Saturday, August 7, 2010

Franchise Growth

Uncertainty Hampers Growth in the Franchise Industry
Ken Walker
Uncertainty is the theme for franchise businesses this summer. Uncertainty about new government regulations, uncertainty about availability of capital, and uncertainty about how quickly the economy will truly recover is stifling job and business growth.

Of course, there are many reasons for the current wave of uncertainly, but as Dallas Fed President Richard Fisher recently said, “Congress and the government have inhibited growth by creating uncertainty about business costs. We need clarity. You can’t eliminate uncertainty, but you have to reduce it as much as possible.”

As job creators, franchise business owners remain in the crossfire of a political agenda that increasingly threatens to stifle economic growth even further. Potential new taxes on both personal and business incomes, a continuing array of new regulatory burdens from health and energy reforms, and the failure to invest in common-sense solutions to help small businesses grow will certainly hamper job creation.

For example, we know that tax paperwork and compliance are already major expenses for small businesses, but buried in the new health-care law is a requirement for small businesses to report every business-to-business transaction that involve property and services in excess of $600 annually.

This would trigger the requirement to file a Form 1099 with the IRS and furnish taxpayer identification numbers (TINs) for all businesses and persons involved.

This new and expanded requirement means that almost every business-to-business transaction is potentially reportable to the IRS. According to a Small Business Administration (SBA) study, the cost of complying with the tax code is already 66 percent higher for a small business as compared to a large business. The new requirements will dramatically increase these costs, pulling capital out of small businesses that could be better used to reinvest in the business and create jobs.

The new reporting has nothing to do with health care, but it is really a way to raise revenue by closing the so-called “tax gap” (the gap between the assumed amount of taxes owed and actual tax revenue, often attributed to intentional under-reporting of earnings). Yet, little data exists to demonstrate that the newly collected information is a source of the tax gap, and it is unclear whether and how the IRS can use the paperwork.

This new rule essentially makes small businesses tax collectors. In order to file Form 1099, small businesses must obtain a Taxpayer Information Number (TIN) from the vendor. If the vendor does not supply a TIN, the small business would be obligated to withhold taxes from its payments to that vendor.

This is the kind of new rule that threatens the tenants of the free enterprise system and, if allowed to persist, will have grave and long-lasting consequences for our nation. As President Dwight D. Eisenhower said, “Without free enterprise, there can be no democracy.” That’s why the International Franchise Association is working to eliminate this unnecessary and onerous paperwork burden on small franchised businesses by supporting a bill to do just that — H.R. 5141.

Small and franchised business owners can help reverse new rules such as this one by alerting their members of Congress how these laws will hamper job creation and economic growth. These types of new regulatory burdens will drive voters’ decisions as they go to the polls in November. For the franchise industry, it will come down to who can help provide the certainty our economy so desperately needs.

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