What Tax Day Means for Small Firms

April 15, 2015

pic-irs-tax-smToday is the dreaded tax day. While the majority of small-business owners, according to NSBA’s 2015 tax survey, have likely already filed their required tax forms, the remaining 40 percent will file under extension.

NSBA’s recent survey on taxes found that, while the financial tax liability for small firms is a huge issue, the sheer complexity of the tax code is actually a more significant problem for America’s small businesses. In fact, 59 percent of small-business owners picked administrative burdens as the biggest challenge concerning federal taxes, up from 53 percent just one year ago.

The weight these administrative burdens impose on small firms is staggering:

  • One-in-three small-business owners spend more than 80 hours per year on federal taxes
  • One-in-four small firms spend more than $10,000 per year on the administration alone of federal taxes
  • 85 percent must pay an external accountant to handle their taxes

Beyond the vast time and financial burden the U.S. tax code imposes on small firms – it has wormed its way into our business operations on a daily basis: NSBA’s data shows that federal taxes have a significant to moderate impact on decision making for the majority of small businesses. It is no wonder small firms are among the loudest champions of broad tax reform – but that reform must NOT come on the backs of America’s smallest firms in the form of corporate-only tax reform.

Despite the widespread Congressional rally for reducing corporate taxes—one of the few areas on which there may be compromise between the Republican-led Congress and Democratic-led White House—many are now coming to the realization that it may not be that simple. Reducing corporate taxes only and paying for that reduction by eliminating deductions could result in an effective tax hike for small firms.

Given that 83 percent of small businesses are pass-through entities, meaning they pay their taxes at the individual income tax level, most small firms, under corporate-only tax reform, could see many of the deductions they utilize disappear while they continue paying high taxes on business income. It is no wonder, then, that the overwhelming majority of small firms support reducing both corporate and individual tax rates coupled with reducing deductions—the only broad tax reform proposal that received the majority of small businesses’ support.

Fortunately, House Ways and Means Chairman Paul Ryan (R-Wis.) and Senate Finance Chairman Orrin Hatch (R-Utah) are working to remedy the situation within the context of corporate tax reform. Together, Chairmen Ryan and Hatch have submitted a request to small-business leaders asking for ideas on how to cut the effective tax rate for businesses that file on the individual side of the tax code.

In the letter, they stated “We are looking for ideas on how to reduce the effective tax rate without reducing the statutory tax rates in a manner that will make small businesses more competitive and better able to invest, grow, hire, and increase wages for their employees.” The chairmen have reached out to small-business owners and leaders, encouraging them to send in their comments and ideas by May 31, which is six days after the Senate Finance Committee working groups are supposed to submit their tax reform recommendations.

Click here to read more from NSBA’s 2015 Taxation Survey.

Click here for the latest updates on NSBA’s tax policy advocacy.

Click here to write to your lawmakers and urge broad tax reform.