This article originally appeared on the Tax Revolution Institute website. Join the Tax Revolution here.
It’s no secret that dealing with the Internal Revenue Service is complicated. But trying to deal with the IRS while also attempting to make sense of the US tax code is just downright daunting.
Now containing 74,000 pages, the federal tax code has almost tripled in the last 30 years. At the current rate it is growing, it will surpass 100,000 pages by 2050.
But what most Americans don’t realize about the complexity of the US tax code is how it kills entrepreneurship, especially in younger generations.
According to data from a Wall Street Journal analysis, about 3.6 percent of households headed by adults younger than 30 owned stakes in private companies in 2013. In 1989, 10.6 percent of young adults owned stakes in private businesses.
The Wall Street Journal lists a multitude of reasons why young people aren’t becoming young business owners. Those reasons could range from little to no savings after paying back student loans, fear of taking risks, new rules about how they can obtain bank loans, or understanding and complying with federal regulations.
Jessica Juillerat, a recent Purdue University graduate, is interested in starting her own event-planning business. However, she is worried that trying to comply with tax rules and regulations will cost too much.
“The only thing holding me back from starting my own company is really the logistics that are associated with it. I feel like I have the talent, but the cost and paperwork that come with hiring a lawyer to help me is just not feasible right now,” Juillerat said.
Trying to navigate those regulations alone can be time consuming and frustrating, says Emily Mishler, also a Purdue University graduate.
“I spent a lot of time and effort opening a nonprofit LLC, and I don’t think it’s worth attempting to open one for a for-profit company by myself at this point,” Mishler said.
Mishler is hoping to attend graduate school to study business administration. She thinks those courses could help her to better understand how to comply with the IRS and its policies.
“I’m thinking of dissolving my current LLC, but I’m not sure how to go about that or if I would owe the IRS anything, which is scary to think about because I wouldn’t want to inadvertently get in trouble,” she said.
According to the IRS website, small-business owners are required to file a Schedule C with their personal income-tax return that outlines business income and expenses. Because Schedule C’s don’t require small-business owners to submit receipts or other records with their returns, they are subject to a higher level of scrutiny by the IRS. (And it’s much easier for the IRS to validate their own official documents in the form of W2’s or 1099’s.)
So how can this trend be reversed?
It is imperative that we find a way to simplify the tax code so that people of all ages have the opportunity to open and operate a business.
Doing this would especially benefit young people. A simplified tax code would mean money saved on hiring attorneys to help file paperwork, along with saving money on costly advanced-degree programs. (And that’s not to mention that the average two-year MBA costs more than $60,000.) The money that would have been spent on trying to decipher the tax code could be better used in funding new businesses.
Lastly, Americans shouldn’t live in fear of the IRS when the agency itself apparently can’t even enforce some of its own rules. There is no reason why small businesses should be scrutinized more for attempting to comply with IRS regulations.