This Critical Part of Tax Reform Would Help Liberate Small Businesses
By Sondra Clark, Managing Director of Communications and Grassroots at Heritage Action for America.
Americans have always fostered a spirit of entrepreneurship. We take pride in pulling ourselves up by our bootstraps.
Unfortunately, our complicated and restrictive tax code is limiting innovation and growth in this country. One of the biggest offenders is the convoluted way businesses are forced to depreciate assets.
Depreciation is a fairly straightforward concept—it simply describes the reduction in the value of some business asset over a number of years. But its impact on American businesses large and small is complicated and ultimately stifling.
Let’s look at an example.
William wants to open a local grocery store. He knows he needs to buy things for his new business. He needs to buy shelves, a cash register, and open signs. Currently, William would have to pay taxes on a significant portion of that investment using a multiyear depreciation schedule.
William must keep records on each shopping cart, shelf, and the building, then properly classify each asset into a category as defined in the tax code, and finally use the proper depreciation method for that asset category as determined by the code. Each year he would pay taxes on a percentage of the value of the equipment.
The federal government currently regulates the writing off process to make sure it can collect more money in the near term from businesses, which makes investment more expensive up front.
The unified Republican tax framework would give William the ability to take the full tax write-off in the first year.
Known as full expensing, or tax-free entrepreneurship, this approach allows entrepreneurs to write off equipment immediately rather than having to write off parts of their equipment each year. Allowing full expensing lowers the barriers for innovation and allows businesses to grow more easily.
With this update in the tax code, William could deduct the full costs of his new display cases, children’s shopping carts, or cash register.
It’s simple and clear—full expensing leaves businesses free to innovate, hire more workers, and offer lower prices to consumers.
Helping Main Street Businesses
Big businesses or corporations have teams of accountants who can keep track of the cost of every desk, every computer, and every property the company owns. They have expensive software that can easily track the depreciation of the equipment and adjust to reflect any change in the tax code.
Those compliance costs may stifle investment in the economy, but at the very least they are not insurmountable.
Small businesses don’t have the luxury of having a team of specialists who understand the intricacies of depreciation. Businesses like William’s grocery store must choose to either take extensive and time-consuming records, or not to keep track and therefore give up on the tax benefits.
Even if a business or corporation can pay to track the depreciation of its assets, it’s extremely costly. The Heritage Foundation’s Adam Michel explains:
According to IRS research, business tax compliance costs are over $100 billion per year, representing a massive waste of money and effort. … Considering that the total compliance cost for traditional C corporations is equal to 14 percent of their taxes paid, expensing could make major inroads toward simplifying business taxpaying and lowering compliance costs.
Making It Easier to Start a Business, or Earn Extra Income
Today, we live in an economy where 35 percent of Americans have jobs that operate by freelancing, or side jobs like driving for Uber or writing articles for a media publication.
In order to take on these kinds of jobs, workers must make some initial investment. This could mean buying a computer in order to freelance write, or a sewing machine to start an online clothing store.
By allowing full expensing, we could significantly lower the hurdles to launching a side business or freelance gig—jobs that help the economy grow.
Putting Money Back Into Your Pockets
Without full expensing, business owners lose money in two ways.
First, when business owners decide not to spend hours keeping track of the depreciation of their materials, they are losing potential savings. Second, if they do choose to comply, they have to pay an accountant or spend hours complying.
Let’s take another look at William’s grocery store.
William has a choice of hiring an accountant to keep track of his expenses for upward of $150 an hour, or he can use hours of his time keeping his own records through a personal software—hours that could be spent reinvesting or growing his business.
Those cost savings ripple through the economy in the form of additional compensation for American workers, cheaper products for consumers, or expansion of an existing business.
When the government finally unshackles innovation and entrepreneurship, the American people will start winning again.
*To read this piece on The Daily Signal website, click here.