The voices of Tax Policy Center's researchers and staff
Hillary Clinton has proposed a package of measures, including some important tax changes, aimed at making life easier for small businesses. They aren’t especially dramatic, and are unlikely to garner many headlines, but they have the potential to make tax filing vastly easier for owners of small firms.
The two key tax pieces would allow small business to take a standard deduction (similar to what 70 percent of individual filers use) and to use cash accounting for tax reporting.
These ideas probably would not cost Treasury much in lost revenue, but would make tax filing far easier for small firms. Anyone who owns a small business knows how much time it takes to track routine expenses. Having the option to take a standard deduction--and Clinton says firms could still itemize if they choose--would be a great relief.
Similarly, cash accounting for tax purposes would ease a big paperwork burden for many small businesses. She proposes two versions of this basic idea. The first, which she calls “checkbook accounting” would be available to firms with gross receipts of $1 million or less. In effect, they could set up a separate bank account, record cash out for expenses, cash in for sales, and pay tax on income that exceeds those costs. No need to account for inventories, depreciation of equipment, or accounts receivable.
Firms with $25 million or less in gross receipts would be able to use a more formal cash accounting system instead of accrual accounting.
She’d also allow firms to expense, or write-off in the first year, up to $1 million in capital investment. Expensing has some real advantages and broader versions have been featured in many GOP plans this year. However, permitting both expensing and allowing firms to deduct their interest costs creates new tax avoidance opportunities. Clinton needs to address this problem. So does Donald Trump, who now appears to back an unlimited plan for expensing.
In practice, simplification is not always so simple and many details would have to be addressed to turn Clinton’s idea into workable policy. For instance, how would she prevent anyone from calling themselves a small business, shifting some income to their venture, and offsetting it with a new standard deduction? She says she’d ask Treasury staff and small business representatives to work out specifics if she is elected.
Clinton’s plan won’t attract as much attention as Donald Trump’s plan to cut the business tax rate to 15 percent rate. But it has two virtues: It could actually help millions of small business people and it might pass Congress.
Her proposal fits in the class of modest tax reforms that might be called housekeeping: Relatively modest efforts to simplify provisions of the tax code that have become excessively complex over the years.
I only wish Clinton would transfer her new-found interest in simplicity to the rest of her tax agenda. The tax plan she released last year is full of needless complexity, especially for high-income taxpayers. For instance, she’s proposed three new minimum taxes, a cap on itemized deductions, and a six-rate capital gains tax system based on the length of time an asset is held.
Clinton might consider simplifying tax filing for high-income households, just as she’s doing for business owners. She could still raise the new revenue she wants but without adding extra aggravation and cost. If she wants to learn how, she could look at Bernie Sanders’s tax plan.
Still, simplification for small business owners is a worthy goal, and it might even attract bipartisan support in Congress.
Posts and comments are solely the opinion of the author and not that of the Tax Policy Center, Urban Institute, or Brookings Institution.
Democratic presidential candidate Hillary Clinton is introduced during a campaign stop Friday, Jan. 22, 2016, in Rochester, N.H. (AP Photo/Matt Rourke)