[House Hearing, 114 Congress]
[From the U.S. Government Publishing Office]
TAX EXTENDERS AND SMALL BUSINESSES AS EMPLOYERS OF CHOICE
=======================================================================
HEARING
before the
SUBCOMMITTEE ON ECONOMIC GROWTH, TAX AND CAPITAL ACCESS
OF THE
COMMITTEE ON SMALL BUSINESS
UNITED STATES
HOUSE OF REPRESENTATIVES
ONE HUNDRED FOURTEENTH CONGRESS
FIRST SESSION
__________
HEARING HELD
DECEMBER 3, 2015
__________
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Small Business Committee Document Number 114-032
Available via the GPO Website: www.fdsys.gov
______
U.S. GOVERNMENT PUBLISHING OFFICE
97-831 WASHINGTON : 2016
-----------------------------------------------------------------------
For sale by the Superintendent of Documents, U.S. Government Publishing
Office Internet: bookstore.gpo.gov Phone: toll free (866) 512-1800;
DC area (202) 512-1800 Fax: (202) 512-2104 Mail: Stop IDCC,
Washington, DC 20402-0001
HOUSE COMMITTEE ON SMALL BUSINESS
STEVE CHABOT, Ohio, Chairman
STEVE KING, Iowa
BLAINE LUETKEMEYER, Missouri
RICHARD HANNA, New York
TIM HUELSKAMP, Kansas
CHRIS GIBSON, New York
DAVE BRAT, Virginia
AUMUA AMATA COLEMAN RADEWAGEN, American Samoa
STEVE KNIGHT, California
CARLOS CURBELO, Florida
MIKE BOST, Illinois
CRESENT HARDY, Nevada
NYDIA VELAZQUEZ, New York, Ranking Member
YVETTE CLARK, New York
JUDY CHU, California
JANICE HAHN, California
DONALD PAYNE, JR., New Jersey
GRACE MENG, New York
BRENDA LAWRENCE, Michigan
ALMA ADAMS, North Carolina
SETH MOULTON, Massachusetts
MARK TAKAI, Hawaii
Kevin Fitzpatrick, Staff Director
Stephen Denis, Deputy Staff Director for Policy
Jan Oliver, Deputy Staff Director for Operation
Barry Pineles, Chief Counsel
Michael Day, Minority Staff Director
C O N T E N T S
OPENING STATEMENTS
Page
Hon. Mike Kelly.................................................. 1
Hon. Judy Chu.................................................... 2
WITNESSES
Mr. Jason Duff, Founder and CEO, Bellefontaine Ohio Properties,
Ltd., Huntsville, OH, testifying on behalf of the Small
Business Entrepreneurship Council.............................. 4
Mr. Todd Kriegel, CEO, Global Precision Parts, Inc., Van Wert,
OH, testifying on behalf of the Precision Machined Products
Association.................................................... 5
Rich Shavell, CPA, CVA, CCIFP, President, Shavell & Company,
P.A., Boca Raton, FL, testifying on behalf of the Associated
Builders and Contractors....................................... 7
Tom Nichols, Esq., Attorney and Chairman of the Board of Advisors
of the S Corporation Association, Meissner Tierney Fisher &
Nichols S.C., Milwaukee, WI, testifying on behalf of the S
Corporation Association........................................ 9
APPENDIX
Prepared Statements:
Mr. Jason Duff, Founder and CEO, Bellefontaine Ohio
Properties, Ltd., Huntsville, OH, testifying on behalf of
the Small Business Entrepreneurship Council................ 17
Mr. Todd Kriegel, CEO, Global Precision Parts, Inc., Van
Wert, OH, testifying on behalf of the Precision Machined
Products Association....................................... 21
Rich Shavell, CPA, CVA, CCIFP, President, Shavell & Company,
P.A., Boca Raton, FL, testifying on behalf of the
Associated Builders and Contractors........................ 26
Tom Nichols, Esq., Attorney and Chairman of the Board of
Advisors of the S Corporation Association, Meissner Tierney
Fisher & Nichols S.C., Milwaukee, WI, testifying on behalf
of the S Corporation Association........................... 31
Questions for the Record:
None.
Answers for the Record:
None.
Additional Material for the Record:
None.
TAX EXTENDERS AND SMALL BUSINESSES AS EMPLOYERS OF CHOICE
----------
THURSDAY, DECEMBER 3, 2015
House of Representatives,
Committee on Small Business,
Subcommittee on Economic Growth,
Tax and Capital Access,
Washington, DC.
The Subcommittee met, pursuant to call, at 10:00 a.m., in
Room 2360, Rayburn House Office Building. Hon. Trent Kelly
presiding.
Present: Representatives Kelly, Chabot, Huelskamp,
Radewagen, and Chu.
Mr. KELLY. Good morning. I call this hearing to order.
I would like to start by thanking the witnesses, especially
the small business owners who have traveled here from different
parts of the country, for being here today.
Being a small business owner in America is a tough job. No
matter what your business, you must wear many different hats.
In addition to doing what you went into business for in the
first place, you probably have to tackle responsibilities as a
tax accountant, advertising executive, regulations expert,
fund-raiser, and human resources expert as well. Yet,
throughout history, entrepreneurs in America have done all
these things and more. One of the things that is critical for
small business owners is finding, attracting, and retaining
qualified employees. To find success in today's global economy,
companies know that creative, adaptable, and engaged employees
are a critical asset, and while recent surveys show that
Americans hold small businesses in high esteem, at a rate of
three times higher than big businesses, small firms still have
to aggressively compete with firms of all sizes to fill out
their rosters. To win this war for talent, firms know that they
must become employees of choice so that their organizations can
bring together the best individuals to work on the challenges
and opportunities of a new and ever-changing economy.
Increasingly, these small businesses have expanded the
traditional benefits they offer prospective employees in the
face of greater competition for talent.
We have had small firms testify before our committee in the
past that offer new benefits that small firms would not
traditionally offer, such as flex time packages with greater
work-home balance, wellness programs with financial incentives,
or bonuses with stock options and profit-sharing arrangements.
But the competition is not always fair. Sometimes, small
business owners' ability to compete for talented employees can
be hindered by federal regulatory or statutory action, or in
some cases, inaction.
One area of particular importance is tax policy. Most small
businesses find it difficult to stay current on tax laws
because so many tax revisions are temporary. Effective only for
a few years or even months, and regularly extended, these
provisions, commonly referred to as ``tax extenders'' leave
small business owners guessing about their tax liabilities each
year. This is in contrast to large firms that often have tax
attorneys and accountants on staff to help them get a better
grasp of their tax liability in any given year. While they
dislike the uncertainty the extenders provide, most small firms
welcome the extension of these provisions because they result
in lower tax bills and provide opportunities for them to invest
in their businesses. Among the most popular are bonus
depreciation, section 179 expensing, and the research and
experimentation tax credit.
I suspect that our witnesses today will give us ideas as to
what they would like to see in the extenders package. I am
looking forward to hearing your thoughts.
Again, I want to thank all of you for taking the time to
testify before us today. I now yield to our ranking member, Ms.
Chu, for her opening statement.
Ms. CHU. Thank you, Mr. Chair. And thank you all for being
here today.
As we approach another last minute extension of various tax
provisions, it is critical that we continue our efforts to
strengthen small business by putting certainty back into our
tax code. We all know that failure to take any action creates
greater uncertainty and in the end hurts our small businesses
who provide two out of every three new net jobs in our country.
This hearing today will give the Committee the opportunity to
examine just how useful tax extenders are to small business and
why their temporary nature creates great challenges.
Section 179 expensing remains one of the most essential tax
provisions for small employers in all industries. It is an
invaluable tool which provides benefits to small firms by
giving them bigger immediate write-offs, reduced paperwork and
money to invest back into their businesses. It also serves as a
spark to the economy as money saved now is injected back into
the marketplace.
While small businesses primarily utilize and benefit from
the enhanced section 179 expensing provisions, several other
extender provisions are critical to small firms. One such
incentive is the research and experimentation credit, the R&D
credit. Although this tax credit is a source of frustration for
many taxpayers due to its temporary status and complex rules,
it has reduced business costs for new research by as much as 7
percent. But most importantly, over 70 percent of the benefits
from the credit are attributable to high-paying, domestic,
research-based job salaries.
With the end of the year fast approaching, the nation's
fiscal health is on the minds of many Americans, especially
small business owners, and as a member of this Committee, I am
well aware of the challenges created by the Internal Revenue
Code and the major obstacles that uncertainty has on business
growth. We cannot pass another retroactive extension that
applies only to the 2015 tax year. This singular focus does not
help our nation's job creators; instead, it hinders their
ability to plan for the future and harms the overall economy.
We depend on these businesses to spur economic growth by
expanding operations, but they cannot do this without the
existing tax incentives they have come to rely on. These
provisions are critical for small businesses, and it is also
critical that we implement these extensions in fiscally
responsible manners.
The primary way to achieve this goal is through
comprehensive tax reform. Long-term reforms will encourage
small entities to make purchases now and in years to come.
Providing this certainty helps put money back in the pockets to
invest and hire now.
I would like to thank the witnesses for their participation
today, and I look forward to their testimony. I yield back.
Mr. KELLY. If Committee members have an opening statement
prepared, I ask that they be submitted for the record.
I would like to take a moment to explain the timing limits
for you. You will each have 5 minutes to deliver your
testimony. The light will start out as green. When you have 1
minute remaining, the light will turn yellow. Finally, at the
end of your 5 minutes it will turn red. I ask that you try to
adhere to the time limit.
And with that said, now I will introduce the witnesses. I
will do all of you and then I will let the ranking member
introduce her witness.
Our first witness is Jason Duff, founder and CEO of
Bellefontaine Ohio Properties, a development firm that
purchases and remodels storefront buildings in Bellefontaine,
Ohio. The firm then works to attract, recruit, and start new
businesses in the community. In addition to his real estate
business, Jason is also a third generation business owner,
working for his family-owned enterprise, Ohio Ready Mix. He is
a regular advice contributor to INC., Forbes, and Entrepreneur
magazines, and is testifying on behalf of the Small Business
Entrepreneurship Council. Thank you for being with us today,
Mr. Duff.
Up next will be Todd Kriegel, CEO of Global Precision
Parts, Inc., or GPP. A family-owned business, GPP has three
locations in the Midwest with approximately 200 team members.
The company sells into the automotive light truck, plumbing,
heavy truck, HVAC, tube fabrication, hydraulic, and munitions
industries. Testifying on behalf of the Precision Machine
Products Association, Todd serves on their Government Affairs
Committee and Board of Directors. We appreciate your
participation today, Mr. Kriegel.
Our next witness is Rich Shavell, president of Shavell and
Company, a CPA and consultation firm based in South Florida.
The company serves contractors of all sizes with financial
statement, tax, and consulting services. Rich is a long-time
member of the Associated Builders and Contractors where he has
served as chair of the National Tax Advisory Group and chair of
the Legislative Committee of ABC's Florida East Coast Chapter.
He has also served as chair of the Construction Financial
Management Association National Tax and Legislative Affairs
Committee. He is testifying on behalf of the Associated
Builders and Contractors today. Thank you again, Mr. Shavell.
I yield to Ms. Chu for the introduction of Mr. Nichols.
Ms. CHU. It is my pleasure to introduce Mr. Thomas Nichols,
an attorney and partner at Meissner Tierney Fisher and Nichols.
This firm is over 160 years old and the second oldest firm in
Wisconsin. Mr. Nichols also serves as the chairman of the Board
of Advisors of the S Corporation Association, and recently
served as chair of the S Corporation's Committee of the ABA
section of Taxation. Mr. Nichols, thank you for joining us
today.
Mr. KELLY. I now yield 5 minutes to Mr. Duff for your
opening statement.
STATEMENTS OF JASON DUFF, FOUNDER AND CEO, BELLEFONTAINE OHIO
PROPERTIES, LTD.; TODD KRIEGEL, CEO, GLOBAL PRECISION PARTS,
INC.; RICH SHAVELL, CPA, CVA, CCIFP, PRESIDENT, SHAVELL &
COMPANY, P.A.; TOM NICHOLS, ESQ., ATTORNEY AND CHAIRMAN OF THE
BOARD OF ADVISORS OF THE S CORPORATION ASSOCIATION, MEISSNER
TIERNEY FISHER & NICHOLS S.C.
STATEMENT OF JASON DUFF
Mr. DUFF. Good morning, Chairman Kelly, Ranking Member Chu,
and members of the Subcommittee. Thank you for the invitation
to provide testimony today on the important issue of
strengthening the nation's small businesses.
My name is Jason Duff, founder and CEO of Bellefontaine
Ohio Properties. I am a third-generation family business owner
and have founded several companies of my own. I started my
first business when I was 8 years old, selling candy bars. In
my earlier years, I have also sold custom greeting cards, made-
to-fit shoes, stamps, coins, and even Beanie Babies.
Bellefontaine Ohio Properties purchases and remodels
storefront buildings on Main Street. We attract, recruit, and
start new businesses in our community. To date, I have
purchased and renovated 14 different historic buildings in our
downtown. My passion is to build and grow smart, vibrant, and
entrepreneurial communities. Bellefontaine Ohio now has a
multitude of diverse stores and businesses due to the
revitalization efforts. These businesses are a gourmet pizza
shop, baker, hair salon, CrossFit gym, several new antique
stores, and a brew pub. All of these have helped create our
downtown having life and vibrancy. Construction has also begun
at eight new loft apartments on the second story of our
buildings.
Bellefontaine is an area that other communities are taking
notice of in terms of our approaches and best practices to
restoration. I am proud to say that our work in Bellefontaine
has all been accomplished in the past 4 years.
While growing assets on our balance sheet is important, I
find that our greatest asset in my company is our employees, so
recruiting and hiring talented employees is a very important
piece of our success. On this front, I must compete with
businesses of all sizes to find talented employees I need to
operate effectively and productively. I am committed to
building a team of people who love their community and allow my
employees flex time to run and serve in public office,
volunteer with local service organizations, like Rotary and
Kiwanis, and have the time they need to successfully raise
their families. Providing employees with key benefits, like
workplace flexibility truly make us and other small businesses
an employer of choice.
Small businesses play a crucial role in the vitality of job
growth in a local community like Bellefontaine. When we are
healthy and growing, we are providing consistent quality and
skilled job opportunities. When we invest and renovate a
commercial storefront, for example, we hire local carpenters,
plumbers, and electricians. Many of our renovation projects
have contributed to the direct job growth in local trades. We
also work with these local companies in purchasing cabinetry,
flooring, and light fixtures. These investments in hiring local
businesses equate to new tax dollars that benefit our
municipalities, our schools, and our service organizations.
As you are aware, the key tax measure, like enhanced
section 179 expensing and bonus depreciation that are part of
the tax extenders have expired and were only made retroactive
very late in 2014 for that year. For 2015, businesses like mine
have been planning and operating under the outdated section 179
expensing level of $25,000.
The uncertainty of bonus depreciation also affects my
investment decisions. Bonus depreciation is a benefit that has
influenced smart decisions for my business. I have purchased
new equipment versus used equipment because of bonus
depreciation, and that new equipment is more efficient,
reliable, and cost effective in the long term. I believe that
these investment incentives are making a positive impact in
keeping small businesses competitive. With a stable and
enhanced 179 provision and certainty on bonus depreciation, I
am able to invest more capital in projects. Again, these
projects start new small businesses that in turn provide
valuable contributions to my community. These new businesses
create jobs, increase property values, and grow local revenues.
Here is my basic advice for government work to work better
and smarter for small business owners and encourage
entrepreneurship. Make permanent the incentives, making
permanent the most robust levels of the section 179 expensing,
as well as bonus depreciation, will provide small businesses
with practical and needed tools to grow, invest, and work
harder. The type of stability and certainty is critically
important. Make the tax code simpler. Simplifying the tax code
would reduce complexity and costs for entrepreneurs. The more
time and money we have to invest in our businesses, the
stronger enterprises will become. Be clear, provide clarity to
small business owners. Give us an opportunity to know and
understand the rules so that we can plan and play by them for
the future. Provide clear instruction so we can focus on the
growth of our businesses and invest with confidence and make a
long-term commitment. Businesses forecast and plan far into the
future. A smart tax code would mirror effective business
planning. Investment thrives when it is encouraged when there
is certainty.
Thank you for the opportunity to share my experiences and
my views with you today. It is truly an honor to be able to do
so, and I look forward to your questions in discussion.
Mr. KELLY. Thank you, Mr. Duff.
And now I recognize Mr. Kriegel for his opening statement.
STATEMENT OF TODD KRIEGEL
Mr. KRIEGEL. Good morning. Thank you for allowing me to
testify today. My name is Todd Kriegel. I am the CEO of Global
Precision Parts, otherwise known as GPP, a family-owned
business with 80 employees in Indiana, and 120 employees split
between two facilities in Ohio.
I am here today to underscore the importance of small
business manufacturing in America and call on Congress to make
permanent key tax provisions which fuel our economy. We founded
GPP in 1989 as a privately-held family business. I increasingly
think about what the future holds for my three children
manufacturing and employees working in our facilities.
Instability in the tax code prevents manufactures from
planning investment, hiring more workers, and purchasing new
equipment, especially for small businesses in industries with
razor-thin profit margins. In the real world, we cannot simply
assume Congress will retroactively extend business investment
provisions and spend money we may not have at the end of the
year.
I am a member of the Precision Machine Products
Association, whose members flew to Washington this week to
personally stress the importance of addressing these expired
tax provisions. To prepare for our visit to Capitol Hill, PMPA
conducted a quick survey of its members on which tax provisions
they use to compete globally. Respondents average 60 employees,
similar to our facilities in Ohio and Indiana, yet despite
being small businesses, they invest heavily in capital
equipment, expecting to spend on average $552,000 in 2015. Most
machines for our industries start at a quarter million dollars
and can exceed $2.5 million. At Global Precision Parts, to
maintain a competitive edge, we continuously buy new equipment,
spending roughly $2 million each year.
Because of our capital investments, bonus depreciation is
by far most important to us. In 2014, it saved our company
$151,000, money we used to hire more employees and purchase
additional equipment. In the precision manufacturing industry,
not only is our equipment expensive and heavy, it takes time to
place into service, often 8 weeks to 18 months. Congress
extending the expired provisions on December 11th does little
for a small business who cannot finance, purchase, and place
into service a 10-ton machine by December 31st when the
provision expires again.
There is a misleading impression amongst some in Washington
that bonus costs the Federal government money in lost revenue.
However, the government does receive the revenue over the life
of the equipment, but the provision provides smaller companies
like ours an immediate discount on the price of the new machine
we could not otherwise afford. The survey also showed the
typical precision parts manufacturer claimed nearly $370,000 in
section 179 equipment expensing for 2014.
When Congress fails to extend this key tax provision, small
businesses have a major hole to fill in their budget. This
means we will cut our current year spending on new equipment
and often suspend investment for the coming year. Remember,
lower machine orders by companies like mine mean fewer workers
are hired and less tax revenue is collected throughout the
supply chain.
Inside the beltway, you may not feel the ripple effects of
your inaction, but in the real world we certainly do. When we
do not know what the future holds, businesses like bankers
spend less, take fewer risks, and reduce or stop hiring
altogether. As a responsible business owner, I have to find a
way to cover that $150,000 gap Congress created for our company
if bonus depreciation remains expired.
According to our association survey, dysfunction in
Washington would cost the average small manufacturer $600,000
if bonus depreciation section 179 and the R&D tax credit remain
expired. Who is going to cover the $600,000 tab Congress
unnecessarily created? This is why we need comprehensive tax
reform for all businesses. C corporations or pass-throughs,
large and small, family-owned or publicly-traded. Like most
family-owned companies, we are a pass-through, meaning we pay
taxes at the much higher individual rate, which for us was 39.4
percent last year. If Congress lowers the tax rate only for C
corporations, Washington will leave behind millions of small
manufacturers like us to pay the higher taxes.
Making the expired provisions permanent and tackling
comprehensive tax reform is not about paying fewer taxes. GPP's
effective tax rate increased by over 11 percent between 2008
and 2014, sending hundreds of thousands of dollars to
Washington rather than putting it in workers' pockets. Yes, I
said workers' pockets, because at GPP last year, we reinvested
71 percent of our profits back into the business.
Uncertainty surrounding the few tax provisions intended to
encourage manufacturing in America is a self-inflicted drag on
growth. I believe that small businesses can continue deriving
the economy; however, Congress must make permanent bonus
depreciation, section 179 equipment expensing, and the R&D tax
credit to allow small businesses to invest and plan for the
future.
Thank you for allowing me the opportunity to testify before
you today on this important issue.
Mr. KELLY. Thank you for your testimony, Mr. Kriegel.
We have House votes on the House floor, so we will adjourn
for about 45 minutes and then have the next two witnesses and
reconvene after the votes.
[Recess]
Mr. KELLY. Okay. We will reconvene at this time, and with
that said, we now ask for the opening statement of Mr. Shavell.
STATEMENT OF RICH SHAVELL
Mr. SHAVELL. Thank you. My name is Rich Shavell, testifying
on behalf of Associated Builders and Contractors, a national
construction industry trade association with 70 chapters
representing 21,000 members. I am president of Shavell and
Company, a full service CPA and consulting firm that focuses on
services to closely-held commercial contractors.
The subject of this hearing is very appropriate as small
businesses, in fact, the employer of choice for the average
American, not only within the commercial construction industry
but throughout the U.S. economy.
Small businesses, and particularly small contractors, are
excellent employers for several reasons. First, there is plenty
of work in commercial construction because we are facing a
severe labor shortage. Secondly, training is available for new
workers to the industry. According to the ABC Institute in
South Florida, the value of being a graduated registered
apprentice is worth $300,000 additional dollars during the
career of the typical worker. Moreover, the construction
industry fosters the realization of the American dream. Through
effort and determination, many construction workers find
themselves picking up small jobs, working them with their peers
afterhours and on weekends. Anecdotal evidence suggests that
seasoned workers can earn significant amounts of money this way
until they are ready to leave their regular position to pursue
their own businesses on a full-time basis. The single biggest
challenge facing small business today is widespread uncertainty
and specifically, uncertain federal tax policies are chipping
away at these small businesses' ability to effectively operate.
From my perspective there are two main tax issues. First,
Congress must do its job and pass tax legislation to stabilize
the tax environment. The continual expiration of effective
dates for tax incentives and other tax provisions included in
the Annual Extenders Bill hurts the business community, and
particularly the small business. Right now, as we are
approaching the end of the year, contractors have to project
and plan for their 2015 tax liabilities, yet it is unknown
whether the tax extenders will even be in the law.
Second, for commercial contractors, Congress should finally
rectify certain tax provisions that are hurting these small
contractors.
In 1986, Congress passed legislation that was intended to
curb abuses by aerospace and defense contractors and how they,
these large businesses, utilize the completed contract method.
The required use of the percentage of completion method was
forced upon all businesses who perform work under long-term
contracts. To address this burden, a small contractor exception
was put in place in 1986 with a $10 million revenue threshold.
Almost 30 years later, that threshold has never been updated.
For comparison, Small Business Administration currently
utilizes a threshold of $36.5 million. We continue to ask
Congress to do three things to address this. First, update the
small contractor threshold from $10 million to $40 million.
Second, index the threshold going forward. And thirdly,
eliminate the section 56(a)(3) addback requirement for
alternative minimum tax purposes, for AMT tax purposes. This
third item would eliminate the requirement that is currently
law, that revenues from long-term contracts we reported under
the percentage of completion method solely for AMT purposes. So
even though they have the small contractor exception, they
still have to use percentage of completion solely for AMT. And
a further horrific result is that the small contractor today is
required to go through complex computations under the lookback
method solely for AMT purposes. By eliminating this AMT
adjustment, this ridiculous lookback requirement would
eliminated for so many small businesses.
In summary, Congress must do its job by adding permanency
to the tax system, and thereby, provide certainty for small
businesses, including contractors. Moreover, it is time for
Congress to rectify the wrong that was done in 1987 whereby
commercial contractors are still saddled with complex tax
requirements that were not even intended to impact them. It is
time to make that right.
Thank you.
Mr. KELLY. At this time, I would like to recognize our
chairman, Mr. Chabot, who has now shown up for the entire
Committee, and with that said, I now yield to our ranking
member, Ms. Chu, for the introduction of our next witness.
Ms. CHU. Well, I did introduce him earlier. So, but I hope
that you can just testify now.
Mr. KELLY. I am sorry. Mr. Nichols, at this time, if you
will give us your opening statement.
STATEMENT OF TOM NICHOLS
Mr. NICHOLS. Thank you very much.
Chairman Kelly and Chairman Chabot, Ranking Member Chu,
thank you very much for asking me to testify today.
I am a member and past chair of the ABA Tax Sections
Committee on S corporations, and I am currently chairman of the
Board of Advisors of the S Corporation Association. I have been
representing closely-held businesses since 1979.
There are many issues that divide members of Congress, but
fortunately, the role Main Street businesses play in creating
jobs is not one of them. Everybody understands that closely-
held businesses create most of the new jobs and employ the
majority of the private sector workforce; what is less known is
the role of startup businesses in this success. As the Kauffman
Foundation has made clear, without startups there would simply
be no net new job creation. We need startups to grow the jobs
base. The challenge for policymakers is that business startup
activity has declined sharply in recent years. To help reverse
this trend, there are a number of bipartisan steps that
Congress could take to ensure these businesses resume their
critical role as a source of jobs, innovation, and growth. I
will briefly describe four of them.
First, Congress needs to stop retroactively adopting the
so-called ``extenders.'' Many of these provisions are of
critical importance to small business and their retroactive
adoption at the end of the year creates unnecessary hardship
for business owners. For example, I have spent considerable
time over the past several years answering the question of
whether the 5-year or the 10-year recognition period for built-
in gains tax will apply. The only response I could give is that
it will probably be 5 years, but that clients cannot count on
it. This has created a number of difficulties. Several of my
farming clients, for example, wanted to sell while farmland
prices were at their peak. Unfortunately, those in the critical
6- to 10-year limbo period were unable to commit to sale absent
a sale absent congressional action, and now it appears that the
optimal time for selling may be gone. This makes no sense.
Built-in gains relief and other business extender provisions
are clearly good policy and should be made permanent.
A second, unforced error is section 409A. It imposes rigid
guidelines for deferred compensation plan, violation of which
triggers substantial penalties on employees, even though the
corresponding tax deduction to their employers has also been
deferred. Section 409A creates an unnecessary impediment to
offering employees deferred benefits. In our practice, we have
had to restate phantom stock plan documents in order to comply
with these new rules, while some of our clients have simply
decided to forgo offering deferred compensation at all.
This provision represents such poor policy that the full
American Bar Association Tax Section has come out against it.
Third, the Affordable Care Act is being implemented in a
way that has serious negative consequences for even employers
with less than 50 employees. The IRS has taken the questionable
position that the HRAs and other employer plans that reimburse
individual policies somehow run afoul of the market reform
provisions of the ACA. This contorted position is particularly
burdensome for small, closely-held businesses. One client at a
longstanding HRA that provided generous reimbursement for
premiums on health insurance policies selected by the
individual employees, his employees like the plan and so did
he, but they just could not keep it. In fact, I understand that
the NFIB has estimated that 16 percent of small businesses are
in violation of this provisions.
The penalties of running afoul of this questionable
position are draconian. A small employer with only 10 employees
could face a penalty of $365,000 in any given year. There is
bipartisan legislation to correct this interpretation, and I
urge you to accelerate the passage of this bill, perhaps as
part of the extenders legislation.
Fourth, the IRS has adopted comprehensive regulations
relating to the capitalization of capital expenditures,
including a safe harbor for expenditures of $500,000 or less.
This is good policy, but it only applies to taxpayers who have
so-called applicable financial statements, such as those
required by the SEC. Entities that do not have these statements
get a much lower standard of just $500. That includes many,
many closely-held businesses. This unfairness should be
corrected as part of the upcoming extender package as well.
These are just four areas where Congress could act in a
bipartisan way to help Main Street businesses create and
maintain good jobs. Once again, I would like to thank the
Committee for holding the hearing and inviting me to testify.
We sincerely appreciate all your efforts to fix these and other
unnecessary burdens small businesses face.
Mr. KELLY. At this time, I recognize myself for 5 minutes
to ask questions to the panel.
During the past 6 years or so, the number of business
deaths has outpaced the number of business formations, and we
have discussed that quite a lot in our Committee this year. In
other words, more businesses are failing each year than are
being created. This is a big problem. Do you any of you feel
that the increasingly complicated nature of the tax code has
played a role in the number of business deaths that we have
seen in recent years?
Mr. Duff?
Mr. DUFF. Entrepreneurs inherently are risk-takers. They
are people that believe or have ideas, and they want to go out
to the marketplace and try to solve that problem. But as
regulations increase, as things become more confusing and
difficult to understand, their ability to stomach that risk is
challenged, and at some point I see in my work on Main Street
some people just throw their hands up and give up. I believe by
us working to make some of these provisions permanent,
specifically the section 179 deduction, it gives businesses
that certainty so they can plan and they can speak and inspire
other entrepreneurs to take a leadership role in opening new
businesses.
Mr. KELLY. Anyone else?
Mr. NICHOLS. Certainly.
Mr. KELLY. Mr. Nichols?
Mr. NICHOLS. There is no question that the complexity and
even the delayed complexity where they are balancing not only
the issue of a very complicated set of rules, but also whether
or not those rules will apply and how they will apply. There is
no question that it has a dampening effect. It is the
equivalent of being told you might have cancer. Yes,
technically, you can do everything you could have done before,
but at the end of the day, you do not really know and it is
going to slow down your long-term thinking.
Mr. KELLY. Mr. Kriegel, you talked a little bit about the
nexus of access to financing and tax liability in your written
testimony. Could you talk a little more about the interplay
between certainty in the tax code and assessing financing and
capital you need in your line of business?
Mr. KRIEGEL. Sure. I would be happy to.
So, obviously, you complete budgets that are 5 or 10 years
out so that you know what your expenses are going to be. With
these tax extenders, not knowing at the end of the year whether
we are going to have to fill $150,000 or $250,000 hole, those
are dollars that we necessarily do not have laying around. So,
in my opinion, that just, for future years, that minimizes the
investments that you are going to make, and you have got to
readjust your budget constantly.
Mr. KELLY. Thank you.
And Mr. Duff, if there were to be an extenders package
passed next week, could you realistically take advantage and
make a snap decision, get something ordered, delivered, and
installed in time to get the tax break?
Mr. DUFF. When we pass laws that retroactively impact the
previous year in such a short timeframe, it makes it very
difficult to be able to plan and make intelligent decisions.
The work that we do in purchasing buildings that have been
vacant for 30 years, and recruiting new businesses to occupy
and fill them, there is a lot of equipment and needs that need
to be purchased, but there is a lot of planning that has to
happen. So making sure that we provide provisions that are
clear and give us a runway to plan throughout the future would
help relieve some of those problems.
Mr. KELLY. Thank you.
And Mr. Shavell, in the past, we have had witnesses that
have said that some small business tax incentives, such as the
Small Business Healthcare Tax Credit established in Obamacare
are not worth the time. Have you found this to be the case when
working with small firms? And how does this contrast provisions
like section 179 or bonus depreciation?
Mr. SHAVELL. Well, there is a lot in these extenders, and
some of them are small, but some of them are important, too.
And not just to the commercial contractors that we represent,
but also to the families of the workers. I mean, you start
right at the top of the list there and you see the deduction
for state and local, state taxes, very important to everybody
in Florida where we do not have the state income tax. I have
clients whose spouses are teachers. They look for that small
amount every year as an adjustment.
The other bigger items that have been mentioned here
already, section 179, bonus depreciation, things like that, are
very important to small businesses. Anybody who is paying a
little more tax than they should have, they do not like it,
whether it is a small item or a big item. But let me give you
an example of that section 179 where this is really important
this year. I have a particular client who purchased equipment
last year, 2014. He purchased to the max, but because of other
requirements in the code, he could not get the entire benefit,
so he has a carryover, six digit carryover of section 179
deduction that we let carry over because we anticipated income
in this year, in 2015. He is now faced with a $25,000
threshold, and that is incongruent with the intent. He did what
was expected. He utilized the incentive in 2014. He may not get
the full benefit in 2015. We are going to have to relook at
that.
Mr. KELLY. Thank you very much. My time is expired.
I next recognize the ranking member, Ms. Chu.
Ms. CHU. Thank you, Mr. Chair.
I would like to address this to anyone on the panel,
starting with Mr. Nichols. Of course, one of this Committee's
goals is providing business owners with certainty when it comes
to taxes. We have talked about the problems of retroactivity
and lack of permanency, but what if Congress does not reach a
deal on tax extenders at all this month? Can you talk about how
this would affect your business's decisions to expand, hire
workers, or make business investments?
Mr. NICHOLS. Obviously, as I indicated earlier, it has an
unavoidable consequence, and the uncertainty alone has a huge
impact. And there are clearly many businesses that have, since
these things have been extended over the years, there are many
businesses that frankly have gone forward on the assumption
that they will, in fact, be extended. There are other
situations, for example, the built-in gains tax. I have got a
client literally this year that I said to him, ``Well, if you
sell your business, the built-in gains tax will probably be 5
years.'' He is in that limbo period, and I am communicating
with him and I say, ``But what I would do is I would get all
the paperwork ready to go, but why do you not wait for the
extenders package gets passed?'' And I got kind of a
heartbreaking email back from him saying, ``Well, I cannot
wait. I have got health problems. I will not be able to do
that.'' These are very real situations and the lack of
certainty, and especially in a context like that, where they
really do have to make a decision. They cannot delay. Critical
for a small business.
Ms. CHU. Yes?
Mr. KRIEGEL. In business there are so many uncertainties--
foreign competition, healthcare costs, trained, skilled
workers--taxes should not be an uncertainty. We should know
what our tax liability is going to be.
Ms. CHU. Anybody else? Mr. Shavell?
Mr. SHAVELL. Well, the question I get this time of year,
every day of the week almost, because we are doing tax planning
for our contractor clients, is what is going to happen? So they
want to know. And they, in essence, are forced to witness
something unusual as just mentioned. There should be some
certainty; yet, I am in the position where I have to show
somebody, hey, look, based on what you spent this year and the
potential for extenders, your liability would be this versus
here is what it is going to be if Congress does not do their
job. That level of uncertainty to look at your cash flow impact
and realize--because there are two parts to tax planning. Not
just knowing what the number is, but when are you going to pay
it? So there is an impact as to whether or not there is going
to be some withholding on a bonus, whether there is going to be
a fourth quarter estimated coupon on January 15th, or a larger
balance due on April 15th. This impacts daily cash flow, this
uncertainty, and it is really unfortunate.
Ms. CHU. Okay. Mr. Nichols, any time we consider renewing
tax incentives, one of the driving principles is cost. Two of
the most expensive provisions are the ones small businesses
rely on the most, section 179 and the R&D credit. What role
should budget neutrality play in our efforts to extend these
tax incentives permanently?
Mr. NICHOLS. I am stumbling a little bit because that is an
area obviously that you are more--Congress is more on the
frontlines in terms of making those decisions, but the budget
neutrality, obviously, is important. But unfortunately, budget
neutrality can have some negative impacts sometimes. Sometimes
in order to achieve budget neutrality there are other
provisions that are put in place to offset the budget cost of
particularly good provisions. And I would submit that, like,
409A would be one of those provisions that I think may have
been put in to offset what was otherwise a good provision, but
409A, frankly, was bad policy to begin with, even though it may
have purported to have raised revenue, at the end of the day it
hurt maybe as much as whatever it was that it was justifying
getting into the code.
Ms. CHU. Mr. Shavell, small firms often have the fewest
resources to spend on accountants to identify potential tax
breaks. And there are individuals and businesses that spend 6.1
billion hours a year complying with these filing requirements.
How does the continuing debate about how to extend tax
provisions create advantages for firms that can devote those
resources to monitoring tax modifications?
Mr. SHAVELL. Well, tax compliance, as you point out,
ridiculous number of hours, and there are provisions in there
that are difficult. And yes, smaller companies have a great
deal of difficulty complying with some of the rules. Larger
firms are going to have internal counsel in a lot of cases.
They are going to have more accountants on staff who are
specialized in various areas, so they can take care of those
things.
In the construction industry, when you talk about
complexity, one of the things I mentioned in my testimony, this
lookback method that affects all contractors performing long-
term contracts. The amount of work and time that is required to
comply is incredibly difficult. We have had conversations with
IRS and folk at the IRS do not like this provisions any more
than the industry does. It is something that for quite a long
time needs to be removed. This lookback method, which requires
taxpayers to go back and look at their contracts on a
hypothetical basis. So you are looking back a year on a
hypothetical basis, recomputing what the tax would have been if
you did not use estimates, then compute a hypothetical----
Mr. KELLY. If you can wrap it up pretty quick. We are past
our time.
Mr. SHAVELL. So these rules are incredibly complex. Sure,
larger companies are going to have a little more resources.
Ms. CHU. Thank you. I yield back.
I now recognize the chairman, Chairman Chabot, for 5
minutes.
Mr. CHABOT. Thank you very much, Mr. Chairman.
Just a couple of questions. In order of their value to
small businesses, and I would ask each of the panel members if
they would like to weigh in on this. Which of the various so-
called tax extenders do you believe are the most important and
would you most strongly encourage us to extend? And maybe we
will start at this end here, if that is okay.
Mr. DUFF. Thank you. The work that I do in purchasing
vacant buildings and reinvesting and recruiting new businesses
to occupy them, it is very capital-intensive for the types of
equipment that we have to purchase. So the section 179
provisions are extremely essential for us to continue to
purchase and buy additional equipment, and the same goes with
having access to bonus depreciation. Those monies keep more
working capital in our business so we can actually grow our
footprint in making a larger impact in our community.
Mr. CHABOT. Thank you.
Mr. Kriebel?
Mr. KRIEGEL. Thank you. Companies in our industry invest
significant capital, $250,000 is kind of a minimum threshold.
So from our standpoint, bonus and section 179 are very
important. R&D is important, too, so really from our
perspective, all three are very important.
Mr. CHABOT. Okay, thank you.
Mr. Shavell?
Mr. SHAVELL. Well, for commercial contractors, I would say
there are three categories. The first category discussed is 179
and bonus. Past that, there are incentives, other depreciation
rules that are very helpful because they induce investment. So
you have the 15-year expensing on real property costs. You have
section 179D, which is an energy deduction that is available to
certain parties, whether it is the owner of the property or in
some cases it is actually the contractor-designer. So that is
very important. And thirdly, you have some labor-related items,
the empowerment zone credits, which are pegged to wage rates as
far as how much of a credit you are going to get. And also, the
work opportunity tax credit. That is the old targeted jobs tax
credit. So those are all valuable to commercial contractors. As
far as the order goes, I would have to argue 179 and bonus are
at the top, just like everybody else.
Mr. CHABOT. Thank you.
Mr. Nichols?
Mr. NICHOLS. I am going to agree with everybody and repeat
179 and bonus. In answer to your question, I am thinking in
terms of how many people are impacted and the importance of the
policy, 179 and bonus, for reasons set forth in more detail in
my written testimony. I do not think 179 and bonus are even a
tax expenditure. I think it is choosing the right time to tax
individuals and tax businesses when they actually are getting
income from the capital that they have been spending.
I would then, as far as having a priority after those
items, there you are balancing how serious of a disruption it
is to the induvial taxpayer versus how many people it affects.
I would probably throw the built-in gains tax next, only
because even though the 5-year period only affects a relatively
small number of people, the pretty dramatic impact that a
forced double tax built-in gains tax has for an individual
owner who is trying to sell their business on retirement or
something like that, I would probably throw that in there, too.
And then another one that has been mentioned in that is the
qualified restaurant and retail property and things like that.
There again it is not as important because it does not affect a
broad cross section, but for the people that it does affect,
the difference between having a 15-year recovery period versus
having a 39-year recovery period is huge and can have a very
dramatic impact on individual, real living businesses.
Mr. CHABOT. Thank you.
I have been on this Committee for about 20 years and have
talked to an awful lot of small business districts in the past
in my district, but now being chair of the Full Committee,
talking to folks from all over the country, and the one word
that I always heard over and over was uncertainty was the
biggest concern that they had, and that is what comes out of
Washington. And I have only got a half minute left. Does
anybody have a real world example of how this kind of
uncertainty on these extenders or any other tax items is really
adversely impacted or we could have done much better on
something if we had just gotten it done up here? Anybody got
anything in particular that they would like to bring before the
Committee? Yes?
Mr. DUFF. We have empty buildings in our community that
people do want to take risks. They want to invest in them, but
they are uncertain. You know, there are enough uncertainties in
the world and the tax consequence of knowing if this is a smart
move or not is causing them to not move forward with taking
that risk.
Mr. CHABOT. Okay, thank you.
Mr. SHAVELL. May I?
Mr. CHABOT. Yes, Mr. Shavell. Yes.
Mr. SHAVELL. I have a real world example. We were engaged
to do a section 179D analysis for a client who has a hotel
property. We started the study. We took a retainer. The client
pointed out that it is not in the law yet because we are
waiting for extenders. I am sitting with a retainer. We
finished the project and the arrangement that was made was that
while if it does not pass, we are going to give her back the
retainer, and if it does pass, they are going to pay us the
second piece. But the engineer that we used, he has yet to get
paid, yet he has done all the work. That is a real-life example
of dollars now sitting in a bank waiting to go to the service
providers, and a client who does not know whether they are
going to get that accelerated deduction.
Mr. CHABOT. Thank you. I yield back, Mr. Chairman.
Mr. KELLY. The gentleman's time is expired. Thank you, Mr.
Chairman.
I next recognize for 5 minutes Ms. Radewagen.
Ms. RADEWAGEN. Thank you, Mr. Chairman. I want to welcome
the entire panel here today.
My question is specific to my home district. I am familiar
with the 30(a) style tax credits and the American Samoa
Economic Development Credit. Are you aware of any other tax
credits specific for U.S. territories? And if so, which of
these would provide the biggest benefit for the territories?
Okay. Can you elaborate on how important these credits are
for economic stability in these territories? For example, these
tax credits are one of the major reasons our tuna canneries are
able to operate in American Samoa, so therefore, these tax
credits provide my islands employment.
Mr. DUFF. I grew up in a small town in a rural community,
so I understand that a lot of--agriculture is a big thing in
the middle of Ohio, and for farm families, being able to invest
and purchase a combine or tractor may be the largest expense
that they make. By having certainty and knowing when you are
making that investment, that large piece of equipment, you will
be able to grow that family business and maybe extend that or
pass that on to siblings and see multi-generations of hard work
actually pay off. And I think that is the American dream, and
these tax credits help people achieve that.
Ms. RADEWAGEN. Thank you very much. I would appreciate if I
could get a little information on my earlier question if that
is possible.
Thank you, Mr. Chairman. I yield back.
Mr. KELLY. Thank you. The gentlewoman has yielded her time
back.
In closing, again, I want to thank each of the witnesses
for being with us. All of you provided excellent testimony,
both orally and in writing, and I appreciate that.
As this Congress progresses, my colleagues and I on the
Committee on Small Business will continue to work to simplify
the tax code and provide small business owners the certainty
they need to focus on growing their businesses instead of
guessing what their tax liability will be in the coming year.
In the meantime, we will share what you have shared with us
today with members of the House Ways and Means Committee to
help them craft a thoughtful and robust tax extenders package.
I ask unanimous consent that members have 5 legislative
days to submit statements and supporting materials for the
record.
Without objection, so ordered.
This hearing is now adjourned.
[Whereupon, at 12:10 P.m., the Subcommittee was adjourned.]
A P P E N D I X
``Tax Extenders and Small Businesses as Employers of Choice''
Testimony of
Jason Duff
Founder & CEO
Bellefontaine Ohio Properties Limited
Before the
Subcommittee on Economic Growth, Tax and Capital Access
Committee on Small Business
United States House of Representatives
December 3, 2015
The Honorable Trent Kelly, Chairman
The Honorable Judy Chu, Ranking Member
Good morning Chairman Kelly, Ranking Member Chu and members
of the subcommittee. Thank you for the invitation to provide
testimony today on the important issue of strengthening our
nation's small businesses.
My name is Jason Duff, Founder and CEO of Bellefontaine
Ohio Properties, Ltd. As background, I am a third generation
family business owner, and founder of several businesses. My
grandparents and parents were small business owners. I started
m first business when I was eight years old, when I sold candy
bars. In my earlier years I have also sold custom greeting
cards, made-to-fit shoes, stamps, coins and beanie babies.
Bellefontaine Ohio Properties purchases and remodels
storefront buildings on Main Street. We attract, recruit and
start new businesses in our community. To date, I have
purchased and renovated fourteen different historic buildings
in Downtown Bellefontaine. My passion is to build and grow
smart, vibrant and entrepreneurial communities.
Bellefontaine, Ohio now has a multitude of diverse stores
and businesses due to these revitalization efforts. These
businesses--a gourmet pizza shop, bakery, hair salon, CrossFit
gym, several new antique stores, and a brewpub, for example--
have helped to give new life to downtown Bellefontaine.
Construction has also begun on eight new loft apartments above
the Main Street storefronts of Bellefontaine.
Bellefontaine is community that other communities are
taking note of in terms of approaches and best practices
towards restoring small town Main Streets and downtown areas. I
am proud to say that our work to rejuvenate Bellefontaine has
all been accomplished in the past four years.
Human Capital is Our Foundation
While growing assets on my balance sheet is important, I
find that the greatest asset to my company is my employees. So
recruiting and hiring talented employees is a very important
piece of our success.
On this front, I must compete with businesses of all sizes
to find the talented employees I need to operate effectively
and productively. I am committed to building a team of people
who love their community and allow my employees flex time to
run and serve public office, serve on local service
organizations like Rotary and Kiwanis and the time they need to
raise their families.
Providing employees with key benefits--like workplace
flexibility--truly make us and other small businesses an
``employer of choice.'' In small businesses like mine,
employees can more quickly learn critical and well-rounded
skills, provide ideas and feedback that are more quickly
implemented in operations, and in the end feel appreciated and
valued by their employer. Such attributes, combined with
innovative benefits, add greatly to our staying power and
ability to grow.
Why the Tax Extenders are Important
Small businesses play a crucial role in the vitality of job
growth in a local community like Bellefontaine. When we are
healthy and growing, we provide consistent, quality and skilled
job opportunities. When we invest in renovating a commercial
storefront, for example, we hire local carpenters, plumbers,
and electricians. Many of our renovation projects have
contributed to direct job growth in local trades. We also work
with local companies to purchase cabinetry, flooring and light
fixtures. These investments in hiring local businesses equate
to new tax dollars that benefit local municipalities, schools
and service organizations.
As you are aware, key tax measures--like enhanced Section
179 expensing and bonus depreciation--that are part of the
``tax extenders'' have expired and were only made retroactive
very late in 2014 for that year. For 2015, businesses like mine
have been planning and operating under the outdated Section 179
expensing level of $25,000. The uncertainty of bonus
depreciation also affects my investment decisions.
Bonus depreciation is a benefit that has influenced smart
decisions for my business. I have purchased new equipment vs.
used because of bonus depreciation and the new equipment is
more efficient, reliable and cost effective in the long term. I
believe that these investment incentives are making a positive
impact in keeping small businesses competitive.
I cannot tell you how important it is for my businesses,
and for the economic health of my local community, that
entrepreneurs and risk-takers like me have practical and stable
expensing levels established so that we can invest with
confidence. Being able to plan our investment strategies and
opportunities will not only strengthen our businesses, but
local communities and job growth as well.
My business model centers on investment in order to restore
and rehabilitate buildings so they are suitable for modern
businesses that customers would like to visit, and spaces that
entrepreneurs can adequately compete and operate in. As noted
above, this investment has helped to launch new businesses and
spark a downtown micro-economy revival in Bellefontaine.
Stability and certainty when it comes to investment incentives
in the tax code is critical for me in terms of planning, taking
risks, and moving forward with projects. For example, and as
noted above, expensing allows me to confidently invest in
equipment to help start new businesses and improve the
efficiency and combativeness of my operations. One small
example is the purchase of new freezers and coolers that are
more energy efficient for our restaurants.
With a stable and enhanced Section 179 provision and
certainty on bonus depreciation, I am able invest more capital
in projects. Again, these projects start new small businesses
that in turn provide valuable contributions to my community.
These new businesses create jobs, increase property values and
grow local tax revenues.
I am also able to encourage investment in areas that have
traditionally been challenged by the dominance of the Internet,
or large international corporations. Again, investment is
central to risk-taking, growth, revitalization and
competitiveness. The impact of a permanent, enhanced Section
179 expensing provision and bonus depreciation would be
powerful for my business and community. I can only imagine what
the impact would be for our broader economy if all small
businesses were provided the certainty of the enhanced and
permanent expensing limits.
Here is my basic advice to make government work better for
small business owners and to encourage entrepreneurship:
Make permanent the incentives. Making permanent the more
robust levels of Section 179 expensing, as well as bonus
depreciation, will provide small businesses with practical and
needed tools to grow, invest and work harder. This type of
stability and certainty is critically important.
Make the tax code simpler. Simplifying the tax code would
reduce complexity and costs for entrepreneurs. The more time
and money we have to invest in our businesses, the stronger our
enterprises will become. Small businesses like mine compete
with larger businesses and in a competitive global marketplace.
Tax relief, simplification and certainty will boost the
competitiveness of small businesses in Bellefontaine and
throughout the United States.
Be clear. Provide clarity to small business owners. Give us
an opportunity to know and understand the rules so we can plan
for the future. Provide clear instructions so we can focus on
the growth of our businesses to invest with confidence. Not
only does this include clarity when it comes to taxes and tax
compliance, but for all rules and regulations as well.
Make a long-term commitment. Businesses forecast and plan
far into the future. A smart tax code would mirror effective
business planning. Investment thrives when it is encouraged and
when there is certainty.
Thank you for the opportunity to share my experiences and
views with you today. It is truly an honor to be able to do so,
and I look forward to your questions and our discussion.
Written Testimony
Of
Todd Kriegel
CEO, Global Precision Parts, Inc.
Before the
Small Business Subcommittee on Economic Growth, Tax, and
Capital Access
U.S. House of Representatives
Thursday, December 3, 2015
Thank you for allowing me to testify today about the role
small businesses like us play in the economy and the impact of
expired tax provisions on manufacturing companies. My name is
Todd Kriegel, I am the CEO of Global Precision Parts, Inc.
(GPP), a family owned business based in Ohio. I came here today
to underscore the importance of small businesses manufacturing
in America and call on Congress to make permanent key tax
provisions which fuel our economy.
After graduating from Xavier University, I went into
banking until I came back to the family business, then known as
Acme Machine Automatics, Inc. Even while working for a larger
regional bank, I always admired the small businesses to whom I
was lending, for their unique ability to control their own
destiny. I went back to manufacturing because at the end of the
day, you have something to show for it and can say, ``As a
manufacturing company, we produced that product.''
Following its creation in 1989, GPP expanded through growth
and acquisition and we now have metalworking manufacturing
facilities in Ottoville and East Liberty, Ohio and Wabash,
Indiana. GPP is a privately held Subchapter S Corporation owned
by the Kriegel family and as my three children grow, I think
about what the future holds for manufacturing and the employees
working at our facilities.
We have sixty employees each in Wabash and East Liberty and
eighty in Ottoville, manufacturing precision parts for the
hydraulics and tube fabrication industries, automotive, light
and heavy truck, agriculture and mining. Our industry is
certainly starting to see a leveling off in our recovery from
the Great Recession of 2008-2009, when our employee numbers
were half what they are today. While we are receiving more
orders these days, the volume is consistently lower. However,
we can succeed and compete with any company around the world,
but only if Washington does its job and lets us do ours.
Instability in the tax code prevents manufacturers from
planning investment, hiring more workers, and purchasing new
equipment, especially for small businesses in industries with
razor-thin profit margins. As a former banker, I know the added
scrutiny these companies face when financing major equipment
and infrastructure investments. Today the lending market is
even tighter for manufacturers as bankers try to assess our tax
liabilities and downgrade our credit due to increased potential
tax liabilities from expired credits and deductions. In the
real world, we cannot simply assume Congress will retroactively
extend business investment provisions and spend money we may
not have at the end of the tax year.
I am a member of the Precision Machined Products
Association (PMPA) whose members flew to Washington this week
to personally stress the importance of addressing these expired
tax provisions. In preparation for those visits with Senators
and Representatives, PMPA conducted a quick survey of its
members. The results clearly underline the role small
businesses play energizing the economy and the importance of
specific tax provisions on manufacturers of our size.
Respondents had an average employee size of 60, quite
similar to our facilities in Ohio and Indiana. Most businesses
in the precision parts industry have roughly $12-15 million in
annual revenues but as this survey shows, they invest heavily
in capital equipment purchases, expecting to spend on average
$552,000 in 2015. Most machines for our industry start at a
quarter million dollars and can exceed $2.5 million. At Global
Precision Parts, in order to maintain a competitive edge, we
need to continuously upgrade our operation and buy new
equipment, leading us to spend roughly two million dollars a
year.
Among the tax provisions Congress allowed to expire, Bonus
Depreciation is by far the most important to our company and to
many other small manufacturers who must continuously invest in
their businesses. In fact, some businesses like ours forego
Section 179 Equipment Expensing because a single machine can
exceed the $500,000 cap and rely on Accelerated or Bonus. In
2014, Bonus saved our company $151,000; money we used to hire
more employees and purchase additional equipment. Bankers are
very aware of these provisions as well and in recent years,
manufacturers would receive notices from lenders to act quickly
to finance capital expenditures before key tax provisions
expired at the end of the year.
In the precision manufacturing industry, not only is our
equipment expensive and heavy, it takes time to place into
service, often eight weeks to eighteen months. Congress
extending expired investment provisions on December 11 does
little for a small business who cannot finance, purchase, and
place into service a 10-ton machine by December 31 when the
provision expires again.
For a typical PMPA member, the survey showed Bonus
Depreciation saved them on average $188,000 with one
manufacturing business reporting a $503,000 savings. Half a
million dollars is a lot of money for businesses of our size--
resources we could use to buy another one or two machines or
hire a half a dozen skilled workers with full benefits. There
is a misleading impression among some in Washington that Bonus
``costs'' the federal government money in lost revenue.
However, the government does receive the revenue over the life
of the equipment but the provision provides smaller companies
like ours an immediate discount on the price of a new machine
we could not otherwise afford.
Were our three facilities wholly separate and not under the
control of a single company, we would also benefit from Section
179, as do many of our PMPA colleagues. The survey showed the
typical small business claimed nearly $370,000 in 2014. When
Congress fails to extend this key tax provision, small
businesses have a major hole to fill in their budget and will
cut back their current year spending on new equipment and often
suspend investment for the coming year. Remember, lower machine
orders by companies like mine means fewer workers are hired and
less tax revenue is collected throughout the supply chain.
Although many PMPA members are contract manufacturers who
do not design their own consumer end product, we still benefit
greatly from our own Research and Development activities, and
even more so from our customers' R&D efforts. The typical PMPA
company claimed roughly $40,000 in 2014 in R&D Credits, with
the maximum being just over $100,000. At GPP, last year we
claimed $28,000 in federal R&D and saved another $10,000 under
the Indiana state R&D credit. Small businesses in particular
are increasingly wary of R&D triggered federal and state tax
audits and prefer to avoid spending $20,000 on accountant and
legal fees to defend a $40,000 claim. However, I believe a
permanent enhanced and expanded federal R&D Tax Credit will
incentivize more small manufacturers to further engage in
developing their own new technologies.
Inside the beltway, you may not feel the ripple effects of
your inaction, but in the real world, we certainly do. When we
do not know what the future holds, businesses, like investors,
spend less, take fewer risks, and reduce or stop hiring all
together. As a responsible business owner, I have to find a way
to cover that $150,000 gap Congress created for our company if
Bonus Depreciation remains expired. Our lenders will recognize
we have less cash on hand, artificially increasing the price of
a new machine we could have bought.
I cannot underscore enough the importance on small
businesses and our economy of these three tax provisions
Congress keeps allowing to lapse. Dysfunction in Washington
could cost the average small manufacturer $370,000 in Section
179, $188,000 in Bonus Depreciation, and $40,000 in R&D. Who is
going to cover this $600,000 tab Congress unnecessarily
created? As usual, it is America's small businesses and their
millions of employees who suffer most, not politicians in
Washington or the ``fat cats'' on Wall Street.
The expired tax credits and deductions are only one layer
to the complicated relationship small businesses have with the
Internal Revenue Code. The vast majority of companies like ours
are not C-Corporations but are structured as pass-through
businesses, often Subchapter S-Corporations, paying taxes at
the higher individual rate. Throughout PMPA, pass-throughs make
up two-thirds of our 400-member association; and in the broader
economy, they account for over half of all business revenue.
We structured ourselves as an S-Corporation because, as a
family owned business, it provides us flexibility in the event
that my children decide to become the next generation of
manufacturers. Especially as many of the original owners are
considering retirement, we can develop critical succession
plans that ensure the previous generation still receives some
compensation for their contributions while bridging the
business to the younger Americans who will serve as the
backbone of our industry for years to come. Indeed, we are not
alone in recognizing the advantages of a pass-through over C-
Corps--the U.S. Census estimates less than six percent of all
businesses today are C-Corporations.
Given these statistics on the number of pass-throughs in
the country, and the clear fact that the majority of them are
small businesses, I am curious why some in Washington are
calling for C-Corp only tax reform. If we leave America's small
entrepreneurs behind, big business wins as usual and Congress
will only have themselves to blame. We need comprehensive tax
reform for all businesses, C-Corp or pass-through, large and
small, family owned or publicly traded. Washington must create
an environment in which manufacturers cannot only compete
globally but can defeat our competition.
This is not about paying less taxes, it is about the
government being smarter about who it taxes and how. The top
tax rate for pass-throughs is 39.6% and 44% when factoring in
health care taxes, higher than 35% C-Corp rate, which Congress
is considering lowering to 25-30%. Some are arguing that
lowering the rates for pass-throughs will amount to a tax cut
for Wall Street and pharmaceutical giants. I assure you that
does not describe us nor do we have plans to reincorporate in
Ireland, but do want to grow here in the U.S. if Congress lets
us.
GPPs current federal effective tax rate is 39.4%, far
higher than our C-Corp counterparts, not to mention the Chinese
companies who we really are competing against. In 2008, we had
a 28.07% effective federal tax rate with the Alternative
Minimum Tax. That 11.33% jump in our tax liability cost us
hundreds of thousands of dollars we could have used to hire
more workers for the machines we would have purchased. Instead,
we sent that money to Washington rather than putting it in
workers' pockets. Yes, I said workers' because at GPP last year
we reinvested 71% of our profits back into the business. When
we can leave the money in the business instead of sending it to
bureaucrats and politicians, it generates additional payroll
and sales tax revenue as we add employees and order new
machines.
I believe that small businesses can continue driving the
economy and serving as the backbone of our nation. However,
Washington's inaction on comprehensive reform and Congress
allowing the continued expiration of key tax provisions creates
a globally uncompetitive environment for small businesses
manufacturing in America. Absent updating the Code for all
companies, Congress must make permanent Bonus Depreciation,
Section 179 Equipment Expensing, and the R&D Tax Credit to
allow small businesses to invest and plan for the future.
Remember, Congressional inaction can cause as much harm as
acting and nowhere have those negative effects been felt more
than by the small businesses on Main Street.
Thank you for the opportunity to testify before you today
on this important issue.
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Thank you for the opportunity to appear today in front of
your Committee. My name is Rich Shavell, and I am testifying
today on behalf of Associated Builders and Contractors (ABC), a
national construction industry trade association with 70
chapters representing nearly 21,000 chapter members. I am
President of Shavell & Company, P.A., a full service CPA and
consulting firm that focuses on services to closely-held
commercial contractors. These are the general contractors,
subcontractors, highway, and infrastructure contractors who
build many of the great projects in South Florida and
Southeastern United States.
The subject of this hearing is highly appropriate, as small
businesses are indeed the employer of choice for the average
American, not only within the commercial construction industry,
but throughout the US economy as a whole. They provide the
engine for economic growth and job creation, and reflect the
spirit of free enterprise in its most basic form. Moreover,
small businesses, particularly small contractors are excellent
employers for several reasons:
First, there is plenty of opportunity for
workers choosing a career in commercial construction
because the industry currently faces a labor shortage.
I recently met with a small contractor who must turn
down work because he cannot field sufficient numbers of
qualified workers--and he is not alone.
Secondly, training is available for new
workers to the industry and in most cases these
individuals do not even need to pay for apprenticeship
training if they meet certain employment requirements.
Third, there is excellent money for workers
pursuing a career in the commercial construction
industry. Via the ABC Institute (www.WeTrain.org) in
South Florida, the Department of Labor has quantified
the value of being a graduated Registered Apprentice at
over $300,000 during the career of the typical
workers.i
Fourth, the construction industry fosters
the realization of the American Dream. The majority of
the owners of my clients started out in the field
working for someone else. Through effort and
determination many construction workers find themselves
picking-up small jobs and working them with their peers
after hours and on weekends. Anecdotal evidence suggest
that seasoned workers can earn significant amounts of
money this way until they are ready to leave their
regular position to pursue their own businesses on a
full-time basis.
The term small business can be parsed in many ways, be it
number of employees, amount of annual revenue, or any number of
other metrics, but perhaps the most useful proxy is the use of
pass-through entities. The pass-through structure is the
simplest, most straightforward option for small, closely-held
and family-owned Main Street businesses that have little use
for the capital markets. As a result, according to a 2011 study
by Ernst & Young, nearly 95 percent of all US businesses are
structured as pass-through entities.ii These pass-
through businesses generate 54 percent of all net business
income, and employ 54 percent of all private sector
employees.iii
In other words, small business is the employer of choice
for most Americans because that is simply where the jobs are.
According to the Small Business Administration, small
businesses account for nearly two thirds of all net new
jobs.iv Construction is no different- according to
Tax Foundation analysis of US Census data, the 94 percent of
contractors structured as pass-through entities employ over 75
percent of the more than 7.5 million workers employed in the
industry.v And, as noted above, given the inherently
entrepreneurial bent of the skilled trades, today's laborer or
independent contractor is likely to be tomorrow's small
business employer.
The single biggest challenge facing small business today is
widespread uncertainty- uncertain economic prospects, an
uncertain regulatory environment, and uncertain tax policy.
While the Congress can't very well control the ebb and flow of
the business cycle, it can and must do better to relieve the
self-inflicted economic constraints caused by regulatory
overreach and anti-growth tax policies.
After years of Congressional showdowns and kicking the can
on marginal tax rates, business owners finally get some needed
tax certainty in 2013 when the ``fiscal cliff'' ended in
permanent policy for the first time in over a decade.
Unfortunately for the pass-through community, certainty is no
salve for onerous tax policy. The terms of the fiscal cliff
agreement took a 35 percent top rate on pass-through
businesses, one that mirrored the C-Corp rate, and raised it to
39.6 percent. With the coincidence of Affordable Care Act
implementation (and its associated taxes) in the same year, the
combined marginal rate for many Main Street businesses surged
nearly 25 percent higher than that faced by the Fortune 500.
This sudden structural disadvantage gives a window into why
permanence must not be an end goal in and of itself- first and
foremost the aim must be to set prudent tax policy that helps
the economy and its key driver, the small business.
We ask Congress to now take a step in that direction - of
prudent tax policy - by rectifying a problem it put in place
almost 30 years ago. In 1986 Congress passed legislation that
was intended to curb abuses by aerospace and defense
contractors and how they utilized the Completed Contract
Method. The required use of the Percentage of Completion Method
(PCM) was forced upon all businesses that perform construction
services. There were a few carve outs, namely for home
builders. But commercial contractors got the short end and have
been increasingly paying for it ever since.
A ``small contractor'' exception was put in place in 1986
with a $10 million average annual revenue threshold,
demonstrating Congress' intent to shield these small
businesses. Yet this figure was not indexed for inflation and
almost 30 years later the threshold has never been updated. By
comparison, the Small Business Administration's current
standard puts the definition of a small contractor in certain
construction categories at $36.5 million. Congress needs to do
three things:
1. First, update the small contractor threshold in
section 460(e) from $10 million to $40 million;
2. Index the threshold going forward; and
3. Eliminate the Section 56(a)(3) add back
requirement for Alternative Minimum Tax (AMT) purposes.
This third item eliminates the requirement that long-term
contracts be reported under the PCM solely for AMT purposes.
And a further horrific result is that the small contractor must
then go through complex computations under the look-back method
solely for AMT purposes. By eliminating the AMT adjustment, as
we recommended, this onerous look-back requirement is
eliminated for so many small businesses.
Next Congress needs to finally address the so-called tax
``extenders,'' the 52 tax provisions and incentives that
expired at the end of 2014, just days after having been renewed
retroactively. These assorted tax provisions have little in
common, other than the fact that they are temporary, and now,
having been lumped together at some point over the years, are
presumed to be extended each year in perpetuity. The problem,
of course, is that many (if not all) of these provisions are
premised upon stimulating or otherwise incentivizing economic
behavior, so unless enacted well in advance they yield
diminishing returns. While Congress may be able to go back and
retroactively extend tax policies to apply to the previous
year, contractors don't have the same luxury with their capital
investments and business planning.
This year is a perfect example of the trouble with the
current practice. As the year end approaches, the small
business owner must project their 2015 taxes both with and
without these tax provisions. They are left with a terrible
choice: pay-in more taxes based on these laws not being
effective or take the chance that the law will be passed. This
is no way to do business, and the cash flow impact can limit
expansion plans, force contraction, affect hiring decisions and
even employee benefits that may or may no longer be available
to employees.
Going back to the imperative of prudent tax policy, it is
incumbent on Congress to go through these measures line by line
to determine what belongs in the underlying tax code, and what
should be allowed to expire or stand on its own merits, however
temporarily, without hijacking the broader package.
The House has already done yeoman's work in separating out
broad based tax policies from rifle shot carve-outs, passing
half a dozen key extender provisions on a permanent basis, and
establishing a strong bipartisan agreement in favor of tax
relief and certainty for small business. These bills include
top priorities for ABC and the construction industry, in
particular making permanent increased expensing under Section
179 and 50 percent bonus depreciation, respectively.
In a capital-intensive business such as construction,
expensing and accelerated depreciation create a tremendous
incentive to invest in equipment that might otherwise be cost
prohibitive. The ability to write off up to $500,000 in
qualified purchases under Section 179 strongly encourages this
sort of spending, while the precipitous drop to $25,000 under
current law (after the expiration of last year's extenders
bill) would have a disastrous effect, as cautious contractors
opt to delay or forego these purchases altogether. More
cavalier counterparts, on the other hand, are stuck with big
ticket items and an unexpected tax bill as they find themselves
unable to utilize these anticipated accelerated deductions.
Likewise, traditional extenders such as the research and
development (R&D) tax credit enjoy a wide, bipartisan consensus
in Congress and should be made part of the permanent code. The
R&D credit in particular has been extended 16 times since 1981,
and is effectively viewed as part of the code, but in the
meantime has turned into a must-pass vehicle for extraneous
policy to attach itself it. Other sensible policies supported
by contractors needlessly tied up in the extenders include:
15-year straight-line cost recovery for
qualified leasehold, restaurant and retail
improvements;
the abbreviated five-year built-in gain
holding period for S Corporations;
the 179D deduction for energy efficient
commercial buildings;
Empowerment/Enterprise Zone Credits; and
Work Opportunity Tax Credits
Small businesses are the employer of choice for most
Americans, but without a commitment - and action - by Congress
this status may be soon jeopardized. Congress needs to:
End the annual extenders debacle and make
permanent those provisions that belong in the
underlying code.
Fix the unfortunate and unintended accident
of 1986 whereby all construction contractors regardless
of size are now forced to report income under the
percentage-of-completion method; and
Address the recently inflated income tax
rates that now befall profitable small businesses
structured as pass-through entities.
Some of this can be done piecemeal, through easy fixes,
such as reform of the small contractor definition under Section
460(e); others will require the political will to pass broad-
based, fundamental tax reform. Until these issues are
addressed, small business is playing with one hand tied behind
its back.
--------------------
iU.S. Department of Labor. Apprenticeship: Frequently
Asked Questions. http://www.dol.gov/apprenticeship/faqs.htm
iiCarroll, Robert and Prante, Gerald. (April 2011). The
Flow-Through Business Sector and Tax Reform. http://www.s-corp.org/wp-
content/uploads/2011/04/Flow-Through-Report-Final-2011-04-08.pdf
iiiIbid.
ivOffice of Advocacy, U.S. Small Business
Administration. (September 2012). Frequently Asked Questions about
Small Business. https://www.sba.gov/sites/default/files/
FAQ--Sept--2012.pdf
vPomerleau, Kyle. (January 2015). An Overview of Pass-
through Businesses in the United States. http://taxfoundation.org/
sites/taxfoundation.org/files/docs/TaxFoundation--SR227.pdf
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
[all]