Testimony
Statement of Eric R.
Blackledge
On
Tax Simplification
for Small Businesses
Before the
U.S.
House of Representatives Small Business Committee
Subcommittee on Finance and Tax
May 7, 2009
Introduction
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.
The “exclusive” 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