The Small Business Owner and the Tax Code

1
The Small Business Owner and the Tax Code

• Working Together?

Roger Harris, President and C.O.O. Padgett
Business Services Testimony before
the President's Advisory Panel on Federal Tax
Reform March 8, 2005
2
Background

• Padgett Business Services has provided tax and
  accounting services for small businesses for over
  35 years
• Over 400 offices in the U.S. and Canada
• Over 100,000 customers
• 0 to 250 employees with an average of 6.5
• Annual sales from 10,000 to 10 million
• Average small business net income is 47,500
• 75 report business income on their personal tax
  return

3
Small Business Overview

• Data from the U.S. Small Business Administration,
  Office of Advocacy
• There are over 5 million small businesses that
  employ less than 20 people
• These businesses account for over 89 of U.S.
  employers
• Small businesses employ over 20 million people,
  roughly 4.5 per small business

4
Starting a small business means doing the one
thing I love and 99 that I hate.
5
Complex DecisionsBefore the Doors Open

• What kind of entity should I elect?
• Sole proprietor, S or C Corp., LLC, or
  Partnership
• How do I pay myself?
• Employee vs. independent contractor
• Salary, dividend, distribution of profits, etc.
• How do I pay my taxes?
• Withholding, business or personal return,
  estimated tax
• What accounting method should I use?
• Cash, accrual, hybrid
• What is my tax year?
• Calendar year, fiscal year, changes?

6
The Next HurdleHiring Help

• How do I classify my staff?
• Employee vs. independent contractor?
• What new tax registrations are required?
• Federal, state, local?
• What about withholding and employment taxes?
• What tax forms must I file?
• Federal, state, local (monthly/quarterly/annually)

7
Additional Complexities

• Record Keeping and Record Retention
• Revenues and expenses
• Capital expenditures
• Employment records
• How long? Permanent or temporary?
• Employee benefit plans
• Retirement plans, medical coverage, other benefits

8
Special Concerns

• Depreciation and Basis
• Alternative Minimum Tax
• Advanced EITC
• Phase In/Out
• Transitional Rules
• Income Thresholds
• Effective Dates
• Fear of making a mistake

9
Cost of Compliance

• Time Spent
• Loss of Productivity
• Professional Consulting Costs
• Penalties and Interest

10
Business vs. Tax Decisions

• Purchasing Equipment
• Timing
• Purchase vs. lease
• Deferring Income/Expenses
• Accelerating Income/Expenses
• Borrowing Money
• Source of Funds
• Collateral
• Payback Methods
• Deductibility of Interest

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Helping the Small Business Owner Get Back to
Business

• A simpler, fairer, and growth-oriented tax code
  will ease the compliance burden on the small
  business owner allowing them to again focus on
  the one thing they love.