House Small Business Committee Examines Tax Code Barriers to Entrepreneurship

CCH Tax Day Report

As part of congressional efforts toward comprehensive tax reform in 2017, the House Small Business Committee in a February 15 hearing examined barriers existing within the current tax code for start-ups and small businesses. According to Chairman Steven Chabot, R-Ohio, the Committee is working closely with Ways and Means members and Chairman Kevin Brady, R-Tex., to ensure small businesses are “front and center” of tax reform efforts.

“There are a number of specific provisions in the current tax code that directly penalize the risk-taking entrepreneur,” Chabot said during opening statements. “These provisions prioritize government growth through revenue collection over economic growth and that is exactly the wrong approach, ” he added.

Tax code simplification was an area of particular focus among witnesses. “Let’s keep it simple – all of us would agree it (the tax code) is too complicated,” Troy K. Lewis, American Institute of CPAs, testified. Lawmakers should consider policies to mitigate three barriers within the tax code: “the limited deductibility of business net operating losses, the limited deductibility of capital losses, and lengthy depreciation schedules,” Lewis said.

According to David Burton, Senior Fellow, The Heritage Foundation, the current tax system burdens both small businesses and the economy as a whole. The solution to enhancing economic grow is to “reduce marginal tax rates, particularly on businesses, to expense capital, to eliminate true tax preferences and to simplify the tax system,” Burton testified.

Passthrough Entities

Business tax rate reduction has been a frequent topic of analysis and discussion among lawmakers, economists and practitioners lately. But a tax code overhaul that includes a tax rate reduction for C corporations without also reducing rates for passthrough entities would be ill-advised, according to Lewis. “The vast majority of businesses are structured as passthrough entities,” Lewis said.

Agreeing that rates for passthrough entities also need careful consideration during ongoing discussions of tax reform, Kyle Pomerleau, Director of Federal Projects, Tax Foundation, testified that “entrepreneurs that choose to set up passthrough businesses, such as S corporations or partnerships, face a higher top federal tax rate today than at any point since 1986.” According to Pomerleau, the current tax code contains several disadvantages for new businesses. “The federal tax code penalizes businesses with large, up-front losses; discourages investors from pursuing risky opportunities; and makes it difficult for successful companies to expand,” he testified.

Interest Expense Deduction

The ability for small businesses to deduct interest expense is another important issue to consider within the context of tax reform, Lewis said. “Equity financing for many start-up businesses is simply not available,” he testified. “A limitation in the deduction for interest expense (to the extent of interest income) would effectively eliminate the benefit of a valid business expense for many small businesses, as well as many professional service firms,” he added.

The House GOP “Better Way” tax reform Blueprint (TAXDAY, 2016/06/24, C.1) currently proposes allowing businesses to deduct interest expense against any interest income, but no deduction would be allowed for net interest expense. According to the Blueprint, eliminating deductions for net interest helps to level the tax treatment of debt versus equity financing.

Retirement Accounts

Both Burton and Lewis testified to the “burden” small businesses face with regard to the rules regulating the adoption and operation of retirement plans. They both advocated for the simplification of retirement accounts, which are one of the “most complex areas of tax law,” Burton said. “Very few small employers offer retirement accounts because of the complexity, high compliance costs and regulatory risk of doing so,” he added.

Other House News

In other news, Ways and Means ranking member Richard Neal, D-Mass., released a statement on February 15 announcing that he and Rep. John Lewis, D-Ga., will be joining the Joint Committee on Taxation (JCT). Rep. Mike Bishop, R-Mich., announced separately that he will be serving on Ways and Means.

“It’s an honor and important responsibility to serve on the Joint Committee on Taxation, particularly during this Congress as we look to tackle comprehensive tax reform for the first time in three decades,” Neal said.” I look forward to serving in this role with my longtime colleague and friend, John Lewis, as we work to secure tax cuts for the middle class, support working families, and make sure our nation’s tax rules work for all Americans, not just the wealthiest at the top.”

By Jessica Jeane, Wolters Kluwer News Staff

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