[Senate Report 114-424]
[From the U.S. Government Publishing Office]
Calendar No. 226
114th Congress } { Report
SENATE
2d Session } { 114-424
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S. RES. 252
_______
December 20, 2016.--Ordered to be printed
Filed, under authority of the order of the Senate of December 10
(legislative day, December 9), 2016
_______
Mr. Vitter, from the Committee on Small Business and Entrepreneurship,
submitted the following
R E P O R T
[To accompany S. Res. 252]
The Committee on Small Business and Entrepreneurship,
having considered an original resolution (S. Res. 252)
expressing the sense of the Committee on Small Business and
Entrepreneurship of the Senate relating to easing the burden of
Federal tax compliance on small businesses, having considered
the same, reports favorably thereon without amendment and with
a preamble and recommends that the resolution do pass.
I. INTRODUCTION
An original resolution expressing the sense of the
Committee on Small Business and Entrepreneurship of the Senate
relating to easing the burden of federal tax compliance on
small businesses, S. Res. 252 was introduced by Senator Vitter
on September 15, 2015.
II. HISTORY (PURPOSE & NEED FOR LEGISLATION)
When the federal tax code was created, it contained only
400 pages, but since then has grown to about 74,000 pages. As
the tax code has expanded, the compliance costs have increased
with it. Most small businesses do not have an in-house
accounting department and depend on costly outside accounting
and legal services. As such, small businesses have a
disproportionate compliance burden.
According to the National Federation of Independent
Businesses (NFIB), for small businesses, the cost of compliance
is 70 percent higher than the cost of compliance for larger
firms. According to a National Small Business Association
(NSBA) small business survey, a small business' administrative
burden for tax compliance is greater than its actual tax
liability. NFIB reported that small businesses spend 1.7
billion hours on tax compliance every year, which amounts to
approximately $16 billion in compliance related costs. Nearly
40 percent of small businesses spend 80 hours or more per year
on tax compliance, and 25 percent of small business spend more
than 120 hours. By reducing these compliance burdens, small
business owners can put more money back into their business,
community, and the economy.
The policy changes included in the resolution have received
broad support. Many organizations offered their letter of
support, such as the NFIB, NSBA, Louisiana Association of
Business and Industry, the Small Business and Entrepreneurship
Council, the Small Business Investor Alliance, the Small
Business Advocacy Council, and others. Other organizations have
offered support publicly, such as the American Institute of
CPAs, the National Association for the Self-Employed, and the
chambers of commerce from several states.
III. HEARINGS & ROUNDTABLES
In the 114th Congress:
On April 2, 2015, the Committee held a field hearing,
titled, ``Reducing the Federal Tax Burden for America's Small
Businesses'' in Lafayette, Louisiana. The Committee heard
testimony from local small business owners regarding their
difficulty in keeping up with changes to the tax code.
On July 22, 2015, the Committee held a hearing, titled,
``Targeted Tax Reform: Solutions to Relieve the Tax Compliance
Burdens for America's Small Businesses.'' The hearing examined
the significant tax compliance burden on small businesses. The
Committee heard testimony from small business owners and
industry advocates. Witnesses discussed the compliance burdens
and how they can outweigh their actual tax liability. The
witnesses suggested extending the cash accounting threshold, as
well as updating tax exclusions and deductions to reflect the
changes that result from inflation.
IV. DESCRIPTION OF BILL
This resolution endorses provisions amending the Internal
Revenue Code relating to the taxation of small businesses. It
recommends allowing small business entities with gross receipts
not exceeding $25 million to use the cash method of accounting.
It also eliminates the restrictions on depreciating computers
or peripheral equipment. The resolution also extends the tax
deduction for the health insurance costs of self-employed
individuals. The legislation requires inflation adjustments
after 2015 to the dollar amounts of specified tax exclusions
and deductions. It also modifies return due dates for
partnerships, C corporations, S corporations, and other
entities and reduces the required holding period from 5 to 3
years for qualified small business stock and extends the
rollover period for such stock.
V. COMMITTEE VOTE
In compliance with rule XXVI (7)(b) of the Standing Rules
of the Senate, the following vote was recorded on July 29,
2015. A motion to adopt the Promotion and Expansion of Private
Employee Ownership Act of 2015, a resolution to recognize the
need for tax compliance reform in order to ease the
disproportionate burden on small businesses, was approved,
unanimously by voice vote with the following Senators present:
Senators Vitter, Scott, Fischer, Gardner, Ernst, Enzi, Shaheen,
Cantwell, Heitkamp, Booker, Hirono, and Peters.
VI. EVALUATION OF REGULATORY IMPACT
In compliance with rule XXVI (11)(b) of the Standing Rules
of the Senate, it is the opinion of the Committee that no
significant additional regulatory impact will be incurred in
carrying out the provisions of this legislation. There will be
no additional impact on the personal privacy of companies or
individuals who utilize the services provided.
VII. SECTION-BY-SECTION ANALYSIS
Section 101--Expansion of cash accounting threshold
This section explains why cash accounting, as opposed to
accrual, is a much simpler accounting method and is often
utilized by small businesses. Cash accounting allows for
flexibility, especially for retail stores dealing with cash.
The accrual accounting method is more complicated and considers
accounts receivable rather than money a business may have on
hand. This section recommends extending the cash accounting
threshold from $5 million to $25 million in order reflect
inflationary changes and give businesses more options.
Section 102--Modification of safe harbor for expensing of acquisition
or production costs of tangible property
This section states that a taxpayer electing to apply for
de minimis safe harbor, is permitted to deduct certain amounts
paid to acquire, produce, or improve tangible property for tax
purposes provided certain requirements are met. The de minimis
safe harbor election provides two threshold amounts: $500 for
taxpayers without an AFS and $5,000 for taxpayers with an AFS.
An AFS is a certified financial statement from a CPA that costs
thousands of dollars and is traditionally something a smaller
business does not have. Therefore, they are bound by the $500
limit which is arbitrarily low, compared with the significantly
higher $5,000 limit available to those companies who can afford
an AFS. In increasing the limit to $2,500, small businesses can
take advantage of de minimis safe harbor and they will not have
to pay thousands of dollars for an AFS. In small businesses
this more accurately reflects the costs associated with
``acquiring, producing, or improving tangible property.''
Section 103--Removal of computer equipment from listed property
This section eliminates burdensome record keeping
requirements on business computer and communication equipment
usage. The Small Business Jobs Act of 2010 eliminated the
requirements for documenting business cell phone usage, but the
law did not addressburdensome requirements on similar business
communication devices and portable computers. With the merging of cell
phones, computers, and cameras into single inexpensive devices, the
remaining ``listed property'' reporting requirements and deduction
limitations for business computers should be eliminated.
Section 104--Deduction for health insurance costs in computing self-
employment taxes
This section allows for the full deductibility for health
insurance purchased by the self-employed. Self-employed
individuals, unlike other businesses, cannot fully deduct the
cost of their health insurance as a business expense. The issue
arises when self-employed individuals have to pay the 15.3% tax
on their employer-provided health insurance costs to which
nobody else is subjected. Because individuals cannot deduct
this as an ordinary business expense, the 15.3% payroll tax
self-employed individuals pay on their premiums amounts to
$1,940.04 in extra taxes that only the self-employed pay. The
Small Business Jobs and Credit Act of 2010 allowed self-
employed individuals to fully deduct the cost of their health
insurance from their self-employment taxes but for one year
only.
Section 105--Modification of rules relating to the termination of
partnerships and S Corporations
This section modifies the rules on the termination of
partnerships and S Corps. Terminated partnerships for tax
purposes are treated as a newly formed entity. In many case
companies don't always realize they have to file a ``final''
tax return after the partnership termination, leading to
companies misunderstanding the rules and having to pay
penalties if they miss the deadline. This often serves as more
of a trap for small businesses rather than a process to help
prevent tax abuse.
Section 201--Inflation adjustments for certain provisions
This section adopts a new inflationary standard that is an
adjustment to the provision to numerous fixed limitation
amounts in different provisions. Many of the IRS' business
provisions and limits were established decades ago and have not
grown to keep pace with inflation. This includes the gift tax
limit of $25, which was passed in 1962, and if adjusted for
inflation would now be $172 and the Employee Achievement Awards
that have a $400 and $1,600 limit which have been the same
since 1986. Other specific provisions include the ceiling of
group-term limit insurance, exclusion for education assistance
from an employer, and a deduction for contributing property or
a vehicle. The inflation adjustments that are present
throughout IRS statutes can have the opportunity to be
standardized.
Section 202--Report on improvements to customer section
This section directs the IRS to produce a report to the
Small Business Committee no later than June 30, 2016 on
specific ways and ideas to improve its customer service to
small businesses and shorten its turnaround time for small
entities. This idea report stems from the method of the IRS to
catch small business centers in an act. Though it is very hard
to attempt a change to an agency with this mentality, the first
step is to signal to the public that the Congress is aware of
the relationship between the IRS and small business community
and is working to address it.
Section 203--Return due date modifications
This section resets dates of certain business filings. For
many small businesses, a delayed tax statement from an entity
can result in a late tax filing thus incurring a penalty,
requesting an extension, or attempting to rush the tax prep
leading to mistakes which may lead to more penalties.
Section 301--Reduction in holding period for qualified small business
stock
This section shortens the holding period under Section 1202
to three years. The holding period to qualify for the reduced
capital gains tax rate, which is a special incentive designed
to help start-ups, under Section 1202 is five years. However,
this tax incentive is supposed to encourage investments in
startup company and five years' defeats that purpose. The
regular long-term capital gains holding period is 1 year.
Therefore, a more appropriate holding period for the tax
incentive to invest in startups under Section 1202 would be 3
years.
Section 302--Extend of Rollover Period for Qualified Small Business
Stock
This section extends the Rollover Period on Qualified Small
Business Stock from 60 days to 1 year. Section 1045 was
designed to encourage investments in qualified small
businesses. In Section 1045, a taxpayer is allowed to roll over
their investment in a qualified small business stock into other
qualified small business stock tax free. Section 1045 has a
very short window in which to make the rollover investment: 60
days. In many cases investors need time to transition
investments from one place to another. Your typical angel
investment takes months to find and is especially true for
investors outside of large metropolitan areas.
Section 402--Findings
This section shows findings that the Employee Retirement
Income Security Act of 1974 (ESOP) has been successful in
providing meaningful retirement savings for S Corp owners.
Section 403--Deferral of tax for certain sales of employer stock to
employee stock ownership plan sponsored by S Corporation
This enables owners of S Corporations in addition to
existing C Corporations to sell their stock to an ESOP.
Section 404--Department of Treasury Technical Assistance Office
This directs the Department of Treasury to conduct outreach
to inform companies and individuals about the possibilities and
benefits of employee ownership of S Corps, while providing
technical assistance to S Corps in sponsoring ESOPs.
Section 405--Small business and employee stock ownership
This defines the terms ``ESOP'' and ``ESOP business
concern.''