Regulations in Relation to Small Businesses

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

(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

Increasing operational costs from EPA Regulations

(NFIB)

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 epensive
• Will this make electricity more costly for people, in particular small businesses?

Expansion of Overtime Eligibility

• Expected to be implemented late 2016, proposed in July 2015
• Any salaried worker who earns less than $50,440 will be eligible for overtime
  • Currently the threshold is at $23,660
  • This would be a 110% increase
• ”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

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.

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."

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 SensibleRegulations.org

"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) - See more at: http://www.sensibleregulations.org/resources/facts-and-figures/#sthash.I6RSwcYs.dpuf