Patricia Thompson, tax partner at Providence-based Piccerelli, Gilstein & Company LLP, recently returned from a trip to Washington, D.C., where she recently testified before the Congressional Ways and Means Sub-Committee on Select Revenue Measures. She was asked her thoughts on tax law and how it affects small businesses. She answered five questions about the experience for Providence Business News.
PBN: Why were you asked to testify?
THOMPSON: As chair of the American Institute of CPAs (AICPA) Tax Executive Committee and a CPA for many small businesses, I was asked to testify on behalf of the AICPA. The hearing focused on the special burdens and complexities that the tax law imposes on small businesses and pass-through entities.
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PBN: What specific burdens did you address in your testimony?
THOMPSON: The focus of the Select Revenue Measures Sub-Committee is tax reform. Business tax reform cannot merely involve changes to corporate tax rates or other corporate provisions if the desired impact is to help small businesses, since many of them are not organized as corporations. In my testimony, I highlighted tax simplification, uncertainty in the tax law, and the need to consider expansion of corporate provisions to help non-corporate entities. Depreciation is a good example of where tax simplification is needed. There are special types of deprecation, such as “bonus”, special “straight-line” and “section 179” and each has special rules on when they apply. Plus there is a different method for AMT. As a result, businesses must maintain several different “books” of deprecation and update each annually for each asset. I also highlighted the uncertainty in the tax law caused by frequent changes in the tax law, the use of temporary provisions and passing legislation late in the year. Many provisions may be worthwhile but, unfortunately, the legislation may be either time-sensitive or a temporary provision. If taxpayers are not aware of a new incentive immediately, the tax-saving opportunity may be significantly reduced. Temporary provisions have become far too common. Often, they are allowed to expire and subsequently revived after much debate. It is inefficient and ineffective to make longstanding tax policy utilizing temporary provisions. Changes occurring late in the year make it difficult for small business owners to evaluate the impact of the changes on their businesses. It is even harder when the new law takes effect in the same tax year it is issued. In many cases, a small-business owner cannot plan for long-term growth, business development or new hiring. It can be difficult to change course in response to a new, short-term expiring tax provision. I highlighted a provision intended to help small business owners exclude the gain on the sale of their stock if certain conditions were met. Unfortunately, this provision only applies to C corporations and many small businesses are conducted as pass-through entities such as sole proprietors, partnerships and S corporations.
PBN: How often have you testified before a congressional committee?
THOMPSON: This was the first time I testified before a congressional committee in Washington D.C. but I have testified several times at certain Rhode Island House and Senate committees. I am looking forward to other opportunities to provide Congress with insights on how the tax system impacts small business and individual taxpayers. Since my role as chair began, I have had more exposure to the Internal Revenue Service decision makers. I have made several trips to Washington D.C. to meet with IRS employees and the IRS Taxpayer Advocate to keep the lines of communication open to be able to address issues that are important to the tax preparer community and taxpayers.
PBN: What else was discussed at the hearing?
THOMPSON: Some individuals testifying were in favor of eliminating pass-through entities. They believed it was unfair to treat businesses differently based on their form of organization. They also believed it is unfair to have different tax treatment depending on how the business funds it operations. For example, if the business funds operations and expansion with loan proceeds, the interest expense is deductible, but if equity is used the dividends paid to shareholders are not deductible. They compared the U.S. income tax system to systems in other countries and believed the U.S. could learn a great deal about improvements to our tax treatment of corporations to make U.S. businesses more competitive with businesses around the world.
PBN: Was it nerve-wracking to testify before Congress?
THOMPSON: The actual testifying is not nerve wracking at all. The challenging part is preparing the testimony and trying to anticipate the questions that might be asked by the members of the committee. The questions were easy. They seemed genuinely interested in the impact the elimination of pass-through entities would have on small businesses meaning that all business would be conducted through a C corporation. They asked about the exclusion of gain on the sale of small business stock.
