S-Corp Submits Comments

The S Corporation Association submitted the following comments to the Senate Finance Committee today as part of the Committee’s request for input:

The United States is unique among developed countries in the emphasis it places on pass-through business structures – S corporations, partnerships (including limited liability companies), and sole proprietorships.  Pass-through businesses make up 95 percent of all U.S. businesses, they employ the majority of private sector workers, and they contribute the majority of business income to our GDP.

This reliance on pass-through businesses is not an accident or a byproduct of other priorities.  Rather, it was done purposefully by successive Congresses seeking to strengthen the role of private businesses in the American economy.  These deliberate actions date back to the creation of the S corporation structure in 1958 and they have worked to the benefit of the businesses themselves, the people they employ, and the communities they serve.  America has more jobs, higher wages, and a more diverse economy because of the strength of its pass-through business sector.

It is critical for Congress to understand this history as it seeks to tackle tax reform in the coming months.

One reason the pass-through business structure has been so successful is that it is, fundamentally, the correct way to tax business income.  If Congress were in a position to start from scratch, the pass-through treatment of business income, particularly how S corporations are taxed, would be the starting point.  As Eric Toder of the Tax Policy Center testified before the Senate Finance Committee:

I would.. note that the ideal way to tax business income is the way we tax S corporations.  We would like to attribute the income to the owners and the only reason we have a corporate tax is for large and frequently traded companies – very hard to do that and identify the owners who would pay the tax.  So where you can do that, we should do that, and that is the right treatment. 

For publicly-owned companies with thousands of shareholders, pass-through treatment is simply not feasible.  But for everyone else, allowing closely-held businesses to pay their taxes using the pass-through structure would be an improvement in tax administration and tax simplicity while helping to make U.S. business more competitive globally.  

Starting with the premise that S corporation taxation is the correct way to tax business income, we encourage the Senate Finance Committee to consider the following broad principles supported by 120 national business trade associations (see attached) as it considers how to best reform the tax code and tax business income:

  1. Tax reform needs to be comprehensive.  Most workers in the United States are employed at pass-through businesses that pay taxes at the individual rates, not the corporate rates.  To ensure that we avoid harming a large segment of American employers, tax reform needs to include both the individual and the corporate portions of the tax codes.  

  2. Congress needs to reduce the tax rates paid by individuals and corporations to similar, low levels. Excessive marginal rates discourage investment and hiring, while splitting business income and taxing it at significantly different rates encourages planning to circumvent the higher rates, ultimately resulting in wasted resources and lower growth.  To ensure that tax reform results in a more simple and competitive tax code, Congress needs to keep top tax rates low, and it needs to keep them at similar levels.  

  3. Congress should continue to reduce the incidence of double-taxing business income.  A 2011 study on tax reform by Ernst & Young made clear that the predominance of pass-through businesses in the United States, and the single layer of tax they face, results in higher levels of investment and employment in the U.S.  A key goal of tax reform should be to continue this progress towards taxing all business income only once.  

Read the entire submission here.

Speak Your Mind

Tell us what you're thinking...
and oh, if you want a pic to show with your comment, go get a gravatar!

error: Content is protected !!