COMMITTEE ON GOVERNMENT REFORM

Testimony before

Subcommittee on National Economic Growth,

Natural Resources, and Regulatory Affairs

By

Cindy Noe

IHM Facility Services

Fishers, Indiana

April 12, 2000

Thank you Chairman McIntosh, Committee members, and Commissioner Rossotti for your continued interest in the impact of paperwork and regulation on small businesses.

I am Cindy Noe, co-founder and owner/operator of IHM Facility Services and Integrated Housekeeping Services, both located in Fishers, Indiana. We provide facility services for industrial and food processing customers in a seven state region. We celebrate our twenty-fifth year in business this August. I have the pleasure of serving on the Indiana Leadership Council of the National Federation of Independent Business.

For me, dealing with the overwhelming requirements of my government, i.e. the IRS and regulatory agencies, and the accompanying paperwork, represent the greatest moral dilemma I face in business today. You see, I desire to be a moral and upright person in everything I do and say. Our company's tagline is "Doing the Right Thing: We reinforce that throughout our company, both in our dealings with our customers and each other.

So what is the moral dilemma I speak of? There are really 3 parts: (1) the complexity of compliance, (2) the cost of compliance, and having done all that, (3) knowing we still are not in compliance even though we have done our very best to comply.

The complexity of compliance-Seemingly simple business related actions get snarled in pages of instructions and paperwork. Moving an employee and their family to a new city requires digesting 16 pages of instructions, probably calling our CPA for clarification, and issuing of the appropriate IRS forms. Similar gyrations are needed for car, travel, business expenses, issuing a K-1, employee benefits, and the list goes on. And, that's just the IRS. Add to that regulations from OSHA, DOT, DOL, EEOC, EPA, FDA, HHS, and we are awash in regulations, forms, training in how to document, certain

language that must appear in just the right way in company manuals, etc. overwhelming for me as a small business owner.

It is

The cost of compliance- We operate in a very competitive marketplace. I know compliance takes both direct and indirect dollars. For example, our industry has inherently high turnover. We now must send new hire employee information to the Department of Health and Human Services to find dead beat dads. We chose to comply by paying our payroll company $2.00 per employee to submit the information. Our costs do not stop there, however. We're finding when the govemment catches up with the employee, sometimes they simply quit, move on to the next job, and our hiring and training expenses go up to cover the increased turnover. Oh the games we play! But in preparing for this statement, I was shocked to find over a third of our administrative salaries are spent towards achieving compliance of the government regulations that apply to our business. And, that doesn't include items like the $23,000 budgeted for the professional services of our CPA, or the increased expense of tumover mentioned

above.

Knowing we still are not in compliance- Here is the crux of the moral

dilemma. I love America and consider it a privilege to have been born here. And Jesus, referring to the government of His day, instructs us to "render to Caesar what is Caesar's." The problem is, I know I do not. I know I cannot "render to Caesar what is Caesar's" because Caesar has become so complex that even Caesar, himself, will disagree internally on how much I owe and when I am in compliance. To achieve the unachievable goal, that is the position in which small business owners find themselves. You always feel like you're one step away from a penalty, a claim, or a suit that could severely disrupt or close down the business, no matter how much you've tried to "Do the right thing. It puts IHM, and every other company, at the mercy of an ever more intrusive and power hungry government.

Would I choose to start over as a small business owner in today's overly regulated and complex business environment? Maybe not. Two years ago my daughter was real excited about starting her own business. She abandoned it about 9 months later because all the required govemment paperwork squelched the excitement and satisfaction of meeting customer's needs. And, that is sad. But, resolve the issue we're addressing here today, and both she and I would very much enjoy operating our own small businesses.

Thank you for the opportunity to tell you my story in the hope it will provide insight into the dilemma of a business owner. And, while there are many short-term, Band-Aid measures you should continue to take under the Small Business Paperwork Reduction Act Amendments of 1999, I'd encourage you to take a step towards long-term resolution. Vote for the passage of H.R. 1041, to terminate the Internal Revenue Code of 1986, and replace it with something that is simple and just as outlined in the bill.

I am happy to answer any questions.

Mr. MCINTOSH. Thank you Cindy. Thank you very much for that testimony.

Let me now turn to our next witness, Mr. Nick Runnebohm. Nick is a good friend from Shelbyville. Welcome here to the committee. And feel free to summarize your testimony and we'll put the entire remarks into the record.

STATEMENT OF NICK RUNNEBOHM, OWNER, RUNNEBOHM CONSTRUCTION CO., INC., SHELBYVILLE, IN

Mr. RUNNEBOHM. Mr. Chairman and members of the House Subcommittee on National Economic Growth, Natural Resources, and Regulatory Affairs, thank you for asking me to testify before you today. I am here to ask you to reduce the paperwork burden and especially that IRS tax form burden on small businesses like mine. I founded Runnebohm Construction in Shelbyville in Indiana 1968. Since that time, the Tax Code has become so complicated that it's almost impossible for a small business person to prepare their own taxes. This year it cost me $9,575 in accountant's time to prepare my company's 1999 taxes. And this doesn't include the substantial time spent by myself and my bookkeeper throughout the year for dealing with issues.

Simplifying the IRS forms would allow more time for my company to concentrate on the construction business. Like Cindy says, I love construction, what I don't love is all the Government paperwork that I have to deal with today and the feeling that you're never in compliance.

There are four particular tax burdens on small businesses that I wish to speak about today. The first three involve substantial paperwork and recordkeeping. First, the look-back calculation for percentage of completion method of reporting income is very burdensome. These calculations cost between $600 and $1,000 in accountant fees to prepare plus several hours of the bookkeeper's time. Moreover, forcing us to use this method means that we must project profits on projects that may be only 10 to 20 percent complete and which entail a high degree of risk because of weather issues, labor issues and many other unknowns. In other words, we have to pay taxes on income that we might never receive.

Second, the alternative minimum tax, AMT, requires taxpayers to calculate their tax using two methods. Certain preference items must be calculated and subsequently added back to determine AMT income. Examples include the difference between regular and accelerated depreciation and the differences between completed contracts versus percent complete accounting for long term contracts. Once these AMT preference items are calculated AMT and related taxes are determined and the taxpayer is required to pay the higher of the regular or the AMT tax. The cost of both of these calculations can be $1,000 to $3,000 per year for a small contractor like me. The AMT should be eliminated or simplified to reduce the cost and the time of figuring the tax due.

Third, section 125 of the Tax Code is unfair to minority owners of sub S corporations and partnerships which include a large number of small businessmen. Anyone who is more than a 2 percent owner of a sub S corporation loses the right to pay for group health insurance with pretax dollars. Every other employee enjoys that