It’s hard to run a small business. Money seems to always be tight, it feels like next month may be your last, and seemingly worst of all, the only tax changes that seem to affect you are the ones written to increase your costs. Though the Tax Cuts and Jobs Act did help you free up working capital and decrease some of the hassles or nuances of the tax code, many outdated policies have remained, leaving you scrambling to pay your dues to the government.
Understandably, even if there is hope—a Republican tax plan could solidify the changes made in 2017 and offer more clarity past 2021—but at the moment, life on Main Street is tumultuous. A pandemic has hurt your supply chain, a lockdown has held you back from working with customers, and with taxes due, you might be realizing some of the annoyances in the tax code.
But the AICPA has put it upon themselves to rectify the situation. In a recent letter to Congress, this leading accounting body has submitted their recommendations for future-proofing the tax code. After discussing four of the biggest challenges faced on Main Street, we would today like to turn our attention to the rest of their recommendations.
Expanding Section 179 Expensing for Intangibles, Startup Costs, and Organizational Costs
Amortizing is complicated, and in today’s technology-driven world, many businesses would benefit from expensing more items to recoup costs quicker. As noted by the AICPA:
“Expanding qualified property that can be expensed under section 179 by small businesses to include intangibles, startup costs under section 195, and organizational costs under sections 248 and 709 would benefit small businesses due to the simplicity and acceleration of tax deductions afforded by this provision. These provisions are complex for small businesses to administer and the expansion would better reflect today’s data-driven business decisions that are the focus of main street businesses.”
Increasing the Limit on Startup Costs
Being able to deduct start-up expenses is an important part of getting a business up and running—but limits set in the tax code haven’t seen much adjustment—despite increasing costs to get a business up and running and inflation. Currently, sections 195, 248 and 709 limit current deductions to $5,000, with the deduction phasing out as expenditures exceed $50,000.
These thresholds have not been increased since the enactment of the sections. And the AICPA recommends that the limit should be increased and adjusted for inflation to continue encouraging small business development.
Helping Self-Employed and Gig Workers by Increasing the Self-Employed Threshold
Another area that feels outdated—especially in the gig economy—deals with thresholds for 1099s and self-employed contributions. Not only have these remained stagnant despite inflation, but the numbers often reflect less than a week of work.
The $400 self-employed threshold under the Self-Employed Contributions Act (“SECA”) has not been changed for a few decades. This amount should be increased, indexed to inflation, and should also exceed what might be earned in one week or less. This change would benefit many individuals in the age of the gig-economy and reflect the changing working habits of Americans. Similarly, the $600 reporting threshold for Form 1099- MISC, Miscellaneous Income, should be increased to reflect current wages.
Broadening and Removing the Limit on Operating Losses
Especially in the disrupted landscape that is 2020, a major consideration that needs to be made immediately is for Congress to look at net operating loss rules and limitations. Here’s what the AICPA had to say:
Exempting small businesses from the section 461(l) rules and 80% limitation on net operating losses (NOLs) will provide an efficient and effective tax system. Substantial losses will be incurred in 2020, and NOL carryovers generated in 2018 and later years can only be used in post-2020 years to offset 80% of taxable income. These limitations substantially burden small businesses recovering from the pandemic. This change would provide small businesses with certainty in tax planning and streamline the system for future disruptions.
Helping Small Businesses Facilitate Employee Benefits Offerings
When you only have a few employees, it’s very easy to trigger a “top-heavy” defined contribution penalty. A defined contribution plan5 is considered top-heavy if as of the last day of the preceding plan year, the aggregate value of the key employees’ accounts exceeds 60% of the aggregate value of all of the employees’ accounts under the plan.
If you only have ten, twenty, or fifty employees, rely on entry level staff, or the like, it’s easy for plans to end up top heavy. In turn failing this top-heavy testing could result in cash flow challenges. As AICPA notes,
“When a plan fails the top-heavy testing, a contribution equal to or greater than the highest employer contribution made to a key employee is required to be made by the employer, to all non-key employee accounts.”
Not only is this prohibitive, it disproportionately affects small businesses.
“Generally, the top-heavy rules negatively affect small and family-owned businesses that sponsor 401(k) plans consisting of employee deferrals only, or employee deferrals and employer matching contributions.
[…] Many small business retirement plans are subject to the top-heavy provisions for two reasons: 1) most small businesses are owned by family members or a close group of individuals and it is common for these owners to remain relatively static over the life of the business; and 2) in today’s work environment, turnover of rank-and-file level employees is commonplace due to a more mobile workforce. […]
Since the top-heavy rules are financially burdensome and overly complicated, they cause many small employers to be unable to offer or be forced to terminate 401(k) plans for their employees. […] Without the top-heavy rules, more small businesses would adopt plans to benefit their employees.”
Continued Modernization of Passthrough Entity Tax Codes
Though the TCJA did address some of the costs and challenges faced by passthrough entities, more work can be done to make these rules more friendly for small businesses operating under this structure.
“Changes are needed to modernize the taxation of businesses that support large sectors of the economy. Many small businesses are passthrough entities and provide professional services. Complementary changes are needed to compensation definitions between profits interest and compensation of owner-members (including guaranteed payments), as well as codification of reasonable compensation. Expanding the scope of section 199A to include essential businesses and repealing the specified service trade or business (“SSTB”) rules under section 199A will allow more small businesses to benefit from these changes and continue to grow. Alternatively, exclude essential businesses from the SSTB rules, such as healthcare and accounting.”
Making Permanent the Tax Provisions Set to Expire
To pass the TCJA, bill writers had to do a bit of work to ensure the act would pass the ten-year plan. This resulted in many provisions being given an expiration date. AICPA recommends that now is the time to make these permanent:
“Certainty is essential for an effective and administrable tax system. The tax extender legislation of expiring provisions injects systematic uncertainty for future business planning and practitioners working to advise taxpayers. COVID-19 spotlights the effect of uncertain tax provisions coupled with uncertain economic and health times. Permanent provisions would allow businesses to appropriately plan both capital expenditures and workforce needs to minimize future disruptions.”
Adding a Mobile Workforce Statute
Possibly one of the most topical recommendations—added in at number 12—the AICPA recommended the addition of a mobile workforce statute to address challenges experienced as companies went mobile and made much more obvious when we started to work from home. Over the past few years, more and more companies relied on a mobile workforce that crossed state lines, making for additional challenges in the management. According to AICPA:
“In order to future-proof both federal and state tax systems, Congress should enact a uniform national standard for non-resident state income tax withholding and a de minimis exemption from the multi-state assessment of state non-resident income tax. […]
The issue of employer tracking and complying with all the different state and local tax laws is quite complicated when employees are ordered to work from home while complying with shelter-in-place orders issued in response to a global pandemic; employees may work in different localities. Consistent and clear rules governing the tax treatment would create a 21st Century tax system reflective of how employees work today and in the future.”
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The world continues to change, and for small businesses, the tax code often doesn’t reflect these changes. We’re happy to see that the AICPA is taking steps to help small businesses and the leaders keep more of their money. Stay tuned for our look into the other recommendations and follow us to keep up with all the latest.