How to Lower the Burden of Tax Compliance –3 Possible Reforms
Everyone agrees that the United States tax code is too complex. But, is there any real hope that changes will be made to simplify it? Wholesale reform remains elusive with a variety of stakeholders and ideas for the best tax system in conflict. Yet, there may be consensus forming around bite-sized reforms that could relieve a few tax headaches for small businesses.
On July 22nd, both the Senate Committee on Small Business and Entrepreneurship and the House Committee on Small Business held hearings on how to reduce the burden of tax compliance on small businesses. And, the Senate Committee’s Chairman, David Vitter (R-LA), has introduced the Small Business Tax Compliance Relief Act to target a number of tax challenges small firms face. The bill contains a number of interesting proposals, but here are three ideas that seemed to resonate with many who had the opportunity to testify at the hearings.
1) Allow More Businesses to Use Cash Accounting.
The cash basis method of accounting is often simpler and more in line with how small businesses operate than the accrual method. Generally, under the cash method income is recognized when received and expenses are deductible when paid. Accrual accounting records income upon a sale, regardless of when the business is paid, which can cause cash flow issues for small businesses, among the other complexities of this method. The proposal would increase the threshold for cash accounting from $5 million in gross receipts to $10 million.
2) Expand the Safe Harbor for Expensing Property.
Tangible property regulations, sometimes referred to as “repair regulations,” provide the rules for when businesses may deduct or depreciate the costs of repairing, acquiring or replacing property. The 200-plus pages that explain what to do when are, not surprisingly, complex. New regulations provide a welcome safe harbor for small-dollar purchases at a de minimis level of $500 or $5,000, depending on whether a business has an applicable financial statement (AFS). Those with an AFS qualify for the more generous safe harbor. The problem is that many small firms do not have an AFS and $500 is seen as too low to be useful. The proposal would not only increase the $500 de minimis level to $2,500, but also expand the definition of AFS to capture more businesses.
3) Require the IRS to Convene Small Business Advisory Panels
A law already on the books called the Regulatory Flexibility Act requires Federal agencies to consider whether the regulations they want to impose will have a significant economic impact on a substantial number of small businesses, and if so, they are to seek alternative approaches that would lessen the burden. Several, but not all, agencies are required to get input directly from small businesses by convening small business advisory panels to give them feedback on their proposed regulations. The proposal would require IRS to convene such panels.
Other ideas like creating more permanency of tax laws, authorizing the IRS to reduce penalties for good faith efforts at compliance, eliminating certain recordkeeping requirements, and improving IRS service/responsiveness are other popular reforms. Chairman Vitter’s bill has a lot of support among small business groups that lobby Washington’s lawmakers. Congress has been debating other tax code changes, that some would like to make part of the budget debate this fall. Perhaps there will be a window this year for commonsense reforms that can let small businesses spend more time creating jobs and making payroll, and less time figuring out how to pay the government.