New tax legislation would ease burden on small businesses

By: Alfredo Ortiz

Appeared in The Hill on June 8, 2016


Last Wednesday, Rep. Randy Hultgren (R-Ill.) announced new legislation to ease the burden on American small businesses, which account for half of all U.S. jobs and two-thirds of its new jobs.

The Bring Small Businesses Back Tax Reform Act (H.R. 5374) would lower the tax rate on pass-through businesses’ first $150,000 worth of income to 10 percent. And it would lower the rate on income between $150,000 and $1 million to 20 percent. Currently, pass-through businesses, which make up over 60 percent of businesses in the country, are charged at personal tax rates, meaning they pay 40 percent tax on every dollar earned above $413,000.

The May jobs report released last Friday by the Bureau of Labor Statistics crystallizes the need to reduce tax burden on the country’s job creators. While the topline unemployment rate remains fell to 4.7 percent, the labor force participation rate – the percent of the adult population working or looking for work – also fell to near a generational low of 62.6 percent. If the LFPR remained at its pre-Great Recession standard of 66 percent, today’s unemployment rate would be 9.6 percent.

Small businesses, which hold the key to truly turbocharging the labor market, also have not fully recovered from the Great Recession. The rate of new business creation remains near a Great Recession low on a per-capita basis. A recent national poll of small business owners commissioned by the Job Creators Network finds that only about one quarter of respondents believe this year is going to be easier to do business in than the last. And only one-in-five plan to hire additional employees over the next year.

Respondents cite over-taxation as the number one cause of their difficulties. Two thirds of small businesses say that over-taxation threatens the viability of their businesses. Hultgren’s tax act would provide tax relief to these S Corporations, sole proprietorships, partnerships, and LLCs that are the heart of our communities and provide us with the products and services we depend upon.

Consider the savings this bill would offer a neighborhood auto body shop that earns $450,000 a year in income. Under the current tax system, the shop would pay an effective federal tax rate of 30 percent — $134,500 in tax. But under Hultgren’s bill, the shop would pay an effective federal tax just shy of 18 percent — $80,000 in tax.

This amounts to a tax savings of 40 percent, which could be used to invest in new products, hire new employees, and expand into new markets – all of which would help improve the labor market and the economy as a whole.

The bill also has two other important reforms that would ease the administrative tax burden on small businesses. First, it would allow them to immediately expense all investment in equipment. This overcomes the cumbersome and speculative depreciation tables that are the bane of many small business owners existence. The time saved by this reform would allow small business owners to focus on building their company, not doing taxes. (Small businesses currently spend about 80 hours a year on their taxes.)

Second, it would allow cash accounting for tax purposes for all businesses with gross receipts less than $25 million. This simplifies the accounting process, allowing businesses to defer income until cash is actually received, more easily balancing their balance sheet.

Taken together, the tax reforms in this bill would provide much needed relief that would finally bring small businesses back from their post-recession malaise, bringing the country back with them.