In today’s legislative environment, tax reform is on the tip of everyone’s tongues. Whether discussing the corporate tax rate, childcare exemptions, or credits and deductions, changes to the tax code will have an impact on America’s small businesses, app developers, and tech innovators. Congress and the Trump Administration have introduced outlines of their tax reform plans that will affect taxpaying individuals and businesses across the country. As drivers of the economy, small businesses create 64 percent of new private sector jobs, and their priorities must be heard and considered within the tax reform debate. Here are a few tax priorities that should be on your radar as the reform efforts continue.
Tax Code Simplification and Worker Classification
Many small businesses, particularly startups in the tech and sharing economy, have found that the tax code has not kept pace with modern day innovations. To provide a much-needed update to the 1986 tax code, House Small Business Committee Chairman Steve Chabot and Ranking Member Nydia Velázquez came together to introduce H.R. 3717, the Small Business Owners’ Tax Simplification Act, to provide greater clarity for small entities. The bill addresses the healthcare expense deduction, worker classifications for small businesses, and the extension of employee cafeteria plans — like pensions, health savings, and other accounts with tax advantages — to employees and business owners.
This week, ACT | The App Association member MotionMobs, a Birmingham, Alabama-based web application consulting firm, testified before the House Small Business Committee to outline key methods to improve the tax experience for small business owners. Most small businesses do not have staff dedicated to taxes and accounting, and the current tax code has requirements that are difficult for many business owners to decipher and uphold. MotionMobs’ president Taylor Peake Wyatt pointed to H.R. 3717 as an important opportunity to clarify the classification of workers and determine the tax requirements that apply.
Why It Matters: Business owners in the growing sharing economy must understand how training services and tax withholding impact the classification of a worker as an employee or a contractor. Simplifying worker classifications will affect the type and amount of taxes paid by small businesses, and it may influence their ability to hire necessary workers to support their growth.
Repatriation
When an American company earns profits overseas, current U.S. law imposes taxes on those foreign earned profits at a higher rate than those earned domestically. This often prevents American businesses from bringing their earnings back into the United States, resulting in an estimated $2 trillion in earnings stored overseas. American companies doing business abroad must pay that country’s corporate tax rate and an additional 35 percent if the profits are repatriated to the United States. This heavy tax burden prevents many American companies from bringing their foreign earned profits to the United States, which has stifling consequences for small businesses who can benefit from capital investments.
Why It Matters: Updates to repatriation requirements have the potential to bring significant capital back to the United States, which may be used for business acquisitions, venture capital projects, and investment opportunities that directly benefit innovative small businesses.
IRS Auditing Practices
IRS audits can be anxiety-inducing for most taxpayers. However small businesses often face a heavier burden when faced with a wrongful audit because they do not have the legal and financial resources to combat the IRS. This summer, the House introduced H.R. 3220, the Preserving Taxpayers’ Rights Act, to address and prevent several worrisome auditing practices, including and unfairly forcing tax litigation in expensive courts.
Why It Matters: By modernizing key elements of the auditing process, small businesses can shift their focus from tax litigation to improving and updating their products and services.
Pass-Through Rate
Roughly 40 percent of small businesses pay their taxes through the pass-through rate—when a business owner pays taxes on his or her business income through personal income tax returns. Unfortunately, many large corporations misuse the pass-through tax rate to avoid a more aggressive corporate tax rate.
Why It Matters: Tax reform must tackle both the corporate and pass-through tax rates to ensure small businesses are appropriately taxed for their size and economic contribution, and in a way that enables their growth.
What’s Next?
The modernization of tax structures and simplification of tax codes are integral to the growth and success of small businesses in the American economy. To ensure we remain a leader in technology, Congress must remove unnecessary tax burdens that hinder tech companies’ and app developers’ ability to focus on innovation, growth, and development.
As the tax reform debate moves forward, the App Association will continue to advocate for smart, simplified tax policies that support our developers and idea makers and keep our members informed along the way.
To read the full testimony from MotionMobs President Taylor Peake-Wyatt on the Small Business Owners’ Tax Simplification Act, please click here.