A small business taxpayer will spend nearly 60 hours to complete a Federal business tax return that includes a Form 1040 with corresponding Schedule C. Sixty hours! That’s a week and a half of time — just spent on completing the return.
In case that number seems hard to swallow, please understand — that is not some figure I just pulled out of a hat. That number comes directly from the Internal Revenue Service (IRS), Office of Burden Reduction.
For self-employed entrepreneurs and microbusinesses, the tax code’s complexity can be daunting. Even if you have an accountant helping you, just maintaining and organizing your records so that the accountant can prepare the return for you, is laborious. Plus, there’s the uncertainty of figuring out what is deductible, what is owed in taxes, and how to comply with the tax code.
But the thing that bothers me most are the lost opportunity costs. Most of us in businesses with under 5 employees (a category which covers 90% of small businesses according to U.S. Census Bureau figures) do not have the luxury of a full-time accountant or controller. We may not even have a part-time bookkeeper. Often it’s just you or me — the owner — burning the midnight oil over QuickBooks, except for a few instances a year when we bring in our outside CPA, such as at tax time.
And if you’re like me, you have to face this tough choice: every hour you spend on taxes is another hour that takes you away from more productive pursuits. Instead of going out and getting new customers, or delighting them, you’re organizing mileage receipts. Ugh.
That’s why the National Association of the Self Employed (NASE) suggested 4 priorities for tax reform, in recent Congressional hearings. The Congressional Subcommittee on Finance and Tax held hearings on May 7, 2009 on “How the Complexity of the Tax Code Hinders Small Businesses.”
The 4 priorities suggested by NASE’s National Tax Advisor Keith Hall, who gave testimony, are:
Putting IRS forms into “plain English” and simplifying them — Due to the complexity, small businesses “pay $1304 per employee [doing their taxes] — roughly twice the amount that big companies pay,” said Chairman Kurt Schrader (D-OR) at the Subcommittee on Finance and Tax hearing. A simpler, and easier to understand set of forms and documentation would help simplify matters, drive out cost, and drive out time.
Passing a standard home office deduction — According to Chairman Schrader, tax complexity should not be a stumbling block to growth. “A good example of this is the home office deduction — 52% of entrepreneurs operate out of their homes, yet only a small handful even claim the deduction,” he said. (See this video of Chairman Schrader’s remarks for more.) Creating a standard home office deduction of $1500 would replace the complicated calculation required today.
Clarifying the definition of independent contractor – Classifying someone who works for you as an independent contractor versus an employee is fraught with uncertainty, said NASE Tax Advisor Keith Hall. The IRS has a lengthy list of factors to consider. It’s easy to get it wrong.
Allowing sole proprietors to deduct their health insurance premiums, same as larger corporations – This would involve deducting health insurance premiums on Schedule C, at the entity level. (Currently only the self-employed can take the deduction, and they still have to pay self-employment tax on the premiums.)
To me, this sounds like a good list of small business priorities. While policy makers seem fixated on SBA loans (something that touches a small percentage of small businesses) and big stimulus bills (that do little to impact small businesses directly), taxes are something that impact every small business. We all have to pay them. Congress will be doing something worthwhile for millions of small businesses if it chooses to simplify the tax code and give more tax parity to small businesses when compared with larger businesses.