[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
              
              
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                   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.

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    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

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