The Invisible Tax Burden on Small Business
Small business owners face significant tax burdens, not only from income and payroll taxes but also from the hidden costs of complying with complex tax rules. Compliance efforts, such as calculating deductions and maintaining records, add up to billions in expenses each year. Proposals like simplifying the home-office deduction, modernizing cell phone tax rules, and increasing start-up cost write-offs could greatly reduce this burden and help small businesses save time and money.
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Blog content provided by Barbara Weltman, Publisher of Big Ideas for Small Business ®
The high tax cost that successful small business owners face is obvious: high income taxes as well as costly payroll taxes. And these burdens could increase significantly under the pending health care bill that would impose a surtax on high-income taxpayers (many of whom are small business owners) as well as a payroll tax on businesses to pay for health care. But there’s a hidden expense that is also very costly to small business: the cost of compliance with tax rules.
A 2005 study estimated individuals and businesses spent an estimated 6 billion hours and $265 billion dollars complying with their tax obligations, with compliance costs predicted to grow to $482.7 billion by 2015. Rep. Kurt Schrader, chairman of the House Subcommittee on Finance and Tax, has noted that the 3.7 million-word Tax Code is especially “taxing” on small businesses that operate on thin profit margins.
Possible solutions for small businesses to this invisible tax burden include:
- Simplify the home-office deduction rules. More than half (53%) of small businesses are home-based. It would be helpful to have a standard write-off so home-based business owners won’t need to spend hours on recordkeeping and tax preparation to figure the home office deduction. The Home Office Deduction Simplification Act (H.R. 1509) would allow a standard home office deduction of up to $1,500, which would be indexed annually for inflation.
- Modernize tax rules for cell phones. Technically, you can only expense the cost of buying a new iPhone or other mobile device if more than 50% of its use is for business, and only the business portion of monthly bills is deductible. What’s more, small business owners that give employees cell phones must include (and pay payroll taxes) on employees’ personal usage. IRS Commissioner Doug Shulman supports the notion of legislation to eliminate tax on employees’ personal usage of business phones.
- Increase the write-off for start-up costs. Only $5,000 of start-up costs can be deducted up front, with the balance amortized over 15 years. The Small Business Jump Start Act of 2009 (S. 1402) would double the write-off to $10,000.