Regulations in Relation to Small Businesses

• The IRS small business forms aren’t overwhelming for big businesses, but for entrepreneurs “the regulations, taxes, and fees are very costly and subsequently discouraging” (opinionated post)
• Forms that small businesses have to fill out:
  • https://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Forms-for-Partnerships

Highlights from the Small Business Jobs Act of 2010

(SBA-SBJA)

• Puts more capital in the hands of small businesses and entrepreneurs
  • SBA loan provisions were extended through 2010
  • Higher loan limits
• Permanently increased microloan limits from 35,000 to 50,000, helping more entrepreneurs with start-up costs and small business owners in underserved communities
  • More small businesses became eligible for SBA loans
• Increased alternate size standard to those with less than 15 million in net worth and 5 million in average net income

Jumpstart Our Business Startups “JOBS” Act (2012)

Amendments made regarding crowdfunding in October 2015

• “New rules and proposed amendments are designed to assist smaller companies with capital formation and provide investors with additional protections” (SEC)
• Raised the threshold for exemption for SEC registration
  • Went from 500 holders of record and total assets exceeding $1 million to either 2000 holders or 500 holders who are not accredited investors and total assets exceeding 10 million (NLR)
  • More companies are now exempt from registration requirements of the federal securities laws

Protecting Americans from Tax Hikes “PATH” Act (2015)

Qualified Small Business “QSB” Stock

• Tax break for taxpayers who invest in early stage or start-up companies
• Non-corporate taxpayers who “acquire QSB stock in a C-corporation at original issuance, hold such stock for more than 5 years, sell such stock at a gain, and meet certain other requirements” can now claim complete tax exclusion (JDS)
• Gain from the sale of the QSB stock will not be subject to capital gains tax
• Requirements
  • Corporation cannot be engaged in ineligible businesses
  • Gross assets must not exceed $50 million
  • For the taxpayer, the amount of gain that can be excluded is limited to the greater of $10 million or 10x the tax basis when the QSB stock was first acquired

S-Corporation Built-in Gains Tax

• Tax planning opportunity when acquiring a C-corporation with built-in gain assets
• S-corporations are not subject to entity-level taxation, so there is no double taxation, whereas C-corporations pay tax on sale of assets and then shareholders pay a second level of tax on dividends
• “To prevent avoidance of the entity-level tax applicable to a C-corporation, a corporation with appreciated assets that elects to convert from C to S-corporation status is taxed on a post-conversion sale of any such appreciated assets, to the extent of built-in-gain at the time of conversion, if the sale occurs within a prescribed period after conversion. The law initially set the period at 10 years, but the period was temporarily reduced to 7 and then 5 years during the economic downturn. The 5-year recognition period has been extended indefinitely. ” (JDS)

Prevents Tax Increases

• Provides small business tax relief, including increased small business expensing (Section 124)(PATH)
  • Permanently extends the small business expensing limitation and phase-out amounts
  • Expensing limitation increases from 25,000 to 500,000
  • Phase-out amounts increase from 200,000 to 2 million
• Offers incentives for innovation, including the research and development tax credit (Section 121) (PATH)
  • Permanently extends the R&D tax credit
  • Eligible small businesses (<$50 million in gross receipts) can claim the credit against AMT liability, and the credit can also be used by certain small businesses against the employer’s payroll tax liability

Harmful Government Regulations

Government Regulations are Too Complex

Laws, such as the Affordable Care Act and Dodd-Frank are well-meaning, but ridiculously long, convoluted, and complex. "The government's drive to micromanage so many activities creates a huge incentive for interest groups to push for special favors. When a bill is hundreds of pages long, it is not hard for congressmen to slip in clauses that benefit their chums and campaign donors. The health-care bill included tons of favors for the pushy. Congress's last, failed attempt to regulate greenhouse gases was even worse." Economist

Complexity Costs Money

Sarbanes-Oxley, a law aimed at preventing Enron-style frauds, has made it so difficult to list shares on an American stock market that firms increasingly look elsewhere or stay private. America's share of initial public offerings fell from 67% in 2002 (when Sarbox passed) to 16% last year, despite some benign tweaks to the law. A study for the Small Business Administration, a government body, found that regulations in general add $10,585 in costs per employee. It's a wonder the jobless rate isn't even higher than it is. Economist

More on the Sarbanes-Oxley Act from a Forbes article:

"Widely deemed the most important piece of security legislation since formation of the Securities and Exchange Commission in 1934, the landmark Sarbanes-Oxley Act of 2002 was born into a climate still reeling from the burst of the high-tech bubble and fraud scandals at Enron and WorldCom. Its intent was to improve corporate governance and restore the faith of investors, but many in the business world spoke out against SOX, viewing it as a politically motivated over-correction that would lead to a loss of risk-taking and competitiveness. We took a cost/benefit approach when considering SOX,' explains Srinivasan. The most worrisome part of the act on the business side was the mandate that required public companies to obtain an independent audit of their internal control practices. The cost of this requirement, he says, was felt most acutely by smaller companies, although it was ultimately deferred for companies with market caps of less than $75 million and made permanent in the Dodd-Frank Act. Audit standards also were modified in 2007, a change that reportedly reduced costs for many firms by 25 percent or more per year."

However, the SOX act has some key takeaways, when considering regulation. For instance, flexibility with crafting regulations:

"'That aspect of flexibility—being able to exempt some smaller companies from the mandate and make it easier for others to implement—is an important quality to keep in mind when we discuss future regulation,' says Srinivasan, who also cites the important role of the Public Company Accounting Oversight Board (PCAOB), a nonprofit private corporation created by SOX that oversees auditors of SEC-registered companies"

Most recent SBA study on regulation's impact found "the annual cost of federal regulations in the United States increased to more than $1.75 trillion in 2008...The portion of regulatory costs that falls initially on businesses was $8,086 per employee in 2008. Small businesses, defined as firms employing fewer than 20 employees, bear the largest burden of federal regulations. As of 2008, small businesses face an annual regulatory cost of $10,585 per employee, which is 36 percent higher than the regulatory cost facing large firms (defined as firms with 500 or more employees)." (SBA 2010 Study)

Ways to Reform Regulation

• "America needs a smarter approach to regulation. First, all important rules should be subjected to cost-benefit analysis by an independent watchdog. The results should be made public before the rule is enacted. All big regulations should also come with sunset clauses, so that they expire after, say, ten years unless Congress explicitly re-authorizes them." Economist
• "More important, rules need to be much simpler. When regulators try to write an all-purpose instruction manual, the truly important dos and don'ts are lost in an ocean of verbiage. Far better to lay down broad goals and prescribe only what is strictly necessary to achieve them. Legislators should pass simple rules, and leave regulators to enforce them." Economist
• Flexibility in regulations- such as exemptions for smaller companies from mandates (see quote in above section from Forbes article