According to an April 14, 2015, press release, the National Federation of Independent Business (NFIB), the average small business must devote 24 hours and pay more than $400 just to prepare and pay its federal taxes, not including the taxes themselves. “That cost is the result of the bewildering complexity in an IRS Code that has grown from 30,000 pages in 1986, the last time it was reformed, to more than 70,000 pages today,” said Dan Danner, president and CEO of the NFIB. “High tax rates are a burden on small business, and the cost of compliance gets bigger every year as the tax code gets more complicated.”
Approximately 75 percent of NFIB’s members pay their business taxes as individual filers, and few of these businesses have in-house accountants. As a result, they have two options. One is to hire professionals, which is costly. The other is to spend endless hours themselves preparing their taxes. “The tax code hampers their competitiveness,” said Danner. “Every dollar that they must send to Washington is a dollar they’re not investing in their business. And every minute it takes to prepare their taxes is a minute they’re falling behind on something else more important.”
On April 8, the National Small Business Association (NSBA) released its “2015 Small Business Taxation Survey,” which highlights the growing administrative burdens imposed by the U.S. tax code. According to the report, while 50 percent of small firms report spending 40 hours (a full work week) or less each year involved in the administration of tax preparation, 15 percent spend 41 to 80 hours, 13 percent spend 81 to 120 hours, and 22 percent (almost one in four) spend over 120 hours (three full work weeks) or more.
The report also noted that 85 percent of small businesses are forced to pay an external tax practitioner to handle their taxes. While 54 percent of small businesses spend $5,000 or less for tax preparation, 19 percent spend $5,001 to $10,000, 11 percent spend $10,001 to $20,000, 11 percent spend $20,001 to $40,000, and five percent spend over $40,000.
“It’s no surprise, given Congress’s inability to effectively address tax legislation last year, that there was an increase in the administrative burden associated with federal taxes,” said Todd McCracken, president and CEO of the NSBA. “The tax code is irretrievably broken, and now is the time for lawmakers to act.”
The NSBA report also noted that, “While the financial tax liability for small firms is a huge issue, the sheer complexity of the tax code is actually a more significant problem for America’s small businesses. In ranking the most significant challenge to their business posed by federal taxes, 59 percent picked administrative burdens, up from 53 percent just one year ago.” The report added: “Unfortunately, the current U.S. Tax Code is becoming an insurmountable hurdle for the growth of existing businesses and creation of new firms.”
On April 15, Holly Wade, Research Director for NFIB, testifying before the Joint Economic Committee of the U.S. Congress, noted, “From mid-2008 through mid-2012, ‘poor sales’ was the number one problem for small businesses as consumer spending declined sharply. But now, ‘taxes’ is often the number one concern for small business owners, a problem that moderates the economic recovery in the small business sector.” She added: “Five of the top 10 problems [reported by small businesses] are tax-related. They’re concerned about the amount of taxes they have to pay, the cost of hiring tax professionals, and the time it takes them to comply with the law.”
Congress itself weighed in on the tax burden that small businesses face. In an April 15 press release, Steve Chabot (R-OH), chair of the House Small Business Committee, noted, “America’s 28 million small business owners, taxpayers themselves, repeatedly complain that the uncertainty of the tax code has made it difficult to plan or grow their companies. We’ve held hearings, met with trade associations, and, most importantly, we’ve talked with our constituents back home. The message we hear is always the same: We’ve got to make the tax code simpler, flatter, and fairer.”
Rep. Chabot noted the importance of revising the tax code for small businesses in specific. “There is no doubt that we must reform our corporate tax structure,” he said. “We have the highest corporate income rates in the world. However, as our committee has identified numerous times before, our small businesses are the backbone of our economy. They create over 60 percent of the new jobs and represent over 90 percent of all employees in the United States. Because so many of these enterprises file and pay their taxes on their individual returns, we cannot and must not ignore them as we move forward with any tax reform debate.”
Testifying before the House Small Business Committee hearing on tax reform that same day, Scott Lipps, owner of Sleep Tite Mattress Factory and Showroom, noted, “The president’s budget calls for a reduction on corporate tax rates in exchange for closing certain loopholes. So far, however, he has been unwilling to discuss changes on the individual side of the code, where most businesses file their taxes. To exclude small business from the reform would be unfair and also unwise.”