[Senate Hearing 114-640]
[From the U.S. Government Publishing Office]
S. Hrg. 114-640
REDUCING THE FEDERAL TAX BURDEN
FOR AMERICA'S SMALL BUSINESSES
=======================================================================
FIELD HEARING
BEFORE THE
COMMITTEE ON SMALL BUSINESS
AND ENTREPRENEURSHIP
UNITED STATES SENATE
ONE HUNDRED FOURTEENTH CONGRESS
FIRST SESSION
__________
APRIL 2, 2015
__________
Printed for the Committee on Small Business and Entrepreneurship
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COMMITTEE ON SMALL BUSINESS AND ENTREPRENEURSHIP
ONE HUNDRED FOURTEENTH CONGRESS
----------
DAVID VITTER, Louisiana, Chairman
BENJAMIN L. CARDIN, Maryland, Ranking Member
JAMES E. RISCH, Idaho MARIA CANTWELL, Washington
MARCO RUBIO, Florida JEANNE SHAHEEN, New Hampshire
RAND PAUL, Kentucky HEIDI HEITKAMP, North Dakota
TIM SCOTT, South Carolina EDWARD J. MARKEY, Massachusetts
DEB FISCHER, Nebraska CORY A. BOOKER, New Jersey
CORY GARDNER, Colorado CHRISTOPHER A. COONS, Delaware
JONI ERNST, Iowa MAZIE K. HIRONO, Hawaii
KELLY AYOTTE, New Hampshire GARY C. PETERS, Michigan
MICHAEL B. ENZI, Wyoming
Zak Baig, Republican Staff Director
Ann Jacobs, Democratic Staff Director
C O N T E N T S
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Opening Statements
Page
Vitter, Hon. David, Chairman, and a U.S. Senator from Louisiana.. 1
Witnesses
Boustany, Hon. Charles, a U.S. Representative from Louisiana..... 6
Shamsie, Sadie, President and Co-Founder, Licensed Title
Insurance Agent, Standard Title, Lafayette, LA................. 14
Moring, Robert, Owner, Weld Done Design, Carencro, LA............ 15
Hebert, Alan D., Partner, Thibodaux Hebert Deshotels Leblanc,
L.L.C., Lafayette, LA.......................................... 20
Feibus, Dan, Chief Executive Officer, Zagis USA, Lafayette, LA... 25
Alphabetical Listing
Boustany, Hon. Charles
Opening statement............................................ 6
Feibus, Dan
Testimony.................................................... 25
Prepared statement........................................... 27
Hebert, Alan
Testimony.................................................... 20
Prepared statement........................................... 22
Moring, Robert
Testimony.................................................... 15
Prepared statement........................................... 18
Shamsie, Sadie
Testimony.................................................... 14
Vitter, Hon. David
Opening statement............................................ 1
Prepared statement........................................... 4
REDUCING THE FEDERAL TAX BURDEN
FOR AMERICA'S SMALL BUSINESSES
----------
THURSDAY, APRIL 2, 2015
Council Chambers,
Lafayette City Hall,
Lafayette, LA.
The Committee met, pursuant to notice, at 8:00 a.m., at
Lafayette City Hall, 705 West University Avenue, Hon. David
Vitter, Chairman of the Committee, presiding.
Present: Senator Vitter.
OPENING STATEMENT OF HON. DAVID VITTER, CHAIRMAN, AND A U.S.
SENATOR FROM LOUISIANA
Chairman Vitter. Good morning, everyone. How's everyone
doing? Welcome, this is a combination Town Hall Meeting and
Field Hearing by the Senate Small Business Committee. I'm
really honored to be joined by Congressman Charles Boustany who
is co-hosting this event with me. We are honored to have you.
Why don't we get started in the right frame of mind, and
right frame of heart, by standing for a prayer, and then please
remain standing right after the prayer. We'll have the Pledge
of Allegiance to the Flag. But first, we'll be led in prayer by
the Reverend Blaine Peterson, of the Church of the Ascension.
Reverend.
Reverend Peterson. Today is Maundy Thursday. This is the
day that Jesus gave his followers a new commandment, a new
perspective of the call to care for others, to serve others and
yes to serve on behalf of others. The Apostle Paul writes: Let
the same mind be in you that was in Christ Jesus, who though he
was in the form of God, did not regard equality with God as
something to be exploited, but emptied himself, taking the form
of a slave, being born in human likeness. And being found in
human form, he humbled himself and became obedient to the point
of death, even death on a cross.
Let us pray: Lord make us instruments of your peace. Where
there is hatred, let us sow love; where there is injury,
pardon; where there is discord, union; where there is doubt,
faith; where there is despair, hope; where there is darkness,
light; where there is sadness, joy. Grant that we may not so
much seek to be consoled as to console; to be understood as to
understand; to be loved as to love; for it is in giving that we
receive; it is in pardoning that we are pardoned, and it is in
dying that we are born to eternal life. Amen.
Chairman Vitter. Thank you so much, Reverend. Please remain
standing for the Pledge of Allegiance. We will be led in the
pledge by Norword Meche, Commander of the VFW Post 9822.
Commander.
Commander Meche. I'm glad to be here. Would everybody
remain standing, and face the flag and salute. I pledge
allegiance to the Flag of the United States of America, and to
the Republic for which it stands, one nation, under God,
indivisible, with liberty and justice for all.
Chairman Vitter. Thank you Commander. Please be seated. We
are also going to open our program today, since this is about
small business, with the recognition of a small business here
in Louisiana. One this I'm interested in as the new Chair of
the Senate Committee on Small Business and Entrepreneurship is
to recognize a vibrant, successful, leading small business
every week, including with comments in the Congressional
Record, and this week we are recognizing Jill Listi Dance
Studio, from right here in Acadiana. Jill is with us, and I
want to present her with this formal copy of the comments in
the Congressional Record, and I'll just read a paragraph of it:
``Listi's Dance Studio is committed to providing
opportunities in the arts to children and adults throughout
Acadiana. The studio values the opportunity to introduce
students to dance while instilling a firm foundation that
promotes the respect and understanding for the art of dance.''
Jill, congratulations, and I'll be presenting this to you.
Congratulations.
[Applause].
Chairman Vitter. Thank you very much, Jill. Your business
is a prime example of how small business is the heart and soul
of our economy throughout the country, including right here in
Acadiana, and that's why we are meeting today in Lafayette, to
talk about some important small business issues.
Let me explain how the program will work. As I said, this
is a combination Town Hall Meeting and we want to hear your
comments and questions, and it's also a Field Hearing of the
Senate Small Business Committee featuring four key witnesses,
and the broad theme is small business tax issues, the hurdles,
the costs, the expense, the complication in our present tax
system that's a burden and a problem for small business.
Now the meeting will proceed and in a minute I will turn it
over to Charles for opening comments. After that, I'll have a
few on the topic of small business tax issues, with a very
brief slide show myself, and then we'll go into the Town Hall
Meeting portion of the program. I want to hear from you, your
comments and questions. If you haven't already, we're passing
around a little form. Just use that to jot your comment or
question, and give it to the staff, and we'll get through
absolutely as many of those as possible. Hopefully, most are on
topic about these key small business issues. We'll certainly
take others off topic as well.
And then, after we do that for roughly 30, 35 minutes, then
we'll proceed to the Field Hearing. Charles and I will
introduce our four great witnesses, and each of them will
testify about their challenges and experience with the Tax Code
for about five minutes, and then following their testimony,
we'll have a conversation with them with comments and questions
and interplay involving Charles and myself. So that's how we
will proceed. With that, let me thank again our co-host today,
who has been a great leader in this area, and was really super
in co-hosting this Town Hall Meeting and Field Hearing,
Congressman Charles Boustany.
[The prepared statement of Chairman Vitter follows:]
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
OPENING STATEMENT OF HON. CHARLES BOUSTANY, A U.S.
REPRESENTATIVE FROM LOUISIANA
Representative Boustany. Well, thank you David, and let me
thank you for holding the hearing and the Town Hall Meeting,
and I want to thank you for your leadership on the Senate Small
Business and Entrepreneurship Committee. It's a very important
committee because small businesses are the backbone of growth.
They drive growth, they drive job creation, and so
understanding the things that have an impact on small
businesses is really critical, and obviously taxation is one of
those, and let me just say, I serve of the Tax Writing
Committee in Congress, the House Ways and Means Committee,
where all tax revenue measures begin, according to the
Constitution.
We have been working for three years on tax reform with an
eye towards what is the impact on startups and entrepreneurs
and businesses, and recognizing the distinction between those
kinds of businesses that we have in our community versus large
corporations who are looking for a corporate rate reduction. If
we get a corporate rate reduction, that's great, it's going to
help our large companies, but it's not going to help the
entrepreneurs who are out there, and the small business owners
who day in and day out throughout their toil of work, and try
to make cash flow needs in their businesses, dealing with tight
credit situations, and having the Government taking more and
more of their money, so I think it's really appropriate that we
have this conversation as we approach tax day, recognizing that
what's happened under this current Administration, we've seen
the highest tax rate go up to nearly 45% at the Federal level
alone, and this is directly affecting small business owners
here in Louisiana, and across our great country.
Secondly, we also have the issue of the Estate Tax, the
Death Tax, which really disproportionately hits small
businesses and farmers around our area, and is something that
we need to address. So I think this is a timely subject, and
I'm really happy to be here with you. Again, David, thank you
for your leadership in all this, and we want to hear questions
from the audience, and then we'll get into the Field Hearing.
Chairman Vitter. Thanks Charles. A few opening comments of
mine. I'm going to refer to this slide show, if we can go to
the first slide.
This makes the point. This is a Small Business Survey that
was done by a leading small business group, and they asked a
simple question. What's the bigger problem, what's the bigger
burden, the check you have to write for taxes, or actually the
administrative burden, the time and the expense of figuring it
all out, doing the paperwork, complying with the law. Actually
a majority of businesses said, it's the administrative burden.
I mean, they weren't happy with the size of the check. Don't
get me wrong; but the time, the burden of figuring out an
overly complicated system was actually an even greater burden,
which is sort of amazing.
Go to the next slide. This is what tax complexity has done
over time. You know, in the early part of the last century, we
started with a Tax Code that was about 400 pages long. It's now
74,000 pages long. That chart on the right basically shows the
increase in the size of the Code. Just under the present
Federal Administration, it's grown 7,000 pages, 10%, just this
one Administration, and that has led to that spike in the last
several decades. That is just unacceptable.
Next slide. This also is about the tax compliance burden.
It's based on the same survey as the first slide was based on;
40% of all small businesses say they spent over 80 hours a year
on tax compliance. So two full work weeks, just figuring out
the Tax Code, and then a quarter spent over 120 hours a year,
so that's a huge burden on small business.
Next slide. Okay, this is the next. One in three businesses
spend over $10,000 on compliance, just on the Federal side;
that's not even counting State and local. Over half spent more
than $5,000. Again, huge burden.
Next slide. Now Solutions. As chair of the Small Business
Committee, I've been collecting a lot of ideas from small
businesses about how we can make some significant improvements,
and in the next several weeks, we're going to be introducing a
Small Business Tax Relief Bill that's going to propose doing a
bunch of these things. Now this isn't overall tax reform. This
isn't everything we need to do to simply the Code, but it's
some key provisions, particularly for small businesses, and
these are some of the main elements of it. I don't want to get
into the weeds, but for those of you in business, you know how
important some of these things are. Extending Section 179
expensing; increasing the limit for cash basis accounting;
increasing the minimum safe harbor threshold, et cetera. So
look for that bill we're going to be introducing soon in the
Small Business Committee.
Next slide. Is that it? Great. Okay, just to put a little
but more meat on the bone, this overly complicated Tax Code we
are talking about, we could describe it this way. Let me find
it in my notes. It's equivalent to over 50 King James Bibles.
We are in Easter week, so pile up 50 Bibles; that's the number
of words, the length, the complexity of the Tax Code. It takes
an average person to figure it out, and comply in small
business, three 40-hour work weeks, cost an average small
business in terms of compliance, not the tax check you write,
but compliance, the cost of taking your family to Disney World.
That's all an enormous burden, particularly the smaller
businesses. Now big corporations have full compliance
departments; it's still a burden on them. I'm not saying it's
not, but for a smaller business, those sorts of burdens can
actually be crushing. So that's what we are here to talk about
today, including with you, including with our witnesses.
With that, let's go to your comments and questions. Charles
and I will alternate, as I get to you, you can stand up and we
can have a conversation about your concern. Where is Raymond
Rosemuster?
Mr. Rosemuster. Right here.
Chairman Vitter. Yes, sir.
Mr. Rosemuster. I used to be an inventor, and I'm working
on a few patents right now. I have one that works. It's old
science, but before I, in other words, get a handfull of other
interested people to either invest, you know, I want to check
on this new Pacific Trade thing that's going on. That doesn't
guarantee anything with intellectual property laws or
copyrights or patents on such. In my past experience, I had
U.S. Patents. They took the National Gazette in New Orleans, as
a matter of record. I had Canadian patents. I also had Taiwan
and South Korean patents, and you know, futuristically having a
product made overseas at those markets. Now, there's no
security, because they read our mail. There was a time, 30
years ago, when I read the CFR 37, the Copyright and Trademark
and all that, and patents, that you know, even though it may
have taken a year or a year-and-a-half before they did a review
to see if your concept was patentable, at least there was some
security during that initial patent pending or the newness of
it. You didn't have to worry about confidentiality or secrecy
or what they said proprietary. Now----
Chairman Vitter. Raymond, I don't want to cut you off, but
we want to get to----
Mr. Rosemuster. But the problem is, first you file and
there's no security. The Chinese are reading our mail. You get
on the computer, your personal file, you file with the patent
office, and the Chinese are making it before you can even raise
the capital and start the manufacturing process, so where does
that leave the entrepreneur today?
Chairman Vitter. Raymond, a huge business issue,
particularly for innovator and entrepreneurs. But when patents
and copyrights were recognized by the Founding Fathers as
essential property rights.
Mr. Rosemuster. It is.
Chairman Vitter. It is in the Constitution, so we need to
protect that. Charles and I are working on several things that
relate to that, and first of all there needs to be proper
protection and reforms in the Patent Office. Secondly, you
mention the Pacific Trade deal.
Mr. Rosemuster. Yes.
Chairman Vitter. That's not final yet, but when it is, and
when we look at the details, certainly I'm going to concentrate
on that sort of patent and copyright protection, because that
is the perennial problem, particularly with countries like
China and the Pacific Rim, and third, we've got to combat that
sort of outright theft by countries like China.
Mr. Rosemuster. I do have a recommendation that might give
us more security, like I say, for proprietary information, that
if the Patent Office would just accept, say, overnight express
packet with the disc, to file, and keep it in house, rather
than out there in the public, you know, where the Chinese are
reading our mail, and where it doesn't give the entrepreneur an
opportunity either raise capital, and I don't want to get a
handful of my acquaintances involved in any of business venture
without my being confident, assured, there'd be some sort of
protection. And I've [inaudible] about filing in Federal Court
jurisdiction, where you would have clones or knock offs being
made and done, and where I would do the research and
investigation, but when you have paid--this is going back a
quarter century, $300,400,000 within the Federal Court
jurisdiction to get that clone or knock off off the market
because it's competing with your 60 or 100 employee business,
it's astounding how they would just pack up and move to
different Federal Court jurisdiction, so you're chasing,
chasing, chasing during the life of the patent. It's a very
costly operation.
Chairman Vitter. I hear you. Raymond, I don't want to cut
you off. We've got to get to other people, but let me give
Charles a chance to respond as well.
Mr. Rosemuster. I speak to the Speaker, and I do want to
keep up on this, because I don't want to make a commitment for
or have any of my associates make a commitment for any kind of
operation for which there is no recourse.
Chairman Vitter. Yes. I heard you.
Representative Boustany. Let me just briefly make a few
comments. I'm one of the leaders of the House overseeing what's
happening with the TPP, the committee and jurisdiction that's
focused on it. One of the things we are intent upon is
addressing these issues, but not just tariff barriers, but all
these other issues dealing with cyber security, dealing with
how some of these state-owned enterprises steal American patent
secrets and trade secrets and use them to leapfrog or get a
competitive advantage. We are all over this issue, and we're
going to--we're focused on making sure that whatever the final
agreement looks like, has to have very strong protections in
it, and these ways of settling disputes that are fair to
American business, otherwise we will not agree to this trade
agreement.
Chairman Vitter. As we go on to the next question, let me
also mention, Raymond, there is proposed patent and copyright
reform in Congress. I'm looking at that very carefully. Quite
frankly, I have big concerns with the so-called comprehensive
bill in the Senate, because I think it would be a setback in
significant ways for inventors and innovators, including folks
they work with, universities, et cetera; so I'm looking at that
very hard. I'm on the relevant Committee judiciary, and I have
real concerns with this so-called comprehensive bill.
Charles, do you want to go to the next?
Representative Boustany. Yes, let's go to Terrell Hebert.
Terrell asks ``do you see cost segregation as an asset for
small businesses.'' Why don't you elaborate on your question?
Mr. Hebert. Cost segregation is a method of paying taxes on
commercial property, and we know big business is always looking
to spend money, because they are always, you know, adding,
building new buildings, et cetera. Small business, my
perception is that most small business people are going to
build one building and that's all they are going to be doing.
Do you see cost segregation as being beneficial to a small
business?
Representative Boustany. Well it could be. It depends on
the small business, and what that business is engaged in. Part
of what we want to do as we go through tax reform, is to take
that deep dive and look at what the impact is on some of these
tax provisions and how they work for small business. I can tell
you that over the last three years, I remember being in
meetings as we were looking at here's current law, here's some
options, and there was this big discussion about whether to use
accrual accounting and where to start accrual accounting
versus, you know, cost accounting, and I was very unhappy with
it because what was being proposed was going to actually affect
a lot of small businesses here. Cash flow is king, as far as
small business. If we don't pay attention to that, we're going
to hurt a lot of people, so I think those are key issues.
Making sure we understand the consequences of what we do in tax
policy at the ground level is critical, because we will set up
a Tax Code that has problems. So when you do tax reform, you
know, you start up talking about fairness, simplicity, lower
compliance burden, lower rates. That's all fine and good; I
think everybody would agree with that. The devil is in the
details, and you've got to get a document out there with the
real proposal to start a real conversation about it, and so I
would welcome a whole lot more information on your perspective
on this, and if you want to comment further on it, you know,
please.
Mr. Hebert. Sure. My experience with cost segregation is
it's going to be beneficial on a case by case basis. Some
people have different reasons for why they need that money up
front. We never know what that's going to be. That's between
them and their CPA. So, yeah, because as you mentioned, cash
flow is critical for most businesses, we are finding that
people who will take the opportunity to take a look at it and
see, then when they have all the information in front of them,
they'll be able to determine yes, it's beneficial, or maybe no,
it's not beneficial. We're finding some CPAs have their own
reasons why they don't want to utilize it; they don't always go
into the details about it. But again, on a case by case basis,
some companies need it, most companies need it because they
need their money up front.
Representative Boustany. Yeah, I think the key, you hit one
key point, and that is, we don't want to generalize when we try
to make tax policy. We need to look at the specifics and what's
actually happening.
David, do you want to----
Chairman Vitter. Jeff Johnson is asking about Iran. Jeff,
why don't you elaborate?
Mr. Johnson. Sir, I don't have a question. I just have a
statement. By signing the letter to the Ayatollah, you sir are
a traitor, a disloyal, un-American traitor. That's my
statement.
Chairman Vitter. Well, I appreciate your right to free
speech. I wish you would appreciate my right to free speech,
because what I did is sent a letter to certain folks in Iran,
co-signed by 46 other U.S. Senators, simply stating a fact, and
the fact is that is they reach a deal with President Obama, and
that deal isn't certified or passed off on or acted upon in
some way by the U.S. Congress, it is just that, a deal with
President Obama. And it doesn't have long-standing stature
beyond President Obama, so that's what I did. So I wrote a
letter, 46 other Senators, and I stated a fact. Now, I think
the substance of the matter is, what is the deal being
negotiated? I'm really concerned that this Administration wants
a deal at all costs, and whenever you want a deal at all costs,
whether it's negotiated with Iran or doing a business deal, you
usually get a really bad deal. We can't afford to enter into a
really bad deal with a power like Iran's extreme leaders
clearly bent on the destruction of the West, the United States,
Israel and others, who are working hard for nuclear weapons, so
that's the substance of the matter that I'm very concerned
about, and I hope we don't rush into that sort of bad deal.
[Applause].
Charles.
Representative Boustany. No, I would just add that any deal
with Iran is going to impact sanctions that were imposed by
Congress. That means Congress made that law saying it is the
law of the United States to impose these sanctions on Iran by
our country. Congress is the only entity that can reverse those
sanctions, and so we have to have a full say in what happens in
all this at the end of the day. I personally am very skeptical
that we'll get to a deal with Iran based on all the reading and
studying and briefings I've had on this. It's in the late
stage; it doesn't look good, but I will not sit back and be
quiet if the Administration tries to push forward a deal that
will hurt U.S. interests in the long run. I'm very adamant
about this. This is a critical massive security issue, but
anything that the Administration decides to do, to accommodate
Iran, will involve sanctions law and U.S., which is something
we would have to reverse or change, and so that's another
reason why Congress has to be involved in this over and above,
in addition to the elements that Senator Vitter has laid out.
Chairman Vitter. Charles, do you want to go to the next?
Are there any more questions? We have one here. I can't quite
make out the name, is it Mel Keatings?
Mr. Keatings. Mike.
Chairman Vitter. ``Is Congress going to''--I want you to
elaborate. I can't make out your handwriting. Are you a doctor?
No offense.
Mr. Keatings. No offense taken. The big thing for me is in
small business dealings and so forth, I do a little business
with Columbia and so forth. I'm returned from National Oilwell/
Varco. So, I do dabble still in the oilfield, and so forth like
that, but my big question is, is there anything on the horizon
or changes coming up in the IRS or is there a possibility that
we're going to go to a flat tax?
Chairman Vitter. Well, Congress is seriously considering
tax reform. Now a few minutes ago, I outlined the focus of the
Small Business Tax Bill that I'm working on. That's very
specific provisions that are important for small business, but
on a broader level, and Charles is very involved in this,
because he's on the relevant House Committee, on a broader
level there's a big discussion of much more fundamental tax
reform, and obviously a flat tax or something close to that is
a version of that where we tremendously simplify the Code to
lower those compliance costs that I was talking about in the
slide show.
Mr. Keatings. I have one more question for the Congressman.
Congressman, since you're on the Tax Committee and so forth, do
y'all ever, or your staff, ever review the bureaucrat's
writings and laws and things like that. Do y'all ever pull it
up and say, wait a minute, this doesn't make sense to the
average guy out on the street?
Representative Boustany. Oh, yeah.
Mr. Keatings. Because I know in my dealings, and every time
I have people come in from Columbia or vice versa, it's a
horrendous amount of paperwork. Nothing sticks from yesterday.
It's always do it, re-do it, and I go guys, don't y'all have
something on file, and they go yeah, but this is a new deal.
You know, so I mean, maybe these large corporations can handle
this, but a small individual person cannot. I think this is a
horrendous thing that these bureaucrats sit back and write the
laws and everything else and it seems like there's no review on
it. And then the other thing that I would like to bring up to
both of y'all is that these billions of dollars that we spend
on educational programs that never change things. Go all the
way back to Jimmy Carter, and they're still sitting there
monitoring the classroom but they're paying them, and you know
this waste has to stop. The businessman is paying for this
waste. If we did that in our businesses, or in our [inaudible],
we wouldn't exist, and you wouldn't be necessary, because this
country wouldn't be what it is for the individual taxpayer. So,
I'm asking how close are y'all or are the Democrats aboard on
making these changes; are any of them privy to the idea that
there has to be some changes made?
Representative Boustany. If I could address that and make a
few points. First of all, with regard to what the IRS is doing,
we are doing a number of things to truly try to hold them
accountable. I spent the last four years chairing the Oversight
Subcommittee on the Tax Writing Committee, really pounding them
about a number of issues. We have gotten them changed in a few
instances, and some they are resistant and we are still in that
fight. I have a tax legislative assistant, plus some staff on
our committee that review every single regulation that comes
out, and we question them, they send letters, we call, we work
with them for clarification.
I think the latest case in point, we had Secretary Lew, the
Treasury Secretary, in front of our Committee a few weeks ago,
and they took this ObamaCare tax provision pertaining to health
reimbursement accounts for small businesses, and imposed these
monumental penalties on small businesses if they tried to use
these, and I pointed this out to the Secretary. I said this is
completely and grossly unfair. You're giving unfair advantage
to labor unions, to large corporations at the expense of small
business, and he looked baffled by it. He turned to one of his
technical assistants or advisors who then whispered back to him
that I was right. And he said, we're looking at this, and a
week later they made a change and they put the whole thing on
hold for six months as a result of my question. I have now
introduced legislation to get rid of that program, because it's
faulty, and it's wrong, and it's very prejudicial towards small
business.
The second point I want to make is just more broadly on tax
reform. We've been working very hard on the Ways and Means
Committee in the House. We've actually formulated a complete
re-write of the Tax Code in draft form. There are a number of
problems with it, and we are still working on it. Under Paul
Ryan's leadership, who chairs the Committee, and I chair one of
the subcommittees, we are really focused on this to do a number
of things. To eliminate all--you know, get rid of the seven tax
brackets for individuals and go to two, simplify; 25 and 10,
combine a bunch of things. For instance, things like raising
the Standard Deductions significantly so that you have fewer
people having to itemize all this complexity. A simpler form
for filing. Taking all the education tax credits that are out
there, and combining them down to three. A lot of
simplification. We are not finished with it. We want to get the
simplicity, flatness, we want to lower rates, and we want to
make this Tax Code fair and easy to navigate to really markedly
lower your compliance costs. The more we have gotten into it,
the more I realize this is pretty complex, because you don't
want to create unintended consequences, you know, by just
generalizing as I said earlier. You've got to really look at
the specifics and the interaction of all of this, so
technically we are getting closer to having something that we
will finalize, and our goal would be to have it completed. We
don't think we'd get anywhere with this current administration
on it, but we'll tee it up for our Republican nominee, and
hopefully they can run with a real tax plan.
Chairman Vitter. Great. Let's drop up with one more
question again from Raymond Rosemuster, asking about the
national debt, 18 trillion dollars. This is a dire condition.
Raymond, I agree. I carry around something with me in my wallet
that illustrates how big a problem this can get to when you
have debt and economic policy out of control. This is a note
that was, when it was printed, a real note in Zimbabwe. It's
their 100 trillion dollar note. This was real when it was
printed. It's not worth anything anymore--100 trillion dollars.
Now, what led to this is out of control economic policy that
didn't make sense, including printing money, including spending
beyond your means. What's interesting about these 100 trillion
dollar notes, about four years before, you know what the
exchange rate between Zimbabwe and the U.S. dollar was? One to
one. It can happen pretty quickly when you have out of control
economic policy. That's why we are trying to address that,
including with a real budget.
Just in the last few weeks, both the House and the Senate
debated and passed a budget that actually balances at some
point in the future, in contrast to President Obama's submitted
budget which raises taxes, raises spending, raises borrowing,
and never balances. It's not a question of when. It's not a
question of it takes too long, it never ever, ever balances.
Mr. Rosemuster. Well, let's start, it looks dire to me,
that if you look at the report that we have like 8,000 tons of
gold, and the present value of gold, we're only placing it at
about 40 trillion dollars. So if we look at the economy as far
as what they call velocity within the economy to achieve that,
and if you look at the debt, you know, okay, it might be just
about even, 40 trillion, that's the gold price right now. But,
if you consider other avenues for other ventures where, say
like factory costs, two or three percent of factory
transactions, say like on credit cards, two or three percent on
a trillion dollars is 20, 30 million dollars, and then if you
look at the interest on it, on say, credit cards, you have 200
million dollars a year. And then you see what's happening is
that you see tax loopholes, but what is happening with say, a
quarter trillion dollars a year with factory costs or interest?
Chairman Vitter. Raymond, again, I don't want to cut you
off, but we do want to go to the Field Hearing portion of our
program. That's what we are going to do right now. So let me
begin to introduce our witnesses.
We have four great small business witnesses today. We're
going to introduce each one in turn, and they are going to talk
about their personal experience in small business, particularly
on tax issues and tax burdens for about five minutes each.
First is Sadie Shamsie. Sadie is the co-owner, the
President of Standard Title. That's been in business since
September 2001, with their main office here in Lafayette, and
now a second office in Lake Charles. Standard Title provides
title research, examination, title insurance and escrow
services for commercial and residential real estate
transactions, and presently has nine employees. Sadie and
Standard Title are affiliated with the Louisiana Land Title
Association, and other realty and other associations. Sadie,
thanks for joining us.
SADIE SHAMSIE, PRESIDENT AND CO-FOUNDER, LICENSED TITLE
INSURANCE AGENT, STANDARD TITLE, LAFAYETTE, LA
Ms. Shamsie. Thank you, Senator. First, I'd like to thank
both Congressman Boustany and Senator Vitter for inviting me
here to testify this morning. I truly have a small business. We
have nine employees, and undoubtedly the most pressing problem
we have is dealing with the complexity of the Internal Revenue
Service, the code, the constant change in laws. Because of
this, we have to hire a CPA firm that takes care of all our tax
issues. I did the calculations this week, and the amount of
money I spend paying my accounting firm, I could actually hire
one full-time employee.
Solutions to that? One of the things, I think, if we could
simplify things, and that's what y'all were talking about. A
single tax rate schedule for all business income. Reducing the
tax burden on small businesses will allow us to reinvest in our
company, hire new people. I think a lot of people fail to
realize, I have an S-Corp, so I pay individual income taxes.
Well, when President Obama increased my personal taxes, it was
a tax increase on my business and did affect my business in a
negative way. If we want to promote economic growth and
fairness between large and small businesses, it needs to be a
fair playing ground. It obviously isn't. I mean, big
corporations have the ability to hire attorneys and accounting
firms, and for us it's just an enormous expense that quite
frankly we really can't afford.
Another problem is the continual changes and temporary
nature of many of the credited deductions. The example is
Section 179. I mean, gee whiz. It almost feels like we are
being held hostage by a bunch of lunatics every year.
Chairman Vitter. It's only because you are.
Ms. Shamsie. I mean, it's like, you know, do we do, well we
don't know. They might extend it, they might not extend it. I
mean, you can't run a business that way. I don't even pretend
that I understand the tax laws and the compliance issues; just
quite frankly, I don't. I mean, sometimes I wonder if my CPA
firm even does. An example of that is, these are letters from
the IRS. They always happen the same. I get a letter in, it
says, we realize you owe more taxes. And then the next letter I
get is saying that they received my correspondence, and they
are looking at it, but it will take 40 to 60 days to respond,
and then eventually, I get a letter in that says, I actually
got one in that said, oh sorry. We owe you a refund.
The IRS deals this, I think a lot of us as taxpayers and
small business owners, it's almost like when you get that
letter back, says you don't owe anything, it's like whew, thank
goodness. But, if I make a mistake on my tax returns, if I sign
that, I'm saying that everything in there is correct, I am held
accountable for that, and if I make a mistake, guess what?
There's a penalty that I have to pay.
The IRS is not held accountable for that, are they? Because
even when this, and I have to hire my CPA firm to deal with
this, I may not have to pay the taxes I didn't owe to start
with, but I have to pay my CPA firm to take care of this. I
would love to see maybe if we could get a tax credit when the
IRS screws up, and hold them accountable, hold their employees
accountable, because it seems to really, really not be the case
at all.
Chairman Vitter. Absolutely. Thank you very much, Sadie.
Great testimony. Next, we're going to hear from Robert Moring.
Robert and his son, Joshua, are owners of Weld Done Design,
which manufactures and services residential metal and copper
door and window awnings, as well as commercial storefront
awnings. They are just north of Carencro, been in business
since 2006, serving all of Acadiana and also serving the South
Louisiana area from New Orleans to the Texas line. They are an
accredited member of the Better Business Bureau, of the
Carencro Business Association, State Police Association, and
the Louisiana Sheriff's Association Support Group. Robert,
welcome.
ROBERT MORING, OWNER, WELD DONE DESIGN,
CARENCRO, LA
Mr. Moring. Thank you, Congressman, Senator. Thank you for
welcoming my testimony here. The Senate Committee on Small
Business and Entrepreneurship focuses on the Federal tax burden
on America's small businesses. When I say I have a small
business, I have a rather small business, and just like Ms.
Shamsie was saying, I think the biggest burden here is the
expenses that us small business people have to incur with our
CPAs as a result of the IRS complexity. I'd like to share my
thoughts and opinions on what I feel are key areas of concern.
The area of concern that I'd like to address is the complexity
of the IRS Tax Code, Social Security, tax legislation, and the
future of our small businesses.
My primary concern is the complexity of the IRS Tax Code.
The Tax Code for small businesses is very complex and makes it
difficult for me to handle the administrative part, like I was
saying, so we have to outsource that to a CPA. CPAs charge a
lot, they really do. Maybe I should become a CPA. It takes time
for me to prepare my documents. When I first went in business,
my CPA was doing everything for me, and I learned real quickly
that I could hire two more people if I would just lower that
cost. I figured it out; I can't lower that cost. I managed to
get it minimized as much as I could. I file as much as I can, I
try to handle as many forms as I can, but you know, the fear of
the IRS comes into play. The IRS, we've all watched the movies
with the mobs, and if they don't get them on the murder charge,
they're going to get them on the tax evasion part. So, it's
true, and you know, like Ms. Shamsie was saying, when I get to
the mailbox and I see a letter from the IRS, I don't even make
it back to my office, because you know it's not good. It's
negative, so the connotation of the IRS is bitter in a small
business person's mind, it really is.
Personally, I worked for my competitor at one time, and he
got in trouble with the IRS, and this is a true story. His
brother was working with him, and he wasn't even at--his
brother was working at a different business, and because he was
limited, he was listed on the LLC as a corporation, he was
liable for that tax burden as well. The penalties and interest
went well over a million dollars for that very small business.
It was crushing; it was crushing.
I feel the average small business owner has a great burden
of research and to try to untangle the Tax Code for just a
simple purpose to operate its software. The cost of the
software is very expensive in itself, and the updates and the
upgrades and to do the payroll modules, that's to be able to
handle what we can do that we don't want our CPAs to bill us
for. The IRS has a threatening presence. You know, it's pretty
fearful that you might accidentally miss a deadline or file the
wrong form, send it to the wrong address, didn't file it on
line correctly. It gets complicated, and I'm talking
specifically just of Federal tax, but it's all taxes that we
have to deal with, but the Federal gets a little precarious at
times, especially if the EFTPS website is down. You know, we
have to make our monthly deposits, [inaudible] quarterly files,
whereas it just gets confusing. I feel that a separate Tax Code
and lower tax rates would help me expand my business, bottom
line.
Another one of my great concerns is the Social Security
matters. When we talk about Federal taxes, I don't know if
the--I don't hear much about Social Security. Social Security
is probably one of the largest concerns for us, for me and my
son, and for our business and for most families. You know,
where are these monies going, and will it be available for me
and my employees when it comes time for us to be able to
collect what we contributed. As a business owner, I'm
responsible for matching that contribution and sending it in. I
can tell you personally, my Social Security tax with matching
contribution is three times what my Federal tax is. That's
crushing to a small business, thus creating a strain on the
system. You know, we hear this, about the Social Security
system, there's a strain, there's going to be a collapse or a
downfall. What I would like to see better communications and
answers given to the Social Security questions from the
Legislature and from the IRS and the Social Security
Administration. We hear nothing but the negative. It's kind of
like the taxes. So the Social Security Administration is now
becoming one of those evil doers as well, you know.
I feel the complex tax laws are not all the fault of the
IRS alone, but legislation as well. With laws constantly
changing, it's very difficult for the small business owner like
myself to make and follow a plan and make an important
decision, like the ones, the Section 179. Absolutely crazy. The
bonus depreciation was a law that was designed to stimulate the
economy, and was put into place for several years; however, in
2014 small business owners were told not to rely on that bonus
depreciation any longer, so we planned accordingly. We planned
our expenses, our fixed assets. For some reason, that I've yet
to understand, the legislation was passed in December as an
economic stimulus. It was supposed to help small business
owners that was no help whatsoever. It's like having a toy and
you can't take it out until December, and when you take it out
in December, they say oh, you could have played with it all
year long! It just doesn't make any sense.
My final thought and concern is about the future of our
small business. My son is an important contributor to my
business. It's just me and my wife and my son who have any
dealings with this business. My son has a great a great
entrepreneurial spirit. He has great dreams of expanding our
business every day. In fact we're putting a new building up
today that I had to fork out of my pocket to do. At the same
time, he sees the daily struggles and the efforts it takes to
operate a business, and I'm fortunate that he has a positive
attitude and a drive to succeed. I also realize that he is
rare. I have met several young would-be entrepreneurs that have
decided to just give up the dream of owning their own business
with the difficulty of building and managing a business
primarily when they see what the involvement is with the taxes,
the Federal tax, State tax, school board and what have you. We
need to see--will we continue to see the American
entrepreneurial spirit in the next generation? It's a great
concern of mine, not just my son but for my grandson.
Again, I thank you for allowing me to voice my thoughts and
opinions in this Field Hearing, and I hope that my small
contribution might plant a seed that Americans who operate
small businesses will benefit and thrive through the efforts of
this Senate Committee. Thank you.
[The prepared statement of Mr. Moring follows:]
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Chairman Vitter. Thank you very much, Robert.
Representative Boustany. David, next we'll hear from Mr.
Alan Hebert. Alan is a partner in a well-established accounting
firm here in town, Thibodeaux, Hebert, Deshotels and LeBlanc,
LLC. In addition to being a very accomplished accountant, Alan
has been very involved in business consulting, is an owner in
several small business ventures in a wide range of areas. I
think Alan, with your background, you bring a very unique
perspective to this debate and discussion from an accounting
and a small business perspective, so Alan, by all means, let's
hear your testimony.
ALAN D. HEBERT, PARTNER, THIBODAUX HEBERT DESHOTELS LEBLANC,
L.L.C., LAFAYETTE, LA
Mr. Hebert. Sure. Congressman Boustany, Senator Vitter,
thanks for inviting me today to address this hearing. I've
heard some of the earlier testimony, and as a CPA I share the
concerns because I deal with those things every day, you know,
on their behalf, in addition, to some of the businesses that I
own, and I understand the problems. During my 37 years as a CPA
and a business consultant, I spent countless hours listening to
and addressing business concerns with clients. As a small
business owner, I have experienced the issues first hand and
through the entities that I own covering a wide spectrum from
oil field services to rice milling.
Small business more than ever must rely on professionals
such as myself to meet the heavy burden presented by the
complexity of our tax laws and the related compliance
requirements. Many times, when they should be focused on
running their business to the best of their ability, they are
focused on tax and compliance issues and end up making
decisions that they would not make otherwise. The days of my
grandfather who had a auto parts store where he and my uncle
and father worked, he prepared every form himself with a Number
2 pencil. Those days are gone.
Just to illustrate, and you've heard about Section 179.
Various methods can be used just to deduct the cost of an asset
as one example of the multi-layered web of rules that the
average small business owner has trouble understanding. The
business owner must decide whether to use IRS Code 179
expensing, bonus depreciation, regular depreciation, and if
that wasn't enough, in 2013, the Minimis Safe Harbor Rules were
passed that govern the immediate write-off of small assets.
Most small businesses can only write-off assets under $500.
This limit is way too small, and requires additional compliance
time recording these assets on the depreciation schedule,
deciding which of all these expensing options are available,
and then tracking them for years to come. Additionally to
comply, taxpayers are required to file and adopt a
capitalization policy, and make an election every year going
forward. Extenders, you've heard about the 179 and bonus
depreciation. Extenders are great but tax law needs to be
permanent. Until Congress decides that there needs to be a
change, all these extenders drive business people crazy, and
they cannot plan.
There has been much discussion lately about corporate tax
reform. While there is much room for improvement in that arena,
I don't think a change in corporate rates will affect many
small businesses as the vast majority pass through entities
bounding as partnerships, S-Corporations, disregarded entities
which pass through the income to the owner's individual tax
return. It would be helpful to the small business owners to
simplify the rules regarding income and deductions at the
company level. The tax burden will only be affected if rates
were changed at the individual level. Compliance and related
penalties create a daunting task for any business owner
navigating the complex and ever increasing matrix of deadlines
or quarter income tax estimates, income tax returns, payroll
tax reports, and payroll tax deposits, not to mention all of
the local sales tax and the local requirements.
Penalties are assessed by the IRS when the computerized
system detects an error before asking the taxpayer for
additional information to clarify discrepancies. The long and
expensive task of proving that information was reported
correctly begins. Of course, it's nearly impossible to contact
anyone by phone and correspondence is not answered for 90 days,
so notices cross in the mail. I have on multiple occasions
corresponded with the IRS for years without resolution while
the taxpayer continues to receive penalty notices and
threatened seizure of assets and liens on bank accounts.
In summary, my testimony only covers a few areas of the tax
law. It does not even venture into the bizarre areas of
alternative minimum tax, tax credits, limits on capital losses,
and of course corporate requirements to report according to
ObamaCare now. The small business owner who has taken risk with
the opportunity to own their business, provide jobs for others,
and purchase the goods of fellow entrepreneurs who are
providing jobs usually does not realize that in addition to
worrying about payroll, rent and mortgages, they now must face
the task of worrying about complex tax laws and regulations.
Every business owner understands their activity must be
reported and taxes must be paid, paid to fund government
services, but bad for a simple and fair system of taxation in
compliance. Thank you.
[The prepared statement of Mr. Hebert follows:]
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Chairman Vitter. Thank you.
Representative Boustany. Next we will have Mr. Dan Feibus.
Dan is a newcomer to Louisiana. He's the Chief Executive
Officer of Zagis, USA. Dan's business is something new in Jeff
Davis Parish, and what he's done is brought diversification to
that area. They buy cotton. They fabricate it and manufacture
it into yarn, and sell about 80% of it overseas, so it's a new
type of business. What, 80 jobs now, Dan? So we welcome. We
look forward to you testifying.
DAN FEIBUS, CHIEF EXECUTIVE OFFICER, ZAGIS USA, LAFAYETTE, LA
Mr. Feibus. Thank you Senator Vitter. Thank you Congressman
Boustany. A little but about our company. It's called Zagis,
USA which is a partnership between myself and some former
textile executives that they grew the Zagis Group out of
Mexico. Our customers are large brands like Hanes or Fruit of
the Loom that you are probably familiar with. We commissioned
our plant in 2009, and since its opening, we have almost
doubled our production investing somewhere in the neighborhood
of 30 million dollars in CAPEX and construction. We employ
about 80 full-time hourly associates in addition to our
operations management team. There are only three people in the
company who are transplants on the Carolinas, and two of those
are competent of the third. We export over 80% of what we
manufacture, and we purchase all of our raw material which is
cotton in bail form through the Mid-South region. We are the
largest customer of our electrical co-op, Jeff Davis Co-Op. We
use approximately five megs of power, and we are a proud member
of our local community.
I am very grateful to the Committee for inviting me here
today to share with you some of the impact of Federal taxation
regulation, on the growth and health of our business and
businesses that we interact with. In general, I strongly
believe in tax reform that will lower corporate and individual
tax rates substantially, and that will diminish the effects of
the differential rates, earned income and unearned income, and
capital gains. I believe there is a simpler and more
transparent approach to taxation that will minimize compliance
costs, and get businesses focused on investing and growing
business, as opposed to developing tax compliance and
minimization strategies. I also believe that our tax policies
should be more neutral, instead of trying to pick winners and
losers to the tax code. I think that we all win with taxes that
are lower and require less compliance.
In regards to the industry that I am part of, the impact of
trade legislation before the Congress and President, the TPP,
will be felt for a long time to come. This is something that we
need to get right as a country, because often in the past my
industry has been viewed as having had its best year or
something that is no longer an area where we have a competitive
advantage. This could not be farther from the truth. Our
industry as a whole employs over 400,000 full-time employees in
the United States, with their numbers growing. The productivity
gains in the industry that I am a part of have been nothing
short of remarkable. We could make more pounds in less space
with fewer people who are better paid than ever before. As an
industry, we are in the process of a major re-investment with
new entrant coming into the market and hundreds of millions of
dollars of new plant equipment being added in the last year
alone. These facilities add value to rural communities,
stabilize the power grid, and add value to our planters of
cotton and growers. Every pound of cotton that we grow here is
one less pound that requires government assistance and
[inaudible] of GSM export support and results in better margins
for our farmers and better opportunities for our rural
communities. I would strongly encourage the Committee to take
into account the impact of taxation and regulatory policy on
our industry, specifically as mentioned tax reforms with lower
rates will make compliance earlier, customs reforms to
modernize and streamline the system which is antiquated and has
been just really a mess. Continue support for programs like new
market tax credits and ED5 with a view to having them be more
effective as a support to permanent manufacturing and job
creation as opposed to safe harbor real estate investments and
achieving a TPP agreement that does not penalize my industry.
An awareness to government mandates, and particularly when they
are in effect hidden, taxation has an impact on all of us as
citizens, business owners and participants in this economy.
I would also like to take this opportunity to point out to
the Committee how important the USDA B&I Guaranteed Loan
Program has been to our startup business and how it impacts
rural communities that they can reach for economic growth. This
program allows local banks to provide credit support necessary
for businesses located and expanding in their communities. This
program as well as the great work done by the SBA, especially
on Export Finance, allow the world of small businesses to
compete globally. At Zagis, we were fortunate to be able to
secure USDA B&I loan when we started out, and it was extremely
helpful in getting it [inaudible]. I am very grateful for this
opportunity, and I thank you both for inviting me.
[The prepared statement of Mr. Feibus follows:]
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Chairman Vitter. Thank you very much, Dan. Now we are going
to go into a discussion, questions and answers, to explore some
of these points further. In starting, let me say as I mentioned
toward the beginning, we are working on a focused Small
Business Tax Bill, and I really encourage and appreciate all of
y'all specific suggestions about that. We do raise that, the
Minimis number, which is way, way too low. I think it's $500
which you mentioned, to $2,500 for small business. We also
mandate to the IRS, once we pass this, you got to come back to
us within a certain period of time with specific proposals to
dramatically reduce small business compliance cost, and have a
number attached to each proposal so it's real, and it really
does that, and we are going to mandate that there can be panels
with small business representatives to actually impact, to
access the impact, particularly of their proposed regulations.
Let me ask, Sadie certainly made the point that a lot of
small businesses are pass-throughs, right? They are not
corporations, so you are paying the individual rate. I just
want to note, we hear a lot in national debate about the rich
need to pay more, the top rate needs to be higher. I mean, that
is basically the small business rate, for the most part. So a
lot of the small businesses, because of the size of their
operations, are paying the top individual rate. It doesn't mean
the owners are ultra-wealthy, but that is the small business
rate. I just want to ask for y'all's reaction to that, and so
that the impact of that, when we have any of these debates that
are often on the left of us on increasing substantially the top
rate. Anybody want to react?
Mr. Feibus. It always seems to me that it's crazy that you
have a completely different tax system for the LLC as opposed
to just fixing the corporate tax or having the tax rates that
applicable to everyone. It's a deep threat. I mean, if you look
at it, you know, we're involved and we did a new market tax
credit deal a while back, and basically those are credits that
allow--it's a really complicated system, but the buyers of
those credits tend to be large banks, like J.P. Morgan or
General Electric, and the idea that the large corporations have
a tax rate that they are able to effectively pay a lower rate
because of the way the system is so complicated, is bizarre.
It's just crazy. It should be transparent and understandable.
Chairman Vitter. Yes. Anybody else?
Mr. Hebert. I'd just like to say, you mentioned a lot about
the pass-through entity so it doesn't--it is affected at the
individual level, and not only just income tax, but then what
people don't realize is the self-employed person is the
employment tax, which is Social Security, Medicare, now
ObamaCare, on top of income tax. I've hear a lot, you know, in
the news about the rich getting richer. What I've seen over my
37 years is there used to be corporations and there were
individuals. With the tax law changes, there are been a lot of
flow through entities, so I think it's a misguided number that
they're looking at individual returns and thinking people are
getting wealthier and what actually is happening is they are
reporting the income of their business on their personal tax
return. They are no longer two separate entities. So I think it
is a very misguided look at it. The other thing people don't
realize is, income does not equal cash flow. So if you have--
you make a million dollars and it flows through your personal
return, that does not mean that you got a million dollars. It
means the business had a net income of a million. They could
have given you two hundred thousand dollars of cash to pay
taxes, and used the rest to buy assets. So for those that don't
prepare returns and don't understand that system, income
reported has nothing to do with cash flow.
Chairman Vitter. And Alan, related to this broad issue, let
me ask you this. There is some discussion in Congress about
perhaps doing a more focused tax reform bill on the corporate
side, corporate tax reform, lowering corporate rates because
our top corporate rate is way out of kilter with the rest of
the world. It's a competition issue. I have a big concern about
that because of this thing we're talking about here, leaving
our small business, you're increasing this disparity. If a
focused corporate tax reform bill were done, which I have
misgivings about, would there be a simple way to make sure that
flow through income is also treated at that rate?
Mr. Hebert. Well, I think you could do it, but it may be a
little complex because now you have to treat that income
differently. Just like capital gains is treated differently
than earned income. Now you have a----
Chairman Vitter. So you could do it, but it's another
complication.
Mr. Hebert. Right. I would say in Acadiana there are very
few businesses of any size that are still C-Corporations paying
tax, and all that came about when the law was changed 20 or 30
years ago to where you'd get double-taxed if you sell the
assets of your company. When that happened, that change was
made, that if you have a C-Corporation, and you pay double
taxation if you sell your company, everyone immediately went to
flow through entities, and so the corporate tax rate in 90% of
the businesses in this area have no impact.
Chairman Vitter. Okay.
Charles.
Representative Boustany. David, this is really good
testimony because it's right at the heart of what we need to do
with tax reform. There's been a lot of talk in Washington about
corporate tax reform as David said, because we currently have
the highest corporate tax rate in the world, but yet many of
these big corporations have tax planning offices that actually
lower their effective tax rate to a significantly lower level
than that 35%, whereas small businesses don't have a whole lot
of options.
All of you have done a really good job of pointing out the
problems with the uncertainty related to temporary tax
measures, and the complexity of compliance and costs that you
bear. I want to tell you, I've heard you, and I know a number
of us on the Ways and Means Committee in the House have heard
the cry from small business about the uncertainty. In fact, we
were very close in December to having an agreement to make
Section 179 expensing permanent, bonus depreciation permanent,
and a number of other small business tax related items
permanent to give you that kind of relief. It fell through at
the end of the year. The Administration put up opposition and
we were not able to get it done. In fact, one of the rare times
the Senate Majority Leader at the time, Harry Reid, agreed, was
with us on this, and the President intervened.
We've started early this year. We've already passed
legislation in Committee to move it forward to the House floor
to make those items permanent. Let me ask you this, since
there's a lot of talk about corporate tax reform in Washington,
if we were to sort of take Senator Vitter's lead on this, and
we did something with corporate tax reform but also brought
into it, making a number of these items permanent, does that
give adequate relief? Frankly, I'd like to do the whole
shooting match, where we get parity with the players, bring the
corporate rate down, maybe in the mid-20s, but also flatten the
Code on the individual side, with maybe two rates, 25 and 10.
Simplify and do a lot of these things that we talked about
earlier. Do you think, I mean, as a temporary measure, trying
to get to full tax reform, is it sufficient to do a corporate
tax rate reduction plus add in making permanent 179 expensing,
allow for more cash full accounting, many of the things Senator
Vitter has laid out, cost depreciation and make that permanent?
Any of you want to comment on that?
Mr. Hebert. Let me just say, you know, anything you could
make permanent, to me if it's important, make it permanent. You
could, you know, it doesn't mean it's permanent; it means it's
permanent until you change it again. These extenders for one or
two years just drive people crazy. With regard to changing the
corporate rate, like I said, that won't affect 90% of the
corporations in this area. I'm sure it's really for large
corporations, and with regard to different tax rates at the
corporate level and individual, people make--they don't just
sit still. They make decisions about the differential in the
rate, so you have to be very careful and have different rates
for corporations and individuals because there could be a
substantial change in the way they do business, so--and I will
look at, you know, a list of these [inaudible], but we talk
about Section 179, bonus depreciation minimis, that doesn't
even drill down to regular depreciation where over the years
it's been straight line MACRS, ACRS; there needs to be
substantial reform in the write off of assets and consolidate
all that, and come up with one method. Maybe combine Section
179 and bonus into a much simpler arena and get rid of all of
the old code. I mean, I'd like to know, I should have looked,
at how many there are just on depreciation but it's huge.
Representative Boustany. Yeah, the depreciation issue,
based on my reading of it, as to regard to tax reform, is just
mind boggling. I can't imagine, you know, having to deal with
it day in and day out. Alan, you also mentioned AMT, and I'm
sure this has affected some of our small business owners here.
It is something we would like to get rid of, repealing AMT,
putting that to rest once small, because it started as
something, I think it was back in the Johnson Administration,
targeting a handfull of wealthy people and this thing has just
grown out of proportion affecting small businesses all across
this country. Have any of you been affected adversely by the
application of AMT?
Mr. Hebert. The AMT affects either mainly folks that, you
know, sell capital, items that have capital gain most of the
time. So, you have these tax laws that say if you have certain
kinds of income it's taxed at one rate, but if you have capital
gain, it's taxed at a lower rate because you've already been
taxed on that money, but just in case you make too much, too
big of a percentage of your income, it's capital gains that
they take away from you because you have this alternative
minimum tax. So you have all these rules that supposedly meant
to really spur investment and to compensate people for taking
risks, but then you take it away if they do too good at it, so
really people don't understand it's very complicated. You make
them add back State income taxes. It just was, in my opinion,
it's a very bizarre calculation and it's like, we're going to
give you all these things but then we are going to take them
away at some point.
Representative Boustany. One final question, Sadie and
Robert, both of you mentioned the cost of complying with the
Tax Code and how it's not only a nightmare, a headache, you
have to deal with the IRS, but both of you would reinvest in
your business and hire more people if you didn't have to deal
with it. Can you elaborate a little further on this?
Ms. Shamsie. Absolutely. Absolutely I would. I'm so fearful
of the IRS, and like I said, it just amazes me some of the
letters I receive from them. My CPA firm, they handle
everything, okay. I don't, I gave that up. The time it would
take me, and time is money, the time it would take me, my time
is better spent trying to grow my business. I honestly could
hire a full time employee, and we looked at possibly hiring
someone fresh out of college with an accounting degree and I
talked to a couple of friends, and they said, and I'm sure you
had suggested, they said bad idea. It's too complicated. All
you're going to do is get yourself in trouble and waste this
money, stick with what you have. But, gee, I pay my accounting
firm a lot of money and still, we--up until a couple of months
ago, I honestly thought, I was starting to doubt, but we've
been with the same CPA firm as long as we've been in business,
that they were doing a bad job because of all these letters I
was get sent, oh you didn't pay. Then I found out from all the
other small business owners, like oh, no, we get the same
thing. So this happens to everyone. Yeah, it's--gee wiz, it is
complicated, it really is. For me it is, and I have a degree in
Political Science; I don't have an accounting background. Yeah,
it's just, and eight employees, nine employees, I have a small
business. It's way over my head.
Chairman Vitter. And Sadie, if I could jump in just to put
a little more meat on the bone. These letters get held up and
those issues and questions when often the IRS is wrong, and you
figured that out dollars and months or years later. In a year,
how many of those sorts of matters from the IRS might you get,
number one? Number two, an individual letter, if you put a
dollar cost on that in terms of your cost hiring accountants,
et cetera, what might it be for one of those letters?
Ms. Shamsie. I know of one instance specifically, they were
saying that there was like $325 I owed them in back taxes, and
I was going to pay it, because my accountant said, I can take
care of it, it'll cost you $150, $200. Also I was advised,
don't pay it. Red flags are going to go up. It's a mistake on
their part. I kid you not, you know, I get so many of these
letters is what I do now is I just stack them and I bring them
to the accountant at the end of the month. In a month's time, I
promise you I always get at least one from the IRS.
Chairman Vitter. Per month?
Ms. Shamsie. Per month, yes.
Chairman Vitter. And one of the more complicated or
cumbersome letters, what might the final bill to your business
have been?
Ms. Shamsie. We had one that reporting 1099-S to the IRS
when we started doing it electronically. We spent several
thousand dollars because they waited two years to tell us that
they didn't receive the data, and we were like, oh no, we
emailed it timely. We have the email confirming it, but they
said the file is corrupt. Well it took them two years, so I had
all these back taxes for not reporting these 1099-S. I spent
several thousand dollars to clear the matter up, and it took
about two years and more penalties, more penalties, and then
finally at the end of it all--at one point it was over $60,000
they said we owed, and at the end of it all, I had what was, I
think, $326; $265, and I was like let's pay this, but several
thousand dollars I spent.
Chairman Vitter. Right.
Charles.
Representative Boustany. That's all I have.
Mr. Hebert. She brings up a good point. The IRS never
issues notices quickly, so there's a three year statute of
limitations. Normally their notices come between the second and
the third year. By then the penalties have racked up and the
information is cold, and they never, ever, ever send you a
notice like six months after you the return, two years later.
Mr. Moring. I think that's one of the biggest obstacles
with the IRS is the lack of communication. You can't even get
anyone on the phone, for one thing. You know going back to that
bonus depreciation, that was--even the media didn't report
that. From what I understand, that was probably one of the
largest tax changes we've had in this country since the Reagan
Administration, and you never heard word of it. Communication
is key for a small business person. I think that going back to
the bonus ending, 179 making it permanent, I think yes. But to
answer your question, I think it's going to be advantageous to
us. Anything that we can do to lower the cost of the CPA, and
that we have to outsource. I understood, one time my CPA told
me, and I wanted to share that with y'all, is that there's a
form out there. It's 80, 3115, or something like that,
something to do with the bonus that was retro back, kind of
mishandled by the IRS, that form is estimated an 84 hours to
fill it out. I don't know about y'all, but I can't afford 84
hours to my accountant's time to fill one form out that I don't
even understand so, you know, I'm sitting here on the side of
Sadie, that we don't understand a lot of it, we just outsource
it. But we do know the bottom line is that if we can get the
taxes lowered, and I think that's the reason why we're both S-
Corps right now, is because that was the lesser of the evils
for us to choose.
Chairman Vitter. And another theme I certainly hear is
certainty, predictability; right? Know what the rules are and
know it is going to be permanent. Know what's coming.
Mr. Moring. Amen.
Chairman Vitter. And we have a number of these things like
Section 179, that are almost certainly going to be extended,
but they're only done at the last minute, or even
retroactively. Now Alan, let me ask you, when Congress does
that, when Washington does that, you know, these are provisions
that are supposed to spur investment and spur activity, but if
we do that at the eleventh hour, or at the thirteenth hour and
do it retroactively, aren't we essentially throwing most of
that spur impact out the window?
Mr. Hebert. You absolutely are. That really makes no sense,
but they were, as I understood, they were designed to spur
activity, to buy equipment, to get manufacturing going, but
when you pass it, I think on December 19, retroactive to
January 1, that doesn't do a whole lot of good. As we are
staring it in the face again, what's it going to be in the
future? People don't always just make decisions for that year.
They make long term decisions also. I heard a lot about needing
to hire extra people or accountants. A lot of clients have
CPAs, CFOs, and they can't, they don't understand the tax law,
so they still have to hire us. We're more like a tax firm now
because the laws are so complicated and so ever changing, and
the 3115 he was talking about has to do with the Minimis rules.
You have to fill out a change in accounting policy. That's an
8-page form, and it took a lot of time. They have made some
changes, though. It only applies to a few people, but when we
first got it, the rules were such that everyone, every business
was going to have to file one of those.
Chairman Vitter. Right. Well, we're going to wrap up.
First, let's all thank our great witnesses for giving us
insight into these issues. Thank y'all very much.
[Applause].
I really appreciate your being here. You gave very
compelling testimony about what it's like in the real world
dealing with this stuff. Also, I want to thank my colleague,
Charles Boustany. Charles, thanks for co-hosting this event.
Even more important, thanks for all your work on these issues,
including on the Ways and Means Committee.
Representative Boustany. Well, thank you, David. Thank you
for your leadership.
Chairman Vitter. Thank you. And we want to thank the City/
Parish for hosting us today, and last but certainly not least,
thanks to all of you for coming out and directly participating.
As I said at the beginning, when I became Chair of the Small
Business Committee, the first thing I wanted to do was to take
the Committee to the real world, not keep it in a bubble in
Washington. Take it to the real world, including Louisiana;
talk to people in the real world; understand the real
challenges of small businesses and make the count in terms of
the IRS, Small Business Administration, and other things. So
this forum was really helpful in that regard. Thank you for
coming out and being a key part of it. Finally, I want to keep
in touch with you on an ongoing basis. If you have a handout
from me here, please keep that handy, because the blue column
on the left side of the page has all of my contact information,
including our Lafayette office, including our website, which
has easy email access. So please use all of that to stay in
touch. Thank y'all very much.
[Applause].
[Whereupon, at 9:32 a.m., the hearing was adjourned.]
[all]