If enacted, the reforms would soften tax laws that trap many small businesses in the alternative minimum tax, or AMT. What's more, the proposed changes would allow businesses to deduct large purchases from their taxable income in the year they make the purchase, rather than depreciating the purchase over time. Small-business owners say the reforms would encourage equipment purchases, avoid conflicts with the Internal Revenue Service, and only tax income that is in their bank accounts rather than on their balance sheets.
Led by Florida Congressman Connie Mack and former Louisiana Senator John Breaux, the panel held town hall-style meetings throughout 2005 to understand how tax policies force businesses to sacrifice investments in order to avoid burdensome and unpredictable taxes.
Small-business consultant Roger Harris, who testified before the panel, applauded the simplification of the AMT, noting that the tax complicates deducting interest on loans that small businesses use for important purchases like machinery or offices. Under the AMT, interest deductions depend on factors like the type of assets bought with the loan and how the asset is used. This can lead small businesses to forgo investment loans for fear that they won't be able to account for interest properly, and may face an IRS audit and fines.
The proposals would lift another deterrent on investment. Currently, business purchases under $102,000 can be deducted from taxable income in the year the purchase was made. But businesses must depreciate larger purchases. (Depreciation spreads out smaller tax deductions over several years, rather than in the year of purchase.) On top of that, the $102,000 threshold will fall by 75% in 2008, effectively forcing small businesses to depreciate all significant purchases. The panel favors "extending and expanding" the current threshold.
For David Hurley, president of Landmark Engineering and Surveying Corporation, an 88-employee outfit based in Tampa, Fla., the difference between deducting and depreciating purchases is critical. "I'd rather buy equipment now and deduct it than wait until the laws require me to depreciate it," said Hurley, when asked how tax laws, rather than business conditions, shape Landmark's investment decisions. Hurley said he favors the proposed reform to allow all large purchases to be deducted in the year that they were made.
Additionally, the proposed reforms would smooth differences between states, the federal government, and the AMT, all of which have separate rules for depreciating corporate assets.
Business leaders cautioned against drawing too many conclusions just yet, as they are still reviewing the proposed reforms, which would also reduce corporate income taxes and eliminate deductions for interest expenses.
Ryan Peebles, the tax policy analyst for the National Federation of Independent Business, said that his group is now studying the recommendations. "What we're seeing are some good provisions," he said. "We're taking it in stride and looking closely at the reforms."