The Big Six released their “framework” today and it’s pretty good. You can read all eight pages here, but key provisions for Main Street businesses include:
- A new, lower pass through tax rate of 25 percent;
- Full repeal of the estate tax; and
- Full repeal of the Alternative Minimum Tax.
Those three provisions represent long-time priorities of the Association and we applaud the Big Six for including them. As S-Corp President Brian Reardon commented:
“Today’s release is good news for Main Street businesses and the families that work for them. The Framework announced this morning would help Main Street employers by lowering tax rates, eliminating the Alternative Minimum Tax, and repealing the estate tax. Implemented correctly, those provisions mean more investment and more jobs in communities across this country.
You can read our full statement here.
So, the framework is a solid beginning, but we aren’t doing our NFL-approved touchdown celebration just yet. As S-Corp readers know, it’s the details that accompany the framework, details that are necessarily missing from today’s document, that are the difference between a plan that benefits Main Street and one that hurts it.
For example, our comments to the Finance Committee last summer, found here showed how the combination of a 25 percent pass through rate, extensive base broadening as envisioned in the framework, and an enforcement provision like 70/30 would literally raise taxes on many S corporations. That’s the opposite of what is supposed to happen, so the tax writers need to get the enforcement provisions right.
Something else missing from the framework is repeal of the 3.8 percent ACA surtax, or Net Investment Income Tax (NIIT). This tax was created to help offset the cost of the Affordable Care Act, so the congressional leadership planned to repeal it as part of their health care reform. But with health care stalled, repeal of the surtax is stuck in limbo – it’s not moving in health care reform, and it’s not part of the tax reform framework. Back in July, an S-Corp led letter calling for the repeal of the NIIT was signed by 42 national trade groups. As Congress grapples with the goal of establishing parity between pass through businesses and C corporations, the NIIT is sure to be part of the discussions.
In terms of timing, first Congress will need to pass a budget that allows for expedited consideration of the tax reform plan, and then turn to crafting the plan. Getting a budget done will not be easy, but it is essential if Congress is going to move on tax reform this year. No budget, no tax reform. Once the budget is in place, the Ways and Means and Finance Committees will begin their work filling in all the missing details. Congressional leadership is aiming to get this all done by Christmas, which is a very aggressive timetable indeed. On the other hand, as the late Senator Domenici used to say, you can do anything you want as long as you have the votes.
For S-Corp, our focus will be on ensuring that the new 25 percent rate is real and applies to a broad definition of active business income. As the example above shows, it’s a serious challenge and getting it right could be the difference between tax reform success and failure. There’s lots of work to do, but at least we are starting in a good place.