Standards be established by the Internal Revenue Service on an industry-by-industry basis for the determination of employee status in other cases. Self-Employed Status of SBE Equity Owners As discussed in Chapter 5, the SBE equity owner for tax purposes is considered to be self-employed, even if he is an employee of a corporate SBE. There are two reasons for this: To equate the employment tax treatment of corporate SBE equity upon the legal form of organization of the SBE is inconsistent with the objective of the SBE to remove tax considerations in the choice of a legal form for operating a business. Further, it simplifies payroll tax reporting for corporate SBES whose employees are all also equity owners. To prevent corporate SBES from utilizing qualified pension and profit 11 between corporate and non-corporate SBES, inconsistent with the The public revenue lost by allowing corporate SBE equity owners to pay Self Employment Tax rather than Social Security Tax would be offset by the revenue gained by denying them the opportunity to adopt qualified pension and profit sharing plans. Provisions for Quick Refund of Overpayments of Estimated Taxes Taxpayers must declare and pay the estimated taxes on their income on a 13 quarterly basis if they are not subject to income tax withholding. If substantial profits occur early in the taxable year, estimated tax payments are based upon these profits. If the profit level is not sustained or losses result, excess estimated tax payments are not refunded until the following year when the annual income tax return is filed. Such financial reverses may cause the business to be in immediate need of funds for survival. The delay in the refund can cause serious hardship. Because of the self-employed status of SBE equity owners discussed in the preceding section, the hardship would be particularly serious for them. It is recommended that a procedure be instituted whereby a taxpayer can get a quick refund of estimated income taxes paid when it becomes clear that the 12/ It is doubtful if Congress would permit corporate SBE equity owners to utilize qualified pension and profit sharing plans, In the analogous situation with Subchapter S, Congress denied this tax benefit to shareholders in 1969. See IRC Section 1379 amounts paid will be in excess of the tax liability year. The payments would be refunded within 45 days after application. This provision would affect all taxpayers, large or small, business or non-business. It is expected, however, that it will be of particular benefit to small business. Reimbursement of Costs of Tax Disputes 14 If there is a dispute with the government regarding a tax matter, and additional tax is assessed, a taxpayer may appeal the assessment within the Internal Revenue Service and in the courts. Even if he prevails, however, he These costs can be quite substantial, and discourage must bear the costs incurred. small businesspersons from vindicating their rights. It is recommended that if a taxpayer is successful in a dispute with the government, his expenses incurred in vindication of his position be reimbursed in full. This reimbursement would apply both to disputes within the Internal Revenue Service and in the courts. 15 Opportunities for Tax Education for Small Businesspersons Tax education for operators of small businesses would do much to remove the bias caused by the complexity of the law. If the small business operator could familiarize himself with the opportunities and problems created by the system, he could 14/ This proposal has been advanced many times. For Example, the American Institute of Certified Public Accountants proposed this change in Journal of Accounting, July, 1975, p. 80 15/ For a discussion of this problem, see Soled, "Redress of an Inequity in more easily cope with them. Presently, few such educational opportunities exist. 16 University courses The Internal Revenue Service furnishes some material. It is recommended that the Small Business Administration, as part of its management assistance program, incorporate tax education. Specifically, it would: O Offer courses and workshops relating to the tax problems O of small business within every district; Provide the services of a tax specialist in every District office to supervise educational activities in taxation and aid SBES with specific tax problems (but not tax return Formal Structure for Analysis of the Impact of Taxation on One of the primary obstacles to the study of the impact of taxation on small business is the lack of statistical information in this area. As discussed in Chapter 6, implementation of the program recommended by this report would solve the problem. With the flow of information forthcoming, it is necessary to establish a formal structure for its analysis. 16/ For Example: Tax Guide for Small Business - 1977 Edition, It is recommended that an Office of Small Business Tax Analysis be established under the supervision of the Office of Planning, Research and Data Management in the Small Business Administration. would be to: The purpose of this office Cooperate closely with the Treasury Department and tax writing Congressional committees in formulating more general tax proposals; Monitor all tax legislation pending before Congress to 159 |