Mixed reviews for the tax plan - Small Business report

Nation's Business, August, 1985 by Mary-Margaret Wantuck

The administration's tax reform plan is getting mixed reviews from small business groups.

While praise is running high for tax rate provisions, there is dissatisfaction with those dealing with accounting, employe benefits and capital formation.

Lowering individual tax rates would be a boon to owners of small unincorporated firms since they report their business income on personal tax returns, says Walter Galanty, chairman of the Small Business Legislative Council. The council is a coalition representing small firms in various fields.

Joel Koenig, a member of the U.S. Chamber of Commerce Small Business Council and a partner in the accounting firm of Touche Ross & Co., recently told a House subcommittee that the provision to retain graduated rates for small corporations is "essential." Corporations would be subjected to graduated rates of 15, 18 and 25 percent until they reached an income level of $75,000, at which point a flat 33 percent would apply. Now there are graduated rates of 15, 18, 30 and 40 percent; a flat rate of 46 percent starts at $100,000. Drawing strong criticism is a proposal to force businesses to use the accrual method of accounting instead of the cash system if they have average annual gross receipts of more than $5 million or regularly employ any other accounting method in applying for credit or reporting to shareholders or partners.

Under the cash method, income is only taxable when received, and deductions cannot be taken until payment is made. The accrual method requires taxation of income and deduction of expenses in the year when the right to receive that income or make the payments becomes certain.

Koenig, who calls the proposal "excessively harsh," says many small firms are "ill-equipped" to handle the accrual method, since it "requires a more sophisticated accounting system" than they have.

Benefit proposals are also under attack. Small business "would have a significant disincentive to establish retirement plans," says Herbert Liebenson, executive director of the National Small business Association. Complex rules and plan limitations pose too many burdens for small firms, he adds.

Other areas of concern are the proposed elimination of state tax deductions, except on corporate returns, and repeal of the bad debt reserve, the investment tax credit and income averaging.

Recently, President Reagan invited 18 small business owners to the White House to discuss their individual concerns regarding his tax proposals.

The outcome was a strong small business endorsement for the concept of general tax reform, according to one invitee, Frank Morsani, president of Precision Enterprises, Inc., Tampa, Fla.

But Morsani, who is also chairman of the U.S. Chamber, says no support was forthcoming specifically for the President's tax plan.

Encouraging Entrepreneurs

A perceived need to encourage new business ventures has prompted Reps. Parren Mitchell (D-Md.) and Ed Jenkins (D-Ga.) to introduce the Entrepreneur Incentive Act.

Mitchell, chairman of the Small Business Committee, says no other tax plans now being considered address incentives for business startups.

Key provisions of his bill:

* A taxpayer deferral of capital gains taxes when proceeds are reinvested in a qualified small business (one that meets size standards under the Small Business Act of 1958 and the Internal Revenue Code). The maximum deferral would be $125,000.

* An up-front deduction for taxpayers who invest in a qualified small business.

* An ordinary loss rather than a capital loss deduction for investments in a small firm.

* An allowance to qualified small corporations in the form of a deduction up to $50,000 for dividends distributed to shareholders.

A plus for the bill, says Mitchell, is that it is "compatible with other tax reform measures."

Worth Noting

* The Travelers Companies Foundation is pumping $100,000 into the Connecticut Small Business Development Center, matching a grant from the Small Business Administration. Some of the funds will go toward setting up a joint venture program with the Hartford Economic Development Corporation to help women entrepreneurs. Travelers, an insurance giant, is built on a base of 10,000 small independent insurance agencies.

* The Seventh National Conference for State and Local Officials on Small Business will be held at the Park Plaza Hotel, Boston, October 23-25. Small business owners are welcome. For more information, contact the Small Business Administration's Office of State and Local Affairs, (202) 634-9341.

* A Dun & Bradstreet Corporation survey finds that more than one third of U.S. businesses expect to hire more employes this year than originally planned. The total of these additional hires: 2 million. Fifty-three percent of the hiring will come from firms with fewer than 100 employes.

* "Big Profits From Small Companies," a new book by small business management specialist Steven Popell, tackles concerns like credit and collection, setting up a ssales territory and making it pay, choosing a loan officer, preparing a loan request, improving marketing's contribution to profit. It is available from Lomas Publishing Company, 625 Ellis Street, Suite 301-L, Mountain View, Calif. 94043. Cost: $19.95.