lot of jobs because of this concern. We do not 
have to use people in this country anymore with all the 
uncertainties and vagaries of how they are taxed.
    Mr. SCHNEIDER. I am sorry; I am going to take back my time 
because we only have a minute.
    It is not just complexity, and Dr. Marron, you touched on 
this, it is certainty. It is the sense of every year it is 
going to change. If we could have certainty, let us say a five 
year confidence level of what the 179 deduction might be or 
what the R&D credit might or might not be, what impact would 
that have on our economy and the ability of small businesses to 
start making decisions, long-term decisions and investing in 
people or equipment and the things that will drive the economy?
    Mr. MARRON. If you think about those provisions, they do 
two things. One is they reward firms for undertaking those 
activities that we think are beneficial. And the other thing it 
does is actually provide like a carrot to think about, hey, you 
are going to get a reward if you do this. And they actually act 
as an incentive. And we are in this unfortunate world where 
there is uncertainty and they expire and whatnot that we are 
missing a chunk of the incentive effect. And it is sort of like 
an after-the-fact sweetener rather than something that firms 
can be confident will be there.
    But if we can go to your scenario, if we know it is in 
place for five years, then firms can put together investment 
plans and R&E plans over five years, recognizing that, putting 
it in their spreadsheets, and having it as an incentive for 
them to do more of it.
    Mr. SCHNEIDER. I see I am out of time. My closing remark on 
that point is oftentimes if Congress waits until December, it 
is rewarding people for making decisions they would have made 
otherwise and not providing the incentive. So I think the 
importance to have it laid out is critical.
    Mr. REYNOLDS. Or in this case, April or May.
    Mr. SCHNEIDER. Right. With that, I yield back. Thank you.
    Chairman GRAVES. Mr. Payne?
    Mr. PAYNE. Thank you, Mr. Chairman.
    Mr. Endres, looking through your testimony, you mention 
that the deadline for the corporate tax returns should be 
extended beyond the current cutoff date of March 15 to add a 
few more additional months. Can you be a little more specific 
in terms of the timeframe you feel it would take to produce a 
quality corporate return?
    Mr. ENDRES. Well, our tax and financial data comes pouring 
in through January and into early February. We have a March 
15th filing deadline. Our accountant needs three weeks to 
prepare the return. He has got a crush of every one of his 
clients have to be done all at the same time in three weeks. 
That gives us a window of about two weeks to work on it and get 
it cleaned up for our accountant. And so our business pretty 
much just stops while we attend to it. There are some years we 
have just skipped over and just let it fly and if we missed 
opportunities to deduct and we missed things, so be it. We are 
just too busy. We pay the taxes as they are due, but if we had 
several more months, I do not know, September 15th, taxes would 
still be paid on time but we would have the time to do a much 
higher quality return, working closer with our accountant when 
he has time to review the prior year's fiscal data and do a 
better return.
    Mr. PAYNE. Anyone else like to take a stab at that?
    Mr. KAUTTER. I do not know the statistics, Congressman, but 
there is a very high percentage of businesses that are not as 
diligent as Mr. Endres, and the automatic reaction is to file 
an extension. The problem with filing an extension is you have 
to pay your taxes or you pay penalties. So you pretty much have 
to have a good idea of what the tax liability is. So I would 
think if you could push the due date out another month to two 
months you would probably have something that is much more 
reasonable.
    Mr. PAYNE. Okay. Thank you.
    Thank you, Mr. Chair. I yield back.
    Chairman GRAVES. Well, I want to thank all of our witnesses 
for being here today. Taxes have a profound effect on the 
operation of small businesses. Tax provisions very often drive 
the decision-making process when it comes to businesses 
purchasing, expansion, hiring, whatever the case may be. We are 
going to stay very engaged in this, the Small Business 
Committee is. It is an important issue to all members on the 
Committee.
    Again, I want to say thank you for coming out, some of you 
coming so far to be a part of this hearing.
    I would ask unanimous consent that members have five 
legislative days to submit statements and supporting materials 
for the record.
    Without objection, that is so ordered.
    The hearing is adjourned.
    [Whereupon, at 2:21 p.m., the Committee was adjourned.]


                            A P P E N D I X

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    Introduction

    Good afternoon, Chairman Graves, Ranking Member Velazquez, 
and distinguished members of the Committee. My name is Rick 
Endres, I appear on behalf of my company The Washington 
Network, Inc., and as a member of The ASCII Group, the nation's 
oldest community of small and medium sized information 
technology (IT) solution providers.

    I want to thank Chairman Graves and Members of this 
Committee for holding this hearing on tax issues facing small 
business. The complexity of the tax code and the difficulty of 
complying with it are challenges that I face on a regular 
basis, and it is a challenge that affects my business, my 
fellow ASCII members, and millions of other small businesses 
across the country.

    Small businesses continue to be the largest job producers 
in the country. As you know, there are 28 million small 
businesses in the United States, and the small business 
community has provided millions of good-paying jobs for 
Americans at a time when big business continues to eliminate 
jobs.

    I would like to share with you my experiences on behalf of 
my company and The ASCII Group on the difficulties the tax code 
presents small businesses in terms of growing our companies and 
the effect it has on our ability to employ more people.

    About The ASCII Group

    The ASCII Group is a membership-based community of 
independent managed service providers, value added resellers, 
and other IT solution providers. Formed in 1984, ASCII brings 
together over 1,000 SMB IT integrators and these IT solution 
providers, located in every state of this country, provide 
integrated IT solutions for many thousands of businesses, 
educational and government entities, daily. ASCII provides its 
members educational information; group purchasing power; 
increased leverage in the marketplace; and multiple networking 
opportunities.

    ASCII provides several ways for SMB companies like The 
Washington Network to communicate with each other, and we have 
learned from talking to each other that we each share the 
daunting task of fully complying with the maze of federal, 
state and local tax laws.

    On a state level, members recently asked ASCII to contact 
each state tax division with nearly two dozen questions related 
to uncertainties about when they should be charging taxes for 
services provided to their clients. For companies like mine who 
do business in the DC area, that means incurring the cost of 
staying updated on various tax interpretations and laws in 
Virginia, Maryland, and the District of Columbia. On a federal 
level, the challenge is just as difficult because of 
uncertainties with the ever-changing tax code and the ever-
increasing number of regulations.

    ASCII realized the marked effect the complex federal tax 
code has had on the success of its members and so became 
involved due to the efforts led by CompTIA (the Computing 
Technology Industry Association) through their TechVoice 
initiative. TechVoice raises awareness on Capitol Hill about 
issues such as the tax code facing the SMB IT community. Small 
business owners work an incredible amount of hours, and every 
hour and every dollar spent on trying to figure out how to 
comply with the tax code is time not spent on growing their 
business so they can hire more people.

    The Effects of a Complex Federal Tax Code

    Founded in 1987, my company, The Washington Network, is an 
IT consulting firm that supports the computer networks and 
telephone systems of Washington DC area businesses. During our 
27 years in business we have provided IT support to hundreds of 
companies and employed dozens of people.

    While I would consider my company to be a true example of a 
successful small business entrepreneur, I also consider myself 
to be the prototypical victim of an uneven tax code that is 
filled with uncertainty, vagueness and unintended consequences 
for me and other small IT companies. The complexity of the tax 
code has had a negative impact on both my business growth and 
my hiring capabilities.

    This is true even for areas of the code that were meant to 
stimulate job growth. Tax credits designed to help my business 
often go unused because of the complexity of learning how to 
take advantage of them.

    Seven Tax Burden Examples from the Front Lines of Small 
Business

    1 - Unworkable Compliance Time Frame

    The ``Hire Veterans Tax Credit'' encourages us to hire an 
unemployed veteran. A worthy incentive, however, this little 
known credit takes many billable hours to comply with; and if 
you don't file Form 8850 within 28 days of hiring, you're 
disqualified from the credit.

    You would think that you'd be able to file Form 8850 for 
the tax year--right? No--have to file within 28 days. While we 
still look to hire veterans we won't be pursuing the credit.

    2 - Remarkable Complexity

    Filing the 10-page Form 8941 for Small Employer Health 
Insurance Credit is my ``Poster Child'' for needless 
complexity. The amount of information that I have to assemble 
to see if I even quality is mind-boggling. In 2007 the IRS 
calculated over 30 hours to comply. In 2013 they claim it can 
be done in less than 15 hours.

    My accountant can do it for me in under 10 hours. So why 
would I pay $1,500 to get a $500 credit? Why not just say--if 
you are a small business under 25 employees and supply health 
insurance for your employees we'll give you a 10% credit. Why 
the Rube Goldberg complexity? The only beneficiaries are the 
accountants. Any wonder that many business-boosting credits 
don't have their intended effect?

    I think that Congress should consider tax preferences for 
small business but only to the extent that they are usable by 
real companies in real world situations and won't require 
extraordinary effort to access them.

    3 - Instability of the Tax Code - Moving Targets

    I am making business investment decisions without having 
any knowledge of how ultimately the tax code is going to tax me 
or my clients. The Section 179 deduction is back down to 
$25,000... that a 1950s number. It needs to be expanded back to 
$500,000 and above all it should be made permanent. Today's 
technologies change too rapidly for the current out-of-date 
depreciation schedules.

    4 - Capital Formation Disincentive

    If you are a Sub-Chapter S Corporation the tax code does 
not allow keeping some retained earnings in the business for a 
rainy day or to fund future growth. There needs to be a portion 
of the K-1 that is not taxed at the highest rates.

    5 - Unintended Consequences Limits Hiring

    The tax code has a chilling effect on the number of 
employees I will hire. Although our employee count has varied 
over time, we never plan to grow beyond 30 employees in an 
effort to stay under regulatory and tax code radars. While we 
make every effort to comply with the tax code, there are so 
many regulations and expenses involved in trying to comply with 
the code that we have turned down opportunities to grow due to 
the potential implications and the increased accounting and 
legal fees in determining what our new tax responsibilities 
would be under the code.

    6 - Many Definitions of Small Business in Federal Law

    Another area that would greatly help small businesses is 
the elimination of uncertainty that permeates the tax code. 
It's extremely frustrating when even simple things like trying 
to determine whether I am considered to be a `small business' 
can be confusing since the government has so many definitions 
of what a `small business' is. Depending on the law or 
regulation, a small business threshold is generally defined as 
anywhere from 11 employees to 50. The SBA definition is 499 
employees and below. This uncertainty eats away at my profits 
as I spend money on legal and accounting fees to make sure I am 
in compliance with the law. I know a number of companies that 
have spent a great deal of money to split their companies in 
two to avoid head counts over 50. Those costs to avoid punitive 
thresholds add nothing to their ability to improve their 
products and increase their competitiveness.

    7 - Need Time to File a Quality Tax Return

    Finally, decreasing the amount of paperwork and being 
sensitive to the time/money factors that a small business faces 
would be very helpful. One change in the code that would help 
small businesses, for instance, is if there could be an 
extended deadline for annual returns. While taxes should 
obviously be paid on time, quality corporate returns often 
cannot be done by March 15th. Most data is pouring in until the 
first week in February and our accountant needs a couple weeks 
to prepare along with the crush of all their other clients. So 
business stops for two or three weeks for many of us while we 
close our books and prepare for our filing. That deadline 
should be extended a few months to give small businesses and 
their accountants more time to prepare a higher quality return.

    Furthermore, the quarterly filing of payroll taxes doesn't 
seem to have any practical utility and adds unnecessary filing 
costs.

    Conclusion

    So in conclusion, as a small business owner I am concerned 
that I will need to continue to divert more resources to make 
sure I comply with the ever-growing complexity of the tax code. 
I would ask the Committee to consider sensible changes that 
will allow me and other IT small business owners to focus more 
energy on company and job growth and less energy and dollars on 
figuring out how to make sure I conform with the code.

    Contact: [email protected]

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    The National Association for the Self-Employed (NASE) 
respectfully submits this official statement for the record on 
today's hearing, ``The Biggest Tax Problems for Small 
Businesses.'' The NASE represents the 23 million self-employed 
and micro-business owners (10 employees or fewer), as well as 
providing educational resources for those looking to start and 
grow their businesses. Founded in 1981, the association has 
been the leading voice advocating for America's smallest 
businesses in all areas of public policy, especially in the 
area of tax inequities faced by the self-employed.

    For background purposes, we would like to put into context 
the role of the self-employed in the larger small-business 
community. At present, there are roughly 27 million small 
businesses nationwide, ranging from 1 to 499 employees and of 
those, 23 million are identified as self-employed, accounting 
for more than 78 percent of the entire small-business 
community. These self-employed businesses generate roughly $950 
million dollars annually in sales (2010 Non-Employer 
Statistics, U.S. Census Bureau). The majority of the self-
employed, roughly 56 percent, have their business organized as 
a sole-proprietorship. Thus, any significant tax reform in the 
corporate area will have little if any impact on the self-
employed.

    On behalf of our members, the NASE is strongly in favor of 
comprehensive tax reform. In a 2012 survey, 78 percent of our 
members, nationwide, voiced their overwhelming support for tax 
reform. So strong is the call for reform that in 2012, 96 
percent of our members deemed individual and corporate tax 
reform as a ``very important or moderately important'' issue 
for Congress to address in 2013. Reform of the tax code is 
essential in order to create a simplified system that treats 
all businesses fairly by removing unnecessary hurdles and 
streamlining a cumbersome and overwhelming filing process.

    Yet lawmakers largely ignore the self-employed in proposed 
reforms. For the past several years the House Ways and Means 
Committee has undertaken a valiant effort to draft and propose 
significant tax reform. However, those efforts are seemingly 
void of any proposals that would address the continued 
disparity faced by the self-employed under the current tax 
code. In blunt terms, only one of the four components has any 
bearing on the self-employed community, the Unified Deduction 
for Start-Up and Organization Expenses. And it is ironic that 
the framework for the unified deduction is included in H.R. 
886, Small Business Tax Relief Act of 2013, which also contains 
an additional six other tax measures that the small-business 
draft overlooks (Note: the small business draft does include 
the permanent expensing provision which is included in H.R. 
866).

    The following are real, actionable tax reform 
recommendations that would have significant, positive impact on 
the self-employed:

    - Deduction of health insurance costs for the self-employed 
as a qualified business expense by adding a line item on the 
Schedule C form and not on page one of Form 1040. The biggest 
tax inequity faced by the self-employed continues to be their 
inability to deduct the cost of the health insurance as a 
qualified business expense. This amounts to roughly $1,800 in 
additional taxes per year for self-employed individuals.

          - Amend the definition of ``employee'' to include the 
        owner and spouse of a sole proprietorship, or a 2 
        percent or greater shareholder in an S Corporation--a 
        simple legislative or administrative fix to current 
        language. This would address many issues related to 
        ``fringe benefits,'' for example: the applicability of 
        an HRA 105 plan, retirement plan contributions, and 
        health insurance premiums.

          - Simplified and streamlined definition of 
        independent contractor versus employee by expanding the 
        Form 1099 that requires the owner and contractor to 
        agree to their business relationship in a transparent 
        manner. Resulting in a reduction of abuse by business 
        owners and their use of independent contractors.

          - Reforms to the Affordable Care Act that would make 
        the purchase of health care coverage simpler and more 
        cost effective for the self-employed. Two proposal: 
        changing the premium assistance calculation from 
        anticipated gross income to adjusted gross income from 
        the previous year (utilizing safe harbor provisions 
        that already excited for the self-employed by the IRS) 
        and reversing the Technical Release No. 2013-03, 
        ``Application of Market Reform and other Provisions of 
        the Affordable Care Act to HRAs, Health FSAs, and 
        Certain other Employer Healthcare Arrangements,'' so 
        that micro-business owners may utilize health 
        reimbursement arrangements for help their employees 
        cover related medical out-of-pocket expenses.

    It goes without saying that any significant reform to the 
tax code will be challenging, but we believe that putting forth 
a dynamic, common-sense proposal for bringing the tax code into 
the 21st Century can be accomplished. Any such proposal must 
provide for a transformational change to all aspects of the tax 
code, individual and corporate.

    As it stands now, the self-employed continue to face a 
significant inequity when it comes to adhering to the current 
dysfunctional and byzantine tax code. We believe it is time for 
Congress to act.

    We look forward to continuing to work with the Small 
Business Committee on removing the barriers to self-employment 
by making the tax code simpler, easier and more business 
friendly.

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