Tax code complexity costs employers billions

Radhika Sivadi

2 min read ·


At a time when Republicans and Democrats can't seem to come to terms on anything, most politicians are in agreement on one thing: the corporate tax code should be simplified.

Tax code complexity costs employers billions

We reported here several weeks ago that far fewer small businesses than the Federal government expected had claimed a tax credit made available to them through the Affordable Care Act. Business owners cited the complexity of complying with the tax code as a major impedance.

Now in a front page story titled, "Firms Pass Up Tax Breaks, Citing Hassles, Complexity," the Wall Street Journal reports that this is true not just for health insurance tax credits but for many other tax breaks available to employers. Fed up with paperwork and leery of inviting IRS scrutiny, businesses are opting to skip deductions for energy efficient buildings, for hiring unemployed veterans and workers from disadvantaged groups, for increasing research, and for producing goods domestically, according to the Journal's report.

Though large corporations have teams of tax accountants and attorneys to sort through the IRS paperwork and claim the credits, the Journal reported that many small- and medium-sized companies "are saying 'no thanks' and are likely paying more taxes than legally required." An accompanying chart showed how much higher the cost of tax compliance is per-employee for small firms: At nearly $1,600 per employee, compliance costs firms with fewer than 20 employees double what bigger companies pay.

As a result, the Journal reports:

"Tax consultants estimate that eligible businesses obtain as little as 5% of the main domestic tax breaks that they are entitled to claim. That means firms are leaving tens of billions of dollars on the table every year. Out of 1.78 million corporate tax returns in the U.S., only about 20,000 claimed any of the three dozen main business tax credits in the code, according to IRS estimates."

With regard to the health care credits, as we reported here in May, according to the General Accounting Office some employers who do offer health insurance were unable to claim the credit due to complex rules regarding full-time equivalent employees and average wages. For others, the time required to calculate the credit was not worth the amount they would collect, according to tax preparers who spoke to GAO.

The Journal indicates the complexity is at least partly deliberate:

"Because of political pressure to hold down budget deficits, U.S. lawmakers often design design tax breaks in ways intended to narrow the number of beneficiaries. 'The more complicated it is…the more [businesses] are going to say it's not worth the candle' to apply, said Dean Zerbe, a former Senate staffer who is now national managing director of alliantgroup, a tax consulting firm."

Indeed, the Journal points to one company, a Texas gourmet burger chain, that skipped filing for the Work Opportunity credit last year. This year, a tax credit consultant has helped the company determine that the credit is worth about $75,000.

What about your business? Have you forfeited tax deductions because it would have cost more to comply than the credit is worth? Let us know in the comments.

Radhika Sivadi