Posts Tagged ‘tax law’

How Large is a Small Business?

June 4, 2012

As my dialog with the White House and Congress to reduce the Government’s burden on my business unfolds, a question in a conversation emerged:

How large is a small business?

To the uninformed, this would seem to be a pretty simple question to answer – less than $ in revenue and/or less than # of employees, and the business is classified as a small business by the Government. There is guidance from the government – some pretty clear, and some implied by legislation, but in my view, it is all baloney.

For the record, my S-Corp engineering consultancy is best classified as NAICS 541330; my LLC medical device design company is best classified as NAICS 541712.

Here are several “footprints” to answer this question: How large is a small business?

The Small Business Administration –

What is a Small Business? |

From this link, you can find a comprehensive pdf document Size_Standards_Table to identify revenue (and numbers of employees for some industries) thresholds that define a small business specified by NAICS code.

NAICS 541330 – $14M revenue or less is a small business;
NAICS 541712 – 500 employees or fewer is a small business.

500 employees? That is a HUGE research firm… Businesses in certain classifications are small with up to 1500 employees (though many SBA classifications with employee limits top out at 500)! These are certainly not small businesses as far as I am concerned.

The Internal Revenue Service –

Small Business and Self-Employed Tax Center

From this link, after a few clicks and some browsing, you can find this introductory publication for small business p334 Tax Guide for Small Business. The focus on this publication is a high level overview of terms and definitions, accounting procedures and processes for the novice that satisfy IRS expectations of a business, but nowhere in this publication does it define a small business… This part of the IRS website is dedicated to service “small business with assets under $10 million.” So, there is one revenue number to define a small business. The focus in this part of the IRS website, though, and in this publication is on the sole proprietorship organization of business, and not small corporations, and not applied to some particular measure of revenue or employee size that the SBA utilizes to classify businesses.

By the way, Pub 334 has specific text dedicated to treatment of “statutory employees” – what are they? Darned if I know – never defined…

With some further browsing (and being a knowledgable business owner and regular IRS website visitor), I located the following article, S Corporations.This part of the IRS website is more appropriately focused on my particular business organization, but this article still leaves the question largely unanswered: “What is small?” Fewer than 100 shareholders is the measure of this classification of small business.

Reference to IRS Section 179 provides for immediate expensing of capital assets up to $500,000 – offset by qualified property exceeding $2,000,000 – to benefit the small business. Again, a reference to assets, and to not revenue or employees.

And finally, reference to the Small Business Health Care Tax Credit for Small Employers (part of the Affordable Care Act) which applies to employers with fewer than 25 employees establishes another reference to “small”. After reading portions of the ACA (26 hrs or so), and reading thoroughly the IRS website articles on this topic (another 10 hrs or so), and reading the instructions for form 8941 (with an estimated burden to read and understand, prepare and submit is 17 hrs or so), well,  of banging my head against the wall on this for 50+ hours to see if I quality for the 35% credit for healthcare insurance premiums I pay, I still don’t understand this topic sufficiently to know… But it does add another measure for “small” – fewer than 25 “equivalent full-time employees” or FTS’s. Yes, this is a rational measure for “small”.

Dad-gum-it, I know that the IRS has some specific language defining a small business… I can’t recall where I saw the definition in the IRS Tax Code.  I’ll find it some other time.

Pragmatically, the IRS definition of small seems to be up to $10M in total assets; fewer than 25 employees. This is a more reasonable criterion for a small business than the SBA guidance.

United States Census Bureau –

Statistics about Business Size (including Small Business) from the U.S. Census Bureau

The United States Census Bureau compiles encyclopedic statistics about business size in the US. About 3/4 of all businesses have no payroll – they are fundamentally sole proprietors.  The Census Bureau’s statistics are compiled for businesses with fewer than 5, 10, 20, 100, 500, and more than 500 employees.  2008 statistics for businesses in rough and round numbers are as follows:

Classification: Employment_Size #_Firms. #_Employees. __Annual_Payroll ($1,000)
Nonemployer_firms (proprietorships) 21,351,320 n/a n/a
1-4 Employees 3,617,764 6,086,291 232,062,907
5-9 Employees 1,044,065 6,878,051 222,504,912
10-19 Employees 633,141 8,497,391 293,534,352
20 to 99 Employees 526,307 20,684,691 774,589,335
100-499 Employees 90,386 17,547,567 706,476,693
500+ Employees 18,469 61,209,560 2,901,340,979

(sorry for awkward table formatting…)

Notice that an “order of magnitude” decline in the number of businesses counted occurs at the 100 employee measure.

Wikipedia –

I am reluctant to site Wikipedia, though it is convenient:

Small business – Wikipedia, the free encyclopedia

Small and medium enterprises – Wikipedia, the free encyclopedia

My Opinion –

So, how large is a small business? My business is a small business with two employees currently. The Local doughnut shop has 4 employees (the entire family) – clearly a small business. The local Quick-Kar Oil Change store has 14 employees – it is a small business from anyone’s perspective – clearly a small business. The local “watering hole” has 43 employees including part timers – still a small business.

Here is where I think I will talk from when I refer to the scale of a business:

SOHO – 1 to 4 employees – a “one or two-room” business;
Small – 5 to 49 employees – a “one or two-building” business;
Medium – 50 to 499 employees;
Large – 500 to 4999  employees;
Giant – 5000 or more employees.

Anyone have an opinion to offer? Yes, I know these numbers aren’t nice powers of 10, but they are orders of magnitude!

Government Burdens on My Business (and what I want to do about it…)

May 28, 2012

The White House called me the other day – they have scheduled a conference call with me to explore a “few ideas”. This is the result of a scathing letter I wrote to President Obama in January.

My “Beefs”? They are “fuzzy”… It boils down to the burden from the total body of law. From my letter:

The law is additive in the United States – it does not diminish – it seems to grow and grow without bound. Every law has a cost – a cost to socialize, write, pass, publish, educate, enforce, comply with and audit. The more laws there are, the higher the social and economic cost of the total body of law.

My Objectives:

I am asking our Government to embark on a cultural shift to eliminate burdensome law, and I am asking our Government to write higher quality legislation that the person it pertains to can read and understand. And I am also asking the Government to foster small business in some new and innovative ways. In my letter, I focused on two areas of law that cost me time and money: tax law and immigration law. I’ll add a third category of law in my conference call: intellectual property or IP law.

Here are five things I want to accomplish for my business:

  1. Reduce the amount of time spent complying with the total body of law to less than a 10% burden of my productive time;
  2. Eliminate significant administrative expenses dedicated to legal compliance;
  3. Create access to skilled and experienced employees who may need visas;
  4. Create and exploit IP protections my business currently does not enjoy;
  5. Encourage law that is essential, minimal, straight forward and readable.

I spend about 20% of my productive time and thousands of dollars every year to comply with the laws I am exposed to in my business. I would much rather invest my time and money in my business. And have you read the law? I have read more than 120,000 pages of law, proposed legislation, instructions, guidelines, position papers, etc. over the years, and I can actually understand some of it – I say that in jest. The law is almost impossible for me to read and understand. Golly, you should be able to read the law and understand what your obligations are without too much of a struggle.

When I am uncertain about how to complete a form (I seem to file an inordinate number of forms), I start with a phone call to a government agency to seek an answer to my questions. My frustration is frequently amplified with every call I make until my frustration is overwhelming. Have you ever called the IRS with a question? Every agency of the Government works in roughly the same way – they are happy to read the law and locate resources in print or on-line for you, and that can be helpful, but they are unable to interpret the law.

Me – This is my question: “blah blah”;

Them – This is the law: “gobblety goop”;

Me “But what does that mean?”

Them “We can’t tell you what it means, we can just tell you what it says.”

Me “OK – what does this word mean? And this word? And this word? And this phrase?”

And on and on…

When the questions get down to the definition of words, well, I start to learn a few things and put things together in my brain. This is a frustrating “peeling the onion” process, but it can be productive none the less.

Another frustration that costs me hours of time and maintains a “simmering” level of frustration – agency registrations, on-line account maintenance and news dissemination. My company has more than a dozen agency registrations that require periodic attention. News and information is posted on-line by each agency, but you must visit each agency’s website to learn these things.

Here is what I intend to propose in a nutshell:

Tell me “what it means” !
Don’t force my company to engage with our attorneys and CPAs to get basic answers to fundamental questions. Provide constructive guidance to the small business. Produce resources that explain the law and describe “official” government interpretations of the law. This is a huge challenge, but the very exercise of addressing this problem will expose the poor quality and ambiguous nature of legislation for Congress to address. Tell me what it means, not what it says…

Give me one login!
Facebook has a neat credential server service. A growing number of websites let you login with your Facebook login. This is a big simplification for a lot of people. The Government has a few focal points for citizen access with a login credential – GRANTS.GOV is one example. Many agency websites use a GRANTS.GOV registration to provide basic registration information for their own registration processes, and this saves time – this is a good step forward.  USA.GOV is another focal point for citizen access, but it currently requires no login. It would be a tremendous step forward if government agencies used a central login resource for secure citizen online access – Login with USA.GOV!. For some uses, a second ID challenge or a biometric or device verification process is fine – mandatory for some uses. For most secure online access requirements with Government, though, let me login with one credential to any agency of the Government just like I login “with Facebook” for many commercial websites.

Offer RSS Services; Maintain an Interest Profile for E-mail News Notifications.
USA.GOV allows users to subscribe to RSS feeds – every agency of the Government should be required to offer RSS feeds to users. Many do, but not all… Further, every agency should maintain an “Interest Profile” for subject-specific e-mail notifications for news and events, bulletins, advisories, etc. Automated and highly focused e-mail notifications would help me stay abreast of news and changes I need to know about. Keep me informed as effortlessly as possible with focused, automated notifications.

The “Hobby” Business – Encourage it!
The IRS discourages the “hobby’ business. The IRS devotes resources to identify and stop a “hobby” business. I believe that a “hobby” business can spur innovation, create wealth and lead to much larger enterprises over time for more and more business owners. Why discourage small revenue-generating and innovative businesses that require long periods of time to flourish? Why stifle tinkering and plodding by uncertain and hesitant entrepreneurs? Why drive this business model into a lawless enterprise in the grey economy or black market? This is a “garden of opportunity” to foster and encourage.

Tax Law – Fewer Forms and Less Information for a Small Business.
Texas offers a huge time-saver for my company – a simple one-page “No Tax Due” annual franchise tax filing requirement that I qualify for because of the small size of my company. The IRS needs a form 1120-SIMPLE and a form K-1-SIMPLE, for example. Don’t ask about accounting methods, inventory valuation, previously taxed shareholder distributions, amortization or depreciation if my business is smaller than a certain employee count threshold or revenue threshold. Make it all very simple with a quick one-page form. Form 1120S, for example, already allows the filer to omit balance sheet information if revenue is less than a threshold amount, but I think the IRS can go much further to simplify things for me. Make my tax filings far simpler than they are so that I can invest my productive time and money in my business – just ask me for Revenue and Profit.

Immigration Law – Give me One or Two Express H1B Visas
A large business finds their necessary mix of skills and experience in their large numbers of employees. Conversely, the small business looks for the critical mix of skills and experience in the same person. In my business, I want to employ specific people I know who are immediately productive because they have previously been associated with my business and its mission for one reason or another. A specific example of this problem for me was a key employee working on a NSF grant awarded to my company. This employee on an F1 visa with an OPT extension can no longer work past this summer because their visa expires. Getting an H1B visa for this employee will take many months and cost thousands of dollars – time and money I don’t have and can’t afford. Because of National quotas, it would take years for a visa for this employee based upon their own conventional visa application. My success depends on this one particular employee. Give a small business one or two “express” H1B visas at little or no cost to the company. Grant it in less than 30 days and make it renewable for one year at a time. Don’t require that I pay a salary “at the market” if my business is smaller than a certain threshold revenue and/or number of employees – eliminate the Department of Labor in this “express” H1B process, in other words, if my business is small enough. Help my small business take advantage of the critical skills and experience in one key person who needs a visa, and help my business to be more nimble – grant my small business one or two express H1B visas.

IP Law – Renew Provisional Patent Applications; Shield Small Business from Litigation Costs and Adverse Settlements. 
Patents are wildly expensive. There is a limited time in which to file before IP rights are forfeit or abandoned. An infringement suit will ruin a small business that cannot afford a legal offense or defense. Current intellectual property law puts the small business at a distinct disadvantage, and these are the three areas of exposure that concern me the most. A patent can cost me between $10,000 and $20,000 to write and file to completion – just one patent, and the patenting process can consume four or five years! I have a year from first discovery to file a patent application, and by filing a provisional application, I can in effect add another year to the formal application filing deadline I am allowed. If my small company could renew a provisional application until such time as I can afford to make a complete formal application, I would benefit significantly. But the real issue I face is infringement – a large company that infringes on my IP can do so without fear of retribution because I cannot afford the time or money to sue, and if my small company inadvertently infringes on the IP of a large company that notices and sues, then I am ruined. Require low cost arbitration in lieu of litigation for IP disputes involving a small business. Shield the small business from infringement consequences and adverse settlements for as long as company revenue is less than a certain threshold amount. Limit future liability for infringement damages for IP invented while the business is small. Improving the IP landscape for the small business can accelerate innovations and reward those small companies like my own that can make better use of the IP.

Pass QUALITY Laws that are Essential, Minimal, Straight Forward and Readable; Benefits Must Exceed the Costs.
All legislation should pass a Cost-Benefit Analysis performed by a Government agency such as the GAO. A Cost-Benefit Analysis is a standard element of business decision making. For most all things, the cost can be measured, and the benefits measured, too. With few “American Values” exceptions, the benefits of every law passed by Congress should exceed the costs of the law. Periodic cost-benefit reviews should detect and eliminate laws with costs that significantly exceed cost estimates or benefits that significantly miss benefit estimates at the time of passage. All legislation should be tested by a panel of ordinary people before being signed into law – if the law can not be read and understood by ordinary people, it goes back to Congress for simplification. It’s QUALITY of law, not quantity of law that counts!

This is a large plate of issues and ideas – the conference call will be verrrry interesting!