WIPP Tax Testimony April 15, 2015
Friday, April 24, 2015
Statement for the Record
House Committee on Small Business
Tax Reform: Ensuring that Main Street Isn’t Left Behind
April 15, 2015
Women Impacting Public Policy
On behalf of women entrepreneurs nationwide, and our diverse group of Coalition Partners, Women Impacting Public Policy (WIPP) submits the following statement identifying the need for tax reforms to benefit women business owners.
As the advocate for the women’s business community, WIPP has always supported a simpler and fairer tax code. Nearly 90% of women-owned firms are small businesses that, as this Committee has noted, face increased burdens and costs from an outdated tax system. Most important to women business owners, though, is the need for comprehensive reform.
In the current environment of tax reform proposals, agreement is building on the need to lower the corporate tax rate to be globally competitive. Doing so without consideration for the millions of pass-through entities paying business taxes as individuals would be unfair. Tax reform must be done comprehensively. Raising or lowering the corporate or individual rate independent of the other would shift the balance between business types more than three decades in the making.
Change, however, is needed. Not only has the business environment noticeably evolved since the last tax overhaul in 1986, but also the American economy. Simply put, now is the time for reform.
WIPP believes that two overarching themes should guide a re-write of the tax code: simplicity and fairness. The current system is too complex, creating confusion and frustration for women-owned businesses. The system is also unfair to the vast majority of women-owned firms that are small businesses, because they do not have the same capabilities and resources as larger corporations that take advantage of the code’s complexity.
Bringing Simplicity to the Tax Code
Part of making tax reform simple is making tax reform permanent. Tax laws changed the Internal Revenue Service’s (IRS) tax code on two different occasions in 2013, and the IRS National Taxpayer Advocate stated that these changes often generate taxpayer confusion. In addition, Congressional action on business deductions on a piecemeal basis makes planning difficult. Permanent tax reform will lead to more certainty, and as a result, better-informed business decisions.
Complexity has costs for the government as well. It increases the ability of firms and individuals to hide revenues. A simpler code and filing system would make perpetrators of tax evasion more obvious to an IRS struggling with diminished resources. The annual tax gap – the significant amount of revenue owed but not collected – is partially caused by the code’s complexity. In 2001, the most recent year analyzed by the IRS, the tax gap was $345 billion.
The view of the tax code with regard to complexity is best summarized by the National Taxpayer Advocate in its most recent report to Congress: “We have to face up to the fact that we have an incredibly complex tax system that, by virtue of its complexity, creates burden, confusion, and unfairness.” WIPP agrees, and urges Congress to address these challenges.
Ensuring the Tax Code is Fair
American women-owned businesses come in all shapes and sizes, including partnerships, S-corps, C-corps, LLCs, and sole-proprietorships. Having different rules for different businesses only increases complexity (see above). Such a tax system hinders growth and discourages businesses to grow in a way that is best suited for their efforts and development.
Whether caused by different compliance costs, business structures, or accounting methods, the reality is, entrepreneurs are paying more than big business. American corporations only pay an effective tax rate of 12.6%, which is nowhere near the statutory 35%, while small businesses operating as S-Corps pay an effective tax rate of nearly 27%. All the while, small firms are paying 67% more in tax compliance. Resolving this inequity should be a goal of the next revision of the tax code.
While WIPP is optimistic that the 114th Congress can lead on tax reform, smaller tax policies can aid women entrepreneurs without a broader overhaul. In the absence of comprehensive reform, there are steps Congress can take to further support women entrepreneurs.
Incentivize New Businesses
Both chambers of Congress search, almost annually, for ways the tax code can support start-up companies and newly formed businesses. WIPP recommends making many of the tax credits and deductions already proven to support small businesses available to newly formed businesses in their first three years. In the event of an overhaul that removes “tax extenders,” they could still be offered to the newest small businesses.
Businesses with employees who are financially invested in the company’s success often produce impressive results. That is why WIPP recommends that any tax reform avoid modifying the provisions that support Employee Stock Ownership Plan (ESOPs). ESOPs have been a valuable option for employees to be rewarded for hard work and to move on after the departure of an owner. Even more important, they represent another way for small businesses to access capital at low cost. These plans should carry protections to prevent undue risk to employees, but have also demonstrated an increase in production and profitability of many small businesses.
Simplify and Expand Cash Accounting Method
Most small businesses operate in a pretty simplistic manner: income and expenses run through the same bank account—similar to a personal checking account that most Americans use. Currently, the tax code does not reflect this practice – instead holding many small businesses to the same accounting standards as global corporations and publicly traded companies.
This does not have to be the case. Expanding the cash accounting method to a larger threshold would give more women entrepreneurs a simpler income reporting mechanism, allowing them to run their businesses and focus on growth.
Moreover, as the Kogod Tax Center has noted, the cash accounting method should be simplified as well. There is no benefit to the IRS, and certainly a detriment to small businesses, by keeping unnecessary complications in this accounting method.
Expand the Small Business Health Care Tax Credit
The Affordable Care Act included a tax credit for small businesses that provided health insurance to their employees. Currently, the tax credit is only available to businesses with fewer than 25 employees and average wages of less than $50,000. Moreover, to receive the full tax credit, which covers up to 50% of employer-paid premiums, businesses must have 10 or fewer employees and average wages of up to $25,000. Women business owners have shared with WIPP that the credit is too restrictive to be valuable.
WIPP recommends expanding eligibility for the tax credit. Under legislation in this Congress, the Small Business Tax Credit Accessibility Act (S. 379), these restrictions would be relaxed to make businesses with up to 50 employees and average wages of up to $80,025 eligible for the tax credit. Additionally, it would extend the number of consecutive years a small business can claim the tax credit from two (current law) to three years. It also removes the requirement that employers claiming the credit must contribute the same percentage of the cost for each employee's health insurance. Women business owners want to provide coverage to their employees. Accessing that help should be easy, and not limited to a few businesses.
Thank you for the consideration of these views. WIPP has long appreciated the role of the House Small Business Committee as an advocate for the diverse business community, including women entrepreneurs.
 U.S. House of Representatives Committee on Small Business, Memorandum on Tax Reform: Ensuring that Main Street Isn’t Left Behind. 2015. Available online at http://smallbusiness.house.gov/uploadedfiles/4-15-2015_hearing_memo.pdf
 Internal Revenue Service, National Taxpayer Advocate: 2014 Report to Congress. 2015. Available online at http://www.taxpayeradvocate.irs.gov/media/default/documents/2014-annual-report/volume-one.pdf
 Internal Revenue Service, National Taxpayer Advocate: 2014 Report to Congress Executive Summary (2015), available online at http://www.taxpayeradvocate.irs.gov/Media/Default/Documents/2014-Annual-Report-to-Congress-Executive-Summary.pdf
 U.S. Government Accountability Office, “Corporate Income Tax: Effective Tax Rates Can Differ Significantly from the Statutory Rate.” 2013. Available online at http://www.gao.gov/assets/660/654957.pdf
 Small Business Administration, “The Impact of Regulatory Costs on Small Firms 7-8.” 2010. Available online: https://www.sba.gov/sites/default/files/The%20Impact%20of%20Regulatory%20Costs%20on%20Small%20Firms%20%28Full%29.pdf
 Testimony of Donald Williamson to the House Small Business Subcommittee on Economic Growth, Tax and Capital Access, “Cash Accounting: A Simpler Method for Firms?” (2014), available online at: http://smallbusiness.house.gov/uploadedfiles/7-10-2014_williamson_testimony.pdf.