One of the most common tax complaints I hear from small business owners is about filing their taxes. Paying is not their biggest objection, although they certainly don’t love it. But they hate the time and money they spend on paperwork.
In a campaign marked by many questionable tax ideas, Democratic presidential candidate Kamala Harris acknowledged the filing problem and offered a solution, albeit missing a key detail. His idea: A new standard deduction for small businesses that would add to the current standard deduction available to all tax filers.
While it may not be the perfect fix—more on that later—he’s done a service by prioritizing an issue that really matters to business owners. The IRS Taxpayer Advocate Service estimates that the average small business spends 82 hours and $2,900 on tax compliance. Then add the cost of aggravation, anxiety, and confusion.
A Concept Not a Plan
Harris is proposing a concept rather than a plan. For example, he did not say how he would design his standard deduction, how big it would be, or what businesses would be eligible. These seemingly technical details distinguish a good proposal from a bad one.
The idea is not new. Hillary Clinton proposed the small business standard deduction during her 2016 presidential campaign. And Harris aides pointed to a 2019 paper by University of North Carolina tax law professor Kathleen DeLaney Thomas as a possible model.
DeLaney Thomas will allow companies to claim the standard deduction if their gross business receipts are less than $100,000, their total adjusted gross income is less than $150,000, and their income is reported on Form 1099. Cash business or labor-only business with minimal expenses, such as some consultants, would be ineligible.
Small business owners will have the option to deduct the new standard deduction from their gross receipts instead of tracking and deducting all of their actual expenses. They can still itemize their business deductions, if they want.
The small business deduction can be a fixed dollar amount, just like for individual income tax. Or it could be a percentage of gross receipts, which DeLaney Thomas prefers.
Alternatively, he proposes separate standard deduction limits. As low as perhaps 10 percent of gross receipts for labor-intensive businesses and much higher, 60 percent, for high-cost companies. That version, of course, would introduce additional complexity into a simplification plan.
Monitoring Costs
Any good business owner wants to stay close to expenses, so they can keep records in any event. And most want to track expenses so they know whether to take the standard deduction or itemize.
However, a small reduction in business standards will reduce the cost of figuring out exactly what expenses are deductible and to what extent.
Harris still has many questions to answer, even beyond the basic structure.
For example, most small businesses are structured as pass-throughs, such as sole proprietorships and partnerships, where the owners pay taxes on their business income through their individual Form 1040s.
How does Harris’ idea fit into Section 199A’s special 20 percent deduction for pass-through businesses included in the Tax Cuts and Jobs Act (TCJA). Harris has not said whether he would extend that provision beyond 2025, though many independent analysts have been highly critical of the provision.
DeLaney Thomas also included guardrails aimed at preventing taxpayers from playing with the new deduction, such as limiting the idea to companies with 1099 income. And he recognizes the need for better reporting of information, especially for gig workers, a controversial issue in its own right.
A fixed decline in the dollar could dampen investment. At the same time, it is likely to create a windfall for businesses with expenses lower than the new standard deduction.
Alternatives
There are other solutions for small business filers. For example, in 2005, President George W. Bush’s tax reform commission (see page 109) proposed cash accounting for small business tax purposes.
Under the long-forgotten plan, small companies would report only receipts less cash costs, excluding buildings and land, and pay tax on the difference. That would be consistent with the way most small companies do their financial accounting today and would not require businesses to keep a separate set of books for taxes.
Let’s not kid ourselves, the complexity of business tax results from special provisions that lower taxes for these companies like 199A, fancy rules for depreciating equipment, and a loophole which allows small business owners in many states to avoid the State and Local Tax Deduction (SALT) limitation.
A small business standard deduction will be only a small piece of whatever Congress does to meet the TCJA’s expiration next year. But the inclusion of a proposal to ease tax filing will please many small business owners.
#Harris #tax #filing #easier #small #businesses