Published by the National Small Business Association
Volume 22, Issue 1
March/April 2008
Read My Lips: Candidates & Taxes 4 Are you Advocate Enough? 6 One Year Later: A Status Report on the Tax Gap 10
Tax Season Survival Guide As tax season kicks into full gear are you up to speed on the tax issues that could affect the way you do business?
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MARCH/APRIL 2008
NSBA LEADERSHIP CORNER
A Message from NSBA’s Chair C Chair Marilyn D. Landis First Vice Chair Keith Ashmus Secretary Lois W. Riske Treasurer Scott Hauge Immediate Past Chair Grafton H. “Cap” Willey, IV Vice Chair, Communications Chris Holman Vice Chair, Advocacy Larry Nannis President Todd McCracken Editor Molly Brogan Writers Molly Brogan Jere Glover Kyle Kempf Jody Milanese Jim Morrison Greg Smith
HOW TO REACH US National Small Business Association 1156 15th Street NW Suite 1000 Washington, DC 20005 Phone: (202) 293-8830 Fax: (202) 872-8543 Web: www. nsba.biz Notification of address changes should be sent to the address listed above.
MISSION STATEMENT
NSBA is a volunteer-led association. Our primary mission is to advocate federal policies that are beneficial to small business and promote the growth of free enterprise
MARCH/APRIL 2008
What Can I Do? By Marilyn Landis
WHAT CAN I DO? With the April 15 tax deadline looming, I’d like to urge the small-business community to consider this: despite April being unofficial tax-panic month, remember, tax laws get passed throughout the year. This is why it is so important for us—the entire small-business community— to speakout in favor of common-sense in lawmaking — not just on tax issues, but all issues that impact us as small-business owners. Initiatives that will mandate the use of plainlanguage in federal documents, to name just one, will alleviate significant headaches for each of us. In my years as a banker, a small-business owner and an activist, I’ve incorporated a key mantra from the business world into my activism: what is the bottom line? Frequently we find ourselves talking about the problems with the government, or coalescing around an important piece of reform legislation, but how often do we say, “What can I do?”
Marily
n D. L
andis
operates with a number of regional, state and local affiliated small-business organizations. As the chair of one of those affiliates—SMC Business Councils of Pittsburgh—I can assure you that you involvement on the local level will impact state and local politics. When you find yourself facing an onerous piece of legislation from the state, these local organizations work to bring small business together to speak with a united voice. Third, you can be active with NSBA. Every year, NSBA hosts the Washington Presentation where small businesses from across the country go to Washington, D.C. THERE ARE SO MANY OPPORTUNITIES. to lobby their elected officials. This year, First, you can be active within your own on June 3 and 4, NSBA will bring small small-business. Last month, NSBA kicked businesses together to discuss election-year off our Small Business: 70 Million Strong… politics, meet with influential policy experts And Voting campaign to educate the public, and visit the Hill offices to discuss the issues media and lawmakers on the importance that matter most to us. of small business. The more we all talk In addition to the valuable meetings we about how set up for you with your REQUENTLY WE FIND OURSELVES the broad lawmakers’ offices, the TALKING ABOUT THE PROBLEMS scope of our Washington Presentation is WITH THE GOVERNMENT community, a great time to get briefed OR COALESCING AROUND AN th e m o r e on the latest issues facing IMPORTANT PIECE OF REFORM important our community. Through LEGISLATION BUT HOW OFTEN our issues both formal briefings and DO WE SAY HAT CAN DO become. I more informal receptions, urge you to this is truly one of the join our campaign—go to www.nsba.biz/vote best opportunities you’ll have to really talk and take a few moments to tell your family, about and understand how Washington, D.C. friends, customers and elected officials how impacts you. important our community is. Even better — you’ll walk away knowing Second, you can be active locally. NSBA exactly “What can I do?”
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ON THE TRAIL
Read My Lips: Where Do the Presidential Candidates Stand on the Issue of Taxes? By Greg Smith
While it may seem that there is nothing more illusive than trying to decipher what is known by the IRS as a simple tax return form, there is one other thing that comes to mind: trying to decipher the presidential candidates’ tax plans. If you find yourself a little confused about where each of the Democratic and Republican candidates stand on the issue of taxes, look no further. Below you will find a simple scorecard that breaks down each of the candidates’ stances on the key tax issues:
John McCain
Hillary Clinton
Barack Obama
Permanency for Bush Tax Cuts
Maintain current rates.
Increase on income over $250,000. Make the current Bush tax cut rates for "middle class" families permanent.
Repeal Bush's tax cuts for top 1 percent and eliminate income taxes on seniors earning $50,000 per year or less.
Corporate Income Tax
Enact a 10 percent cut reducing the rate from 35 to 25 percent.
No specifics available.
No specifics available.
Tax Reform
No specifics available, but he has suggested a system that is "simpler" and "fairer" with "lower" rates.
No plan available.
Estate Tax
Modify to apply to estates over $10 million, taxed at 15% rate.
Estates valued at $7 million or more would be subject to the estate tax.
Social Security Payroll Tax
Opposes tax increase as solution.
Supports retaining the Social Security tax cap arguing that removing the cap is a "tax increase on the middle class."
Alternative Minimum Tax
Permanently repeal.
Fair Tax
Does not support.
Health Care Tax Reform
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She has indicated that she wants to reform, but no specific plan is available. Does not support.
Reform the federal tax code to allow more people to get a tax credit for their health care.
Remove Hidden Taxes from current system. Provide Small Businesses with a tax credit to continue or begin to offer coverage. Working families will receive a refundable tax credit to help them afford high-quality health coverage.
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Have the IRS send out pre-populated tax forms based on employer-provided data, allowing tax return completion in "five minutes." Opposes repeal, but has called for a $3.5 million exemption per spouse. Increase the wage cap, causing more in wages to be subject to the tax. Possibly include a "donut hole" to exempt income just above the current cap (now $102,000). No plan available. Does not support.
No plan available.
MARCH/APRIL 2008
FROM OUR AFFILIATES Get the attention your
Tallying the Score:
high-growth company
SBAM Works to Revitalize Michigan Economy
deserves! Applications are now being
accepted
for
the Inc. 5,000 awards. The Inc. 5,000 is Inc. magazine’s
and
Inc.
com’s annual list of the fastest growing private companies in America. Every company honored on the Inc. 5,000 will be profiled on Inc. com, while the top 10% will be featured in Inc. magazine.
The
Inc.
5,000 also recognizes the top 100 companies in every major metro
By Rob Fowler
Michigan has the nation’s highest unemployment rate. And the state is 50th – dead last in the nation – in General Business Growth, Small Business Payroll Growth, Large Business Payroll Growth and State Gross Product Growth. An affiliate of NSBA, the Small Business Association of Michigan (SBAM) is working to ensure—despite the past several years of a sagging state economy — that entrepreneurs have a viable economic base in Michigan. Dismal economic conditions like that are enough to dampen the spirits of even the hardiest entrepreneur. Yet, it is precisely those entrepreneurs — the ones who create new, fast growing companies and new jobs — who are the best hope for pulling Michigan out of its doldrums. That’s why SBAM’s Small Business Foundation of Michigan recently released its fourth annual Entrepreneurship Score Card, a project designed to help motivate policy makers to make the changes needed to support entrepreneurialism. The Score Card consists of 128 economic research metrics that assess Michigan’s standing compared to other states. This year’s
report finds that despite Michigan’s strengths (#1 in the nation in Industry R&D, #3 in Private Lending to Small Businesses, #5 in Net Firm Entrants Increase, #8 in Patents per Innovation Worker) it still lags behind other states in nurturing job-creating small businesses. In measures of Entrepreneurial Change, Entrepreneurial Dynamism and Entrepreneurial Climate, Michigan has lost ground to its Midwest and Great Lakes competitors. What’s to be done? SBAM used the Score Card findings to help craft an entrepreneurial legislative agenda that was presented to Michigan lawmakers in mid-March. It includes specific recommendations for utilizing the state tax structure to incentivize entrepreneurial growth, protect entrepreneurs from burdensome regulations, increase capital available for entrepreneurs, get more technology out of Michigan universities and to the market, and make entrepreneurial education a higher state priority. For a more details on the Score Card, please visit www.sbam.org or e-mail sbam@ sbam.org.
area and several other categories. include local
Benefits
coverage and
in
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media, as well as access to
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alumni
courtesy
IncBizNet
and
of Inc.
events. The Inc. 5,000 is an editorial award and there are no fees involved with entering or qualifying. The deadline to apply is April 30th, 2008. Please visit www.nsba.biz for more details. MARCH/APRIL 2008
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MEMBER SPOTLIGHT
Hense and Associates Breaking the Mold and Redefining What it Means to be a CPA. By Greg Smith
T
ax season is undoubtedly the most dreaded time of the year for many small businesses. It elicits thoughts of introverted boring systematic suits, known as certified public accountants (CPA), invading the office to peruse over seemingly endless piles of financial statements and scrutinizing every piece of documentation. Anyone who has interacted with a CPA may find the stereotype cited above to hold true, but Paul Hense, owner and president of Hense and Associates, breaks the mold and redefines what it means to be a CPA. Located in Grand Rapids, Michigan,
Hense and Associates has been in business for over 38 years. Hense brought his small business to fruition after working for several larger accounting firms and coming to the realization that “the rule book doesn’t say that work has to be hell.” Needless to say this philosophy has served Hense and his five employees well over the years. “The work is hard, the pressure is terrible, but I don’t subject my employees to the constant demand for conformity,” says Hense, “after all, being able to live life out and express your own views is a gift that very few people get.” The philosophy of Hense and Associates has not only made it a pleasant place to work, but it has also provided a level and quality of service that keeps the clients coming back for more. It may also explain why over 60 percent of Hense’s clients are in fact small businesses. Hense does not hide the fact that he feels a great sense of pride and fulfillment in being a CPA and serving the small-business community. “The greatest contribution I have made is providing other small businesses with the resources and services that help them develop and grow their business.” What Hense does not mention is the lasting impact he has made for the smallbusiness community at large through his
leadership and involvement with NSBA. It was nearly 25 years ago that Hense first heard about NSBA through the Small Business Association of Michigan, an affiliate member of NSBA, and shortly thereafter joined. “One of the things that I loved about NSBA was that it was a group of leaders who stood up for people who just didn’t have the time to do so themselves.” Hense continues to explain “the small-business community has provided me with a business for my whole adult life so I would certainly want to take care of that and pass it on to future generations.” While Paul Hense is an active member of the small-business community and a champion for the growth of small business there is one foreseeable challenge that causes him to be concerned. “The biggest thing hurting the small-business community is the misguided concept that it’s too hard to run a small business and that owning a small business means sacrificing job security.” The way Hense sees it, “Job security now comes from what you can do. You can obtain security through your own ability, which has not always been the case.” Hense and Associates is a clear example that leveraging your abilities and personality is one of the best ways you can truly be secure and happy with your job.
Are You Advocate Enough? NSBA is Accepting Advocate of the Year Award Nominations By Molly Brogan
T
he National Small Business Association is seeking nominations for the 2008 Small Business Advocate of the Year. The Small Business Advocate of the Year Award recognizes small-business owners who go above and beyond in advocating for pro-small business issues. For the first time in 2008, this award will be made in honor of the late Lewis Shattuck, the pioneering small-business advocate and long-time president of the Smaller Business Association of New England.
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Qualified candidates will demonstrate a commitment to small business advocacy, a proven history of volunteer activism on behalf of the small-business community, and success and growth as a small-business owner. NSBA will select five finalists and one winner to be recognized at the annual Small Business Advocate of the Year Award Luncheon on June 3, 2008, held in conjunction with the NSBA Washington Presentation in Washington, D.C. Past winners include: Scott Hauge, president of Cal Insurance & Associates and executive director of Small Business
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California, a grassroots organization with significant influence in California; Robert Schmidt, founder of Cleveland Medical Devices Inc. and Orbital Research Inc., an active voice in state and national politics on taxation and commercialization; and Valerie W. Perlowitz founder and CEO of Reliable Integration Services, Inc., a leader in technology issues serving on President George W. Bush’s IT Advisory Council. Please see p.14 for a complete nomination form. The deadline is April 18, and self-nominations are encouraged.
MARCH/APRIL 2008
Dear NSBA Member, In an environment where every vote counts and political races are widely contested, it is unthinkable that any elected official would not reach out to a captive and eager community that comprises one-third of the general electorate. Yet several months ago, a group of NSBA small-business owners participated in a roundtable discussion with presidential policy experts, and were left with the sinking feeling that, perhaps, small business isn’t even near the top of the priority list. We decided then and there that it’s up to us—the small-business community—to make small business a priority. What resulted is our campaign, Small Business: 70 Million Strong…And Voting, launched Feb. 18, which seeks to educate lawmakers, candidates and the public on the importance of small business. We’re going to do this the best way we know how: by the numbers. Did you know that more than one in two people in the U.S. private workforce (56 percent) work for or run a small business, according to data from the U.S. Census and Small Business Administration Office of Advocacy. For the past 15 years, small business has created on average 93.5 percent of all net new jobs—resulting in an average of 4,000 new jobs EVERY day. In 2007, 54 percent of adults surveyed for the Harris Interactive Poll, Confidence in Leaders of Major Institutions, expressed a great deal of confidence in small-business owners. In the past 34 years, only the military has received confidence ratings as high as small business. So why aren’t people talking about small-business issues? It’s up to each one of us in the small-business community—employers, employees, family, friends and customers—to start speaking out as part of a united constituency. We urge you to join our campaign, and let your candidates know that small-business issues matter to you. You can help spread the word by downloading our Web sticker and linking to our site, or simply downloading our e-mail signature button. Small business represents one-fourth of the overall U.S. population, one-half of the private workforce, and one-third of the voting population in the U.S.— numbers that cannot be ignored. Since the launch of our campaign, there has been a good deal of media coverage on what we’re trying to do. But that is only one part of the campaign. We need you to reach-out to your network as well as to your elected officials and candidates. Tell them about the campaign, tell them about your small business, tell them that our issues matter, and tell them that the small-business community is a force to be reckoned with. We are Small Business: 70 Million Strong…And Voting! Please visit www.nsba. biz/vote for more details. Sincerely, Keith Ashmus Chair, Presidential Elections Taskforce
MARCH/APRIL 2008
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Chris Holman Vice Chair of Communications
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RESOURCES
What should small-business owners be thinking about this tax season? According to data from the most recent NSBA nationwide survey of small business, 25% of respondents ranked taxes among the top three most significant challenges to the future growth and survival of their business. The same survey asked small-business owners what their top issue is in considering who they will vote for in the 2008 presidential elections—reducing the tax burden was ranked number one. Tax reform continues to be in the top two of NSBA’s top ten priority issues, which is voted on by our members at the biennial Small Business Congress. With so many small-business owners greatly concerned with tax burden, we decided to get some pointers from the experts on what you should be thinking about this tax season.
ert
k David Ic
Kathy
Hughes
nis
Larry Nan
The two bi biggest issues small businesses run into are proper documentation of business documentat expenses—specifically travel, expenses— meals and eentertainment—and the improper imprope classification of employe employees as independent contractors contractors. With the first, the IRS is vvery specific that it wants you tto indicate where you travele traveled, with whom you visited, din dined, or entertained, and the bus business purpose of the visit. It doe doesn’t es have to be a long descrip description p but a short and succinct on one, ne and will minimize the chance oof an unallowable deduction. Properly classifying workers as eemployees will insure that ppension plans will deemed ineligible and not be deem penalties for not withholding payroll taxes will be or paying pa Yes, the cost of an mitigated. Y employee is increased by about employer payroll taxes; 10% for emp may be a small cost however, it m avoid more major to pay to avo iss issues. sues. I admit iit may sound like I am m working for the IRS, but as lo long as small business continues to be targeted by the IRS, these ar are a few small steps to improve th the result of an audit.
There are several things to look for when hiring a tax preparer or accountant. First, what resources are available to the accountant? With the complexity of the tax code, additional resources are needed to research different problems that can occur. Be sure your accountant has access to a library, tax-specializing colleagues, and professional associations. Second, consider the accountant’s reputation. Ask other business owners who their tax preparer is and their experience with the preparer—a high quality firm will have earned the trust of other businesses in the community. Third, look for an accountant who offers yearround services. While tax preparation is required for compliance with taxing authorities, other issues can occur requiring professional consultation. Having an accountant that understands your business will help you with myriad other issues such as planning for expansion, budgeting, tax problem communication and general financial or succession planning.
La Larry Nannis, shareholder in the Needham, Mass. CPA firrm, Levine, Katz, Nannis + So Solomon, PC.
Kathy Hughes, partner in the central-Ohio accounting firm, Taylor, Applegate, Hughes & Associates Ltd since 1987.
As we move into the tax season, the one thing I would recommend is for a small business to be confidant that their tax preparer is familiar and knowledgeable about the issues of their business. Many tax laws are very specific and good compliance guidance from the tax preparer is important in assuring that proper steps have been completed and documented for certain positions taken on the return. As an example, with more small businesses contemplating and/or increasing their export sales, there are specific issues impacting tax results that might be considered. One such issue is the utilization of an IC-DISC entity by a small-business exporter. This can be a very useful tool but make sure your tax preparer is knowledgeable of the law concerning an ICDISC entity. How do you determine their comfort with a specific area? Ask them. David Ickert, owner of Air Tractor, Inc., located in Olney, Texas. David started his career as a CPA.
**IRS CIRCULAR 230 DISCLOSURE: To ensure compliance with requirements imposed by the IRS, we inform you that any tax advice contained in this newsletter was not intended or written to be used, and cannot be used, for the purpose of (1) avoiding penalties under the Internal Revenue Code or (2) promoting, marketing or recommending to another party any matter(s) addressed in this communication.
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MARCH/APRIL 2008
RESOURCES
Q&A
You heard about it on the campaign trail. The media canʼt stop talking about it. NSBA supports it. So what exactly is the Fair Tax?
What is the Fair Tax? The Fair Tax plan is a comprehensive proposal that replaces all federal income and payroll based taxes with a 23 percent, single rate, national retail sales tax. Unlike the current system, the Fair Tax moves the burden from the workforce to the consumer— giving them control over how much they are taxed. This way, every taxpayer will be subject to the same tax rate with no exceptions and no exclusions.
economic growth and job creation.
Has a bill been introduced to support the idea of the Fair Tax? Yes, bipartisan legislation has been introduced in the 110th Congress (H.R. 25/S. 1025) that abolishes all federal income taxes, including personal, estate, gift, capital gains, alternative minimum, corporate, Social Security, other payroll, and self-employment taxes, and replaces them all with one simple, visible, federal consumption tax—administered primarily by existing state sales tax authorities.
How would the Fair Tax be collected? Retail businesses collect the tax from the consumer, just as state sales tax systems already do in 45 states. The Fair Tax is an additional line on the current sales tax reporting form. Retailers simply collect the tax and send it to the state taxing authority who will then remit the funds to the Treasury Department. All businesses serving as collection agents receive a fee for collection, and the states also receive a collection fee. The Internal Revenue Service (IRS) would be abolished, and businesses that collect the tax would remit it on a weekly or monthly basis to their state revenue department.
Is there wide-support in Congress? Yes, the current list of cosponsors has grown to 70 members in the House. The Fair Tax bill has the most cosponsors of any fundamental tax reform bill on Capitol Hill. Lawmakers are responding to their constituents who are looking for tax solutions that will provide long-term MARCH/APRIL 2008
What is taxed? The Fair Tax is a single-rate, personal consumption tax (similar to a retail sales tax) collected only once, at the final point of purchase of new goods and services for personal consumption. Used items are not taxed. Business-to-business purchases for the production of goods and services are not taxed.
Why is the Fair Tax good for small businesses? The Fair Tax will be beneficial to small businesses in terms of compliance costs, which are continually seen as one
of the many detrimental characteristics of the current tax system. It is estimated that Americans spend at least $225 billion each year to comply with the current tax code. If enacted, the Fair Tax compliance costs will fall to less than $10 billion— decreasing by 90 percent. Since business-to-business purchases will not be taxed, production costs will be lower resulting in company and job growth as well as lower prices for consumers. What about Business Expense Deductions? If the Fair Tax is enacted, no business expenses are ever taxed. Since you will pay no taxes on business expenses, you never need business deductions. With the Fair Tax, you always purchase business items tax-free, and those taxfree purchases are never limited by “partial deductibility” or “depreciation schedules” as many business purchases are today. What about low and middle income individuals? Contrary to opponent’s arguments that claim the Fair
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Tax would harm elderly and low-income individuals, the system would actually place these individuals in great control over how much they actually pay in taxes. The Fair Tax will include a rebate system where every family would receive a monthly check based on the 23 percent tax on spending on goods and services up to the federal poverty level. This rebate will be paid in advance, in equal installments each month. Why Support the Fair Tax? NSBA is the only national small business group actively pushing for the Fair Tax – and we have been doing so since legislation was first introduced in 1998. The Fair Tax dramatically changes the basis for taxation by eliminating the root of the problem: taxing income. The Fair Tax taxes us only on what we choose to spend, not on what we earn. It does not raise any more or less revenue; it is designed to be revenue neutral. The Fair Tax is a fair, efficient, and intelligent solution to the frustration and inequity of our current tax system.
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FEATURE ARTICLE of three components: non-filing (failure to file a return), underreporting (understating income or overstating deductions), and underpayment (failure to pay reported tax owed.) Of these, IRS argues underreporting is the largest, comprising 80 percent or $166 billion of the total gap. Of the $166 billion, IRS claims that small businesses are responsible for $109 billion. While it sounds shocking to hear that Americans underpay their taxes by nearly onefifth, it is estimated that the U.S. is within the upper tier of worldwide compliance rates. NSBA firmly believes that the IRS has misinterpreted its data, failing to account for the extremely complex tax code, and has reached erroneous conclusions about where the tax gap lies.
One Year Later: A Status Report on the
Tax GAp
I
t is the time of year when the term “IRS” ceases to be a federal agency known as the Internal Revenue Service, and instead becomes a phrase following some sort of colorful pejorative hurled out the mouths of most American taxpayers. That’s right—it’s tax season. As small-business owners wade through the tedious task of organizing reports, receipts and statements to prepare their tax returns, this year, they face the added pressure from the IRS’s push to close the so-called tax gap. In 2007, following some very startling statements from the IRS on small business’ culpability for the tax gap, NSBA launched an initiative to educate small business and address the IRS and Treasury Department’s proposals to close the tax gap. Under the direction of a specially-appointed taskforce, NSBA developed a Web site, www.preventirsabuse.org, with detailed information about the tax-gap and resources to help small-businesses cope with the projected onslaught of heightened scrutiny from the IRS. Now, nearly a year later, here’s where things stand.
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Small-Business Tax Burden While many people are able to do the simple or ‘easy’ form for their taxes, small-business owners typically are required to complete additional forms. The plethora of forms and reporting entangles entrepreneurs in a paperwork nightmare that only an accountant can figure out. Approximately 36 percent of NSBA members have less than 5 employees—few, if any, of whom is a tax attorney—leaving business owners with no other choice but to hire outside help to keep track of all this paperwork. Not only is the burden a heavy one, it is By Jody Milanese disproportional as well. According to the U.S. Small Business Administration (SBA) Office of Background Advocacy, the cost of tax compliance for small Despite the time and cost spent on compliance, firms is 67 percent higher than for their larger lawmakers in both parties are eager for the IRS to counterparts. For firms with less than twenty improve tax compliance rates and boost revenue. employees, the per-employee cost of complying Therefore, the IRS conducted the National with the tax code is $1,304. Research Program (NRP), a three-year study This data proves that lawmakers have crafted during which 46,000 randomly selected NSBA has thoroughly a tax system that is so 2001 tax returns were reviewed the various complex and burdensome intensively reviewed. proposals and found that small businesses are spending valuable time Using this sample, the most would not financial resources IRS found its tax gap effectively increase and on record-keeping and estimates by measuring compliance or minimize outside help to ensure the rate of taxpayer the tax gap. Instead, compliance instead of compliance—the they add additional and using these resources difference between unnecessary burdens on to invest and grow their taxes owed and taxes already over-burdened business. actually paid—of
small-business owners
nearly $345 billion, or nearly one-fifth of all taxes collected by the IRS. Interestingly, this sum happens to be just a few billion dollars less than the projected federal budget deficit for 2007. After recovering about $55 billion of this sum, there remains a net tax gap of $290 billion. As defined by the IRS, the tax gap consists ADVOCATE
Tax Gap Proposals
In the past few years, there has been an increase in congressional pressure to narrow the tax gap, and increase the nation’s overall tax-compliance rate. Specifically, Senate Finance Chairman Max Baucus (D-Mont.) has said that the IRS too often does not give specific updates on how it plans MARCH/APRIL 2008
FEATURE ARTICLE employ teams of accountants and lawyers to fight their cases—a luxury enjoyed by big business.
NSBA Tax Gap Initiative
to reduce the growing tax gap and instead has his own target to reduce the tax gap by driving compliance from the current 83 percent rate to 90 percent by 2017. The recently released FY 2009 budget — almost identical to their FY 2008 proposal — calls for a number of steps to close the tax gap. Of the different proposals outlined, many of them would impose new regulatory, reporting and withholding burdens on small business—all in an effort to try to “catch” other businesses that might not be reporting all of their income. Squeezing money out of those who owe taxes is seen as a smarter move politically than raising taxes, especially in an election year. For FY 2009, Congress is expected to increase the IRS’s budget, particularly for enforcement activities. According to a Treasury Department publication, President George W. Bush has asked Congress to appropriate a record $11.36 billion for the IRS for the year starting Oct. 1. That would be an increase of 4.3 percent from 2008, and spending on enforcement would rise more than seven percent. With this increase, IRS is expected to increase audits, especially on high-income taxpayers and self-employed workers. Stricter filing rules and more stringent audits may spur the IRS to penalize smaller businesses for unintentional transgressions—likely unfairly targeting most of the businesses which report accurately on their tax returns. IRS agents are expected to continue focusing on people who make $100,000 or more (which accounts for 60 percent of NSBA member’s annual revenues) and those making $1 million or more (23 percent of NSBA members). Even without increases in their budget, IRS has, in the last two years alone, increased audits of small corporations 150 percent and there is every reason to believe that number will continue to increase. NSBA has thoroughly reviewed the various proposals and found most would not effectively increase compliance or minimize the tax gap. Instead, they add additional and unnecessary burdens on already over-burdened small-business owners. Small business tends to be an easy target since many small-business owners cannot afford to MARCH/APRIL 2008
Fearing what could have been an unfair attack by the IRS on small businesses, NSBA’s tax gap initiative stemmed from the small-business community’s disbelief of the allegations that 75 percent of the tax gap comes from the smallbusiness sector. In an effort to address the root causes of these unpaid taxes and find a solution without placing excessive and intrusive burdens on honest smallbusiness owners, NSBA launched an aggressive campaign in 2007 with three main objectives: inform small businesses about the potential threat that is posed by the tax gap, give smallbusiness owners an avenue to communicate their concerns back to elected officials, and provide an information repository to answer key questions about tax compliance, in order to cut back on honest mistakes. It must be said—NSBA does not condone the non-payment of tax obligations. The overwhelming majority of small businesses are honest, hard working organizations that are critical to the economic success of the American economy. Given the extraordinary burden that compliance with the unbelievably complex tax code already imposes on small businesses, it is unfair to ask truthful small businesses to do even more in order to catch a few potential cheats. The NSBA taskforce has been monitoring both Congress’ and IRS’s actions regarding the tax gap with a measured level of success. Though IRS has increased their rate of audits, the increase hasn’t been nearly the all-out-war predicted, and Congress has refused to enact any of the administration’s proposals. NSBA has been working to deliver the message that just because large corporations’ tax liabilities are more difficult to determine does not mean the IRS should not pursue these companies. For the past year, NSBA has stated that the IRS should conduct more research to better identify noncompliant taxpayers, enhance taxpayer services to inform taxpayers of their correct tax obligations and adjust its enforcement tools to target those who intentionally evade paying taxes.
several key bills before the end of the session, lawmakers will continue to look for ways to offset the costs of such legislation. Most recently, there have been discussions about using the administration’s revenue proposals as a way to offset the potential cost of the farm bill. One of the administration’s proposals gaining attention as a possible offset would require credit and debit card issuers to turn over to the IRS an information report on the amount of gross income a “merchant” receives from credit and debit card transactions. In theory, the IRS can then conduct some sort of matching exercise with a merchant’s reported gross receipts on tax returns. The recommendation is appealing because the direct impact on a merchant is perceived to be limited. Nevertheless, this new level of regulatory burden on credit card issuers likely will lead to increased fees being passed on to businesses which conduct credit card transactions. These increased fees will have a negative impact on business revenue and sales, and in turn tax revenue. The issue of closing the tax gap has catapulted to the top of NSBA’s list of priorities this Congress because of the very high level of small-business concern over the increased tax compliance and enforcement burdens the issue could generate. We feel very strongly that the withholding, record-keeping, reporting, and general compliance burden the tax code imposes on small businesses is already too great. Not just during tax season, but throughout the year, NSBA members are encouraged to remain active and engaged in learning and educating the small-business community about this constant threat. As champions, we have a long road ahead to ensure that small businesses can thrive in the face of new burdens from the tax code and the IRS. Thus far, all of our efforts are making a difference amongst officials in Washington, D.C.
Looking Ahead NSBA’s initiative has been instrumental in preventing the administration’s proposals from being enacted thus far. Faced with difficult payas-you-go budgetary rules, Congress has avoided using any of the tax gap proposals as revenueraisers. However, with Congress’ goal of passing ADVOCATE
>>For more information on the tax gap and NSBA’s latest initiatives visit www.preventirsabuse.org
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COUNCIL UPDATES
Are you in the Know? SBTC’s Technology Entrepreneur Available for all NSBA Members by Jere Glover & Jim Morrison
NSBA members have some new options for getting updated on concerns affecting technologybased businesses. The latest issue of Technology Entrepreneur, the newsletter of the Small Business Technology Council, is just out, and copies are available for all NSBA members. The March issue highlights a breakthrough in federal support for technology commercialization that SBTC worked hard on. The newsletter also describes developments in the campaign to reauthorize the Small Business Innovation
Research (SBIR) Program. Another way to stay up to date is to participate in SBTC’s monthly conference calls on SBIR reauthorization and other small business technology issues. Held on the first Tuesday of every month, the conference calls start with a brief presentation and are followed by Q and A sessions that bring to light new developments around the country. You can get a copy of the newsletter, or obtain instructions for joining the conference call, by sending an e-mail to alec@sbtc.org or by calling Alec at (202) 662-9700. NSBA members also can upgrade to full SBTC benefits for a modest charge. To discuss the benefits and fees, contact Tony Paschal at tpaschal@sbtc.org or by calling him at (202) 552-2925.
Why Limit Your Business Potential? Do you want to gain additional value and benefits from your NSBA membership? If so, join one of of NSBA’s councils for a nominal yearly fee. It is a great way to compliment your NSBA Membership, expand your business network, and gain access to valuable resources. Visit www.NSBA.biz for more details.
Fighting the Good Fight SBEA Top Priorities Ensure American Small Business Remains Competivive in the Global Market by Jim Morrison
Maintaining globally competitive export taxes and broadening access to capital are the top 2008 priorities of the Small Business Exporters Association, A longstanding provision in the tax code, called the Interest Charge Domestic International Sales Corporation (IC-DISC), helps small, privately held exporters compete with Asian and European exporters that have their taxes rebated at the border. In spite of enormous U.S. trade deficits and relatively low participation in exporting by American small businesses, some in Congress are seeking to repeal this modest but useful incentive. SBEA helped prevent a repeal in 2007 and intends to do so again
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this year. Another continuing concern is access to capital for small exporters. In 2006, SBEA pioneered a plan to strengthen commercial bank financing for export transactions that have a repayment period of six months to seven years. (Banks already routinely approve deals with shorter repayment periods.) Last year, the Export-Import Bank of the United States, a federal agency that provides back-up guarantees for such transactions, approved SBEA’s plan. SBEA will be monitoring the roll out, which begins in April 2008. NSBA members interested in international trade can keep up to date on these and other topics by upgrading to SBEA membership. Call (202) 659-9320, or visit www.sbea.org for more information.
ADVOCATE
MARCH/APRIL 2008
FROM THE HILL
What the Office of Advocacy Thinks You Should Know Assistant Chief Counsel Talks Tax Burden By Dillon J. Taylor
The U.S. Small Business Administration Office of Advocacy is perhaps the most important federal agency working for small business. Serving as the small-business “watch-dog” inside the federal government, the Office of Advocacy works to reduce the regulatory burden imposed by federal policies on small firms. Simply stated, Advocacy’s mission is to encourage policies that support the development and growth of American small business. To this end, Advocacy recently announced the 2008 Top 10 Rules for Review and Reform. These top 10 rules are drawn from over 80 rules nominated by small business owners and their representatives as part of the Regulatory Review and Reform (r3) initiative. One of the top 10 rules concerned simplification of the Home Office Business Tax Deduction. The confusion over this particular deduction prompted several small businesses to recommend that the IRS should revise their rules to permit a standard deduction for home-based businesses, which constitute 53 percent of all small businesses. Though the Office of Advocacy does not provide specific tax advice for small business owners, there are some important developments that small business should keep in mind. Below are some key changes to the tax code you should know about. Additional details can be found in greater detail on the IRS Web site.
in service by the taxpayer during the tax year exceeds $800,000. For additional information, please visit http://www.irs.gov/ newsroom/article/0,,id=179227,00.html. Tax Election Permits Certain Married CoOwners in Qualified Joint Ventures to File Schedules C Rather than Partnership Returns For tax years beginning after December 31, 2006, the Small Business and Work Opportunity Tax Act of 2007 (Public Law 110-28) provides that a “qualified joint venture,” whose only members are a husband and a wife filing a joint return, can elect not to be treated as a partnership for
Federal tax purposes. This election permits certain married co-owners to avoid filing partnership returns, Forms 1065, if each spouse separately reports a share of all of the businesses’ items of income, gain, loss, deduction, and credit with a Schedule C (Form 1040). For additional information, visit http://www.irs.gov/businesses/small/ article/0,,id=177376,00.html. Checklist of Common Errors when Preparing a Tax Return The IRS provides a checklist to avoid common tax return preparation mistakes. http://www.irs.gov/taxtopics/tc303.html.
2008 Economic Stimulus Act Increases Section 179 Expensing Limits In general, a qualifying taxpayer can elect to treat the cost of certain property as an expense and deduct it in the year the property is placed in service instead of depreciating it over several years. This property is frequently referred to as section 179 property, after the relevant section in the Internal Revenue Code. Under the 2008 Economic Stimulus Act, a qualifying business can expense up to $250,000 of section 179 property purchased by the taxpayer in a tax year beginning in 2008. Absent this legislation, the 2008 expensing limit for section 179 property would have been $128,000. The $250,000 amount provided under the new law is reduced if the cost of all section 179 property placed MARCH/APRIL 2008
ADVOCATE
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2008 Small Business Advocate of the Year Award Nomination Form Thank you for your interest in the 2008 Small Business Advocate of the Year Award! All nominees must be a smallbusiness owner, and self-nominations are encouraged. The judging committee will select five finalists and ultimately one winner to be recognized at the annual Washington Presentation Advocate of the Year Award Luncheon on June 3, 2008 in Washington, D.C. We are pleased to announce, that for the first time in 2008, this award will be made in honor of the late Lewis Shattuck, the pioneering small business advocate and long-time president of the Smaller Business Association of New England. Nominations are due April 18, 2008 Potential award winners will demonstrate: A commitment to small-business advocacy A proven history of voluntary efforts to advance and improve conditions for the small-business community Success and growth as a small-business owner Any other accomplishments demonstrating merit as an effective advocate for small-business interests
• • • •
Name Company Name Street Address City
State
Business Phone
Business Fax
E-mail Address
Web Site
Ownership Status (circle one)
C Corp
S Corp
Zip Code
LLC
Partnership
Sole Proprietor
In What Industry is Your Business? Founding Date Name of Founders For each of the following years, please tell us your: Annual Revenue
Number of Employees
2008 (projected) 2007 2006 2005 2004 In less than 1,500 type-written words, please describe how you have shown a commitment to small-business advocacy. (Suggested topics include: what sector(s) you are part of (i.e. public, private, local, state, national, media, etc.); your voluntary efforts and endeavors to advance small business and improve the conditions for small-business owners; your success and growth as a small-business owner; any other applicable accomplishments.) Please submit entry, along with supporting materials (i.e.: press clippings, recognitions, etc…) to: NSBA Small Business Advocate of the Year Award c/o Molly Brogan 1156 15th Street NW Suite 1100 Washington, DC 20005-1755 Please e-mail press@nsba.biz with any questions.
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ADVOCATE
MARCH/APRIL 2008
ADVOCACY & EVENTS
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Feb NSBA. 26, 20 McC Preside 08 Hou racken nt Todd Businse Commtestified Con ess Sub ittee o before t rega tracting commit n Small he Plain rding th and Tectee on Com Langua e NSBA- hnolog (H.R. munica ge in G supportey 3548 tions overn d
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Jan. 25, 2008 NSBA staff participated in a board of advisors teleconference of the Consumer Energy Alliance.
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Feb. 22, 2008 NSBA Chair Marilyn Landis was featured on CNN’s Lou Dobbs Tonight talking about the credit crunch.
March 5,2008 NSBA staff participated in a roundtable luncheon and hill briefing on small business trends
08 12, 20 March ends tt Staff a Finance Ma e g rch N Senat tee hearin 4, 2 par SBA it 0 08 t p Comm natives to disc reside icipate l er on Alt rent Federa Yor ussion ntial e d in a r u ker the C ax System. Ma with th lection T gaz eN s Estate ine ew
MARCH/APRIL 2008
ADVOCATE
March 13, 2008 House Ways Staff attended ommittee on & Means Subc ing on the Oversight hear g Season, IRS Tax Return Filin 2009 Budget Operations, FY l the IRS Nationa Proposals and l ua nn A s ocate’ Taxpayer Adv Report.
08 , 20 a 8 1 ded rch Ma atten h the f it Staf ting w he t e n on ai me o g ormati t S f IR st in to late aining sses. e t per ll busin sma
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Pho h to By: By: Tony By Tony Wan Ke Kenob n i nob
Hear from policy experts and lawmakers in Washington, D.C. on the key issues for small business. Held at the Capital Hilton Hotel just blocks from the White House, you will get the inside scoop on the elections, share breakfast with influential members of Congress, and make important Hill visits to lobby on the issues that matter to you. Please visit www.nsba.biz for more details!
June 3 - 4, 2008
1156 15th Street NW Washington, DC 20005 nsba.biz