• NASE National Tax Advisor, CPA Testifies to Congress on the Tax Gap
• Health Insurance Deductions Keep Businesses Open
• NASE, Nation Celebrate the Importance of Small Business
• Senate Finance Committee Weighs SBHP Option
• Member Poll: A Taxing Time for Micro-Businesses

NASE National Tax Advisor, CPA Testifies to Congress on the Tax Gap

Keith Hall Keith Hall, national tax advisor for the NASE, testified to Congress last week regarding concerns on proposals to require further withholding and information reporting in an effort to narrow the tax gap. Instead, Hall emphasized the need for more education and assistance to improve tax compliance at a House Small Business Committee hearing titled “IRS Latest Enforcement: Is the Bulls-eye on Small Businesses?” “Accurate tax reporting and compliance are extremely important to small business,” testified Hall. “Those who make a good faith effort, yet are inaccurately complying, should be assisted through education and tax simplification efforts. Those willfully disregarding their tax liability should be held accountable.” The IRS found a $345 billion difference between taxes owed and taxes paid for the 2001 tax year. Close to $68 billion of the tax gap is attributed to nonfarm sole proprietors, those filing a Schedule C, due to a net misreporting percentage of 57 percent. The IRS also found a 15 percent overall noncompliance rate with all tax returns filed. Underreporting was the largest cause of noncompliance. Understated income accounts for more than 80 percent of underreporting, not overstated deductions. Some officials have recommended withholding on non-employee payments to ensure proper filing. Another proposal would require credit and debit card companies to report to the IRS on gross reimbursements paid to certain businesses. Hall attested to the difficulties this would have on micro-business owners. “The NASE feels that rather than adding to the burden of compliance faced by micro-business taxpayers through increased regulations, the goal should be to simplify the tax regulations surrounding independent contractors,” testified Hall. Hall also cited inequities in the proposed withholding including the requirement to withhold on the basis of gross income versus taxable income. Withholding on gross income overstates employers’ liability since it often includes legitimate deductible expenses. Additionally, the withholding requirement would only apply to sole proprietors, which is discriminatory on the basis of business structure. With the proposal to require credit and debit card companies to report gross receipts, discussions have included taking the total credit card receipts reported for a particular business and then extrapolating total income based on industry averages. Hall testified that these averages will only provide an additional discrimination against those businesses that have higher then average credit card receipts, which could be attributed to other circumstances. Additionally, Hall addressed enforcement issues and the Fiscal Year 2007 IRS budget. He voiced urged caution in proceeding with a shift in funds from tax assistance and outreach programs to enforcement activities. “I believe everyone agrees that any solution should include at its core the goal of providing equity for all taxpayers,” said Hall. “However, we also feel that any recommendations seeking to increase compliance and lessen the tax gap should seek to refrain from increasing the regulatory burden on taxpayers.” To read Hall’s complete testimony, visit http://advocacy.NASE.org. Health Insurance Deductions Keep Businesses Open Micro-business owners say that one of the largest barriers to leaving the corporate world for self-employment is having to give up benefits such as health insurance. A recent study commissioned by the Office of Advocacy for the U.S. Small Business Administration (SBA) finds ties between health insurance deductibility and small businesses' ability to remain open. It reinforces the need to alleviate unfair tax penalties on health insurance costs for micro-businesses by eliminating the self-employment tax on premiums. "Each year health care costs continue to increase at a rapid rate for small business and continue to be a disincentive to going into business for oneself," said Robert Hughes, president of the NASE and a certified public accountant. "Elimination of the self-employment tax on health insurance represents a simple solution to an inequity faced only by the self-employed." The self-employed have traditionally had a different tax treatment for health insurance premiums that other business forms. Prior to 1987, the self-employed were forced to pay taxes on health insurance costs in both their income and payroll taxes. A law passed that year allowed the self-employed to deduct their health insurance costs from their income tax as other businesses can. This study seeks to quantify how much that treatment affects a small business closing shop. It finds that when the self-employed are able to deduct their health insurance premiums, the rate at which they close the business decreases. The study shows that the health insurance deduction for the self-employed has decreased the likelihood of businesses closing by 10.8 percent for single filers and 64.9 percent for married filers. Additionally, the absolute dollar amount of the health insurance premium deduction also influences the probability of a business staying open. For single filers a 10 percent increase in the amount of the deduction reduces the probability of closing by 10.6 percent. For married filers the probably of closing is only reduced by 1.2 percent. While this study evaluated the impact on income taxes, the self-employed are still forced to pay self-employment (FICA) taxes on health insurance premiums at a rate of 15.3 percent. Unlike corporations, the self-employed cannot consider health insurance deductions as ordinary and necessary business expenses. The NASE's top legislative priority is to eliminate the payment of self-employment tax on health insurance premiums to help lower the cost of health care for micro-business owners. Legislation introduced last month by Reps. Melissa Hart (R-Pa.) and Donald Manzullo (R-Ill.) would correct this inequity. The Equity for Our Nation's Self-Employed Act would allow the self-employed to deduct the cost of health insurance from payroll taxes, thus making health insurance more affordable. To read the full report, visit http://www.sba.gov/advo/research/rs273tot.pdf. More information on the NASE's legislative priorities can be found at http://advocacy.NASE.org. NASE, Nation Celebrate the Importance of Small Business President Bush has declared this week National Small Business Week to recognize the importance of sole proprietors and small employers to the nation’s economy. For 25 years the NASE has promoted the successes of the smallest segment of this population, and has worked to encourage the growth of micro-business. “The entrepreneurial spirit of America is robust and strong, and small businesses are thriving throughout our great nation,” Bush said in his proclamation. “The opportunity to own a business is an important part of the American dream. During Small Business Week, we celebrate small business owners and employees who are willing to take risks and work hard in pursuit of a better life for themselves and their families.” “The NASE applauds President Bush’s efforts to recognize the contributions of small-business owners to this country’s economy,” said NASE president Robert Hughes. “Work still needs to be done to put micro-business on a level playing field with big corporations, and that is what the NASE strives to do year-round. I look forward to continuing to pursue our legislative priorities with this administration. Every week is small business week in the U.S.” For more information on the NASE and its mission to help micro-businesses throughout this country, visit www.NASE.org. Senate Finance Committee Weighs SBHP Option Last week, the Senate Finance Committee held a hearing to discuss health care affordability for small business. Much focus was put on the Health Insurance Marketplace Modernization and Affordability Act of 2005, sponsored by Sen. Michael B. Enzi (R-Wyo.) and approved by the Senate Health, Education, Labor and Pensions Committee. The legislation would create an alternative in health insurance purchasing for micro-businesses owners and the self-employed by allowing them to join into pools across state lines and purchase Small Business Health Plans (SBHPs) collectively, formerly known as association health plans. The NASE has been a strong supporter of these purchasing pools as a way for micro-business owners to purchase affordable and comprehensive health insurance. If implemented, the bill would reduce premium costs by 12 percent for members of SBHPs, said Joseph Rossmann at the hearing, representing the Associated Builders and Contractors, Inc. “[This bill] is the most viable proposal currently before the U.S. Senate,” Rossmann said, adding that the insurance market for SBHPs would be run by the private sector. Association health plan proposals have not made much headway in the Senate in previous sessions. However, this bill differs from previous legislation in that it includes a condition that would only allow insurers to bypass state mandates in their benefit options if they also sell a plan that matches a benefit plan offered to state employees of one of the five highest populated states. Senate Finance Committee Chairman Charles Grassley (R-Iowa) said that he would continue to hold hearings regarding the rising cost of health care and the uninsured, although he appeared to be somewhat nonchalant regarding the Enzi bill . It is possible that this bill could pass through the Senate as early as May but with immigration and lobbying reform still on the table, the prospects are dim. Let your legislators know how you feel about SBHPs by visiting the NASE Legislative Action Center at http://advocacy.NASE.org. Member Poll: A Taxing Time for Micro-Businesses Taxes are a source of frustration for the self-employed. The NASE has long supported tax simplification and tax fairness for micro-businesses. Please take this short member survey regarding your opinions on federal tax reform. Let the NASE know your opinions by visiting the MyNASE Web site at http://my.NASE.org/. Log in to your free MyNASE Web Account. If you have not set up an account, you can do so at http://my.NASE.org/ with your member number. Let your voice be heard in the association by taking this until Tax Day!