Small Business Inventory Expensing
Calvin H. Johnson
University of Texas at Austin - School of Law
November 16, 2010
Tax Notes, 2010
U of Texas Law, Law and Econ Research Paper No. 193
The Shelf Project
Calvin H. Johnson is a professor of law at the University of Texas. The author wishes to thank Stephen Zeff and Michael Granof for helpful comments without binding them to conclusions with which they disagree.
The President’s Economic Recovery Advisory Board (PERAB) recently recommended allowing small businesses to expense their inventory and exclude their customer receivables from tax. The PERAB proposals are a tax shelter or subsidy that are better than no tax. Investing with deducted or excluded funds is economically equivalent to an exemption of profit from tax, and when the interest deduction is taken into account, the result is a negative tax.
Records to reflect inventory and receivables are easy to maintain and are getting cheaper with the availability of computerized accounting. Every business knows how much its customers owe it, and no business has lost money reflected in valuable inventory it still has on hand. The PERAB proposal is prone to abuse as dentists and lawyers seek shelter. Indeed it would always be open to abuse.
The Shelf Project is a collaboration among tax professionals to develop proposals to raise revenue in the impending revenue crisis by defending the tax base. It is intended to raise revenue without a VAT or a rate increase in ways that will improve the fairness, efficiency, and rationality of the tax system. The Shelf Project ordinarily proposes amendments to close existing loopholes, and the PERAB proposal to allow expensing of inventory and deferral on receivables is a loophole. Blocking enactment of the PERAB proposal would prevent the revenue loss that the PERAB proposal would cause.
An overview of the Shelf Project is found in ‘‘How to Raise $1 Trillion Without a VAT or a Rate Hike,’’ Tax Notes, July 5, 2010, p. 101, Doc 2010-13081, or 2010 TNT 129-4. Congress adopted its first Shelf Project in March 2010. New section 871(1), enacted in the Hiring Incentives to Restore Employment Act, is based on the Shelf Project proposal by Reuven Avi-Yonah, ‘‘Enforcing DividendWithholding on Derivatives,’’ Tax Notes, Nov. 10, 2008, p. 747, Doc 2008-22806, or 2008 TNT 219-34.
Shelf Project proposals follow the format of a congressional tax committee report in explaining current law, what is wrong with it, and how to fix it.
Number of Pages in PDF File: 11Accepted Paper Series
Date posted: November 16, 2010
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