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Posted on Jun 06, 2011

Tax Reform and Small Business

National Small Business Week Picture - Franchise HelpIf you consider yourself to be a small business owner, hopefully you "felt the love" the other week when President Obama declared it Small Business Week.  He stated: "From the family businesses that anchor Main Street to the high-tech startups that keep America on the cutting edge, small businesses are the backbone of our economy and the cornerstones of America's promise."

Not to be left out, the IRS did its part as well to honor small businesses by reminding them of special IRS tools and incentives for America's job creators.

Congress, meanwhile, has been holding several hearings in preparation for reforming the federal tax system. In March, the House Ways & Means Committee held a hearing on small businesses and tax reform. In April, the House Small Business Committee held a hearing on how tax complexity hinders small businesses.


Yet despite attention on small business opportunities, the talk of tax reform seems more centered on lowering the corporate tax rate to improve international competitiveness than it does on ground-level relief that will spur growth and job creation from our nation's struggling small businesses. You see, most businesses simply do not operate as C corporations. In fact, as the IRS' data indicates (see charts below), in 2007 only 18% of businesses were corporations! Of that 18%, two-thirds operated as S corporations (pass-through entities), meaning the corporate tax rate modifications under review would have virtually no effect on their earnings.

(For more data, click here.)

 

 

 

 

 

 

 

So -- what is ACTUALLY in store for small businesses when it comes to future income tax rates, possible changes in deductions and credits, tax code simplification, and other reforms? Well, there are certainly no shortage of reforms that needed to help small businesses (and our economy) grow: these reforms include the need to simplify the law, modernize tax rules on employee benefits to reflect today's workforce, make better use of technology in tax compliance, and assist states in resolving the time-killing (and growth-reducing) multi-state tax issues that plague many businesses on the cusp of expansion.

In future guest posts, I will discuss what President Obama and Congress are focused on and proposing for tax reform, suggest some possible reforms, and do my best to address comments I hope to get from you on my posts.

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Annette Nellen has been running the 21st Century Taxation website and blog for over four years.  Her focus is raising awareness on tax system weaknesses, possible solutions and the need to modernize tax systems and follow principles of good tax policy. She is a full-time professor in a graduate tax program (MST) at San Jose State University and an active member of the tax sections of the AICPA, ABA and California Bar. Annette has been actively involved in studying tax policy and reform for over 20 years – check out her website for more information.

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