Small Business Identification: Definition and Methodology, Lecture notes of Business Informatics

Download Small Business Identification: Definition and Methodology and more Lecture notes Business Informatics in PDF only on Docsity!

Small Business Identification

How and Why

Richard Prisinzano

Overview

• How
  • Tax Data
  • Simple & Malleable Rules
• Why
  • Policy Goal
  • Inconsistent

Overview of Methodology

• Keep tests and thresholds simple and constant across all business returns.
• Count all income and deductions that are reported by business entity, including Schedule K.
• Exclude entities that only report income, but allow entities that only report deductions.

Small Business Methodology

• Step 1: Consider all “business” income base.
  • Include sole proprietors, partnerships, S and C corporations, Schedule E rental real estate, farmers
  • Include any investment income and deductions from Schedule K for partnerships and S corporations
• Step 2: Separate business from non-business activity.
• Step 3: Separate small businesses from all businesses.

Business Test

• Test 1: De Minimis Activity
  • Total Deductions or Total Income >= $10, OR
  • Total Deductions and Total Income >= $15,
• Test 2: General Business Activity
  • Total Deductions > $5,

Identifying Businesses Thousands of Filers 0 5, 10, 15, 20, 25, 2007 Business 2010 Business 2014 Business 2007 Non 2010 Non 2014 Non C Corp S Corp Part Farm Renter Sole Prop

Identification of Small Businesses

• We define small business as entity that reports < $10 million Total Income and < $10 million in Total Deductions.
• Result:
  • For each year, we retained 99% of business entities, but between only 17% and 18% of total income and between 17% and 19% of net income.

Business vs. Small Business Thousands of Filers 0 5, 10, 15, 20, 25, 2007 Business 2010 Business 2014 Business 2007 Small 2010 Small 2014 Small C Corp S Corp Part Farm Renter Sole Prop

Identification of Employers

• We define a small business as an employer if entity reports > $10K in labor deductions
• Result:
  • For each year, only 20% of small businesses are employers.

Small Business Employers Net Income, Billions of Dollars

• 0 20 40 60 80 100 120 140 160 180 Sole Prop Renter Farm Part S Corp C Corp 2007 Employer 2010 Employer 2014 Employer 2007 Non-Employer 2010 Non-Employer 2014 Non-Employer

CARES ACT (PPP) Table 1. Characteristics by Firm Size, 2016 Number of Employees Number of Firms Employment Annual payroll ($1,000) 500 or more 0.3% 52.7% 59.3% Fewer than 500 99.7% 47.3% 40.7% 100 - 499 1.5% 14.0% 13.5% 20 - 99 9.0% 16.6% 14.0% 5 - 19 27.6% 11.9% 9.0% 0 - 4 61.6% 4.7% 4.2% Total 5,954,684 126,752,238 6,435,142, Source: U.S. Census Bureau, Statistics of U.S. Businesses 2016

CARES ACT (PPP) Table 2. Average Annual Growth in Wages and Employment by Size Category, 2012- 2016 Firm Size (Number of Employees) Wages Employment Percent Change Contribution to Percent Change Percent Change Contribution to Percent Change Total 4.3 4.3 2.1 2. 500 or more 4.8 2.7 2.6 1. 100 - 499 4.5 0.6 2.2 0. 50 - 99 3.4 0.2 1.8 0. 20 - 49 3.6 0.3 2.3 0. 0 - 19 3 0.4 0.7 0.