Regulations in Relation to Small Businesses

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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 Small Businesses Must Fill Out

"Unfortunately, discounting the impact to small businesses has become the new norm. Today more than 3,300 new rules and regulations are in the federal pipeline, most of which would directly affect small businesses that lack the resources of their larger competitors to navigate the complex regulatory thicket. It is of little wonder over the past 70 consecutive months small businesses have cited government regulations as one the biggest obstacles to their growth in a monthly poll conducted of NFIB members. Washington's regulatory expansionism, though grown over the last two decades, conflicts with President Obama's own rule-making guidance. In 2011, the President issued an executive order requiring federal agencies to limit the scope and weigh the full impact of new rules. That directive has largely gone unheeded. In the first 10 months of this year, regulators added more than 3,100 final regulations the Federal Register. " TheHill

Highlights from the Small Business Jobs Act of 2010


  • 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

Increasing operational costs from EPA Regulations


Definition of Waters of the US Under the Clean Water Act

  • Final rule issued in May 2015
  • Expanding definition of US waters that are ‘navigable’, in some cases including small depressions or farm ponds
  • Could impose federal mandates for water quality levels in these local waters
  • May restrict ability of small businesses to expand or develop their land and decrease land value

Greenhouse Gas Emissions

  • Final rule issued August 2015
  • Require states to increase the percentage of power they generate from alternative sources, which are weaker and more expensive
  • Will this make electricity more costly for people, in particular small businesses?

Expansion of Overtime Eligibility


  • Expected to be implemented late 2016
  • On March 13, 2014, President Obama signed a Presidential Memorandum directing the Department of Labor to update the regulations defining which white collar workers are protected by the FLSA's minimum wage and overtime standards (DOL)
  • The memorandum instructed the Department to look for ways to modernize and simplify the regulations while ensuring that the FLSA's intended overtime protections are fully implemented (DOL)


  • Previously:
    • ”Salaried workers who earn below $455 per week, or $23,660 per year, are automatically eligible for overtime pay–regardless of the nature of their job or the duties they perform.” (Alternet)
    • ”Salaried workers whose earnings are $455 per week or more can be exempted from the right to receive overtime if they fall into one of three categories: professionals, administrators, and executives.” (Alternet)
    • Many white-collar workers with very low salaries (sometimes just above the overtime threshold) can be classified by their employers as professionals, administrators, or executives–and thus exempted from overtime pay
  • Proposed changes:
    • New rule states that any salaried worker who earns less than $50,440 (40th percentile) will be eligible for overtime
      • This would be a 110% increase from 23,660

Effects & Consequences

  • Ross Eisenbrey, vice president of the Economic Policy Institute, a research group partly funded by labor unions, has estimated that the higher salary threshold would expand overtime to as many as 15 million additional workers (Bloomberg)
  • ”NFIB estimates that about 40% of small businesses will have employees newly eligible for time-and-a-half overtime pay. If a business cannot afford to pay managers over $50,000 per year, the business will have to change these employees from salaried exempt to hourly nonexempt employees and prohibit overtime work.” (NFIB-OR)
  • For small businesses to avoid the overtime pay, managers would probably be moved from salaried positions to hourly jobs
    • Less flexibility of hours
    • Decreased worker morale
    • Fewer salaried, managerial positions → little advancement opportunities
  • The proposed rule received some 270,000 comments during the 60-day period after its publication in June 2015. By comparison, the agency received 75,280 comments in response to its last proposed rule update in 2004.
  • Many employers—especially small and midsize businesses—wouldn’t be able to absorb the increased labor and litigation costs, according to the U.S. Chamber of Commerce (COC)
  • Few workers would actually get bigger paychecks
    • "A recent report released by the NRF said that employers were much more likely to cut wages and bonuses or reduce hours to avoid paying overtime. If employers made no changes to their pay and scheduling structure, an option the NRF acknowledged is highly unlikely, overtime costs would run businesses $9.5 billion under the proposed changes" (LATimes)
  • "Employers can respond to these higher costs in several ways. First, they can cut the base or regular wage for workers who will likely receive these overtime payments. Second, they can cut existing workers’ hours and hire new workers who will also work fewer than 40 hours per week. Third, they can cut their hours or their jobs entirely and invest in a machine that can do the same job, perhaps more cheaply. Fourth, they can keep the workers but pass on the costs to consumers in the form of higher prices. Fifth, they can keep the workers, pay them the time and a half premium and bear the brunt of the higher costs." (BAM)


  • "Government wage mandates are no substitute for economic growth, and contrary to the administration’s assertions, they do little to lift the middle class. If our leaders want to see hiring accelerate and incomes climb, they should pursue pro-growth policies that enable employers to expand, invest, and create more high-paying opportunities for workers." (COC)
  • "The U.S. Chamber continues to advocate for commonsense regulatory and legal reform, a simplified tax code that lowers rates for businesses and individuals, long-term investment in infrastructure, and policies that will allow the United States to capitalize on its vast energy resources."(COC)

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

Specific regulations correlated with harming business

From (SBA 2010 Study)

  • "The compliance cost disadvantage faced by small businesses is driven by environmental regulations, tax compliance, occupational safety and health, and homeland security regulations."
  • The cost per employee of environmental regulations is more than four times higher in small firms than in large firms. With respect to tax compliance, the cost per employee is three times higher in small firms than in large firms.
  • the cost per employee of economic regulations falls most heavily on large firms. In part, this likely reflects the fact some industrial structures do not lend themselves to small firm participation (e.g., utilities, telecoms, or mining) because large scale operations are a precondition to remain competitive. This simply reduces the number of small enterprises that would be affected.
  • One factor impacting the distribution of economic regulations is the Regulatory Flexibility Act (RFA). Under the RFA agencies are required to assess the effect of regulations on small businesses, and to mitigate undue burdens, including exemptions and relaxed phase-in schedules.
  • the disproportionate cost burden on small firms is most dramatic in the manufacturing sector; the compliance cost per employee for small manufacturers is more than double the compliance cost for medium-sized and large firms. In the health care sector and the “other” sector categories, the compliance costs also appear starkly higher in small firms compared with medium-sized and large firms. In the service and trade sectors, the distribution of regulatory costs among firm sizes is much more even overall, yet varies depending on the type of regulation.

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EPA Evades RFA Act through Clean Water Act

Taken from an article in TheHill:

The impacts of such aggressive federal policies are typified by one regulation in particular. The Environmental Protection Agency (EPA) has proposed to vastly expand federal authority by redefining the "waters of the United States."

The proposal would go well beyond "navigable waters" - the traditional domain of federal regulators - to include dry creek beds, standing water in fields, and ditches. If finalized, the rule would introduce stringent restrictions on the use of public and private land.

For small business owners, farmers, and manufacturers, the change could require special permitting to expand their business, clear vegetation or modify their facilities. Any alteration to a federal "water," including those that are dry most of the year, could require costly and time-consuming permitting. A recent U.S. Supreme Court case cited the average cost of a permit to be $270,000. Violating the regulation would be punishable by fines of up to $37,500 per day.

Even more troubling, the rule does not take into consideration the economic impact on small businesses. Under the Regulatory Flexibility Act, federal agencies must review the cost of a proposed rule on small business; the EPA, however, bypassed this requirement, suggesting the new rule not directly affect small businesses. Key members of Congress disagree, including both the House and Senate Small Business Committees. In comments to the EPA, we at the National Federation of Independent Business (NFIB) emphasized the proposed regulation "represents bad public policy because it increases regulatory burdens on small business landowners by expanding the jurisdictional reach of the Clean Water Act." We asked the EPA to withdraw the rule until the required comprehensive analysis is complete."

Key Points: Slate

  • The main concerns with redefining the "waters of the United States" to include wetlands and streams is that the EPA could force small business owners, specifically farmers, would face expensive permit costs if they wish to expand their facilities/business or clear vegetation.
  • The EPA argues that the redefinition was necessary as before the language of the regulation was too vague, and a large proportion of the pollution is attributed to agricultural runoff (approximately 12,000,000 tons).
  • Farmers, legislators, and small business owners are very skeptical of the redefinition and regulation, as they are frightened the EPA could vastly their operating costs, even operations as simple as watering their own crops
  • The EPA argues that this is a deliberate misinterpretation of the rule to undermine their efforts to lower pollution (promise they are not trying to hike up costs for farmers/small business owners)

Possible solutions to this issue b/w small business and EPA:

  • Clarify more specifically what would require a permit (if you promise you are not hiking up costs, then explicitly write what practices would require the purchase of permit)
  • Create subsidies for farmers to cope with increased operating costs (if you are declaring their property, land of the United States, help them come up with ways to clear vegetation without polluting the streams/wetlands
  • Law states "A Clean Water Act permit is only needed if a water is going to be polluted or destroyed." (what does this mean for farmers?)
  • "Does not regulate most ditches and does not regulate groundwater, shallow subsurface flows, or tile drains. It does not make changes to current policies on irrigation or water transfers or apply to erosion in a field. The Clean Water Rule addresses the pollution and destruction of waterways – not land use or private property rights."
  • Intent of law seems well-meaning, main ways to improve regulation would to increase cooperation/transparency/trust between EPA and farmers, so fears of misinterpretations of rhetoric are not misconstrue,

more clear/concise language when crafting the law, rather than lengthy pages of contingencies

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: "Building flexibility into new policymaking that allows for more experimentation and measurement is helpful, he notes, as is avoiding a one-size-fits-all approach. “The costs of regulation are more direct and easier to comprehend than the benefits, which are mostly indirect. So there will always be upfront concerns about regulation, which leads back to the importance of building in opportunities to measure the costs and benefits." (refer to another quote on flexibility in regulation from above section also from Forbes article)

Small Businesses for Sensible Regulations

All information collected from

"Small businesses create two-thirds of the net new jobs annually, employ more than half of the private-sector workforce, and generate nearly 50 percent of annual GDP. America’s small businesses are the backbone of our economy and engines of job creation. "

Regulations by the Numbers

  • Today, there are 3,348 federal regulations in the pipeline, with nearly 1/3 impacting small business directly. (Source: The Office of Information and Regulatory Affairs, Unified Agenda 2013)
  • According to the NFIB Small Business Optimism Index, small business owners have cited regulations as a top impediment to conducting business for over 65 months in a row. (Source: NFIB Small Business Optimism Index)
  • United States fell out of the top ten ranks in the ease of starting a business, according to World Bank data. In fact, the World Bank found that it’s easier to start a new business in Portugal, Romania, Panama, Hungary and Belarus than in the U.S. (Source: U.S. World Bank)
  • Due to federal regulations, U.S. productivity growth rate is nearly half of its historical rate, dropping from an annual average rate of 2.5 percent since 1948 to 1.1 percent since 2011. (Source: Wall Street Journal, 2014)
  • The annual rate of new business starts is about 28% lower today than it was in the 1980s, according to a recent analysis of U.S. Census Bureau data in the Wall Street Journal. (Source: Wall Street Journal, 2014)
  • Over the last five decades, there has been a tremendous growth of the Federal Register – in 1960 there were 22,877 pages and in 2012 there were 174,545 pages. (Source: Competitive Enterprise Institute)

Polls Reveal Federal Regulations Hurting Small Business Owners

August’s NFIB Index of Small Business Optimism rose 0.7 points to 95.7. In comparison, between 1975 and 2008, the historical average index value was nearly 100. (Source: NFIB – Small Business Optimism Index)

  • Nearly 60 percent of small business owners think it’s a bad time for small business expansion. (Source: NFIB – Small Business Optimism Index)
  • 21 percent of small business owners cite regulations as their single most important problem (Source: NFIB – Small Business Optimism Index)
  • 90 percent of small business owners support reforming the regulatory process. (Source: NAM/NFIB Survey, “Small Businesses and Manufacturers: Government a Barrier”)
  • 74 percent of small business owners believe that businesses and consumers are over-regulated. (Source: Public Notice, “MEMO: National poll on government regulations)
  • 72 percent of small businesses reported that regulations were hurting their “operating environment” (Source: Wells Fargo/Gallup News Release, “Small Business Index”)
  • 67 percent of small businesses do not have plans to hire in the next six months due to poor business conditions (Source: Capital One second quarter 2013 Spark Small Business Barometer)
  • 62 percent of small business owners and manufacturers say that the United States own laws, regulations, rules, taxes and fees impact their business more negatively than foreign competitors. (Source: NAM/NFIB Survey, “Small Businesses and Manufacturers: Government a Barrier”)
  • 55 percent of small business owners say they would not start a business today given what they know now and in the current regulatory environment. (Source: NAM/NFIB Survey, “Small Businesses and Manufacturers: Government a Barrier”)
  • 54 percent of small business owners say countries like China and India are more supportive of their small businesses and manufacturers than the United States. (Source: NAM/NFIB Survey, “Small Businesses and Manufacturers: Government a Barrier”)

Impact of Federal Regulations

  • Federal regulations cost an estimated $515 billion, according to analysis by NFIB. (Source: Small Businesses for Sensible Regulations, “Regulatory Tidal Wave)
  • Regulatory burdens on Americans increased by nearly $70 billion during President Obama’s first term in office. (Source: Heritage Foundation)
  • Federal agencies reported $23.5 billion in new annual regulatory costs in 2012 alone. (Source: Heritage Foundation)
  • President Obama’s FY2013 budget request for regulatory activities was $58.7 billion, compared to $2.8 billion in 1960. (Source: “Growth in Regulators’ Budget Slowed by Fiscal Stalemate: An Analysis of the U.S. Budget for Fiscal Years 2012 and 2013,” The George Washington University and Washington University in St. Louis)
  • Average annual cost of regulations in President Obama’s first two years in office ranged from $8 to $16.5 billion, compared to a $1.3 to $3.4 billion during the same period under President Bush. (Source: Annenberg Public Policy Center:

Need for Regulatory Reform

  • 283,615 full-time government employees were dedicated to drafting and enforcing regulations in 2012, while fewer than 50 employees at OMB are responsible for reviewing the new regulatory mandates to ensure they are justified and accurate prior to implementation (Source: “Growth in Regulators’ Budget Slowed by Fiscal Stalemate: An Analysis of the U.S. Budget for Fiscal Years 2012 and 2013,” The George Washington University and Washington University in St. Louis)
  • From 2003-2010, one-third of major rules, costing $100 million or more, did not go through public review and input, despite federal requirements for public comment. (Source: GAO Report)