Each year on April 15th, you can easily get overwhelmed when trying to personally file your taxes. Am I eligible for a certain tax credit? Do I have the right documents to justify all my expenses and charitable donations throughout the year? Did I fill out my HSA information properly? Am I correctly claiming my medical expenses? The list goes on and on. The same compliance nightmare awaits small business owners, many of which operate within extremely tight margins and are unable to afford a tax professional.
The time is right for smart tax reform that will end this annual nightmare. America can no longer limp along with little to no economic growth. Our businesses, both big and small, need to once again be able to compete with the rest of the world for jobs and investment.
Smart tax reform begins with tackling the complexity of the code itself. The Internal Revenue Code has grown to 2.4 million words, with a mind-boggling 7.7 million additional words of regulations to ‘clarify’ the code. However, clarity is the last thing anyone would accuse the American tax code of having. It is unrealistic to expect most individuals or business owners to comply with this mountain of confusing and conflicting tax legalese and regulations, despite their best intentions.
The White House, the House Ways and Means Committee and the Senate Finance Committee recently released their framework for tax reform, which lays out the key principles that would touch every citizen in the U.S. and businesses, large and small. The Louisiana Association of Business and Industry is a strong voice among other business groups around the nation who are loudly imploring Congress to reform the U.S. tax code by making it more competitive, predictable and understandable. Our tax code should promote private investment rather than punish it. You shouldn’t have to be a CPA or hire a team of expensive experts to file your taxes.
Small businesses, which serve as the backbone of our economy, are most dependent on smart tax reform. At least 75% of small business owners (think dry cleaner, restaurateur, homebuilder, hardware store owner) file their taxes as what we call a “pass-through,” or on the individual level. They are not set up like a corporation, so they don’t follow the corporate tax structure. It puts small business owners in a unique situation. They must file business tax forms on top of their personal tax forms and can even pay at the highest tax rate for individuals, a 39.6% marginal rate.
Simplifying the way that they file their taxes would be a welcome relief for the little guy. If you are a sub-chapter S corporation, the Tax Foundation notes that annually this one tax treatment spends 889,393,518 hours on tax compliance, equating to $46,292,932,612 for paperwork; roughly $12,000 a year for each business. These hours and dollars spent would be much better invested in our local communities rather than in unnecessary compliance.
In addition to compliance challenges, there are a few other critical principles we urge Congress to follow in reforming the tax code to best help business owners invest back into their business and grow the economy.
Repeal the Alternative Minimum Tax (AMT): The AMT may have been designed as a sneaky way to go after higher income individuals, but what it really did was discourage growth and inject massive complexity into the tax code by requiring many to file their tax returns twice.
Repeal the Death Tax: This unfairly combines the only two things certain in life: death and taxes. This archaic provision punishes success and encourages convoluted planning, often targeting small, homegrown businesses that simply want to continue a family tradition upon the death of a loved one.
Change the tax structure for Small Businesses: Limit their top rate to 25% and figure out a way for them to file taxes as a small business owner and not on top of an individual tax filing. Lessen their rate and simplify their form. We want more small businesses, not less of them, though you would never know it by our tax code.
Expense Capital Investments: Provide needed relief for small business owners by allowing them to immediately write off the cost of new investments, while also lengthening the time to do so and broadening the scope of eligible assets. This will help small businesses invest in the new equipment needed for production or to enhance services.
These principles are critical components of any tax reform intended to help small businesses compete in the modern economy, a goal we must embrace since these owners employ more than 50% of the state and nation’s workforce.
The president and Congress have a moment in time to make a real change, leave a lasting mark and have a positive impact on the economy for generations to come. Tax reform provides the perfect opportunity for Washington to send a clear signal that they, despite popular belief, can still get big things done. This would encourage international markets, inspire domestic voters and hopefully incentivize states like Louisiana to also embrace smart tax reform that simplifies our code, lowers our rates and unleashes the beast of economic growth.