2013 MID-YEAR ECONOMIC REPORT

2013 MID-YEAR ECONOMIC REPORT 1

NATIONAL SMALL BUSINESS ASSOCIATION

FOREWORD
The National Small Business Association (NSBA) is the nations first small-business advocacy group celebrating more than 75 years representing small business in Washington, D.C. Focused on federal advocacy and operating on a staunchly nonpartisan basis, NSBA is a recognized leader of Americas small-business community. In addition to our wide array of advocacy efforts, NSBA provides critical data on the small-business community. Throughout the year, we conduct a series of surveys and quick polls, chief among them are our two Economic Reports: the NSBA Mid-Year Economic Report and the NSBA Year-End Economic Report. These reports use NSBA survey data to provide a snapshot of how small businesses are dealing with the current economic situation and provide long-term trending data. This 2013 Mid-Year Report shows businesses are feeling more confident in the overall economy than they have in some time. In fact, when asking to compare todays economy with five years ago, 40 percent said it is better offthe highest its been in five years. Furthermore, those small firms predicting a flat or recessionary economy in the coming 12 months is at its lowest point in five years. Unfortunately, while there was growth in small-business owners confidence about the future of their own business, it wasnt as great as the growth in confidence in the overall economy. Underscoring the difference in small-business owners broad economic outlook vs. their outlook of their own business: there was very little change in small-businesses revenue and profits over the last 12 months and similarly stagnant growth in projections for both indicators in the coming 12 months. A likely cause for this discrepancy is the fact that media reports signaling massive economic failures, such as the debt ceiling and sequestration, have been fewer in recent months, anddespite Congress continuing inability to get much donethe focus of their failures has not necessarily been economic in nature. Despite the lower prevalence of negative economic news, the fact remains that times are still very difficult for small businesses and there is growing hesitation by small businesses, even those who have a better economic outlook than six months ago, to take on the risk of growth or hiring. Small business plays a huge role in economic growth, specifically when it comes to hiring. Unfortunately, just 18 percent report increasing their employee size, while 26 percent report decreases in employee size, resulting in negative net employee growth. When it comes to financingthe lifeblood of any small business65 percent of small businesses report they are able to obtain adequate financing, down from 73 percent just six months ago. This capital shortage continues to hamper other growth. Since 1993, when NSBA began asking these questions, there has been a direct correlation to a small-business owners ability to hire and his/her ability to get financing. Economic uncertainty continues to top the list of challenges facing small-business owners, followed by decline in customer spending and cost of health insurance. The number one issue and a new answer option provided for the first time in this surveysmall businesses want policymakers to address is to end the partisan gridlock and work together. That was followed closely by reduce the national deficit, simplify and reduce the tax burden, reduce regulatory burdens and rein-in costs of health care reform. The 2013 Mid-Year Economic Report was conducted on-line June 25 through July 17, 2013 among more than 1,100 smallbusiness ownersboth members and nonmembers of NSBA representing every industry in every state in the nation. A larger sample set was surveyed for this report, resulting in a slightly smaller average firm size, however all other demographics remained consistent. Please contact NSBAs media office for inquiries at press@nsba.biz.

Todd McCracken NSBA President and CEO

David Ickert NSBA Chair Air Tractor, Inc.

2013 MID-YEAR ECONOMIC REPORT 2

NATIONAL SMALL BUSINESS ASSOCIATION

DEMOGRAPHICS
How many total full-time personnel are currently employed by your business? Which of the following best describes the structure of your business?
CORPORATION PARTNERSHIP LLC SOLE PROPRIETORSHIP S-CORP

0 1 to 5 6 to 19 20 to 99 100 to 499

7% 40% 26% 22% 4%

41% 25% 12% 2% 20%

In what region is your business located? New England Mid-Atlantic Great Lakes Farm Belt South Mountain Pacific 6% 22% 14% 5% 29% 11% 13%

Which of the following best describes the industry or sector in which your business operates? Manufacturing Professional Construction Other Services (except Public Administration) Scientific and Technical Services Retail Trade Information (IT) Wholesale Trade Health Care and Social Assistance Transportation and Warehousing Educational Services Agriculture, Forestry, Fishing and Hunting Real Estate, Rental and Leasing Administrative and Support Arts, Entertainment, and Recreation Insurance Accommodation and Food Services Finance Management of Companies and Enterprises Public Administration 28% Mining Utilities 17% 13% 12% 10% 9% 7% 6% 6% 4% 3% 2% 2% 2% 1% 1% 1% 1% 1% 1% 1% 0% 0%

What was your total payroll for the most recent fiscal year?
Less than $100,000 $100,000 - $500,000 $500,000 - $1 Million $1 - $5 Million $5 - $25 Million $25 - $75 Million $75 - $150 Million More than $150 Million

31% 27% 14% 19% 5% 1% 1% 2%

What were your gross sales or revenues for your most recent fiscal year?
Less than $100,000 $100,000 - $250,000 $250,000 - $500,000 $500,000 - $1 Million $1 - $5 Million $5 - $25 Million $25 - $75 Million $75 - $150 Million More than $150 Million

Waste Management and Remediation Services 1%

16% 11% 9% 13% 16% 3% 1% 2%

While the industry groupings are consistent with past surveys, the categories were changed to match up with NAICS codes to provide better uniformity amongst other national surveys.

2013 MID-YEAR ECONOMIC REPORT 3

NATIONAL SMALL BUSINESS ASSOCIATION

SMALL BUSINESS CONFIDENCE

NSBAs Economic Reports have been cyclical in nature over the past several years: there typically is a depression in confidence and economic outlook during summer months and increases in both indicators at the beginning of a new year. However, the 2013 MidYear Report shows businesses are feeling more confident in the overall economy than they have in some time. In fact, when asked to compare todays economy with five years ago, 40 percent said it is better offthe highest its been in five years. Those who say the economy is worse off than five years ago also is at its lowest pointjust 45 percent. Underscoring the more positive outlook on the economy is the fact that those predicting a flat or recessionary economy in the coming 12 months is at its lowest point in five years. Unfortunately, while there was growth in small-business owners confidence about the future of their own business, it doesnt match the growth in confidence in the overall economy. The improved economic outlook, coupled with changes in the most significant challenges faced by small business, appear to correspond with the timing of major breakdowns in Congress. Economic outlook has typically been lower during and after times when there was significant brinksmanship on economic issues, such as the summer 2011 debt ceiling debacle or last falls failure to avoid sequestration. The fact that there hasnt been that level of breakdown or corresponding press coverage is a likely factor in why small businesses are feeling better today than they have in the last few years.

When compared with six months ago, would you say todays national economy is:
DEC. 11 JULY 12 DEC. 12 JULY 13

44% 42% 24% 29% 16% 19% 31% 31%

46% 40% 39% 18%

BETTER OFF

WORSE OFF

ABOUT THE SAME

When compared with one year ago, would you say todays national economy is:
DEC. 11 JULY 12 DEC. 12 JULY 13

35% 24% 21% 23%

44%

48%

47% 34% 31% 31% 30% 32%

BETTER OFF

WORSE OFF

ABOUT THE SAME

Compared to five years ago ... Would you say the national economy is: Better Off
80%

Worse Off

About The Same

60%

40%

20%

0%
c De .1 0 l Ju y 11 c De .1 1 l Ju y 12 c De .1 2 l Ju y 13

2013 MID-YEAR ECONOMIC REPORT 4

NATIONAL SMALL BUSINESS ASSOCIATION

SMALL BUSINESS CONFIDENCE

What are the three most significant challenges to the future growth and survival of your business? JULY 13 Economic uncertainty Decline in customer spending Cost of health insurance benefits Regulatory burdens Federal taxes Lack of available capital Growing national debt Lack of qualified workers State and local taxes Cost of employee salaries Cost of employee benefits Cost of technology Foreign competition Cost of training workers No major challenges 60% 40% 36% 30% 22% 20% 18% 12% 12% 9% 7% 7% 4% 3% 3% JULY 12 68% 42% 33% 38% 26% 23% 27% 10% 10% 8% 5% 4% 6% 3% 1% DEC 12 69% 37% 38% 39% 34% 17% 27% 12% 13% 5% 3% 3% 5% 2% 1%

From a financial perspective, how do you feel right now about the future for your business?
Confident Not Confident

80%

60%

40%

20%

0%
Au g.

08

De

c.

08 Ju

ly

09

De

c.

09 Ju

ly

10

De

c.

10 Ju

ly

11

De

c.

11 Ju

ly

12

De

c.

12 Ju

ly

13

2013 MID-YEAR ECONOMIC REPORT 5

NATIONAL SMALL BUSINESS ASSOCIATION

SMALL BUSINESS CONFIDENCE

Thinking about the next 12 months, do you anticipate: Economic expansion A flat economy A recession

80% 70% 60% 50% 40% 30% 20% 10% 0%

g Au .0 8 .0 8 l Ju 09 .0 9 l Ju 10 .1 0 l Ju 11 .1 1 l Ju 12 .1 2 l Ju 13

c De

c De

c De

c De

c De

2013 MID-YEAR ECONOMIC REPORT 6

NATIONAL SMALL BUSINESS ASSOCIATION

Businesses are feeling more confident in the overall economy than they have in some time. In fact, when asked to compare todays economy with five years ago, 40 percent said it is better offthe highest its been in five years. Those who say the economy is worse off than five years ago also is at its lowest pointjust 45 percent.

BUSINESS GROWTH
Today, almost two-thirds (59 percent) of small-business owners either expect growth in the coming year or already are growing, a notable jump from 50 percent just six months ago. Interestingly, despite positive growth in economic outlook, there was very little change in small-businesses revenue and profits over the last 12 months and similarly stagnant growth in projections for both revenue and profits in the coming 12 months. There also was relatively little change in growth strategies planned for small business in the next year.

Do you believe there will be growth opportunities for your business in the coming year?

Which of the following growth strategies will you use in the next 12 months? JULY 2013 New advertising and marketing strategies Internet / Expand E-commerce Strategic alliance No growth strategies will be used in the next 12 months 46% 33% 32% 21% 18% 10% 15% 8% 9% 8% 6% 5%

JULY 2013

45%
YES

41% 14%
NO ALREADY GROWING

Hire new employees Investments in R&D Joint Venture

DEC. 2012 38% 50% JULY 2012 41% 47% 45% DEC. 2011 37% 17% 14% 12%

Other Expand operations to new facilities/add additional stores Outsourcing Acquisition Merger

2013 MID-YEAR ECONOMIC REPORT 7

NATIONAL SMALL BUSINESS ASSOCIATION

BUSINESS GROWTH
How much did your gross sales/revenues change over the last 12 months? How much do you expect gross sales/revenues to change over the next 12 months?

JULY 2013

JULY 2013

37%

37%

27%

47%

21% 32%

INCREASE

DECREASE

NO CHANGE

INCREASE

DECREASE

NO CHANGE

DEC. 2012 36% 38% JULY 2012 39% 46% 40% DEC. 2011 31% 24% 56% 22% 45% 26% 47%

DEC. 2012 23% JULY 2012 24% DEC. 2011 14% 29% 31% 30%

How much did net profits change over the last 12 months?

How much do you expect net profits to change over the next 12 months?

JULY 2013

JULY 2013

31%

42% 27%

42%

27% 32%

INCREASE

DECREASE

NO CHANGE

INCREASE

DECREASE

NO CHANGE

DEC. 2012 32% 45% JULY 2012 31% 36% 48% DEC. 2011 38% 25% 50% 21% 37% 23% 39%

JULY 2012 29% JULY 2012 31% DEC. 2011 18% 32% 31% 33%

2013 MID-YEAR ECONOMIC REPORT 8

NATIONAL SMALL BUSINESS ASSOCIATION

JOB GROWTH
Small businesses reported virtually no change in employment numbers from six months ago. Today, just 18 percent report increasing their employee size, while 26 percent report decreases in employee size, resulting in negative net employee growth. Looking ahead, the number of small-business owners who project increases in employee size in the coming 12 months remained level at 26 percent. On a slightly positive note, those who anticipate decreasing their workforce dropped modestly from 16 percent six months ago to 14 percent today. Employee compensation remains relatively stagnant, with 41 percent reporting increases in the past 12 months (unchanged from six months ago) and 40 percent projecting increases in the coming 12 months (down two percentage points from six months ago).

How much did the number of employees change over the last 12 months?

How much do you expect THE number of employees to change over the next 12 months?

INCREASE

DECREASE

NO CHANGE

INCREASE

DECREASE

NO CHANGE

18% 19% 19% 22%

JULY 2013 26% DEC. 2012 26% JULY 2012 25% DEC. 2011 23%

57% 52% 55% 55%

26% 19% 25% 30%

JULY 2013 14% DEC. 2012 26% JULY 2012 12% DEC. 2011 8%

60% 55% 63% 62%

How much did EMPLOYEE COMPENSATION change over the last 12 months?

How much do you expect EMPLOYEE COMPENSATION to change over the next 12 months?

JULY 2013 Increase Decrease No Change

41% 14% 45%

DEC. 2012
41% 12% 47%

JULY 2012
43% 16% 41%

DEC. 2011
48% 12% 41%

JULY 2013 Increase Decrease No Change

40% 10% 50%

DEC. 2012
42% 9% 49%

JULY 2012
43% 13% 44%

DEC. 2011
50% 5% 46%

2013 MID-YEAR ECONOMIC REPORT 9

NATIONAL SMALL BUSINESS ASSOCIATION

SMALL BUSINESS FINANCING

Using NSBA data from as far back as 1993, there is a clear correlation to a small-business owners ability to hire and his/her ability to get financing. While the last four years have seen a small-business community struggling to stay afloat, we also have seen their ability to get capital diminish. Today, just 65 percent of small businesses report they are able to obtain adequate financing, down from 73 percent just six months ago. This could be driven somewhat by the fact that the average business size surveyed in the 2013 Mid-Year Economic Report was slightly smaller than in previous reports, and the smallest businesses are those which struggle most to secure financing. This drop in capital availability is inline with slow employment growth both in the last 12 months as well as low projections for the coming 12 months. The number of small businesses relying on loans from large banks and earnings of the business was down from previous surveys. This, too, could be impacted slightly by a slightly smaller average business size of survey respondents, which typically are seen as more risky by larger banks. This drop also is likely driven by the still-stagnant projections of growth in a number of key indicators, including revenue, profits and employees a fairly clear disincentive to most business owners to take on additional debt. Furthermore, there was a slight increase in the number of small businesses reporting the terms to their bank loans have become less favorable to their business. Small businesses relying on community bank loans, credit union loans and credit cards remained virtually unchanged. Just over a year ago, in June 2012, NSBA released its Small-Business Access to Capital Survey, which provides a detailed look at smallbusiness credit markets. Please click here to view that survey. Has your business been impacted by the credit-crunch?
YES NO

69%

31%

68%

32%

75%

25%

68%

32%

JULY 2013

DEC. 2012

JULY 2012

DEC. 2011

Have you experienced any of the following changes on any of your lines of credit or on your credit cards in the last six months?

JULY 2013

11%

15%

74%

INCREASE

DECREASE

NO CHANGE

DEC. 2012 11% 13% JULY 2012 11% 12% 16% DEC. 2011 17% 71% 73% 76%

2013 MID-YEAR ECONOMIC REPORT 10

NATIONAL SMALL BUSINESS ASSOCIATION

Today, just 65 percent of small businesses report they are able to obtain adequate financing, down from 73 percent six months ago.

SMALL BUSINESS FINANCING

Is your business able to obtain adequate financing?
YES NO

What types of financing has your company used within the past 12 months to meet your capital needs?

JULY 2013
Earnings of the business Bank Loan (total of 3 options below) -- Large Bank Loan

JULY 2013 35% 33% 13% 18% 2% 31% 30% 17% 16% 5% 5% 2% 5% 2% 1% 1% 0%

DEC. 2012 43% 45% 23% 19% 3% 31% 24% 17% 18% 7% 5% 3% 3% 1% 1% 0% 0%

JULY 2012 43% 46% ---34% 23% 19% 18% 6% 3% 2% 6% 3% 1% 2% 0%

DEC. 2011 46% 47% ---33% 21% 14% 23% 11% 6% 3% 4% 2% 1% 1% 1%

35% 65%

-- Community Bank Loan -- Credit Union Loan Credit cards Used no financing Private loan (friends or family) Vendor credit Leasing Other Selling/pledging accounts receivable Small Business Administration (SBA) loan

DEC. 2012

27% 73%

JULY 2012

Private placement of debt State/Regional Loan and Incentive Programs Private placement of stock

34% 66%

Public issuance of stock

For bank loans that are currently outstanding, which of the following has occurred in the last 12 Months?

DEC. 2011
Terms have become less favorable to your business.

JULY 2013 14% 33% 6% 46%

DEC. 2012 11% 43% 8% 39%

JULY 2012 13% 41% 9% 37%

DEC. 2011 17% 40% 6% 36%

30% 70%

Terms have stayed the same. Terms have become more favorable to your business. Do not have outstanding loans.

2013 MID-YEAR ECONOMIC REPORT 11

NATIONAL SMALL BUSINESS ASSOCIATION

SMALL BUSINESS FINANCING

Percentage of Small Businesses Carrying Any Debt

88%

79%

73%

78%

JULY 2013

DEC. 2012

JULY 2012

DEC. 2012

Average debt among those that do have debt

$835,828
JULY 2013

The fact that there are more businesses reporting they carry some kind of business-related debt increased but that the average debt size decreased is likely due to a smaller average size of business among the respondents than in previous years.

2013 MID-YEAR ECONOMIC REPORT 12

NATIONAL SMALL BUSINESS ASSOCIATION

SMALL BUSINESS FINANCING

Do you believe that the terms of the credit cards you use for business have improved or gotten worse over the last five years?

9%
IMPROVED

43%
GOTTEN WORSE

36%
NOT SURE

12%
N/A - I DONT USE CREDIT CARDS

Do you believe that the terms of the credit cards you use for business have improved or gotten worse over the last SIX MONTHS?

8%
IMPROVED

30%
GOTTEN WORSE

50%
NOT SURE

13%
N/A - I DONT USE CREDIT CARDS

If capital availability is a problem for your business, what is the effect on your operations?

JULY 2013 Not a problem / No effects Unable to grow business or expand operations Unable to finance increased sales Reduced the number of employees Unable to increase inventory to meet demand Reduced benefits to employees Other (please specify) Closed stores or branches 50% 36% 18% 20% 10% 14% 3% 4%

DEC. 2012 57% 29% 16% 14% 8%

JULY 2012 54% 33% 18% 16% 11%

DEC. 2011 53% 34% 16% 20% 10%

11% 2%
2%

9% 6%
2%

11% 2%
3%

2013 MID-YEAR ECONOMIC REPORT 13

NATIONAL SMALL BUSINESS ASSOCIATION

There was a notable jump, from 14 percent to 20 percent, in small businesses who said they were forced to reduce their number of employees as a result of an inability to access financing.

SMALL BUSINESS FINANCING

CORRELATION BETWEEN AVAILABILITY OF CAPITAL AND EMPLOYMENT GROWTH Able to get financing Increased Employment

100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0%
9 19 3 9 19 4 9 19 5 9 19 6 9 19 7 0 20 0 0 20 7 b Fe .0 8 g Au .0 8 c De .0 8 l Ju y 09 c De .0 9 l Ju y 10 c De .1 0 l Ju y 11 c De .1 1 l Ju y 2 12 . 1 13 c ly e u D J

2013 MID-YEAR ECONOMIC REPORT 14

Using NSBA data from as far back as 1993, there is a clear correlation to a small-business owners ability to hire and his/her ability to get financing.
NATIONAL SMALL BUSINESS ASSOCIATION

PUBLIC POLICY
The 2013 Mid-Year Economic Report asked general questions on policy and focused on two current key areas of concern: health care reform and taxation. When asked to rank to top items that Congress and the administration should address, the number one issueand a new answer option provided for the first time in this surveywas end the partisan gridlock and work together. That was followed closely by reduce the national deficit, simplify and reduce the tax burden, reduce regulatory burden and rein-in costs of health care reform. The number one way small businesses believe we should address the national deficit is to reform and reduce entitlement spending, followed by significant cuts for certain federal agencies and programs. More than one-in-four support eliminating certain tax credits and deductions even those which impact their businessin order to get our financial house in order. Which one of the following issues do you believe Congress and President Obamas administration should address first? End the partisan gridlock and work together Reduce the national deficit Simplify the tax system Reduce the tax burden Reduce the regulatory burden on businesses Rein-in costs of health care reform Other Increase small business access to capital Improve education to provide a qualified domestic workforce Reform Immigration Reform the federal contracting system Tort reform Enact a comprehensive energy policy Credit card reform (that includes Small Business) 19% 18% 15% 12% 8% 6% 6% 5% 2% 2% 2% 2% 1% 1%

Which of the following deficit-reducing proposals would you support? JULY 2012 58% 46% 35% 33% 32% 29% 27% 13%

Reform and reduce entitlement spending Significant cuts for certain federal agencies and programs Eliminate all tax credits and deductions in conjunction with dramatically lower income tax rates An across-the-board budget cut for federal agencies Greater authority of the administration to reduce Congressionallyapproved spending A tax increase for those making more than $1 million annually Eliminate certain tax credits and deductionseven those which may benefit my business A tax increase for those making more than $250,000 annually

2013 MID-YEAR ECONOMIC REPORT 15

NATIONAL SMALL BUSINESS ASSOCIATION

The number one thing small businesses want policymakers to do is end the partisan gridlock and work together.

HEALTHCARE
Implementation

PUBLIC POLICY
of the Patient Protection and How well would you say you understand how the new health care reform law is going to impact your business? Affordable Care Act continues to be an increasing worry of small business and something they are spending more and more time dealing with. Today, 20 percent say they have a clear understanding of how the law will impact their businessup from 17 percent six months ago, whereas 80 percent still have a limited or no understanding of how the law will impact their business. Costs continue to rise: more than one-third (35 percent) say they faced an 11 percent or higher increase at their last renewal. The influx of new regulations and growing CLEAR LIMITED UNDERSTANDING UNDERSTANDING NO UNDERSTANDING

20%

JULY 2013

59%

21%

17% 23% 19%

understanding of the complexity of the law is taking its toll on small firms. In the last six months, there was an increase from 19 percent to 26 percent among firms with fewer than 50 employees who said they dont offer health insurance and dont plan to, while those same firms doubled in terms of those who said they will give employees money toward the exchange. Similar confusion exists over the small-business tax credits, where 38 percent are not sure if they qualify and 22 percent say the credit will provide their business any assistance at all. Among employers with 50 employees or more, the majority (73 percent) said they plan to continue offering health insurance and just two percent said they plan to pay the penalty. Among the smaller employers (those with fewer than 50 employees) one-third still are not sure what theyll do to comply with the law.

DEC. 2012 66% JULY 2012 63% DEC. 2011 60%

17% 14% 21%

In what ways have you coped with rising health care costs? JULY 2013 56% 40% 36% 36% 31% 26% 20% 18% 16% 15% 11% 9%

Less profit available for general business growth Increased deductible Increased employee share of premium Held off on salary increases for employees Reduced employee benefits Held off on hiring a new employee Held off on implementing growth strategy Delayed purchase of new equipment Other Switched insurance carriers Dropped insurance Laid off an employee

At your most recent health insurance renewal, which of the following changes occurred to the cost of your health insurance?

JULY 13 DEC. 12 JULY 12 DEC. 11

38% 39%

42% 31% 27% 23% 21% 22% 6% 7% 5% 6%

0-10% INCREASE

11-20% INCREASE

NO CHANGE

2013 MID-YEAR ECONOMIC REPORT 16

NATIONAL SMALL BUSINESS ASSOCIATION

HEALTHCARE

PUBLIC POLICY

The majority (73 percent) of employers with 50 or more workers said they plan to continue offering health insurance just two percent said they plan to pay the penalty.

If you qualify for the small-business health care tax credits, how much will they help your business? JULY 2013 6% 6% 9% 16% 24% 38% DEC. 2012 3% 4% 10% 17% 24% 42% JULY 2012 3% 6% 10% 19% 26% 36% DEC. 2011 5% 6% 13% 18% 20% 38%

Significantly Moderately Just a little Not at all I do not qualify Im not sure if I qualify

Among employers with MORE THAN 50 EMPLOYEES, do you plan to offer health insurance under the new health care law? JULY 2013 I already offer insurance and plan to continue doing so I will begin offering health insurance to my employees under the new law I will give my employees funds for an exchange I plan to pay the penalty Not sure 73% 3% 2% 2% 19% DEC. 2012 71% 3% 0% 3% 24%

Among employers with FEWER THAN 50 EMPLOYEES, what changes do you anticipate to your companys health insurance offerings? JULY 2013 I have a health insurance benefit and will continue offering it under the new health care law I dont offer health insurance and dont plan to I will give employees money toward the exchange Not sure 35% 26% 6% 33% DEC. 2012 32% 19% 3% 46%

2013 MID-YEAR ECONOMIC REPORT 17

NATIONAL SMALL BUSINESS ASSOCIATION

TAXES

PUBLIC POLICY
NSBA data has shown for the last several years that the administrative burden (complexity) of federal taxes is a larger problem for small business than the actual financial burden. (See here for our annual Taxation Survey) As expected, simplify the tax code outranked reduce the tax burden among the top things small businesses want Congress and the administration to do. For the first time, NSBA asked a number of questions about small-business interaction with the IRS and found that close to half of small businesses (43 percent) have been the subject of an IRS audit or follow-up action in the last 10 years. More than a third of small-business owners report they personally (not their business) have been audited or receiving some kind of IRS follow-up action in the last 10 years. Among those small firms that did have additional interaction with the IRS in the last 10 years, a full-fledged audit was the most common response, followed by requests for more information and additional tax payments. Interestingly, among those that did have additional IRS interaction, 35 percent were told it was simply a random audit selection. According to documents submitted to House Small Business Committee Chairman Sam Graves (R-Mo.) by IRS Principal Deputy Commissioner Daniel I. Werfel as part of a July 17 hearing on the IRS treatment of small business: of all audits conducted in FY 2012, 21 percent were small-business audits. In other words, 351,837 of the total 1,657,698 audits conducted in 2012 were on small business. The IRS has estimated that for 2012, there was a grand total of 239.3 million tax returns filed (these include a wide variety of tax forms, including individual, fiduciary, corporation, employment, and so on). Using this figure and the 1,657,698 figure reported by the IRS in terms of total 2012 audits, that means that the average audit rate of all tax returns is less than one percent, or 0.56 percent. With regards to the time spent on audits, Mr. Werfels follow-up letter to Chairman graves cites that, In FY 2012, the average cycle time for small business audits was 264 days, while the average cycle time for all audits was 230 days.
Have you been subject to an IRS audit or additional IRS follow-up in the last 10 years? My Business Yes Me Total Personally

A field audit (in-person)

16%

6%

22%

Yes A letter audit

8%

7%

15%

Yes

A follow-up request for more information

11%

12%

24%

Yes

A follow-up request for additional tax payments

9%

10%

18%

Among those who have been subject to an IRS audit or additional IRS follow-up in the last 10 years, what type of audit was it?

My Business

Me Personally

A field audit

36%

17%

A letter audit

18%

21%

A follow-up request for more information

26%

34%

A follow-up request for additional tax payments

20%

28%

2013 MID-YEAR ECONOMIC REPORT 18

NATIONAL SMALL BUSINESS ASSOCIATION

TAXES

PUBLIC POLICY
Among those small firms that have been audited in the last 10 years, in-person or via correspondence, what were the reasons cited by the IRS for the audit? JULY 2013 35% 19% 15% 12% 12% 12% 12% 12% 8% 8% 4% 4% 4% 4% 4%

Random selection for audit Other (please specify) Record keeping discrepancy Self-employment income Discrepancy from previous years Mismatch in income on various IRS forms Changes in reportable income An amended return was filed Issues related to tax preparer Schedule C losses Little or no wages reported for an s-corp Change in business structure Business is seen as a hobby business Large rental losses-realized R&D credits claimed

Among those small firms that have been audited or the subject of some other IRS follow-up request in the last 10 years, how did you respond? JULY 2013 I provided the information and clarified my position, which the IRS accepted I complied because it was an error on my part I complied because the cost of fighting it would exceed the amount at issue despite my belief it was an IRS error I fought it because I believed it was an IRS error I complied to avoid further problems with the IRS despite my belief it was an IRS error Other 66% 14% 14% 10% 7% 7%

2013 MID-YEAR ECONOMIC REPORT 19

NATIONAL SMALL BUSINESS ASSOCIATION

CONCLUSION

METHODOLOGY Small employers comprise 99.7 percent of all employer firms in the U.S. One in two workers in the private workforce run or work for a small business, and one in four individuals in the total U.S. population is part of the small-business community. Firms with fewer than 500 employees accounted for 64 percent of net new jobs between 1993 and the third quarter of 2008 and 32 percent of those gains came from the creation of new, small firms. Small businesses, despite a more positive overall economic outlook, continue to struggle with growth and hiring. Not only are our elected officials not doing enough to improve the U.S. economic situation, oftentimes, they are causingby their inability or unwillingness to deal with serious issues facing the countryslow growth and a lack of longterm economic security among small businesses. Small businesses simply need the environment to grow and create jobs: economic stability; predictability, fairness and transparency in taxes and health care costs; common-sense regulations that dont unfairly disadvantage small firms; and lawmakers willing to tackle the major issues facing our country, and to do so together. The 2013 Mid-Year Economic Report was conducted on-line June 25 through July 17, 2013 among more than 1,100 smallbusiness owners both members and nonmembers of NSBArepresenting every industry in every state in the nation. While the survey was sent to a larger sample set than in previous Economic Reports, the demographics were largely in-line with previous sample sets. It is worth mentioning that the respondents to this survey represented a slightly smaller average size business, yet industry and other demographics remain consistent, resulting in valid trending data.

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2013 MID-YEAR ECONOMIC REPORT 20

NATIONAL SMALL BUSINESS ASSOCIATION

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