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Three experts answer questions on income taxes, depreciation deductions, labor policy, unions, medical leaves, and health-care reform
The election is finally over, and as the dust settles, it's time for some accounting. How will small businesses fare under an Obama administration? Smart Answers columnist Karen E. Klein asked three experts—Bill Rys, tax counsel for advocacy group National Federation of Independent Business; Jay Sumner, labor law attorney with the law firm of Littler Mendelson; and John Arensmeyer, executive director of advocacy group Small Business Majority—to comment about issues important to entrepreneurs, including taxes, labor policy, and health care. Edited excerpts of their conversations follow.
Toward the end of the campaign, Obama put forward a small business emergency rescue plan. While it's not set in stone, the principles indicate some of President Obama's small business policy priorities. What are some of the highlights?
Bill Rys: His tax plan keeps the 2001 tax rates in place and extends them [rather than extending the Bush Administration's tax cuts of 2003]. It also extends business tax incentives based on tax code section 179—that are scheduled to expire in 2008—through 2009.
In his stump speech, Obama talked a lot about cutting taxes on individuals earning less than $250,000 a year. How does that threshold impact small business owners?
Rys: Well, 75% of small business owners have organized their companies as pass-through entities, meaning that they pay taxes at the individual level. So we did a survey at the end of 2007 that asked small business owners how much they earn from their businesses, and about 10% reported that they make more than $250,000. When we broke that down by how many employees they had, about 30% of those with 20 to 250 employees said they make more than $250,000 in taxable income. What the survey concluded is that regardless of the tax rate, small business owners draw a considerable amount of income from their businesses, and if a higher tax is placed on that income, they will have to make tough decisions about where to cut business investments.
Will it be helpful to extend the Section 179 tax incentives, which allow businesses to take an immediate deduction for the full value of qualified purchases on things like trucks, copiers, and manufacturing equipment, as Obama's plan advocates?
Rys: Let's get some background: The current limit on those deductions is $125,000, but last year, as part of the economic stimulus bill, they increased it to $250,000 for purchases made in 2008. That is supposed to expire at the end of 2008, but Obama's proposing to extend it through 2009. In 2003, when the limit was $25,000 and it was increased to $100,000, IRS data showed that the amount of depreciation deductions taken in that year represented the largest increase ever. So a lot of businesses did make investments in equipment during that year, based on IRS stats, and anytime you increase those limits, it's certainly helpful for small businesses in particular.
My concern now is whether small businesses really have the money to make those kinds of investments with their sales decreasing and many entrepreneurs reluctant to make expansions. I'd recommend locking in the higher dollar amount past 2010, and then, as we start to see the economy recover, it would send a nice signal to small business owners that as things pick up for them, they'll have a tax incentive they can rely on to do some investment at that time.
What other tax changes do you hope the new administration will put in place that will help small companies?
Rys: In general, when it comes to small business owners and taxes, we try to stress the importance of simplicity. The cost of tax compliance on small business owners can be especially onerous, because they don't have in-house tax departments like big businesses do.
Our surveys show that 88% of small business owners hire someone on the outside to do their taxes for them. We think that trying to find ways to simplify the filing process can have a benefit for small business owners. A lot of these targeted tax incentives are interesting proposals, but they also increase the complexity of the tax code and make it more expensive for small business owners. A simpler, more straightforward tax code might be as effective in reducing costs as a lot of targeted provisions would be.
Senator Obama got a lot of support during the campaign from labor unions. How would you characterize candidate Obama's outlook on labor issues?
Jay Sumner: We expect that the Obama Administration will focus on the protection of the worker. Their primary initial priority may be an attempt to make it easier for workers to unionize. The Employee Free Choice Act was introduced in the last Congress, and we anticipate that it will be reintroduced in the next, with a good chance that it will be passed in some form.
Many smaller companies don't have unionized workers. How would the proposed legislation—if it gets reintroduced and passes—affect small business owners?
Sumner: It could get easier for labor unions to go after small businesses, because it will be cheaper for them to unionize, since they wouldn't have to hold a secret ballot election. We anticipate that small companies will have a much greater likelihood of being unionized. The impact of being unionized is greater on small companies because of the overhead costs of managing a unionized workforce. Even if the union does not negotiate higher salaries and benefits, the employer still incurs the costs of negotiating and administering the union contract.
What other labor policy changes would you predict are likely to occur?
Sumner: There may be efforts to expand the coverage of the Family Medical Leave Act to smaller employers and have the leave paid through an employer payroll tax. Right now, the FMLA covers firms with 50 or more employees. That could be reduced to cover companies with 25 employees. Other changes might address paying for leave, making paid sick leave mandatory, and requiring employers to attempt to accommodate flexible work arrangements for employees.
What kind of timeline do you think might be attached to some of these ideas, if they are indeed proposed?
Sumner: All of the labor and employment initiatives that the Obama campaign talked about were introduced in the 110th Congress, and he was a sponsor. So all of these proposals have been introduced and voted on at least once. That makes it easier to get passage quickly.
The cost of offering quality health care is consistently cited as one of the top concerns for small business owners. How will the Obama Administration address those concerns?
John Arensmeyer: He has a number of health-care proposals for small business that we generally support. For instance, a bill was introduced in the last Senate that allows smaller companies to form health-care pools and reduce the cost of their coverage. There's also a proposal to increase coverage for children under SCHIP [State Children's Health Insurance Program] that passed Congress, but Bush vetoed it. I think there's no doubt that will have enough support to pass under Obama, and it could help small companies, because 37% of all SCHIP-eligible children have parents who work in small businesses.
Some surveys have shown small employers are wary about health-care reform. Is getting comprehensive reform through really possible?
Arensmeyer: Having small business owners worry about something like health care—which has nothing to do with running their core business or improving the quality of their product—is a huge impediment to companies starting up and growing. For us to really innovate and solve economic problems, health care is a critical piece. At the end of the day, most recessions have been overcome by small businesses starting to create new jobs, and if we want to have that happen again, health-care reform is essential.
What timeline do you anticipate on the process?
Arensmeyer: I'd say the chances are very high that the issue will be addressed during Obama's first term. Whether it will be taken up during '09, I'd say there's maybe a little more than a 50-50 chance. There may be a lot of incremental steps taken, and I think it will be tempting to get a victory on the children's health-care funding increase quickly. But we'd like to see comprehensive reform addressed as quickly as possible, because we believe that's really crucial for small business.
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