Executive Summary... pg. 3. Pertinent Tax Code Sections Reviewed... pg. 5. Key Findings & Methodology... pg Toplines... pg.

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2 Table of Contents Executive Summary... pg. 3 Pertinent Tax Code Sections Reviewed... pg. 5 Key Findings & Methodology... pg. 6-7 Toplines... pg Partner Organizations. pg. 17 2

3 Executive Summary The last time Congress overhauled the tax code in 1986, there were 4.1 million women business owners. Today, there are more than 10 million more than a third of all U.S. businesses who generate more than $1.4 trillion in revenues and employ 8.4 million people. A recent online survey of 515 women business owners nationwide by Women Impacting Public Policy and American University s Kogod Tax Policy Center shows the majority of these women business owners do not fully benefit from key small business provisions of the U.S. tax code designed to stimulate small business growth, access to capital and investment. They can t use those provisions because of the way they legally organize their businesses or because of the industries they are in. As a result, most of these businesses and the women who own them are not benefiting from the more than $255 billion in tax incentives the Congressional Joint Committee on Tax projects small businesses will claim between now and These businesses are being overlooked as vehicles for economic growth and expansion that would benefit the economy and the country. As the Kogod Tax Policy Center s accompanying report, Billion Dollar Blind Spot: How the U.S. Tax Code s Small Business Expenditures Impact Women Business Owners, makes clear, women business owners do take advantage of small business tax incentives when they can. However, our survey shows that women predominately own small businesses in service industries (84%) and are not organized as C-Corporations (88% are organized as something other than a C-Corp). As a result, the majority don t benefit from some small business tax incentives because those incentives either explicitly exclude services firms or effectively bypass firms that are not incorporated or have few capital-intensive equipment investments. The survey and Kogod s report find that policymakers have a blind spot when it comes to understanding how effective tax incentives are in helping women-owned businesses grow and access capital. For instance, less than 0.6% of all poll respondents took advantage of Section 1202 which will cost taxpayers $6 billion in the next few years. This section is designed to make investing in qualified small businesses attractive by exempting them from capital gains taxes. However, the majority of women business owners surveyed are unable to use Section 1202 to attract investors because they are organized as something other than a C-Corp or are in services industries that are excluded. This means the vast majority of women small business owners have never been able to attract capital for their businesses using this key provision. At the same time, the survey indicates that women business owners are savvy enough to take tax advantages when they re available. For example, the majority (58%) of respondents claimed a deduction for start-up costs under Section 195 in the year they began operations. With Congress contemplating a comprehensive overhaul of the tax code for the first time since 1986, this survey, coupled with Kogod s analysis, shows it s imperative Congress look into how the code impact women entrepreneurs now. There has been no comprehensive research in recent decades into whether women get their fair share of tax incentives to start and grow. Indeed, the 3

4 U.S. Census did not even begin taking stock of women in business until 1972, when they counted approximately 400,000 women business owners operating in the U.S. This survey identifies a pressing need for in-depth government and academic research on how small business tax expenditures impact women-owned firms to provide policymakers, stakeholders, the media and public with the information necessary to make clear-eyed, evidencebased policy decisions as Congress moves forward with tax reform. Women in business are an economic force and they deserve a tax code that unleashes the full potential of their businesses. 4

5 Respondents Were Asked Questions Around the Following Tax Code Sections Section % Exclusion from Capital Gains Tax for Investments in Qualified Small Business Stock: Section 1202 creates a 100% exclusion from Capital Gains tax for investments in qualified small business stock issued by a C-corporation to create an incentive for people to invest in small businesses. Section 1244 Ordinary Loss Treatment for Investments in Small Business Stock: Section 1244 is another small business tax expenditure designed to encourage small business financing by allowing individuals or partnerships to claim losses on sales or exchanges of certain small business stock as ordinary losses, up to a specified amount ($50,000 for individuals and $100,000 for joint filers) rather than as capital losses, which are generally limited to $3,000. Section 179 Accelerated Depreciation for Investments in Tangible Property for Small Businesses: Section 179 is a well-known tax provision that allows businesses to deduct the cost of new or used business property in the year in which the property is purchased and placed in service (as opposed to recovering the cost over a longer period of years under current depreciation rules). Section 195 Deduction for Qualified Start-Up Costs: To encourage business formation, Section 195 allows business owners to deduct qualified start-up costs in the year they begin operations. 5

6 Key Findings The vast majority of respondents operate businesses in service industries, and are excluded from using a key provision of the U.S. tax code designed to stimulate small business growth, access to capital and investment: 84.27% of women business owners are operating in services industries. Most of respondents organize their business as something other than a C- Corporation, which means they re shut out from some U.S. tax code provisions aimed at helping small businesses get access to capital and grow: 44.66% of respondents organize their business as an S-Corporation, 32.04% organize their business as a Sole Proprietor or Single-Member LLC, and 9.13% organize their business as a Partnership or Multiple-Member LLC. Just 12.43% of respondents report their businesses as C-Corporations for federal income tax purposes. Less than 1% of all respondents have attracted capital for their business by taking advantage of Section 1202, which excludes service industry firms and those organized as something other than a C-Corp. Just three respondents fewer than 0.6% of all women business owners surveyed have at some point been able to attract capital for their businesses from non-corporate investors by issuing qualified small business stock. Only business owners who organize their business as a C-Corp (just 64 respondents) were asked this question, as others are automatically excluded from the provision. Of those women business owners organized as C-corps, just 4.69% of the respondents said they ve been able to attract capital using Section We also tested whether women business owners were aware of Section 1202 and found that a majority of respondents organized as C-corps (65.63%) were aware of Section 1202 but have never pursued it. This could be because more than 80% of respondents reported being in service industries that are excluded by Section The Joint Committee on Tax estimates that the provision will cost taxpayers $6 billion from , however women business owners are rarely using it to access capital. The majority of respondents don t fully benefit from Section 179 a well-known tax provision that allows businesses to deduct business equipment purchased and placed in service. The majority of respondents (52.53%) don t fully benefit from Section 179, either because they don t buy equipment so don t make use of that deduction (14.59%), or they don t know about it (37.94%). However, 47.47%, know about Section 179 and do make use of it. While a plurality of women business owners are using this provision, our survey indicates that women-owned firms claim Section 179 at significantly lower rates than existing government research finds for small firms generally. A 2016 analysis by the Treasury s Office of Tax Analysis found take-up rates were relatively high for Section 179 expensing.generally in the 70% or 80% range for C-corporations and S- Corporations, and somewhat lower at around 60% to 70% for partnerships and individuals. Moreover, the Treasury report offers no insight into the pick-up of womenowned firms specifically. The Joint Committee on Tax estimates that Section 179 will 6

7 cost taxpayers $248 billion from , however there is no government data research on whether this expenditure actually benefits women-owned firms, and our data finds that it might not. The majority of respondents have never used Section 1244, a provision aimed at incentivizing investment in small businesses, as investors: 85.63% of respondents have never claimed Section 1244 s benefit of ordinary loss treatment on the sale or exchange of qualified small business stock. Only 5.63% of respondents have ever claimed Section 1244 as an investor in a qualified corporation and 8.74% were unsure if they ve ever claimed it. The Kogod report interprets these results as potentially indicative of an overall lack of awareness among women-owned firms of Section 1244 and its benefits as an access to capital strategy for their own firms. When there are tax incentives that women business owners can take advantage of, they do. To encourage business formation, Section 195 allows business owners to deduct their start-up costs in the year they begin operations. Of the respondents who incurred deductible start-up expenses in their first year in business, the majority (58.01%) elected to deduct up to $5,000 of those start-up expenses. Of those who did not deduct their startup expenses, 35.9% didn t know they could deduct them, and 6.09% had more than $55,000 in startup costs and had to amortize those costs. Majority of women business owners are micro-businesses. More than two-thirds (68.35%) of respondents reported having fewer than 10 employees at the end of More than a quarter of respondents (27.38%) reported that they had no employees other than themselves; 31.07% said they had between two and five employees; and 9.9% reported having between six and 10 employees. Methodology This was an online survey, conducted by Women Impacting Public Policy using Survey Monkey, of 515 women business owners. The survey was an opt-in survey sent via to WIPP s members and associates, and members of its coalition partners (see full list on pg. 17). The survey was sent to 550,000 women business owners in total. 7

8 Toplines Women Impacting Public Policy Tax Survey 515 Women Business Owners Nationwide Online opt-in survey of WIPP members and associates Feb. 24-April 11, 2017 Q1: Before you begin, please answer a few questions about yourself to ensure that the survey is reaching the appropriate participants. What is your gender? Q2: Do you on your own, or with other women, own at least 51% of a business? 8

9 Q3: How would you categorize your business? Q4: How do you report your business s income for federal tax purposes? 9

10 (IF As a C-Corporation Filing IRS Form 1120 Corporate Tax Return 0n Q4) Q5: At any point, have you been able to attract capital for your corporation from noncorporate investors by issuing qualified small business stock in exchange for money, services or other property? (IF As a C-Corporation Filing IRS Form 1120 Corporate Tax Return on Q4) Q6: Have you ever claimed an ordinary loss (as opposed to a capital loss) on your individual tax return from the sale or exchange of stock you purchased from a domestic corporation or S-Corp that had less than $1 million in aggregate capital when you bought the stock and didn t earn more than 50% of its income from passive investments? 10

11 (Resume all) Q7: Thinking back to when you FIRST started your business, which of these categories best describes the gross ASSETS of your business in your first year? Q8: Thinking back to when you first launched your business, did you incur any of the following start-up expenses in that year? CHECK ALL THAT APPLY 11

12 Q9: Did you deduct up to $5,000 of those start-up expenses on your tax return in the year you started your business? Q10: Since you ve been running your business, have you purchased any of the following types of property that you have been able to deduct on your tax return in full in the year you placed the property in service? CHECK ALL THAT APPLY 12

13 Q11: Do you know you can deduct the full amount of business equipment purchased and placed in service (in recent years, up to $500,000) as long the total purchase does not exceed $2 million? Q12: How many employees did your business have at the END of 2016, including yourself? Q13: Do you ever hire independent contractors for your business? 13

14 Q14: Thinking over the past five years, have you found that you often hire independent contractors instead of regular employees? Q15: Do you use a tax preparer or tax preparation software to help you prepare your taxes? Q16: How much did you pay for the services or software? 14

15 Q17: About how much time did you spend over the last year preparing your taxes? Q18: Which of these categories best describes the gross REVENUE of your business for 2016? 15

16 Q19: What is your race? 16

17 WIPP thanks its partner organizations and their members for participating in this survey 17

18 About Women Impacting Public Policy Women Impacting Public Policy (WIPP) is a national nonpartisan organization advocating on behalf of women entrepreneurs strengthening their impact on our nation s public policy, creating economic opportunities, and forging alliances with other business organizations. 18