Regulatory Issues
Chief financial officers are so swamped with compliance work and earnings reports that they are unable to focus on expanding their companies, a global report from IBM and the Economist said last month.

Further, for firms with fewer than 20 employees, federal regulations cost $7,647 per employee per year, according to a report released in September by the United States Small Business Association's Office of Advocacy. The cost is $5,411 in midsized firms and $5,282 in large firms. As such, the report noted, "Costs per employee thus appear to be at least 40 percent higher in small firms than in medium-sized and large firms." Sector-specific, the compliance cost per employee for small manufacturers is at least double the compliance cost for medium-sized and large firms. In the service sector, regulatory costs differ little from small businesses to larger-size firms. The distribution of the regulatory burden across firm sizes in the other major business sectors falls somewhere in between these two cases.

The cost disadvantage faced by small businesses is driven largely by compliance with environmental regulations and tax-related paperwork, the SBA report said. Additionally, "compliance with environmental regulations costs 364 percent more in small firms than in large firms. The cost of tax compliance is 67 percent higher in small firms than in large firms."

Adapting to new compliance and regulatory issues can surely stall base efforts, particularly those of small businesses. Indeed, 2005 saw many regulatory issues that would impose burdens upon small businesses. SBA's December 2005-January 2006 issue of the Small Business Advocate (pg. 4) provided a roundup of regulatory issues that affect small businesses. For a bevy of information regarding regulatory and legislative actions on important small-business issues, visit the Regulatory Policy Office of Interagency Affairs.

AMT Tax
The alternative minimum tax (AMT) may soon be coming to a Form 6251 near you. Little is known of the AMT outside of tax and accounting circles, but every taxpayer — including small businesses — should understand it. April 15 is rounding the corner, and, as such, many small-business owners will be hit with this tax this year.

Enacted in 1969 to snare wealthy individuals who had managed to deduct their way out of paying any taxes whatsoever — specifically, aimed at 200 wealthy families — this controversial parallel tax doesn't adjust for inflation. The AMT was designed to ensure everyone paid some tax by requiring taxes be calculated twice: once under the traditional system that allows deductions and credits, and once under the alternative system that eliminates deductions and credits but imposes income taxes at somewhat lower rates.

Taxpayers must pay the higher of the two tax bills.

Although it is considered by many as a tax on individuals, the AMT stealthily strikes harder at small-business owners than at wage earners.

Why? For starters, according to Fortune (via CNN/MONEY), successful entrepreneurs tend to earn more.

And 90 [percent] of small businesses have their profits taxed as personal income, regardless of whether the firm is organized as an S Corp., LLC, or unincorporated business. In addition, when an entrepreneur's income carries him or her into AMT land, some business deductions are not allowed. On average, those affected by the AMT paid $6,000 more in federal income taxes in 2004 than they would have under the standard calculation.

While every taxpayer is supposed to make the dual calculation, the AMT mainly hits those who gross $100k per year or more and whose Schedule A includes deductions for such items as dependents, state and local taxes, mortgage interest and medical bills. Business owners are significantly harder hit by the AMT for several reasons: according to a 2001 study by the SBA, households headed by a business owner are four times more likely to earn $100,000 than those headed by regular-wage earners; while most business deductions are allowed under AMT, several are not, including accelerated depreciation of new machinery or equipment; and net operating losses from operating a business also are limited by the AMT.

A decade ago, only 700,000 taxpayers were affected by the AMT. Estimates show that close to three million taxpayers were subject to the AMT in 2004, said the National Federation of Independent Business (NFIB). That number will swell to approximately four million this year, said BusinessWeek, then is expected to jump to 20.5 million in 2007, according to the Treasury Dept. By 2010, according to the Urban Institute Tax Policy Center, half of taxpayers earning between $75,000 and $100,000 will be hit.

According to NFIB, that's 30 million taxpayers in 2010 if the law is not changed — as in, unless Congress reforms the tax law or extends a temporary legislative "patch" to limit the AMT's reach

Last week a BusinessWeek article said:

Efforts are afoot to repeal the unpopular levy. The House of Representatives and the Senate are hashing out legislation that would spare taxpayers from the AMT. In late 2005, the President's Advisory Panel on Federal Tax Reform recommended changes that would include the AMT's demise. But it's unclear whether lawmakers will find room in the budget to slash another revenue source.

To find out if your small business (or your family) will have to file under the AMT, visit the IRS' Alternative Minimum Tax topic on its Web site.

References

Survey: CFOs bogged down in compliance
Reuters, Dec. 16, 2005

The Impact of Regulatory Costs on Small Firms
by W. Mark Crain
SBA Office of Advocacy, September 2005

Regulatory Roundup for 2005
SBA Office of Advocacy
The Small Business Advocate, December 2005-January 2006

Regulatory Policy Office of Interagency Affairs
United States Small Business Administration

A Hidden Tax on Small Business
by Brian O'Reilly
Fortune Small Business magazine (via CNN/MONEY), Jan. 16, 2006

Small Business Hurt by AMT
National Federation of Independent Business, Dec. 16, 2005

Coping with the Alternative Minimum Tax
by Marc Hogan
BusinessWeek, Jan. 12, 2006

Topic 556 - Alternative Minimum Tax
Internal Revenue Service, U.S. Dept. of the Treasury