The House of Representatives’ top tax writer wants to change the way many small businesses are structured, hoping to make the system more transparent and less expensive for employers who pay personal taxes on their business income.
House Ways and Means Chairman Dave Camp (R-Mich.) on Tuesday released a draft of the committee’s latest tax reform legislation, which includes various proposals to simplify tax rules that affect millions of small business owners and their employees. The legislation would, for instance, create one set of rules for various types of businesses, simplify the code for start-ups, and make permanent a popular-yet-temporary provision for expensing investments in property and equipment.
By providing greater long-term clarity and fewer compliance challenges, the changes are meant to give employers more time and resources to spend building their firms and creating jobs.
“More Americans get their paycheck from small businesses than any other type of business or government,” Camp said in a statement. “If we really want to strengthen our economy and put more money in the pockets of American workers, we must fix the Tax Code and how it treats small businesses.
The discussion draft offers two alternatives to eliminate variations between partnerships and S corporations — one that revises the current system to treat both entities more uniformly, and another that would essentially throw out the terms altogether and create a new standard for all pass-through businesses (firms that pay taxes through owner’s personal returns, rather than at the corporate rate). The draft’s authors argue that the latter would make compliance simpler for millions of business owners and cut down on tax evasion.
In addition, they propose expanding Section 179 expensing, which currently allows business owners to immediately deduct up to $500,000 worth of qualifying property and equipment investments. The cap was set to fall to $25,000 next year, but the legislation would make permanent a maximum deduction of $250,000.
In a statement, National Federation of Independent Business President Dan Danner called the draft “a good starting point for reforming the taxation of small businesses filing as pass-through entities,” noting that employers need a system that is “simpler, fairer, [and] more rational.”
A new survey by Danner’s group showed that more than half of small business owners believe tax reform should be a top priority for policy makers, with most citing inconsistency — both over time and with regards to various business entities — as their greatest compliance challenge. However, they appear to have little faith in lawmakers, as 55 percent of respondents said they doubt any changes will actually alleviate complexity.
Still, “these look like promising ideas,” John Arensmeyer, CEO of lobbying and advocacy group Small Business Majority, said in an interview. He noted that many small employers hope policy makers will also close some of the tax loopholes exploited by large corporations, but he said that would likely be tackled as part of a broader deal.
This more targeted legislation from the House Ways and Means Committee would also include help for new companies. Currently, many of the expenses associated with launching a business can be deducted from founders’ taxes, but the costs tend to fall into three sepatate classifications — lawmakers want to instead create one set of rules that apply to all start-up organizational costs, capping the deduction at $10,000.
“When I had my business, I always thought it was weird to have to report that this was used for copyrights and that was used for incorporation expenses,” said Arensmeyer, who previously founded an e-commerce company, ACI Interactive. “It just seemed silly to have to separate it out rather than just include it all as part of the cost of starting the business.”
Camp’s small business proposals are part of a broader push to completely overhaul the current tax system, and they follow similar drafts released earlier this year targeting corporations and financial derivatives. These latest ideas, he said, stem from a series of hearings with business owners and incorporate proposals previously floated by representatives on both sides of the aisle.
Rep. Sander Levin (D-Mich.), Camp’s Democratic counterpart on the Ways and Means committee, acknowledged in a statement that some of the draft’s provisions “have bipartisan support, including many that were put forward by the Obama administration.”