U.S. House Focuses on Small Business Tax Reform

Posted 6/11/2012
By Robert L. Redding Jr.

The U.S. House of Representa­tives has been busy with legislation and hearings structured to assist small businesses. House Small Business Committee Chairman Sam Graves (R-Mo.) has been aggressive with hearings promoting a small business agenda and the value of small businesses to the U.S. economy.

The House sent a strong policy message with the passage of H.R. 9, the Small Business Tax Cut Act. This legislation allows a business employing fewer than 500 employees to deduct 20 percent of its income from its federal taxes. It is estimated that this bill, if it became law, would impact 22 million small business owners in the U.S.

The bill:
•            Amends the Internal Revenue Code, to allow a qualified small business a tax deduction equal to 20 percent of the lesser of qualified domestic business income or taxable income.
•            Defines: (1) “qualified small business” as any employer engaged in a trade or business if such employer had fewer than 500 full-time employees in either 2010 or 2011; and (2) “qualified domestic business income” as an amount equal to the excess (if any) of the taxpayer’s domestic business gross receipts (i.e., gross receipts effectively connected with a trade or business within the United States) for a taxable year over the sum of the cost of goods sold allocable to such receipts and other expenses, losses, or deductions properly allocable to such receipts.
•            Limits the amount of such deduction to 50 percent of the greater of: (1) the taxpayer’s
W-2 wages (payroll) paid to nonowners of the taxpayer’s business; or (2) the sum of the W-2 wages paid to individuals who are nonowner family members of direct owners (i.e., stockholders of the business), plus any W-2 wages paid to direct owners who have an ownership interest in the business of 10 percent or less.

The U.S. Senate has not scheduled floor consideration for H.R. 9.

At the House Small Business Committee, members met to hear testimony on the “Tax Landscape for Small Businesses: What’s on the Horizon?” Graves opened the public hearing, stating: “Federal taxes consistently rank among the top five problems that small business owners face. And a Small Business Adminis­tration study found that it costs small- and medium-sized businesses 36 percent more per employee to comply with regulations than larger ones.

“Small business owners face other obstacles, too. Many will be hit with new taxes and tax increases in the health care law, such as the increase in the Medicare payroll tax and an unprecedented Medicare tax on non-payroll income. And if the 2001 and 2003 tax relief is not extended, many small business owners may see their tax bills increase. Already facing rising energy costs and scarce capital, they don’t need tax increases in this struggling economy, too. We should be fostering an environment where people are rewarded for investment; that’s why we encourage investment in entrepreneurship. But if we are going to penalize those investments by raising taxes on them, then our small businesses will find it even more difficult to access capital.”

Witnesses for the hearing included Dr. Aparna Mathur, American Enterprise Institute; and Leonard Steinberg, Steinberg Enterprises, LLC. Mathur pointed out the negative impact higher tax rates, higher health care costs and policy uncertainty can have on small businesses and noted the blow the current recession has caused to small businesses.

Mathur stated, “Between 2007 and 2010, employer establishment births dropped 12 percent from 844,000 to 742,000. Of the total number of firm births, about 85 percent are new employer firms, or startups, that are small businesses, while the remaining 15 percent tend to be new locations for existing businesses that expanded their operations. In the second quarter of 2008, the establishment startup rate fell below 3 percent for the first time since figures were recorded in the early 1990s. The latest startup rate for which data is available is 2.7 percent in the second quarter of 2011. Moreover, the startups being created now are smaller on average than they were in 1999. In other words, they are creating fewer jobs. Given the important role that startups play in job creation, this recession has been particularly bad for small employer firms.”

This certainly affirms what is occurring in the collision marketplace with multi-shop operators (MSOs) increasing versus new shop starts.

Steinberg, a certified public accountant, commented: “The constant uncertainty in the tax code from year to year causes business owners to be reluctant to take action which would enhance their respective firms. Business owners cannot effectively plan for the future. When Congress passes tax credits, these only take effect when the tax return is filed, which is at least 12 to 18 months later.” With reference to the tax pressure on small businesses, Steinberg said, “Whenever money is taken out of the economy from the small business community, the consequences have multiple effects. Business owners cannot afford to give their employees timely raises, profit sharing and other fringe benefits are cut or withdrawn, business owners defer capital expenditures affecting their suppliers and the supplier workers, worker disposable income is reduced, affecting vacations, restaurants, entertainment and other activities.”

It is unlikely the Senate will act on H.R. 9 this session of Congress. Unfortunately, if the House passes tax reform, the Senate remains
in gridlock on major issues, particularly related to taxes. The necessity of having 60 Senate votes on major legislation has the potential to stall meaningful small business tax reform legislation for the foreseeable future. It is unlikely that either party will begin the 113th Congress with 60 or more votes in the Senate. Without 60 votes necessary to halt debate, tax reform becomes very difficult.

Bob Redding is the Automotive Service Association's Washington, D.C., representative. He is a member of several federal and state advisory committees involved in the automotive industry. For more information about the legislative activities of ASA, visit www.TakingTheHill.com.