[Congressional Record Volume 147, Number 10 (Thursday, January 25, 2001)]
[Senate]
[Pages S576-S581]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]

      By Mr. BOND:
  S. 189. A bill to amend the Internal Revenue Code of 1986 to provide 
tax relief for small businesses, and for other purposes; to the 
Committee on Finance.
  Mr. BOND. Mr. President, I rise because I have just come from a very 
interesting and informative hearing in the Budget Committee. Federal 
Reserve Chairman Alan Greenspan came in today to talk about what he has 
seen as the tremendous productivity growth in this economy. The 
productivity growth essentially has come about because of the 
investment in information technology which has allowed our country to 
produce more in less time and to increase the output of the many 
sources of goods and services in this country. It has brought with it, 
as Chairman Greenspan noted, a significant increase in revenues to the 
Federal Government, which are allowing us to pay down even more rapidly 
than previously thought the debt now held by the public.
  Last year, Chairman Greenspan was adamant. He said the best thing we 
could do was to pay down the debt. He said, ``I have absolutely zero 
concern that we are going to pay the debt down too fast.'' Remarkably, 
today he has said that there is a real danger: We are potentially 
paying down the debt too quickly. He said if we get to the point where 
we have paid down the debt and the Federal Government is starting to 
accumulate private assets--in other words, having to put its surpluses 
into investments in the country--we could have a serious political 
problem. He therefore said that, in addition to continuing debt 
reduction, it is time to take ``surplus-lowering policy initiatives.''
  Now sometimes the Chairman doesn't speak in the clearest language, 
and we questioned him as to what he meant. He indicated that a 
reduction in taxes beginning now, prior to the time we get to the point 
where there is no debt held by the public, is a good idea. He said, 
from an economist's standpoint, the most effective way to generate 
growth in the economy is to reduce marginal rates.
  Well, this was very informative and useful testimony. I urge my 
colleagues to read it. He also warned that we are in serious trouble if 
we follow the path we have followed in this Congress and in the last 
several years of spending explosions, going above the budget and 
continuing to spend more. He said that spending too much can be a real 
danger. There is much less danger of cutting taxes too much because 
there are limits on how much taxes can be cut.
  Mr. President, I introduce the Small Business Works Act of 2001. This 
legislation is built on one inescapable fact--small business ``works'' 
in this country. The men and women who venture into small businesses 
take incredible risks. They work countless hours, often seven days a 
week, just to see their businesses break even. They risk their life 
savings and often capital put up by family and friends. And they forego 
valuable time with their families all for the promise of working for 
themselves and creating prosperous businesses in their communities.
  Our country also reaps the benefits of successful small enterprises. 
According to the Small Business Administration, small businesses 
represent more than 99 percent of all employers, employ 53 percent of 
the private work force, and create about 75 percent of the new jobs in 
this country. In addition, these small firms contribute 47 percent of 
all sales in this country, and they are responsible for 51 percent of 
the private gross domestic product. With these kinds of results, it is 
quite clear that small business works for America.
  Despite their success in recent years, one thing clearly does not 
work for small business--the Internal Revenue Code. Instead of 
collecting the lowest amount of taxes necessary in the least burdensome 
manner, the current tax law represents a morass of rules, regulations, 
forms, and, of course, penalties, with which the self-employed must 
contend. Just to put this into perspective, by some estimates, small 
business owners spend more than 5 percent of their revenues just to 
comply with the tax laws. In fact, a small business owner from Kansas 
City testified before the Senate Committee on Small Business that his 
business routinely spends more than 16 percent of the company's net 
income just to keep the records and file the appropriate tax forms. And 
that's even before he writes the tax check.
  These revenues are taken away from the business and spent on 
accountants, bookkeepers, and lawyers to sort out all the rules and 
filing requirements. In addition, small business owners must dedicate 
valuable time and energy on day-to-day recordkeeping and other 
compliance requirements, all of which keep them from doing what they do 
best--running their business.
  And then there are the taxes themselves. As the chairman of the 
Committee on Small Business, I have heard from small business owners in 
Missouri and across this country that they are more than willing to pay 
their fair share of taxes. What they object to, however, is paying high 
tax bills and vast amounts for professional tax assistance only to end 
up the victim of an unfair tax code.
  Mr. President, the legislation I introduce today continues my long-
standing commitment to helping small businesses obtain much needed tax 
relief and common-sense simplifications of our tax laws. For their 
unending contribution to the prosperity of this country, they deserve 
no less.
  The bill is designed to complement the broad-based tax stimulus 
package that President Bush has proposed. With an economy that appears 
to be slowing, small businesses are likely to be among the first 
affected. We need to ensure that they benefit from any tax stimulus we 
enact this year to secure their continued vitality in the future.
  The Small Business Works Act also draws from the priorities of the 
nation's small business organizations including the National Federation 
of Independent Business, the Small Business Legislative Council, and 
many others. While there are too many organizations to name them all 
individually, I am grateful for their ideas, their insights, and their 
support, without which this bill would not have been possible.
  This legislation also includes recommendations from the National 
Women's Small Business Summit, which I chaired in Kansas City, 
Missouri, last June. That summit brought together hundreds of women 
business owners who focused on specific areas of concern to their 
businesses, one of which was taxes. As the Summit's final report 
concludes, ``the Congress and the Executive Branch have a new mandate--
listen to what women small-business owners have said and answer their 
call to action.'' During the Summit, I listened carefully to the views 
and recommendations of the participants, and with this legislation I am 
taking steps to answer their needs.
  Lastly, this bill incorporates a number of the recommendations that 
the Internal Revenue Service (IRS) National Taxpayer Advocate set out 
in

[[Page S577]]

his Annual Report to Congress for 2001. The Taxpayer Advocate has 
become an invaluable resource for identifying problems facing small 
business taxpayers and offering legislative proposals to address them.
  Mr. President, the Small Business Works Act recognizes the incredible 
contribution that entrepreneurs, farmers and ranchers, and home-based 
business owners continually make to our economy despite the financial 
and paperwork headaches they face at every turn. To ease those burdens, 
the legislation provides tax relief for the self-employed and small 
firms, includes broad ranging tax simplifications for small 
enterprises, and accords small businesses greater protection as they 
strive to comply with our increasingly complex tax code.
  When it comes to paying taxes, small business really works for the 
government. According to recent IRS data, small business owners pay 
approximately 40 percent of the nearly $2 trillion that the Federal 
government collects each year. With the growing budget surpluses, small 
businesses, like American families, are clearly paying more than the 
government needs to carry out its programs and obligations. So when we 
talk about a tax cut, small enterprises cannot be left behind. The 
Small Business Works Act embraces that fact by reducing the tax burden 
on small firms in several ways.
  First, the bill includes the legislation that I introduced earlier 
this week to provide 100 percent deductibility of health insurance for 
the self-employed beginning this year. This was among the top 
priorities named by the National Women's Small Business Summit last 
summer, and it has been identified by the IRS National Taxpayer 
Advocate as a legislative recommendation for small business taxpayers.

  With the self-employed able to deduct only 60 percent of their 
health-insurance costs today, and only 70 percent next year, it comes 
as no surprise that 24.2 percent of the self-employed still do not have 
health insurance. In fact, 4.8 million Americans live in families 
headed by a self-employed individual and have no health insurance. A 
full deduction will make health insurance more affordable to the self-
employed and help them and their families get the health-insurance 
coverage that they need and deserve today--not years in the future.
  Full deductibility also levels the playing field for the self-
employed, who for too long have only had partial deductibility while 
their large corporate competitors have been able to deduct all of their 
insurance costs. Full deductibility against income taxes, however, is 
only part of the battle. My bill also corrects an additional 
peculiarity of the tax code, which prevents the self-employed from 
deducting their health-insurance premiums against their self-employment 
taxes. As the Taxpayer Advocate noted in his 2001 Report to Congress, 
``[a]lthough self- employed individuals can reduce their taxable income 
by the cost of their health insurance, they still must pay self-
employment taxes on this amount.'' In contrast, the Taxpayer Advocate 
continues, ``Wage earners who participate in pre-tax plans do not pay 
Social Security tax on their health insurance payments.'' My bill 
eliminates this narrow disparity in the law and allows the self-
employed to exclude their health-insurance premiums from their self-
employment tax.
  As a result, the self-employed will truly be on an equal footing with 
owners and employees of corporations whose health-insurance benefits 
are not subject to income or employment taxes. It is a simple matter of 
fairness.
  Second, the Small Business Works Act addresses the increasingly 
onerous consequences of the individual and corporate Alternative 
Minimum Tax (AMT). For the sole proprietors, partners, and S 
corporation shareholders, the individual AMT increases their tax 
liability by, among other things, reducing depreciation and depletion 
deductions, limiting net operating loss treatment, eliminating the 
deductibility of state and local taxes, and curtailing the expensing of 
research and experimentation costs. In addition, because of its 
complexity, this tax forces small business owners to waste precious 
funds on tax professionals to determine whether the AMT even applies. 
For these reasons, the bill includes the recommendation of the Taxpayer 
Advocate to repeal the individual AMT. This will be accomplished by 
eliminating 20 percent of the tax each year until it is completely 
repealed in 2006.
  For small corporations, the AMT story is much the same--high 
compliance costs and additional taxes draining away scarce capital from 
the business. In fact, the Committee on Small Business heard at a 
hearing in the last Congress that the corporate AMT resulted in a 
$95,000 tax bill for one small business in Kansas City, all because the 
company purchased life insurance on the father, who was the primary 
owner of the business, to prevent the estate tax from closing the 
company down. That type of nonsense must come to an end here and now.
  Accordingly, for small corporate taxpayers, the bill increases the 
current exemption from the corporate AMT. As a result, a small 
corporation will initially qualify for the exemption if its average 
gross receipts are $7.5 million or less (up from the current $5 
million) during its first three taxable years. Thereafter, a small 
corporation will continue to qualify for the AMT exemption for as long 
as its average gross receipts for the prior three-year period do not 
exceed $10 million (up from the current $7.5 million).
  Third, the Small Business Works Act, repeals the unemployment surtax. 
Since 1976, small businesses have had to bear the burden of a 0.2 
percent surtax on the unemployment taxes they pay for their employees. 
This surtax was enacted to repay loans from the Federal unemployment 
fund made during the 1974 recession. Those loans were fully repaid in 
1987, and yet the surtax continues to be extended, adding to the tax 
burden facing small employers. With the Federal surplus proving that 
small businesses are paying too much, this tax clearly should go.
  Fourth, the Small Business Works Act incorporates a central piece of 
President Bush's tax plan to help businesses dedicated to developing 
new products and technology; it permanently extends the research and 
experimentation tax credit. Over the years this credit has stimulated 
research and development in this country and has contributed to the 
leadership of American businesses in the technological revolution. 
Unfortunately, this credit has also had a checkered history of 
expiration and reauthorization, which is simply untenable for 
businesses trying to plan for long-term research programs. It is time 
to end the on-again/off-again nature of this credit and provide 
businesses the certainty of knowing it will be available for the 
future.
  Finally, the bill responds to the recommendation from the National 
Women's Small Business Summit to enhance the business-meals deduction. 
Unlike their large competitors, small enterprises often sell their 
products and services by word of mouth and close many business 
transactions on the road or in a local diner. In many ways the business 
breakfast with a potential customer is akin to formal advertising that 
larger businesses purchase in newspapers or on radio or television. 
While the newspaper ad is fully deductible, however, the business meal 
is only 50 percent deductible for the small business owner.
  In addition, individuals who are subject to the Federal hours-of-
service limitations of the Department of Transportation (such as truck 
drivers) are currently able to deduct 60 percent of their business 
meals and are on schedule to deduct up to 80 percent in coming years. 
As a result, small business owners have a significant lack of parity 
with individuals subject to hours-of-service limitations. Accordingly, 
the Small Business Works Act increases the limitation on the 
deductibility of business meals from the current 50 percent to 80 
percent beginning in 2001.
  As chairman of the Committee on Small Business, I spent considerable 
time in the last Congress examining the paperwork and filing burdens on 
small enterprises. According to research completed by the General 
Accounting Office at my request, there are more than 200 forms and 
schedules that a small business owner could have to file. That's a 
daunting universe of forms, which boils down to more than 8,000 lines, 
boxes, and data requirements. These forms are also accompanied by more 
than 700 pages of instructions--not including the countless pages of 
the tax code, regulations, rulings, and other IRS guidance.

[[Page S578]]

  Since entrepreneurs usually open their own businesses to work for 
themselves, not to waste valuable time and resources on government 
filing and recordkeeping requirements, the Small Business Works Act 
includes several provisions to simplify the tax code and let small 
business owners get on with their work.
  First, in continuation of my effort in the last Congress, the bill 
includes my Small Business Tax Accounting Simplification Act, with some 
improvements. This provision allows a small business to use the cash 
method of accounting, rather than the more onerous accrual method, if 
the business' average annual gross receipts are less than $5 million. 
This proposal has been strongly endorsed by small business 
associations, including the National Federation of Independent Business 
and the Associated Builders and Contractors, and most recently by the 
Taxpayer Advocate stressing the need for simplifying the tax accounting 
rules.
  More critically, the bill allows businesses that require merchandise 
in the performance of their services to use the cash method of 
accounting for all purposes. This provision responds to the pleas for 
help from small service providers, such as painters and contractors, 
who have recently become the focus of the IRS' attention, to the tune 
of thousands of dollars in taxes and penalties, not to mention 
accounting fees. And for what? A difference in timing, when the small 
business will ultimately pay the same amount of taxes? This change in 
the tax code is long overdue and will dramatically simplify the tax 
rules for countless small businesses.
  At the National Women's Small Business Summit last summer, the 
participants raised another area of complexity for America's 
entrepreneurs--depreciation. The Small Business Works Act addresses 
this issue, in large part, by increasing the amount of equipment that 
small firms can expense each year to $50,000 and thereby avoid the 
complex depreciation rules. This bill also adjusts the phase-out 
limitation on expensing to permit more small businesses to purchase 
basic equipment without losing the benefit of immediate expensing. This 
limitation has not been increased since 1986, and as a result it is 
sorely out of step with the cost of new technology, which has risen 
dramatically over the past decade.
  In addition, the bill responds to another recommendation of the 
Taxpayer Advocate by permitting computer software to be expensed. For 
computers and software purchased over the new $50,000 expensing limit, 
the bill modifies the present law to allow this technology to be 
depreciated over two years. Currently, computer equipment is generally 
depreciated over a five- year period and software is usually 
depreciated over three years. Any small business owner will tell you 
that a computer is largely obsolete well before three years of use, let 
alone five years. And computer software becomes outdated even faster. 
As a result, small business owners are left with thousands of dollars 
of depreciation on their books well after the equipment or software is 
obsolete. The bill makes the tax code in this area more consistent with 
the technological reality of the business world.
  The Small Business Works Act also amends the limitations on the 
amount of depreciation that business owners may claim for vehicles used 
for business purposes. Under current law, a business loses a portion of 
its depreciation deduction if the vehicle placed in service in 2000 
costs more than $14,400. Although these limitations have been subject 
to inflation adjustments, they have not kept pace with the actual cost 
of new cars and vans in most cases. For many small businesses, the use 
of a car or van is an essential asset for transporting personnel to 
sales and service appointments and for delivering their products. 
Accordingly, the bill adjusts the thresholds so that a business will 
not lose any of its depreciation deduction for vehicles costing less 
than $25,000, which will continue to be indexed for inflation.
  Mr. President, another source of complexity for many small business 
owners are the estimated tax rules and the differing thresholds 
depending on the owner's income level. In fact, this issue was the 
number three legislative recommendation of the Taxpayer Advocate this 
year. The Small Business Works Act restores the simple two-option rule 
to avoid the interest penalty for underpayment of estimated taxes, 
which has been repeatedly altered in recent years primarily to raise 
revenues. To end that headache for the self-employed, the bill allows 
an individual to satisfy the requirements of the code if his estimated 
taxes are equal to 90 percent of the current year's tax bill or 100% of 
last year's tax bill--a simple and straightforward rule so small 
business owners can stop wasting time on tax preparation and get back 
to work.
  The Small Business Works Act also addresses a complexity issue raised 
by the IRS National Taxpayer Advocate concerning small businesses 
jointly owned by a husband and wife. As noted by the Advocate in his 
2001 Report to Congress: ``A married couple operating a small business 
must comply with the complex partnership reporting requirements. Even 
though the married couple files a joint tax return, the law requires 
them to treat the business as a partnership rather than a sole 
proprietorship. . . . [the] IRS estimates it takes over 200 hours 
longer to complete a partnership return than a Sole Proprietorship 
Schedule C.'' In light of this situation, the bill amends the tax code 
to permit married couples who jointly own a small business to opt out 
of the partnership rules and file as a sole proprietorship.
  Mr. President, in the 105th Congress, we took bold steps to 
restructure the IRS and improve the quality of service that taxpayers 
receive. Since the IRS Restructuring and Reform Act was enacted in 
1998, the IRS made great strides to redirect the agency and balance its 
dual mission of collecting tax revenues and serving taxpayers in a fair 
and respectful manner.
  With the growing complexity of our tax code, however, opportunities 
abound for small businesses to make honest mistakes. The IRS 
Restructuring and Reform Act provided important protections for all 
taxpayers, but work remains to ensure that small businesses are treated 
justly under the tax laws. The Small Business Works Act addresses 
several issues that small businesses continue to report as major 
problems.
  A top concern is the excessive nature of penalties and interest 
imposed on taxpayers who make mistakes. Far too often, a minor tax bill 
grows into an unmanageable liability because of the interest on the tax 
owed, the penalties for negligence and late payment, and the interest 
on the penalties. Frequently, these penalties can prevent a small 
business owner from settling his account and getting back into good 
standing.

  Penalties were included in the tax code to encourage taxpayers to 
comply with our voluntary assessment system, and interest was intended 
to compensate the government for the lost use of tax dollars. But the 
multiplicity of penalties and hidden punishments disguised as interest 
on those penalties seriously undermines Americans' confidence that our 
system is fair.
  The Small Business Works Act stops the runaway freight train of 
excessive penalties and interest in two ways. First, the bill 
eliminates the failure-to-pay penalty, which is part of the multiple 
penalties often applied to the same error. Penalties should punish bad 
behavior, not honest errors that even well-intentioned people are bound 
to make now and then. Second, the bill stops the practice of charging 
interest on penalties. Instead, interest will only be applied to the 
taxes due, just like interest is charged on a credit card for unpaid 
balances. Both of these changes implement recommendations of the 
Taxpayer Advocate. Again, it's simply a matter of fairness.
  The bill also addresses the issue of electronic filing of tax 
returns. In the 1998 IRS Restructuring and Reform Act, we set a goal 
for the IRS to make electronic filing the most practical and preferred 
method of filing so that 80 percent of taxpayers would choose to file 
electronically by 2007. While I continue to support that goal, I am 
concerned that the temptation for ensuring that the goal is reached 
will lead to mandatory electronic filing. At a time when small firms 
are already faced with daunting government mandates just in completing 
their tax returns, the last thing they need is a new mandate for filing 
them. To prevent that

[[Page S579]]

result, my bill makes clear that expanded electronic filing of tax and 
information returns will be a voluntary option for small businesses, 
not another government mandate.
  The taxpayer protections included in the bill are intended to strike 
a balance for small business taxpayers. On the one hand, the bill eases 
the excessive punishment imposed for honest errors and reduces the 
burdens faced by taxpayers subject to an audit by the IRS. On the 
other, it preserves the agency's authority to enforce the tax laws and 
prevent individuals from cheating the tax system, which in the end 
increases the tax burden on all Americans.
  Mr. President, the legislation I introduce today is a commonsense 
package of tax relief, simplification, and protections for America's 
small businesses who work so hard. As we strive in the coming weeks to 
enact tax-relief legislation, I urge my colleagues to remember that 
small business works in America, the jobs they provide in our local 
communities are too important, and they simply cannot be left behind.
  I ask unanimous consent to have printed in the Record following the 
text of my statement a description of the bill's provisions, and 
letters I have received from small business organizations supporting 
the Small Business Works Act.
  There being no objection, the material was ordered to be printed in 
the Record, as follows:

                    Self Business Works Act of 2001


                   title I--small business tax relief

     Self-Employed Health Insurance Deductibility
       The bill amends section 162(l)(1) of the Internal Revenue 
     Code to increase the deduction for health-insurance costs for 
     self-employed individuals to 100 percent beginning on January 
     1, 2001. Currently the self-employed can only deduct 60 
     percent of these costs. The deduction is not scheduled to 
     reach 100 percent until 2003, under the provisions signed 
     into law in October 1998. The bill is designed to place self-
     employed individuals on an equal footing with large 
     businesses, which can currently deduct 100 percent of the 
     health-insurance costs for all of their employees.
       In addition, the bill corrects a disparity under current 
     law that bars a self-employed individual from deducting any 
     of his or her health-insurance costs if the individual is 
     eligible to participate in another health-insurance plan. 
     This provision affects self-employed individuals who are 
     eligible for, but do not participate in, a health-insurance 
     plan offered through a second job or through a spouse's 
     employer. That insurance plan may not be adequate for the 
     self-employed business owner, and this provision prevents the 
     self-employed from deducting the costs of insurance policies 
     that do meet the specific needs of their families. In 
     addition, this provision provides a significant disincentive 
     for self-employed business owners to provide group health 
     insurance for their employees. The bill ends this disparity 
     by clarifying that a self-employed person loses the deduction 
     only if he or she actually participates in another health-
     insurance plan.
       The bill also levels the playing field by permitting self-
     employed individuals to deduct the cost of their health 
     insurance against their self-employment taxes. This change 
     will put the self-employed on an equal footing with owners 
     and employees of corporations whose health-insurance benefits 
     are not subject to employment taxes.
     Alternative Minimum Tax Relief
       The bill repeals the individual Alternative Minimum Tax 
     (AMT) by 2006. For individual taxpayers, the individual AMT 
     has become an increasingly burdensome tax. For the sole 
     proprietors, partners, and S corporation shareholders, the 
     individual AMT increases their tax liability by, among other 
     things, limiting depreciation and depletion deductions, net 
     operating loss treatment, the deductibility of state and 
     local taxes, and expensing of research and experimentation 
     costs. In addition, because of its complexity, this tax 
     forces small business owners to waste precious funds on tax 
     professionals to determine whether the AMT even applies.
       The bill addresses these issues by eliminating 20 percent 
     of the individual AMT each year until complete repeal is 
     achieved in 2006. During the phase-out period, the bill 
     extends the current exclusion of personal tax credits from 
     the AMT, and it coordinates the farm income-averaging rules 
     with the AMT to ensure that farmers and ranchers do not lose 
     the benefits of income averaging.
       For small corporate taxpayers, the bill increases the 
     current exemption from the corporate AMT, under section 55(e) 
     of the Internal Revenue Code. Under the bill, a small 
     corporation will initially qualify for the exemption if its 
     average gross receipts are $7.5 million or less (up from the 
     current $5 million) during its first three taxable years. 
     Thereafter, a small corporation will continue to qualify for 
     the AMT exemption for so long as its average gross receipts 
     for the prior three-year period do not exceed $10 million (up 
     from the current $7.5 million). The increased limits for the 
     small-corporation exemption from the corporate AMT will be 
     effective for taxable years beginning after December 31, 
     2000.
     Repeal of Federal Unemployment Surtax
       In 1976, a surtax of 0.2 percent was added to the Federal 
     Unemployment Tax to repay loans from the Federal unemployment 
     fund made during the 1974 recession. Those loans were fully 
     repaid in 1987. Accordingly, the bill repeals the 0.2 percent 
     surtax beginning in taxable year 2001.
     Extend Research and Experimentation Tax Credit Permanently
       The bill permanently extends the research and 
     experimentation (R&E) tax credit, which has been a valuable 
     resource for businesses developing new products. Under 
     current law, the R&E tax credit is set to expire on June 30, 
     2004.
     Increased Deduction for Business Meal Expenses
       The bill increases the limitation on the deductibility of 
     business meals from the current 50 percent to 80 percent 
     beginning in 2001. Unlike their large competitors, small 
     enterprises often sell their products and services by word of 
     mouth and close many business transactions on the road or in 
     a local diner. In addition, individuals who are subject to 
     the Federal hours-of-service limitations of the Department of 
     Transportation (such as truck drivers) are currently able to 
     deduct 60 percent of their business meals and are on schedule 
     to deduct up to 80 percent in coming years. Accordingly, the 
     bill corrects this significant lack of parity for small-
     business owners by putting them on par with individuals 
     subject to hours-of-service limitations and their large 
     competitors.


              title II--small business tax simplification

     Clarification of Cash Accounting Rules for Small Businesses
       The bill amends section 446 of the Internal Revenue Code to 
     provide a clear threshold for small businesses to use the 
     cash receipts and disbursements method of accounting, instead 
     of accrual accounting. To qualify, the business must have $5 
     million or less in average annual gross receipts based on the 
     preceding three years. Thus, even if the production, 
     purchase, or sale of merchandise is an income-producing 
     factor in the taxpayer's business, the taxpayer will not 
     be required to use an accrual method of accounting if the 
     taxpayer meets the average annual gross receipts test.
       In addition, the bill provides that a taxpayer meeting the 
     average annual gross receipts test is not required to account 
     for inventories under section 471. The taxpayer will be 
     required to treat such inventory in the same manner as 
     materials or supplies that are not incidental. Accordingly, 
     the taxpayer may deduct the expenses for such inventory that 
     are actually consumed and used in the operation of the 
     business during that particular taxable year.
       The bill indexes the $5 million average annual gross 
     receipts threshold for inflation. The cash-accounting safe 
     harbor will be effective for taxable years beginning after 
     December 31, 2000.
     Increase in Expense Treatment for Small Businesses
       The bill amends section 179 of the Internal Revenue Code to 
     increase the amount of equipment purchases that small 
     businesses may expense each year from the current $24,000 to 
     $50,000. This change will eliminate the burdensome 
     recordkeeping involved in depreciating such equipment and 
     free up capital for small businesses to grow and create jobs.
       The bill also increases the phase-out limitation for 
     equipment expensing from the current $200,000 to $400,000, 
     thereby expanding the type of equipment that can qualify for 
     expensing treatment. This limitation along with the annual 
     expensing amount will be indexed for inflation under the 
     bill.
       Following the recommendation of the National Taxpayer 
     Advocate, the bill also amends section 179 to permit 
     expensing in the year that the property is purchased or the 
     year that the property is placed in service, whichever is 
     earlier. This will eliminate the difficulty that many small 
     firms have encountered when investing in new equipment in one 
     tax year (e.g., 2000) that cannot be placed in service until 
     the following year (e.g., 2001). The bill also expands 
     section 179 to permit the expensing of computer software up 
     to the new $50,000 limit.
       The equipment-expensing provisions will be effective for 
     taxable years beginning after December 31, 2000.
     Modification of Depreciation Rules
       The bill modifies the outdated depreciation rules to permit 
     taxpayers to depreciate computer equipment and software over 
     a two-year period. Under present law, computer equipment is 
     generally depreciated over a five-year period and software is 
     usually depreciated over three years. With the rapid 
     advancements in technology, these depreciation periods are 
     sorely out of date and can result in small businesses having 
     to exhaust their depreciation deductions well after the 
     equipment or software is obsolete. The bill makes the tax 
     code in this area more consistent with the technological 
     reality of the business world.
       The bill also amends section 280F of the Internal Revenue 
     Code, which limits the amount of depreciation that a business 
     may claim with respect to a vehicle used for business 
     purposes. Under the current thresholds, a business loses a 
     portion of its depreciation deduction if the vehicle placed 
     in service in 2000 costs more than $14,400. Although these 
     limitations have been subject to inflation

[[Page S580]]

     adjustments, they have not kept pace with the actual cost of 
     new cars and vans in most cases. For many small businesses, 
     the use of a car or van is an essential asset for 
     transporting personnel to sales and service appointments and 
     for delivering their products. Accordingly, the bill adjusts 
     the thresholds so that a business will not lose any of its 
     depreciation deduction for automobiles costing less than 
     $25,000, which will continue to be indexed for inflation.
     Simplification of Estimated Tax Rules
       The bill simplifies the current rules for calculating the 
     level of estimated taxes necessary to avoid the interest 
     penalty for underpayment of estimated taxes. Currently, small 
     business owners can avoid the interest penalty if they pay 
     estimated taxes equal to at least 90 percent of their tax 
     liability for the current year. Alternatively, for taxable 
     year 2001, small business owners who earned more than 
     $150,000 in taxable year 2000 can avoid the interest penalty 
     if they pay estimated taxes equal to 112 percent of their 
     2000 tax liability. For taxable years 2002 and beyond, the 
     threshold will be 110 percent. In contrast, taxpayers earning 
     $150,000 or less, can avoid the penalty by paying estimated 
     taxes equal to 100 percent of their prior year's tax 
     liability.
       The bill simplifies the estimated-tax rules by providing a 
     consistent test for avoiding the interest penalty: taxpayers 
     must deposit estimated taxes equal to 90 percent of the 
     current year's or 100 percent of the prior year's tax 
     liability. This change will eliminate complex calculations 
     currently required of small business owners and ease strains 
     on the business' cashflow. These changes will be effective 
     for tax years beginning after the date of enactment.
     Exemption from Partnership Rules for Sole Proprietorships 
         Jointly Owned by Spouses
       The Internal Revenue Service (IRS) National Taxpayer 
     Advocate's Annual Report to Congress for 2001 identified a 
     problem facing married couples operating a small business. 
     Although these couples file a joint tax return, they are 
     currently required to comply with the onerous partnership 
     rules instead of being permitted to treat the business as a 
     sole proprietorship. According to IRS estimates, the 
     additional burden of the partnership rules can add more than 
     200 hours to the time required to prepare the business' tax 
     return than would be necessary if it were treated as a sole 
     proprietorship.
       The bill amends section 761 of the Internal Revenue Code to 
     permit married couples who file joint tax returns to opt out 
     of the partnership rules and treat their jointly owned 
     business as a sole proprietorship. It also amends the self-
     employment tax rules to allow such married couples to receive 
     Social Security credits on an individual basis, which they 
     currently receive when filing a partnership return.


             Title III--Small Business Taxpayer Protections

     Taxpayer's right to have an IRS examination take place at 
         another site
       The bill provides that the IRS must accept a taxpayer's 
     request that an audit be moved away from his or her home or 
     business premises if the off-site location (e.g., an 
     accountant's office) is accessible to the auditor and the 
     taxpayer's books and records are available at such a 
     location. This provision will enable the IRS to conduct an 
     audit but without the fear and disruption resulting from the 
     auditor being present in a family home and among a business' 
     employees and customers for days or weeks.
     Clarification that Electronic Filing is a Goal, not a Mandate
       The bill amends the IRS Restructuring and Reform Act of 
     1998 (Public Law 105-206) to clarify that the IRS should set 
     as a goal, but not a mandate, that paperless filing should be 
     the preferred and most convenient means of filing tax and 
     information returns in 80 percent of cases by the year 2007. 
     Concerns have been raised that in order to reach this goal, 
     the IRS may have to require certain taxpayers to file 
     electronically. The bill makes clear that electronic filing 
     should be a voluntary option for taxpayers, not a new 
     government mandate.
     Taxpayer's election with respect to recovery of costs and 
         certain fees
       Under the Internal Revenue Code, a taxpayer may recover 
     costs and fees, including attorney's fees, against the IRS if 
     he or she prevails and the IRS' litigation position was not 
     substantially justified. The Equal Access to Justice Act 
     (EAJA) permits a small business to recover such costs when an 
     unreasonable agency demand for fines or civil penalties is 
     not sustained in court or in an administrative proceeding. In 
     addition, a small business may also recover such costs and 
     fees under the EAJA when it is the prevailing party and the 
     agency enforcement action is not substantially justified. 
     Currently, the EAJA prohibits a taxpayer seeking to recover 
     costs and fees in an IRS enforcement action from doing so 
     under the EAJA if the fees and costs can be recovered under 
     the Internal Revenue Code.
       The bill permits taxpayers to elect whether to pursue 
     recovery of attorney's fees and expenses under the EAJA or 
     the Internal Revenue Code.
     Repeal of the failure-to-pay penalty
       The failure-to-pay penalty was originally enacted in the 
     1960s to compensate for the low rate of interest applied to 
     an individual's tax liability, and for the fact that such 
     interest was not compounded. Today, with interest compounded 
     daily and adjusted for changes in the interest rate, this 
     penalty is no longer needed and serves only as another 
     hidden, second penalty. In addition, this penalty is often 
     applied on top of accuracy-related penalties, resulting in 
     total punishment of as much as 45 percent in non-criminal 
     cases. To simplify the tax rules and reduce the multiplicity 
     of punishment on taxpayers, the bill repeals the failure-to-
     pay penalty.
     Limit Compounded Interest to Underlying Tax
       Under current law, when a taxpayer fails to pay the correct 
     amount of taxes, interest is applied and compounded not only 
     on the underlying tax liability, but also on any penalties 
     assessed. As a result, compound interest becomes an 
     additional penalty. In many cases the interest on penalties 
     can substantially increase the total amount of tax due and 
     jeopardize the small business taxpayer's ability to pay its 
     tax debt. In addition, calculating the interest on penalties 
     adds an additional layer of complexity and compliance costs 
     for small businesses. The bill alleviates this situation by 
     limiting the application of interest to only the underlying 
     tax assessment.
                                  ____

                                                    Small Business


                                          Legislative Council,

                                 Washington, DC, January 22, 2001.
     Hon. Kit Bond,
     Chairman, Committee on Small Business, U.S. Senate, 
         Washington, DC.
       Dear Mr. Chairman: First, let me take the opportunity on 
     behalf of SBLC, to thank you for your tireless efforts on 
     behalf of small business. I have no doubt that in future 
     Congresses we will be holding up your stewardship of the 
     Small Business Committee as the model for future chairs.
       My primary reason in writing is to offer our unqualified 
     support for your initiative to bring fairness and 
     simplification to the current tax system. As you know, 
     perhaps better than anyone in Congress, the current tax code 
     remains a minefield of problems for small business. Your 
     legislation is a comprehensive blueprint for how to sweep it 
     clean.
       While we endorse all of your initiatives, I do want to take 
     the opportunity to single out four items.
       We are absolutely convinced settling the issue of whether 
     small businesses can use cash accounting is not only a matter 
     of fairness, but that it will also significantly simplify 
     small business compliance. We have had a hard time 
     understanding why the IRS has been so intent on chasing the 
     opportunity to collect a few tax dollars just a little 
     sooner. Using cash accounting is not about tax avoidance. The 
     costs to small business productivity must surely outweigh the 
     time value of revenue to the government.
       SBLC was one of the original champions of the concept of 
     direct expensing. We wholeheartedly endorse your efforts to 
     ``modernize'' the concept. The amount needs to be increased. 
     The other important reason to address cost recovery is that 
     our depreciation system is no longer in sync with the pace of 
     technology obsolescence.
       One of the ticking time bombs of the tax code is the 
     personal Alternative Minimum Tax (AMT). We believe in the 
     near future it may do more harm to small business than any 
     other provision of the tax code. It swallows up any profits 
     that can be reinvested in the business.
       Finally, Section 280F of the tax code and regulations 
     thereunder, reflect a different time and different philosophy 
     with respect to business vehicles. It is time to move the 
     clock ahead two decades and simplify the process of dealing 
     with this provision.
       We look forward, as always, to working with you on behalf 
     of small business.
       As you know, the SBLC is a permanent, independent coalition 
     of 80 trade and professional associations that share a common 
     commitment to the future of small business. Our members 
     represent the interests of small businesses in such diverse 
     economic sectors as manufacturing, retailing, distribution, 
     professional and technical services, construction, 
     transportation, tourism and agriculture. Our policies are 
     developed through a consensus among our membership. 
     Individual associations may express their own views. For your 
     information, a list of our members is enclosed.
           Sincerely,
                                                  John S. Satagaj,
                                    President and General Counsel.

           Members of the Small Business Legislative Council

     ACIL
     Air Conditioning Contractors of America
     Alliance of Independent Store Owners and Professionals
     Alliance of Affordable Services
     American Association of Equine Practitioners
     American Bus Association
     American Consulting Engineers Council
     American Machine Tool Distributors Association
     American Moving and Storage Association
     American Nursery and Landscape Association
     American Road & Transportation Builders Association
     American Society of Interior Designers
     American Society of Travel Agents, Inc.
     American Subcontractors Association
     Associated Landscape Contractors of America
     Association of Small Business Development Centers

[[Page S581]]

     Association of Sales and Marketing Companies
     Automotive Recyclers Association
     Bowling Proprietors Association of America
     Building Service Contractors Association International
     Business Advertising Council
     CBA
     Council of Fleet Specialists
     Council of Growing Companies
     Cremation Association of North America
     Direct Selling Association
     Electronics Representatives Association
     Health Industry Representatives Association
     Helicopter Association International
     Independent Bankers Association of America
     Independent Medical Distributors Association
     International Association of Refrigerated Warehouses
     International Franchise Association
     Machinery Dealers National Association
     Mail Advertising Service Association
     Manufacturers Agents for the Food Service Industry
     Manufacturers Agents National Association
     Manufacturers Representatives of America, Inc.
     National Association for the Self-Employed
     National Association of Plumbing-Heating-Cooling Contractors
     National Association of Realtors
     National Association of RV Parks and Campgrounds
     National Association of Small Business Investment Companies
     National Association of the Remodeling Industry
     National Community Pharmacists Association
     National Electrical Contractors Association
     National Electrical Manufacturers Representatives Association
     National Lumber & Building Material Dealers Association
     National Ornamental & Miscellaneous Metals Association
     National Paperbox Association
     National Retail Hardware Association
     National Society of Accountants
     National Tooling and Machining Association
     National Wood Flooring Association
     Organization for the Promotion and Advancement of Small 
         Telephone Companies
     Painting and Decorating Contractors of America
     Petroleum Marketers Association of America
     Printing Industries of America, Inc.
     Professional Lawn Care Association of America
     Promotional Products Association International
     The Retailer's Bakery Association
     Saturation Mailers Coalition
     Small Business Council of America, Inc.
     Small Business Exporters Association
     Small Business Exporters Association
     SMC Business Councils
     Society of American Florists
     Tire Association of North America
     Turfgrass Producers International
     United Motorcoach Association
     Washington Area New Automotive Dealers Association
                                  ____

                                            National Federation of


                                         Independent Business,

                                 Washington, DC, January 24, 2001.
     Hon. Kit Bond,
     Chairman, Senate Small Business Committee, Washington, DC.
       Dear Chairman Bond: On behalf of the 600,000 members of the 
     National Federation of Independent Business (NFIB), I want to 
     express our strong support for the ``Small Business Works Act 
     of 2001'' which would provide badly needed tax relief to 
     America's small business. NFIB urges the Senate to quickly 
     support its adoption.
       While economic conditions for small business remain 
     relatively strong, economic activity has cooled over the past 
     few months. According to NFIB's monthly Small Business 
     Economic Trends (SBET) index, confidence in the economy is 
     approximately half as strong as it was a year ago. Over the 
     coming months, it appears likely that the problem of the 
     slowing economy will only continue.
       Small businesses are forced by Washington to spend an 
     overwhelming amount of time, money, and energy complying with 
     the tax and regulatory burdens. With the economy showing 
     signs of slowing, tax relief will significantly help spur 
     immediate economic recovery for America's small businesses.
       Your bill goes a long way towards providing America's small 
     business owners valuable tax relief.
       Cash vs. Accrual Accounting--Clarifying the IRS code to 
     state clearly that small business owners with gross revenues 
     below $5 million are eligible to use cash accounting methods 
     would save small business owners from spending valuable 
     resources on high-priced tax accountants and lawyers.
       Accelerate 100% Self-Employed Health Insurance Deduction--
     Currently, self-employed workers can only deduct 60% of their 
     health-insurance costs from their taxable income. Raising 
     that threshold to 100% in 2001 would cut health-care costs 
     for the typical small-business owner by hundreds of dollars 
     per year.
       Increase Section 179 Expensing--A majority of NFIB members 
     exceed the current small-business expensing limits in only 
     three months. The limit for 2001 is only $24,000. Raising the 
     threshold to $50,000 and indexing it with inflation will 
     allow additional investments in the business to be expensed 
     thus helping small businesses expand and create new jobs. 
     This provision lowers the cost of capital for tangible 
     property and eliminates depreciation record-keeping 
     requirements. Updating our tax code to reflect the reality of 
     today's technology-based workplace is critical to the 
     continued success of our economy and to the daily advancement 
     of small business in America. Allowing small business to 
     depreciate software assets while they are still useful and 
     efficient technologies is critical to future technological 
     development in the job producing engines of our economy. This 
     change would provide small business owners the opportunity to 
     compete in today's high technology markets.
       Increase Deduction for Business Meals--For many self-
     employed and small business owners, discussing business over 
     lunch is an efficient use of time and an absolute necessity 
     when courting new clients. Increasing the deductibility 
     reduces a large and disproportionate tax on small-business 
     owners who rely on mealtime to conduct business.
       Federal Unemployment Insurance Surtax Repeal--The .2% 
     surtax was adopted in 1976 to repay loans to the federal 
     unemployment fund during the 1974 recession. This debt was 
     fully repaid in 1987. This so-called temporary surtax has 
     long outlived its original purpose and is now used to pay for 
     government programs totally unrelated to the unemployment 
     compensation system.
       AMT Relief and Repeal--According to the Joint Committee on 
     Taxation, fewer than 1 in 150 taxpayers is subjected to the 
     AMT today. By 2007, however, that number if expected to grow 
     to 1 in 14, with the largest increase coming from taxpayers 
     earning between $50,000 and $100,000. The individual AMT is a 
     remarkably complex and obtuse provision in a tax code not 
     known for its clarity. It literally requires taxpayers to 
     calculate their taxes twice, and then pay the larger amount. 
     While originally designed to ensure that wealthy Americans 
     pay a reasonable level of their income in taxes, the AMT has 
     the side effect of hitting taxpayers--increasingly middle-
     class taxpayers--when they can least afford the bill. The AMT 
     literally kicks taxpayers when they are down. NFIB supports 
     abolishing the individual Alternative Minimum Tax. NFIB also 
     supports your efforts to increase the exemption for small 
     businesses from the heavily burdensome corporate AMT.
       Mr. Chairman, we applaud your proactive efforts to reduce 
     the tax burden on small business. We thank you for your 
     continued support of small businesses, and we look forward to 
     working with you to see the ``Small Business Works Act of 
     2001'' enacted into law.
           Sincerely,

                                                   Dan Danner,

                                            Senior Vice President,
                                            Federal Public Policy.
                                 ______