Demystifying the U.S. Tax Code: How Congress Affects Business Income Taxes

The U.S. tax code forms the backbone of how the IRS operates. Despite calls for reforms during just about every session of Congress, the tax code remains complex and, in some cases, difficult to interpret. Demystifying the code may take years, or even a special degree. Ordinary citizens and business owners may not be able to make heads or tails of the U.S. tax code, but a little knowledge can go a long way.

Sources of Income Tax Law
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The U.S. Constitution gives Congress authority to collect taxes as a means to provide revenue for the federal government. The 13th Amendment, ratified by the states in 1913,  gives Congress the ability to assess income taxes on individuals and entities. The income can derive from any source, such as hourly wages, investment income, profits from a business operation, and sales of physical assets. Section 61 of Title 26 within the U.S. Code enumerates exactly what counts as income, although that list does not include every possible source. Laws that start as bills in Congress may alter the tax code periodically.


How Taxes Become Law
Congress passes tax laws, and then the IRS has the authority to enforce those laws. It all starts with the House Ways and Means Committee. Members of this committee agree on which proposals should go up for debate and a vote in the full House and they craft tax legislation. The House then debates the bill and the legislative body may amend it.

If the House approves the bill, it goes to the Senate Finance Committee for review, where it undergoes the same process in the House. If the Senate approves a different version of the legislation, a joint committee between both bodies tries to come up with a compromise bill. When both sides of Congress agree and pass the same legislation, the President of the United States either signs the bill into law or vetoes it. The bill becomes a law within the U.S. tax code when the president signs it or Congress overrides a veto.


Intricacies of Tax Laws
Tax legislation, even before it goes into the tax code, is very complicated. The text of the Consolidated Appropriations Act of 2015 is 233 pages, and the behind-the-scenes work that goes into the legislative process is enormous. Congressional staffers and researchers crunch numbers, representatives and senators hear testimony about the effectiveness of tax changes, and members of the legislative body hear hours of debate before voting on a proposal. 

The tax laws passed and signed into law December 2015 include several provisions that extend tax benefits already on the books. The overall cost of this legislation comes to $622 billion over 10 years, according to estimates from Congress. The bill itself changes verbiage to various sections of the U.S. tax code, using quotes and legal citations.

Delegated Legislation Adopted by the IRS
The IRS takes the changes to the tax code and comes up with procedures, policies, instructions, and tax forms that correlate to provisions within the law. If a law changes the way a business collects an employment tax, the IRS tells businesses how to accomplish this tax collection. This also means the IRS has the authority to penalize businesses for not following the IRS rules. Rules within the IRS turn into instruction booklets and tax forms.

Some of these booklets and forms are long, complicated, and hard to read. Owners and investors must differentiate between statutory employees, independent contractors, self-employment income, small businesses, and corporations. Business owners need to know how to implement the Work Opportunity Tax Credit, parts of the Affordable Care Act, and general accounting principles that determine the value of assets, income, and revenue. Businesses that take advantage of deductions and credits can reduce their tax liability, while increases in sales and revenue may increase the taxes a business pays.

The process of tax legislation comes full circle when individuals and businesses either pay income taxes each year or receive an income tax refund. Companies usually pay estimated taxes each quarter so the entire burden of paying taxes doesn't occur on April 15 each year. Getting to the point where a company files tax returns may take some effort, depending on the size of a business, the number of employees, and the amount of income brought in by a business. 


Help for Taxes
A licensed accountant can help a company by outlining how tax laws affect the bottom line of a business. An experienced business owner knows the intricacies and minutiae of owning a business with the ultimate goal of making money. Likewise, a CPA is an expert on tax laws who can explain how a company can take advantage of tax laws by developing strategies all year long. When tax time rolls around in April, a good CPA gives a client the best way to file the most complete return possible.