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The Small Business Owner and the Tax Code

Working Together?

Roger Harris, President and C.O.O. Padgett Business Services

Testimony before thePresident's Advisory Panel on Federal Tax Reform

March 8, 2005

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Background

• Padgett Business Services has provided tax and accounting services for small businesses for over 35 years

• Over 400 offices in the U.S. and Canada• Over 100,000 customers• 0 to 250 employees with an average of 6.5• Annual sales from $10,000 to $10 million• Average small business net income is

$47,500• 75% report business income on their

personal tax return

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Small Business Overview

• Data from the U.S. Small Business Administration, Office of Advocacy:• There are over 5 million small

businesses that employ less than 20 people

• These businesses account for over 89% of U.S. employers

• Small businesses employ over 20 million people, roughly 4.5 per small business

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“Starting a small business means doing the one thing I love… and 99 that I hate.”

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Complex DecisionsBefore the Doors Open

• What kind of entity should I elect?• Sole proprietor, S or C Corp., LLC, or Partnership

• How do I pay myself?• Employee vs. independent contractor• Salary, dividend, distribution of profits, etc.

• How do I pay my taxes?• Withholding, business or personal return,

estimated tax • What accounting method should I use?

• Cash, accrual, hybrid• What is my tax year?

• Calendar year, fiscal year, changes?

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The Next HurdleHiring Help

• How do I classify my staff?• Employee vs. independent contractor?

• What new tax registrations are required?• Federal, state, local?

• What about withholding and employment taxes?

• What tax forms must I file? • Federal, state, local

(monthly/quarterly/annually)

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Additional Complexities

• Record Keeping and Record Retention• Revenues and expenses• Capital expenditures• Employment records• How long? Permanent or temporary?

• Employee benefit plans• Retirement plans, medical coverage,

other benefits

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Special Concerns

• Depreciation and Basis• Alternative Minimum Tax• Advanced EITC• Phase In/Out • Transitional Rules • Income Thresholds• Effective Dates• Fear of making a mistake

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Cost of Compliance

•Time Spent

•Loss of Productivity

•Professional Consulting Costs

•Penalties and Interest

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Business vs. Tax Decisions

• Purchasing Equipment• Timing• Purchase vs. lease

• Deferring Income/Expenses• Accelerating Income/Expenses• Borrowing Money

• Source of Funds• Collateral• Payback Methods• Deductibility of Interest

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Helping the Small Business Owner

Get Back to Business

A simpler, fairer, and growth-oriented tax code will ease the

compliance burden on the small business owner – allowing them to again focus on the one thing

they love.