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[Senate Report 114-424]
[From the U.S. Government Publishing Office]

                                                       Calendar No. 226
                                                       
114th Congress    }                                            {  Report
                                  SENATE
 2d Session       }                                            {  114-424

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                              S. RES. 252

                                _______
                                

               December 20, 2016.--Ordered to be printed

   Filed, under authority of the order of the Senate of December 10 
                  (legislative day, December 9), 2016

                                _______
                                

Mr. Vitter, from the Committee on Small Business and Entrepreneurship, 
                        submitted the following

                              R E P O R T

                       [To accompany S. Res. 252]

    The Committee on Small Business and Entrepreneurship, 
having considered an original resolution (S. Res. 252) 
expressing the sense of the Committee on Small Business and 
Entrepreneurship of the Senate relating to easing the burden of 
Federal tax compliance on small businesses, having considered 
the same, reports favorably thereon without amendment and with 
a preamble and recommends that the resolution do pass.

                            I. INTRODUCTION

    An original resolution expressing the sense of the 
Committee on Small Business and Entrepreneurship of the Senate 
relating to easing the burden of federal tax compliance on 
small businesses, S. Res. 252 was introduced by Senator Vitter 
on September 15, 2015.

              II. HISTORY (PURPOSE & NEED FOR LEGISLATION)

    When the federal tax code was created, it contained only 
400 pages, but since then has grown to about 74,000 pages. As 
the tax code has expanded, the compliance costs have increased 
with it. Most small businesses do not have an in-house 
accounting department and depend on costly outside accounting 
and legal services. As such, small businesses have a 
disproportionate compliance burden.
    According to the National Federation of Independent 
Businesses (NFIB), for small businesses, the cost of compliance 
is 70 percent higher than the cost of compliance for larger 
firms. According to a National Small Business Association 
(NSBA) small business survey, a small business' administrative 
burden for tax compliance is greater than its actual tax 
liability. NFIB reported that small businesses spend 1.7 
billion hours on tax compliance every year, which amounts to 
approximately $16 billion in compliance related costs. Nearly 
40 percent of small businesses spend 80 hours or more per year 
on tax compliance, and 25 percent of small business spend more 
than 120 hours. By reducing these compliance burdens, small 
business owners can put more money back into their business, 
community, and the economy.
    The policy changes included in the resolution have received 
broad support. Many organizations offered their letter of 
support, such as the NFIB, NSBA, Louisiana Association of 
Business and Industry, the Small Business and Entrepreneurship 
Council, the Small Business Investor Alliance, the Small 
Business Advocacy Council, and others. Other organizations have 
offered support publicly, such as the American Institute of 
CPAs, the National Association for the Self-Employed, and the 
chambers of commerce from several states.

                      III. HEARINGS & ROUNDTABLES

    In the 114th Congress:
    On April 2, 2015, the Committee held a field hearing, 
titled, ``Reducing the Federal Tax Burden for America's Small 
Businesses'' in Lafayette, Louisiana. The Committee heard 
testimony from local small business owners regarding their 
difficulty in keeping up with changes to the tax code.
    On July 22, 2015, the Committee held a hearing, titled, 
``Targeted Tax Reform: Solutions to Relieve the Tax Compliance 
Burdens for America's Small Businesses.'' The hearing examined 
the significant tax compliance burden on small businesses. The 
Committee heard testimony from small business owners and 
industry advocates. Witnesses discussed the compliance burdens 
and how they can outweigh their actual tax liability. The 
witnesses suggested extending the cash accounting threshold, as 
well as updating tax exclusions and deductions to reflect the 
changes that result from inflation.

                        IV. DESCRIPTION OF BILL

    This resolution endorses provisions amending the Internal 
Revenue Code relating to the taxation of small businesses. It 
recommends allowing small business entities with gross receipts 
not exceeding $25 million to use the cash method of accounting. 
It also eliminates the restrictions on depreciating computers 
or peripheral equipment. The resolution also extends the tax 
deduction for the health insurance costs of self-employed 
individuals. The legislation requires inflation adjustments 
after 2015 to the dollar amounts of specified tax exclusions 
and deductions. It also modifies return due dates for 
partnerships, C corporations, S corporations, and other 
entities and reduces the required holding period from 5 to 3 
years for qualified small business stock and extends the 
rollover period for such stock.

                           V. COMMITTEE VOTE

    In compliance with rule XXVI (7)(b) of the Standing Rules 
of the Senate, the following vote was recorded on July 29, 
2015. A motion to adopt the Promotion and Expansion of Private 
Employee Ownership Act of 2015, a resolution to recognize the 
need for tax compliance reform in order to ease the 
disproportionate burden on small businesses, was approved, 
unanimously by voice vote with the following Senators present: 
Senators Vitter, Scott, Fischer, Gardner, Ernst, Enzi, Shaheen, 
Cantwell, Heitkamp, Booker, Hirono, and Peters.

                  VI. EVALUATION OF REGULATORY IMPACT

    In compliance with rule XXVI (11)(b) of the Standing Rules 
of the Senate, it is the opinion of the Committee that no 
significant additional regulatory impact will be incurred in 
carrying out the provisions of this legislation. There will be 
no additional impact on the personal privacy of companies or 
individuals who utilize the services provided.

                    VII. SECTION-BY-SECTION ANALYSIS

Section 101--Expansion of cash accounting threshold

    This section explains why cash accounting, as opposed to 
accrual, is a much simpler accounting method and is often 
utilized by small businesses. Cash accounting allows for 
flexibility, especially for retail stores dealing with cash. 
The accrual accounting method is more complicated and considers 
accounts receivable rather than money a business may have on 
hand. This section recommends extending the cash accounting 
threshold from $5 million to $25 million in order reflect 
inflationary changes and give businesses more options.

Section 102--Modification of safe harbor for expensing of acquisition 
        or production costs of tangible property

    This section states that a taxpayer electing to apply for 
de minimis safe harbor, is permitted to deduct certain amounts 
paid to acquire, produce, or improve tangible property for tax 
purposes provided certain requirements are met. The de minimis 
safe harbor election provides two threshold amounts: $500 for 
taxpayers without an AFS and $5,000 for taxpayers with an AFS. 
An AFS is a certified financial statement from a CPA that costs 
thousands of dollars and is traditionally something a smaller 
business does not have. Therefore, they are bound by the $500 
limit which is arbitrarily low, compared with the significantly 
higher $5,000 limit available to those companies who can afford 
an AFS. In increasing the limit to $2,500, small businesses can 
take advantage of de minimis safe harbor and they will not have 
to pay thousands of dollars for an AFS. In small businesses 
this more accurately reflects the costs associated with 
``acquiring, producing, or improving tangible property.''

Section 103--Removal of computer equipment from listed property

    This section eliminates burdensome record keeping 
requirements on business computer and communication equipment 
usage. The Small Business Jobs Act of 2010 eliminated the 
requirements for documenting business cell phone usage, but the 
law did not addressburdensome requirements on similar business 
communication devices and portable computers. With the merging of cell 
phones, computers, and cameras into single inexpensive devices, the 
remaining ``listed property'' reporting requirements and deduction 
limitations for business computers should be eliminated.

Section 104--Deduction for health insurance costs in computing self-
        employment taxes

    This section allows for the full deductibility for health 
insurance purchased by the self-employed. Self-employed 
individuals, unlike other businesses, cannot fully deduct the 
cost of their health insurance as a business expense. The issue 
arises when self-employed individuals have to pay the 15.3% tax 
on their employer-provided health insurance costs to which 
nobody else is subjected. Because individuals cannot deduct 
this as an ordinary business expense, the 15.3% payroll tax 
self-employed individuals pay on their premiums amounts to 
$1,940.04 in extra taxes that only the self-employed pay. The 
Small Business Jobs and Credit Act of 2010 allowed self-
employed individuals to fully deduct the cost of their health 
insurance from their self-employment taxes but for one year 
only.

Section 105--Modification of rules relating to the termination of 
        partnerships and S Corporations

    This section modifies the rules on the termination of 
partnerships and S Corps. Terminated partnerships for tax 
purposes are treated as a newly formed entity. In many case 
companies don't always realize they have to file a ``final'' 
tax return after the partnership termination, leading to 
companies misunderstanding the rules and having to pay 
penalties if they miss the deadline. This often serves as more 
of a trap for small businesses rather than a process to help 
prevent tax abuse.

Section 201--Inflation adjustments for certain provisions

    This section adopts a new inflationary standard that is an 
adjustment to the provision to numerous fixed limitation 
amounts in different provisions. Many of the IRS' business 
provisions and limits were established decades ago and have not 
grown to keep pace with inflation. This includes the gift tax 
limit of $25, which was passed in 1962, and if adjusted for 
inflation would now be $172 and the Employee Achievement Awards 
that have a $400 and $1,600 limit which have been the same 
since 1986. Other specific provisions include the ceiling of 
group-term limit insurance, exclusion for education assistance 
from an employer, and a deduction for contributing property or 
a vehicle. The inflation adjustments that are present 
throughout IRS statutes can have the opportunity to be 
standardized.

Section 202--Report on improvements to customer section

    This section directs the IRS to produce a report to the 
Small Business Committee no later than June 30, 2016 on 
specific ways and ideas to improve its customer service to 
small businesses and shorten its turnaround time for small 
entities. This idea report stems from the method of the IRS to 
catch small business centers in an act. Though it is very hard 
to attempt a change to an agency with this mentality, the first 
step is to signal to the public that the Congress is aware of 
the relationship between the IRS and small business community 
and is working to address it.

Section 203--Return due date modifications

    This section resets dates of certain business filings. For 
many small businesses, a delayed tax statement from an entity 
can result in a late tax filing thus incurring a penalty, 
requesting an extension, or attempting to rush the tax prep 
leading to mistakes which may lead to more penalties.

Section 301--Reduction in holding period for qualified small business 
        stock

    This section shortens the holding period under Section 1202 
to three years. The holding period to qualify for the reduced 
capital gains tax rate, which is a special incentive designed 
to help start-ups, under Section 1202 is five years. However, 
this tax incentive is supposed to encourage investments in 
startup company and five years' defeats that purpose. The 
regular long-term capital gains holding period is 1 year. 
Therefore, a more appropriate holding period for the tax 
incentive to invest in startups under Section 1202 would be 3 
years.

Section 302--Extend of Rollover Period for Qualified Small Business 
        Stock

    This section extends the Rollover Period on Qualified Small 
Business Stock from 60 days to 1 year. Section 1045 was 
designed to encourage investments in qualified small 
businesses. In Section 1045, a taxpayer is allowed to roll over 
their investment in a qualified small business stock into other 
qualified small business stock tax free. Section 1045 has a 
very short window in which to make the rollover investment: 60 
days. In many cases investors need time to transition 
investments from one place to another. Your typical angel 
investment takes months to find and is especially true for 
investors outside of large metropolitan areas.

Section 402--Findings

    This section shows findings that the Employee Retirement 
Income Security Act of 1974 (ESOP) has been successful in 
providing meaningful retirement savings for S Corp owners.

Section 403--Deferral of tax for certain sales of employer stock to 
        employee stock ownership plan sponsored by S Corporation

    This enables owners of S Corporations in addition to 
existing C Corporations to sell their stock to an ESOP.

Section 404--Department of Treasury Technical Assistance Office

    This directs the Department of Treasury to conduct outreach 
to inform companies and individuals about the possibilities and 
benefits of employee ownership of S Corps, while providing 
technical assistance to S Corps in sponsoring ESOPs.

Section 405--Small business and employee stock ownership

    This defines the terms ``ESOP'' and ``ESOP business 
concern.''
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