Small Business Needs Simplified Tax Code

CONTACT: Suzanne Stoltenberg 717-232-8582 x1 [email protected]

Small Business Needs Fair, Simplified Tax Code in Pennsylvania
Any hike in personal income tax will also disproportionately hurt small businesses

HARRISBURG, (March 2, 2015) – The National Federation of Independent Business (NFIB), which represents 15,000 small businesses in Pennsylvania applaud lawmakers today for introducing three bills to simplify the state’s tax code. The complexity of the current system is time-consuming and expensive for small businesses in the Commonwealth.

"The governor says he wants to improve the business climate in Pennsylvania by lowering the Corporate Net Income Tax, but if he opts to raise the Personal Income Tax that will be devastating to most small businesses," said Kevin Shivers, executive state director of NFIB/Pa. "On the other hand, bills like the ones introduced today to simplify the tax code are small-business friendly and we are grateful to the sponsors for understanding the obstacles the mom-and-pop businesses face."

Right now small businesses spend thousands of dollars hiring tax experts at an average of $74 dollars an hour. A business owner would much prefer to spend time expanding their business and creating jobs rather than being burdened with hours of paperwork preparing tax returns.

Senator Scott Hutchinson (R-Venango), who along with Rep. George Dunbar is sponsoring a measure involving expensing and depreciation, said "Small businesses play an integral role in Pennsylvania’s economy and in our communities, and it’s in our best interests to help them grow and expand."

The sponsor of a measure on like-kind exchanges, Representative Stephen Bloom (R-Cumberland) said "Small businesses create more than half of all jobs in Pennsylvania, but instead of encouraging them to grow, our outdated tax laws weigh them down with unfair rules and overly complex requirements. The reforms we are announcing today would replace several unnecessarily complicated tax obstacles with fairness and simplicity so our small businesses can focus on growing the jobs our citizens need." Senator Mike Folmer is also sponsoring a like-kind exchange bill in the Senate.

Representative Seth Grove (R-York) and Senator John Eichelberger (R-Blair) are sponsoring a bill on Net Operating Losses. Grove said "This legislation I am working on with my colleagues will help improve the tax process, allowing Pennsylvania’s business men and women to spend more time building their companies and creating jobs."

Small Business Tax Reform Summary

Like-Kind Exchanges – Prime Sponsors: Rep. Stephen Bloom and Sen. Mike Folmer

Under Federal tax law, a "like-kind" exchange under Internal Revenue Code Section 1031 allows for tax-deferral when property is exchanged for similar property. This long-standing Federal provision facilitates efficient investment in the job-creating assets businesses need to remain competitive. Every state but Pennsylvania provides for a similar deferral on the state level (current Pennsylvania tax law contains no such provision).
This legislation would allow for like-kind exchanges in Pennsylvania to mirror Internal Revenue Code Section 1031, thereby removing a disadvantage Pennsylvania small businesses face when competing with businesses in other states.

Net Operating Loss – Prime Sponsors: Rep. Seth Grove and Sen. John Eichelberger
The Tax Reform Code of 1971 allows corporate taxpayers to deduct Pennsylvania losses from one year from Pennsylvania Income in subsequent years. However, there have been several changes in the carry forward period for Net Operating Losses and limitations on the amount of Net Operating Loss that can be used in a given tax period.

This legislation would allow a small business to use the Net Operating Loss deduction. Since small businesses don’t have access to the capital larger companies have, their ability to use such tax strategies helps them have greater control over their financial positions. For example, if an owner sells some personal items to help the business make payroll, that owner can take the business loss against his or her tax bill created by selling the personal items

Section 179 Expense Deductions – Prime Sponsors: Rep. George Dunbar and Sen. Scott Hutchinson

For Pennsylvania C Corporations, the calculation for Pennsylvania Corporate Net Income begins with federal taxable income, which is then adjusted for certain items specified in Article IV of the Tax Reform Code. Currently, there is no adjustment for Section 179 expenses. The Section 179 expense used in the calculation of Federal taxable income is also used in Pennsylvania C Corporation Net income.

The Federal limit for Section 179 expenses has been $500,000 for the last four years. However, for personal income tax purposes (S Corporations, partnerships, and individuals), Pennsylvania law limits the amount of Section 179 deduction to $25,000.

This has created an inequity for small businesses in Pennsylvania.

Pennsylvania C corporations are allowed a 179 deduction that small businesses are not. Senator Hutchinson’s legislation would increase the maximum amount a taxpayer may elect to expense for Section 179 assets: to $100,000 per taxable year. The bill would also increase the phase-out of this deduction from the current $200,000 to the current federal amount of $2,000,000.

Please note: this increase in the deduction is not a tax credit, but simply allows a tax deduction earlier in the useful life of depreciable assets. The proposed increase in limits is an incentive to encourage businesses to buy equipment and to invest, which promotes economic development in Pennsylvania.