Two Republicans question change of small business definition in context of tax debate

Republicans argue that a proposed tax increase on those making at least $250,000 a year ensnares many of the nation's small businesses.

"If the [Treasury] department has concerns regarding the existing definitions, it is puzzling why those concerns were not raised with either the SBA or the congressional committees of jurisdictions," according to a letter obtained by The Hill sent Thursday to Treasury Secretary Timothy Geithner. 

"We are concerned about the effect of the report's definition on current policy discussions, and believe it is not helpful to inject yet another definition into an already muddled field."

The report released in August 2011 says the definitions should be used to "define the characteristics that distinguish a small business so that the impact of targeted tax provisions can be modeled appropriately." 

Graves and Snowe wrote the letter because "they believe that not only is the Obama administration ignoring the law, but that the Treasury’s misguided definition of a small business" will be used by the Obama administration in the debate over the fiscal cliff and its effects on small companies, D.J. Jordan, spokesman for House Small Business Committee, told The Hill in an email. 

Tax policy will be one of the main subjects of debate for the next several months, "so Graves and Snowe believe that we should look to what the law says is a small business, not make up new definitions for political convenience.”

A year ago, Treasury released a report finding that the previous approach to pinpointing who owned a small company was too broad and too narrow amid the debate over tax reform and the extension of the Bush-era tax cuts. 

The report said it was providing a "more nuanced definition of small business owner" and that, under the new definition, the number of small businesses might be much smaller than originally thought. 

“We note that our revised methodology is but one reasonable approach that could be used to identify small businesses and their owners,” the report says. 

“However, we believe it represents a significant improvement over previous methodologies that were constrained by data limitations.”

Generally, those claiming pass-through income on their individual tax return have been classified as small-business owners. 

But the Treasury tax-analysis group said that method does not include smaller businesses organized as corporations, and leaves out minor activity or companies that are too large and fall outside the definition of a small business. 

Under the previous approach of defining small-business owners, 34.7 million businesses reported $662 billion in net pass-through income in 2007, the year the Treasury analyzed.

For that same year, the tax analysis office stopped considering any business that had more than $10 million in income or deductions as a small business. 

Using the new method to determine who fits the new small-business owner criteria, the report found 20 million filers making $376 billion in net business income. 

Under the narrow definition, there were 9.4 million filers reporting $335 billion of net business income as small-business owners.