Small business owners favor tax reform to reduce complexity

Complexity and inconsistency within the tax code continue to be major issues for small business owners. According to a survey conducted by the National Small Business Association, approximately 25% of small businesses say that they spend 120 hours or more (or 3 full work weeks) per year on the administration and preparation of Federal taxes.

The national survey of 1,500 small business owners showed that two-thirds (66%) support a broad reform of the Federal tax code that would reduce both corporate and individual tax rates, in conjunction with a reduction in business and individual tax deductions. On the other hand, 35% of small business owners said they support raising taxes on the highest-earning individuals, and only 10% indicated they are in favor of introducing a European-style “Value Added Tax” (or VAT).

The research study also showed that 82% of those surveyed support deficit reduction through tax reform to help spur economic growth and generate Federal revenue.

In addition, the survey found that 84% of small business owners currently pay an external tax practitioner or professional accountant to handle their taxes.

When asked to identify the most significant challenge posed by the Federal tax code to their business, 55% cited administrative burdens while 45% said financial burdens. Just over half (51%) reported using the cash (rather than the accrual) accounting method for reporting their personal income taxes, while 42% said their business uses the cash method.

The study further revealed that small business owners see both the financial and administrative burdens they face as nearly identical for the most common small business taxes. When asked to rate a series of common small business taxes, those cited as most burdensome (both financially and administratively) were: income taxes, payroll taxes, corporate taxes, and state and local taxes.

READ: Taking advantage of tax deductions for business travel and entertainment

According to the study, the greatest overall burdens imposed by the tax code are the financial cost to the business (45%), the administration of tax forms and the time it takes to prepare and complete them (14%), complexity and concerns about getting audited (13%), and a lack of consistency in regulations (12%).

“Federal taxes have huge implications on small businesses, with 74% reporting that Federal taxes have a significant to moderate impact on the day-to-day operation of their business,” said NSBA president and CEO Todd McCracken.

When asked to name the Federal tax deductions and tax credits that they currently take advantage of, 35% of small business owners cited the mortgage interest deduction, followed by Section 179 expensing (30%), bonus depreciation (25%), the self-employment deduction on health care (25%), the home office deduction  (14%), R&D credits (11%), and energy efficiency credits (10%).

The small business owners participating in the survey were also asked to what extent tax credits or deductions influence their decisions about their company and/or employees. While 17% answered “not at all,” 29% said “significantly,” 29% said “moderately,” and 25% said “a little.”

READ: How does the Federal Insurance Contributions Act (FICA) affect my taxes?

“Given that the overwhelming majority of small businesses pay taxes on their business at the personal income level, or are so-called ‘pass-through’ entities, a broad reform of our tax system is the best way to truly help small business and ease the massive, and growing tax burden,” said NSBA chair David Ickert of Air Tractor, Inc. in Olney, Texas.

 

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