Small businesses now employ nearly half of all private sector workers and pay more than 45 percent of all private payroll in the United States. In light of the growth in this segment of the economy, Congress is considering several measures to simplify their tax filings and ease their tax burden.
Among the proposals under consideration are measures to create a standard home-office deduction, raise the gross receipts cap for use of cash accounting and permanently increase the limit on Section 179 expensing.
Home-office deduction
The Small Business Administration’s Office of Advocacy has focused on finding a simple way for home-based businesses to deduct some of their office costs.
Home office tax deductions may be simplified by new laws
Home-based businesses make up more than half the small businesses in the United States, according to the SBA. The Office of Advocacy wants the Internal Revenue Service (IRS) to amend its rules to permit a standard home-office deduction for home-based businesses.
Legislation to force such a change was introduced in Congress by Rep. John McHugh (R-N.Y.) June 9. The bill, H.R. 6214, would write a $1,500 standard home-office deduction into Section 280A of the tax code and index the amount for inflation beginning in 2009. Under the measure, business owners could choose whether to deduct the $1,500 or complete the IRS’s complex calculations on Form 8829 to take the full amount.
According to the IRS Taxpayer Advocate, only about a third of the 8.4 million tax filers eligible for the home-office deduction in 2003 actually claimed the deduction.
“Many small business owners avoid the deduction because of the complications and the fear of a potential audit,” CPA Dewey Martin told a Senate Finance Committee hearing June 5 on behalf of the National Federation of Independent Business (NFIB). “The standard deduction would allow the business owner to claim a deduction he is entitled to, reduce the filing burden, and ultimately improve tax compliance.”
Cash accounting
Another measure would allow more businesses to use cash accounting, rather than the accrual method, by raising the gross receipts threshold for its use to $10 million annually. Cash accounting now can be used only by businesses with gross receipts of less than $5 million a year.
“The cash accounting method is much easier for small business owners to follow and more closely matches the way that a small business owner will keep his books,” Martin told the Senate panel. Other advocates of the change have said that cash accounting can help small businesses by accelerating deductions rather than requiring that they be taken in association with income at some point in the future.
Congress has considered bills that would raise the cash accounting threshold since 2004. The Senate approved such a measure last year but it was not included in final compromise legislation.
Expensing under Section 179
Another measure favored by NFIB would permanently raise the limit on capital expenses that can be taken as a business deduction, rather than being written off over an asset’s useful life under complicated depreciation rules, Martin said.
Under Section 179 of the tax code, businesses can take an immediate deduction for certain capital purchases of up to $25,000. In the last two years, Congress has raised the limit temporarily—to $125,000 in 2007 and $250,000 in 2008. While the higher limits gave businesses welcome tax breaks, the temporary nature of the relief they provided has added to the complexity of financial planning for small-business owners.
The higher limits “provide the majority of small business owners with an immediate deduction for almost any investment they make in their business,” Martin said. “Making the higher Section 179 amounts permanent would go a long way to reducing complexity and providing an important tax benefit to small business owners.”
Questionable prospects
Congress-watchers don’t have much hope for further tax legislation once Congress clears bills to patch the alternative minimum tax and expiring tax provisions for one more year. Those measures are moving on Capitol Hill now—earlier than tax bills generally get serious considerations most years.
Some popular or inexpensive measures could slip into other legislation along the way. For example, a tax cut for small businesses paying the difference between their workers’ salaries and any lower rate of pay provided to employees called into the National Guard or reserves was enacted in the military tax relief bill signed into law June 17.
But the big issues, such as parity in the treatment of fringe benefits between small and large businesses, are not likely to be voted on this year.
