Strangling Small Business In The Crib

The tax and bureaucracy overheads on small businesses grow more onerous

Starting a business in America is extremely simple. Everything can be done online in every state within minutes, and the IRS-issued tax ID arrives just as quickly. Growing that business is not as easy when multiple government entities crowd in quickly, taking one cut after another, layering on bureaucratic overheads and inducing unjustified inertia. Reflect that everything used to build and grow Ad Crucem has already been taxed multiple times at eye-watering marginal rates.

As you might deduce, Ad Crucem is deep into tax prep season. It will take the better part of two months to receive all the statutory documents proving we earned this and spent that before we can compile the results in a tax filing that runs to hundreds of pages. That is after spending a good deal of each month fulfilling several tax-related reporting and payment obligations.

Ad Crucem is not a large business by any standard, and it is constantly imperiled by living in the oxygen-free tax zone between being an Amazon, where you decide how much tax you’ll pay, and the painting contractor who takes everything in cash to avoid even having to pay never mind file taxes.

A new year typically kicks off with:

• Collecting W9s from contractors and vendors. Fortunately, everyone has responded in time to allow us to meet the corollary filing deadlines.

• Issuing 1099s. Significant changes were announced by the IRS for 2024 in terms of e-filing (it used to be 250 returns, and now it is 10) and a reduced earnings threshold; just $600 in payments for services, rent, royalties, or other income has to be reported via 1099.

• Filing sales tax reports and making payments to dozens of jurisdictions. The thresholds for reporting and filing have fallen dramatically because of inflation and the aggressive posture of many collectors - they do not dare miss out on the $0.16 you owe in sales taxes. Below is a small snapshot of recent filings just for Ad Crucem’s Colorado domicile, which is on top of the activity required during the year. Many filings cost more to prepare and file than the taxes owed. In some cases, the effective tax rate on the sale is over 100% of the total revenue collected from the sale:

• Tracking the myriad agencies that collect tax and staying on top of changes. For example, this sale to a Denver suburban address triggers a slew of taxes, and this is a relatively tame example.

• Keeping up with bureaucrats changing their minds. In early 2023, we asked for and received a reprieve from the State of Colorado for quarterly filings. Three months later, the decision was reversed for the sake of a total amount that wouldn’t pay a single lobbyist lunch bill for the Governor.

• Tracking out-of-state thresholds for reporting and filing. More states are demanding sales taxes on purchases by their residents. The thresholds are ludicrously low! Once Ad Crucem triggers the thresholds, a whole new set of costs drag on the business if we leave them unaddressed. How do we address them? Increase prices to the customers, especially for jurisdictions imposing new and higher costs.

• Monitor tax changes on the cost of goods sold to understand what drives price inflation for a particular product and how to deal with the consequences. Ad Crucem has absorbed most of the inflation impact since 2020 to avoid compounding the economy’s misery for our customers. That is not a wise survival strategy, so we expect, regrettably, to increase prices on many items this year. For example, consider this product that shocked us with a 42% increase in little more than two years.

It all amounts to unnecessary minutia that distracts from driving the business to grow to its full potential, impedes capital formation, and raises final costs for the consumer.

We can do very little about it except rely on our accountant to be on top of everything (she is! ) and be grateful to our loyal customers who make the navigation pains worthwhile.