1 The Small Business Owner and the Tax Code Working Together? Roger Harris, President and C.O.O. Padgett Business Services Testimony before the President's Advisory Panel on Federal Tax Reform March 8, 2005

2 Background Padgett Business Services has provided tax and accounting services for small businesses for over 35 years Over 400 offices in the U.S. and Canada Over 100,000 customers 0 to 250 employees with an average of 6.5 Annual sales from $10,000 to $10 million Average small business net income is $47,500 75% report business income on their personal tax return

3 Small Business Overview Data from the U.S. Small Business Administration, Office of Advocacy: There are over 5 million small businesses that employ less than 20 people These businesses account for over 89% of U.S. employers Small businesses employ over 20 million people, roughly 4.5 per small business

4 “Starting a small business means doing the one thing I love… and 99 that I hate.”

5 Complex Decisions Before the Doors Open What kind of entity should I elect? Sole proprietor, S or C Corp., LLC, or Partnership How do I pay myself? Employee vs. independent contractor Salary, dividend, distribution of profits, etc. How do I pay my taxes? Withholding, business or personal return, estimated tax What accounting method should I use? Cash, accrual, hybrid What is my tax year? Calendar year, fiscal year, changes?

6 The Next Hurdle Hiring Help How do I classify my staff? Employee vs. independent contractor? What new tax registrations are required? Federal, state, local? What about withholding and employment taxes? What tax forms must I file? Federal, state, local (monthly/quarterly/annually)

7 Additional Complexities Record Keeping and Record Retention Revenues and expenses Capital expenditures Employment records How long? Permanent or temporary? Employee benefit plans Retirement plans, medical coverage, other benefits

8 Special Concerns Depreciation and Basis Alternative Minimum Tax Advanced EITC Phase In/Out Transitional Rules Income Thresholds Effective Dates Fear of making a mistake

9 Cost of Compliance Time Spent Loss of Productivity Professional Consulting Costs Penalties and Interest

10 Business vs. Tax Decisions Purchasing Equipment Timing Purchase vs. lease Deferring Income/Expenses Accelerating Income/Expenses Borrowing Money Source of Funds Collateral Payback Methods Deductibility of Interest

11 Helping the Small Business Owner Get Back to Business A simpler, fairer, and growth-oriented tax code will ease the compliance burden on the small business owner – allowing them to again focus on the one thing they love.