WASHINGTON — The Obama administration and Republicans each want a broad overhaul of the tax system to close loopholes and lower corporate rates, but small businesses that do much of the nation's hiring feel they're an afterthought in the debate.
"A lot of the conversation is dominated by topics that are really a focus of larger businesses," said Kristie Arslan, president of the National Association for the Self-Employed.
By government definition, a small business is one with fewer than 500 employees. To most Americans, however, the image of a small business is the self-employed contractor, a family restaurant or a mom-and-pop shop in a strip mall. Statistics suggest that 78 percent of small businesses have 10 employees or fewer.
These businesses rarely can take advantage of tax breaks for how they write off equipment purchases, or even the payroll tax holidays being proposed in the president's recent jobs plan. Their tax needs are often more basic and not addressed in either Democratic or Republican plans.
"It's inexpensive, or relatively inexpensive, small fixes that could be done in the tax code that could really have a profound effect," said Arslan, noting that more than half of all small businesses are home-based firms.
The group — which counts more than 200,000 members — wants a standard tax deduction for a home office. The qualifications for claiming such a deduction wouldn't change from the present system, but the self-employed could opt to take a standard $1,200 or $1,500 deduction instead of having to itemize and keep receipts.
The association also seeks a change to allow the self-employed to deduct fully their health care costs. Employers who hire workers are able to deduct from taxes what they spend on employee health care, and the employee is not taxed on the health care offered by their employer. The self-employed get no such break.
"If we just leveled the playing field ... you would boost their bottom line at the end of the day," said Arslan.
Health care remains at the top of the list of small business concerns. Many are unsure what President Barack Obama's 2010 health care law, which is phased in through 2014, will cost their business. Republicans deride the law as "Obamacare" and claim it's already harming the atmosphere for small business hiring.
Uncertainty about rising health care costs, however, is far from new. The National Federation of Independent Business, which represents more than 350,000 small firms, published a problems and priorities survey in June 2008. It ranked the concerns of small businesses, and health care costs topped the list even before Obama took office. Health care costs have topped the group's surveys for more than two decades now.
The National Federation of Independent Business's chief economist, William Dunkelberg, said the ongoing debate over taxing earners reporting more than $200,000 of taxable income is weighing on small business owners, many of whom claim their business income when filing their personal income taxes.
"What are my tax rates three months from now, that would be nice to know. There is no certainty about anything. This is what they're unhappy about," said Dunkelberg.
The National Restaurant Association shares that concern. There are more than 1 million restaurants nationwide, and about 93 percent of them are considered small businesses. The group wants Congress to adopt a permanent and simpler tax policy for writing off equipment purchases, over a period of 15 years or less. That period has been approved as a temporary measure, but absent renewal, the time frame could revert back to an antiquated 40-year-long tax write-off.
"If you know that the tax laws you are dealing with only apply for nine or 12 months, but your investment schedule is three to five years, or seven to 10 years, it's hard to make the larger, sustained investment," said Scott DeFife, the group's executive vice president and head of government affairs. "If they wanted to send a more stabilizing symbol to the markets and the business community ... rationalization of the depreciation schedule would make a lot of sense."
Many small business owners are still finding it tough to get loans. Banks often simply won't lend, even to borrowers with stellar credit.
Don DiGiulian, a dentist in Wilmington, N.C., went to his local bank recently to seek a $9,000 loan to modernize his dental office with a digital X-ray machine. He was told he couldn't get a conventional loan. The equipment is needed to meet new electronic record-keeping requirements under federal law.
"When I went to the bank, she says, 'You've got a good credit rating, you do all your banking here, but the bank will not loan you the money for the equipment,'" DiGiulian said, noting that his business is a safe bet since even in down times people seek dental care.
Dental equipment is often financed through lenders affiliated with suppliers. Even so, DiGiulian was left with the impression that banks simply don't want to lend.
"This is their quote: 'The new federal regulations won't allow us to loan the money.' And it is just a screen that they hide behind," he said. Eventually he did get a loan from his bank, a regional lender, but only by offering his automobile as collateral.
When McClatchy reached out to a sample of small businesses across the country in late August, difficulty obtaining loans came up repeatedly. But it doesn't show up among top concerns in National Federation of Independent Business polls.
"Thirty-six percent of our owners said the top business problem is taxes, red tape and regulation," said Dunkelberg, the group's chief economist.
Retailers, too, have a lot at stake in what eventually happens on tax reform. Some may see benefit from the president's proposal to expand the current payroll tax holiday to free businesses from full payment of payroll taxes. But they're wary of his proposal to extend and expand tax credits for new hiring, especially hiring of the long-term unemployed.
"Business is not going to want to take advantage of a temporary tax break that is not available next year or the year after," said David French, senior vice president of government affairs for the National Retail Federation. "Predictability is very important for a lot of small businesses, and unless consumer demand is there, they are even more skeptical. I think the president's proposals on the consumer side, the payroll tax relief, is helpful, but without a long-term stable predictable tax policy on the business side, we don't see a lot of positive developments in that area."
The federation is ramping up a $10 million nationwide lobbying campaign, arguing that retailers directly or indirectly account for one in four jobs nationwide and need to be considered in policy talks. Under Obama's plan, they'd lose a major accounting loophole that they've enjoyed for years — affecting how they, for tax purposes, account for their inventories. The administration projects collecting $52 billion over a decade by closing the loophole.
In exchange for losing that loophole, retailers presumably would benefit from a new lower, broader corporate tax rate — which the president hasn't yet specified.
"He's been very general," said French, whose organization favors a corporate tax rate in the 25 percent range, down from 35 percent today.
For now, much of the tax-overhaul debate focuses on issues such as whether corporations should be allowed to bring home foreign earnings at reduced tax rates, or if the energy sector should lose tax breaks. Small firms are lost in the mix.
"Somehow it is OK to take a hit (on mounting deficits) on tax provisions that benefit larger corporations," said Arlsan, adding that "the word 'small business' is the card that's always pulled out when there is a talking point on the economy ... but a lot of policy out there does not help mainstream businesses. We should be looking at shoring up mom-and-pop businesses, because if you look at them as a whole, they are Main Street America."
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