Top 10 Problems & Concerns for California Small Businesses
So CNBC wrote an article on June 22nd, called “Good news for The GOP: Small businesses are hungry for tax reform” and in this article, the reporter Kate Rogers interviewed and highlighted a North Carolina small business’ most pressing concerns. Yes, Thomas Huckabee CPA also has clients, like the NC shop, that suffer the 35% fed tax (and a 10% CA tax)…they all dislike it. For now, we use tax strategies to drive down the profits to avoid it. We are not highlighting any of them in particular because if you’re in the 35% tax bracket you are making $417,000 AFTER your deductions.
Small business problems and priorities are very important to monitor, especially if you are looking at a state like California. Based on the responses of 294 National Federation of Independent Business (NFIB) small business owners, a mail survey was conducted from mid-January through April 2016. After results were compiled, a list of concerns and issues was released. This article will focus on the top 10 California issues.
1) Cost of Health Insurance
Running your small business is difficult enough without all of the confusion that health insurance can bring on. Health care is expensive so it’s obvious why it would rank number one on this list. Also, a majority of employers want to understand how the Affordable Care Act (ACA) has altered group health insurance plans in California. Business owners want to know the reasoning behind such dramatic changes in rates and benefits.
Also, small-business exchanges basically did not function last year. The federal government does not have exact numbers but very few businesses used their respective states’ small-business exchanges. In California, only 12,000 people participated in the state’s small-business exchange. This is in stark comparison to the more than a million who enrolled as individuals there.
Evaluating a health care plan is a very convoluted process if you are not an expert. You can simplify the evaluation process by focusing on three things: benefits, prices, and providers.
2) Unreasonable Government Regulations
Small-business owners usually say that regulations are one of the largest obstacles in operating their businesses. In fact, the NFIB survey we reference notes that more than one-third of businesses rate regulations as a critical problem and 48% say it’s a very serious problem. At the top of the list is the cost of compliance. Regulatory hoops and hurdles encountered by owners vary in specificity. Some owners are frustrated by the volume of regulatory compliances, while others are overwhelmed by one or two.
“Small business owners are drowning in regulations imposed by every level of government,” said NFIB President and CEO Juanita Duggan. “It’s a major problem affecting millions of businesses, and the federal government is the biggest contributor.”
During Obama’s tenure, a record breaking number of regulations were approved and implemented despite their detrimental effect on businesses. THe NFIB survey also reports that: “Over the past eight years, record volumes of regulations have been imposed by the federal government as well as state and local authorities with little or no concern given to the net value of the regulations to society in comparison to the costs of compliance.” Under the first few months of the Trump presidency, however, issued regulations have declined by 72%.
3) Federal Taxes on Business Income
Small business owners in the start-up phase often ask how much they will owe in taxes? Unfortunately, the answer depends on a number of factors so it’s easy to understand why “Federal Taxes on Business Income” comes in at number three.
The way your business is organized as an entity has a significant impact on the way your federal taxes are calculated and who pays them. A C corporation is the most simple entity to handle to handle, so let’s get it out of the way. A C corporation pays tax based on its income using a set of graduated rates.
Conversely, the income of Sole Proprietorships, S Corporations, Partnerships and Limited Liability Companies (LLCs) is added to the personal income of the shareholders and subsequently taxed on their respective personal returns. Operating as any of these entities means net income (or loss) is added to (or subtracted from) your individual income. The business, as an entity, does not pay a separate tax.
Of note is the following statement from Thomas Huckabee, CPA:
"While Trump has promised 35% going to 15% there is much water to go under that bridge before it happens. Corporations cannot distribute profits without creating more income taxes to the recipient but partnerships, proprietorships, S Corps and LLCs can. Small business uses all the latter forms of organization for that reason. There’s an ongoing argument in Congress about limiting the tax reduction to corporations because of that. So IF Trump’s tax rate proposal gets passed, Congress may not give it to small businesses."
4) State Taxes on Business Income
There is a California state tax on business income for corporations and LLCs that elect to be treated as corporations. Higher than the national average, this rate is 8.84%. Net taxable income from business activity in California is subject to this rate. Corporations do not have to pay California’s franchise tax, but they do have to pay the alternative minimum tax (AMT) of 6.65%. Writing off expenses to lower corporate tax rates is limited by the AMT.
S corporations, LLCs, limited partnerships (LPs) and limited liability partnerships (LLPs) are subject to the franchise tax. Also, C Corporations, also known as traditional corporations, that do not earn positive net incomes and, therefore, are not subject to the corporate tax must instead pay the California franchise tax.
5) Workers’ Compensation Costs
California employers are legally mandated by law to have workers’ compensation insurance, even if they have only one employee. Historically, California has been ranked as one of the most expensive states for workers’ compensation costs. A report called The Workers’ Compensation Premium Rate Ranking Summary compiled by Oregon’s Department of Consumer and Business Services shows that, for every $100 of payroll, $3.48 is dedicated to workers’ compensation. This means that California companies spend 188% of the median cost of $1.85 for all 50 states.
“California’s workers’ compensation system is incredibly inefficient,” said Jerry Azevedo, a spokesman for the California-based Workers’ Compensation Action Network, which seeks to reduce costs for employers and improve services to injured workers. “It does not do a good job of achieving its goal. For as much as employers pay, they don’t get a lot out of it.”
That also applies to injured workers, according to Azevedo.
“You would think that since California has the highest cost system that we’d also have the most generous benefits — but we don’t,” he said. “We plow a lot of money into the system but too little of it ends up in the hands of injured workers.”
6) Uncertainty over Economic Conditions
Almost 40% of those surveyed indicated that economic uncertainty was the most critical problem. The NFIB explains that under Obama’s presidency “significant policy changes of an immense nature were enacted” and “their impact will continue as the regulatory system works to implement new policy directives.”
“Uncertainty also surrounds pending government action on the expiring 2001 and 2003 tax cuts, the debt ceiling, and the federal budget,” NFIB noted. “All of these policy changes create a huge ‘question mark’ for small-business owners, impeding their ability to make short and long-term business decisions.”
7) Tax Complexity
On the 2016 presidential campaign trail, all candidates seemed to differ on tax policy. But, what they did not differ on was the tax code’s appalling complexity. Now, President Donald Trump has even said that his tax return “would literally probably be 10 feet high if I put them together, it is so complicated and so terrible.”
The problem is getting exponentially worse. Federal tax rules take up around about 75,000 pages today. This 75,000 figure is three times more the number of pages that President Jimmy Carter called “a disgrace to the human race” during his administration.
Tax complexity is driven by Congress’ micromanagement of the tax system with even more tax credits, deductions, and exemptions for education, energy, health care, saving, working and other activities. The Affordable Care Act (ACA) has also really complicated the United States’ tax system.
When considered carefully, in addition to the monetary implications of complexity, the current tax code does the following:
- An increase in evasion and avoidance. Tax code complexity has spawned an industry of fraudulent return filing- costing billions of dollars annually.
- An undermining of financial planning because new regulations are constantly being introduced.
- A creation of “horizontal inequity”, meaning that people with virtually identical incomes pay different amounts in taxes due to special breaks.
8) Uncertainty over Government Actions
The ranking of the “Uncertainty over Government Actions” category can almost be combined with #6, “Uncertainty over Economic Conditions.” It almost makes sense to say that there is a fair amount of uncertainty in every facet of the government. We live in tumultuous and constantly changing times so uncertainty can be expected, although not desirable.
9) State/Local Paperwork
Bookkeeping! Monitoring cash flow! Closing your books monthly, or even daily! Managing employees! Your business’ taxes! You are already stuck in a mountain paperwork and then your small business realizes the requirements that state and local authorities are asking for! State and local requests for paperwork are generally more frequent, wider-ranging and higher in number than those of the federal government. This is especially true when one considers all of the small business licenses necessary to operate and other local issues such as zoning ordinances, building codes and lease considerations… California is no different and when a business is originated in California, state and local laws apply.
10) Frequent Changes in Federal Tax Laws and Rules
The reasoning behind the high ranking of this category is very similar to #7, “Tax Complexity”. 75,000 pages of existing federal tax rules! 4,428 federal tax rule changes over a ten- year period! And now, a brand new Trump administration with tax code changes on its agenda! Who wouldn’t cite “Frequent Changes in Federal Tax Laws and Rules” as an issue?
Needless to say, California and American small businesses have a lot of concerns about the current state of affairs on practically every level. The good thing is that these issues are being identified so lawmakers and business owners can at least begin to tackle them for solutions. Thomas Huckabee, CPA of San Diego, California is a full-service CPA who can answer all your questions.