Small Businesses  

MAKING GOVERNMENT RESPONSIBLE means . . . eliminating the obstacles to small business formation and expansion . . . affirmatively assisting small businesses with loans, technical assistance and trade policies that create opportunities for small businesses . . . integrating programs of assistance to small businesses with community and economic development efforts.

POSITION SUMMARY:

We need to promote small business formation and expansion with financial assistance through expanded small business loan programs and through tax policies that encourage private investment in small businesses.

We need to exempt small businesses from labor and environmental regulations that have little applicability to them but impose significant compliance and reporting costs.

We need to amend the Internal Revenue Code to eliminate expensive and unnecessary recordkeeping requirements and deny sole proprietors and partners the benefits of tax deductions that are available to incorporated business. We also need to amend the Internal Revenue Code to make the corporate tax a progressive tax that applies lower tax rates to small businesses.

[Related issues are discussed in separate sections on Economy and Jobs and Tax Reform]

DISCUSSION:

Small firms employ half of the nation’s workforce and comprise 99.7% of American enterprise. Over 80% of the country’s nearly 290,000 manufacturing firms have fewer than 20 employees, and over 98% have fewer than 500 employees.  The Small Business Administration reports that small businesses generate 60 to 80% of new jobs each year and are responsible for hiring 40% of all high tech workers. 

We need to promote the starting, and expanding, of small businesses through legislation that encourages investment in start-up and expanding businesses and reduces the regulatory and tax burdens small business.  Although there are many things than can and should be done to help small businesses, a few of the most important actions I would promote are summarized below. 

Promoting Investments in Small Businesses:

Small businesses need money to start and expand, but small businesses, especially those with limited business history, are not viewed as prime candidates for loans or equity investments. These problems can, however, be addressed by making small business loans and equity investments more attractive to lenders and investors. Therefore, I believe that: 

Laws relating to the tax deductibility of bad debts should be liberalized:  Current tax law severely limits the ability of taxpayers—especially taxpayers related to the business owner--to write-off losses resulting from bad loans. Making it easier to write-off bad business loans will make it easier for businesses to obtain loans from private (and family) sources.  

Eliminate capital gains taxes on Original Issue Stock: Investments in small businesses will be more attractive if there are no taxes on gains when that stock is eventually sold.

Institute A Tax Credit Incentives for Small Business Start-up and Expansion: The use of investment tax credits to promote investment in small business is not a new or novel concept. For example, in New Mexico a taxpayer who is a "qualified investor" may take a tax credit of up to $25,000 for an investment made in a New Mexico company that is engaging in high-technology research or manufacturing. New Mexico also has a number of tax credit based programs intended to promote new job creation.   The inclusion of a similar program in the Internal Revenue Code has the potential to vastly increase equity investments in small businesses.

Revise federal “small business set-aside” programs: Federal small business set-aside programs need to be revised and expanded to increase small business participation in all publicly funded projects.

Federal funding to States should be used to support state businesses. :Federal appropriations to States for capital projects – especially allocations based on state-specific demographic and economics factors – should, to the fullest extent possible, require that funds be used to purchases products and services from in-state contractors and suppliers.

Exemption from Employment Regulations::

Small businesses are characterized by personal relationships between the employer and employee. The owners of small businesses can, and should, be able to make employment decisions without fear of lawsuits. 

Small businesses are also severely limited in their ability to comply with requirements of such statutes as the Americans With Disabilities Act and the Age Discrimination in Employment Act.  Likewise, small businesses do not have, and cannot be expected to have, the ability to establish formal policies regarding workplace discrimination or for addressing employee complaints.

We need to exempt small businesses from all employment discrimination laws.

Amendments to the Internal Revenue Code::

Many of the provisions of the Internal Revenue Code that were enacted for the benefit of large corporations are not appropriate for small businesses.  Other provisions of the Internal Revenue Code that were intended to prevent abusive practices actually inhibit the development of small businesses and penalize their owners. We need to re-examine these provisions to make the Internal Revenue Code more “small business friendly.”  A few of the needed changes include the following. 

Institute a progressive business income tax: We should promote small businesses by establishing a progressive business income tax, starting at zero for small businesses, and exempting, for example, the first $500,000 of profits. This would leave small businesses with more money to expand. A progressive income tax on businesses would also make smaller companies more attractive as investments by increasing their relative after-tax earnings.

Accelerate the Deductibility of Capital Investments:  The last major reform of the nation’s tax code occurred in 1986. Since then, there have been dramatic advances in technology, which greatly alter the way small businesses operate in the modern marketplace. Many of the Internal Revenue provisions that apply to the use of electronics were put on the books over two decades ago and have not been updated since.  These—and other outdated sections of the code—discourage entrepreneurial investment and growth.  We need to amend the Internal Revenue Code to replace the depreciation allowance with a provision allowing the expensing [e.g. writing-off the entire cost of a capital acquisition immediately rather than over a period of years] of capital investments.

Liberalize the Home Office Deduction:  According to the National Bureau of Labor Statistics 3 of out every 10 homeowners operate a business out of their home, which represents 52% of all small businesses.  Unfortunately, the inherent complexity of the Code hinders small business. According to the 2007 IRS Taxpayer Advocate Report, over 8 million taxpayers use one or more rooms in their home for business purposes only. However, according to the IRS, of the nearly 20 million Schedule C filers, only 2.7 million claimed the deduction.  We need to liberalize the home office deduction.

Reduce record keeping requirements:  In an attempt to limit the abuse of tax deductions on equipment that could also serve a personal use, the Tax Reform Act of 1986 required extensive record keeping requirements for these ‘listed properties.’ When these provisions were written into the tax code, cell phone technology and other electronic equipment were expensive technologies worthy of detailed log sheets. However, since that time technological changes have dramatically reduced the cost of such equipment as well as revolutionizing the way cell phone and mobile communications devices are used today.  In the face of such changing circumstances, there is little justification for the complex record keeping requirements of the Internal Revenue Code. The onerous recordkeeping requirements of Internal Revenue Code should be waived for small businesses.

Make health insurance deductible to by sole-proprietors and partnerships:   Under current law, corporations are able to deduct health insurance costs incurred on behalf of their employees as a pre-tax business expenses.  However, sole-proprietors, partners in partnerships, LLC owners and S Corporation owners are not able to deduct the cost of their own health insurance—even when they are able to deduct the cost of insurance provided to their employees.  We need to eliminate regulations that prevent Owner-Employees from being treated as employees for purposes of deducting the costs of health insurance.

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