[House Hearing, 113 Congress]
[From the U.S. Government Publishing Office]
SMALL BUSINESS TAX REFORM: GROWTH THROUGH SIMPLICITY
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HEARING
before the
COMMITTEE ON SMALL BUSINESS
UNITED STATES
HOUSE OF REPRESENTATIVES
ONE HUNDRED THIRTEENTH CONGRESS
FIRST SESSION
__________
HEARING HELD
APRIL 10, 2013
__________
[GRAPHIC] [TIFF OMITTED] TONGRESS.#13
Small Business Committee Document Number 113-009
Available via the GPO Website: www.fdsys.gov
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HOUSE COMMITTEE ON SMALL BUSINESS
SAM GRAVES, Missouri, Chairman
STEVE CHABOT, Ohio
STEVE KING, Iowa
MIKE COFFMAN, Colorado
BLAINE LUETKEMER, Missour
MICK MULVANEY, South Carolina
SCOTT TIPTON, Colorado
JAIME HERRERA BEUTLER, Washington
RICHARD HANNA, New York
TIM HUELSKAMP, Kansas
DAVID SCHWEIKERT, Arizona
KERRY BENTIVOLIO, Michigan
CHRIS COLLINS, New York
TOM RICE, South Carolina
NYDIA VELAZQUEZ, New York, Ranking Member
KURT SCHRADER, Oregon
YVETTE CLARKE, New York
JUDY CHU, California
JANICE HAHN, California
DONALD PAYNE, JR., New Jersey
GRACE MENG, New York
BRAD SCHNEIDER, Illinois
RON BARBER, Arizona
ANN McLANE KUSTER, New Hampshire
PATRICK MURPHY, Florida
Lori Salley, Staff Director
Paul Sass, Deputy Staff Director
Barry Pineles, Chief Counsel
Michael Day, Minority Staff Director
C O N T E N T S
OPENING STATEMENTS
Page
Hon. Sam Graves.................................................. 1
Hon. Nydia Velazquez............................................. 2
WITNESSES
Hon. Dave Camp, Chairman, Committee on Ways and Means,
Washington, DC................................................. 3
Mr. Sam Griffith, President and CEO, National Jet Company, Inc.,
Cumberland, MD, testifying on behalf of the National Tooling
and Machining Association...................................... 5
Mr. Steve Bearden, President and CEO, Linemark Printing, Upper
Marlboro, MD, testifying on behalf of Printing Industries of
America........................................................ 7
Mr. Tim Watters, President and CEO of Hoffman Equipment,
Piscataway, NJ, testifying on behalf of Associated Equipment
Distributors................................................... 9
Mr. Roger Harris, President and COO, Padgett Business Services,
Athens, GA..................................................... 11
APPENDIX
Prepared Statements:
Hon. Dave Camp, Chairman, Committee on Ways and Means,
Washington, DC............................................. 28
Mr. Sam Griffith, President and CEO, National Jet Company,
Inc., Cumberland, MD, testifying on behalf of the National
Tooling and Machining Association.......................... 40
Mr. Steve Bearden, President and CEO, Linemark Printing,
Upper Marlboro, MD, testifying on behalf of Printing
Industries of America...................................... 45
Mr. Tim Watters, President and CEO of Hoffman Equipment,
Piscataway, NJ, testifying on behalf of Associated
Equipment Distributors..................................... 48
Mr. Roger Harris, President and COO, Padgett Business
Services, Athens, GA....................................... 54
Questions for the Record:
None.
Answers for the Record:
None.
Additional Material for the Record:
Chart - Annual Tax Liability on Manufacturing Entity & Owner
- Summary - New England Company............................ 58
AAFA - American Apparel & Footwear Association............... 59
AdvaMed - Advanced Medical Technology Association............ 60
AGC of America - The Associated General Contractors of
America.................................................... 68
American Association for Homecare............................ 73
ADA - American Dental Association............................ 75
American Farm Bureau Federation.............................. 76
AIA - The American Institute of Architects................... 85
APPA - American Public Power Association..................... 87
ASSET - Americans Standing for Simplification of the Estate
Tax........................................................ 98
ATA - American Trucking Associations......................... 102
Chamber of Commerce of the United States of America.......... 104
CompTIA - The Computing Technology Industry Association...... 124
ITA - Indoor Tanning Association............................. 131
NATA - National Air Transportation Association............... 133
NACD - National Association of Chemical Distributors......... 135
NASE - The National Association for the Self-Employed........ 137
NFDA - National Funeral Directors Association................ 140
NGA - National Grocers Association........................... 141
NPES The Association for Suppliers of Printing, Publishing
and Converting Technologies................................ 159
NRMCA - National Ready Mixed Concrete Association............ 165
National Restaurant Association.............................. 167
NRF - National Retail Federation............................. 177
NRCA - National Roofing Contractors Association.............. 179
NSSGA - National Stone, Sand & Gravel Association............ 181
SBE Council - Small Business & Entrepreneurship Council...... 183
SEMA - Specialty Equipment Market Association................ 186
TechAmerica.................................................. 188
SMALL BUSINESS TAX REFORM: GROWTH THROUGH SIMPLICITY
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WEDNESDAY, APRIL 10, 2013
House of Representatives,
Committee on Small Business,
Washington, DC.
The Committee met, pursuant to call, at 1:00 p.m., in Room
2360, Rayburn House Office Building. Hon. Sam Graves [chairman
of the Committee] presiding.
Present: Representatives Graves, Luetkemeyer, Mulvaney,
Hanna, Huelskamp, Schweikert, Bentivolio, Velazquez, Schrader,
Clarke, Chu, Payne, Meng and Barber.
Chairman GRAVES. We will call this hearing to order. I want
to thank all of you for joining us here today as we discuss tax
reform and its importance on small business. I am very much
looking forward to the testimony of our distinguished guests.
Over time, our tax code has become more complex and
temporary, with tax relief being extended for one year, months
at a time, or even retroactively, taxpayers, and particularly
small business owners, repeatedly complain that this
uncertainty, coupled with new taxes, regulations, and the weak
economy, have made it difficult to play or grow their
companies.
Small businesses are disproportionately affected by tax
complicity. A study by the Small Business Administration's
Office of Advocacy disclosed that small firms pay 67 percent
more to comply with the tax code than large firms do, and a
growing number of provisions, along with the fact that small
firms frequently do not have an in-house account with their tax
attorney means that small business owners must hire outside
experts or add those duties to another employee's workload.
For these and many other reasons, small business owners
have urged Congress to address tax reform. But ``tax reform''
can mean different things to different people. And since I have
been chairman, the Small Business Committee has held 10
hearings dedicated to highlighting the negative impact the
complex tax code has had on small firms. We have additionally,
created an open mike web platform that allows small businesses
from outside the beltway to communicate with our committee on
any issues affecting their businesses. Nearly all those small
businesses, whether they were here in this room or via the
``Open Mic'' project, have consistently asked for
simplification of the tax code and reduced tax rates both for
corporations and individuals.
For the past few years, many members of Congress and the
administration have said that tax reform is an important agenda
item, and since the beginning of the 112th Congress, the Ways
and Means Committee chairman, Dave Camp, has held over 20
hearings focusing on tax reform at all levels. He has also
established 11 bipartisan working groups of members of Congress
who have met with hundreds of associations, think tanks, and
interested parties in an effort to put forth transparent,
comprehensive, and truly bipartisan proposals to reform and
simplify the tax code. And over the past few months, the Ways
and Means Committee has released discussion drafts of
legislation reform in corporate and individual rates,
international taxes, and financial products.
Which leads us to why we are here today. On March 10, 2013,
Chairman Camp issued a discussion draft of a tax reform plan
for small businesses. As part of the larger effort to reform
various portions of the tax code, this draft would, among other
things, make Section 179 expensing for equipment and property
permanent, simplify and expand the use of cash accounting for
certain small firms, create a unified deduction for start-up
and organizational expenses, and provide two options for reform
of the Federal Tax Rules applicable to pass-through businesses.
This is truly an excellent place to start, and I commend
Chairman Camp on his efforts so far. I am looking forward to
hearing from all of our witnesses today and what they have to
say about this draft legislation so we can offer further
recommendations to our colleagues on the tax writing committee.
This is really an open and transparent process.
And with that I will turn to Ranking Member Velazquez for
her opening statement.
Ms. VELAZQUEZ. Thank you, Chairman Graves. And welcome.
Chairman GRAVES. Thank you.
Ms. VELAZQUEZ. The American marketplace is perpetually
evolving, but while its vibrant nature has spurred growth and
innovation, it has also managed to outgrow many tax policies.
As a resort, we often come across provisions in need of
reassessment. Such is the nature of our current tax code, which
must be reviewed and redesigned to be made simpler and more
effective for our nation's small businesses. While some of the
existing tax policies provide critical small business tax
breaks, much of the code is riddled with flagrant inequities
and unnecessary complexities. For small firms, this creates an
obstacle to success, rather than a means of encouraging growth
and job creation.
This Committee is well aware of the challenges created by
the Internal Revenue Code and the major complications it has on
business planning. Given that the last major reform of the code
took place in 1986, it is clear changes are long overdue and
that we cannot go forward without input from small business
owners and entrepreneurs. With that in mind, it is important
that we continue our progress towards comprehensive tax reform
to spur innovation and stimulate small businesses. Failure to
take any action, however, creates greater uncertainty and damps
the outlook for small businesses.
Comprehensive reform will have immediate benefits for small
businesses, while also serving our nation's economic objective
of promoting pro growth policies, devoting reform efforts on a
complete overhaul of the code, support our nation's job
creators by allowing them to continue hiring and expanding
without worrying about annual changes. Most importantly, any
agreed upon plan must ensure the extension of enhanced business
expense and provisions. This will help to encourage small
entities to make purchases now while also putting more money
back in their pockets to invest and hire.
One thing is clear. As we talk about tax reform, the needs
of small businesses must come first. We cannot move forward
without their input, and we must fully recognize the impact of
how any proposals will affect them. Small businesses are the
drivers of the nation's economy and we cannot afford to put the
costs of collecting taxes on them. Instead, we should be
working together to help them thrive. This entails a complete
restricting of the tax code rather than a piecemeal approach.
A corporate-only method disregards the importance of pass-
through entities as drivers of the economy. It will be unwise
to ignore their needs during the tax reform debates because
when they do well, we all do well. It is clear that small
businesses and our economy can come out winners if we approach
tax reform in a comprehensive manner. It is my hope that we can
address this issue immediately. If Congress acts quickly, small
firms will see immediate benefits through a fairer and simpler
tax code. The only reason for delay will be to keep a political
issue alive.
Today's hearing will hopefully start an ongoing dialogue
between the small business community and policymakers regarding
which tax proposals best support the success of small firms. I
believe there exists an opportunity for this Congress to
implement long-lasting reforms. Doing so will have immediate
benefits for small businesses. It will also ensure the nation's
long-term economic growth. I stand committed to working in a
bipartisan way to revise policies that stifle entrepreneurship,
innovation, and growth.
With that, let me welcome Chairman Camp to this Committee,
as well as the small business owners who have taken time from
their busy schedule to be here today. Thank you. And I yield
back.
Chairman GRAVES. I am not going to make the introduction
long, but obviously starting off the hearing is the Honorable
Dave Camp, who is chairman of the Ways and Means Committee.
Chairman, I appreciate you coming in. I know we are short on
time, and I look forward to hearing from you.
STATEMENT OF DAVE CAMP, CHAIRMAN, WAYS AND MEANS COMMITTEE
Mr. CAMP. Thank you. Good afternoon, Chairman Graves and
Ranking Member Velazquez and members of the House Small
Business Committee. As a former member of the Committee, it is
great to be back.
I also want to take a moment to thank the small business
owners who will appear on the next panel. Taking time away from
their business is a big deal, and they have firsthand knowledge
of just how broken our tax code is, how much time and energy it
takes to comply with it, and what it means for them and their
employees. That means fewer resources for them to hire new
workers and provide benefits. They deserve a tax code that
works for them in a better way. So I appreciate them coming to
share their ideas and adding their voice to the dialogue.
In preparation for today's hearing I did a little research,
and the last Chairman of the Ways and Means Committee to
testify before the Small Business Committee was Al Ullman in
1979. So it was nearly that long ago that Congress reformed the
tax code. Instead of making the tax code better, Congress has
spent the last 27 years tinkering with the code, adding special
provisions, making the code less effective and less efficient.
That is something we must correct, especially for America's
small businesses and their workers.
Most Americans get their paychecks from a small business
than any other type of business or government. And if we really
want to strengthen our economy and put more money in the pocket
of American workers and families, we must fix the tax code and
how it treats small businesses.
Last month, I released a discussion draft aimed at creating
a simpler and fairer code for small businesses. The discussion
draft is part of a broader comprehensive tax reform package
that significantly lowers rates for individuals, small
businesses, and corporations. The goal of the draft is to spur
greater job creation and higher wages by reducing the burden of
the tax code and the burden that it has imposed on small
business.
According to the National Federation of Independent
Business, tax compliance costs are 65 percent higher for small
businesses than for big businesses, costing business owners $18
to $19 billion per year. In addition, nearly 9 out of every 10
small businesses rely on an outside tax preparer to do their
returns.
So with about half of the private sector workforce employed
by small business--nearly 60 million Americans--these costs,
along with the Federal tax rate as high as 44.6 percent, are
especially burdensome for a sector that has long been
responsible for leading the nation out of economic downturns.
The discussion draft includes a number of core provisions
that are designed to simplify tax compliance for small
businesses, whether organized as sole proprietorships,
partnerships, LLCs, or corporations. These proposals are not
partisan. Democrats and Republicans have championed these
ideas, and small business organizations across the country have
supported them. The core provisions in the draft would:
Spur investment in equipment needed to grow business
operations by providing permanent expensing of investments and
property under section 179 of the tax code;
Simplify tax accounting practices by expanding the use of
simpler ``cash accounting'' method to businesses with gross
receipts of $10 million or less;
Provide relief for start-up organizational costs by
establishing a unified deduction for these expenses; and
Make tax compliance easier for partners and S corporation
shareholders by reordering and simplifying the due dates of tax
returns for partners and S corporations.
In addition, the discussion draft includes two separate
options designed to have greater uniformity between the two
main types of pass-through entities: S corporations and
partnerships.
One option is an incremental approach that improves the
ability of S corporations to compete, grow, and gain access to
capital by modernizing current tax rules affecting S
corporations and partnerships.
Option 2 is a more transformative approach that simplifies
the tax treatment of nonpublicly traded companies by repealing
existing tax rules governing partnerships and S corporations
and replacing those rules with a new unified pass-through
regime.
Since we released the draft, we have actively sought
feedback from the small business community. The International
Franchise Association, for instance, has said, and I am
quoting, ``The proposal would reduce compliance costs and
provide greater certainty to the more than 8 million employees
across the country who wake up every day and go to work in the
franchise industry and those Americans who aspire to become
franchise business owners.''
And Mr. Chairman, I will not read all the comments that we
have received, but I do have a packet of feedback I am happy to
share with the Committee Members, and I have included that in
my formal testimony.
Simply put, the tax code ought to be easier to understand
and less expensive for small businesses to comply with--because
every dollar they are not spending on taxes and tax compliance
is a dollar they have to invest in equipment, start a new
production line, hire a new employee, or provide more in wages
and benefits. And that is my goal for comprehensive tax
reform--a simpler, fairer tax code that leads to more jobs and
higher wages.
Thank you very much.
Chairman GRAVES. I appreciate it, Chairman. And since we
are obviously out of time and we have got a vote, which we will
reconvene the hearing right after this, Chairman Camp does have
to leave but he has said just submit questions in writing. His
Committee would be more than happy to answer them. So just do
it in writing and he will get those answered. So thank you very
much for testifying. And we stand in recess at least for two
votes.
[Recess]
Chairman GRAVES. All right. We will bring the hearing back
to order. I apologize for the vote series in the middle of our
hearing. It happens from time to time, but I do apologize for
the delay.
Our first witness on our second panel today is Mr. Sam
Griffith, who is the President and CEO of the National Jet
Company in LaVale, Maryland. National Jet is known for its
micro hole drilling expertise and serves the aerospace,
automotive, electrical, medical, and textile industries. Mr.
Griffith purchased National Jet in 1992 and currently has 24
employees. Today he is testifying on behalf of the National
Tooling and Machining Association. I thank you for being here
today and look forward to your testimony.
STATEMENTS OF SAM GRIFFITH, PRESIDENT AND CEO, NATIONAL JET
COMPANY; STEVE BEARDEN, PRESIDENT AND CEO, LINEMARK PRINTING;
TIM WATTERS, PRESIDENT AND CEO OF HOFFMAN EQUIPMENT; ROGER
HARRIS, PRESIDENT AND COO, PADGETT BUSINESS SERVICES
STATEMENT OF SAM GRIFFITH
Mr. GRIFFITH. Thank you for the opportunity to testify
before you today on the impact of tax reform on small
businesses. My name is Sam Griffith; I am president and CEO of
National Jet Company in LaVale, Maryland. I am also a member of
the National Tooling and Machining Association (NTMA) and I am
testifying here today on behalf of both my company and the
NTMA.
I am also a Certified Public Accountant (CPA). I began my
career practicing as a CPA with the international firm of Price
Waterhouse Coopers.
National Jet Company, which I purchased in 1992, was found
in 1937, today is an internationally known expert in precision
micro hole drilling technology. We can drill a human in a human
hair to give you an idea of size. We service primarily the
aerospace, automotive, medical, and textile industries.
National Jet is structured as a subchapter S corporation,
which means all income flows from the company to my personal
return, which puts me into a much higher tax bracket than I
normally would be due to the pass through.
Given my combined training as a CPA and having worked in
both the C and a S corporation provides me with a unique
perspective on tax policy.
The NTMA and I wholeheartedly support tax reform that
includes real reform for both C corporations and pass-through
companies. We desperately need lower rates, simplification of
rules, and elimination of sunset provisions in the tax code. It
is very difficult to play into the future when there is such
uncertainty in the tax code.
Why do most businesses use a pass-through entity? The
reason is obvious. The double taxation of C corporation
dividends which the owners pay when they take their earnings
out of the business. No one wants to pay double taxes on their
hard earned income. After all, when the owner pays a higher tax
rate there is less revenue to buy equipment and hire employees.
The fewer resources we have available, the more difficult it is
to expand.
Based on a December 2012 survey, the National Tooling
Machine Association, 200 respondents identified the most used
tax credits and deductions. They are section 179 Equipment
Expensing; Bonus ``accelerated'' Depreciation; R&D Tax Credit;
Section 199 Domestic Production Activities Deduction; LIFO
inventory valuation.
National Jet, in 2011, we claimed $400,000 in section 179
equipment deduction; however, in 2012, the section 179 limit
was $139,000, and a phase-out if you purchased over $560,000 in
equipment. Our company needed a machine that cost $611,000, but
if you purchased this equipment in 2012, we would lose section
179 deduction because it exceeded the limit. This one piece of
equipment exceeded the entire limit. Therefore, I only
purchased $130,000 worth of smaller equipment to stay within
the threshold of the tax provision. Then Congress, on December
30, one day before year-end as part of the fiscal cliff, passed
a provision increasing the section 179 to $500,000 and
increased the phase-out to 2 million.
Now, how could any small business react to this? One day in
which to purchase a machine that weighs 36,000 pounds,
transport it, have electrical lines installed, have airlines
installed, and place it in service within 24 hours. No one
could react to this. Small business did not get the benefit
based on this last minute act of Congress.
Another issue which received a lot of headlines in tax
reform that is discussed is Alternative Minimum Tax (AMT).
Because our business is captured under AMT, we cannot claim the
R&D tax credit, which would be available to us because we are a
leading-edge technology. In 2012, we could have received
$30,000 in R&D credits. This was lost to us because the AMT
limitation.
In addition, when I hired a long-term unemployed person in
my shop last year, I thought I could claim the $1,000 credit
Congress passed under the hire act. Again, because I am subject
to AMT, I cannot claim that credit. So you give us credits for
R&D and employing workers who have lost their unemployment
benefits, and then you take them away because of AMT. Why?
As you can see, the current tax code is a maze of
mismatched, complex provisions that provide disincentives to
grow our businesses and hire new employees.
We fully support Chairman Dave Camp's approach to push for
comprehensive tax reform and applaud this Committee for holding
this hearing to focus on the impact of small businesses. Our
greatest concern is the seeming obsession with corporate-only
tax reform--a path which leaves America's small businesses and
manufacturers behind.
I believe we must develop a reformed tax code which
encourages manufacturing in America and helps our small
businesses compete globally in the 21st Century. Small business
has a stake in this great country and we want our voice heard.
That concludes my testimony.
Chairman GRAVES. Our next witness is Mr. Steve Bearden, who
is the president of Linemark Printing, a full-service printing,
graphics, and communication company at Upper Marlboro,
Maryland. He participates in a variety of professional-related
projects and associations such as serving as board member for
the Printing and Graphics Association of the Mid-Atlantic. He
is testifying today on behalf of the Printing Industries of
America. Welcome to the Small Business Committee.
STATEMENT OF STEVEN BEARDEN
Mr. BEARDEN. Chairman Graves, Ranking Member Velazquez, and
members of the Committee, good afternoon, and thank you for
inviting me today.
I am Steve Bearden, president of Linemark, a private-owned
union printing and graphics communications company
headquartered in Upper Marlboro, Maryland. Linemark is a 27-
year-old company that employs 92 workers. I am also here as a
member of the Printing and Graphics Association of the Mid-
Atlantic and of the Printing Industries of America.
Despite tough economic times that saw our industry lose
over 75,000 jobs in the past four years, printing companies
like Linemark are ready to come back. It is critical tax
policies that are in place that will us to do so.
Chairman Camp's overall goal of simplifying tax rules
concerning small business in order to reduce the impact of tax
costs and complexity is one both Printing Industries of America
and I personally can and do support.
My comments this afternoon will focus on three specific
provisions of the discussion draft.
The first is making permanent section 179 expensing to
allow Linemark and other small businesses to deduct investments
in new equipment and property up to $250,000.
This provision is vital to the future growth and job
creation of my company and others like it. In the environment
of a rapidly changing communications marketplace, it is vital
that small printers be able to continually modernize their
product and service offerings. When I say I am in the printing
business, I am often asked if the Internet is killing off our
profits. People are surprised to hear it is quite the opposite;
there are tremendous growth opportunities in combining old
school ink-on-paper printing with online and social media
technologies. But it takes serious capital investment in order
for small printers to evolve.
For example, in 2012, Linemark had purchases over $2.5
million. This included a $2.2 million printing press, a
$174,000 router system, an $82,000 laminator, and a new $17,000
VOIP phone system. By utilizing bonus depreciation, we did have
an incentive and the additional resources to make the
investments in our company's future growth. In the future, we
will be upgrading our digital printing presses, which is the
predicted growth area in the printing industry, and we will be
adding new large format printers and expanding our bindery
functions--both of which will allow Linemark to better compete
in ancillary services that are critical to staying live in the
new print marketplace.
Small printers would benefit in their ability to grow if
section 179 expensing was made permanent. The typical printer
plans on spending $50,000 to $100,000 on capital equipment this
year. Generally, higher profit printers are more likely to
invest in capital equipment and to invest higher amounts than
lower profit printers. These profit-leading printers are most
likely to create new jobs. The impact is also positive for
small suppliers that manufacture printing equipment, many of
which are members of the Printing and Graphics Association of
the Mid-Atlantic and the Printing Industries of America.
The second is the provision that would simplify and expand
the use of cash accounting for small business. The typical
printing plant is small with around $3.3 million in annual
sales and 20 employees. Many of these small firms would find
new cash accounting rules helpful as Linemark would have when
it was smaller. However, I should note that with this proposal,
C corporations with gross receipts up to $10 million would gain
the option of using cash accounting, but larger S corporations
would lose it. More than 800 printing plants are S corporations
and would fall into this category.
Finally, the discussion draft poses two options to reform
the rules for small business organized as partnerships and S
corporations. Approximately, 20 percent of the industry is
comprised of sole proprietorships and partnerships. Another 5
in 10 printing firms are organized as S corporations. Linemark
is a C corporation, but we do recognize that many other
printing companies use the S corporation to simplify their
structures.
I would also like to briefly mention estate tax. The new
exemption levels passed by Congress early this year are very
helpful to companies like Linemark as I prepare for my children
currently working with me to hopefully stay with the family
business in the future.
In conclusion, I urge this Committee and all Members of
Congress to continue this important dialogue, maintain a strong
focus on how the comprehensive tax reform legislation will
impact America's small printers and small businesses in all
industries.
Thank you. And I look forward to answering any questions
you may have.
Ms. VELAZQUEZ. Mr. Chairman, it is my pleasure to introduce
Mr. Tim Watters. Mr. Watters is the president and CEO of
Hoffman Equipment Company located in New Jersey. The company
was started in 1920 as the Hoffman Motor Transportation to
deliver roofing material for installers, and it has been
expanding ever since. Mr. Watters represents the third
generation to run the business. He is testifying on behalf of
the Associated Equipment Distributors, which represents over
500 distributor member companies. Welcome.
STATEMENT OF TIMOTHY WATTERS
Mr. WATTERS. Good afternoon, and thank you, Chairman Graves
and Ranking Member Velazquez for organizing this important
hearing and for inviting AED to participate. I also want to
thank Chairman Camp for making tax reform a priority and for
the transparent process he is created to gather the best ideas
about how to improve the code. AED is looking forward to
working with him and with all of you to achieve the objectives
in the weeks and months ahead.
AED's members are family-owned companies, like mine, that
sell, rent, and service construction, energy, mining, forestry,
and farm equipment. We are the critical link between machinery
manufacturers and the local highway contractor, home builder,
and farmer, and others who put equipment to productive use.
The equipment industry is dominated by closely-held, pass-
through entities. Two-thirds of our entities are S Corps, LLCs,
or LLPs. The average AED member who organizes a partnership has
fewer than three owners. For that reason, we believe business
tax reform should not only benefit big publicly-traded
corporations. Tax laws affecting smaller companies and pass-
through entities must be improved as well.
It is AED's position that tax reform should focus on two
broad objectives. First, simplifying the code the reduce
compliance costs and unintended consequences. And second,
restoring long-term certainty to allow businesses and
individuals to better plan for the future. The code's
complexity has driven compliance costs through the roof. In
fact, the IRS itself estimates that Americans collectively
spend 6 billion hours per year on tax compliance, the
equivalent of 3 million full-time jobs. Indeed, the code has
grown so unwieldy that Congress cannot change it without
negative unintended consequences.
Let me give you an example specific to my industry. The
Affordable Care Act established a new 3.8 percent tax on
unearned investment income, which took effect January 1st of
this year. The purpose of this new tax was to ensure that
individuals who derive their income from passive sources, like
stocks and beach houses, would not be able to avoid paying
Medicare taxes. Unfortunately, the bill's drafters did not
foresee the impact the law would have on legitimate, active
construction equipment companies like my own. The people who
wrote the bill certainly knew the tax code generally treats
rental income as passive income but they did not consider that
over the past 25 years there have been significant shifts in
the construction industry towards the renting of construction
equipment. This trend has accelerated in recent years as a
weakened economy and uncertainty surrounding government
infrastructure programs have made contractors more hesitant to
buy new equipment. So despite the fact that this rental money
is being earned by brick and mortar companies like my own that
actively employ close to 47,000 people, the revenue is
considered passive and it is therefore subject to the new 3.8
percent tax, which in our own case will result in an
approximately $400,000 tax increase.
Basically, we have become entangled in the complex web that
is the U.S. tax code and find ourselves ensnared by the new tax
law we were never meant to pay. Not surprisingly, one of our
top reform priorities is working to resolve this issue and we
would of course appreciate any support this Committee can give.
As I mentioned earlier, restoring certainty should be the
second guiding priority for tax reform. Ninety-six percent of
our members agree or strongly agree that the uncertainty
surrounding the tax code is undermining the nation's economic
vitality. Certainty means many things. It means making the good
parts of the code permanent and ending the practice of having
so many provisions like higher section 179 small business
expensing levels expire on an annual basis. It means
establishing a permanent tax code so we know that the things we
are doing today and have been doing for years, like using
``last in, first out'' accounting method and deducting business
interest are going to be permissible not just a year from now
but a decade from now as well.
In conclusion, tax reform should be fair, encourage
business risk taking and investment, and everyone should share
in the benefits. AED and its members look forward to working
with Congress to achieve these objectives. Thank you again for
the opportunity to testify today and I am looking forward to
any questions.
Chairman GRAVES. Thank you very much, Mr. Watters.
Our next witness is Roger Harris, President and CEO of
Padgett Business Services in Athens, Georgia. He has been with
Padgett for more than 40 years. After serving as president of
its largest franchise in the organization he became president
of the entire franchise system in 1992. He has served twice as
chairman of the Internal Revenue Advisory Council and has been
called to testify numerous times before both houses of Congress
on small businesses, IRS, and tax issues. Thank you for being
here, and I look forward to your testimony.
STATEMENT OF ROGER HARRIS
Mr. HARRIS. Thank you, Chairman Graves and Ranking Member
Velazquez. It is a pleasure to be here. Thank you for the
opportunity.
Padgett Business Services has been providing accounting,
tax planning, tax preparation, and payroll services to small
businesses for, as we said, almost 50 years. We define our
customer as one with fewer than 20 employees. And to some
people they consider those to be ``mom and pop'' businesses.
However, when you look at them collectively, I think the last
study I saw said that that group of people employs 90 percent
of the workforce, so we think individually they may not be that
large but collectively they are a powerful organization.
The other interesting thing I think as I listen to my panel
colleague and other small business owners is someone once told
me that being a small business owner was the opportunity to do
the one thing that you love and the 99 things that you hate.
And probably the top two things on the 99 list would be paying
taxes and tax compliance. And so anything that we can do to
simplify our small business owners' lives would be welcome by
then. And quite honestly as we sit here on April the 10th, five
days from the filing season, I can assure you despite the
comments that have been made about firms like ours benefitting
from tax reform, we would be very happy to see a little simpler
and more predictable tax system going forward. So we want to
thank this Committee and, of course, Chairman Camp and his
Committee for the work that they are doing and all of you are
doing to simplify the tax code.
We are particularly excited about the expansion of the cash
method of accounting because for our marketplace that would
make their lives terribly simpler because one thing they do
understand is their checkbook. They understand when money comes
in it should be income and when money goes out it should be an
expense. And the closer we can stay to that method of
accounting, the better it will be for all of us, so we are
particularly pleased to see that included in Chairman Camp's
proposal. We have, in fact, been trying to push that along with
David Kautter from American University. In fact, we are a
little more aggressive than Chairman Camp is, so we hope you
would consider some of our ideas to even expand that. But we
are particularly pleased to hear that that is a big part of
what tax reform could look like.
We are also happy to see the discussion on the business
structuring part of small business because, you know, in many
instances a lot of people assume, particularly in our
marketplace, that people got to where they are through a lot of
planning and taking advantage of how the tax code helps them.
Really in our marketplace it does not work that way, and I
would like to illustrate that by telling a short story. And
that is that one day you are cutting your grass and the IRS
views that as a hobby. The next day when your neighbor needs
you to cut their grass. You became a sole proprietor. When more
neighbors needed their grass cut you called your friend with
his lawnmower and they came and helped her, you became a
partnership. And then later on you talked to someone like us or
an attorney and you became an S Corp or an LLC. All through
that process your life got more and more complicated, but to
the business owners they are still just cutting grass. And that
is what they want to do and that is what they want to spend
time doing so they can cut more yards and hire more people and
do more things, and less time complying with a complicated tax
system.
So tax reform is very much needed for small business, for
people like us. We are a big supporter of what the chairman and
his bill proposes. Like anything, we have some ideas that we
would like to see a little differently. We are a little
concerned in one of the proposals about entity level
withholding on income because that requires there to be a
calculation of income that may or may not exist, and so we
think perhaps we could do something with entity level
withholding on payments that might work better. But again, this
is a great step.
I echo the comments of everyone. Predictability was a huge
part of the problem we face today and anything we can do to
make small businesses' life simpler we would all welcome it. I
think we all recognize there is a compliance burden that has to
be met but we have to be careful that that burden does not get
into something beyond what it is intended to. And as we have
heard here there can be unintended consequences that take away
from that business owner focusing on that thing that got them
in business in the first place because they can help this
economy grow. Again, small businesses may not hire 100 people
at a time but there are so many of them. If they could all just
hire one new person over the next 12 months this country would
be a whole lot better for that. So anything we can do. And
again, I want to applaud the work of Chairman Camp and his
Committee, and this Committee particularly, and I look forward
to the opportunity of taking your questions. Thank you again
for the opportunity to be here today.
Chairman GRAVES. Absolutely. And thank you all for
participating. We are now going to move into questions. And I
do want to remind the Committee, too, that if anybody has any
questions for Chairman Camp, just submit them and he will be
happy to get those answered.
We are going to start out with Mr. Hanna.
Mr. HANNA. Thank you, Chairman.
I have a question that may sound like a philosophical
question but it is not. One of the conversations that goes on
around this place a lot is what wealth is, what wealth means,
what the accumulation of wealth, and how much of that wealth
that you accumulate is the government supposed to take away
from you. I have always maintained that being in small
business, while we all want to make money, it is hard to grow
your business if the government does not let you retain things
because we all live in cyclical businesses, like even Mr.
Watters, up and down, you do not know from year to year what
you are going to do. And in a very real way it is hard to run a
secure business unless you are allowed to retain your earnings.
And if we are taxing you at a rate of 44 percent as Mr. Camp
said, then add your state rates to that and then you have to
live off of it, my point is a quarter of a million dollars a
year may sound like a lot of money to a lot of people but I
would like your view of what that means to you in terms of
growing your business and hiring people, and how you view that
kind of wealth in terms of your ability to raise your family
and run your life and still grow. If that is not too abstract.
Mr. WATTERS. Are you asking me specifically?
Mr. HANNA. Yes, sir. Or anyone, really.
Mr. WATTERS. Well, I will take a stab at it.
Yeah. The cost of running a business is extraordinary and
seems to grow all the time and from all angles, and it is
really a very difficult world to operate a business. And in
many regards $250,000 is a lot of money and there are a lot of
people and our own employees that do not earn anywhere near
that much. And you wonder in today's economy how they make it
quite frankly.
But in terms of operating a business, you know, it is a
drop in the bucket. It is not a lot of money at all in terms of
the various expenses they face on a day-to-day basis for sure.
Mr. HANNA. Mr. Griffith?
Mr. GRIFFITH. Well, you have a good point there when you
said 44 percent to the federal and then you pay the state. That
is about 50 percent of your money that goes away. That is a
huge silent partner out there that is taking no risk. You know,
we are taking all the risk of the business and we have got 50
percent left that we invest in our business and live off that
money, and that is very difficult. Two hundred fifty thousand
dollars when you are a pass-through entity, you can get to that
number very quickly. And also when you have two wage earners
you can get to that number very quickly. And I think that is a
pretty low number to say that it is a wealthy person.
Mr. HANNA. Mr. Bearden.
Mr. BEARDEN. I would agree with these gentlemen. Our
business is very cyclical, so when we have good times we do
need to put away some money for times that are not as good. And
that happens. We went through a very steep drop in 2009 with
our own business and we were very fortunate to make it through
there but it got very, very tight. And through the better years
if we had been able to keep a little bit more money in the
business it would have helped out.
Mr. HARRIS. Just to add to what others have said, and I
will come back to the cash method of accounting again, it is
one thing to owe taxes on money that you have earned; it is
another thing to owe taxes on money that showed up on a piece
of paper that you did not have. So I think what is critically
important is whatever our tax rates are that it be based on the
real money that the company generated, not some fabricated
number due to some complicated tax law or accounting trick.
Mr. HANNA. So you would like the accrual method to be an
option and cash method to be an option also. You are at--what
is it, 5 million now, so you raise it to 10.
Mr. HARRIS. Ten. We would think that for the--and again,
everything has got to have exceptions for certain things but
for the most part, the closer we can allow businesses to track
their cash inflows and outflows and let that be the determining
factor of how much tax they owe, not that they will ever like
paying taxes but at least it will be a little bit more
understandable and a little more bearable because it will be
based on the real money that they generated.
Mr. HANNA. Mr. Griffith, if I have a moment left I want to
ask you something. You said that you put off making certain
decisions based on the uncertainty of the tax code. If you
could clarify that. I would assume that that means that you buy
what you need regardless of the tax code but the uncertainty
changes kind of the dynamic and makes it harder to think about?
Mr. GRIFFITH. Right. All your decisions are investments and
are not necessarily affected just by taxes. But you have to
have the cash to buy this equipment. And when you are sitting
there and you see this deduction go away if you purchase too
much in that year, then all of a sudden you have got less cash
to put into that piece of equipment and it might make the
decision of whether you can afford to buy it or not. And that
is basically what I was getting at.
Mr. HANNA. Thank you. I have no further questions. Thank
you, Chairman.
Chairman GRAVES. Thank you, Mr. Hanna.
Ms. VELAZQUEZ. Mr. Watters, there is much talk about
repealing certain tax provisions that are vital to small
businesses, such as the AMT and the estate tax. However, there
is a reluctance to have these taxes paid for which builds upon
our national debt and further reduces the investment that can
be made for transportation or infrastructure. Higher taxes do
burden businesses but in order to control national debt also
stifles overall growth in our economy. How do we strike an
appropriate balance between the need for businesses to have
lower taxes and keeping our government fiscally responsible?
Mr. WATTERS. And I guess that is the million dollar
question. And I wish I had the answer to that. And I do not
think I have the answer but I do have some thoughts on that,
some themes.
Ms. VELAZQUEZ. Nor do we.
Mr. WATTERS. So I think that the end of simplifying the tax
code and creating certainty to the tax code is an end
worthwhile in and of itself, irrespective of whether the
changes are tax neutral or create tax revenue. I think that end
is worthwhile and will benefit the economy, and ultimately will
indirectly produce more revenue for the government down the
road because of having greater certainty and businesses are
doing better.
In addition to that though, you know, we are very much in
favor of any tax that would be directed towards infrastructure
investment. We feel that investment in our infrastructure,
which is in serious decay, is ultimately beneficial to the
economy and we would actually be proponents of user fees,
either increased gas taxes or miles driven taxes, that would be
earmarked towards infrastructure investment, particularly our
highways and bridges.
Ms. VELAZQUEZ. Thank you.
Mr. WATTERS. Thank you.
Ms. VELAZQUEZ. Mr. Harris, the current tax code contains
sections using various definitions of a small business, either
using gross receipts or number of employees. Some experts have
suggested that using only one definition for a small business
will make the tax code simpler. How could the use of a single
definition help or hurt small businesses if this is an approach
that should be considered as we move forward with tax reform?
Mr. HARRIS. Well, you are right. There are as many
definitions of a small business. Depending on who you talk to
they can all come up with a different one. We focused on
employees because we thought gross receipts as a definition
probably had more to do with what you sold than anything. Like,
if you are selling Cadillacs it is going to be easier to get to
10 million than if you are selling candy bars. And so we looked
at employees as a measure of complexity in what we thought a
small business should be and we thought if you have one
employee it cannot be too complicated, and if you have 100, it
cannot be too simple. But I am not sure there is a perfect
definition of small business. Maybe it would be good to at
least agree on what it is, whatever that is. But I think we can
all make a strong case for whatever we want it to be.
Ms. VELAZQUEZ. Mr. Bearden, there are a variety of business
classifications that entrepreneurs can choose from when
incorporating their firm. How do you choose your business
entity classification? And what advantages does that form offer
that the other structures do not?
Mr. BEARDEN. Our company was started as a C corporation
before I actually became the owner of the company, so we
carried that on. Now what we would look at were the tax
structure as far as being a pass-through or being a separate
entity. And there are various advantages and disadvantages to
it either way. If we go to sell the company as a C corporation
we could run into an issue of double taxation. We cannot take
dividends out of our company without paying taxes on them
twice.
Ms. VELAZQUEZ. So depending on how the tax reform is
implemented, will you consider changing your classification?
Mr. BEARDEN. We were considering changing just a couple
years ago but now with the latest changes in the income tax law
it is actually more expensive for us if we were an S
corporation than a C corporation. So we are kind of stuck
between are we trying to get a better tax advantage for when we
sell? Or are we trying to get a better tax advantage right now
as we run the business?
Ms. VELAZQUEZ. Mr. Harris, the small business tax reform
proposal will make numerous changes to the S corporation rules.
The draft contains two options for pass-through entities. One
of them keeps the current system and the other starts fresh. Is
there a balance that can be struck between making changes to
the S corporation rules while keeping an entity classification
that caters to the small family-owned businesses?
Mr. HARRIS. Oh, sure. I think there can. I think as a
general rule we supported what I think was option one in
Chairman Camp's white paper because it was a little easier to
understand. It was more of a transition than a radical change.
And again, in any of these instances there can be pluses and
minuses. What I find interesting when we talk about entity
classifications is in many instances what the small business
owner wants is the entity that gives them the most protection
from a legal standpoint that comes with the least burden of
recordkeeping. And sometimes one drives the other.
And to the comment made earlier, with the changing of the
tax law you think you have picked the right entity and then the
next time you turn around you need to change because the law
has changed and now you are trying to go back and forth. So
consistency would help tremendously. But I think, I do not
know, maybe it is just that I have done this long enough,
tinkering with the option one feels to me a little bit more
than just a radical change and trying to understand what that
transition would look like.
Ms. VELAZQUEZ. Okay. Thank you. Thank you, Mr. Chairman.
Chairman GRAVES. Mr. Bentivolio.
Mr. BENTIVOLIO. Thank you very much, Mr. Chairman.
Mr. Griffith, I think you said you are a CPA and you own a
machine or tool and die company; correct?
Mr. GRIFFITH. Yes.
Mr. BENTIVOLIO. Now, let us see if I understand this right.
Section 179, $500,000, if you purchase equipment you get a
deduction; right? Is that right?
Mr. GRIFFITH. Yes, sir.
Mr. BENTIVOLIO. So the cost of this C&C machine?
Mr. GRIFFITH. $611,000 machine.
Mr. BENTIVOLIO. I think I read that in your testimony.
There are more expensive ones, is there not?
Mr. GRIFFITH. Oh, yes.
Mr. BENTIVOLIO. And a small business can buy a 40-ton
stamping press?
Mr. GRIFFITH. Oh, yes.
Mr. BENTIVOLIO. Do you have any idea how much those cost?
Mr. GRIFFITH. Not off the top of my head but I would think
they can range anywhere from probably in the hundreds of
thousands to a million dollars.
Mr. BENTIVOLIO. Over a million.
Mr. GRIFFITH. It depends on the complexity of the machine
and type.
Mr. BENTIVOLIO. As well as the dye.
Mr. GRIFFITH. Yes.
Mr. BENTIVOLIO. You know, the dye can cause----
Mr. GRIFFITH. Absolutely.
Mr. BENTIVOLIO. And you need that die in order to stamp, to
make a product that adds to, well, productivity.
Mr. GRIFFITH. Right.
Mr. BENTIVOLIO. Manufacturing.
Mr. GRIFFITH. Right.
Mr. BENTIVOLIO. Mr. Bearden, you said that a press,
printing press can range, well, I bought one for $300 for my
office, right? And they can go--commercial grade can cost----
Mr. BEARDEN. You could go to $3 or $4 or $5 million.
Mr. BENTIVOLIO. So this $500,000 deduction would not
really, if you bought something like that, would not really
make a difference, would it?
Mr. BEARDEN. Well, not if I was buying a printing press.
Mr. BENTIVOLIO. Right. Or, well, the printing. I do not
know--do they call them presses now or are they just----
Mr. BEARDEN. Yeah. They still have printing presses.
Mr. BENTIVOLIO. Yeah, okay. Good. I know things have
changed.
Let us see. You touched on concept, Mr. Griffith? You
touched on a concept not often talked about in your written
testimony, how your tax liability impacts your ability to
obtain financing. Could you expand a little on this issue?
Mr. GRIFFITH. Well, yes. When you have to use your cash to
pay your taxes, it leaves you a lot less capital to invest in
the business. And so when you go out to borrow money they look
at your liabilities, they look at your assets, and they
determine whether or not you can repay the loan. And so the
more cash that goes out the door for a nonrecurring asset or
something that is a debt expense like that, the less you have
to work with the more difficult it is to get the financing.
Mr. BENTIVOLIO. And you noted in your written testimony,
and I think I touched on this, written testimony that Congress
passed a provision increasing the deduction allowance under
section 179 to 500,000 and increased the phase-out provision to
2 million. But that was done on December 30th of last year,
giving a business no time to act. That is what you said; right?
Mr. GRIFFITH. Yes, sir.
Mr. BENTIVOLIO. So we had to move, for instance, if I
bought a 40-ton press, I mean, they can be about, what, a third
the size of this room?
Mr. GRIFFITH. Right.
Mr. BENTIVOLIO. It weighs more than an Abrams tank; does it
not?
Mr. GRIFFITH. Yes. And you cannot, you know, and the rule
was you have to be placed in service, which means it has to be
under power, ready to run. These are not plug-and-play
machines.
Mr. BENTIVOLIO. I understand.
Mr. GRIFFITH. So in a day you could not react to that. That
is correct.
Mr. BENTIVOLIO. I was raised in manufacturing. I know
exactly what you are talking about.
So what would you recommend?
Mr. GRIFFITH. Well----
Mr. BENTIVOLIO. I want to get people back in my district
working again. I am sick and tired of driving by industrial
parks that say For Rent, For Lease, and Available. I like to
see Help Wanted signs. So what can I do? Or what can we do?
What would you recommend to Chairman Camp?
Mr. GRIFFITH. Make it permanent so that we--in other words,
set the 179 deduction and stay at $500,000. Raise the limit to
more than $2 million. In other words, you know, do not phase it
out at a low level and make it permanent so that we know year
in, year out, what we are working with as opposed to one year--
it used to be $25,000 and then it went to $125, and then it
went to $500,000. Then last year it was $139,000 with a phase
out over $560. So if I bought it a $600,000 machine and it
phased out the deduction to me, make it such that we can
actually get this deduction when we do buy this equipment
because when we buy a piece of equipment like you are talking
about--a stamping press or in my case it was a tool grinding
machine, I have to hire a person to run it. So not only do I
add equipment to my shop, I add employment. So by not buying
that piece of equipment I did not hire that person. So, you
know, I think if you can make it permanent so we know what we
are working with and it is not a moving target and it is not
changing every year, it makes it a lot easier to manage.
Mr. BENTIVOLIO. And I could buy, like, well, a small
business could buy a 3 million C&C machine and have five people
in the shop. Be actually employing five people; correct?
Mr. GRIFFITH. Correct.
Mr. BENTIVOLIO. Right. Great. Thank you very much.
I yield back my time, Mr. Chairman. Thank you.
Chairman GRAVES. My good friend, Mr. Barber.
Mr. BARBER. Well, thank you, Mr. Chairman. Thank you to the
witnesses. You provide us with real life accounts of what it is
like to run a small business, and I appreciate that testimony
very much. We need more of it on the Hill, I think.
My wife and I ran a small business for 22 years and we have
our own first-hand accounts of what it is like to meet the tax
code challenges and the other regulatory challenges. And I am
really proud to be on this Committee. I am a new member of the
Committee. I asked to come on as a third Committee because I
really wanted to do what I could to help small businesses not
only back home but across the country.
And I want to venture into an area that has not really been
discussed today but I think is one that is really important as
we think about simplification of the code, we always have to
think about new taxes that have been imposed. You mentioned one
or two of them earlier, the Affordable Care Act being one of
the examples.
Back home in my district we have a business called
Syncardia. It manufactures the first and only FDA-approved
total artificial heart, and it took Syncardia about 30 years to
get where they are today, one small investment at a time. And
now they are cash flow positive, they are paying taxes, and
they are saving hundreds of lives every year. But one of the
issues that they face and other businesses like them face are
taxes that stifle innovation, creativity. One example of that
is a tax that is now included in the Affordable Care Act, the
medical device tax, a $20 billion tax that is going to be
levied on total revenues of medical device manufacturers
beginning this year. And for companies like Syncardia and many
others across the country, the impact of this tax would be
devastating to their future innovation and success. It is a tax
I believe we must eliminate and I co-sponsored a bipartisan
bill called the Protect Medical Innovation Act to do away with
that tax.
So this is one example, I think, of taxes that stifle
creativity and innovation, and one of the great things about
our country is that small businesses are the leaders in
creativity, and they really, of course, drive our economy. So
it is really a question for any and all of the witnesses who
want to comment. Could you comment on what other taxes we ought
to be looking at as we simplify the code or want to do that
that are hurting small businesses, specifically when it comes
to innovation? New ideas, new products, new kinds of assistance
for people in the medical arena and every other place. I mean,
I think we have them across this country. And could you each
comment to your own experience on what other taxes are getting
in the way of innovation?
I thought Mr. Harris might be the first to jump in.
Mr. HARRIS. I will go first, which will be a more general
comment than specific to an industry that these gentlemen can
speak to, is that I do not think anybody in this room likes
paying taxes and would like to pay less, but what they want to
know is they want to understand what they owe, be able to plan
for what they owe. Clearly something like the Alternative
Minimum Tax that traps people who tried to do the best they
could and tried to plan and then they have this second tax
level pop up and surprise them. So I think transparency in
taxes, predictability in taxes, and not being picked on because
you are in a certain industry or doing a certain thing. I think
that as long as people feel like they are paying equally and
they are all bearing the responsibility, but any time we target
a particular business and say you are going to pay something I
think it obviously leads to higher noncompliance because they
are going to go ``why me?'' Why is it not someone else?
Mr. BARBER. The issue of the medical device tax was first
brought to my attention by a dentist in my district. He wanted
to come see me and he said, ``I need to talk to you about
this.'' He said, ``It is not only going to affect my business
but my patients. They have to pick up additional costs.'' And
this is why I am really concerned about how this might affect
other industries. Any other comments from any of the other
witnesses?
Mr. BEARDEN. I would just say commercial printers are
domestic manufacturers, and we qualify for the 9 percent
deduction in our net income. And I would encourage the
Committee to incorporate the domestic production activities
deduction in their small business reform. That is something
that is very helpful for us and I would agree with the other
gentlemen. Just stabilizing and simplifying the taxes would
help out tremendously.
Mr. BARBER. Very good.
Mr. GRIFFITH. You know, the complexity is a tough issue
because you give us credits and then you take them away because
of AMT. And that is one of the things I mentioned earlier, and
the Alternative Minimum Tax, we need to get rid of that. We
need to fix that because it is something that is hanging out
there and the complexity--let us say if we bought assets in my
business and I have let us say 1,000 assets. I have to do
depreciation calculation for federal tax purposes. I do a
depreciation calculation for state tax purposes because
Maryland decoupled from federal. I have to do depreciation
calculation for AMT purposes. And then I have generally
accepted accounting principles, which is GAAP. I have to
calculate depreciation four times on the same asset. That is a
lot of work and a lot of busy work for no reason. So why are we
not trying to look at simplifying and getting rid of some of
the complexity so that we know what we are working with and it
does not take a lot of time and effort away from our businesses
to comply with these kind of rules.
Mr. BARBER. Thank you, Mr. Chairman.
Chairman GRAVES. Mr. Luetkemeyer.
Mr. LUETKEMEYER. Thank you, Mr. Chairman. And thank all of
you for being here today. It is always near and dear to my
heart when I see small business guys in front of us.
Just quickly, I did not see anything in the testimony and
in the recommendations and information that Congressman Camp
gave us today with regards to intellectual property. Do any of
you have intellectual property and have some tax concerns about
that? Probably Mr. Griffith may be the only one that actually
would have something there. I do not know if you do or not, but
just kind of curious if there is something in that area because
it was not mentioned in Mr. Camp's testimony if we need to look
at something like that.
Mr. GRIFFITH. We do not. We do not have any intellectual
property in our business.
Mr. LUETKEMEYER. One of the other things I noticed, Mr.
Bearden, you indicated or mentioned anyway that you support
estate tax changes that were made earlier. And I was just kind
of curious if there is any changes or anything else that you
would like to see done differently with the state taxes and how
it impacted you and your business. Perhaps a little firsthand
anecdote here would be informational to us as a body.
Mr. BEARDEN. Well, just as the business hopefully grows,
knowing that I can plan for that in the future and that it is
permanent now is very helpful. Under the other rules when it
was running out it was kind of up in the air. We did not know
where we would be. You almost had to pick your time, I guess,
but going forward now that it is permanent it is much better
and it is very helpful. Thank you.
Mr. LUETKEMEYER. Mr. Harris, a lot of your customers and
your clients, was this an issue big to them? And do you see any
things that we need to tweak on this law as well?
Mr. HARRIS. I think, again, as everyone has said, what they
needed to know is what is the law?
Mr. LUETKEMEYER. Does the company see uncertainty?
Mr. HARRIS. Yeah. The moving and changing levels, I mean,
it made planning impossible because, again, you had better
years to die than others, which is not the way we want, you
know, our tax code to push people. So consistency and
predictability, I will keep coming back to that, is the key
thing.
Mr. LUETKEMEYER. Very good.
It did not lend itself to a good business model, a good
business planning, did it? In a management crisis you realize
that, right?
One of the things that is coming up shortly here that we
will be discussing when we talk about revamping the tax code is
perhaps doing away with some of the deductions that are in
there and then on a revenue neutral basis lowering the tax
rates and things like that. Are there some things in there, in
the tax code that you would like to--that you would be willing
to give up so that you could get a lower tax rate? Is there
something there that would entice you to be interested in
doing? It is going to be a hot button issue. I thought maybe
you guys would like to jump in on it.
Mr. HARRIS. Generally, we have to understand from a
business standpoint that the calculation of taxes has two
elements--the rate and what we are applying the rate to. And at
the end of the day if those two numbers are moving equally, the
amount you write the check for does not change. So anything
that is simpler and easier to get to, small business would
appreciate. And then we can argue about what the proper rate is
at that point. But we do not even know. It takes so long to
come up with a number, by the time we get there the rate is
almost a secondary discussion. So I would like to see us focus
on yes, there are plenty of things that we can get rid of; the
problem with getting rid of them is we do not know what the
rate is going to be applied to when we give it up. And at the
end of the day, if you do not know both sides of the equation,
it is hard to say I am for this or for that because I do not
know what I am giving up and what I am getting in return. But
as a general rule. Sure. Make it simpler and hopefully the
rates will not cause it to go up.
Mr. LUETKEMEYER. Does anybody else want to weigh in on it?
Yes, sir. Mr. Watters.
Mr. WATTERS. I would like to weigh in on that.
As Mr. Harris says, it is hard to say what we are willing
to give up without knowing what the rate would be.
Mr. LUETKEMEYER. Well, let us assume it goes down. We are
not going to raise it. Okay? Let us assume that if you take
your deduction you are going to lower the rate from 35 down to
whatever it gets down to.
Mr. WATTERS. We absolutely think that restoring the highway
trust fund to a reasonable level of investment is absolutely a
worthwhile goal and should be part of any tax reform, and we
would be willing to give up user fees and other types of things
along that line to fund the highway trust fund for sure.
Mr. LUETKEMEYER. Okay. Excellent.
Did you guys want to weigh in on it?
Mr. GRIFFITH. I do not know really what I would like to
give up but I would like to give you a radical opinion on one
thing, and that is I would like to see you abolish the
inheritance tax. Just get rid of it because, you know, you have
to sell the farm. If you ever saw the movie ``Secretariat.''
The horse won the race and now all of a sudden it is worth $6
million and she had to syndicate, practically sell the horse to
save the farm. That is criminal. And I think that we should
just abolish the darn thing.
As far as what I would give up, I would have to see the
balance. I would like to see what is going on and what you are
arriving at before I start giving up anything and see where we
are going with everything because it seems like we do not have
a revenue problem in this country; we have a spending problem,
sir. I think you know that. And I think everyone else here
knows that. And we need to look at where our monies are going
and not really what we are doing with our expenses as much as
we do revenue. I am talking about any business is faced with
that and the government certainly should be faced with that.
Mr. LUETKEMEYER. Very good.
Mr. Bearden, do you want to weigh in on it? Okay.
I see my time is up and I certainly appreciate all of you
being here today. As a small business owner myself I know that
you did build it. Thank you. Thank you, Mr. Chairman.
Chairman GRAVES. Mr. Payne.
Mr. PAYNE. Thank you, Mr. Chairman.
Good afternoon, gentlemen. It has really been interesting
to listen to your testimony.
Mr. Bearden, we share a vocation. I was a printer by trade.
My uncle started a computer forms manufacturing firm in 1969
and ran up against quite a few challenges being the only
minority firm in the United States doing what we were doing at
that time. And had to overcome many obstacles. Some were biased
and problems with him being the only minority in the field and
overcame many challenges at that time. But, you know, from one
printer to another it is good to see you here.
Mr. BEARDEN. Thank you.
Mr. PAYNE. Let me say in Mr. Watters's prepared testimony,
you know, he stated that his members agree that balancing the
federal budget requires spending cuts naturally, entitlement
reform, and tax increases. How does the rest of the panel feel
and what are your sentiments, Mr. Griffith?
Mr. GRIFFITH. I think that definitely we need to look at
tax reform and make it, you know, as we said before, make it
simpler and balance the budget is very important. I think any
business, any company, any government should balance budgets.
And deficit spending does not work and where we are basically
leveraging our children's future and our grandchildren's future
when we do that type thing. So I think we really need to take a
look at when you increase revenues--when you increase taxes
rather I think the model that has been seen in the past is that
the economy goes down and the government has less money to
spend. When you reduce taxes oddly enough the economy grows and
the government has more money to work with. I think you really
need to take a look at that. I do not think tax increases is
going to necessarily bring you more revenue. But I do believe
that you need to take a look at a balanced approach, and that
is, you know, what is revenue neutral, we need to get back to
the old school of balancing a budget in all of our businesses.
I certainly could not survive--deficit spending. And I think
that is something we need to take a look at.
Mr. PAYNE. Mr. Bearden?
Mr. BEARDEN. One of the things I think would just help us
in what we are looking at is just the simplification of the
code and making the changes permanent. And that way we can do
longer range planning. Right now some of the things that we
have talked about here today, I mean, there are times, last
year, for instance, when we did not know whether we were going
to have bonus depreciation until the end of the year. So all
during the year we really could not make any plans to use that.
If those things are set and they are permanent, we can react
from our business and that can be a positive factor to help us
invest quicker and make quicker decisions. There is also a lot
of time that we have to spend as business owners trying to
learn the tax code and to keep up with our accountants and our
CPAs. What is happening right now? What is going to happen six
months from now? It is not three years out. It is on a weekly-
monthly basis on what we are doing today. So just the
simplification and making that permanent would help out
tremendously.
Mr. PAYNE. Mr. Harris.
Mr. HARRIS. Well, I think everyone would like to see the
federal government's budget come to balance. I am not going to
sit here and say I am smart enough to tell you exactly how to
do that. It is a lot smarter than me. I have not figured it out
quite yet.
I would say this. I think that the way that I would prefer
to see there be more revenue raised would be that the small
businesses are paying more taxes because they are making more
money as opposed to taking more of what they are making today.
So I think if we can have them grow and expand then I think
they would be happy to pay in more revenue to the government
through that method.
Mr. PAYNE. And, you know, Mr. Harris, you know, you
detailed a proposal that, you know, since we are talking about
making it easier and knowing, you know, what--keeping things in
place, you know, your simplified cash method that you discuss,
and under this method a business checking account would be
essentially their books for a small business. Can any of the
panelists speak to the benefit of such a method, that simple a
method and any potential challenges with that and/or benefits?
Mr. Griffith.
Mr. GRIFFITH. Yeah. I guess it would definitely simplify
for small business when you are dealing with a cash basis
because as Mr. Harris has stated it is cash in and then
expenses out. You can see where the money is coming and where
it is going. You get rid of all of the transactions and you
have to record--you have to book payables, you have to book
accruals, or you have to depreciate assets and that type thing.
When you know when you purchase it you expense it. And I guess
it would maybe simplify considerable businesses on a certain
size. And again, as we were talking earlier, how do you
determine that size? But I think that it would have some merit
for a small business.
Mr. PAYNE. Mr. Bearden.
Mr. BEARDEN. I would agree. It is simpler for a small
business to use the cash accounting. Even in our business, for
our internal statements we use cash accounting to look at how
the business is operating. It is very important for the
business to understand its cash flows and things like that and
cash accounting takes you pretty close to that.
Mr. PAYNE. Mr. Watters.
Mr. WATTERS. Yeah. I agree as well. I think it is a great
idea and would simplify things significantly for smaller
businesses. Our business volume exceeds the cutoff so it would
impact us directly, but it seems like a great idea to me for
sure.
Mr. PAYNE. Thank you. Thank you very much.
Chairman GRAVES. Mr. Huelskamp.
Mr. HUELSKAMP. Thank you, Mr. Chairman. Gentlemen, I
appreciate your presence.
A very broad question. A couple different themes we have
heard here today. Obviously, one would be tax simplification as
well as tax certainty. A pretty broad question to each one of
you. Which of those would you consider most important and why
between those two? I do not consider them separately but
generally they are discussed separately around here as two
different goals.
Mr. Griffith.
Mr. GRIFFITH. Well, definitely simplification is needed,
and I would probably lean towards that direction. However,
again, uncertainty is hard to play if you do not know how the
law is going to react given in the future. In other words, if I
make a decision today, what impact will it have on me 10 years
from now? Will it still be the same decision and am I still in
the same place? That does make it difficult, but I think the
complexity of the issue you are dealing with on a day-to-day
basis is probably something I would look more for as of right
now.
Mr. HUELSKAMP. The gentleman, Mr. Watters.
Mr. WATTERS. Sure. Actually, I would disagree. They are
both critical topics and we want both but I would rather have a
complex law but that I know is going to be in place for many
years and I can plan around and I will figure out a way to
figure it out. I would have to hire a gentleman like Mr. Harris
here to figure it out, but at least you have something you can
plan around and make investment decisions around as opposed to
having a simple law that is going to change every December 30th
and you never know what you are going to get the following
year.
Mr. HUELSKAMP. How long would you need for certainty? How
many years in your business? What are you looking at?
Mr. WATTERS. Ten years. A generation. Always. Start with
10.
Mr. HUELSKAMP. Mr. Harris? Mr. Bearden?
Mr. BEARDEN. I would agree with Mr. Watters. I think for
our planning purposes certainty would be better. If it is
complex we can figure that out and know what we are dealing
with, but as long as we know what we are dealing with for some
length of time we can plan properly. And so definitely
certainty in my case.
Mr. HUELSKAMP. Okay.
Mr. HARRIS. Well, I guess I am either going to break the
tie or tie it up here.
I think first of all for it to be simple it has to have a
certain element of certainty to it. I mean, if it is just
simple and it can change tomorrow, it is not really simple. If
I had to pick between the two, I guess I would pick certainty
because one thing I have learned in this many years of doing
this is complexity does not bother people near as much when it
makes their taxes go down as when it makes their taxes go up.
So there is some complexity people will accept because it helps
them. So I guess I would pick certainty, but I am just not sure
I could be simple if it is not certain.
Mr. HUELSKAMP. Well, thank you, gentlemen. I appreciate
that. I yield back. Mr. Chairman.
Chairman GRAVES. Ms. Clarke.
Ms. CLARKE. Thank you, Chairman Graves, Ranking Member
Velazquez, gentlemen.
I have a simple question. We talked a lot today about the
whole idea of simplifying the tax code, especially with regard
to our nation's small businesses given the complex nature of
our overall global economy. Exactly what does simple mean to
you?
Mr. HARRIS. Okay. I will go first.
I think it is predictable to go back to the earlier
discussion, something that we can count on. Something that does
not require a business to keep records and do things they would
not do because it is necessary to run their business. When they
are being required to do things only to comply with the tax law
that they would not do to run their business, it has gotten too
complicated. There are certain records we need to keep to run a
business that we need to know to make sure our business is
doing things properly, and to the extent that what we do as a
natural part of running our business allows us at the same time
to comply with the tax law, that is simple. If we are doing
things only to comply, it is no longer simple.
Ms. CLARKE. So let me just ask then. What you are asking
then is that whatever you do to document the running of your
business should be adequate enough to address the tax concerns
of the United States' government?
Mr. HARRIS. In a perfect world, yes.
Ms. CLARKE. Okay.
Mr. HARRIS. There are obviously exceptions to everything
but we should focus on the idea that what can we use that
already exists or is in the best business interest of that
taxpayer to keep for themselves before we add something just
for a compliance purpose.
Ms. CLARKE. Okay.
Does anyone else want to answer simplicity? Or do you all--
are you all in agreement with Mr. Harris's definition?
Mr. WATTERS. I agree.
Ms. CLARKE. You agree?
Mr. WATTERS. I agree as well. In fact, I think Mr. Griffith
cited earlier that he has to keep four separate depreciation
schedules for one piece of machinery and I think that is a
great example of what Mr. Harris was saying, where just because
the tax code is such--it is so complex and it forces you to
do--to keep four separate depreciation schedules is crazy. And
there are lots of examples throughout the tax code.
Ms. CLARKE. So to the extent that we can just distill that
down so that that one depreciation schedule suffices for the
purposes of the tax code, that simplifies things? Okay.
Let me ask one further question of you gentlemen.
Do you believe that the tax code is sort of like a living,
breathing document? Is that sort of your experience?
Mr. HARRIS. I will go first again. Certainly from my
perspective it is definitely living and breathing but it is
about time for it to take its last breath.
Mr. GRIFFITH. It is certainly--if you have seen the tax
code, it is a volume.
Ms. CLARKE. Yeah.
Mr. GRIFFITH. So there is a lot in there. So it definitely
needs some simplification.
Ms. CLARKE. So to the extent that your companies I guess
maintain a certain stability, they are not--they are doing, you
know, relatively the same year in and year out but the tax code
continues to add more--I guess more regulation or more
requirement of documentation, it is not meeting the needs of
your companies. Well, it is becoming more burdensome to the
companies with each passing year than, for instance, it would
be more burdensome this year than it was in the preceding year.
Is that your experience?
Mr. GRIFFITH. Yes. If you take--for instance, just take
Obama Care. When you have--they were going to allow small
businesses to get premium reductions or credits back to help
pay for the premiums and they benched it if you had more than
10 employees and less than 25 it was a phase out. And if you
had an average of $50,000, I mean, $250,000 average salary,
phase that up to $50,000, you had a two-way computation. One
was on number of employees and then the second one was on the
average salaries. Taking those together, you had to add the two
together and you have to do a very complex calculation to find
out do I get any help? And there it is just a matter of what we
are talking about is it is a lot of work and most companies in
my industry did not get that because we are all over 10 and our
average salaries are $125,000.
So there again, we are trying to comply and find out do we
comply. We do a lot of work to find out, okay, we do not get
that. So I think if we can get rid of a lot of that nonsense it
would help.
Ms. CLARKE. Anyone else have any anectdotal--something that
we can put on the record to sort of examine this or does that
example suffice for all of you?
Very well then. Mr. Chairman, I thank you. Gentlemen, I
thank you. I yield back.
Chairman GRAVES. Mr. Hanna. Make it quick.
Mr. HANNA. I will. Thank you.
I have a question. All of you are legitimate businesses.
You pay your taxes. You are concerned or you would not be here.
I want to ask about complexity and compliance in the
underground economy. And Mr. Harris, in particular. What is
your sense of that? I mean, mine is that it is growing daily
for all the reasons that you are here, but there are a lot of
people who do not have to fall within compliance. But I do not
want to predetermine.
Mr. HARRIS. I think, and again, part of my background is
spending time with the IRS Advisory Council. I got to see it
from kind of both sides and I do not think there is any doubt
that there is an underground economy. And I think that
unfortunately sometimes the efforts to catch that gets in the
way of doing common sense things for the honest person. But I
think the more complexity you add, the more taxes you add that
are unhidden, you are just encouraging more of it to be honest
with you. The more records you have to keep, the more things
you have to do, again, we know it is out there. I have got a
sense it is growing, but because where it is it is hard to
measure.
Mr. HANNA. Mr. Griffith, do you have a sense of that?
People you know, businesses you watch? No names, you know.
Mr. GRIFFITH. I kind of lost my train of thought there.
What was that question again?
Mr. HANNA. I am concerned that everything we do makes our
laws harder to enforce and harder to comply with. Therefore,
there is an incentive. I mean, Russia lowered their rates to I
think it was 17 percent across the board. Compliance shot
through the roof. It was easier to pay your taxes than go to
jail or whatever. Do you have a sense in your own communities
that that is growing? Or maybe you do not at all.
Mr. GRIFFITH. No. I am not certain.
Mr. WATTERS. Well, I am happy to say I do not know anyone
who is participating in the underground economy, and we do not
either, but it does seem that your logic is intuitive and makes
sense. Yes. If there is one out there it is probably----
Mr. HANNA. I have just seen estimates that are 30, 40
percent of our overall economy. But that is okay.
I am good, Chairman. Thank you for the time.
Chairman GRAVES. Well, again. Thank you to all our
witnesses for being here today.
Tax reform is such a critical issue to our nation's small
businesses, and it is important that we continue to try to move
the ball forward and provide some certainty to the small
business community.
In addition to the testimony that we received here today we
have had numerous trade associations that represent thousands
of small businesses write letters to the committee expressing
their ideas obviously on tax reform and simplification. We will
be including those in the hearing record and also passing those
on to the Ways and Means Committee as they move forward in this
process.
And with that I would ask unanimous consent the members
have five legislative days to submit statements and supporting
materials for the record. Without objection that is so ordered.
And with that the hearing is adjourned. Thank you all very
much.
[Whereupon, at 2:52 p.m., the Committee was adjourned.]
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Written Testimony
Of
R. Samuel Griffith, C.P.A.
President & CEO, National Jet Company, Inc.
And
Member, Board of Trustees, National Tooling and Machining Association
Before the
U.S. House of Representatives Committee on Small Business
Wednesday, April 10, 2013
Thank you for the opportunity to testify before you today
about the impact of tax reform on small and medium sized
manufacturing businesses. My name is Sam Griffith; I have been
President and CEO of National Jet Company in LaVale, Maryland
for the last 20 years having purchased the company in 1992. I
am also a member of the Board of Trustees and Chairman of the
Audit Committee of the National Tooling and Machining
Association (NTMA) and I am testifying here today on behalf of
my company and also representing the NTMA members and industry.
As further background, not only am I a manufacturer, I am
also a Certified Public Accountant (CPA), and I remain involved
with the Maryland Association of CPA's and American Institute
of CPA's. I began my career practicing as a certified public
accountant with the international firm of Coopers & Lybrand
known today as Price Waterhouse Coopers. I practiced for 13
years and I was an Audit Manager when I left the firm to join
York Oil Company as Chief Financial Officer.
National Jet Company was founded in 1937, and today is an
internationally known expert in precision micro drilling
technology. We have the capability to drill holes as small as
two ten-thousandths of an inch in diameter. We can drill or EDM
(electrically discharge machine) holes in any shape and we hold
very close tolerances for our work. To give you an idea of
size, we can drill a hole in a human hair. We service primarily
the aerospace, automotive, electrical, medical, and textile
industries. Some of the products we are involved with include
extrusions dies for the production of man-made fiber for the
carpet industry, AstroTurf for the athletic fields, injector
plates for autos, spray nozzles and orifices. We are a small
specialty shop with twenty-four employees and have added two
new employees in the last four months.
National Jet is structured as a subchapter S Corporation,
which means all income flows into my personal return and I then
pay taxes at the individual rate which puts me into a much
higher tax rate than I normally would be due to the pass
through of the corporate income into my personal return.
As I mentioned earlier, prior to purchasing the company, I
served as the Chief Operating Officer and the CFO of the York
Oil Company in Hampton, Virginia, a subchapter C Corporation.
Given my combined training as a CPA, and having worked in both
a C and an S Corporation provides me with a unique perspective
on tax policy.
The National Tooling and Machining Association represents
roughly 1,500 manufacturing businesses who average 35-50
employees and are typically classified under the North American
Industrial Classification System (NAICS) as 332 (Fabricated
Metal Product Manufacturing) and 333 (Machinery Manufacturing).
These classifications include 80,000 manufacturing
establishments nation-wide according to the U.S. Census. We are
normally referred to as contract machine shops.
The National Tooling and Machining Association and I
wholeheartedly support tax reform that includes real reform for
both C Corporations and pass-through companies which make up
the majority of small businesses in this country. We
desperately need lower rates, simplification of rules and
elimination of the sunset provisions in the tax code to allow
us to compete globally. It is very difficult to plan into the
future when there is such uncertainty in the tax code. No one
likes a moving target and for the last ten years it has been a
nightmare to plan.
A recent survey of NTMA members showed that sixty-seven
percent are structured as a pass-through business. Eighty-one
percent of all manufacturing businesses are structured as pass-
throughs, further reinforcing the importance of including these
types of companies in tax reform.
Why Most Manufacturers are Pass-throughs
The reason most small manufacturers structure themselves as
pass-through, in part, because many are family-owned businesses
who want to keep the company in the family when the current
owners retire. This is particularly true with most NTMA members
who are now planning the transition from the third to the
fourth generation of manufacturers.
The other reason is more obvious; the double taxation of C-
Corporations' dividends which the owners pay when they take
their earnings out of the business. No one wants to pay double
taxes on their hard earned income. After all, when the owner
pays a higher tax rate, it really means the company is paying
more in taxes and has less to buy equipment and hire employees.
Furthermore, what many people do not know is a small business
owner has to personally guarantee loans for the company when
buying equipment which can cost in the millions--the fewer
resources we have available to show our lenders, the more
difficult it is to obtain financing to expand.
To better understand the impact of various tax reform
proposals on small and medium sized manufacturers, the
Association worked with Michigan-based accounting firm Plante &
Moran to develop a tax template to model different scenarios.
Attached to these comments is Exhibit ``A'' for the record
which is an example of a New England-based small manufacturing
business structured as an S Corporation with five shareholders
and two hundred employees. While larger than the average NTMA
business, this company's tax template shown here demonstrates
what happens to a manufacturer when Congress fails to stabilize
tax policy.
A pre-fiscal cliff calculation showed this New England
manufacturer paying a combined federal, state, and local
effective tax rate of 31.5% in 2011. An examination of the
Fiscal Cliff scenario which went into effect for a few hours on
January 1, 2013 resulted in a 46.91% effective tax rate for
this company with virtually all deductions and credits
eliminated or reduced and a 39.6% statutory individual income
tax rate. This scenario showed the company would owe an
additional $715,000 in federal taxes on $4.6 million in
adjusted taxable income. This 15% increase in their effective
tax rate means they have fewer resources to purchase new
equipment and hire more employees in New England as would we in
Maryland.
Tax Credits and Deductions Manufacturers Use
Every manufacturing business is different and each company
serves a variety of industries which has varying needs and
requires specialty equipment. Based on a December 2012 survey
of the National Tooling and Machining Association and Precision
Metalforming Association, the 200 respondents identified using
the following tax credits and deductions:
Section 179 Equipment Expensing
Bonus ``Accelerated'' Depreciation
Research & Development Tax Credit (R&D)
Section 199 Domestic Production Activities
Deduction
Last-In-First-Out (LIFO) inventory valuation
Interest Charge Domestic International Sales
Corporation (IC-DISC)
Net Operating Loss (NOL)
We recognize that policymakers face many difficult
decisions ahead in reforming the tax code. You will have to
decide which deductions and credits you will eliminate or keep
in place. However, to remain globally competitive, small
businesses use several credits and deductions to free up
resources to reinvest back in our business. While each year is
different, in 2010, National Jet Company reinvested 137% of our
net income into the company and in 2011 we reinvested 112% back
into the company.
While most of our industry is made up of small businesses
with fewer than fifty employees, our capital equipment needs
are significant and many machines are very expensive and start
at a few hundred thousand dollars and range into the millions.
To further emphasize the importance of capital equipment to
these businesses, eighty-nine percent of survey respondents
claimed Section 179 Equipment Expensing in 2012 while eighty-
eight percent used Bonus ``Accelerated'' Depreciation. This
means that our members maxed out their Section 179 deduction
and then still turned to accelerated depreciation to support
their investments in the company. Remember, when you buy a
machine, you usually need to hire someone to run it. Expansion
equal jobs.
At National Jet, in 2011, we claimed $400,000 in Section
179 Equipment Deduction. However, in 2012, the Section 179
limit was $139,000 with a phase out if you purchased over
$560,000 in equipment. Our company needed a machine that cost
$611,000 but if we purchased this equipment we would lose the
Sect. 179 deduction because it exceeded the phase out
provision. This one piece of equipment exceeded the entire
limit. Therefore, I only purchased $130,000 worth of smaller
equipment to stay within the threshold of the tax provision.
Then Congress on December 30, 2012 passed a provision
allowing a Sect. 179 deduction of $500,000 and increased the
phase out provision to $2,000,000. Now how could any small
business react to this? One day in which to purchase a machine
that weighs 36,000 pounds, transport it, have electrical lines
installed, run air lines to the machine and have it placed in
service all in 24 hours? No one could do this. However,
Congress pats themselves on the back for passing legislation to
help small business and moves on to the next issue. Small
business did not get the benefit because of the last minute
action by an otherwise action less Congress. Thanks for
nothing. This is exactly why I am here today.
If it were not for the uncertainty surrounding the status
of the Section 179 Expensing provision on Capitol Hill last
year, I would have invested another $400,000 in equipment and
hired two additional employees to run the machines. With all
due respect, the failure of Congress to do its job should not
prevent me from creating jobs.
The Section 199 Domestic Production Activities Deduction is
one of the few provisions in the tax code which directly
incentivizes manufacturing in America. Roughly half of our
members claim Section 199 which amounts to an effective three
percent rate reduction for most domestic manufactures. We
claimed $31,000 in 2012 nearly double in 2011 because of a
rebound in business after the Great Recession that still
lingers among some small businesses today, especially those who
are still suffering under a Net Operating Loss.
Another issue which receives many headlines when tax reform
is discussed is the Alternative Minimum Tax, or AMT. Most
members of Congress probably only think about the AMT in terms
of its impact on the average ``middle class'' family. But its
reach is far broader.
Because our business is captured under the AMT, we cannot
claim the Research and Development Tax credit which would be
available to us and is to popular among politicians. In
addition, when I hired a long-term unemployed person in my shop
last year, I thought I could claim the $1,000 credit Congress
passed into law to encourage this kind of action. Again,
because I am under the AMT, I also cannot claim that credit. So
you give us credits for R&D and employing workers who have lost
their unemployment benefits and then you take them away because
of the AMT. How does this make any sense?
As Washington explores comprehensive tax reform, you will
decide which tax credits and deductions you will eliminate
along the way--whether to reduce the rates, raise revenues, or
both. I ask that you keep in mind which of these provisions
help stimulate growth in the economy and truly create jobs. For
example, if it were not for the $400,000 in Section 179 we
claimed in 2011, my effective tax rate would have been
significantly higher and I would likely not have had the
capital to purchase the equipment we needed to grow the company
and hire employees.
Conclusion
As you can see, the current tax code is a maze of
mismatched provisions which provide disincentives to grow our
businesses and hire new employees. Good intentions by lawmakers
often result in temporary tax provisions which do not allow a
small business to plan, to secure loans, and to hire employees.
While we are just starting 2013, I am already budgeting for
growth and purchasing equipment in 2014--and hopefully hiring
more employees.
We can't just purchase a machine on December 31st by
midnight based on a vote Congress just took. It takes time to
place this equipment into service even if we had the free
capital to make a last minute multi-million dollar purchase
based on Congressional action, or inaction.
We fully support Chairman Dave Camp's approach and efforts
by others to push for comprehensive tax reform and applaud this
committee for holding this hearing to focus on the impact on
small businesses. Our greatest concern is a seeming obsession
with corporate-only tax reform--a path which leaves America's
small businesses and eighty-one percent of U.S. manufactures
behind.
Thank you for the opportunity to testify before you today
on this important issue. I believe we must develop a reformed
tax code which encourages manufacturing in America and helps
our small businesses compete globally in the 21st Century. We
have a stake in this great country and we want our voice heard.
STATEMENT FOR THE RECORD
MR. STEVEN BEARDEN
LINEMARK
and
PRINTING INDUSTRIES OF AMERICA
BEFORE THE
HOUSE COMMITTEE ON SMALL BUSINESS
``Small Business Tax Reform: Growth Through Simplicity''
Chairman Graves, Ranking Member Velazquez, and members of
the Committee, good afternoon and thank you for inviting me to
testify today.
I am Steve Bearden, President of Linemark, a privately-
owned printing and graphics communications company
headquartered in Upper Marlboro, Maryland. Linemark is a 27-
year old company that employs 92 workers. I am also here as a
member of Printing & Graphics Association of the Mid-Atlantic
and of Printing Industries of America.
Despite tough economic times that saw the industry lose
over 75,000 jobs in the past four years, printing companies
like Linemark are ready to come back. It's critical that tax
policies are in place that will allow us to do so.
Chairman Camp's overall goal of simplifying tax rules
concerning small business in order to reduce the impact of tax
costs and complexity is one both Printing Industries of America
and I, personally, can and do support.
My comments this afternoon will focus on three specific
provisions of the discussion draft.
The first is: Making permanent section 179 expensing to
allow Linemark and other small businesses to deduct investments
in new equipment and property up to $250,000.
This provision is vital to the future growth and job
creation of my company and others like mine. In the environment
of a rapidly changing communications marketplace, it is vital
that small printers be able to continually modernize their
product and service offerings. When I say I'm in the printing
business, I'm often asked if the Internet is killing off my
profits. People are surprised to hear it's quite the opposite;
there are tremendous growth opportunities in combining old
school ink-on-paper printing with online and social medial
technologies. But it takes serious capital investment in order
for small printers to evolve.
For example, in 2012 Linemark had purchases over
$2,500,000. This included a $2,200,000 printing press, a
$174,000 Esko Kongsberg router system, an $82,000 Komfi
laminator and a new $17,000 VOIP phone system. By utilizing
bonus depreciation, we did have an incentive and the additional
resources to make investments in our company's future growth.
In the future we will be upgrading to digital printing presses,
which is the predicted growth area in the printing industry,
and will be adding a new large format printer and expanding our
bindery functions--both of which will allow Linemark to better
compete in ancillary services that are critical to staying
alive in the new print marketplace.
Small printers across the country would benefit similarly
in their ability to grow if section 179 expensing was made
permanent. The typical printer plans on spending around $50,000
to $100,000 on capital equipment this year. Generally, higher
profit printers are more likely to invest in capital equipment
and to invest higher amounts than lower profit printers. These
profit leading printers are the most likely to create new jobs.
The impact is also positive for small suppliers that
manufacture printing equipment, many of which are also members
of Printing & Graphics Association of the Mid-Atlantic and of
Printing Industries of America.
The second is: the provision that would simplify and expand
use of cash accounting for small business. The typical printing
plant is small with around $3.3 million in annual sales and 20
employees. Many of these small firms would find new cash
accounting rules helpful as Linemark would have when it was
smaller. However, I should note that with this proposal, C
corporations with gross receipts up to $10 million would gain
the option of using cash accounting, but larger S corporations
would lose it. More than 800 printing plants are S corporations
and would fall into this category.
Finally, the discussion draft poses two options to reform
the rules for small businesses organized as partnerships and S
corporations. Approximately 20 percent of the industry is
comprised of sole proprietorships or partnerships. Another five
in ten printing firms are organized as S corporations. Linemark
is a C corporation, but we do recognize that many other
printing companies use the S corporation to simplify their
structures.
I would also like to briefly mention the estate tax. The
new exemption levels passed by Congress early this year are
very helpful to companies like Linemark as I prepare for my two
children currently working with me to hopefully stay with the
family business in the future.
In conclusion, I urge this Committee and all Members of
Congress to continue this important dialogue and to maintain a
strong focus on how comprehensive tax reform legislation will
impact America's small printers and small businesses in all
industries.
Thank you, and I look forward to answering any questions
you may have.
Industry Numbers
The average printing company employs 27 workers;
60% are family-owned businesses. At the end of 2012, there were
approximately 47,000 printing and related establishments in the
US employing around 970,000 workers.
Despite tough economic times that saw the industry
lose over 75,000 jobs in the past four years, Printing
Industries of America predicts on average 3.0% to 4.0% growth
in 2013. But overall printing industry sales are forecasted to
decline by about 1.0% due to the number of firms going out of
business over the year.
The typical printer plans on spending around
$50,000 to $100,000 on capital equipment this year. Smaller
printers plan to spend less--typically $50,000 and one-in four
plans to spend less than $10,000.
Although the printing industry is very large in a
macro sense with over $156 billion in annual shipments, some
47,000 plants and almost 970,000 employees it remains America's
largest small manufacturing business with two-thirds of all
establishments or more than 30,000 employing fewer than 10
employees. Additionally, another 14 percent of printers employ
10-19 employees. On average, the typical plant is small with
around $3.3 million in annual sales and 20 employees.
As an industry, printing is composed of very few
public companies. While 32% are setup as C corporations, only a
handful are publicly traded.
In any given year there are perhaps a few hundred
start-ups in the printing industry. As expected the vast
majority of these start-ups are small firms--most with less
than 20 employees and less than $3 million in annual sales even
years after their business was started.
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Statement of Roger Harris
Before the U.S. House of Representatives Committee on Small
Business
President and Chief Operating Officer
Padgett Business Services
April 10, 2013
Good afternoon, I am Roger Harris, President and Chief
Operating Office of Padgett Business Services.
For nearly fifty years Padgett Business Services has been
providing accounting, income tax planning and preparation,
payroll and payroll tax services to thousands of small business
owners through our network of 300 offices across the United
States. Our clients generally have 20 or fewer employees and
are what some people would consider ``mom & pop'' businesses.
Based on recent studies almost 90% of all firms that have
employees operate in our target market. In addition to my forty
plus years with Padgett I also had the honor of serving on the
Internal Revenue Advisory Council for four years and was its
Chair for two of those years. I believe this experience gives
me a balanced approach to small business taxation--I have had
the opportunity to see what works and what doesn't work in the
real world.
A wise man once said tat owning your own business is about
doing the one thing you love and 99 other things you MUST do
but dislike. I can tell you with some certainty that for most
small business owners at the top of that list is taxes and tax
compliance. It is my experience that, while no one likes paying
taxes, most hate the paperwork and time devoted to complying
with the tax laws on an almost equal basis.
Over the years it has become clear to me that for most
entrepreneurs the business checking account is the focal point
for their bookkeeping. It is how they measure cash flow and
profits, and to a great extent is the basis for their tax
accounting as well. First working with President Bush's
Advisory Panel on Federal Tax Reform and most recently with
David Kautter, Professor of Taxation and Executive Director of
the Kogod Tax Center at American University, we have developed
a legislative tax reform proposal--the Simplified Cash Method--
that we believe would provide significant simplification,
improve cash flow, encourage entrepreneurship and improve
compliance for the Nation's millions of small businesses.
In a nutshell, the proposal is as follows:
Qualifying taxpayers electing to use the
Simplified Cash Method would be required to have a dedicated
small business checking account (or accounts) associated with a
single EIN.
In order to take advantage of the Simplified Cash
Method, all cash receipts and disbursements must pass through
the dedicated account.
Taxable income is based solely on amounts actually
received
Deductions would be allowed when made for cash
disbursements for inventory, prepayments, capital assets and
depreciable assets.
Payments made for leasehold improvements would be
deducted as cash disbursements are made. All other real
property rules would be governed under current law.
Banks would report annual gross cash receipts and
disbursements to the IRS and IRS forms shall provide means on
the tax return to reconcile any cash flows not income or a
deductible disbursement.
The Simplified Cash Method would have the advantage of
making the business checking account the ``books'' for the
small business. A tax practitioner would rely almost solely on
it for preparing the tax return. The Internal Revenue would
have the same information to decide on which businesses to
audit or contact. The tax return would provide the flexibility
for the taxpayer to explain differences between what is
reported to the IRS and what is on the tax return. By
comparison, today's rules require many small businesses to
separately track and compute depreciation, amortization,
inventory capital expenditures and other items, strictly for
tax purposes. On the flip side, the IRS receives only parts of
the information necessary for selecting taxpayers for
compliance actions. We believe that both sides win from this
proposal.
We were pleased to find many of the same principles of our
plan in Chairman Camp's Ways and Means white paper. I believe
it takes a big step toward a more simplified tax world for
small business, especially the following provisions:
Permanent section 179 expensing, including
leasehold improvements and computer software.
Increasing the threshold for Cash Basis small
business exception to $10 million and simplifying its
application.
Coordinating the new cash-accounting rules with
the uniform capitalization rules generally to exempt small
businesses from the capitalization rules that require the
allocation to their inventory of certain direct costs (e.g.,
materials and labor) associated with the production of the
inventory as well as indirect costs (e.g., overhead and
administrative expenses).
Combining three existing provisions for start-up
and organizational expenses into a single provision applicable
to all businesses and increasing the threshold to $10,000.
It is my sincere hope that the Committee on Ways and Means
will consider further simplifying the inventory rules to that
most business with inventory and under the $10 million gross
receipts would benefit from additional simplification.
The white paper also provides an interesting discussion on
reforming the rules governing tax structures, partnerships and
S corporations. As a general rule, it is important to keep in
mind that small businesses do not plan always their tax
structure they simply evolve to the situation. I would like to
illustrate that with a story I have told to many audiences.
When a person mows his own lawn, it's considered a hobby.
If the neighbor notices he does a good job and offers to pay
him to mow his lawn, he becomes a sole proprietor. When he
signs up enough neighbors, he brings in a friend and they
become a partnership. At that point, the two of them realize
that all the tax accounting and legal issues are too
complicated and they seek out help and are advised to become an
LLC. Without any planning their life got much more complicated
but to them they are still just cutting grass. What we should
all want for these people is for their business to continue to
grow so they continue to hire more people to keep up with
demand. The only way for that to happen is for them to keep
cutting lawns instead of keeping unnecessary records.
With this in mind, I would like to comment on the following
issues in regard to option 1 of the white paper:
The proposed changes in this section are very beneficial to
businesses that operate as S Corporations. For our customers
this is a very common business structure and these proposed
changes would be welcomed. While few of our clients operate as
a partnership those that do would also welcome most of the
proposals. There are some proposed changes to payments made to
partners that will require some change of thinking but as a
whole these too would be beneficial for our clients.
As to option 2, I think it is important to say that this
represents more of a radical change from the current tax
structure. As we all know, change can be a scary thing for some
people. I do have some concern about the proposal to require
entity level withholding on income for the smallest of small
businesses. For this group, withholding on payments to the
partners instead of income would be simpler for them to comply.
Also, option 2 could generate more in the way of transition
rule issues. But this option would still be an improvement over
the current system.
In conclusion, it is important to remember that
policymakers should always try to strike a balance between tax
compliance and taxpayer burden. For many small business owners
that rely heavily on their business checking account for their
basic books what might seem like good tax policy here in the
halls of Congress will, and is, seen as needless burden to
someone simply trying to make the next payroll. Chairman Camp's
proposal definitely heads in the right direction for
entrepreneurs looking for a simpler system that simplifies
their life and lets them just focus on running and building
their business. Thank you for this opportunity to testify today
and Padgett Business Services looks forward to working with
this Committee and the Committee on Ways and Means on this
crucial issue.
For additional information on the Simplified Cash Method
proposal, please see the following:
David Kautter and Donald Williamson, ``A Simplified Cash
Method of Accounting for Small Business'' Tax Notes, February
13, 2012, pages 863-867.
General Accountability Office ``TAX GAP - A Strategy for
Reducing the Gap Should Include Options for Addressing Sole
Proprietor Noncompliance'' July 2007 GAO-07-1014
The Report of The President's Advisory Panel on Federal Tax
Reform, pages 94-96, 127-128
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Statement of
The Associated General Contractors of America
Committee on Small Business
United States House of Representatives
April 10, 2013
The Associated General Contractors of America (AGC)
appreciates Chairman Graves for holding yet another hearing on
the difficulties faced by small businesses when wading through
the regulations and complexities of the Internal Revenue Code
(IRC). Furthermore, AGC wants to commend the thoughtful
progress that Chairman Camp, Ranking Member Levin, and the
Members on the Ways and Means Committee are making towards
comprehensive tax reform and welcomes the opportunity to
comment on areas relating to small businesses as pass-through
entities.
As part of the Ways and Means Committee's goal to
strengthen the economy, crate more jobs and increase wages for
American families by making the tax code simpler and fairer,
Chairman Camp has directed over 20 tax hearings, released three
draft legislative discussions to enhance the feedback to the
committee and most recently organized bipartisan working groups
to address specific areas of the tax code and more
specifically, focusing on the small business community.
Since the beginning of his tenure at the helm of the
Committee, Chairman Camp has exhibited a steadfast commitment
to pursuing tax reform in a comprehensive manner. In fact, his
first order of business was to chair a full committee hearing
that addressed the complexity and broader cost to the U.S.
economy of a tax system that fails to maximize job creation and
impedes economic growth.
Early in the debate, Chairman Camp laid down the ground
rules that the rates should be lowered to 25 percent in order
to make the U.S. more competitive, and that reform should
address the structure of both individuals and corporations in
tandem. This is important, since more than three-quarters of
small business pay taxes on business income at the individual
rate.
AGC members are engaged in all forms of nonresidential
construction and consist primarily of small businesses with the
vast majority of our members (typically more than 70 percent
when surveyed) organized as pass-through entities. When our
members discuss tax reform they gravitate towards simplicity
and permanency as being critical to tax policy. With a critical
element of permanency being the indexing of income thresholds
so that inflation is not the cause of tax policy changes.
AGC is the leading association in the construction
industry. Founded in 1918 at the express request of President
Woodrow Wilson, AGC now represents nearly 30,000 leading firms
in the construction industry through a network of 95 chapters
throughout the United States. AGC members engage in the
construction of buildings, shopping centers, factories,
industrial facilities, warehouses, highways, bridges, tunnels,
airports, waterworks facilities, waste treatment facilities,
dams, hospitals, water conservation projects, defense
facilities, multi-family housing projects, municipal utilities
and other improvements to real property.
While AGC and its membership continue to analyze the latest
discussion draft released by the Ways and Means Committee on
small businesses and pass-through entities; AGC would like to
provide the following commentary on the impact of selected
proposals on our construction company members and offer other
areas for consideration.
Predictability for Business Operations
AGC appreciates the efforts by Congress to provide a
significant amount of certainty to its membership through the
passage of the American Taxpayer Relief Act (ATRA). The
legislation that was signed in to law to avert the 2012 fiscal
cliff permits companies to plan with the greater confidence
that comes from cost predictability. AGC is particular pleased
with the permanent extension of the 2001 and 2003 tax cuts for
98 percent of Americans.
AGC is also appreciative for the certainty provided for
marginal rates for long-term capital gains and dividends set at
15 percent for earnings below $400,000 ($450,000 for joint
filers) and 20 percent taxable incomes above the aforementioned
amounts; as well as the increase in the Alternative Minimum Tax
(AMT) exemption amount, exemption phase-out threshold, and
indexing for inflation.
Another priority for AGC members if the planning for
transfer of ownership after the passing of an owner. ATRA
allows family-owned businesses within the AGC membership to
focus on growth and business planning; which would grow our
economy, create new jobs, and strengthen businesses. For this
reason, AGC is grateful for the reasonable, permanent reform
provided under the new law with a 40 percent tax rate for
estates above the exemption value of $5 million indexed for
inflation ($5.25 million for 2013).
Small Business Provisions
179 Expensing
While ATRA allows Section 179 expensing levels to increase
to $500,000, the limit on what a business can deduct is slated
to decrease to a meager $25,000 in 2014. AGC supports Chairman
Camp's discussion draft provisions regarding the permanent
nature of the Section 179 expensing of new equipment and
property up to $250,000 phasing it out at $800,000 and indexing
the amount to inflation. AGC continues to study the impact on
the construction industry of phasing-down from the $2,000,000
to $800,000 level.
In addition, we recommend making two changes to current law
that could provide additional flexibility and simplicity to
construction industry tax compliance.
Lookback Accounting
The Tax Reform Act of 1986 revised the long-term contract
accounting rules for contractors. These rules--contained in
Section 460 of the IRC--require a construction contractor to
file amended tax returns for every prior year in which a
currently completed contract was in progress. For small and
mid-size contractors, look-back computations are very complex
and expensive, requiring inordinate amounts of time, resources
and accounting fees to comply, with the results usually being
confusing and immaterial to both the government and the
taxpayer. Since this process is pushed down to the individual
shareholder level, a company must go through each individual's
returns to make the interest computation. These recalculations
can go back a number of years. In the end, the same tax is
paid.
Currently, Section 460(b)(3)(B) provides an exemption from
the look-back rules for contracts which are completed within
two years and for which the contract price does not exceed the
lesser of $1,000,000 or 1 percent of the average gross receipts
of the taxpayer for the three preceding years. A legislative
change to exempt long-term contracts spanning 36 months at a
$25,000,000 threshold would exempt a significant percentage of
the small and mid-size construction contracts currently subject
o look-back. According to AGC data, approximately 95 percent of
construction contracts are completed in two years or less. For
construction companies, most contracts are fulfilled in under
36 months.
AGC believes that a legislative change exempting closely-
held pass-through entities under a 36 month timeframe would
significantly reduce the compliance burden on these taxpayers
by averting thousands of dollars spent on tax practitioners to
make the interest calculations; as well as diminish the
enforcement burden for the Internal Revenue Service, with no
measurable effect on revenue. AGC advocates that this
modification to lookback accounting should encompass business
of all sizes and tax structures to include pass-throughs, as
well as C-corporations.
Employment Taxes
There have been a number of proposals put forth to address
the treatment of employment taxes currently afforded to pass-
through entities. S-corporation flow-through income has
historically had an employment tax advantage over that of sole
proprietorships, partnerships and limited liability companies
(LLCs). An S-corporation shareholder's undistributed share of S
corporation income is not treated as self-employment income.
Alternatively, earnings attributed to a sole proprietor,
general partner or many LLC members are subject to self-
employment taxes; although Section 1402 excludes from self-
employment income a limited partner's distributive share of
partnership income. Some proposals that have been introduced
would eliminate that exclusion for any partner with a higher
adjusted gross income.
AGC believes that proposals to modify or unify rules for
pass-through entities should be fully vetted by the Ways and
Means Committee in an open and transparent manner with
continued significant input from stakeholders. A brash attempt
to treat taxation of S-corporation shareholders the same as
partnerships, thus exposing 100 percent of earnings to a
potential Social Security or Medicare tax would be a
significant departure from the current structure of these
entities and it would distort the tax liability of certain
corporate structures.
Comprehensive Reform for Both Entities
AGC believes that Congress should continue the dialogue of
comprehensive tax reform at both the individual and corporate
levels simultaneously. The individual and corporate codes are
not mutually exclusive and they must be reformed while
discussing the reactionary affect a policy change would have on
each other structure. Pass-through entities account for some 90
percent of businesses, employ more than 50 percent of the
private sector workforce and report more than a third of all
business receipts. Like corporations, pass-through
organizations face nearly the highest rate among industrialized
countries on business income. Under the individual code, pass-
through entities face a top marginal rate of 39.6 percent, even
higher than the anti-competitive 35 percent rate faced by C-
corporations.
Moreover, changes to the IRC under the Patient Protection
and Affordable Care Act (PPACA) only exacerbate the tax burden
on pass-through businesses. The law increases the Medicare Part
A (hospital insurance) tax rate by 0.9 percent on unearned
income on earnings over $200,000 for single filers or $250,000
for joint filers, and imposes a 3.8 percent tax on investment
income for taxpayers with a modified adjust gross income (MAGI)
exceeding $200,000 for single filers or $250,000 for joint
filers. Including the healthcare tax increase, marginal rates
will be set at 40.5 percent for individuals earning over
$400,000 and 40.5 percent for joint filers earning over
$450,000.
If Congress ultimately pursues a reform that eliminates
deductions and credits for a lower corporate rate, many small
businesses would experience an increase in the income taxes
paid as individual owners of a pass-through business. For the
aforementioned reasons, AGC strongly recommends that tax reform
be pursued comprehensively, addressing both individual and
corporate tax rates.
Conclusion
AGC thanks the Members of the Small Business Committee for
the opportunity to submit comments on areas regarding small
business/pass-throughs during this period of fact-finding for
comprehensive tax reforms. We believe strongly that an overhaul
of the IRC must deal with all business structures similarly and
contemporaneously. We believe that simplicity and certainty
should be the goal of tax reform and that provisions in the
existing code that create a compliance nuisance with little or
no change in tax liability should be eliminated especially for
small businesses.
AGC looks forward to ongoing consultation with Congress,
the Committee, and Members of the Working Groups as this
process continues to make improvements to the code in order to
create an atmosphere that is increasingly pro-business and pro-
growth.
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Small Business Tax Reform: Growth Through Simplicity
House Small Business Committee
Wednesday, April 10, 2013
Submitted by:
The Computing Technology Industry Association (CompTIA)
515 2nd Street, NE
Washington, DC 20002
Computing Technology Industry Association (CompTIA)
515 2nd St NE
Washington, DC 20002
Introduction.
Tax burdens and compliance costs consistently force small
and medium-sized (SMB) information technology (IT) companies to
divert needed resources away from their core businesses,
restricting growth and innovation. Reducing the financial
burden on these firms via tax reform would promote additional
growth and opportunities for the SMB IT industry and eliminate
hurdles within the tax code that are limiting the industry's
ability to remain globally competitive.
While the SMB IT industry strongly supports closing unfair
loopholes and outdated deductions as a means of increasing
revenue for broader reforms, there are several key tax
provisions that incentivize growth and innovation. Removing
these provisions would significantly hamstring SMB IT's ability
to grow and strengthen the economy.
This testimony provides an overview of the industry and
highlights the key tax policies for the IT industry within four
tax reform principles:
1. Simplify the tax code.
2. Reduce the tax burden on the SMB IT
industry.
3. Incentivize growth and innovation.
4. Protect SMB IT from new interstate tax
compliance burdens.
The data compiled for this report are largely the result of
an annual survey CompTIA conducts of its members.
About CompTIA.
The Computing Technology Industry Association (CompTIA) is
the voice of the world's $3 trillion information technology
industry. CompTIA membership extends to more than 100
countries. Membership includes companies at the forefront of
innovation along with the channel partners and solution
providers they rely on to bring their products to market and
the professionals responsible for maximizing the benefits that
organizations receive from their technology investments. The
promotion of policies that enhance growth and competition
within the computing world is central to CompTIA's core
functions. Further, CompTIA's mission is to facilitate the
development of vendor-neutral standards in e-commerce, customer
service, workforce development, and ICT (Information and
Communications Technology) workforce certification. CompTIA is
also the leading global provider of IT workforce vendor-neutral
certifications. Currently there are over 1.4 million CompTIA IT
vendor-neutral certification holders worldwide, and many of
those are for IT security.
CompTIA's members include thousands of small computer
services businesses called Value Added Resellers (VARs), as
well as nearly every major computer hardware manufacturer,
software publisher and services provider. Our membership also
includes thousands of individuals who are members of our ``IT
Pro'' and our ``TechVoice'' groups. Further, we are proud to
represent a wide array of entities including those that are
highly innovative and entrepreneurial, develop software, and
hold patents. Likewise, we are proud to represent the American
IT worker who relies on this technology to enhance the lives
and productivity of our nation.
A Vital Contributor to the Economy.
The IT industry in the United States remains a vital
contributor to the domestic economy. Currently, the industry
comprises about 26 percent (or $950 billion) of the $3 trillion
global industry. Through innovation and growth, domestic IT
firms have remained globally competitive and economically
strong.
SMBs within the IT industry employ some 1.8 million
workers, while spending approximately $110 billion annually on
payroll. Generally, these are high-paying jobs that rely on
skilled workers who continually adjust their skills to meet
market trends.
Many of these SMB companies operate within what is referred
to as the IT channel. The IT channel spans the IT marketplace
between the vendor and the end-user and forms a bridge between
distributors, resellers, integrators and consultants. Seventy-
five percent of all IT products and services, representing more
than $350 billion, are sold to businesses through the channel
as opposed to through retailers or direct sales. The vast
majority of IT firms in the channel are small and medium-sized
enterprises.
Although the industry remains strong, there is significant
potential for additional growth. According to January 2013
statistics from Indeed.com, more than 265,000 IT-related jobs
are currently available. While this reflects a clear skills gap
among potential employees, it also highlights the current job
growth in IT firms.
While a range of policies may impact the state of the
industry, few have a larger impact than the current tax code.
Despite good intentions, too many outdated our unfair policies
have proven to hamstring growth within the industry. Given the
impact that SMB IT business has on the economy, ensuring the
tax code promoters growth for domestic IT should be a key goal
in any tax reform efforts.
Principle 1: Simplify the Tax Code.
The tax code has continued to become increasingly complex
and complicated, especially for SMB IT companies that do not
have the resources to maintain large internal accounting and
legal departments. As the tax code has grown, the cost of
compliance (and potential for mistakes) has increased rapidly.
Both sides of the political aisle have identified the need to
simplify the tax code as a key priority.
A recent CompTIA survey found that 48 percent of IT
executives identify complexity and the burdens associated with
managing taxes as their primary concern with U.S. tax policy.
Further, the survey found payroll tax filings to be the most
costly and complicated tax requirements for businesses. In this
survey, the SMB IT industry has identified a number of tax
provisions that would clearly benefit from reforms that reduce
the complexity of the tax code.
Recommendation: Payroll Tax Filing
Simplification. Employers are generally
required to file Form 941 on a quarterly basis
to report and pay federal income tax
withholdings, social security and Medicare tax.
Very small employers with an annual liability
of $1,000 or less are allowed to replace these
quarterly filings with a single annual Form
944. Increasing this $1,000 threshold would
allow more small businesses to file annually
instead of quarterly, which would significantly
reduce the cost of compliance and risk of
error. CompTIA recommends increasing this
threshold to $50,000, which will provide
compliance burden relief for the majority of
the 5.8 million \1\ small businesses employing
1-99 employees.
---------------------------------------------------------------------------
\1\ According to the 2008 U.S. Census, there were a total of
5,821,277 small businesses employing approximately 42 million employees
with an annual payroll of over $1.5 trillion
---------------------------------------------------------------------------
Principle 2: Reduce the Tax Burden on the SMB IT Industry.
According to the U.S. Economic Census, 67 percent of IT
services firms, including employer and non-employer businesses,
pay taxes at individual rates as a sole proprietor or pass-
through entity. Therefore, it is important that tax reform does
not adversely affect these small businesses. While a corporate
tax rate reduction remains very popular among SMB IT companies
(63 percent believe it would be an important policy), the
direct impact to pass-through entities would be tangential.
However, the economic implications of a corporate tax rate
reduction (and its impact on adjacent industries) would likely
have a positive impact on SMB IT companies depending on the
broader tax policies adopted.
We also note that SMB IT companies cite a reduction in
payroll tax as a top issue. While income tax liability might
fluctuate, virtually all of the SMB IT industry must pay
payroll taxes, associated with its $110 billion annual payroll.
The most direct way to lessen the burden on these businesses is
to provide a reduction in the employer's share of these taxes.
This would make it easier and less costly to add new workers.
Recommendations: Comparable Tax
Treatment for Sole Proprietor and Pass-Through
Entities. Within comprehensive tax reform, a
variety of tax provisions, including a
corporate tax rate reduction, will be on the
table. While the IT industry may be impacted to
varying degrees depending on the combination of
the various reductions, it is important that
any solution provide comparable rate reduction
for entities that are sole proprietors and
pass-through entities. Ignoring these important
economic engines--by simply reducing the
corporate tax rate alone--would continue to
hamstring the ability of the SMB IT to grow and
prosper. We also recommend a reduction in the
employer's share of payroll taxes; this will
encourage businesses to hire more workers,
which will in turn lead to economic growth for
our nation.
Principle 3: Incentivize Growth and Innovation.
The SMB IT industry relies on its ability to grow and
remain innovative. Many of the largest IT companies in the U.S.
started as small businesses that succeeded through constant
innovation and investment. Unfortunately, many of these small
start-up IT firms are economically unable to continue to make
these innovation investments.
The SMB IT industry believes the tax reform debate must
include discussion of all tax provisions. In fact, executives
surveyed indicated that certain deductions and loopholes were a
major issue impacting tax policy. However, there are tax
benefits that are meaningful to economic growth and provide a
pathway to innovation for the SMB IT industry.
Recommendations:
R&E Tax Credit for Small
Businesses: Most small start-up
companies do not show a profit, and
thus do not have an income tax
liability against which to offset the
traditional R&E tax credit. Therefore,
some of the most vital and innovative
companies cannot receive any economic
benefit from the traditional R&E tax
credit. Accordingly, CompTIA supports
legislation that would allow start-up
companies to offset a simplified R&E
tax credit against payroll tax
liability.
Bonus Depreciation: Bonus
depreciation promotes investment and
growth by businesses and has been
especially important to small
businesses. While the economy shows
signs of improvement, small businesses
need continuing support to grow their
businesses. For 2011 and 2012,
businesses were allowed an additional
100 percent bonus depreciation. This
limitation has been extended through
2013, but will expire beginning in
2014. CompTIA calls on Congress to
permanently extend bonus depreciation
at the 100-percent level.
Small Business Expensing:
Section 179 allows small businesses to
deduct the cost of certain asset
purchases, as opposed to requiring the
cost to be capitalized and depreciated
over a period of years. This enables
small businesses to invest in
technologies that improve both
productivity and the quality of goods
and services. The current limitation of
$500,000 per year will drop to $25,000
after 2013. CompTIA strongly supports a
permanent extension of the $500,000
limitation.
Principle 4: Protect SMB IT from New Interstate Tax
Compliance Burdens.
As state budgets face ever-increasing pressures to raise
revenues, state tax authorities must become more creative in
their collection efforts. While states should not be limited in
their ability to tax transactions within their jurisdiction, it
is important that this emerging regime of taxation not unfairly
impact the IT and tech industries, especially SMBs.
Additionally, it is important that new state tax laws do not
create unfair and duplicative taxes on SMB IT companies,
imposing additional compliance costs on sellers and their
customers.
Recommendations:
Small Business Exemption for
Internet Tax Collections: For any
legislation that would require out-of-
state sellers to collect and remit
sales taxes, CompTIA supports a robust
small business exemption. Small
businesses are less capable of bearing
the costs of a new tax compliance
requirement. CompTIA believes the
debate should be refocused to balance
the rights of states to collect sales
taxes with the ability of small
businesses to cover these new
compliance costs. States have a right
to collect sales and use taxes owed,
but the costs associated with shifting
this compliance burden onto small
businesses also must be weighed. Small
businesses that provide goods and
services remotely are as vital to our
economy as those small businesses that
reside in and make sales within a
single state.
Digital Download Taxation:
Consumers, vendors and taxing
authorities need a consistent rule to
determine which state/jurisdiction is
permitted to impose a tax on the
purchase of a digital product or
service. Currently, there is no
certainty concerning which jurisdiction
has the authority to tax these products
among the location of the customer,
seller's server and customer's home
address. This creates the potential for
multiple and discriminatory taxes on
the purchase of digital goods and
services. Therefore, CompTIA supports
proposals that would restrict
collection of sales taxes on digital
goods and services to the jurisdiction
encompassing the consumer's tax
address, while also prohibiting
multiple and discriminatory taxes. We
believe this is a simple and objective
criterion that will bring both
certainty and lower compliance costs
for taxpayers, vendors and taxing
authorities.
Business Activity Taxation:
While physical nexus (having an office
or place of business in the state, or
employing workers that operate within
the state) continues to control sales
and use tax collections, some states
now are seeking to tax any transaction
that has an ``economic nexus'' to that
state. CompTIA supports enactment of a
distinct physical presence requirement
as a prerequisite for the taxation of
business activities. That is, states
should not be permitted to tax
businesses that do not have a physical
presence or workforce within that
state. Permitting states to reach out
to impose tax collections and reporting
on non-resident small businesses that
have no contact with that state would
impose an unaffordable compliance
burden, especially on the SMB IT
industry.
Conclusion.
The strength of the IT industry relies on its ability to
grow, innovate and adjust to market trends. SMB IT companies
across the nation are providing services to all major
industries from healthcare to agriculture. The success of these
industries relies on the IT industry and the services they
provide.
The U.S. IT industry continues to add jobs and strengthen
the economy. Additionally, we are remaining competitive in a
rapidly evolving global marketplace. While the industry remains
strong, we must continually identify ways to mitigate the
burdens on these companies in an effort to increase their
growth potential, which translates into sustaining and
generating high-paying jobs.
Therefore, tax reform should be a mechanism to promote
additional growth and opportunity for the SMB IT industry and
eliminate hurdles within the tax code that are limiting the
industry's ability to remain globally competitive.
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