As Congress debates tax reform, it is necessary to keep in mind the issues that are most important to small business owners. High tax rates and the complexity of the current tax code are persistent problems for small business owners. NFIB’s most recent Small Business Problems and Priorities survey demonstrates the challenges the tax code presents to small businesses. Five out of the top 10 issues identified in the survey are tax-related. Specifically, federal taxes on business income rank third, tax complexity ranks fifth, and state taxes on business income rank ninth among major concerns. This demonstrates a strong need for tax reform that helps small business owners.
Small businesses are the major source of growth and job creation in our economy. In fact, according to the Small Business Administration (SBA), small businesses account for 64 percent of the net new private sector jobs created in America and make up 99.7 percent of U.S. employer firms. Yet small businesses are still struggling to recover from the recession. Comprehensive tax reform is one way that Congress can create an economic environment that can help small businesses thrive. By improving our tax system, Congress can address a constant concern of small businesses, reduce the cost of doing business, and create a tax system that will support economic growth.
NFIB supports the following principles for tax reform:
- Tax reform must ensure that small businesses have rate parity with their larger competitors, and reduces tax rates for all small businesses, regardless of size or structure.
- No small business should pay a higher tax rate than they do currently, and small businesses should not face a higher tax rate than large corporations, which would put them at a competitive disadvantage.
- Tax rates on corporate and pass-through businesses should stay equal and low.
- Tax reform should promote economic growth and simplify the tax code.
- Tax reform should avoid picking winners and losers based on their industry type.
Tax rates on corporate and pass-through businesses:
The vast majority of small businesses are organized as pass-through entities, which pay tax on business income at the pass-through tax rates and not at the corporate tax rate. Such entities include any company that is organized as a sole proprietorship, a partnership, LLC, or S Corporation. The term “pass-through” comes from the way the income earned by the business “passes through” to the owner. This means that increases in the pass-through taxes reduce the capital the business relies on to purchase new equipment, pay salaries and benefits, and meet daily operating expenses.
Pass-through businesses play an important role in the economy and have been a growing source of entrepreneurship. Therefore, the tax implications of choosing a pass-through entity should play a major role in the tax reform debate. While most discussions on tax reform are about lowering the corporate tax rate, tax reform should also include lowering the pass-through tax rate to support pass-through businesses. NFIB supports H.R. 116 and S. 707, the Main Street Fairness Act, which would reduce taxes on pass-through businesses and make them more competitive, and ensure that all businesses, large and small alike, compete on a level playing field going forward.
Key Facts about pass-through businesses:
- Based on a 2012 NFIB Tax Survey, 77 percent of NFIB members operate as pass-through entities.
- According to the Tax Foundation, pass-through businesses accounted for 64 percent of net business income in 2011.
- Corporate-only reform would raise taxes on pass-through firms by 8 percent per year ($27 billion) Note: 8 percent tax hike does not include higher rates in 2013. (Bob Carroll at Ernst & Young)
Tax reform should promote economic growth and simplify the tax code:
Small businesses understand better than others that the current tax code is needlessly complex and in need of simplification. For small business owners, a less complicated tax code would reduce the cost of doing business, freeing up funds that could be spent on operating and growing the business resulting in a stronger business environment and economy. NFIB research has shown that small businesses spend annually between 1.7 billion to 1.8 billion hours on tax compliance and $15 billion to $16 billion on compliance costs. They spend on average $74.24 per hour on the paperwork associated with tax compliance—the highest paperwork cost imposed on small businesses by the federal government. Simplifying the tax code would mean small business can spend less time and money doing their taxes and commit more resources to running and growing their business. Click here for more information on tax complexity.