Tax Reform Riddle: How Big Can a 'Small' Business Be?by
Let’s take a moment to sympathize with the philosopher kings in Congress, who might soon be grappling with one of the most gripping existential questions of our time: What, exactly, is a small business?
Lawmakers’ most recent cause for meditation on the subject is a provision in the small business tax reform bill advanced by Representative Dave Camp (R-Mich.), which aims to reduce compliance burdens on companies with $10 million or less in annual revenue by letting them use the simpler cash method of accounting. The provision is expected to receive widespread support at a meeting today of the House Ways and Means Committee (which Camp chairs), according to a story by Marc Heller in Bloomberg BNA (subscription required). One point of possible contention, according to Heller: Whether the $10 million threshold should be higher.
If you haven’t given much thought to quantifying the “small” in small business, you could start by perusing the Small Business Administration’s Table of Small Business Size Standards Matched to North American Industry Classification System Codes—a 46-page document (pdf) that sets limits, usually for revenue or number of employees, for how big a company in a given industry can be and still qualify as a small business in federal programs.
It makes for fun reading, but in the end, it doesn’t provide much clarity. The SBA considers a casino a small business if it does $7 million or less in annual revenue, unless the casino has a hotel attached, in which case the cap is $30 million. A pet food manufacturer can have 500 employees and be considered a small business, while beer wholesalers graduate out of the category after 100 workers. Power plants are generally evaluated in terms of their annual output in megawatt hours.
The various groups that track small businesses aren’t much clearer. The National Federation of Independent Business, which publishes a closely watched optimism index of its members, distributes the bulk of its surveys to companies with 20 or fewer workers. SurePayroll and CBIZ—two business service firms that tally small business hiring—define small businesses as those with up to 100 and 300 employees, respectively.
The many definitions of what constitutes a small business might seem like small beer but matter plenty for business owners who want to sell to the government, take advantage of federal loan guarantees, or know how a law will affect them. The Affordable Care Act, which will require businesses with 50 or more employees to provide health coverage beginning next year, is one good example. For another, the Senate’s Marketplace Fairness Act, which has yet to pass the House, would require businesses with more than $1 million in annual revenue to begin collecting an online sales tax on out-of-state transactions. (EBay, which opposed the bill, proposed raising the revenue exemption to $10 million.)
Back to the cash method of accounting provision in Camp’s small business tax reform bill: It would allow some small businesses to record revenue when they receive payments, likely simplifying their tax filing process and improving cash flow (because they won’t have to pay taxes until they’ve received payment). Right now, most small businesses are supposed to book revenue when it’s earned (the accrual method), for tax purposes at least.
When BNA’s Heller went looking for naysayers to Camp’s cash accounting proposal, the closest he could get was Grafton Willey, a former chairman of the National Small Business Association, who told Heller he’d like to see the $10 million cap for the provision set “a little higher.” If you’re curious, the NSBA limits membership to businesses with 500 or fewer employees, though the average size of its 65,000 members is somewhere between eight and 11 workers.