SIMPLIFY THE TAX CODE

By Todd Stottlemyer

You could hear the sighs of relief as millions of tax returns were dropped at post offices across the land. Another tax deadline has come and gone. But at the same time many taxpayers were left scratching their heads wondering why filing a return is so hard.

Certainly, small business owners are wondering. According to an NFIB Research Foundation Small Business Poll on Tax Complexity and the IRS, 88 percent of small employer taxpayers used a tax professional to prepare their most recent federal tax return.

For those employers who employ 20 or more people, the
percentage increased to 95 percent. Nearly 27 percent admit that the laws and requirements are just too complex for them to do their own taxes.

The two reasons small employer taxpayers most frequently cited for using tax professionals are to assure that they properly comply with tax laws, and the sheer complexity of the law. Only about one in four report that they even try to understand the law. For example:

• 95 percent of small employer taxpayers think that the depreciation provisions of the tax code apply to them, but just 15 percent think they have a good understanding of depreciation requirements.
  
  
• 93 percent think the accrual method of accounting rules apply to them, but just 16 percent think they have a good understanding of the requirements.

Other provisions that small employer taxpayers most frequently rely on their tax professional to understand for them include the amounts subject to self employment tax, capital gains or losses on investments, and the Alternative Minimum Tax.

The AMT was originally intended to ensure that the extremely wealthy pay at least some tax, but will affect approximately 23.4 million Americans this year.

Of course, every dollar that a small business owner has to pay a professional is a dollar that can't be invested in growing the business or providing employees with better pay or benefits. Reforming or repealing the AMT would be a big step Congress could take to keep small business owners from having to figure their taxes twice. But there are some easy things that Congress can do to help simplify the code and the many forms required for a tax return.

Creating a standard deduction for use of a home office would allow more small businesses to take advantage of the deduction that they're entitled to, but don't because it's too hard to calculate under current law.

At the same time, simplifying Schedule C to make the form more user friendly would benefit the self employed and sole proprietors, as well as encouraging better compliance with the tax laws.

Expanding eligible investments for Section 179 expensing which allows the deduction to be taken in the same year the expense is recorded would reduce record keeping burdens required for depreciation purposes.

Similarly, codifying the law allowing small business owners to use cash basis accounting rather than accrual basis would greatly reduce record keeping burdens since small businesses wouldn't have to track nearly as many transactions.

You may remember that the Internal Revenue Service was forced to change its ways in the mid-90s after a Senate investigation spotlighted numerous cases of taxpayer abuse. Those efforts appear to be paying off as 53 percent of small business taxpayers report that their dealings with the IRS were either "generally" or "very" satisfactory.

Simplifying the tax code would go along way toward ensuring that the two sides maintain good relations.

Todd Stottlemyer is president and CEO of the National Federation of Independent Business in Washington, D.C.

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