Statement of Eric R. Blackledge


Tax Simplification for Small Businesses





Before the

 U.S.  House of Representatives Small Business Committee                                                             Subcommittee on Finance and Tax

May 7, 2009





Chairman Schrader and Ranking Member Buchanan, thank you for the opportunity to talk with you today about simplifying the tax code and reducing the administrative burden for small business taxpayers.    My name is Eric Blackledge and I am President of Blackledge Furniture in Corvallis Oregon.    I have a long history of involvement in small business tax issues including serving as the Region 10 Tax Issues Advisory Chair to the SBA Office of Advocacy, and as chair of the US Chamber of Commerce Small Business Council Tax Policy Sub-council.  I also am active in many other small business organizations and state and federal level tax policy advisory groups.     In addition, I have had an opportunity to see the taxation system from the IRS perspective, as a member of both the IRS Advisory Council and the IRS Electronic Tax Administration Advisory Council.  


The Internal Revenue Code has grown from simple beginnings to over 1,395,000 words, to which the Internal Revenue Service has added over another 8,000,000 words of interpretive regulations and instructions, and the courts have added even further pages of decisions.    There are now over 650 IRS forms and schedules, with over 16,000 lines, 160 worksheets and 340 publications.     Even IRS staff who are hired and trained to provide taxpayer assistance give incorrect tax information a fourth of the time based on GAO evaluations.    There has been much discussion in recent years about the “Tax Gap” resulting from inaccurate filing.      While some of this gap probably results from intentional under reporting, much of it also results from unintentional filing errors caused by complexity.

Although there have been suggestions to” simplify” the tax system by  completely changing our tax structure to a consumption tax, a  value added tax, or a “flat” income based tax,  the potential economic impacts of transitions make such a major systemic change unlikely in the near future.

I will therefore limit my comments to eight key principles for good tax legislation that could make the current tax system simpler and easier for small businesses, and all taxpayers, to comply with.    I will also suggest priorities for legislation that implements these principles.   The details for each proposal are included in my written testimony.  Many of these proposals have been supported by Committee members in the past, and I hope you will continue to support their passage in this Congress.


Principle 1.  Remove outdated and un-necessary record keeping burdens that don’t significantly impact tax revenue. 

A top priority is removal of the outdated “Listed Property” record keeping requirements and deduction limitations on business cellular phones and computers.    The Tax Reform Act of 1986 enacted code section 280F to differentiate “listed property” from other depreciable business property.  Listed property included cellular telephones and any computer, video or photo camera, or peripheral equipment not used in a “regular business establishment”.  At that time these technologies were expensive and any personal use might have significant non-deductable value, justifying a requirement for taxpayers to keep use logs.

Now, cell phones are a basic tool for all business and professional people, and most everyone else, because of far lower initial and monthly operating costs.   Anyone can now get a good cell phone at no cost with a two year contract.    Most plans also include free calling to selected numbers, or on all calls made during evening and weekend hours, making the marginal cost of personal use of a business cell phone essentially zero.  If there is no additional cost for minor personal use, businesses should not be burdened with keeping detailed use logs to deduct an otherwise legitimate business expense.

The tax code also makes any computers not used in a business office, or in a qualified home office, listed property, requiring documentation under IRC 280F (d) (4) (c) (3) of the specific amount of business and personal use.  Since 1986, the cost of computers has significantly decreased, and the ability and need for business people to use laptops and PDA computers outside of a regular office has greatly increased.     As with cell phones, if there is a legitimate business need for the computer or PDA, there is little or no additional marginal cost for any personal use of the same equipment, since most hardware is replaced long before the end of its potential usable life.   

Most government employees have office computers, laptops, PDAs, or cell phones, provided at taxpayer expense, which many of them also use for personal emails, personal conversations and other nongovernmental activities.    Taxpayers should also no longer be burdened with outdated and impractical record keeping requirements and deduction limitations for basic business tools.    Revenue scoring costs for these changes should not be high because JCT takes noncompliance into account and most business people probably already ignore these requirements because they no longer seem reasonable.

Cell phones, PDAs, computer equipment under $2500 in value, and similar equipment whether used in a regular office, a home office, or on the road, should be removed from listed property requirements, and any taxpayer who can show substantial (75% or greater) business use, should be allowed to deduct all monthly service charges and depreciate, or expense under IRC Section 179, the equipment costs, without detailed usage logs.   Any extra cost recreational software or accessory equipment that is not required for business use should of course continue to be non-deductable.




Principle 2.   Periodically update all dollar limitations and rate break points in the tax code by an appropriate and standard inflation factor.

This could be done with a one time adjustment for inflation that has occurred since each provision’s adoption or last change, and the addition of a standard inflation adjustment provision for all dollar limits in the code that do not have a greater specific adjustment.   This would preempt the many separate and different inflation adjustments in various areas of the code by defining a standard  basis for measuring  general  monetary inflation,  and requiring that whenever it has increased more than 15% or  20% since the last adjustment the IRS would calculate and issue by regulation new limitation amounts and rate breakpoints to apply to the following tax year.  This would prevent inflation from changing the original intent of Congress on limits that have not received regular adjustments.   

A good example of a provision needing modernization is the outdated $25 business gift limitation.   In 1962, Congress passed Public Law 87-834, which limited the deductibility of a business gift to $25 to prevent the deduction of “excessive” gifts.  This amount has never been adjusted for inflation.  After 44 years of inflation, that $25 gift would now cost $172.  The $25 limit applies to either a gift to a single person or an indirect gift received by a group such as a business customer.   Thank you gifts to customers are an important sales generating tool for small businesses.    There should not be unlimited gifting, but the $25 amount needs to be increased.  Even a “thank you” plant delivered to a business would cost about $100.

The deductible business gift limit should be updated to at least $100, or the current equivalent value that $25 represented when the original law was passed, and this amount should be adjusted for inflation.


Another priority would be modernizing the outdated and poorly written limitation on “luxury” automobiles.   The tax code defines passenger automobiles as 5-year property under ADS standards for cost recovery.  However, in 1984 Congress limited the ability to expense or depreciate what they thought were “luxury” automobiles used for business by enacting Section 280F(a)(1).    These limits have only increased by about 19.5% since 1987 under an outdated and very restrictive calculation formula, even with general inflation of 89% in that time.     The current limits on depreciation or Sec. 179 expensing for automobiles purchased in 2009 are $2,960 the first year plus possible bonus depreciation, $4,800 the 2nd year, $2,850 the 3rd year, and $1,775 for each succeeding year.”  This is actually a decline from 2007 and 2008.   That means that during the “normal” 5-year recovery period, a business could actually only fully recover the cost of a $14,160 vehicle.  Even after 10 years, at 100% business use, a business could only recover the cost of a $23,035 car.    With average use of only 15,000 miles a year, a business car would have 150,000 miles of use at the end of a 10-year recovery period, and many business users exceed that yearly mileage use.  To consider an automobile costing less than $15,000 a “luxury car” is simply unrealistic. The National Automobile Dealers Association indicates that the average new vehicle selling price in 2006 was $28,450.   The only vehicles that still sell below this depreciation limitation are small compact cars such as the Hyundai Accent.  None of these vehicles is designed to transport five adults, or is suitable for many valid business uses such as transporting samples.  Most of these cheaper cars are also imported, which has helped contribute to the decline of American auto manufactures.   The depreciation limitations also force businesses to keep older, more polluting, and less fuel-efficient vehicles in use.

The Joint Tax Committee staff indicates that the inadequate adjustment for inflation resulted from an unrealistic indexing formula in the original law that was based on a standard “basic” 1984 car, which does not include all of the expensive safety, pollution control, and fuel economy equipment that is now required on most cars.  

The American automobile industry is in an economic crisis, and one or more of the remaining manufacturers may soon fail, with significant economy wide job and benefit losses.   The tax code should encourage regular replacement of business vehicles, not unreasonably discourage them.     If Ford, Chrysler, and GM fail, economists predict a loss of 3 million jobs and $60 Billion in annual tax revenue.   Removing this antiquated provision will stimulate business purchases of new vehicles, and help rebuild auto sales.    

The automobile depreciation limits should be adjusted to allow a person who needs to use an automobile for business to fully recover the cost of a vehicle with a cost basis of at least $25,000 during the standard 5-year recovery period, at 100% business use, and that amount should then be adjusted for average vehicle inflation.


Principle 3.    As much as possible, take tax considerations out of the business issues involved in choosing a business entity by applying the same rules, and offering comparable tax advantages, to all forms of business organization.

A top priority is the equal and simple deductibility of group health insurance, for all small businesses.    Although prior Congressional action  partly corrected this inequity, 21 million self employed individuals are still required to treat their health insurance premiums expense as a non business expense that is included in the individual’s income which is subject to the 15.3% self employment tax.    This is not the case with other employees of corporations and governments.  This inequity has always been an emotional disincentive for small business owners to provide group health insurance for their other employees.  As more states or the Federal government adopt universal health insurance requirements, the impact of this inequity will continued to grow, unless corrected.   The National Taxpayer Advocate has recommended correction of this inequity in her Reports to Congress.   

Congress should finally fully equalize the deductibility of a reasonable level of group health insurance at the entity level for all forms of businesses by repealing IRC section 162(l) (4).   If there is concern about small businesses not providing coverage for similar non-owner employees, provisions could be added that deductable coverage be the same as for other employees of the same job class.   An even better step for businesses would be for Congress to allow the deduction of a reasonable level of health insurance by individuals, so businesses could just provide monetary compensation, so employees could choose their own health plans and providers.  


Another priority would be removing the inequitable limitations on all small businesses, other than “C” corporations, that would like to offer a “cafeteria” benefit option program to their employees.

Small businesses compete for workers with large businesses and the public sector.  These employers can provide more employee benefit options to potential employees than most small businesses.    Because of differing family situations, differences in the benefits available through other family members, or just because of different personal preferences, potential employees often want different employment benefits than other workers.     Small business usually cannot afford the expense or administrative cost to provide a wide selection of benefits to all employees, particularly when they may not be important to many of their workers.      The logical solution is to offer employees a given dollar cost benefit amount, but allow the employee to select the benefits they need.

Large employers have this option in the form of tax free “Cafeteria Plans”, but the current restrictions on offering Cafeteria Plans makes them unusable for most small businesses because business owners could not be part of the plan.   Current law specifically prevents sole proprietors, partners, sub chapter S corporation shareholders, and members of an LLC from participating in a cafeteria benefit plan even if they receive only the same level of benefit as other employees.    These illogical limitations restrict the ability of small businesses to compete for workers, and prevent them from offering employees a very logical form of employment benefit.

Congress should enact legislation allowing “simple” cafeteria benefit plans that could be offered by all types of small business entities, for both non-owner and part owner employees, at a reasonable administrative cost and with adequate provisions to prevent misuse.


A third priority would be correcting the inequitable impact of Alternative Minimum Taxes on “pass through” entities such as S corporations, partnerships and Schedule C or F filers.

Small businesses are unfairly impacted by the Personal Alternative Minimum Tax because most small businesses and farms report their income and deductions, and pay taxes on their business income, in addition to their personal salaries and other income, on their personal 1040 tax return.   This combined reporting of both personal and business income pushes a large percentage of small business people above the exemption limit and makes them calculate and pay the Personal AMT which applies at much lower income levels than the Corporate AMT.    The Corporate AMT only applies if the 3 year average business gross income exceeds $7,500,000.    Small businesses are also unfairly impacted because they are unable to actually deduct the large amounts of state income tax paid on their business income because of the low personal AMT exemption limit.   Some state income tax rates exceed 10%.   What remains of the business income, after paying taxes, must often be re-invested in the business, and is a key factor in a business’ ability to survive and grow. 

Taxpayer Advocate Olson, starting in her 2001 Report to Congress, has repeatedly indicated that if the individual AMT is not eliminated, Congress should “Eliminate personal exemptions, the standard deduction, deductable state and local taxes, and miscellaneous itemized deductions, as adjustment items for Individual Alternative Minimum Tax purposes.”  She has also advocated that the AMT be permanently indexed for inflation. 

Proposals to eliminate the individual AMT and offset the revenue with an across the board “surtax” on individual incomes would still have an adverse discriminatory impact on small businesses, who report all their business income in addition to their personal income on their personal return.  This approach also ignores the original, and reasonable, intent of the AMT not to be a general revenue source, but to target only those who take excessive or unfair advantage of the regular tax system.


Congress should provide better equality in the tax treatment of small business income with the far more generous “C” corporation AMT exemption on business income of $7,500,000.   An additional ”business income” exemption of up to $250,000, should be added to the personal AMT code for business income reported on a Schedule K1 or Schedules C or F for a business in which the taxpayer materially participates.   Congress should also set a reasonable minimum gross taxable income threshold of perhaps $250,000 in Adjusted Gross Income for all taxpayers before the AMT calculation would even be required.   The deduction for state and local taxes paid should also be permanently allowed in the personal AMT calculation.


These changes would remove the AMT burden for most taxpayers and provide some equitability with the C corporation AMT exemption, with a lower tax expenditure cost than full repeal, and also restore the original congressional intent of the AMT.


Principle 4.    Do not create new tax expenditure benefits in the tax code, and then take them away from many taxpayers through complicated  phase-outs, limitations, adjustments, recaptures,  or a lack the of matching exemptions in the Alternative Minimum Tax provisions.

A prime example is the ineffectiveness of the Section 1202 and Section 1244 incentives for small business equity investment.    Congress passed Section 1202 and Section 1244 of the tax code to encourage direct investment in small business startups.  Most business startups are under capitalized and are financed largely with expensive short-term borrowing, which is a major reason for their high failure rate.   These provisions were adopted because of the realization that new businesses need a stable base of equity capital to survive and grow.    It is very difficult for new businesses to get equity capital because of the far higher risk and lack of market liquidity of small business stock compared to other investments.


  Section 1202 provided an incentive of a partial exclusion on the capital gain from a sale of Qualified Small Business Stock held for more than 5 years.     Congress recently raised the exclusion percentage on a temporary basis.    However, the reduction in the capital gains tax rates on all investments combined with the failure of Congress to include the 1202 exemption in the AMT tax provisions has effectively eliminated much of the value of this incentive.      Section 1244 also provides an incentive by allowing a greater offset of capital losses on small business investments against other income.    Both of these provisions have been less effective than intended in promoting small business investment because they provide no up-front tax incentive for an investor who may have to hold the stock for a long period.     In recognition of this, President Obama has proposed eliminating the capital gains tax up to $250,000 on start-ups and small businesses to encourage innovation and economic growth.

Congress should make permanent the current regular tax code exclusion on part of the gain on Section 1202 qualified small business stock and also exempt it in the AMT calculation.   This could revitalize an important tool for small business financing, particularly if capital gains rates increase in the future.   As an alternative, Congress should consider providing a 10% up-front tax credit for investment in Qualified Small Business Stock, which would help offset the much higher risk of loss.   The credit could be recaptured at 20% per year if the stock is sold within 5 years and would reduce the stock basis in the event of a gain.


Principle 5.    Reduce long cost recovery periods, and complex record keeping for small business equipment purchases and facility improvements.  

The Section 179 small business expensing provisions are a key factor in helping small businesses survive and grow by improving their ability to quickly, and simply, recover the costs of investments in new equipment.   This promotes business productivity and provides a major stimulus to the general economy from increased purchasing capability, particularly with the limited credit available to small and new businesses.    Without rapid cost recovery, many small businesses have inadequate capital to continue and grow.  Timely cost recovery is particularly critical for start-up businesses that are often dependent on personal savings or high interest credit card financing.   This has become even more critical because of the severe restrictions on bank credit availability due to the current economic crisis.

Bureau of Labor Statistics research has found that 44 % of all new businesses fail within their first two years, and 66% fail within 4 years.   Tax regulations that unreasonably delay or prevent businesses from recovering their costs can be a major factor in that high failure rate.

Congress should make permanent the current $250,000 expensing limitation and $800,000 investment cap for Section 179 property, so small businesses can make equipment  purchases when they need them.


There is also a need to change the definition of Section 179 property to reflect the changing needs of small business.   In 1958, when this Section was first approved, the US economy was strongly manufacturing oriented and most small businesses needed to purchase production equipment.   Over the last 50 years the US economy has become more service and innovation oriented and the capital expenditure needs of small businesses have changed.

To compete for customers and clients, businesses today need functional and attractive facilities in which to conduct business.   Better facilities also help businesses attract and retain more highly skilled employees.   New businesses often face significant costs in remodeling and preparing a business property for their use which must then be recovered over a long period.   This can consume a large amount of the business’ initial capital, and make it difficult for the business to survive and grow.    Congress has partly recognized the changing capital investment needs of small business by including non-structural leasehold improvements for some kinds of business real property in recent short-term stimulus measures.    Prior to the 1986 tax act, tenant improvements to real property could be depreciated over the remaining lease period.

Congress should amend the definition of Section 179 property to include general non-structural remodeling improvements to business real property used for conducting business with customers or clients.   This would include changes to interior and exterior surfaces, and items such as display windows, nonstructural partitions, and building fixtures.   The current exclusion of heating and air conditioning equipment from Section 179 property should also be changed to encourage businesses to replace old equipment with new high energy efficiency units.   For more expensive improvements, Congress should shorten the depreciation period for nonstructural real property improvements to 15 years on a straight-line basis. These changes would have significant short-term and long-term economic stimulus effects.


Principle 6.    Provide alternative “simple” provisions in the tax code that provide equitable tax deduction benefits to small businesses without excessive administrative requirements and costs that often become a barrier to small business use of a tax benefit.

A high priority would be passage of a “simple“ home office deduction alternative.    Most small businesses are prevented from recovering the cost of a home office even if they meet the other qualifications because of the complexity of the current requirements to calculate proportionate expenses and depreciation for the designated office area. 

New entrepreneurs who are unsure how long they will need a home office may be particularly concerned about the recapture of depreciation, or need for other adjustments, when they sell their home, whether they actually deducted the full potential depreciation or not.   Most startup businesses that operate outside the home usually choose to rent business space and equipment rather than own it, partly to avoid all the tax complexities.   New home based businesses are usually even smaller and less knowledgeable about the tax code.

IRS Tax Payer Advocate Nina Olson in her 2007 Report to Congress agreed, stating:

“The tax laws regarding the home office deduction are considered by many to be too complex and the record keeping responsibilities associated with the deduction to be too time-consuming.   It is questionable whether most taxpayers who are eligible to take the deduction actually do so.”  She recommends that; “Congress should amend IRC Sec 208A to create an optional standard home office deduction.  The legislative provision would direct the Secretary of the Treasury to draft regulations which calculate the deduction by multiplying an applicable standard rate, as determined and published by the Commissioner of the IRS on a periodic basis, by the applicable square footage of the portion of the dwelling unit described in IRC Sec. 280A(c).”

Currently, home-based businesses represent 52 percent of all American firms and generate 10 percent of the total country’s GDP, or economic revenue.    In the future, that percentage is likely to grow as new technologies and the Internet make new business models possible and increase the ability of people to work remotely, rather than commute.   Because the Tax Code does not exclude income resulting from work done in home offices, it should also allow home office workers a reasonable ability to deduct the cost of space and equipment actually used to produce the income.      Working from the home has become more attractive because of the increased costs of commuting, high commercial real estate and parking costs, and the desire of many workers to have more involvement with their children and families.    Government should also have an interest in promoting working at home as a way to reduce the need for new highway construction, conserve energy, and reduce “green-house gas” emissions from unnecessary commutes to a distant business office. 

Business owners and home based businesses should have a simple optional way to deduct a reasonable standardized amount for utilizing part of their home for business use, without the current calculation complexity.   This amount could be based on the square footage of the office area used, with clear calculation guidelines, and an upper limit.    The deduction amount should also be limited by the amount of income produced by the related business activity.    This concept would be similar to the standard deduction options for business travel per diem or auto mileage, and would not involve depreciation calculations and later re-capture.   Home office users could choose to continue to follow the current deductibility rules, or choose the more conservative, but simpler, standard deduction, which would include a reasonable cost allowance based on the space used for typical costs, including utility expense, real estate taxes, and  maintenance costs.


Current home office deduction requirements also include outdated and unrealistic requirements for physical customer presence and exclusive use that also need to be changed to permit reasonable deductibility.

Internal Revenue Code Section 280A(c) (1) defines the deductibility requirements for a “qualified” home office.  The Code currently permits a deduction for a home office in a taxpayer’s residence only if it is -

       “…exclusively used on a regular basis –

(A) as the principal place of business for any trade or business of the taxpayer,  

(B) as a place of business which is used by patients, clients, or customers in meeting       or dealing with the taxpayer in the normal course of his trade or business, or 

(C) in the case of a separate structure which is not attached to the dwelling unit, in connection with the taxpayer’s trade or business”,

or for certain specifically defined business storage or home care facility uses.

 Many at-home workers are afraid to use the home office business deduction because of the fear of audits on vague issues and the extra record keeping and calculations that may be required. The existing requirements for qualified activity are also unrealistic and outdated by the realities of today’s technologies, and current business practices, and should be modified.

Theexclusive” use requirement-

The Code requires any home office to be “exclusively used on a regular basis” as a place for business.   IRS Publication 587 currently states, “You do not meet the requirements of the exclusive use test if you use the area in question both for business and personal purposes.”    This is actually a much higher standard than is applied to regular fully deductable business locations.    A reality of today’s business world,  where employees carry cell phones and work at internet connected computers, is that most workers conduct some personal business and receive  some personal calls or emails during the day at their place of business.   The same is true in the public sector, where GAO investigations have even found IRS employees using their computers for personal email and activities in the IRS Building.     It probably happens in most government offices.     It is both unrealistic and unreasonable not to also allow some minor de minimis personal activity in an otherwise qualified home office area used 80% or more for business.

The “principal place of business” requirement-

As the first optional test, the Code allows a deduction for a home office which functions “as the principal place of business for any trade or business of the taxpayer”.   Previous IRS regulations stated “a home office in which a taxpayer engages in a business as a self-employed person would rarely qualify as the taxpayer’s principal place of business if the taxpayer’s primary source of income is wages for services performed in another business on an employer’s premises.”  Yet, the code clearly allows for multiple businesses of a taxpayer.    Many new home based businesses are started on a part-time basis, during evenings and weekends, while the entrepreneur still has the income cushion of a regular job.   Regulations should clearly allow deduction of a home office used for new business activity; even if the taxpayer’s primary income is from a different business.

The Code also states that “…the term ‘principal place of business’ includes a place of business which is used by the taxpayer for the administrative activities of any trade or business of the taxpayer if there is no other fixed location of such trade or business where the taxpayer conducts substantial administrative activities of such trade or business.”  This allows outside sale representatives and others to deduct a home administrative office when they have no alternate office location.     

Unfortunately, for many small businesses the inability “to conduct substantial administrative activities” at their regular place of business” is often the result of a lack of time, rather than a lack of space.    In a small business, the owner or manager is often also the front line person who actively waits on customers and actively supervises employees during regular business hours.   To deal with all the competitive and regulatory issues that most small businesses face, successful owners and managers often need to work on business issues in the evenings and on weekends, even after working a 50 to 80 hour week.  Large businesses have specialized executive staffs to do planning, administrative and accounting functions and other support activities, but small businesses don’t.   Small business people can have a legitimate business need for a home office in which they can regularly work, even if it is not the principal place of business where they physically serve their customers.   IRS Regulations should allow small businesses to deduct otherwise qualified home offices used for administrative work even when they have a primary place of business outside the home.

Interestingly, the code currently allows a clear deduction  for home offices and other business uses in separate “free standing structures” on a residential property “…such as a studio, garage, or barn” without meeting the requirements of being the principal place of business or the requirement for meeting with clients.    Why should some taxpayers who can afford a large house with a detached garage, or have a large enough lot where they can legally build a separate structure, be exempted from these home office use requirements when poorer taxpayers living in smaller houses can’t use the same standards for deducting business use of part of an attached room?

Part owners of partnership, S corporation and LLC structured small businesses, are also specifically prohibited from deducting a home office, or renting part of their home to their corporation.   However, many small businesses want the protection of an S corporation or LLC structure and may have no other place to operate their business other than their home.   Owners or managers of small corporations or partnerships should not be denied the ability to recover the costs of a home office if they meet the other reasonable requirements for deductibility.

The “used by patients, clients, or customers” requirement-

The current IRS Publication 587 on “Business Use of Your Home” states that the taxpayer must “physically meet with patients, clients, or customers on your premises.”, to qualify as a home office    The actual IRC code only requires that it be “a place of business which is used by patients, clients, or customers in meeting or dealing with the taxpayer in the normal course of his trade or business.    Today, many businesses deal with their customers electronically through websites, without any physical presence.  Major and minor business transactions are now fully completed, over the internet, or through emails, faxes or on the telephone.   The old physical presence requirements are obsolete and block reasonable recovery of expenses for many small home based businesses.

Congress should modernize the definition of a qualified home office for entrepreneurs who have a need to use an area of their home on a regular basis for normal business activity.   The “principle place of business” requirement should be modified in statute to allow a home office when it is needed to regularly perform work activities outside the principle business location.  The exclusive use requirement should also be changed to allow occasional personal activity comparable to that which occurs in a regular business office, and legislation should clarify that use of the office for electronic business transactions has the same validity as use for physical business interaction.


Principle 7.   Reduce the burden on  taxpayers to create complex legal arrangements to preserve family businesses for their children, because of uncertain or excessive Estate Taxes.

The Estate Tax currently affects only those estates with an adjusted value over $3.5 million and collects only about $24 billion in revenue.   Under existing law the estate tax will be fully eliminated for one year in 2010, but without the normal “step up” or re-valuation in basis to the value of the assets at the date of death.    To avoid future complexity, is important to retain this traditional re-valuation in basis with each generational transfer because most individuals do not keep adequate records to determine the original cost of most personal assets. This makes it difficult to determine the basis and taxable gain when the receivers eventually sell the assets.   Executors of estates can face penalties for not providing correct basis valuation information.

Unless new Congressional action is taken, the Estate Tax will then return in 2011 under old rules, with only a $1 million exemption and with a maximum tax rate up to 55%.   After many years of hard work, and monetary inflation, many small businesses can have appraised valuations well over that exemption level, resulting in significant potential estate tax liability upon the death of the business owners.     Because much of the “wealth” that is taxed by the Estate Tax is actually just the result of inflation in the dollar value of assets such as businesses and homes over the 20 years or more between generations, it is particularly important that Estate Tax exemptions  also be adjusted regularly for inflation.    

Before 2010, adopt the provision in the recent Budget Reconciliation for a permanent unified Gift and Estate Tax exclusion of $3.5 million per individual, with a maximum tax rate of 45%, in addition to maintaining the current Code provisions intended to help family farms and business survive generation transfers.   The code should continue to provide a re-valuation of the basis of inherited assets based on their value at the time of death and any unused part of a spouse’s exemption should be transferable to a surviving spouse.


Principle 8.    It is important to regularly evaluate the actual impacts of the tax system, and the financial and regulatory environment on the ability of small businesses to succeed and grow.  The Congress and Administration should seek broad based input from small businesses about the problems they face, and the ideas they can develop for improving the small business economy, by authorizing a National Small Business Summit on economic recovery.


If we are going to rebuild a growing and sustainable economy, government needs to better understand and address the unique needs of the small business community, particularly in the area of taxation and regulation.   According to the latest SBA research, over 99% of all US, businesses are small businesses and they provide over 50.4% of all private sector jobs.  Small businesses created over 79% of the net new domestic jobs in 2005.  Small Business is a major factor in the export of traded sector goods and services, which is vital to our economic future.   Unlike many large businesses, most of these businesses are also American owned, and their jobs and profits stay in the US to grow our economy.    

This year marks the beginning of a new Presidency, with many new leaders in the Administration, in federal agencies, and in the Congress.    For these leaders to be effective in helping rebuild the small business economy, they need to better understand its needs.    It has been over 14 years since the federal government last sought broad based and balanced input on the problems affecting the small businesses, through the 1995 White House Conference on Small Business.    

That National Summit process provided lasting benefits to both the small business community and to the government.  Small business representatives came from across the country to learn about the governmental process and communicate their problems, concerns, and ideas.   The administration and Congress also benefited by obtaining a better understanding of the factors which impact small businesses and their ability to create jobs and economic growth.   The representatives had an opportunity to discuss, with our leaders, creative and efficient solutions to national problems that affect small businesses. This dialogue significantly enhanced the Administration’s “re-inventing government” process and they recommended regular periodic summits.   Many of the 60 recommendations developed by the delegates in 1995 were later implemented by Congress or federal agencies with lasting economic benefits.    Continuing activity by participants on some issue areas, such as tax policy, has also helped build cooperative partnerships with federal agencies to resolve long-term problems for small business.   


Now, new and different problems threaten the survival and potential growth of the small business economy.     With the devastating impact of this economic recession, it is imperative that Congress take action this year to initiate another National Small Business Summit to understand what will help rebuild the small business economy.

A new Summit format would involve Congress more heavily in the selection of both an organizing Commission and Conference delegates.   Congressional leaders would receive special recognition and have an opportunity to participate in the Summit.


Delegates would be real small business people and include representatives of all states to reflect the country's geographic and social diversity.  The delegates would be selected by Congressional and Presidential appointment and by application to the SBA Office of Advocacy.    A Small Business Summit would provide Congress and the Administration with input on the broad concerns of small businesses rather than the positions of separate business and trade associations that focus mostly on their own, or their industry's, priorities. Actual small business owners will be able to communicate what is actually needed to help them grow their businesses and the economy.


The Summit should be efficiently organized by a conference contractor, with policy guidance from an appointed Commission and the SBA Chief Counsel for Advocacy.  The contractor would solicit private sector sponsors for Conference events to minimize public cost and delegate registration fees.  


The Summit would utilize cost efficient electronic information sharing and communication technologies, to develop and communicate issues.  This would enable state delegations and issue groups to share information and ideas prior to the National Summit, and eliminate the need for expensive state and regional level meetings that were used in past summits.   With this cost efficient format, the event sponsorships and delegate registration fees should fund all direct Summit costs other than SBA staff time and communication costs.


To start this Summit process, I ask that the House Small Business Committee add a provision to the SBA Re-Authorization bill matching the provision in the Senate version of the Reauthorization which authorizes a National Small Business Summit on Economic Recovery in 2010.


Thank you and I would be pleased to answer any questions.


Eric Blackledge                                    Coalition for a National Small Business Summit

P.O. Box 639  Corvallis, Oregon 97339            Email Eric@NationalSmallBusiness.net