In 1989, my mother and I started a business out of our garage. We worked hard, raised money to get our business started, and developed an office chair based on my dad's expertise in ergonomics. We still believe it's the best chair on the market.
Two years later, as our business was gaining steam, we discovered an unwelcome surprise: We owed an additional $86,000 in taxes on top of what we had already paid.
It wasn't because of ill intent or carelessness. It was because our complex, outdated tax code was engineered, by accident, to prevent small businesses from starting and growing here in the United States. In our case, the tax bill was a penalty for taking the necessary steps to make our company successful. Instead of counting inventory as a deductible investment in our business, it was instead considered a taxable asset. Lesson learned, at a cost of $86,000.
Fortunately, we were able to expand quickly enough to cover those unexpected costs. Other small start-ups are not that lucky. Almost 30 years later, we employ 130 workers, including 90 at our headquarters in Bryan, Texas, and another 60 across the U.S., Canada, and Puerto Rico.
For small business owners, it's clear our tax code has been broken for decades. We're due for an overhaul – one that closely resembles the plan laid out by Republican leaders in Congress.
It begins with giving small businesses the same tax treatment we give to large corporations. The Small Business & Entrepreneurship Council estimates that 99.7 percent of American businesses (or 5.7 million companies) employ fewer than 500 people. Roughly 90 percent have fewer than 20 employees.
Many small businesses in the U.S. are classified as an S corporation. Under the current tax code, this classification can make the process of filing your taxes hopelessly complicated. I'm a perfect example. My most recent personal tax return was 83 pages long.
The 35 percent rate the U.S. imposes on businesses is one of the highest in the world. Cutting that rate to 20 percent, and applying it more evenhandedly to companies both large and small, would give entrepreneurs the capital they need to invest profits back into our businesses, increase output, and hire more workers.
We shouldn't stop there. In the furniture industry, we face heavy competition from foreign importers. Companies that sell cheaper, less-reliable products from countries like China get to deduct the cost of those goods as a business expense. Our American-made products do not receive the same tax break.
The U.S. tax code has essentially created a foreign import subsidy at the expense of American-based businesses and workers, paid for by taxpayers. Eliminating the foreign-goods subsidy and allowing American producers to deduct capital investments would quickly level the playing field. President Trump recently endorsed the idea in order to encourage companies to headquarter their operations and create jobs in the U.S.
The current system is so outdated and broken that you cannot blame business owners for thinking it is designed to impede success. Take the estate tax for instance. If someone happens to claim a significant share of a family-owned small business as an asset, the heirs to that asset can potentially be penalized to the point that the company no longer survives.
In our case, my mother owns 44 percent of our business. If she were to pass away, we would be unable to pay the ensuing tax burden. That's right: if you clear all the other hurdles and manage to create a successful business, the government makes it as difficult as possible to pass that business on to future generations. The estate tax amounts to double jeopardy on income and assets that have already been taxed. It should be eliminated.
If Washington is serious about both tax reform and strengthening the American economy, it's long past time to enact a plan that creates a level playing field for American businesses and allows them to keep more of the money they earn so they can spend it on new investments and new employees.
Piecemeal efforts won't get us where we need to go. We need comprehensive tax reform, and we need it now.
Rebecca Boenigk is the CEO of Neutral Posture, a family-owned business based in Bryan, Texas.