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Small Businesses Fight New Tax Rules

Published April 9, 2008

Advocates for small businesses are fighting changes in tax laws that the Bush administration says are aimed at cracking down on tax cheating, particularly by the self-employed.

Not all the changes proposed by the Treasury Department are aimed at small-business owners but the ones that do, those representing small business argue, will create a mountain of new paperwork that will be cumbersome and costly.

One proposal, part of President Bush’s federal budget, would require detailed reporting of credit card transactions to the Internal Revenue Service. Another would require most owners of small businesses to report any payments above $600 to corporations, like Federal Express, for services.

The administration has proposed such measures before, but Congress has not gone along with them, mainly because lawmakers are not anxious to associate their names with tax collection.

But one important change was added in closed-door budget negotiations in 2006 requiring federal, state and local agencies to withhold a percentage of payments from contractors — touching everything from the cleaning of schools to the paving of roads to supplying military uniforms.

The new rule does not take effect until 2011 but its passage lit a fire under small-business groups who say it is unfair and who are fighting for its repeal.

“This is our No. 1 priority issue for this Congress,” said Molly Brogan, a spokeswoman for the National Small Business Association.

With the economy slumping, Congress could once again adopt last-minute measures to raise revenue. A growing number of lawmakers, both Democrats and Republicans, want to pay for new spending by closing what is known as the “tax gap” — the shortfall of some $300 million in uncollected taxes. The government says that at least $100 million of that is due to underreporting by the self-employed, like painters, landscapers or restaurant owners.

But small business lobbyists say small enterprises are already overburdened by current requirements for tax withholding, record-keeping and reporting.

“There are some fraudulent actors,” conceded Grafton Willey IV, a principal in Tofias P.C., a certified public accounting firm, who just stepped down as chairman of the small business association. “But most of the so-called tax gap comes from the extraordinary complexity of the tax code.”

Individual merchants say the reporting of credit card receipts will add significantly to their paperwork, and make it easy for the I.R.S. to initiate audits if credit card total do not match what the small business owner reported to the government.

On-line sellers, like Evan Prytherch, who operates a musical instruments and accessories Web site called evanp.com, say such a requirement will fall most heavily on them because, unlike brick-and-mortar stores, their transactions are almost exclusively by credit card.

“And returns are a big part of our business,” he said, “so the yearly total can be very different when returns and things like people who don’t pay are taken into account.”

As a result, he said, he would have to match each entry with the paper receipt to make sure it had been paid and was accurate.

“You’re talking a book-size reporting effort,” he said.

More worrisome to some small companies is the Treasury Department proposal that businesses report, on the 1099 tax form, payments to corporations over $600. Businesses are already required to provide a 1099 form for employees. But expanding that to corporations, small business groups argue, will add paperwork.

“I do business with hundreds of corporations, but I don’t keep my books by company,” said Eric Blackledge, owner of Blackledge Furniture in Corvallis, Ore. “We’re a typical small business and like most, I keep them by accounts such as business supplies.”

Mr. Blackledge, the fourth generation to run the residential and commercial office furniture supplier, said he “would have to redo my entire accounting system to keep track of this, and it would be a tremendous expense.”

The Treasury Department plans to push Congress to add its measures to upcoming legislation. The credit card provision alone “is expected over a 10-year period to bring in $18.7 billion in taxes that would otherwise not be collected,” said a department spokesman, Anthony C. DeSouza.

Small business advocates say they will continue to battle such measures. The Coalition for Fairness in Tax Compliance, formed in 2006 by the United States Chamber of Commerce, the National Federal of Independent Business and Small Business Legislative Council, is among the groups fighting the proposals.

“Paperwork burdens and regulatory requirements already are big concerns for small business,” said Giovanni Coratolo, small business director at the United States Chamber of Commerce. “This would be adding something new that would cost more money for businesses which are already in compliance.”