Earlier today, CompTIA moderated a panel sponsored by the Congressional Small Business IT Caucus that included Rep. Loretta Sanchez (D-CA), who founded the Congressional Small Business IT Caucus in 2011 and introduced “Startup Act 3.0,” a bipartisan bill that provides tax incentives that help small- and medium-sized businesses (SMBs).
David Brown, policy advisor of Third Way, started the morning with a discussion on the need for research and development (R&D) and research and experimentation (R&E) tax credits, which he said are not only the basis for innovation, but would help create high-paying jobs. Right now such credits aren’t readily available to startups because they don’t have an income tax liability against which to take a credit. In fact, more than half of R&D credits granted in recent years were taken by companies with revenue of more than $1 billion.
Brown wants to see R&D and R&E tax credits made a permanent part of the tax code. In fact, he would like to see “the Startup Innovation Credit Act of 2013,” which he said is essentially a jobs bill, passed. It would not only spur R&D but allow companies to claim the R&D tax credit against their employment taxes, opening credit to new companies that don’t yet have an income tax liability.
We also heard from Robert Carroll, principal of Ernst & Young, who discussed the tax rate debate in Congress and its impact on job creation and business investment. The concern over the top individual tax rates has been in focus, in part because of the prominent role played by flow-through businesses in the U.S. economy. Flow-through businesses, he explained, include S corporations, partnerships, limited liability companies and sole proprietorships. These businesses employ 54 percent of the private sector workforce and pay 44 percent of federal business income taxes. The number of workers employed by large flow-through businesses is also significant: more than 20 million people are employed by flow-through businesses with more than 100 employees.
In today’s tax world, he said, these businesses pay taxes on income but don’t get credit for losses. He wants to see a tax code that treats income and loss the same way. He said it’s important to continue to educate policymakers on the important role pass-through businesses play in job creation and investment.
Panelist Roger Harris, president and COO of Padgett Business Services, which has a customer-base of SMBs with less than 20 employees, said that tax reform today is not necessarily in the best interest of an SMB. He said that entrepreneurs start and operate their own business doing the one thing they love but end up doing 99 things they hate, including tax compliance, payroll, etc. He said we need to let them do the things they want to do so more people will venture into starting their own business, which would ensure that our economy continues to grow.
Harris said many SMB benefits incorporated into the tax code are complicated and, arguably, in need of reform. He is a proponent of expanding the cash accounting method as cited in “the American Taxpayer Relief Act of 2012,” which expands the availability of the cash method of accounting for certain business entities that do not currently have the option to use the simpler cash method, under which items of income accrue when received and expenses are counted when actually paid.
We also heard from Raymond Keating, chief economist of the Small Business & Entrepreneurship Council, who said taxes are the biggest obstacles for SMBs. He said SMBs need financial capital to grow and the lack of that capital has put the economy in an entrepreneurship depression. He said our tax system works against risk taking and entrepreneurship.
Keating proposed the following:
- Lower tax rates. Make them fair, simple and pro-growth.
- Bring the corporate tax and personal income tax rate down.
- Abolish the capital gains tax, which he said is the most destructive tax we have.
- Index capital gains for inflation. He said President Obama has proposed a no capital gains tax for startups but that it’s far too focused on C corps.
- Provide a business deduction for debt.
- Make section Section 179 SMB expensing of Startup Act 3.0 permanent, enabling SMBs to invest in technologies that improve their productivity and quality of goods and services. Currently, the expensing limit is $500,000 and next year it will get phased down.
Sanchez wrapped up the panel, thanked the panelists for their participation and stressed the importance of continuing the discussion on tax reform. She stressed her ongoing commitment to finding legislation that will help SMBs succeed.
It was a great morning! Please check out twitter chatter on today’s panel at @TechVoice.
