Future-proofing the tax system with small businesses in mind

Shutterstock_302007509Life has quickly changed because of the COVID-19 pandemic. The responses from Congress, the Department of Treasury, IRS and Federal Reserve have been wide ranging. The coronavirus has caused tremendous upheaval for small businesses and their employees. Technology, the economic environment and new ways of working are being pushed to new phases, requiring new tactics.

COVID-19 has highlighted elements in the U.S. tax system that create barriers for small businesses. In a May 7th comment letter to Congress, AICPA identified a dozen of these barriers that Congress needs to address to future-proof our tax system and bring it into the 21st century. This post highlights three of the barriers small businesses frequently encounter:

  1. The limited home office deduction.
  2. Small amounts of self-employment income.
  3. Absence of a mobile workforce statute.

Additionally, the letter highlights:

  • Recommendations to modernize outdated tax provisions that left us unprepared for the current Internet of Things era.
  • Suggested technical corrections to the Coronavirus Aid, Relief, and Economic Security Act (CARES Act).
  • Additional legislative recommendations to streamline the tax system.

The current tax system predates some 21st century concerns.

As stated in the letter, the following three recommendations address the most pressing challenges and will help future-proof the tax system:

  1. Remove the strict-use requirement for the limited home office deduction.

The exponential rise of telework and pace of traditional working habits necessitates a modern approach to the home office deduction.

Example: “Strict use” requires regular, exclusive use of part of the home for conducting business. COVID-19 has forced many people to use laptops and smartphones in their home for all aspects of their lives, thus making “strict use” an outdated barrier that prohibits tax deductions.

Removing strict-use requirements — and allowing an above-the-line deduction — would allow businesses and their employees to report income in a manner that reflects how businesses operate today.

  1. Increase the small amounts allowed for self-employment income, and index to inflation.

The Self Employment Contributions Act has not changed in decades. Many individuals currently work in the gig economy, and still more people may seek self-employment income during the economic recovery period.

The gig economy, self-employed individuals and entrepreneurs of start-up companies understand the potential to reach global customers and earn income with a part-time “side hustle.” These small businesses and the gig economy are bearing the brunt of the economic downturn.

Increasing these thresholds, and indexing them to inflation, would bring the tax system current with today’s wages and ensure the system is on autopilot to keep pace with the ever-changing work habits of Americans. Similarly, the $600 reporting threshold for Form 1099-MISC, Miscellaneous Income, should be increased to reflect current wages.

  1. Enact a uniform mobile workforce statute.

Employers track, withhold and file many state non-resident tax returns for employees who work just a few days in various states. This process is complicated and burdensome for small business owners and their employees.

Enacting a uniform mobile workforce statute provides clear and consistent rules for small businesses to apply. Technology allows employees to telework in different locations, perhaps even many locations, as opposed to a singular traditional brick-and-mortar location where tax withholding was simpler to administer.  

The tax system needs to adapt to the changes in technology and small-business processes that push us forward. An updated tax system would be proactive both in the present and in anticipated future events.

We are continually monitoring the virus’ impact and we keep the Coronavirus Resource Center current. Additionally, with you in mind, we continually monitor and advocate on legislative, regulatory and administrative tax matters.

Alexander Scott, JD, LLM, Senior Manager – AICPA Tax Policy & Advocacy, Association of International Certified Professional Accountants