The U.S. House Committee on Small Business, calling the Internal Revenue Code an obstacle to entrepreneurial growth and progress because of its size, complexity, and age, proposed on Thursday seven specific changes to the Code that the Committee believes can "can be accomplished in a short period of time - and without delay." The provisions, which include a standard deduction for the home office, a provision for shorter depreciation schedules and a deduction for health insurance for self-employed entrepreneurs, are contained in the report, "Seven Ways to Stimulate the Economy by Updating the Internal Revenue Code."
The report says further that business classifications used by small business result in higher taxes and that in effect there are two business tax systems in the United States.
Noting numerous calls over the years for comprehensive reform of the Code, the Committee on Small Business says that a targeted modernization of particularly outdated provisions of the Code can streamline the Code and make it fair to small businesses.
The Committee identified the following provisions in the Internal Revenue Code as outdated and complex and in some cases causing unfair burdens on small businesses and recommends specific solutions targeted to the problems. The report says that the Code:
- Has inordinately complex provisions for a Home Office deduction. This complexity means that the majority of home-based small businesses miss out on a deduction to which they are lawfully entitled.
Simplify the Home Office deduction provisions. Allow for a reasonable standardized deduction for people using their home as part of their business.
- Has outdated limits on deductions and overly burdensome record keeping requirements for electronic business equipment. Small firms lose time and money. Many small firms forego investment in new technology and lose competitive edge.
Allow taxpayers who can prove substantial business use of electronic equipment to deduct a greater portion of the cost without having to keep detailed records.
- Fails to accurately index for inflation the cost of vehicles used in business. Entrepreneurs lose thousands of dollars annually because they can't depreciate the true value of their vehicles.
Allow a small business owner who uses an automobile for work-related purposes over 75 percent of the time to recover the true cost of the vehicle (with a price of at least $25,000) during the standard 5-year recovery period.
- Antiquated provisions force small businesses to use extended depreciation schedules. Entrepreneurs end up paying taxes that are higher than necessary and can't recover costs in a timely manner.
Allow small businesses to use shorter depreciation schedules that are in line with today's technological and market realities.
- Unlike large firms, self-employed entrepreneurs have to pay taxes on health insurance premiums twice - as employees and business owners. Millions go without adequate (or any) health insurance.
Allow self-employed entrepreneurs to deduct cost of health insurance premiums in the same manner as large firms.
- An arbitrary (50 percent) limit on small business deduction of business meals and entertainment costs. Most small firms lack advertising budgets and business meals and entertainment are important tools used by entrepreneurs to grow their businesses.
Raise the small business limit for deduction of business meals and entertainment to 80 or 100 percent.
- Important incentives for investment in small firms have been eliminated by a reduction in long-term capital gains taxes. Today, with the long-term capital gains rate practically the same as the rate for sales and exchanges of qualified small business stock (QSBS), the goal [of a 1993 law] of moving investment to smaller businesses has been thwarted. Without this incentive, business investment will increasingly go to larger companies with less risk.
Restore incentives to prompt those with capital to invest their money in U.S. small businesses.
Building on their analysis of tax provisions passed since 1993 that have ended up eliminating incentives for investment in small business, the Committee's report argues that the entity classifications that small businesses use affects the Code's fairness and says that in effect there are two business taxation systems in the United States:
Whether it is because of changes in technology, or structural deficiencies with the way the provision was written, there are many tax code provisions that do not provide benefits to smaller businesses simply because of the entity classification that most small businesses operate under. Most large entities pay their taxes through the corporate tax system, while most small businesses are Sub-chapter S corporations, partnerships, or Schedule C or F businesses and pay taxes for their business earnings on their personal returns. As a result, many small firms lose business deductions that that are not available on their personal returns.