Small Business Taxation Survey20

12

With just days until the April 17 income tax deadline, federal taxes are weighing heavily on America’s small-business community. Federal taxes are routinely ranked among the top issues facing small businesses and pose a huge financial and administrative burden for small-business owners. NSBA has surveyed its membership on a broad array of federal taxes and tax policies, and is pleased to provide the results of that survey this document, the NSBA 2012 Small Business Taxation Survey.

Celebrating its 75th anniversary, NSBA has been the nation’s leading small-business advocate. As part of NSBA’s mission to address the needs and represent the concerns of the small-business community, we conduct a series of targeted surveys and quick polls throughout the year, including our semiannual Economic Reports. The 2012 Small Business Taxation Survey is a follow-up of a similar survey in 2011 and will provide valuable trending data.

Small business consistently ranks reducing the tax burden among their top issues for Congress and the administration to address. Although the actual out-of-pocket cost is a huge issue, the sheer complexity of the tax code, along with the mountains of paperwork that necessitates, is actually a more significant problem for America’s small businesses. In 2012, 64 percent of small businesses reported they spend more than 40 hours per year dealing with federal taxes, up from 57 percent just one year ago. Forty-five percent report spending more than 80 hours per year—two full weeks—just on dealing with federal taxes.

Underscoring the growing complexity with the U.S. tax code is the fact that 85 percent of small-business owners must pay an external tax practitioner or accountant to handle their taxes. Furthermore, when asked to rate the most significant challenge posed by the federal tax code to their business, the majority (56 percent) picked administrative burdens while 44 percent said financial burdens.

A likely result of ongoing economic difficulties, fewer companies today are using payroll service companies, down from 44 percent to 41 percent. However, those that do are paying more: —36 percent of small businesses spend in excess of $500 per month on payroll services, up from 28 percent just a year ago.

When it comes to public policy, the clear majority of small businesses (73 percent) support broad tax reform that will reduce both corporate and individual tax rates coupled with reduced deductions. Given that the overwhelming majority of small businesses (83 percent, according to existing NSBA data) pay taxes on their business at the personal income level, or are so-called “pass-through” entities, addressing just one piece of the puzzle—such as corporate tax reform—will lead to even greater complexity and a massive tipping of the scales in favor of the nation’s largest companies at the expense of small businesses.

Touching again on the ever-changing maze of tax credits and laws, small businesses expressed the greatest concern over a pending increase in the marginal income tax rates; massive increases in the estate tax; prohibiting self-employed from fully deducting the cost of their health insurance; and expiration of the expanded Section 179 expensing and bonus depreciation.

We hope this survey provides timely and useful information on how taxes are impacting America’s small-business community.

Sincerely,

Chris Holman, Todd O. McCrackenNSBA Chair NSBA President and CEOMichigan Business Network

FOREWORD

NSBA Chair Chris Holman

NSBA President Todd McCracken

3

DE

MO

GR

AP

HIC

S

It is worth noting that the businesses surveyed represent a slightly larger proportion of c-corps than what is found in the at-large small-business community where approximately 17 are c-corps. Additionally, employee size and revenues are slightly larger among the survey sample than what is generally found among the at-large small-business community. Finally, NSBA members represent a slightly higher proportion of manufacturers and professional services.

FIGURE 1 - BUSINESS STRUCTURE

FIGURE 4 - SALES/REVENUES FIGURE 5 - PAYROLL

FIGURE 2 - NUMBER OF EMPLOYEES

FIGURE 3 - INDUSTRY

Which of the following best describes the structure of your business?

What were your gross sales or revenues for your most recent fiscal year?

What was your total payroll for the most recent fiscal year?

How many total full-time personnel are currently employed by your business?

Which of the following best describes the industry or sector in which your business operates?

ManufacturingProfessional services

ConstructionRetail

DistributionTransportation

InsuranceReal estate

SoftwareIT/Telecom

FinanceFabricated Products

Health CareFood Service

Printing and PublishingBiotech

Chemicals

23%17%

13%12%

8%4%4%4%

3%3%

2%2%2%

1%1%1%

0%

Corporation

Less than $100,000 Less than $100,000

1 to 40

S-Corp

$100,000 - $250,000 $100,000 - $250,000

5 to 9Partnership

$250,000 - $500,000 $250,000 - $500,000

10 to 19Sole Proprietorship

$500,001 - $1 Million $500,001 - $1 Million

20-99LLC

$1 - $5 Million $1 - $5 Million$5 - $25 Million $5 - $25 Million$25 - $75 Million $25 - $75 MillionMore than $75 Million More than $75 Million

100-49932%

42%

12%

13%1%7%

28%

15%18%

27%

5%

12%

9%

8%

12%33%

20%

5%

1%

23%

25%18%

25%

5%

4

Complexity of the tax code continues to pose significant challenges to small business. The tax burden on America’s small-business owners is growing with 64 percent reporting they spend more than 40 hours per year dealing with federal taxes, up from 57 percent just one year ago. The financial burden also is growing with a slight increase in the number of small businesses spending in excess of $5,000 annually on the administration (i.e.: accountant fees or internal costs) of federal taxes alone.

The time and money spent, coupled with the fact 85 percent of small-business owners must pay an external tax practitioner or accountant to handle their taxes ought to be a clear signal that the tax code is far too complex.

When asked to rate the most significant challenge to their business, the majority (56 percent) picked administrative burdens while 44 percent said financial burdens. These administrative burdens are usurping more and more of the small-business owner’s time and directly correlates to increased spending simply to pay ones taxes.

Interestingly, the financial and administrative burden small-businesses feel is nearly identical for various taxes. When asked to rate a series of 11 common small-business taxes both in terms of financial and administrative burden, payroll taxes, state and local taxes, property taxes, sales tax and income taxes rounded out the top five.

FIGURE 6 - TIME SPENT ON FEDERAL TAXES

FIGURE 7 - MONEY SPENT ON FEDERAL TAXES

Approximately how much time do you spend each year dealing with federal taxes?, (i.e. calculating payroll, self-employment or any other business-related tax, filing reports, working with your accountant, estate planning, etc)

Approximately how much money do you spend each year on the administration of federal taxes not including your owed taxes? (i.e.: accountant fees, internal costs for administration of taxes, legal fees, etc…)

Total spending more than $5,000

2011 2010

53% 50%

SM

AL

L-BU

SIN

ES

S T

AX

BU

RD

ENNearly one in three small-business owners spend more than

three weeks dealing with federal taxes—up five percentage points from just one year ago.”- Chris Holman, NSBA Chair and CEO of Michigan Business Network.com and President of The Greater Lansing Business Monthly

““

64% 57%Total number of

businesses spending more than 40 hours

(2011)

Total number of businesses spending more than 40 hours

(2010)

vs.1 to 10 hours11 to 20 hours21 to 40 hours41 to 80 hours81 to 120 hours120 hours +

10%

10%

17%

19%18%

28%

Less than $500$501 to $1,000$1,001 to $5,000$5,001 to $10,000$10,001 to $20,000$20,001 to $40,000More than $40,000

9%

11%

27%

18%

13%

12%

10%

vs.

5

SM

AL

L-BU

SIN

ES

S T

AX

BU

RD

EN

FIGURE 9 - ADMINISTRATIVE BURDEN

FIGURE 10 - FINANCIAL BURDEN

FIGURE 11 - LARGEST TAX BURDEN

FIGURE 12 - CUMULATIVE BURDEN BY TYPE IMPOSED ON SMALL BUSINESS BY THE FEDERAL TAX CODE

Please rank, in order of their administrative burden on you and your business, the following taxes.

Please rank, in order of their financial burden on you and your business, the following taxes.

What is the largest burden posed to you by the federal tax code?

1. Income Taxes (Both C-Corps and Pass-Through Entities)2. Payroll taxes3. Sales tax4. State and local tax compliance5. Property taxes6. Alternative Minimum Tax

7. Capital gains taxes8. Import taxes (I import)9. Excise taxes10. Estate tax11. International taxes (I export)

1. Payroll taxes2. Income Taxes (Both C-Corps and Pass-Through Entities)3. Property taxes4. State and local tax compliance5. Sales tax6. Alternative Minimum Tax

7. Estate tax8. Capital gains taxes9. Excise taxes10. Import taxes (I import)11. International taxes (I export)

Financial cost to my business

The lack of consistency/continuously changing regulations

Administration of tax forms and the time it takes

Complexity and the concern over getting audited

Amount of paperwork that must be completed

Inequity within the Code

ADMINISTRATIVE BURDEN FINANCIAL BURDEN

FIGURE 8 - HOW TAXES ARE PREPARED

How do you prepare your taxes?

Tax practitioner/accountant

Tax software on computer

Personally calculate taxes and fill out the paper forms

Electronic Filing

Staff member calculates taxes and fills out the paper forms

85%5%

4%2%

3%

44%

15%

13%

56% 44%

11%

10%

7%

66

Significantly ModeratelyA Little Not at all

Significant impact Small impact Moderate impact No impact

TA

X D

ED

UC

TIO

NS

AN

D C

RE

DIT

S

FIGURE 13 -DEDUCTIONS & CREDITS

Which of the following deductions or credits do you take advantage of? (Check all that apply)

Sec. 179 expensing

Home mortgage interest deduction

Bonus depreciation

Home office deduction

R&D credit

Energy efficiency credits

Start-up costs deduction

There was a decrease in the take-up rate of nearly every common small-

business deduction between 2011 and 2012, likely due to actual sunsets or

confusion over last-minute changes to various sunset dates. Although tax law

and credits or deductions do have a significant impact on a notable number

of businesses, many NSBA members have commented that the complexity,

continually changing and temporary nature of many credits and deductions

have diminished their importance.

36%47%

54%

25%25%

14%18%

12%

11%

3%

11%

10%

4%

36%

FIGURE 14 -IMPACT OF FEDERAL TAXES ON OPERATIONS FIGURE 15 -INFLUENCE OF TAX CREDITS & DEDUCTIONS

How much of an impact would you say federal taxes have on the day-to-day operation of your business?

How much do tax credits and/or deductions influence your decisions about your company and/or employees?

6%

25%

29%

32%

15%15%

41%

38%

2011 2010

7

AC

CO

UN

TIN

G &

INV

EN

TO

RY

FIGURE 17 - BUSINESS INVENTORY

FIGURE 16 - ACCOUNTING METHOD

FIGURE 18 - DETERMINING INVENTORY COSTS

Do you have inventory for your business?

Which method of accounting does your business utilize?

Among those that do have inventory, methods is used to determine inventory cost.

Accrual

Yes

Cash

No

62%

57%

38%

43%

First-in, First-out (FIFO)

Specific Identification Method

Last-in, First-out (LIFO)

Not Sure

32%

30%

21%

17%

8

FIGURE 19 - SELF EMPLOYMENT TAX DEDUCTION

FIGURE 23 - IMPACT OF W2 REQUIREMENT

FIGURE 20 - AVERAGE SAVINGS FROM SELF-EMPLOYMENT TAX FIGURE 21 - SPENDING SAVINGS

FIGURE 22 - AWARENESS OF W2 REQUIREMENT

Did you utilize the one-year provision enabling self-employed individuals to fully deduct the cost of their health insurance for 2010, thereby foregoing the self-employment taxes that are otherwise assessed on health insurance premiums?

How do you expect this new requirement to impact your business?

Yes No - I do pay self-employment taxes

No - I don’t pay self-employment taxes

I wasn’t aware of it

Not Sure

Approximately how much money did the 2010 exemption of self-employment taxes on the cost of your health insurance save your company?

What did you do or plan to do with this extra money?

Are you aware of the new requirement which goes into effect in 2012 that all health insurance spendingby your company be reported on employees’ W2 forms?

HE

AL

TH

INS

UR

AN

CE

AN

D T

AX

ES

25%

$3,130

13% 38% 06% 19%

Although it appears there still is a significant number of small

businesses who are not aware of the 2012 requirement

that that all health insurance spending must be reported

on employees’ W2 forms, one in five said the requirement

will consume a significant amount of staff time or result in a

significant increase in their payroll provider’s fees.

Yes

No60%40%

It will cost me or my staff a significant amount of time

14%

It will cost me or my staff a moderate amount of time

31%

It will increase my payroll provider’s cost significantly

6%

It will increase my payroll provider’s cost somewhat

20%

No Impact 15%Not sure 23%

Save or reinvest it back into the company 48%

Other 20%

Buy new equipment 13%

Reduce employees’ portion of the health insurance plan

8%

Grow inventory 8%

Increase advertising 7%

Reduce my (the employer) share of our health insurance plan

5%

Hire more employees 2%

9

FIGURE 26 - EXCESS OF $500 SPENT ON PAYROLL FIGURE 27 - TIME SPENT ON HANDLING PAYROLL INTERNALLY

FIGURE 28 - TIME SPENT ON ADMINISTRATION OF PAYROLL TAXES - INTERNALLY

FIGURE 24 - USE OF PAYROLL SERVICES FIGURE 25 - MONEY SPENT ON PAYROLL SERVICES

Percentage of small-business owners spending in excess of $500 per month on payroll

of small-business owners spend in excess of 6 hours per month on

administration of payroll.

If you handle payroll internally, approximately how much time do you spend on the administration of payroll taxes?

Do you use a payroll service like ADP or Paychex to prepare your payroll?

If you use an external payroll company, approximately how much MONEY do you spend per month with the payroll company?

PA

YR

OL

L T

AX

ES

AN

D A

DM

INIS

TR

AT

ION

$1 to $50

$51 to $100

$101 to $500

$500 to $1,000

$1,001 to $5,000

More than $5,000

4%

11%

50%50%

16%20%

1%10%

2%

5%

18%

15%

No time - I have no employeees

1 to 2 hours per month

3 to 5 hours per month

6 to 10 hours per month

10 hours +21% 21% 25% 14% 19%

While fewer companies report using payroll service companies like ADP or Paychex (down from 44 percent to 41 percent), those that do are paying more. More than one-third of small businesses spend in excess of $500 per month on payroll services. This equals more than $6,000 per year that could be better spent elsewhere in a small business and is an increase from one-in four just a year ago.

The time commitment also is significant with 33 percent of small-business owners spending more than six hours per month handling payroll which amounts to more than 72 hours per year, or nearly two weeks.

20102011

36%

YES

41%

59%

44%56%

NO

27%

33%vs.

2011 2010

2011 2010

10

ES

TA

TE

TA

X &

SA

LE

S T

AX

FIGURE 30 - TIME SPENT ON ESTATE TAX PLANNING

FIGURE 29 - TIME SPENT ON ADMINISTRATION OF SALES TAX

FIGURE 31 - MONEY SPENT ON ESTATE TAX PLANNING

In the last three years, how much time have you spent on estate tax planning?

Approximately how much time to you spend on the administration of sales taxes?

None

No time - I don’t collect sales tax

None

1 to 10 Hours

1 to 2 hoursper month

$1 to $1,000

11 to 20 Hours

3 to 5 hoursper month

$1,001 to $5,000

21 to 40 Hours

6 to 10 Hoursper month

$5,001 to $10,000

40 Hours +

10 Hours + per month

$10,001 to $20,000

More than $20,000

In the last three years, how much money have you spent on estate tax planning?

34%

41%

44%

26%

25%

18%

18%

20%

21%

11%

7%

11%

11%

8%

3% 4%

Given the relatively higher proportion of professional services and manufacturing businesses among the respondents of the survey, it is not unusual that such a high proportion don’t

collect sales taxes.” - Todd McCracken, NSBA President & CEO

““

11

FIGURE 33 - SUPPORT FOR DEFICIT REDUCTION PROPOSALS

Which of the following deficit-reducing proposals do you support?

Reform and reduce entitlement spending

Implement tax reform to create economic growth and generate federal revenues.

An across-the-board budget cut for federal agencies

Greater authority of the president to reduce Congressionally-approved spending (line-item veto)

Raise taxes on the highest-earning two percent of individuals (allow the Bush-era tax cuts to expire)

86%

84%

73%

58%

25%

FIGURE 32 - SUPPORT FOR TAX REFORM PROPOSALS

Which of the following tax reform proposals do you support?

Reduce both corporate and individual tax rates and deductions

A broad reform of the tax system in-line with the Fair Tax*

Reduce the corporate tax rate and eliminate some business deductions

A European type value added tax

*Elimination of all income and corporate tax rates as well as all deductions, and instead implement a 23 percent tax on the end point-of-sale for all goods

73%

54%

50%

4%

As voted on by NSBA’s members at the biennial Small Business Congress, tax reform is one of NSBA’s top ten priorities. The current tax code is comprised of more than 10,000 pages of laws and regulations that serve as a disadvantage to small businesses, and are egregiously complex and constantly in flux.

Addressing just one piece of the puzzle—such as corporate tax reform—without all pieces will lead to even greater complexity and a massive tipping of the scales in favor of the nation’s largest companies at the expense of small businesses.

Furthermore, small businesses strongly support implementing broad tax reform to create economic growth and generate federal revenues as a sound way of addressing the growing national deficit.

TA

X P

OL

ICY

Given the majority of small businesses are pass-through entities, there is overwhelming support for tax reform that would reduce both corporate and individual tax rates coupled with a reduction in business and individual deductions. - Chris Holman, NSBA Chair

““

12

FIGURE 34 -IMPACT OF RECENT AND PENDING TAX CHANGES

Percentage of owners who said the tax change would have a moderate to significant impact on their small business.

Marginal income tax rates increase in 2013 (expiration of Bush tax cuts)

Estate tax exemption reduced from $5 million and top rate of 35% to $1 million and a top rate of 55%

Self-employed no longer able to fully deduct cost of health care in 2011 and 2012

Sec. 179 Expensing reduced to $125,000 from $500,000 in 2011

Bonus depreciation reduced to 50% in 2012

AMT exemption amount reduced

R&E (also called R&D) tax credit no longer available in 2012

74%

58%

53%

52%

51%

47%

38%

TA

X P

OL

ICY

The overwhelming majority of small-business owners support broad reform of the federal tax code—not tinkering with certain taxes here and there. While certain credits and deductions can be very helpful, the ever-changing tax landscape is a roller coaster ride without the slightest indication of what’s around the next corner. Lawmakers must work toward broad reform, and they must do it now.” - Todd McCracken, NSBA President & CEO

““

Touching again on the ever-changing maze of tax credits and laws, small businesses

expressed the greatest concern over the following tax changes, many of which

either already have taken place or will in 2013 unless Congress acts: an increase in

the marginal income tax rates; estate tax exemption drops and the tax increases;

self-employed no longer can fully deduct the cost of their health insurance; and

expiration of the expanded Section 179 expensing and bonus depreciation.

METHODOLOGYThe 2012 Small Business Taxation Survey was

conducted on-line March 14 – March 28 among

350 small-business members of NSBA representing

every industry in every state in the nation. While

the results in this survey can be extrapolated to

the at-large small-business community, it is worth

mentioning that NSBA members tend to be older,

more well-established small businesses, and there

is a higher concentration of C-Corps in this survey

than what is traditionally found in the at-large

small-business community in the U.S.

14