It's no secret: Tax compliance is a challenge for many small-business owners. Small businesses must cope with an ever-growing list of new tax requirements and rules, and worry about incurring penalties if they are not compliant. Unlike most large corporations, they often don't have the tax experts and resources on hand to manage today's complex tax laws or even to fully take advantage of all the tax breaks available.
A recent hearing in U.S. Senate Committee on Small Business and Entrepreneurship looked at the tax burdens faced by small companies, and experts proposed some solutions for how to make tax compliance easier:
Simplify the Tax Code
The U.S. tax code contains 74,608 pages—triple what it was in 1980. A streamlined tax code could save small businesses time they could spend on managing their business and help them avoid mistakes and penalties, says Diana Beebe, owner of ProSys, a Baton Rouge, Louisiana company that consults the refining and chemicals industries. "A complex tax code with frequent changes is a threat for small businesses that are trying to produce value for their customers, employees and business owners," Beebe said in prepared testimony for the Senate's small business committee hearing. "Large complex legislation provides uncertainty, and benefits large corporations that have the resources to analyze the impact these legislation have to their market sectors and businesses."
Some proposals for simplifying the tax code include decreasing the number of industry categories, reducing the number of unique tax breaks while using that savings to reduce overall tax rates, and reducing the number of distinctions and different tax rules between various business types and sizes.
Allow More "Cash-Method" Accounting
Nonfarm businesses incorporated as “C Corporations” with more than $5 million in annual revenues are required to use the "accrual method" of accounting, meaning expenses are matched with the related revenues and are reported when the expense occurs, not when payment is received. But one proposal seeks to allow businesses with up to $10 million in revenues to use the "cash method" of accounting, which would allow them to count earnings when they receive them. The cash method is generally seen as much easier.
Tom Mathison, owner of a Grand Rapids, Michigan-based architecture firm and tax chair for the National Small Business Association (NSBA), says he supports allowing more small companies to use the cash method. "Cash accounting—widely seen as a simpler, more straightforward method of accounting—is utilized by 46 percent of small businesses, according to the NSBA 2015 Taxation Survey and increasing the threshold to $10 million will provide consistency in defining small business in the tax code," he told the Senate small business committee. "I use cash accounting in my small business because of its relative simplicity, and because it is a more honest reflection of the resources we have to sustain investments in equipment and personnel as we grow."
Make the Section 179 Expensing Limit Permanent
Section 179 lets businesses write off 100 percent of certain types of equipment as expenses (up to the annual limit) rather than depreciating them over many years. Congress passed extensions to keep the limit at $500,000 for 2014, up from the permanent $25,000, but it has not extended it yet for 2015. Keeping the Section 179 expensing limit permanently at $500,000 would provide great tax relief to small business owners and reduce uncertainty, said Nicholas Karellas, tax counsel for the National Federation of Independent Business (NFIB). "When considering the stress of our members on the topic of expensing the cost of long-lived assets, making the law permanent and eliminating the roller coaster of the maximum deduction would ease their minds considerably," Karellas told the Senate committee.
While there are many proposals for how to make tax compliance easier on small businesses over the years, getting such proposals through Congress has proven much harder. A recent bill introduced by Senator David Vitter (R-Louisiana) called the Small Business Tax Relief Act of 2015 includes many of the proposals mentioned above, but only has a 10 percent chance of being enacted, according to GovTrack.us.