[Congressional Record Volume 150, Number 98 (Thursday, July 15, 2004)]
[Senate]
[Pages S8237-S8239]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]

      By Ms. SNOWE:
  S. 2675. A bill to amend the Internal Revenue Code of 1986 to expand 
the availability of the cash method of accounting for small business, 
and for other purposes; to the Committee on Finance.
  Ms. SNOWE. Mr. President, I rise today to introduce a bill I hope 
will be the first in a series of proposals to simplify the tax code for 
small business owners. Once enacted, these provisions will reduce not 
only the amount of taxes that small businesses pay, but that they also 
will reduce the administrative burden that saddles small companies in 
trying to meet this obligation.
  The proposal that I am introducing today, will simplify the tax code 
by permitting small business owners to use the cash method of 
accounting for reporting their income if they generally earn less than 
$10 million during the tax year. Currently, only those taxpayers that 
earn less than $5 million per year are able to use the cash method. By 
increasing this threshold to $10 million, more small businesses will be 
relieved of the burdensome record keeping requirements that currently 
require them to use a different accounting method to report their 
income.
  Before I talk about the specifics of this particular provision, let 
me first explain why it is so critical to begin considering ways to 
simplify the tax code. As you know, small businesses are the backbone 
of our Nation's economy. According to the Small Business 
Administration, small businesses represent 99 percent of all employers, 
employ 51 percent of the private-sector workforce, and contribute 51 
percent of the private-sector output.
  Yet, the despite the fact that small businesses are the real job-
creators for our Nation's economy, the current tax system imposes an 
unreasonable burden on small businesses attempting to comply with the 
current tax code. This code imposes a large, and expensive, burden on 
all taxpayers in terms of satisfying reporting and record-keeping 
obligations, but small businesses are disadvantaged most, even more 
than large companies, in terms of money and time spent satisfying their 
tax obligations.
  For example, according to the Small Business Administration's Office 
of Advocacy, small businesses spend more than 8 billion hours each year 
filing-out government reports, and they spend more than 80 percent of 
this time on completing tax forms. What's even more troubling is that 
companies that employ fewer than 20 employees spend nearly $6,975 per 
employee in tax compliance costs--nearly 60 percent more than companies 
with more than 500 employees spend.

[[Page S8238]]

  These statistics are disconcerting for several reasons. First, the 
fact that small businesses are required to spend so much money on 
compliance costs means they have less earnings to reinvest into their 
business. This, in turn, means that they have less money to spend on 
new equipment or on worker training, which, unfortunately, has an 
adverse effect on their overall production and the economy as a whole.
  Second, the inordinate amount of time small business owners are 
forced to devote to the completion of paperwork means they have less 
time to spend doing what they do best-namely running their business and 
creating jobs.
  I do not mean to suggest that the challenges small business confront 
in regard to tax reporting and compliance are unique to this group, or 
that these companies should receive a free pass. In order to benefit 
from the freedoms and protections that our great country provides, 
individuals and businesses alike are required to pay taxes, and this 
duty carries with it certain administrative and opportunity costs. What 
I am asking for is a fairer, simpler tax code that allows small 
companies to satisfy their obligation without having to expend the 
amount of resources that they do currently, resources that might be 
invested in more productive ways.
  For that reason, the package of proposals that I will be introducing 
will provide not only targeted, affordable tax relief to small business 
owners, it will also seek to simplify existing rules under the tax 
code. By simplifying the tax code, small business owners will be able 
to satisfy their tax obligation in a less costly, more efficient 
manner, allowing them to devote more time and resources to their 
primary business goals.
  As I mentioned earlier, the provision that I am introducing today 
will permit more taxpayers to use the cash method of accounting, as 
opposed to depending on accrual or other hybrid method. The same law I 
referenced earlier which currently permits only those taxpayers earning 
less than $5 million in gross receipts during the tax year to use the 
cash method in reporting their income also precludes taxpayers in 
possession of inventory from using the simpler cash method. As a 
result, thousands of small businesses which possess inventories, but 
which might otherwise be entitled to report their income and expenses 
under the cash method of accounting are also required to follow the 
accrual or some sort of hybrid accounting method. The result, once 
more, is the imposition of undue financial hardship and unreasonable 
administrative burdens.
  My bill changes these existing rules, increasing the gross receipts 
test under current law to $10 million for small businesses and indexing 
this higher threshold to account for inflation. Given that the current 
$5 million threshold, it makes little sense to preserve an outdated 
benchmark in this most important provision when the sensible adjustment 
that I propose will allow thousands of small businesses presently 
hobbled by unnecessary paperwork to use the cash method of accounting.
  My bill also changes current law to permit even those taxpayers with 
inventory to qualify for the cash method of accounting. It is important 
to note, however, that my bill will not simply give these taxpayers an 
opportunity to recover costs associated with these otherwise 
inventoriable assets in the year of purchase, but that the bill will 
require these taxpayers to account for such costs as if they were a 
material or supply that is not incidental. This standard already exists 
under current law, and it is one with which most small businesses are 
already familiar. As such, this less-burdensome standard should ease 
the existing compliance burden for eligible taxpayers and allow them to 
devote more time and resources to their business.
  Very importantly, these changes will not reduce the amount of taxes a 
small business pays by even one dollar. Indeed, the overall amount of 
taxes a qualifying small business pays will remain the same. Rather, 
this bill simply permits more taxpayers to report income and account 
for costs in the year of the receipt or expenditure. Clearly, this 
method makes compliance easier and simpler for small taxpayers, and it 
will reduce both the time and monetary expenditures spent today to 
comply with the current tax code.
  Finally, this proposal is revenue neutral. In addition to the 
provision that modifies the income tax rules, my bill would enact 
Federal legislation to stop an abusive tax shelter that exists 
currently whereby taxpayers avoid State unemployment taxes. 
Specifically, States would be required to enact laws that prevent the 
avoidance of State unemployment tax and that also impose penalties on 
taxpayers and their advisors who engage in these scams. Consequently, 
my bill provides a revenue-neutral proposal that simplifies the tax 
code for small business owners by cracking down on taxpayers who 
otherwise try to avoid their State unemployment tax obligations.
  I ask unanimous consent that the text of the bill be printed in the 
Record.
  There being no objection, the bill was ordered to be printed in the 
Record, as follows:

                                S. 2675

       Be it enacted by the Senate and House of Representatives of 
     the United States of America in Congress assembled,

     SECTION 1. CLARIFICATION OF CASH ACCOUNTING RULES FOR SMALL 
                   BUSINESS.

       (a) Cash Accounting Permitted.--
       (1) In general.--Section 446 of the Internal Revenue Code 
     of 1986 (relating to general rule for methods of accounting) 
     is amended by adding at the end the following new subsection:
       ``(g) Certain Small Business Taxpayers Permitted to Use 
     Cash Accounting Method Without Limitation.--
       ``(1) In general.--An eligible taxpayer shall not be 
     required to use an accrual method of accounting for any 
     taxable year.
       ``(2) Eligible taxpayer.--For purposes of this subsection, 
     a taxpayer is an eligible taxpayer with respect to any 
     taxable year if--
       ``(A) for all prior taxable years beginning after December 
     31, 2003, the taxpayer (or any predecessor) met the gross 
     receipts test of section 448(c), and
       ``(B) the taxpayer is not subject to section 447 or 448.''.
       (2) Expansion of gross receipts test.--
       (A) In general.--Paragraph (3) of section 448(b) of such 
     Code (relating to entities with gross receipts of not more 
     than $5,000,000) is amended by striking ``$5,000,000'' in the 
     text and in the heading and inserting ``$10,000,000''.
       (B) Conforming Amendments.--Section 448(c) of such Code is 
     amended--
       (i) by striking ``$5,000,000'' each place it appears in the 
     text and in the heading of paragraph (1) and inserting 
     ``$10,000,000'', and
       (ii) by adding at the end the following new paragraph:
       ``(4) Inflation adjustment.--In the case of any taxable 
     year beginning in a calendar year after 2005, the dollar 
     amount contained in subsection (b)(3) and paragraph (1) of 
     this subsection shall be increased by an amount equal to--
       ``(A) such dollar amount, multiplied by
       ``(B) the cost-of-living adjustment determined under 
     section 1(f)(3) for the calendar year in which the taxable 
     year begins, by substituting `calendar year 2004' for 
     `calendar year 1992' in subparagraph (B) thereof.

     If any amount as adjusted under this subparagraph is not a 
     multiple of $100,000, such amount shall be rounded to the 
     nearest multiple of $100,000.''.
       (b) Clarification of Inventory Rules for Small Business.--
       (1) In general.--Section 471 of the Internal Revenue Code 
     of 1986 (relating to general rule for inventories) is amended 
     by redesignating subsection (c) as subsection (d) and by 
     inserting after subsection (b) the following new subsection:
       ``(c) Small Business Taxpayers Not Required to Use 
     Inventories.--
       ``(1) In general.--A qualified taxpayer shall not be 
     required to use inventories under this section for a taxable 
     year.
       ``(2) Treatment of taxpayers not using inventories.--If a 
     qualified taxpayer does not use inventories with respect to 
     any property for any taxable year beginning after December 
     31, 2003, such property shall be treated as a material or 
     supply which is not incidental.
       ``(3) Qualified taxpayer.--For purposes of this subsection, 
     the term `qualified taxpayer' means--
       ``(A) any eligible taxpayer (as defined in section 
     446(g)(2)), and
       ``(B) any taxpayer described in section 448(b)(3).''.
       (2) Conforming amendments.--
       (A) Subpart D of part II of subchapter E of chapter 1 of 
     such Code is amended by striking section 474.
       (B) The table of sections for subpart D of part II of 
     subchapter E of chapter 1 of such Code is amended by striking 
     the item relating to section 474.
       (c) Effective Date and Special Rules.--
       (1) In general.--The amendments made by this section shall 
     apply to taxable years beginning after December 31, 2003.
       (2) Change in method of accounting.--In the case of any 
     taxpayer changing the taxpayer's method of accounting for any 
     taxable year under the amendments made by this section--
       (A) such change shall be treated as initiated by the 
     taxpayer;

[[Page S8239]]

       (B) such change shall be treated as made with the consent 
     of the Secretary of the Treasury; and
       (C) the net amount of the adjustments required to be taken 
     into account by the taxpayer under section 481 of the 
     Internal Revenue Code of 1986 shall be taken into account 
     over a period (not greater than 4 taxable years) beginning 
     with such taxable year.

     SEC. 2. TRANSFER OF UNEMPLOYMENT EXPERIENCE UPON TRANSFER OR 
                   ACQUISITION OF A BUSINESS.

       (a) In General.--Section 303 of the Social Security Act (42 
     U.S.C. 503) is amended by adding at the end the following:
       ``(k)(1) For purposes of subsection (a), the unemployment 
     compensation law of a State must provide--
       ``(A) that if an employer transfers its business to another 
     employer, and both employers are (at the time of transfer) 
     under substantially common ownership, management, or control, 
     then the unemployment experience attributable to the 
     transferred business shall also be transferred to (and 
     combined with the unemployment experience attributable to) 
     the employer to whom such business is so transferred,
       ``(B) that unemployment experience shall not, by virtue of 
     the transfer of a business, be transferred to the person 
     acquiring such business if--
       ``(i) such person is not otherwise an employer at the time 
     of such acquisition, and
       ``(ii) the State agency finds that such person acquired the 
     business solely or primarily for the purpose of obtaining a 
     lower rate of contributions,
       ``(C) that unemployment experience shall (or shall not) be 
     transferred in accordance with such regulations as the 
     Secretary of Labor may prescribe to ensure that higher rates 
     of contributions are not avoided through the transfer or 
     acquisition of a business,
       ``(D) that meaningful civil and criminal penalties are 
     imposed with respect to--
       ``(i) persons that knowingly violate or attempt to violate 
     those provisions of the State law which implement 
     subparagraph (A) or (B) or regulations under subparagraph 
     (C), and
       ``(ii) persons that knowingly advise another person to 
     violate those provisions of the State law which implement 
     subparagraph (A) or (B) or regulations under subparagraph 
     (C), and
       ``(E) for the establishment of procedures to identify the 
     transfer or acquisition of a business for purposes of this 
     subsection.
       ``(2) For purposes of this subsection--
       ``(A) the term `unemployment experience', with respect to 
     any person, refers to such person's experience with respect 
     to unemployment or other factors bearing a direct relation to 
     such person's unemployment risk;
       ``(B) the term `employer' means an employer as defined 
     under the State law;
       ``(C) the term `business' means a trade or business (or an 
     identifiable and segregable part thereof);
       ``(D) the term `contributions' has the meaning given such 
     term by section 3306(g) of the Internal Revenue Code of 1986;
       ``(E) the term `knowingly' means having actual knowledge of 
     or acting with deliberate ignorance of or reckless disregard 
     for the prohibition involved; and
       ``(F) the term `person' has the meaning given such term by 
     section 7701(a)(1) of the Internal Revenue Code of 1986.''.
       (b) Study and Reporting Requirements.--
       (1) Study.--The Secretary of Labor shall conduct a study of 
     the implementation of the provisions of section 303(k) of the 
     Social Security Act (as added by subsection (a)) to assess 
     the status and appropriateness of State actions to meet the 
     requirements of such provisions.
       (2) Report.--Not later than July 15, 2006, the Secretary of 
     Labor shall submit to the Congress a report that contains the 
     findings of the study required by paragraph (1) and 
     recommendations for any Congressional action that the 
     Secretary considers necessary to improve the effectiveness of 
     section 303(k) of the Social Security Act.
       (c) Effective Date.--The amendment made by subsection (a) 
     shall, with respect to a State, apply to certifications for 
     payments (under section 302(a) of the Social Security Act) in 
     rate years beginning after the end of the 26-week period 
     beginning on the first day of the first regularly scheduled 
     session of the State legislature beginning on or after the 
     date of the enactment of this Act.
       (d) Definitions.--For purposes of this section--
       (1) the term ``State'' includes the District of Columbia, 
     the Commonwealth of Puerto Rico, and the Virgin Islands;
       (2) the term ``rate year'' means the rate year as defined 
     in the applicable State law; and
       (3) the term ``State law'' means the unemployment 
     compensation law of the State, approved by the Secretary of 
     Labor under section 3304 of the Internal Revenue Code of 
     1986.

     SEC. 3. USE OF NEW HIRE INFORMATION TO ASSIST IN 
                   ADMINISTRATION OF UNEMPLOYMENT COMPENSATION 
                   PROGRAMS.

       Section 453(j) of the Social Security Act (42 U.S.C. 
     653(j)) is amended by adding at the end the following:
       ``(7) Information comparisons and disclosure to assist in 
     administration of unemployment compensation programs.--
       ``(A) In general.--If, for purposes of administering an 
     unemployment compensation program under Federal or State law, 
     a State agency responsible for the administration of such 
     program transmits to the Secretary the names and social 
     security account numbers of individuals, the Secretary shall 
     disclose to such State agency information on such individuals 
     and their employers maintained in the National Directory of 
     New Hires, subject to this paragraph.
       ``(B) Condition on disclosure by the secretary.--The 
     Secretary shall make a disclosure under subparagraph (A) only 
     to the extent that the Secretary determines that the 
     disclosure would not interfere with the effective operation 
     of the program under this part.
       ``(C) Use and disclosure of information by state 
     agencies.--
       ``(i) In general.--A State agency may not use or disclose 
     information provided under this paragraph except for purposes 
     of administering a program referred to in subparagraph (A).
       ``(ii) Information security.--The State agency shall have 
     in effect data security and control policies that the 
     Secretary finds adequate to ensure the security of 
     information obtained under this paragraph and to ensure that 
     access to such information is restricted to authorized 
     persons for purposes of authorized uses and disclosures.
       ``(iii) Penalty for misuse of information.--An officer or 
     employee of the State agency who fails to comply with this 
     subparagraph shall be subject to the sanctions under 
     subsection (l)(2) to the same extent as if such officer or 
     employee was an officer or employee of the United States.
       ``(D) Procedural requirements.--State agencies requesting 
     information under this paragraph shall adhere to uniform 
     procedures established by the Secretary governing information 
     requests and data matching under this paragraph.
       ``(E) Reimbursement of costs.--The State agency shall 
     reimburse the Secretary, in accordance with subsection 
     (k)(3), for the costs incurred by the Secretary in furnishing 
     the information requested under this paragraph.''.
                                 ______