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WHAT IS WORKING: TAX INCENTIVES TO AID 

SMALL BUSINESS RECOVERY 

ROUNDTABLE 

BEFORE THE

COMMITTEE ON SMALL BUSINESS AND 

ENTREPRENEURSHIP 

UNITED STATES SENATE 

ONE HUNDRED ELEVENTH CONGRESS 

FIRST SESSION 

DECEMBER 3, 2009 

Printed for the Committee on Small Business and Entrepreneurship 

( 

Available via the World Wide Web: http://www.fdsys.gov 
(II) 

COMMITTEE ON SMALL BUSINESS AND ENTREPRENEURSHIP 

ONE HUNDRED ELEVENTH CONGRESS 

MARY L. LANDRIEU, Louisiana, Chair 

OLYMPIA J. SNOWE, Maine, Ranking Member 

JOHN F. KERRY, Massachusetts 

CARL LEVIN, Michigan 

TOM HARKIN, Iowa 

JOSEPH I. LIEBERMAN, Connecticut 

MARIA CANTWELL, Washington 

EVAN BAYH, Indiana 

MARK L. PRYOR, Arkansas 

BENJAMIN L. CARDIN, Maryland 

JEANNE SHAHEEN, New Hampshire 

KAY HAGAN, North Carolina 

CHRISTOPHER S. BOND, Missouri 

DAVID VITTER, Louisiana 

JOHN THUNE, South Dakota 

MICHAEL B. ENZI, Wyoming 

JOHNNY ISAKSON, Georgia 

ROGER WICKER, Mississippi 

JAMES E. RISCH, Idaho 

DONALD R. CRAVINS, JR., Democratic Staff Director 

WALLACE K. HSUEH, Republican Staff Director 
(III) 

C O N T E N T S 

OPENING STATEMENTS

Page 

Cravins, Donald, Democratic Staff Director and Chief Counsel, Senate Committee on Small Business .................................................................................... 1 

WITNESSES

Brumfield, Krystal, Democratic Tax Counsel, Senate Committee on Small 

Business ................................................................................................................ 1 

Hall, Keith, National Tax Advisor, National Association for the Self-Employed .................................................................................................................... 1 

Rys, Bill, Tax Counsel, National Federation of Independent Business .............. 1 

Stewart, Nikki, President, Capital Management Advisors, Inc., CMA Solutions and CMA Accounting Solutions, on behalf of Women Impacting Public 

Policy ..................................................................................................................... 2 

Villalobos, Jose, Senior Vice President, Telacu, Inc., on behalf of the New 

Markets Tax Credit Coalition ............................................................................. 2 

Koenig, David, Director, Tax and Profitability, National Restaurant Association ........................................................................................................................ 2 

Fletcher, Jeff, Corporate Controller, Appleton Papers, on behalf of Appleton 

Paper, the S Corporation Association and the Employee-Owned S Corporations of America ................................................................................................... 2 

Greenblatt, Drew, President, Marlin Steel Wire Products, LLC, on behalf 

of the National Association of Manufacturers ................................................... 2 

Berger, Matthew, Republican Economist and Press Secretary, Senate Committee on Small Business .................................................................................... 2 

Black, Kathleen, Republican Tax and Finance Advisor, Senate Committee 

on Small Business ................................................................................................ 2 

Calimafde, Paula, Chair, Small Business Council of America ............................. 2 

ALPHABETICAL LISTING AND APPENDIX MATERIAL SUBMITTED

Associated Builders and Contractors, Inc. 

Letter ................................................................................................................. 59 

Berger, Matthew 

Testimony .......................................................................................................... 2 

Black, Kathleen 

Testimony .......................................................................................................... 2 

Brumfield, Krystal 

Testimony .......................................................................................................... 1 

Calimafde, Paula 

Testimony .......................................................................................................... 2 

Cravins, Donald 

Testimony .......................................................................................................... 1 

Fletcher, Jeff 

Testimony .......................................................................................................... 2 

Prepared statement .......................................................................................... 42 

Greenblatt, Drew 

Testimony .......................................................................................................... 2 

Hall, Keith 1 

Koenig, Dave 

Testimony .......................................................................................................... 2 

Prepared statement .......................................................................................... 48 

Landrieu, Hon. Mary L. 
Page

IV 

—Continued 

Prepared statement .......................................................................................... 38 

Rys, Bill 

Testimony .......................................................................................................... 1 

Stewart, Nikki 

Testimony .......................................................................................................... 2 

Villalobos, Jose 

Testimony .......................................................................................................... 2 

Prepared statement .......................................................................................... 55 
(1) 

WHAT IS WORKING: TAX INCENTIVES TO AID 

SMALL BUSINESS RECOVERY 

THURSDAY, DECEMBER 3, 2009 

UNITED STATES SENATE, COMMITTEE ON SMALL BUSINESS

AND ENTREPRENEURSHIP, Washington, DC. 

The Committee met, pursuant to notice, at 10:07 a.m., in Room 

418, Russell Senate Office Building, Hon. Mary L. Landrieu (chair 

of the committee) presiding. 

Present: Senator Landrieu. 

OPENING STATEMENT OF DONALD CRAVINS, DEMOCRATIC 

STAFF DIRECTOR AND CHIEF COUNSEL, SENATE COMMITTEE ON SMALL BUSINESS 

Mr. CRAVINS. Good morning, ladies and gentlemen. We are going 

to go ahead and get started. I think we are still waiting on a few 

witnesses who are going to be coming in. My name is Donald 

Cravins, and I have the pleasure of serving as the Majority Staff 

Director for the Senate Small Business Committee. 

Senator Landrieu is going to be here in about 15 minutes, but 

she did want us to get started because she knows some of you have 

traveled and probably have flights and plans to get back. She wanted us to get started so we wouldn’t keep you around later than we 

had to. Thank you all for agreeing to participate. 

At this time, I am going to turn it over to our committee’s Tax 

Counsel, Ms. Krystal Brumfield. I also want to thank my colleagues on Senator Snowe’s staff who are here this morning. It is 

always good when you can work with people across the aisle and 

we do that very well on our committee. 

Krystal. 

Ms. BRUMFIELD. Good morning, everyone. Thank you again for 

joining us today to discuss these very important expiring tax provisions. We would first like to start by allowing you to introduce 

yourselves, so if we could just go around the room and just have 

a few words from you. 

Please, Keith. 

Mr. HALL. Thank you. My name is Keith Hall. I am with the National Association for the Self-Employed. We represent about 

250,000 of the smallest small businesses, micro businesses, and I 

am really happy to be here. 

Ms. BRUMFIELD. Sure. 

Mr. RYS. Hi. I am Bill Rys, Tax Counsel with the National Federation of Independent Business. We represent about 350,000 small 
2 

business owners, not just the micro businesses but all small businesses, and thanks for inviting us. 

Ms. STEWART. Hi. Nikki Stewart from Sarasota, Florida, representing Women Impacting Public Policy. I am also a CPA. I am 

looking forward to this. Thank you for inviting us. 

Mr. VILLALOBOS. Jose Villalobos with Telacu, a nonprofit Community Development Corporation based in East Los Angeles, and 

I am also an Executive Committee member of the New Markets 

Tax Credit Coalition, which represents over 150 Community Development entities involved in New Markets Tax Credit across the 

country. 

Mr. KOENIG. Good morning. I am Dave Koenig, Director of Tax 

and Profitability at the National Restaurant Association. We represent 945,000 restaurant and food service outlets in the country. 

Seven out of ten restaurants are single-unit operators, which 

means that the restaurant industry is really, for the most part, an 

industry of small businesses, and we really thank you for the opportunity to be here today. 

Mr. FLETCHER. Good morning. I am Jeff Fletcher. I am with Appleton Papers. I am the Controller for the country. We are an employee-owned S Corporation. We appreciate the opportunity to be 

here. 

Mr. GREENBLATT. Hi. I am Drew Greenblatt. I am the owner of 

Marlin Steel Wire. We make wire baskets in Baltimore City. We 

make 100 percent in the USA and we export all over the world. We 

have 29 employees and we are growing. 

Mr. BERGER. I am Matthew Berger. I am the Economist for Senator Snowe. 

Ms. BLACK. I am Kathleen Black. I work for Senator Snowe on 

the Republican Staff of the Small Business Committee and I am 

her tax and finance advisor. 

Ms. BRUMFIELD. And we have Paula, who just stepped in. 

Ms. CALIMAFDE. I am Paula Calimafde, Chair of the Small Business Council of America, and we represent the more stable, successful small business sector of the economy and we are thrilled to 

have on our advisory board some of the leading tax advisors, insurance folks, actuaries, and accountants in the country. 

Ms. BRUMFIELD. Well, welcome, everyone. We have a nice-sized 

group. I will briefly explain the format of the roundtable. If you 

seek to be recognized, please stand up your name card in such 

manner so that we will get around to everyone. I am looking forward to a very thought-provoking discussion, so let us get started 

with questions. 

[Pause.] 

Okay. We will start off with a very general question, and whoever would like to respond may. The first question would be with 

regards to the Alternative Minimum Tax (AMT). What would be 

the consequence of allowing the increase in AMT exemption 

amount to sunset? What impact would that have on small business 

owners? Anyone? 

Mr. Greenblatt. 

Mr. GREENBLATT. The AMT, the whole concept of it is not good 

because we have to figure out our taxes not once, but twice, which 

doubles the cost for tax preparation. I pay about 30-plus grand a 
3 

year—I am a little company—30-plus grand a year just to figure 

out my taxes. I do nothing fancy. I could instead hire an unemployed Baltimore City welder rather than figuring out taxes. It 

should be on a little postcard. Having a second tax system is very 

burdensome on us and wasteful. And then to increase the threshold 

is going to only add more taxes, and again, so we hire less people. 

Ms. BRUMFIELD. Okay. Bill? And we will work our way around. 

Mr. RYS. I don’t want to just keep hogging the time. Mr. 

Greenblatt is right, but I would like to add to that. Not only is it 

the increased amount of tax you are going to pay, but it is also the 

complexity issue. Small business owners face a heavy burden in 

terms of tax compliance. The cost of complying with taxes is 66 percent higher, on average, for a small business than it is for a large 

business. Tax complexity is a major problem. 

Every other year, we do a problems and priorities survey, and for 

the first time in the 2008 survey, we added tax complexity to a list 

of 75 possible issues. It ranked third. So this is a big problem for 

small business owners. 

I would also like to note, the AMT is not indexed for inflation, 

and that is a problem. But I would just warn that there are a number of bills moving through Congress right now that are also not 

indexed for inflation. So I would hope that we don’t fill the tax code 

with AMT time bombs—the estate tax, health care, payroll taxes. 

I would keep that in mind as you are moving other legislation 

along, as well. 

Ms. BRUMFIELD. Sure. 

Keith. 

Mr. HALL. I also agree. I think for particularly the smallest businesses, the micro businesses, complexity is a problem. I think just 

keeping up with the tax code, having AMT implications, having 

complications in even filling out the home office deduction form, 

makes it difficult for the smallest guy to even do the forms. And 

I think one of the things they end up doing is foregoing some of 

the deductions that they would normally have or be eligible for, 

like the home office deduction. 

And as AMT comes into play, they may not even recognize it is 

due. It puts them in a position of filing a tax return without the 

AMT calculations. It puts them in a position of getting the nice little letter from the IRS that they don’t like a year and a half later. 

So that causes additional problems. 

I think it also exacerbates those that are already in a tough situation, because the typical smallest person, the individual who is 

going to be affected by the AMT, is someone who has higher than 

average mortgage interest cost, or higher than average state income tax, for example. Those are some of the things that get left 

out of the AMT calculation. So somebody who may be in New York 

or California, already paying a bunch of state income tax, those are 

also the places that their houses are typically bigger, so they have 

more mortgage interest. So the people who get hit by it are those 

already being hit by higher taxes, also. So it is just not only the 

complexity, it is those that are affected by it just seems even more 

unfair. 

Ms. BRUMFIELD. Sure. 

Paula. 
4 

Ms. CALIMAFDE. Well, I think it hits small business harder than 

anybody, really, because many small business entities are what is 

referred to as pass-through entities, which means the business income is part of the owner’s income, and AMT, in effect, is sort of 

a system that takes away all the deductions and says, figure out 

your tax and here is the rate. If that is higher than what you 

would have had to pay otherwise, well, go to it. You get the higher 

tax rate. 

So it is hitting the small businesses much harder than, for instance, a regular C Corporation with a larger business. So it is, in 

some senses, a very hard-hitting issue for small business, as is the 

increased tax rates that are supposed to hit next year. It is the 

same issue because of the pass-through entity. 

Ms. BRUMFIELD. Jose. 

Mr. VILLALOBOS. The AMT puts the New Markets Tax Credit at 

a competitive disadvantage with other tax credits because the New 

Markets Tax Credit is not exempt from the AMT. And in last year’s 

economic recovery bill, the Low-Income Housing Tax Credit and the 

Historic Tax Credit received exemptions from the AMT. So now as 

we go into the marketplace to try to attract investors for the New 

Markets, we have to compete against others that have an exemption. The New Markets Tax Credit has been critical in terms of getting capital into underserved low-income communities. A lot of that 

is targeted directly to the benefit of small businesses in underserved communities. 

We would propose that the New Markets Tax Credit actually be 

exempted from the AMT, similar to the LIHTC and the Historic 

Tax Credit, and such an exemption actually was included in last 

year’s recovery bill, economic recovery bill, in the Senate bill, but 

was dropped in conference. 

Ms. BRUMFIELD. Keith, response? 

Mr. HALL. I don’t know if I get to say twice. I will use Jeff’s, 

since he isn’t here yet. 

[Laughter.] 

Ms. BRUMFIELD. Just this time. 

Mr. HALL. We are not actually talking here about getting rid of 

the AMT or having everyone who is currently affected by the AMT 

exempted from the AMT. This is just the exemption amount changing. So the people that are going to be affected by allowing this provision to sunset are only going to be the smallest people anyway, 

the people who have that level of exemption. The richest people, 

the people that the AMT was targeted at to begin with, won’t be 

affected by this sunset provision. It is only the smaller people with 

the lower level of earnings that are even going to be affected by allowing this provision to sunset anyway. 

Ms. BLACK. To follow up on that, and Paula started the conversation on pass-throughs and tax rates in general. Today, the President is holding a Jobs Summit on a lot of important questions Congress will ultimately have to consider. Small businesses will in 13 

months have to contend with another major set of expiring provisions, including individual tax rates. As pass-through entities, 

small businesses will be subject to higher tax rates 13 months from 

now. I would like to get an idea from representatives of the business community or small business owners about your planning 
5 

cycle. Looking at this wall of new taxes that you are going to be 

facing, a year from now, I’d like to know what that means to you 

for planning and what that means to you for retained earnings and 

the ability to reinvest in your businesses. 

We will start with Nikki. She has got the first one up. 

Ms. STEWART. Yes. Hi. I guess as a general comment with this 

issue, the question that you just raised as well as the AMT and 

going into the estate tax issue, as a financial planner, my world 

gets very complicated because it seems like there are continually 

changing amounts that we have to worry about for our clients. 

For instance, the estate tax. As we all know, next year it is re- pealed and then it goes back to $1 million. There are so many planning issues that we have to deal with. It would be so nice, in a perfect world, to have consistent values for us, because—and again, it 

goes to the tax rates, as you mentioned, and a year or so from 

now—most of the complaints I get from my clients—again, they are 

all small businesses. They pay a lot of money to get their taxes 

done. I think a lot of that complexity could be changed if we could 

just come up with something that we all know we can plan on year 

after year. 

Mr. GREENBLATT. This is really important. We export to 27 countries. I compete with factories in Germany, France, Taiwan. These 

countries have lower taxes than I do. You are putting us at a massive disadvantage with our current taxes, because what is happening is when I compete against Germany, if I lose, I have less 

work for my guys, so I need to hire less people. If I win jobs, I hire 

more guys. Baltimore City unemployment will be impacted by your 

decision here. 

If you lower my taxes, I will win more jobs. And if you raise my 

taxes, I will lose more jobs. So I recommend making our tax rates 

very competitive with our competitors, like lower taxes than 

France. We should also have lower taxes than Germany, and we do 

not now. We have higher tax rates than socialized countries, and 

this is really hurting us. 

Mr. RYS. Mr. Greenblatt, again, is exactly right. Seventy-five percent of small business owners are pass-through businesses. This 

means they are paying their tax at the individual level. Those expiring tax rates—the individual rates, the estate tax, Section 179— 

are a concern. 

We do a monthly small business economic trend survey. We ask 

small business owners in the survey—and I will say that the survey is at some of its historic lows, especially in terms of lost sales, 

which is the biggest problem. There is just no business. But we 

asked the question, is this a good time to invest in your business, 

and the overwhelming answer was no. The number one reason 

given for the last—economic conditions. 

For the last four months, the number two reason, and it has been 

in double digits, hovering between 15 and ten percent, is the political climate. Small business owners don’t know what the rules of 

the game are next year. They don’t know what their health care 

costs are going to be. They don’t know what their energy costs are 

going to be. They don’t know what their tax costs are going to be. 

And they are not seeing a tax increase at the end of next year. 

They are seeing a tax increase today, because unemployment taxes 
6 

are going up. The State of Hawaii increased their unemployment 

taxes by 1,000 percent. That is not an environment to increase job 

creation. 

Ms. BLACK. What was the number on the unemployment tax increase? I mean, was it some fraction that went up? 

Mr. RYS. Well, Hawaii is kind of an odd state because they have 

had some changes in their unemployment system, but the percent 

overall is somewhere around 100 percent. But we have seen Maryland announce that they are going to increase their taxes. Maryland is on a schedule. They go from a Schedule A to a Schedule 

F. They were on Schedule B this year. They are going to move to 

Schedule F next year to try to replenish their trust fund. 

We have got to figure out a way to try to deal with it. I mean, 

we have got to make sure these unemployment benefits are available, but the people that are paying those benefits are small business owners. So the same people we are saying create a job are the 

people that are paying for these benefits. So, somehow, we have got 

to come up with a system that is going to work to address that 

issue, especially when we are going through such a rough economic 

patch. 

But in terms of the individual rates, it is very important that 

those are extended and done quickly, being that they expire at the 

end of next year, for planning purposes. This should just be across 

the board. You know, we have heard this $250,000 number. We 

have done some surveys. We have done some research on this. We 

have asked business owners, how much money do you make, and 

when we ask business owners with 20 to 250 employees, more than 

30 percent of those business owners made $250,000. Those businesses account for more than one-quarter of the American workforce, 28 percent. Between 2001 and 2006, those businesses created 

two million jobs. If you want to create jobs, make sure those tax 

rates stay low. 

Ms. BRUMFIELD. Well, we will take a moment. Senator Landrieu 

has just arrived and we would like to have her opening statement. 

Chair LANDRIEU. Were you in the middle of anything? 

Ms. BRUMFIELD. We were just—— 

Chair LANDRIEU. Go ahead and continue. 

Ms. BRUMFIELD. Okay. I think, Keith, you were next. 

Mr. HALL. Thank you. I do agree with these guys, and I know 

it is very complicated. With all due respect to France and Germany, I would not trade places where I live. Obviously, it is expensive and it is complicated to maintain all the services that this 

country provides for us, and I am proud, and I know we all have 

to pay our fair share. 

I guess that is the point I want to make as it relates to small 

businesses, because the individual tax rates—we are talking about 

pass-throughs—most small businesses, particularly the micro business owners, pay their tax at the individual level. Allowing those 

provisions to sunset, to go back to a different set of rates, represents a tax increase on small businesses because that is where 

they pay their taxes. 

And I think the idea for small business, the request is, just let 

small business be on the same playing field with big businesses. Allowing most of these provisions to sunset—we talked about that 
7 

AMT provision sunsetting. That is only going to affect the smallest 

people, not the richer people. The access to the Section 179 deduction, bonus depreciation, all those things provide timing for cash 

flow investments into small business. The people who have the 

most difficulty with their cash flow management and determining 

whether or not to invest in their business are the smallest businesses. Access to capital, decreasing some of the hurdles to getting 

new capital. Most of those things affect the bigger businesses, not 

the small businesses. 

So allowing all of these things to expire really just continues to 

be an inequity as it relates to small business compared to big business, and I think that is the key to the individual rates, because 

that is where we pay our taxes. 

Ms. BRUMFIELD. We have a—I am sorry. 

Mr. KOENIG. As I mentioned at the outset, representing the restaurant industries, seven out of ten restaurants are single-unit operators, which means we clearly are an industry of small businesses. To the issue that Kathleen asked about, individual rates, 

clearly, we are hearing from our restaurateurs and entrepreneurs 

about the uncertainty with regard to the expiration of the individual rates. But again, that almost looks like a long-term problem 

for them vis-a-vis the expiring tax provisions coming up by the end 

of the month. 

Things of importance for the restaurant industry, which I see we 

will talk about later, include Section 179, and even more significant 

than that, a provision on 15-year depreciation for restaurants, retail, and leasehold improvements. If that is allowed to expire at the 

end of December, we revert back to a 39-year schedule, which in 

reality just does not measure the economic benefits of putting up 

a new restaurant. So the rates are very important and we hear 

about that from our members from a planning standpoint. Obviously, if we can get through being able to extend some of these important provisions that are expiring at the end of 2009, hopefully, 

we will be able to do the same on the rates in 2010. 

Ms. BLACK. Matthew has a follow-up before we move on. 

Mr. BERGER. I just wanted to ask about the House’s proposal to 

raise the top marginal tax rate by 5.4 percent to pay for their 

version of health care legislation. Combined with the expiration of 

the 2001 tax cuts, that would take the top marginal rate up by 28.7 

percent, from the current 35 percent to 45 percent. While it is not 

clear that this will occur, because there are miles to go before we 

get to a conference report on the health care legislation, with a 10.2 

percent unemployment rate and unemployment expected to be very 

high for at least the next couple years, what would that do to job 

creation? Put another way, how would that affect a business on the 

ground? Drew. Bill. 

Mr. GREENBLATT. It is very bad. We compete with—— 

[Laughter.] 

Germany and France and their tax rates are lower than my tax 

rate. So when I export to Europe or when I export to Asia, I am 

competing against very ruthless competition who has very low 

prices. So when you raise my taxes high, I win less jobs. When you 

cut my taxes, I win more jobs. I have a factory in Baltimore City. 

I make everything in Baltimore City. If you help me be more com-
8 

petitive, I am going to hire more people in Baltimore City and unemployment will go down and the economy will get stronger. By 

raising the burden for me, it is very challenging for me to beat the 

Germans or to beat the Japanese, and I want to. 

[Laughter.] 

Ms. CALIMAFDE. Could you be a little clearer for us? 

[Laughter.] 

Mr. BERGER. Bill. 

Mr. RYS. I am going to take a little different position than what 

Mr. Greenblatt did. It is very, very bad, because it isn’t just—— 

[Laughter.] 

It is not just the Federal rate and it is not just that 5.4 percent 

surtax. It is your state taxes. It is your local taxes. It is your property taxes. It is the payroll taxes, the unemployment insurance. 

You start stacking those and we are starting to talk about an effective tax rate on a pass-through business that is pushing towards 

60 percent. That is confiscatory. That is not good tax policy. 

And to get to the point of international competition, as well, we 

have heard this about the—especially in regards to the lower corporate tax rate, reducing it to 25 percent to be more on par with 

other countries, you know, the second-highest corporate tax rate in 

the country—but think about what kind of disparity you create if 

you have a 25 percent corporate rate and a 40 percent or higher 

individual rate. You are basically telling the successful passthrough business that you are going to pay ten percent more—or 

more when you start stacking on state taxes and payroll taxes— 

than what a C Corporation is going to pay. That puts those small 

businesses in an unfair advantage. 

There has been tremendous growth in things like S Corporations 

and pass-through businesses. In 1978, there were a half-a-million 

S Corporations and partnerships. There are now three million. We 

tax more business income at the individual level than we do at the 

corporate level. A lot of businesses run through those corporate levels. 

If you had that kind of disparity in the rates, you are also creating a new planning nightmare, just as we talked about complexity. There was a provision in the code called 341(e), a collapsible corporation. When we talk about complexity, there was a sentence in Section 341(e) that was twice as long as the Gettysburg 

Address. 

[Laughter.] 

If you have tax rates that are that disparate between the two, 

you are going to go back to having to come up and plan that way 

and come up with 341(e) again to make sure that we don’t have 

that type of planning, dumping the money into a corporation to 

avoid the higher individual rates. We don’t need a tax provision 

twice as long as the Gettysburg Address. 

Mr. HALL. We may be overbudget on the ‘‘very’’s in front of bad, 

so I won’t use it, but obviously, increasing tax rates make it more 

difficult to invest in your business. It obviously takes cash flow out 

from other options, whether that be new infrastructure, new business, or new jobs. So of course, increasing tax rates like that are 

going to make it more difficult to create jobs, except maybe with 

the IRS enforcement staff. They could have more jobs there. 
9 

The thing that I want to keep reiterating, though, again, I recognize that it is a tough job you guys have in allocating what we are 

going to pay for and then how to pay for it. That is extremely complicated. Nobody is going to stand up and say, I am for a 45 percent marginal tax rate. But there are choices out there that we are 

going to have to make and figure out how to pay for it. 

The NASE always points out that let us do what we need to do 

and let us pay for it, but let us make sure that it is fair. One of 

the things we like to talk about is the equity for our small business—I forget the name of it, but it is S. 725, which basically allows the small guy to deduct their health insurance premiums. Expanding the definition of employee under HRA plans. If we are 

going to put this health care out there, basically mandate that people have the coverage, the request is, at least let everyone have the 

opportunity to pay for their premiums pretax, and I think that goes 

back to if we are going to have to increase taxes, if we are going 

to have to pay for things, let us at least have the level playing field 

for small business so that we can have the same opportunity as big 

businesses do. 

Ms. CALIMAFDE. Well, when Keith just said, allowing small business owners to be treated as employees, I couldn’t let it go without 

bringing up the cafeteria plan proposal, where in cafeteria plans, 

right now, small business owners, whether they are LLC members, 

partners, Sub-S stock holders, are not allowed to participate in a 

cafeteria plan, which means that only the larger entities get to provide these really good benefits. A cafeteria plan in the government, 

you all know what it does. Everybody gets to have one but small 

business. The smallest of the small businesses does not get to have 

a cafeteria plan. It makes no sense, particularly when a lot of the 

state laws are now mandating companies to have cafeteria plans. 

So I just wanted to jump on what you were saying, and it goes all 

the way to cafeteria plans, as well. 

Ms. BLACK. And that is one thing that we have begun to address 

in the Senate health care bill. There are a couple of glitches that 

we are still working through on technical drafting with respect to 

this issue, but it is something that I know Senator Snowe has 

worked on at the Senate Finance Committee, and we, as staff, are 

continuing to work on as we move forward with the health care reform bill. 

Ms. CALIMAFDE. I think Senator Snowe has done such a tremendous job in this area, but as you know, there seems to be this 

thought that small business owners are somehow going to treat a 

cafeteria plan different than everyone else, which is just—you 

know, to keep running into this kind of—it is almost discrimination 

against small business owners, I think, in the tax code, and I don’t 

understand it. 

Chair LANDRIEU. Let me just say, that is why we are here, to try 

to fix as much as we can. We are making great efforts in the health 

care bill on the table with the help of Senator Snowe to provide robust exchanges and tax credits for health care, because it is one of 

the issues besides high taxes. 

Please explain a little bit more to me about the cafeteria plans 

and why this has not come up in any of the health care discussions—and maybe it has. Maybe the staff can clarify it. You are 
10 

talking about health care benefits for small business. There is a tax 

provision in this for the smallest of businesses, 25 employees or 

less. That would be the very small businesses. They are going to 

get 35 percent off the top in addition to your deduction cost against 

any health care cost that you would provide. Is that not covering 

your concern? 

Ms. CALIMAFDE. No. Do you want me to answer, Kathleen, or—— 

Ms. BLACK. Yes, go ahead. 

Ms. CALIMAFDE. Okay. You know, the cafeteria plan, I don’t 

know what it is called in the government. What is the name of it? 

It is the plan where you are allowed to pick and choose between 

benefits. So if you need more disability, you pick that up. If you 

need more life insurance, you pick that up. There is usually a 

Flexible Health Care Spending Account. There may be a Dependent Care Account. So that is under this umbrella cafeteria plan. 

Ms. BLACK. At the Federal level, we have got the Federal Thrift 

Savings Plan, but it is a la carte. It is not really a cafeteria plan 

in that sense. 

Ms. CALIMAFDE. Right. Okay. 

Chair LANDRIEU. We don’t have a cafeteria. I mean, I am sitting 

here thinking—— 

Ms. BLACK. Correct. 

Chair LANDRIEU [continuing]. Do I have one—— 

Ms. BLACK. No. 

Chair LANDRIEU [continuing]. And not know about it? 

[Laughter.] 

I don’t think we do. 

Ms. BLACK. No. 

Chair LANDRIEU. That is what I am saying. I mean, we have a 

health insurance plan, which is called the Federal Employees 

Health Benefit Plan. 

Ms. BLACK. Yes. 

Chair LANDRIEU. And Federal employees in every state have 

choices, which is what we are trying to accomplish in this health 

care bill, to provide every small business in America with those 

same choices, is the idea of this bill. I do know that New York has 

the most choices, of 34 plans, and Rhode Island has the least number of choices at 14 plans. 

So our vision on this health care bill, which looks likely to pass 

before Christmas, is going to hopefully provide that same sort of 

opportunity in every state. And if you are a small business of 25 

people or less, which is the smallest of the small, we are working 

right now with Senator Snowe to substantially increase the credit 

that came out of the Finance Committee on the Senate side. 

Whether we can achieve that or not, I don’t know. 

Ms. CALIMAFDE. Senator, what you are talking about—— 

Chair LANDRIEU. So tell me about—— 

Ms. CALIMAFDE [continuing]. Is like the huge part of the health 

care bill and is critically important, and having choices for small 

business with different insurance companies, insurance reform is 

critical. The SBCA, for instance, is not in favor of the public option. 

There are certain things in that bill that get us incredibly nervous. 
11 

But we are talking about a piece of that bill. For instance, as a 

Federal employee, if you don’t—does the government pay for the 

entire health insurance premium? 

Ms. BLACK. No. 

Chair LANDRIEU. No. 

Ms. CALIMAFDE. So the portion that you pay, is that pretax? 

Ms. BLACK. Sure. 

Ms. CALIMAFDE. Well, then that is your cafeteria plan, and it is 

that piece that is—for a small business owner, it is not allowed—— 

Chair LANDRIEU. Paying that piece pretax is what the equity 

would be? 

Ms. CALIMAFDE. That is part of the cafeteria plan and owners are 

not allowed to—— 

Chair LANDRIEU. I am going to ask the staff, since this bill is still 

open. I am going to ask the staff to gather—the joint staff here to 

help present an idea to Senator Snowe and I that we could get that 

fixed potentially in this health care bill. 

Ms. CALIMAFDE. That would be great. 

Chair LANDRIEU. We would like to do that, if we can, because 

once this bill closes—not that there won’t be other health care bills 

that will allow us to address it—but while we are at it, if you all 

think this is a big issue, maybe we can take care of this now. 

Let us go to Ms. Stewart. 

Ms. STEWART. Yes, and in addition to that, too, one thing that 

you probably should look at in the health care, when it talks about 

tax credits, as an S Corporation, there are different rules there and 

when you can take a dollar-for-dollar tax credit versus a C Corporation. And so it may look like if they—with the bill, it may look 

like it is going to be good for us to be mandated to have these 

health care plans, but as an S Corporation, I may not get the same 

benefit as the C Corporations do. So I think that is something that 

you need to look into, as well. 

And again, that goes to the parity issue. As a planner, I have to 

take a lot of time with my clients to decide if we want to be an 

S Corporation, if we want to be a C Corporation. We have always 

gone the S Corporation route because it has been easier for us from 

a tax perspective. Obviously, if the tax rate is going up, that is not 

going to be the case. So what that means is they go back to being 

a C Corporation, which means double tax returns and more expense. Yes, there are good things about the S Corporations because 

of the benefits that we can get, but if we could have that available 

to the S Corporations, I think that would solve a whole lot of problems for us as small businesses. 

Chair LANDRIEU. The one thing, and then I would like to go to 

this side for the next question, is the concept of, or part of what 

is driving this health care bill is based on the testimony of small 

businesses, is not to put an employer mandate, but to have in its 

stead an individual responsibility for individuals in the country to 

have health insurance, because if we don’t get more people into the 

pool, those businesses that do provide insurance just keep paying 

more and more and more. So the idea is to push as many people 

into insurance and try to make it as affordable as possible for individuals and small businesses so that you are not out there in a 

dog-eat-dog market, which is what you are right now, kind of on 
12 

your own as a small business, trying to find quality plans that are 

out of reach and very expensive. That is sort of the concept. 

But I am going to ask the staff to look at the differences based 

on that between S Corporations and C Corporations and see if in 

some of the amendments that we are filing we couldn’t sharpen 

that up a little bit. 

Was it your turn for questions? 

Ms. BRUMFIELD. Sure. In the interest of time, we would like to 

move on to another topic. I think everyone who just spoke in this 

round mentioned something about planning. So we would like to 

talk about estate planning and the effects of extending the current 

rates and exemptions temporarily versus permanently and what effect that would have on small businesses. 

Chair LANDRIEU. Nikki, we will get you first. 

Ms. STEWART. Again, as I said earlier, as a planner, and I have 

been doing this for 25-plus years, it is not easy to try to plan for 

estates with my clients, high-net-worth individuals, because we 

never—at least for now, we don’t know what that rate is going to 

be. Do we get life insurance to cover it? Do we do all kinds of 

trusts? What do we do? 

I think that, in general, for us as a planning community, it would 

be a lot easier if we decided to make it a $3.5 million exemption. 

Then let us make it that and let us leave it at that, because that 

way, we can plan for 5-, 10-, 15-year dynasties with the families. 

Otherwise, there is no way that we can decide every year how 

much life insurance to buy, what kind of trusts. It gets into a lot 

more complex issues. 

So, personally, I don’t think—repealing it would be great. I don’t 

think that is going to happen. I do think that we should come to 

a level that we can all agree on and let us leave it at that and have 

some consistency. 

Chair LANDRIEU. Does anybody else agree or disagree? Go ahead. 

Ms. CALIMAFDE. The SBCA largely agrees with that. We had 

hoped that we could deliver the 30-second sound bite, ‘‘repeal estate taxes,’’ which sounds good, and it is much sexier when you get 

to ‘‘kill the death tax.’’ That is really great. 

Unfortunately, we have about 100 experts in our organization 

that actually read tax laws and read tax regulations which causes 

us not to be able to say the 30-second sound bite, and the reason 

why is that, when we discovered that carryover basis came into the 

fore when you repeal estate tax and you lost step-up in basis, and 

the amount of carryover basis and step-up basis that came in with 

repeal, we found that, in our estimation, many, many small businesses were better off under the 2009 estate tax law than they 

would be under repeal. And I think the numbers have now come 

out to about 70,000 small businesses fall in that category. 

Unless you know what a step-up in basis is and a carryover basis 

and what the estate tax exemption means, it is just mumbo-jumbo. 

If you know that, you can hone in on it, and what it really means 

is if a small business owner today has $3.5 million of assets when 

he or she dies, there is no estate tax and the heirs receive that entire $3.5 million of assets with a step-up basis, which means they 

get it valued as of date of death. If there is a spouse, that num-
13 

ber—if there is proper estate planning, that number comes up to 

$7 million. 

So you would say, well, repeal should be repealed, except it was 

written so that carryover basis came in, which meant when an heir 

received the assets, they received the assets at the value that the 

owner, the cedent, actually had those assets. So if you are dealing 

with an 85-year-old, let us say, gentleman who has a dry cleaning 

store and he has owned it for 50 or 60 years, now somebody has 

to figure out, well, what did he pay for that dry cleaning store? 

And assuming anybody could even find those records—and by the 

way, this repeal of step-up happened a long time ago and never 

even came into law because estate planners throughout the country 

were saying, this is impossible. So by 1980, it was already repealed. So we have gone down this road. We know it doesn’t work, 

but here we are again. 

Chair LANDRIEU. I don’t think we are going to propose that. 

Ms. CALIMAFDE. Good. Good. 

[Laughter.] 

So it—— 

Ms. BLACK. Those who don’t remember the past are condemned 

to repeat it. 

Ms. CALIMAFDE. Yes—— 

Chair LANDRIEU. Kent Conrad reminds us enough, so it is not 

going anywhere. 

Ms. CALIMAFDE. Good. Well, I actually have some comments out 

on the table and it really sets out that a single person with assets 

of more than $1.3 million and less than $3.5 million is actually better off with extending the 2009 estate tax law permanently. And 

in the case of a couple, it would be those with assets of up to $4.3 

million and less than $7 million do better with the 2009 estate tax 

law. And those numbers encompass a huge amount of small business owners. 

So that is why, when we actually went to the law and read it 

and were actually shocked to find out what had happened with the 

carryover basis and the step-up in basis, we are definitely in favor 

of 2009 extending permanently. But if we had our druthers, that 

is what we would want this year. Next year, we would want to 

come back and say, let us bring that $3.5 million and index it. Let 

us put in portability. Let us strengthen 6166. Let us reunify gift 

and estate tax. There is a lot more to do, but it is not going to be 

done on December 3. 

If nothing is done, we end up with repeal and then a horrible situation in 2011 with a $1 million exemption. And if you do a oneyear extension, we are back to the problem Nikki is talking about 

where planning—everybody—all these small business owners have 

to keep this cadre of estate planning attorneys going on, which is 

just a waste of resources. 

Chair LANDRIEU. First of all, let me just comment. I think we are 

going to be able to work through this over the next year or year 

and a half. Our problem is we have to come up with something 

pretty quickly, before the end of this year. 

So if you all can—all these comments are wonderful and I really 

do want to get Bill and Drew to comment on this, but as simply 

as we could fix it for the next year and then we could come back 
14 

and try to do a permanent, very simple, clear fix, so everybody can 

forward for the next several years or decades understanding what 

the liability is going to be. 

Bill. 

Mr. RYS. Well, you know, at NFIB, we have always supported 

full repeal as the best solution. But short of that, we have supported something along the lines of the Lincoln-Kyl Amendment 

that was in the budget last year, which was a $5 million exemption 

and a 35 percent rate. We think that is fairly generous, provides 

a substantial amount of protection. 

But in terms of permanency or certainty, that is a very important thing to keep in mind with this because of the constant need 

to plan, and as Paula said, the issue of stepped-up versus carryover 

basis is very important, and I will spare the history lesson, which 

was 1976. It was repealed in 1978, before it ever got put in place. 

But when you think about business, we have a member who I 

talked to yesterday. They own a farming business out in California. 

They bought another business in 1971 and that business was started in 1852. There have been a few transactions in the last 157 

years. I would assume that it would be difficult to track the basis 

of those assets, so carryover basis does become difficult, especially 

when you get to an older business like that. 

Chair LANDRIEU. Drew. 

Mr. GREENBLATT. This tax is not right. Every year, we pay 35 

percent, year in, year out. If I own the company for 20 or 30 years, 

I will be paying 35 percent year in, year out. And then, when I die, 

my family has to pay whatever the number is, 40, 50 percent. This 

is patently wrong. We shouldn’t have this tax. 

So how do we handle it? We have it now. How do we handle it? 

Well, we pay premiums. We hire an insurance company. We make 

an insurance company rich because I don’t want to give my wife 

a $1 million or $2 million tax bill the day I die. I mean, the day 

I die, hopefully, that will be the biggest issue. But the second biggest issue—— 

[Laughter.] 

Chair LANDRIEU. She might miss you, you know. Might. 

Mr. GREENBLATT. So to defend my wife, I have to pay premiums, 

and I am making an insurance company rich. I am not hiring people in Baltimore City. So this is counterproductive. It is not good 

for our economy. 

Chair LANDRIEU. Okay. Can I take this moment to turn this over 

to this team for the next question, but to thank you all very much. 

I am sorry I was a little bit delayed. I had a meeting that went 

a little over and then a blockage out on the street, which happens 

occasionally around here. But anyway, I have got to slip out for another meeting, but this will continue until 11:30. 

I am very pleased, as the Chair of the committee, to continue, I 

think, the tradition that Senator Snowe and Senator Kerry both 

used, to have these informal roundtables to really provide voice for 

small business. That does really get overlooked, I think, in many 

instances, sometimes intentionally and sometimes not. 

We want to give voice to small business, so as we move to the 

end of this year for the tax extension, we can give as much relief 

as possible. And as we look forward to building out of this reces-
15 

sion, we can develop policies that really support and honor the entrepreneurial spirit of these small businesses, of all of you and the 

people that you represent, the people that we represent, as well. 

So I am going to slip out and leave you in the good hands of 

these very able staffers, and I thank all of you very much. 

Ms. BLACK. We will do one more final wrap-up on estate tax and 

then we will perhaps move on, unless anybody else wants to keep 

going on estate tax for a little bit. 

Ms. CALIMAFDE. Well, I just wanted to mention, Drew, if it is any 

consolation, you get $7 million under the 2009 estate tax law free 

of any estate tax. So you might get hit with state estate tax, but 

at least you get $7 million off the top before you get hit with a dollar of estate tax. 

But what I wanted to say was if the choice which I think this 

year this choice is, a permanent extension of 2009 or a one-year extension of 2009, the permanent extension is only about 8,000-trillion times better than a one-year extension. The one-year extension 

just sets us up for another fight next year. It sets us up for the 

2011 $1 million, 55 percent tax rate with a little five percent bubble sitting in there, so you actually get to 60 percent at some point. 

I mean, to me, it is like if there is anything that you all can do 

to help us get a permanent 2009 estate tax level this year, it would 

be fabulous, and then let us put in the good fight next year, but 

at least start with the 3.5 and the 45 percent tax rate rather than 

running into 2011, where we are going to be fighting against a $1 

million, 55 percent tax rate. 

Ms. BLACK. Dave. 

Mr. KOENIG. I would just say briefly that, as we know, the House 

is going to take up permanent extension of the estate tax today and 

likely pass with the parameters of the $3.5 million exemption and 

a 45 percent rate. While we all agree that a permanent solution is 

necessary, I know from our organization’s standpoint, and I know 

there is a lot of support in the Senate and even among some members of the House, I would argue that if you are going to do either 

a permanent or one-year extension, that a better alternative would 

be the 35 percent rate and the $5 million exemption that has been 

discussed. 

Ms. STEWART. Just one more last comment. Something that 

Paula said that I didn’t speak to, which is very key, is the stepup versus carryover. I can tell you, with my experience, it was an 

absolute nightmare to go back and try to find what cost basis is 

on all kinds of things. So just for what that is worth. 

And also, I do also agree with her that I think it should be a permanent $3.5 million exemption rather than going to a one-year and 

then having to start all over again. 

Ms. BLACK. And just so that we have this on the record, which 

then gives us ammunition as we are going out and discussing these 

issues with our colleagues and our bosses are working with their 

colleagues, for the nightmare that is a carryover basis situation, if 

you can’t prove what your basis is in a business, what ends up happening? What basis does the inheritor of a business receive? 

Ms. CALIMAFDE. Zero. 

Ms. BLACK. And you get taxed on the entire amount. 
16 

Ms. STEWART. And that is just not fair. I mean, that absolutely— 

so, yes, you are correct. It would be a zero. 

Ms. BLACK. And it is—— 

Mr. GREENBLATT. And high legal fees. 

Ms. BLACK. And huge legal and accounting fees for doing some 

sort of forensic accounting of what this was worth so that you can 

try to prove the price for which dear old Granddad bought the business. 

Ms. STEWART. And that is a very good point, because what happens is you end up spending so much time and paying so many 

people to go back through and find all this stuff, and all the legal 

fees and everything else, the government and everybody else is a 

lot better off just taking it as a step-up, because it is a lot easier 

to track from there forward. 

Ms. CALIMAFDE. The burden is on the taxpayer to prove basis, 

and that is why, when repeal went through, it sounded terrific, and 

it wasn’t until folks really read the law that they realized that carryover had taken the place of the step-up. 

Ms. BLACK. Right. 

Mr. HALL. And obviously, it is complicated. I mean, regardless of 

where you go, it is still complicated. And to Drew’s point, I think 

the main issue here is providing a permanent answer so that people can plan. If you are covering your potential liability with a 

health insurance policy and then we wake up one year with dramatically different levels, then do you have to go back and change 

what your whole plan is? Are we going to have to redo that every 

year? So providing—regardless of 45 or 35, $5 million or $3.5 million, I think the key is a solution that puts people in a position to 

be able to plan. 

Ms. BLACK. Thank you. It is fabulous to have all of that out there 

on record, because I don’t know that we have had this examination 

of what is carryover versus stepped-up and it is really important 

for us to have had this on record. 

Mr. BERGER. The only other question I had as we consider the 

estate tax pertains to marriage and the exemption level. We had 

a hearing in the Finance Committee not that long ago, and one of 

the issues that was discussed is what about just making it a 

straight-up $7 million exemption or a straight-up $10 million exemption so that people don’t have to go through the rigmarole of 

when one spouse dies, then you get the next $3.5 or the next $5 

million, down the line. Is that something that is important as you 

plan, or are other things more critical? 

Ms. BRUMFIELD. Paula? 

Ms. CALIMAFDE. I just wanted to give someone else a chance. Are 

you talking about the portability provision—— 

Mr. BERGER. Yes. 

Ms. CALIMAFDE [continuing]. Which is really a great provision. 

The portability provision would—let us use $3.5 million, but I am 

hoping one day it will be $5 million, but let us say it is $3.5 million. Each spouse has their own $3.5 million, and if the first spouse 

doesn’t use up all their $3.5 million, the surviving spouse gets to 

keep whatever they didn’t use and apply it to the estate tax assets. 

What it really means is that you don’t have to have proper estate 

tax planning, and it means that, if you didn’t end up with an ex-
17 

emption trust or a bypass trust in your will, you didn’t lose the entire tax credit exemption amount on the first spouse’s death. So it 

is a terrific provision. I was surprised to hear that it has not been 

deemed much of a revenue loser. I don’t know how we got to those 

numbers, but I was glad to hear that. A terrific provision. 

By the way, reunifying gift and estate tax system is really important, as well, because right now, in anticipation of repeal, they 

pushed the systems apart and you can only make a gift up to $1 

million during lifetime, even though you can give away $3.5 million 

at death, and a lot of small business owners like to give the business away to children during their lifetime rather than waiting 

until death. So it is an artificial provision and it really is not needed if you don’t go to repeal. 

Ms. BLACK. Or—and I would love to hear from Mr. Fletcher on 

this point—it is not just the owner who might give it to children, 

but an owner giving it to the employees. 

Ms. CALIMAFDE. That is absolutely right. 

Ms. BLACK. Can you speak to that issue? 

Mr. FLETCHER. Yes, I can try. 

Ms. BLACK. Okay. 

Mr. FLETCHER. Right now, an owner can sell his business to an 

ESOP and get some tax benefits. But if he is an S Corporation 

owner, he can’t do that, and so that is a problem. There is a bill 

that has been introduced to fix that, I believe, that would be helpful in that regard. 

But what I wanted to speak about was really the consistency 

part of it and simplicity, because a lot of these small business owners are tied up trying to make a buck. By the time they get down 

the road that estate planning becomes an issue, they have got a 

real problem to deal with and they have to do a lot of structuring 

costs around rearranging the ownership and so forth to try to accommodate that. So if you can make it simpler, it would be a lot 

easier for them. 

Ms. BLACK. Okay. 

Mr. RYS. Real quick, I mean, one other thing to keep in mind in 

this is that the assets that the business is talking about, too, aren’t 

liquid assets. So you are talking about the assets of the business. 

And when we are talking about the exemption and we are talking 

about what those rates are and how you plan around it, I mean, 

if you still get hit with it, it is on the value of the business. So 

something has to give to pay the tax then. So some of this is an 

issue of lost productivity when you get to the point of the tax. So 

we do need to make sure that protection is there. 

You know, with the House considering this bill today, it is not 

indexed for inflation, again, another little AMT time bomb. That is 

something that ought to be looked at as it is coming back to the 

Senate, because if this gets tied up next year, and as policy, I think 

next year we want to definitely push for something more along the 

lines—I know at least for us, more along the lines of a Lincoln-Kyl 

type proposal, which does provide more relief and more protection 

and a bigger exemption and a lower rate. But short of that, if we 

have got some time on our hands—I mean, it is not really a permanent solution. It is not tied for inflation, because it is changing 
18 

every year because inflation is going to change. Who knows where 

inflation is in a year. 

Mr. BERGER. Bill, you actually make a great point on the illiquid 

assets piece. The current tax code allows certain small businesses 

to stretch out their payment period. Are those rules something we 

should look at, too, as we consider the estate tax, or is the panel 

comfortable with the way those rules are currently constituted? 

Ms. CALIMAFDE. I think you are referring to 6166 there—— 

Mr. BERGER. Yes. 

Ms. CALIMAFDE [continuing]. And they need to be straightened 

up and strengthened, as well. And I think—actually, I believe the 

Senate Finance Committee had hearings on—— 

Mr. BERGER. We did. 

Ms. CALIMAFDE [continuing]. And I think the 6166 issue was 

dealt with really well at those hearings, if I recall correctly. But 

definitely something to look at. 

You all may remember the thing called the QFOB, or the Qualified Family-Owned Business. That was an attempt to try to allow 

small business assets to be exempt from estate tax. But the thing 

was so complicated, and it suffered, in our opinion, from one huge 

flaw, which was you didn’t know if you made it until you died, 

which is a terrible way to plan. 

So actually John Satagaj, who is over at the Small Business Legislative Counsel, and myself and I know a number of us in the 

room have tried to come up with some kind of exemption for small 

business and we just have not been able to do it. So our idea is 

get the exemption level high enough that you have effectively repealed estate taxes for small business. 

Mr. RYS. If I could—I am sorry. It is a business continuity issue, 

as well. I mean, we want that business. If the son is working in 

the business, we want that business to stay in the family. We want 

that to be passed on. That is a smart and resourceful use of resources in this country, and we do it at the corporate level on reorganizations of corporations. We have a whole system set up. They 

are much more complicated. 

I am not suggesting that at all for small business. But making 

sure that the estate—I mean, the estate tax is sort of the similar 

side to this. If I decide I want to acquire a larger corporation, I can 

do that in any number—I can do that, I think, seven different ways 

and it is a tax-free reorganization. But if I pass the business on to 

my son, you know, that is not the same situation. So we need to 

make sure that we have a high enough exemption and we make 

these planning issues as simple as possible. Short of the tax going 

away, and I understand the basis issues there, if there is going to 

be a tax, it shouldn’t be something that small business owners 

have to stay up at night worrying about. 

Ms. STEWART. And one more comment on that, as well. The 6166, 

as everyone is talking about, as well, I do believe that it needs to 

be strengthened. In addition, small business owners, a lot of all of 

our assets are in our business. So, again, if it is illiquid and that 

is what we own, then we need to have some kind of a provision to 

stretch that out, and 6166, I know, exists, but it does need to be 

strengthened. 

Mr. BERGER. Okay. 
19 

Ms. BLACK. Move on to cash flow? 

Ms. BRUMFIELD. Sure. 

Ms. BLACK. Do you want to start with cash flow? 

Mr. BERGER. I just wanted to start the cash flow discussion with 

Section 179 expensing. On Tuesday, Senator Snowe and Senator 

Landrieu introduced legislation to extend the Section 179 expensing rules at the $250,000 level permanently, because people need 

certainty with how much they can expense rather than depreciate. So my first question to the panel is, do we think that $250,000 

is an appropriate level and that it should be made permanent? And 

part two is, wouldn’t levels of investment be lower than they otherwise might be if we let Section 179 fall to $134,000 next year and 

$25,000 in 2011? And what would the impact of job creation and 

the overall investment be? 

Ms. BRUMFIELD. Any questions? 

Mr. HALL. Well, certainly, it would have an impact. This is similar to increase in tax rates we talked about before and it is a cash 

flow issue. Particularly for small business, it is timing. We are not 

talking about changing the deduction for an investment in total. 

We are just moving that investment up to the year of purchase. It 

is true matching of the investment with the tax benefits which provides financing. 

And particularly when you are a small business, even today more 

than ever, access to capital, financing options are difficult. And if 

you have a less amount of tax incentive to provide that cash investment, then you are going to have to borrow more money to be able 

to make that investment in your business, hopefully which increases the number of jobs you have. So decreasing that provision 

certainly is going to affect somebody’s ability to manage the cash 

flow for an investment, therefore, manage the growth of their jobs. 

And back to the same thing we have talked about before, providing some certainty to people so they can plan where they are 

going, I think is critical. So I think it is definitely a mistake to 

allow these things to go back to previous levels, and the only thing 

that can happen is more difficult decisions in investing in the business and lower jobs. 

Ms. BLACK. Drew. 

Mr. GREENBLATT. This is an important issue because it makes us 

more efficient. I compete with China, where they pay 30 cents an 

hour. My guys get paid $20 an hour with health care, 401(k). So 

the only way I can beat China is if we are more efficient, and the 

way we get more efficient is if we buy more robots. We have about 

15, 17 robots in our factory and the quarter-million dollar expensing is about one robot. So it is not a lot of money. If it could be 

a half-million or a million bucks, we could invest in more robots 

and we could fight the Chinese better. 

So it is very good for us to have very high expensing so that we 

can invest more so that our guys are protected, because when we 

are efficient, we are more viable and we have a better chance of 

being prosperous and hiring people. 

Ms. BLACK. Bill. 

Mr. RYS. It is important to extend this and make it permanent, 

and again, that certainty is an issue. And especially right now, we 

have seen business owners really sort of sit on the sidelines, as I 
20 

mentioned in our surveys. One of the issues we do ask about our 

capital expenditures, and again, they are at or near historic lows. 

So business owners are standing back and waiting to see what the 

playing field looks like. If this goes away, that is clearly a lost incentive to invest. And again, it is a cash flow problem. One in five 

small business owners have a regular cash flow problem. That is 

how they finance their businesses. 

So making sure these are extended—and Matthew, to your question about would this reduce investment, it is sort of hard to say. 

These provisions have only been in place for a while and the tax 

data sort of lags, but if you look at after Section 179 was first put 

in place in 2003, if you look at the statistics of income data for sole 

proprietors for 2003, or for 2004, that was the largest increase in 

depreciation deductions since 1986. So clearly, something happened 

there, moving that from $25,000 to $100,000. So similarly, if you 

start to scale that back, I think you are going to see a retrenchment. I mean, the only thing that may be a positive on that is because business has pulled back so far, they may have to make 

those investments. But making sure that is available, I think is 

definitely very important. 

One other suggestion I would throw out to take a look at is it 

is qualified equipment. So we are talking, you know, refrigerators, 

robots—I would like to have a robot in the office—— 

[Laughter.] 

But it doesn’t include real property. And I think as maybe a 

short-term, a one-year thing, looking at how do we give some additional incentives on real property, whether it is the 15-year depreciation schedule or even maybe something along the lines of Section 179 for real property, as one of our members said to me, he 

said, I am equipment-ed out. He said, I have all I need, but I would 

like to replace a roof on our office, and he has to depreciate that. 

So let us find a way where we can shorten those time schedules, 

as well. 

Ms. BLACK. Mr. Fletcher. 

Mr. FLETCHER. This is important for two reasons. One, because 

it is an important source of capital for businesses that are not liquid and they can’t get access to money from the bank. So this is 

very important because it helps reduce that up-front investment. 

But it is also important from a planning perspective because everybody that makes an investment looks at paying out dollars today 

versus the future dollars and they are measuring, they are discounting those. And the larger that up-front investment, the more 

disinclined they are to make the investment. So this helps reduce 

that up-front cost so it improves the investment returns and so it 

facilitates that investment decision and allows them to make the 

investments to hire more people. 

Ms. BLACK. David. 

Mr. KOENIG. I would agree with what everyone has said, that 

clearly, we don’t want to go back to pre-$250,000 expensing. So we 

would certainly support a permanent extension, as you mentioned 

in the legislation that is introduced for Section 179. 

But again, as Bill pointed out, that applies to machinery and 

equipment as opposed to real property, and certainly from the restaurant industry perspective, the issue of depreciation is critical, 
21 

and I know that is on our discussion list and we can talk about it 

now or if you want to wait on that—— 

Ms. BLACK. Yes, why don’t you keep going. 

Mr. KOENIG. Okay. 

Ms. BLACK. Cash flow, bring it on. 

Mr. KOENIG. Sure. Well, in that case, a critical issue for the restaurant industry, the biggest tax issue that we are fighting right 

now is the short-term extension of the 15-year depreciation provision, and that provision is for restaurant improvements and new 

construction in addition to leasehold improvements and retail improvements. You know, just from a realistic standpoint, if you look 

at the foot traffic in the restaurants in this country, it definitely 

warrants much less of a depreciation schedule than 39 years. I 

think everyone would agree to that. And Congress in the last few 

sessions have made some inroads there and we are at the point 

where we have got an expiring provision for 15 years for such depreciation. 

Just to read a couple of figures to you on how this really impacts 

cash flow, which I think is really the bottom line here—and I have 

got this in a statement that I submitted for the record, as well— 

if you look at the average cost to renovate a so-called quick-serve 

restaurant, i.e., McDonald’s, it is approximately $250,000, and for 

a full-serve, more fine dining restaurant, it is $500,000. Just using 

a 24 percent effective marginal tax rate for argument purposes, on 

the $250,000 expenditure, the annual difference in tax savings between the 15-year and the 39-year schedule is approximately 

$2,500 per year. For the $500,000 renovation, it is about double 

that, $5,000. And that is just for renovation. 

If you look at costs for new construction or rebuilding, the aver- age costs become $700,000 in the quick-serve category and $1.5 

million in fine dining. Those numbers are approximately annual 

savings of about—and this is cash—$7,000 for the quick-serve and 

about $15,000 for full-service. And again, it is a time value of 

money, given the 15-year versus 39-year. 

Mr. BERGER. So, David, have you done any modeling in terms of 

job creation or overall levels of investment? Put another way, if we 

let this lapse, what happens to your industry? 

Mr. KOENIG. Well, in 2007, prior to the onset of the recession, the restaurant industry spent about $10 billion in construction of buildings, and that is the most recent figures that we have. Clearly, 

with the state of the economy in the last two years, those numbers 

are down. But if you look at Bureau of Economic Analysis statistics, every dollar that is spent in the construction industry generates an additional $2.39 in spending in the rest of the economy. 

A million dollars spent in the construction industry creates more 

than 28 jobs in the overall economy. So if you translate that into the $10 billion spent by restaurants 

in 2007, that translates into 280,000 jobs. And again, those are 

2007 figures. Clearly, the situation now is markedly different than 

2007, which I think really necessitates the need to move forward 

on extending the 15-year depreciation. 

Ms. BLACK. One thing I have always wondered about with restaurants or retail space, but more about restaurants, is with a 39- 

year depreciation period for renovating either the customer space 
22 

or, frankly, the back kitchen space. How many restaurants could 

pass a health code inspection if you didn’t update your space every 

39 plus years? 

Mr. KOENIG. Well, that is a great point, and obviously, fear not, 

whether it is the 39 years or 15 years, restaurants are not waiting 

39 years to renovate. 

Ms. BLACK. I am glad to hear that. 

Mr. KOENIG. Our research at the NRA shows that most restaurants remodel and update their buildings every six to eight 

years, regardless of what the tax treatment is, and that is pretty 

consistent along all segments of the industry. 

Ms. CALIMAFDE. Well, I think that is exactly the problem, is that 

the depreciation schedule doesn’t match up with reality. So you are 

not allowed to take the proper depreciation based on what is really 

going on. You know, instead of 39 years, it is really eight years. So 

the real depreciation schedule should have been eight years, not 

39. 

Mr. KOENIG. That is right, and with this six- to eight-year renovation—and there is a lot of intricacies, as well, between if you 

are a franchisee, you may—in your contract, it may be required 

that you have to make renovations even more frequently than this 

six- to eight-year period. So this is all going on in the context of, 

as Paula just stated, a totally unrealistic period of 39 years to write 

off the costs. 

So for us, clearly, as we have talked about the estate tax, we 

have talked about obviously the rates, and those are critical issues, 

but at least in the short term, before the end of the year, we certainly hope that Congress will not only extend this provision on depreciation, but extend it seamlessly, because clearly, for planning 

purposes, we don’t want to go beyond 2009 and going into January, 

February, March, saying, well, we think it is going to be extended 

but we can’t be sure. 

Ms. BLACK. And one of the things that in the last couple of years 

has finally come together for restaurant and retail depreciation 

issues has been a bit of a conundrum over whether it was a leasehold or an owner-owned restaurant. Can you explain that this is 

now unified? 

Mr. KOENIG. That is correct. This provision for 15-year depreciation, as I said, it is not only for restaurant improvements and new 

construction, but it is also for leasehold improvements and for retail improvements. Its history goes back, I believe to the 107th 

Congress, where it was just put in place for leasehold improvements and restaurant improvements, and subsequently, it was extended, as these provisions often are, for a short period. Last year, 

in 2008, the provision was extended to include not only those improvements, but restaurant construction as well as retail improvements. So it is now under an umbrella. It is going forward as hopefully one expiring provision. 

NRA leads a coalition of interests that has expanded beyond the 

restaurant industry to include, you know, the shopping centers, the 

construction trades, NFIB, the Real Estate Round Table. So we are 

unified in the approach of we need to extend this for everybody. 
23 

Ms. BLACK. And with respect to leaseholds, for how long do restaurateurs sign their leases? How long are national chain restaurant leases or leases for a pad in a shopping center? 

Mr. KOENIG. You know, I don’t have the specifics on that. I can 

certainly get back to you. But I imagine it varies. But I think the 

point is if they are long-term, you have got to be able to factor in 

over this period of time—whether long-term be three years, five 

years, ten years—you have got to factor in what your cash flow is 

going to be during this period. Without the certainty of provisions 

like the depreciation provision, you can’t do that. 

Ms. BRUMFIELD. To follow up with that, and Dave, this will actually cross over into what Jose is here to talk about, the New Markets Tax Credit, let us talk about the up-front barrier, the current 

financial crisis and the inability to access credit before even deciding to purchase something for the restaurant. Let us talk about the 

ability to access the credit to make those purchases and, as well, 

for Jose to have those investments in a New Markets Tax Credit. 

Mr. KOENIG. I am happy to address the access to credit issue. I 

will let Jose handle the New Markets Tax Credit. 

We had a witness appear yesterday before the Democratic Policy 

Committee, and they held a hearing on the issue of access to credit 

and we had a restaurateur from Chicago, Illinois, Ivan Matsunaga, 

who owns two Connie’s Pizza establishments in Chicago, and he is 

a very successful businessman. The long and short of it is, he has 

been mandated under his agreement at one of his properties to 

make the kind of improvements that we are talking about and he 

is having a very difficult time in securing financing for the renovations. He is not unique. We hear that at the Restaurant Association 

every single day. That issue is as significant to us right now as this 

depreciation issue, maybe even more so from a long-term standpoint. 

Clearly, your committee has done a lot. There has been legislation out there to increase the amount of SBA guarantees up to, I 

believe, $5 million. That is helpful. There has been some talk. I believe Senator Warner had sent a letter to the President not too long 

ago with about 30 or 33 Senators, asking for possible use of excess 

TARP funds, about $40 or $50 billion to be pooled together to utilize for small business loans. We are grappling with this as an organization and from our members, and clearly, we are not the only 

segment of the industry that is. 

So I don’t know what the simple solution is. I don’t think there 

is one. But until our members feel that they have access to capital, 

expansion or even holding on to properties is going to be difficult. 

Mr. VILLALOBOS. And following up on that, the New Markets Tax 

Credit has been a very effective tool and has been a credit that has 

been quickly deployed. Prior to the economic crisis and the credit 

freeze, the New Markets Tax Credit would quite often partner with 

traditional financing in a junior position. But since the credit 

freeze, now the New Markets Tax Credit quite frequently is the 

sole financing source for the qualifying business in a low-income 

community. I mean, to date, over $14.3 billion has been invested in over 

2,000 businesses across the country, both urban and rural, and as 

a result of that $14.3 billion, you are talking about—has been used 
24 

to rehabilitate over 68 million square feet of real estate projects, 

create 210,000 construction jobs, and create or maintain over 

45,000 full-time jobs. 

So the New Markets Tax Credit really has been a critical piece 

in the current crisis, as I said, because now it really has become 

one of the few sources of capital available to low-income communities. I know we always talk about how the small business really 

drives the economic engine of the U.S., and in the communities we 

serve with the tax credit, it quite often is the only engine. So it 

really has been critical to try and address the current crisis. 

Like I said, it has been quickly deployed over its short history. 

The Treasury Department through the CD5 Fund has made available $26 billion in credit authority, and you have applications totaling in excess of $200 billion. So it is a credit that is in high demand, and because of the competitive nature, it is quickly deployed. And even though we are seeing the deployment slow down 

a little in the current economy, it is still being very quickly deployed and, again, a critical source of capital to low-income communities, and at the end of the day, really having a big impact on 

small business, either by providing direct financing to them or 

through creating opportunities, if it is a real estate development 

where there is space at competitive lease rates, it allows a small 

business to come in and operate at a profit. 

Mr. BERGER. Well, obviously, Jose, we couldn’t agree more, which 

is why Senator Rockefeller and Senator Snowe have introduced legislation to make the credit effective for five more years at a rate 

of $5 billion per year, as well as solve your AMT problem, and we 

are very grateful that Senator Landrieu just this week decided to 

cosponsor, as well, and we hope to get that into an extenders package. 

But my question is, often around here, you think you can just 

wait until the last minute to extend expiring tax provisions, and 

lots of times the incentives actually expire and we extend them 

retroactively. How does that impact what you are trying to do on 

the ground and getting a deal done? And how long of an extension 

are you looking for to give people some certainty that the New 

Markets Credit is going to endure? 

Mr. VILLALOBOS. Well, I mean, from our perspective, we would 

love a permanent—but the longer the period for the tax credit, the 

better in terms of authority, because that allows the organization’s 

community development entities to plan and work with the investor market to know that this credit is going to be around for an 

extended period of time so that everybody can plan accordingly. 

Again, the tax credit is such that there is a competitive application process annually and the CD5 Fund has to be able to prepare 

for that. The organizations, the community development entities, 

also have to be able to prepare, build a pipeline, and we are talking 

about projects that oftentimes take a year or more to come to fruition. So you just can’t have these things kind of hanging in limbo, 

waiting to see whether or not the authority is going to be extended. 

So, I mean, we fully support Senators Snowe and Rockefeller to 

do a $5 billion, and currently, at least in the legislation, there is 

$3.5 billion. We would fully recommend that it be at minimum $5 

billion, which would be the current level. And again, when you are 
25 

talking about a credit that you have year in and year out and ask 

of $20 to $30 billion for what is $5 billion, a $5 billion authority 

is more than reasonable. 

Ms. BLACK. Since we represent the Small Business Committee, 

I would like to draw out a little more information about the New 

Markets Credit and an aspect that you had already touched on, 

which is that these projects create a place where small businesses 

can find a home to find space. In communities struggling to create 

jobs, does the New Markets Credit Coalition, or TELACU, have information about jobs created in places where there is not so much 

opportunity, either in the initial construction of places or once businesses do find a home in these projects? 

Mr. VILLALOBOS. Well, like I said, the tax credit, because of its 

competitive nature, you really—one of the keys to being competitive and receiving an allocation authority is to be able to measure 

your community impacts. So those are being measured not only before the project, but also over the life of the project or the loan, and 

we are talking financing, if it is debt, seven year interest-only at 

interest rates that are roughly—you can find easily at two percent 

in the marketplace right now or other nonconforming terms. It 

really is nontraditional, nonconforming, below-market interest. 

And so you want to track the jobs. You want to track the wages 

that the individuals are being—and is the employment coming 

from the low-income community. So you really look to measure the 

community impacts, not only the economic, but also the social. 

What type of service is being provided by the project that is being 

funded? Is it a health center? Is it a charter school? So it is really 

across the board in terms of the many needs that an underserved 

community needs. 

Ms. BLACK. A follow-on to that? Mr. Fletcher. 

Mr. FLETCHER. My comments really aren’t around the New Jobs 

Credit or the New Markets Credit, but it does have to do with access to credit. And since you brought it up, I would like to interject 

here, if I could, and it has to do with my company is owned by its 

employees and it has been that way for about seven or eight years. 

One of the issues that we have around access to credit, particularly in these times, is we have got assets that we used to use, but 

we don’t use now. But when we converted to an S Corporation 

seven or eight years ago, they were appreciated in value over their 

cost. That subject, when you convert to an S Corporation, that creates what is called a built-in gains tax exposure. If you hold the 

assets for ten years, you can sell those assets without any sort of 

tax penalty. But if you sell them within that ten-year period, there 

is a substantial tax penalty on the S Corporation, which really affects the ability to access capital and to redeploy assets in a more 

effective and efficient way. 

Earlier this year, there was a short-term fix provided that shortened that ten-year holding period to seven years, and that is due 

to expire next year. And so, when you think about access to credit, 

the ability for companies like ours and others to redeploy assets— 

and they can’t go out and borrow money, but they can sell assets 

and get funds that way—this is an important thing for you to consider and would be helpful. 

Ms. BRUMFIELD. Thank you. 
26 

Ms. BLACK. Thank you. Mr. Hall. 

Mr. HALL. Kind of the same thing I would add as it relates to 

access to credit for the smallest businesses. In order to get a conventional loan, you pretty much have to prove that you don’t need 

it, and that is always a difficult thing. So for micro businesses, they 

typically finance their business with their own credit cards or their 

savings or take money out of their retirement plans to invest in 

their business. 

Back to the New Markets Tax Credit, those are typically bigger 

deals that invest in an underserved community, as they talked 

about. The good news in those type of projects is that typically then 

provides other small businesses the opportunity for ancillary businesses. The cleaning shop in the same neighborhood, a little restaurant in the same neighborhood, a sandwich shop, the Starbucks, 

all of those things grow up around that community, which is the 

whole point for that investment. 

Again, the smallest micro businesses, which represents a vast 

majority of the small businesses—95 percent of small businesses by 

count are businesses that are self-employed people or under ten 

employees. So the New Markets Tax Credit really doesn’t, from a 

practical standpoint, reach down to those people. The small business mom-and-pop shops don’t do that type of project. But they do 

do the Starbucks in that neighborhood. 

So providing all of these things together, the bonus depreciation, 

15-year, extending the Section 179, all of that goes back to providing access to capital cash flow for the small businesses to then 

also invest in that same community. There is also a Small Business 

Jump Start Act that is pending. I think that is S. 1402. A small 

number—I think we are talking about $5 billion here—but this is 

increasing the deduction for start-up costs from $5,000 to $10,000. 

Those are the type of small businesses that are going to support 

that community reinvestment, and I think all of those things together translate into access to capital for small business and I 

think it is very important. 

Ms. BLACK. Thank you. 

Ms. STEWART. On that note, as well, I think that if I can throw 

in a couple of things about women-owned businesses, when you 

talk about access to capital and access to credit, a lot of our—even 

if we are not very, very small businesses, most of us as women 

have had to use our own personal credit lines and those types of 

things to fund our businesses. It is very difficult when you go to 

a bank and the bank asks what your husband does to make sure 

that you can get the loan, and that is a very, very frequent—it 

sounds like it is funny, but it is really not. 

So just in a general sense, all of these things with the credits, 

with the 179, all of those things help us tremendously. So not that 

this is the venue for it, but I think the access to capital issue 

should be addressed, as well. 

Ms. BRUMFIELD. Jose. 

Mr. VILLALOBOS. Following up on Keith’s comments, the tax period, or, I guess, for the New Markets is seven years, so from an 

operating business loan or access to capital perspective, it is difficult to make a seven-year interest-only loan to a business that 

needs a line of credit, working capital, or purchase machinery or 
27 

equipment. However, we believe, and we have made recommendations to Treasury to create a safe harbor for community development entities that want to make loans to operating businesses so 

that if they need to repay that loan or make a term that is more 

in line with the use of the money, say, machinery and equipment, 

or needs and should be repaid in five years, that as that principal 

gets repaid, the investor is not at risk of recapture if the money 

is not redeployed within 12 months, which is the current requirement. So we do have that recommendation pending before Treasury 

and we believe they have the ability to do that without a legislative 

fix. 

Ms. BRUMFIELD. Bill. 

Mr. RYS. Following up on what Keith said, the start-up deduction, I think, would be very beneficial. It is only $5,000 now. Increasing it to $10,000, as Senator Merkley does, there is a bill in 

the House that Congressman Kratovil has introduced that would 

increase it to $20,000. These are the costs you spend before you actually open the doors, the advertising, looking for financing, maybe 

you have a couple of months advance rent you have to pay. Technically, those aren’t your business expenses because you haven’t 

started the business. This lets you take those expenses in the first 

year. If you have more than $5,000, you can deduct it over 15 

years. So it is making it a little bit bigger on the front end. I mean, 

a start-up business needs the money up front, not in the back, so 

it is very important to do that. 

In terms of the credit issue, one issue, and it is especially difficult, is housing and the real estate market. We have done some 

surveys and we have found just how many small business owners 

use their mortgages as financing, as part of their business financing, and really that shuffling of personal assets with the business 

assets, especially when it comes to their homes and how many of 

those could be underwater right now because of what we see in the 

housing market. Clearly, it is having a real impact on the viability 

of businesses to be able to get credit. 

As I said, we have done this monthly survey of business owners. 

Oh, and I should say, on credit, we are actually in the process of 

doing some research on that, so we should have some new, interesting stuff soon. 

Ms. BLACK. Which credit? 

Mr. RYS. Just access to credit. When we do these monthly surveys, we ask about the problems of credit, and the one thing that 

is still sticking out is this lost sales. While credit is certainly a 

problem and definitely needs to be addressed, we also need to make 

sure that the balance sheets of these businesses are looking stronger, and that is a much bigger overall economic issue. But until 

those balance sheets come back, some of these businesses are going 

to have a harder and harder time getting that credit because it is 

going to be harder for the banks who are getting squeezed by the 

regulators to not make a loan that may come back to haunt them 

later. 

So we are kind of stuck in a vicious cycle here and we need to 

find a way out, and so all these pieces sort of have to fit together, 

and to sort of bring it all back together, the higher these tax rates 
28 

go, the worse those balance sheets are going to look, so let us keep 

that in mind, too. 

Ms. BLACK. Did you have one more comment? 

Mr. VILLALOBOS. Well, yes. As I said, we found the New Markets 

Tax Credit to be just wildly successful beyond our initial dreams 

and we are part of the, I guess, founding New Markets Tax Credit 

Coalition member and really it was critical in terms of how can we 

get additional long-term capital into low-income communities. That 

really was kind of the concept of the New Markets Tax Credit and 

working with the Hill and the White House back in the 1990s to 

try to get this moving. I am definitely very appreciative of everything Senator Snowe has done to support the New Markets Tax 

Credit. 

But given the current economic climate, we definitely want to 

make sure that the New Markets Tax Credit continues to be on a 

level playing field with LIHTC and historic and be able to get that 

AMT relief, but also try to get clarification from the IRS on the 

passive activity issue so that we can attract and have a wider pool 

of investors. Right now, because of the AMT and the possible application of the passive losses, we can’t go out to individuals or smaller businesses to be able to take advantage of this tax credit. And 

like I said, it is huge in terms of the impact it has from an economic perspective and ultimately the social and underserved communities. 

Ms. BLACK. Finally, of other specific provisions that are going to 

expire this year including that—for instance, the R&D credit is 

one, and there are some energy incentives. 

Mr. Greenblatt, do you have any experience with the R&D credit? 

Mr. GREENBLATT. The R&D credit is extremely critical for us because we, again, are at a massive disadvantage when we compete 

with China. So the only way we could beat them is if we are more 

productive and we have really slick engineering. And the only way 

you do that is by investing in engineers, designers, people that will 

come up with novel inventions that make it beneficial to go with 

us, because we are never going to win on price. We are only going 

to win on quality or custom or some really neat design. 

When you have the R&D tax credit unsure or flopping all over 

the place, we don’t have comfort for the investments. And this is 

the only reason why people come to buy from American companies, 

is because we have really great ideas. And we need to invest in 

new research and development all the time, to stay cutting edge, 

because they are always copying us. If you give us uncertainty in 

this aspect of business, then it is hard for us to invest in new designers, new software, et cetera. 

Mr. BERGER. Drew, apart from the uncertainty, one of the things 

we keep hearing about from companies is that paperwork burdens 

make it very hard to make the credit as effective as it could be. 

Have you guys experienced paperwork issues with the credit? 

Mr. GREENBLATT. It is very burdensome and it is very wasteful. 

To get our initial R&D tax credit was over $9,000, one check for 

$9,000—— 

Ms. BLACK. And how much compliance cost? 
29 

Mr. GREENBLATT. Well, I mean, every year, every year—my accountant just bundles it, so it is a little bit hard to discern that. 

My gut is that it is ten percent. It is probably two or three grand 

a year. It is just so wasteful, okay, because I could spend that 

money and buy another software station for one of my designers, 

or I could invest in something that will add values that the customer cares about. The customer doesn’t care how much I spend 

with my accountant. 

Mr. BERGER. How do we fix it? 

Mr. GREENBLATT. I mean, the vision is that you make everything 

simpler. I mean, rather than making it—my tax return is, like, 80 

or 90 pages long. This is very foolish. I have a simple company and 

we are a small company. Things should be on a postcard. The way 

it is done now is a great way to tie us up in knots and we should 

be the opposite. We should be simple and elegant and reducing everything to its simplest form is critical. 

Mr. FLETCHER. Specifically on the cost issue, I can tell you that, 

not at Appleton but at another company, we had an R&D credit 

and I think it amounted to about $1 million. We paid over $150,000 

to somebody to put together the documentation, and I ended up 

with a notebook, or two or three notebooks, actually, about this 

high of—— 

Mr. GREENBLATT. It’s just a total waste. 

Mr. FLETCHER [continuing]. Pictures and diagrams and employees’ hourly work schedules and the projects that they worked on. 

So that is what we had in terms of documentation. But worse, that 

was just the tip of the iceberg, because all my employees had to 

go out and document what they did every day of the week in terms 

of R&D projects so that we could try to account for that appropriately to meet the documentation requirements. 

Ms. BLACK. Thank you. 

Mr. FLETCHER. So it is very inefficient. 

Mr. GREENBLATT. And nobody reads this. 

Ms. BLACK. Well, unless you get audited, and I don’t wish that 

on anybody. 

Ms. CALIMAFDE. I guess I am speaking on the same point but a 

little bit different, because I definitely agree that the R&D credit, 

what you have to go through to get it is crazy. But lots of times, 

things happen over here, and by the time IRS is done with them, 

they are about 100 times more complicated, and I will throw out 

an example, which is 409(a) that you all passed because of huge 

mega-corporations going out of business and the major folks at the 

top leaving with millions and millions of dollars of nonqualified deferred compensation plans. 

Well, most people—then it went over to IRS and IRS sort of 

went, oh, boy, we get to write tons and tons of regulations about 

nonqualified deferred compensation plans, and while we are at it, 

let us extend nonqualified deferred compensation to mean anything 

that can possibly ever come out after the business closes its doors 

to an owner, which means that small businesses that don’t even 

know that they are hit by 409(a) are presently in default of 409(a), 

and this crazy provision, most of the small business advisors don’t 

even know that it applies to their clients. 
30 

So there is a smoking gun out there, and I just heard IRS is now 

going to ramp up their audits on small businesses’ compliance with 

409(a), and I can tell you, it is an absolute train wreck because I 

could go around to most small business owners and they would 

look at me and say, I don’t have a nonqualified deferred compensation. They don’t. What they have is the ability to get money after 

they close the doors. That is good enough for 409(a). 

So it is the same kind of thing. Even if you do a great job doing 

the credit, somehow, you have got to—and I don’t know the mechanism here, but do it in such a way that IRS then doesn’t give us 

400 pages of regulations that make it impossible to carry out what 

should be something fairly simple. 

Ms. BRUMFIELD. Yes. 

Bill. 

Mr. RYS. I can’t agree with that more, and whether it is R&D 

tax credit or a number of other provisions in the code, I think a 

lot of small business owners may very well be scared away from 

the R&D tax credit when they see how complicated it is going to 

be. You may have some very interesting, very good potential out 

there, but they might walk away from it. 

Again, we survey our members all the time, and this isn’t just 

members. This survey was the entire small business population. 

Tax compliance—the paperwork associated with tax compliance is 

the most expensive paperwork burden the Federal Government 

places on small business owners, by far. It is huge. And it is only 

getting worse. 

In the health care bill, we have got this corporate reporting provision which will have small business owners filling out 1099s all 

year, constantly going back, constantly going forward in terms of 

trying to figure out, how much did I spend on air travel this year? 

How much did I spend on restaurants? How much did I spend on 

telephone services? Business owners are being—and they don’t 

have a finance department. So it is the owner doing this, or in most 

cases, they just dump it to their accountant and say, give it to me 

at the end of the year and I will sign it and pay it and whatever, 

and they move on and they don’t know what exactly the cost is. So 

we really do need to think through those things, especially as they 

come out of IRS. 

Something Paul and I have talked about were the penalties dealing with 6707(a), where if you had a listed transaction, which in 

many cases was a retirement plan set up for a sole proprietor of 

a very small, small business, you had to file a form to go with that. 

But the penalty attached both to the individual form and to the 

business information return, it is a $100,000 penalty, right, on the 

individual and $200,000 on the business. So for one year, you have 

got $300,000 in penalties and you didn’t have anywhere near that 

much in terms of your tax benefit from it. That type of thing needs 

to be addressed. 

Ms. CALIMAFDE. Bill, that is like $300,000 if you are only one 

member. But, I mean, I have heard of cases where there are, like, 

three or four children who are minors who have also been caught 

up to it. So the family is getting a $1 million penalty a year for 

going into something that they had no idea was a listed transaction, and the promoter never told them it was a listed trans-
31 

action. And then IRS comes in and it turns out that maybe the tax 

liability is $5,000—and these are real numbers of people out there. 

And, by the way, this is being targeted to small business almost 

entirely. 

And meanwhile, they have got a $1 million penalty that IRS cannot abate because of the way this was written, and IRS is not crazy 

about this. They feel really terrible about this situation, because 

what is happening is you have got small business owners out there, 

and you can call this a tax issue, but this one has transcended it 

because you have people who are having heart attacks, families are 

breaking up because these people haven’t made $1 million if you 

put all of their earnings together for their entire life, and they 

thought they were doing something that was fine and now they are 

being held to a standard. So it is bankruptcy, it is financial ruin. 

I mean, it is a horrible situation, and anything you can do to help 

out small businesses on 6707(a) is critical. 

Mr. RYS. There is a moratorium on moving forward on those penalties until the end of the year, but time is running out, and I know 

we have heard from members about that. Included in the statute 

is really no ability to go to court and litigate this without paying 

the penalty up front, which is just—at $1 million, you just can’t do. 

Ms. CALIMAFDE. Senator Baucus and Grassley have a bill, but it 

really doesn’t go far enough. It still treats these people, who all 

they did was didn’t disclose something they didn’t know about, to 

a standard where they are deemed to be worse than fraud in the 

tax area. So it is crazy. But at least it is a start and someone is 

hearing us. 

That wasn’t the comment I wanted to make. There was something you had said earlier that really got me, but I forgot already, 

so—— 

Ms. BLACK. Mr. Fletcher, there is a tax credit currently in law, 

an energy provision, and I am wondering if you might chat about 

that a little while. It is something that Senator Snowe has been 

very interested in, and that has helped paper companies maintain 

jobs this year. 

Mr. FLETCHER. Thank you for that opportunity. Yes, Appleton 

and a number of other small paper companies, as well as some 

large paper companies, have benefitted this year from an alternative fuel mixture credit that was enacted several years ago, or 

a few years ago, anyway, and that is due to expire at the end of 

this year. And there has been a lot of discussion around unintended consequences and things of that sort, and yet the paper industry is one of the—was one of the earliest recycling businesses 

around and it is one of the earliest producers of alternative fuel 

and continues today to be one of the largest producers of alternative fuel used in its business, both for heat and for electricity, 

used in its own facility, so they are, like, self-sustaining in the 

world. 

So as a business model, it is something that we all ought to try 

to support, and yet there are a number of things going on around 

discussions to extend the Alternative Fuel Mixture Credit in one 

form or another or some other credits. Because of larger companies 

that are also able to avail themselves of this credit or these types 
32 

of credits, there is some backlash that the smaller companies are 

inadvertently being made to bear. 

So if there is a way to come up with a structure that allows and 

supports these smaller companies who have problems accessing 

capital, to afford them the ability to continue to invest in alternative fuel mechanisms to continue to—so it is environmentally 

friendly, it also makes them to be competitive against the Germans, the Japanese, and the Chinese—increasingly the Chinese 

sending paper over here—that would be appreciated. 

Ms. BRUMFIELD. Jeff, could you speak a little bit about the impact on jobs that your industry has? 

Mr. FLETCHER. Yes. For smaller companies, in particular, the 

way this fuel comes about is that we take wood chips and we soak 

them in water and chemicals to break the wood apart so that we 

can take the fiber out and make paper out of it. And then we try 

to reclaim the chemicals. But then we are left with what is called 

lignin, and lignin is kind of like glue that holds the fibers together 

in the wood. Well, that lignin, we recover the chemicals by burning 

the lignin and the chemicals drop to the bottom of the furnace and 

the lignin—the heat that we produce produces steam that we pump 

into the paper machine and it dries the paper. So it is a very interesting, unique, closed-loop process. 

So we have been getting a credit for burning these lignins and 

producing steam, and in some cases, you take the steam and further on produce electricity that you can use to power other aspects 

of the mill. 

Ms. BRUMFIELD. Okay. 

Ms. BLACK. There is a Section 45 tax credit for electricity generated from alternative fuels. With that, the credit does not currently apply to thermal heat, so that when you create steam from 

burning your alternative fuel, you are not eligible for a Section 45 

credit. 

But you are also not eligible for the Section 45 credit if you use 

the electricity generated from your alternative energy source, if you 

use the electricity in your own facility, and that is an issue that 

Senator Snowe has been working on with Senator Lincoln and Senator Roberts over at the Finance Committee. Would being able to 

use the electricity on site rather than having to sell it out into the 

grid be beneficial to your business? 

Mr. FLETCHER. Frankly, for us, probably not in terms of—we 

don’t have a generator to produce electricity, so all we do is 

produce the steam. So Section 45, you are right, there are two aspects of it. One is, in order to qualify for the credit today, you have 

to produce the electricity and sell it to the utility. And so most of 

the companies produce the electricity and use it on their own facility and they only sell off the surplus stuff. So the credit has limited 

application unless you specifically design something that you can 

say, I am going to sell. But then the returns on that are tough to 

make. 

So if we could find a way to expand that credit to allow for the 

production of electricity that we use on the site, that would be 

helpful. It would also take away some of the peak loads that the 

utilities are feeling so that we relieve the strain on the grid system. 
33 

And then for companies like Appleton that don’t have generators 

to produce electricity, just the fact that we produce the steam—— 

Ms. BLACK. The thermal heat. 

Mr. FLETCHER. The thermal heat, that is right—there is a BTU 

content that otherwise, if we weren’t running that pulp mill, if we 

weren’t using that boiler system to recover those chemicals, we 

would have to produce the thermal heat in some other form or 

fashion by burning natural gas or coal or something like that. 

Ms. BLACK. Exactly. 

Paula. 

Ms. CALIMAFDE. I just want to take a moment and go back to 

something Bill kind of went over quickly dealing with the 1099. 

This is a—I believe it is revenue raiser sitting inside both, I think, 

both health care bills right now. I think there is a sense that it 

must be okay, because nobody is talking about it. But I think it is 

sort of the opposite. I think small business is not aware of what 

this issue could mean to them, and part of this goes into this whole 

concept of the tax gap and a lot of the small businesses aren’t reporting their income properly, and you can say whatever you want 

to say about that. But I don’t think this 1099 thing is going to do 

anything to help the tax gap. 

But basically, what it is going to require is 1099s. I think it is 

for every service and property—— 

Mr. RYS. It is every transaction over $600 for both an incorporated and unincorporated business. Currently, it is only an unincorporated business, but now it will be included to an incorporated 

business. But it will also include not just services, which is what 

it is now, but would also include property. So how do you define 

property? I am assuming it doesn’t mean inventory, but that raises 

a whole set of issues, because if I am a roofer but I have a storefront and I sell shingles as a retail, but I also put those shingles 

on my building, well, part of it is inventory, part of it is not. So 

how do you make those distinctions? Where are you going to draw 

the line? 

And you are going to have to constantly keep up and figure out, 

if I am a landscaper and I buy six bags of dirt at Home Depot and 

that puts me over $600 at the Home Depot, but it was just one of 

my guys who was out at the job for the day and said, darn, we need 

six more bags of dirt, well, did he remember to include however 

much six bags of dirt cost at Home Depot that he now has to report 

when he brings it back, and is that going to cause them to fail to 

report? You know, it is a whole—it is a paperwork thing. 

Ms. CALIMAFDE. It sounds to me like the cost of small business, 

and probably any business, of having to deal with the paperwork 

load and administrative burden of this, I can’t imagine how that 

wouldn’t exceed any possible good that anyone could get out of this. 

So if you would look at that provision, because as I said, I think 

the concept is, well, no one is talking about it. I think no one is 

talking about it like 409(a), because no one knows about it. 

Ms. BLACK. And with respect to that, this provision hasn’t yet 

taken effect to require that 1099s get sent to taxpayers. The provision in the health care bill is to apply to C Corporations. It is just 

not yet effective, correct, for pass-throughs? 
34 

Mr. RYS. Well, no. I mean, currently, if you are any sort of business and you get services from an unincorporated business, you report that to the IRS and you report it back to the business, and 

the purpose behind that is, since there is not generally withholding 

on the income that the sole proprietor, for example, would hold, 

that 1099 serves as a back-up for the IRS to be able to say, okay, 

you have reported this much income. We have got this many 1099s. 

We can see where your income matches up. 

This would expand that universe to now include transactions 

with corporations. So as today, if I am one of Dave’s members and 

I own a restaurant and I have Verizon come in and put in my telephone services and Internet access and that sort of thing, I don’t 

report that today because Verizon is a C Corporation. But I would 

report that tomorrow. So that is the distinction. 

Ms. BLACK. Got it. 

Ms. CALIMAFDE. But I think you are right, Kathleen. The provision that we are talking about in the health care bill, I don’t think 

it becomes effective until 2012. I think there is this concept of a 

ramp-up time, because, in addition, you have to get the EIN numbers for all these different vendors, and that is the small business’ 

burden to get all those EINs, so—— 

Mr. RYS. And to add to that, if you don’t get the correct number, 

then you have to—or if you don’t get the correct number or you 

don’t know where to send it, because you have to send it to the 

business that provided the services, if you get an incorrect number 

or you get no number at all or you don’t know where to hold it, 

you have to withhold 23 percent on the contract. So now you are 

deputizing the small business owner to basically withhold the 

money. It raises $17 billion. My assumption is that the $17 billion is 

largely that withholding number as small business owners run 

around trying to figure out, do I have the right lottery numbers 

here or not, or am I sending—and if you have a franchise, do I send 

it to the corporate franchise? Do I send it to the owner? Where does 

it go? So there are a number of just little technical questions that 

are going to come up for every business owner that has these 

transactions. 

Ms. CALIMAFDE. I mean, do you believe that number? I don’t believe that revenue raiser number. I mean, you know. It certainly 

wasn’t offset by the administrative burdens. 

Ms. BLACK. If Joint Tax chisels it onto a score sheet, I can assure 

you, that is what we live with. 

Ms. CALIMAFDE. Yes. 

Ms. BRUMFIELD. Yes. Sure. Well, we would like to thank everyone—— 

Ms. BLACK. I am sorry—— 

Ms. BRUMFIELD. I am sorry. 

Dave. 

Mr. KOENIG. I am sorry, I will be brief, but there is one expiring 

provision that I would like to mention—— 

Ms. BRUMFIELD. Sure. 

Mr. KOENIG [continuing]. That hasn’t been discussed that is of 

great importance, not only to the restaurant industry, but to small 

businesses and really to society. Since 1976, the tax code has al-
35 

lowed traditional C Corporations, and only traditional C Corporations, to get under Section 170 of the code an enhanced deduction 

to encourage the charitable donation of food inventory. And in 

2005, I believe it was, Congress wisely extended that provision to 

cover all taxpayers, regardless of business form and entity. Like a 

lot of the other provisions we have talked about earlier, that enhanced deduction provision expires for non-C Corporations at the 

end of 2009. 

And certainly, given the state of the economy and given shortages that have been in the paper recently at food banks, I think 

it is pretty self-evident that Congress would want to extend that 

provision. Legislation has been introduced in the Senate, the Good 

Samaritan Hunger Relief Tax Incentive Extension Act, S. 1313. 

The lead sponsors are Senators Lincoln, Lugar, and Leahy. This 

would make that provision permanent for all taxpayers, regardless 

of C Corporation status or not. 

Ms. BLACK. Finishing up on an altruistic end there. 

[Laughter.] 

Ms. BLACK. Good. 

Ms. BRUMFIELD. There we go. 

Well, this has been a great roundtable. I would like to thank everyone for participating and all of the attendees for attending. 

Thank you very much. We will take this information back and do 

as much work as possible before January 1 to have the results that 

you all desire. So thank you. 

Ms. BLACK. Thank you. 

[Whereupon, at 12:04 p.m., the committee was adjourned.] 

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