The rich get richer, but then, they know better how to play the game. This is particularly true when it comes to tax incentives. While multinationals dip lavishly into government incentives, small businesses languish in a silence punctuated by “Woe is me.”
In one way it is understandable. When your company gets to the size of an IBM or a Microsoft it can afford teams of lawyers and accountants able to spend entire careers poring through dense tax laws to find breaks. But when your company is a little bakery or a two-person consulting firm there is little time that can be taken away from the job itself. After all, if you’re combing through tax documents, who’s baking the muffins?
The result is that large companies, already flush with revenue, consume nearly 85 percent of some categories of tax breaks, effectively bringing their tax bases down below 20 percent. And small businesses, rightfully terrified of probing IRS agents who make small businesses their focus, overpay their taxes and wallow in learned helplessness.
So what’s a little guy to do? Well, Dean Zerbe, national managing director of Houston-based Alliantgroup’s Washington, D.C., office, advises opening your mouth. And your ears. Zerbe will present “Obama’s Tax Policy: Its Impact on Middle Market Business” on Wednesday, January 14, at 5:30 p.m. at Mercadien, on Quakerbridge Road in Hamilton. In this free seminar, he will try to awaken small and mid-sized businesses to the possibilities available in the Bush tax plan that will likely continue under Barack Obama, as well as remind these same businesses to not expect miracles, despite what Zerbe says is some well-intended economics. For more information, call 609-689-2401.
Despite a career immersed in Republican politics, including time spent working on the Senate Finance Committee under chairman Charles Grassey of Iowa, Zerbe has no unkind words for the coming Democratic administration. In fact, he believes Obama is, in good faith, trying hard to do the right thing by offering tax rebates to all and $3,000 credits to new, small businesses.
The problem, rather than being political, he says, is one of education. Small and mid-sized business owners simply are not aware of what’s available to them; and big corporations go after tax incentives “like monkeys after bananas,” Zerbe says.
What worries Zerbe is that despite its good intentions, Obama’s most visible small business tax incentives are simply not enough to do any long-term good. While encouraging the formation of small businesses is great, the government should also encourage expanding businesses. It’s all well and good to start up a new venture, he says, but those ventures need to stick around. “Now is a good time to encourage expanding business,” he says.
Why this aspect is not part of the Obama tax plan — and why it has not been part of the Bush, Clinton, or any other administration’s plans — is, Zerbe says, because Capitol Hill simply doesn’t hear from small business owners. While mega-companies have industry lobbyists in their pockets, small companies, again, are run by people directly immersed in the work of getting their businesses off the ground and staying there.
It lends itself to an unbalanced cycle. Little companies don’t explain their plight to Washington, so the supremely un-psychic Washington does not factor small businesses into its calculations. Senators and Congress members make broad laws intended to include the little guy, but never tell him how to play. Or they make incentives packages requiring owners to, as Zerbe puts it, “put on a pink dress and hop up and down on one leg” before they can cash in. Politicians make incentives such a knotty process, he says, that the little guy simply throws up his hands and says it isn’t worth it.
It’s like supplies. Much of the problem with small business taxes, Zerbe says, is that certain attitudes have been deeply ingrained. And it’s for good reason. In the past decade especially, the IRS has turned its auditors on the little guy who, Zerbe says, are by and large law-abiding, dutiful people. These are the ones who pay their taxes on time, and often twice, just to make sure they are not audited and consequently forced to pay back money they can’t spare. Large companies, able to withstand an audit triggered by an oversight, have far less to worry about.
It is a skewed way of doing business, and one that annoys Zerbe. In the past months he, like everyone else, has watched the day of reckoning caused by federal regulators having shied away from watching over large companies. T-Men have ignored grievous sins on Wall Street and scared the little guy into a corner, causing them to take themselves out of the game before it even starts. “Self-censorship,” Zerbe says, “is the biggest problem.”
But Zerbe advises small businesses to start thinking about incentives. There are hundreds of them out there, from research and development to dependent care, and they are not there just for the big fish. Annually, in fact, the R&D incentive offered at the federal level is a $10 billion reserve — and 85 percent of it goes to pharma’s superpowers, such as Pfizer and Merck.
But this pool, and others like it, are available to any business that does the work outlined. The big guys are taking it, he says, because they can, and the little guy is not even thinking about it. Zerbe says business owners would be wise to start considering tax incentives — often the second-largest expense in a small company’s budget — like they would supplies, payroll, and training. It has to be part of the deal from the outset, he says. And when it is, small companies can reap huge rewards.
So where are the accountants? Though small business owners have little time to explore tax laws, many small business owners already use professionals, from accountants to janitorial services, to do jobs they can’t or have no time to do themselves.
Accountants, Zerbe says, have to know tax laws. The problem is, what they know is not being communicated to their clients.
Much of the reason Zerbe tours the country giving presentations like the one on January 14 is because he wants to make accountants aware that they need to inform clients what tax incentives are ripe for plucking. “Everybody needs to be aware of what’s out there,” he says. “There are hundreds of thousands of dollars out there for a good medium-size company.”
By “everybody,” Zerbe also hopes to poke small and mid-sized business owners into broaching the subject with their accountants as well.
They might not have time to do research themselves, but they should ask questions of their accountants, a basic one being, “Are there any tax incentives out there that I should be cashing in on?”
Incentives. “The export credit is huge,” Zerbe says. As a rule of thumb, companies that can export more than $2 million of product can see a break of up to 15 percent.
But there are incentives available to smaller companies as well. And things could get more interesting. According to the National Small Business Association, the Export-Import Bank of the United States, the country’s official export credit agency, is preparing a “series of initiatives” to meet international credit problems sparked by the global economic downturn.
These initiatives largely come in the form of loans, but could include tax incentives as well.
Taking things off the global stage, small businesses right down to the two-person bakery have a world of initiatives to look into. There are incentives for improving accessibility under the Americans with Disabilities Act; renovations incentives for commercial buildings; green energy credits for buildings and auto fleets; hiring incentives (often outlined by the state); and work opportunity incentives that reward development and growth in economically challenged area. The list goes on.
The caveat. Taxes will go up. Sounds obvious, but it’s something that often gets overlooked when presidents sign stimulus bills. Under George W. Bush, Americans have received tax rebates that have reached $600 per person. Barack Obama has promised similar rebates, plus that $3,000 new business credit.
But that will pass, says Zerbe. As economies improve, governments no longer need to coax people into spending. By the end of 2010, Zerbe says, businesses will likely see rebates start to dry up. Owners, then, should make plans now to meet these challenges. Besides that, he says, $3,000 is not enough to do much in the long run. Better to not count on windfalls and focus instead on the sea of incentives available.
Zerbe began his career in politics after graduating at age 19 from NYU’s film school in 1984 and finding that “I had no family members who owned film studios.” His mother was a seamstress and his father worked at Home Savings and Loan in California. Neither were involved in politics, but his mother’s father and brother were career foreign service officers in the State Department.
So while Zerbe had no family in Hollywood, he did have family in D.C., so he moved there after NYU. There he became interested in politics and found he was fascinated by administrative law.
Zerbe went to work for Senator Grassey before the senator chaired the Finance Committee and was involved in several committees and initiatives on Capitol Hill. He has served as tax counsel for the U.S. Senate Small Business Committee; as senior policy advisor for the National Commission on Restructuring the IRS — which served as the basis for the 1998 legislation that was signed into law providing significant reforms to the IRS and expanding taxpayer rights; as a legislative aide for Congressmen Denny Smith of Oregon and Richard Baker of Louisiana; and was appointed to positions at the departments of Defense and Health and Human Services by President George H.W. Bush.
Zerbe earned his J.D. from George Mason University in 1997. Still in Washington, Zerbe commuted by train to New York to earn his master’s in tax law from NYU.
Travel, though, is nothing new for Zerbe. Born in Omaha, Zerbe later grew up in Santa Monica, California. As a headstrong young artist, he opted not to “go right down the road” to USC or Stanford to study cinema, but to Manhattan, which scared him half to death when he first arrived. But he paid his way through college by playing piano and then headed south.
In 1998 Zerbe moved to Nevada to work at a law firm was brought back to Washington when Grassey became the finance chair. Since then he has served as that committee’s senior tax counsel, where he took part in almost every major piece of tax legislation that was signed into law. He also was involved in the Enron case — a company he gives one big credit to: Enron so wisely used tax initiatives that it had an effective tax base of zero.
And lest you snicker, this is not uncommon among large corporations. According to the General Accounting Office, roughly half of all large U.S. and foreign-owned businesses in this country reported zero tax liability at least once in the years spanning 1998 to 2005.
He took over Alliantgroup’s D.C. offices last year. Alliantgroup is a national tax consulting group specializing in small and medium-sized businesses. Zerbe has since spent much time trying to get the word out that businesses of all sizes have many options for helping themselves alleviate the second-highest corporate tax rate in the industrialized world.