Small Businesses Grapple with Outdated Tax Code

The small business community is rapidly become the nation's Mighty Mouse. As the economy falters and large firms are downsizing, more entrepreneurs are springing up. But as their ranks grow so do their obstacles -- lack of affordable health care and rising gas prices to name a few, along with a tax code that some say treats them unfairly when compared to big businesses.

The House Small Business Committee released a plan (pdf) today recommending seven ways to stimulate the economy by updating the nation's tax code to better benefit the nation's smallest firms.

The panel said it may fall on the shoulders of small businesses and entrepreneurs to help yank the economy back from the precipice of recession and allay some of the problems stemming from the sub-prime mortgage crisis. However, it believes an outdated internal revenue code stands in the way.

The last major reform of the U.S. tax code happened in 1986 -- before computers and cell phones became ubiquitous -- and the committee believes that the tax code does not reflect the "dramatic advances in technology, which greatly alter the way small businesses operate in the modern marketplace."

The committee recommends encouraging and promoting investment and business activity such as tax incentives for employers to offer health care coverage. It also advocates that the code be simplified so that small businesses don't have to spend their financial resources on accountants and lawyers just to figure out how to comply. The panel also promotes a standard home-office deduction so that small businesses don't miss out on something to which they are entitled simply because it's too confusing to figure out.

Additionally, the committee says that small business owners lose money and competitiveness because, unlike large firms, self-employed entrepreneurs must pay taxes on health insurance premiums twice in their capacity as both employees and business owners. Other committee suggestions cover outdated equipment deduction limits and record-keeping requirements, business automobile depreciation limits that are based on 1984 prices, depreciation schedules for equipment like computers, and higher limits on deductions for business meals and entertainment costs.

"Entrepreneurs have always been at the forefront of the nation's economic success," the report concludes. "Giving them the opportunity to grow their businesses just makes plain sense...Antiquated fiscal policy...hinders the ability of these crucial drivers of innovation and growth."

Separately, the National Small Business Association on Wednesday released new data showing that small firms pay 67 percent more for tax compliance than large businesses. The data -- part of its yearly survey of small and mid-sized businesses that will be released next week -- also show how the complex tax code is a big problem for the small business community.

By Sharon McLoone |  April 9, 2008; 4:00 PM ET Policymakers , Regulation Legislation
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