The National Taxpayers Union (NTU), the oldest taxpayer advocacy organization in the U.S., said in a letter to the House Small Business Committee in April that federal Tax Code unfairly burdens small businesses. Well, we know that! To ameliorate this, several measures have been proposed in Congress to change current federal tax rules in order to help small businesses. It’s impossible to know whether some or all will be enacted; it’s likely most if not all won’t become law. Still, it’s worthwhile to know what’s happening and to tell those who represent you in Congress what you support.
Small Business Taxpayer Bill of Rights Act
This measure—H.R. 2681 —would provide a variety of protections for small businesses concerning federal taxes. The bill provides for a number of changes, including:
- The right to recover reasonable administrative and litigation costs from the federal government when the taxpayer prevails and the IRS’s position is not substantially justified by eliminating the net worth limitation for small businesses. Small businesses would be defined as privately held corporations, partnerships, and sole proprietorships with average annual gross receipts in the 3 prior years not exceeding $50 million (adjusted annually for inflation). Note: The current requirement for recovery is a net worth of no more than $7 million at the time of the proceeding for a partnership, corporation of owner of an unincorporated business.
- The right to an independent conference with the IRS Independent Office of Appeals that does not include personnel from the Office of the Chief Counsel or compliance functions of the IRS.
- The right to have greater access to alternative dispute resolution—mediation or arbitration—with the IRS. This would be done by eliminating the requirement of sharing the cost of a mediator for a small business. For this purpose, it means having an annual average number of employees during either of the 2 preceding calendar years of 500 or fewer.
- The right to greater damages for unauthorized disclosures of information.
- The right of protection for personal residences against enforcement of tax liens.
- The right to deduct expenses related to certain audits as an above-the-line deduction for owners of pass-through entities. The deduction would be limited to $5,000 of “qualified National Research Program” audit expenses and would be allowed only if the audits result in no increase in tax liability.
American Innovation and R&D Competitive Act
Currently, R&D expenses must be amortized over a period of not less than 5 years. Prior to 2022, these costs could be expensed. A proposed bill would roll back the current treatment of R&D costs to pre-2022 rules.
This measure would help businesses small and large. But because many startups have R&D costs, it’s particularly helpful to small businesses.
Small Business Investment Act
Currently, C corporations in technology, manufacturing, retail, and wholesale businesses can offer a valuable inducement to investors to invest and to employees to forego cash compensation in favor of stock by dangling the tax-free treatment of stock sales down the road. The sale of qualified small business stock, also called Sec. 1202 stock after the Tax Code section governing it, allows for a 100% exclusion of gain up to $10 million on the sale if the stock has been held more than 5 years. The Small Business Investment Act would expand the exclusion for more businesses to make it easier to raise capital. The measure has been endorsed by a number of business groups and associations, including the Small Business & Entrepreneurship Council of which I’m an advisory member.
Eliminating Paperwork for Startups Act
Startups and other small businesses may reward employees with restricted stock for 2 good reasons: these businesses can’t afford significant cash payments and they want to share ownership with employees. An employee who receives restricted stock in connection with the performance of services can elect to include the value of the stock in income when received rather than wait until the restrictions are gone. Doing this can result in less tax cost to the employee because going forward all appreciation is transformed into capital gain. The election to get this treatment must be made within 30 days of receipt of the restricted stock, and the IRS has a sample form that can be used for this purpose. The proposed measure--H.R. 2611 --would allow the election to be made electronically.
Small Business Tax Equity Act
Currently, marijuana businesses operating legally under state law are barred under the Tax Code from claiming deductions and credits on their federal income tax returns. The proposed measure--H.R. 2643 —would allow businesses to claim tax deductions and credits for marijuana businesses legal under state law. If the measure passes, it would apply to tax years ending after the date of enactment.
Strengthening Supply Chains Through Truck Drivers Incentive Act
A proposed measure—H.R. would create a $7,500 federal tax credit beginning in 2024 for those who drive not less than 1,900 hours per year and have adjusted gross income below certain limits. New truck drivers would receive a credit of $10,000.
A number of these proposals have bi-partisan support, but that’s no guarantee they’ll be enacted. Typically, proposed tax changes get rolled into a larger bill, and the 2024 fiscal year budget currently being considered may be just the thing to see some proposals become law.