S-CORP News Clips

Small Business Confidence Survey

You’ll remember back in June we profiled three small business surveys from NFIB, Wells Fargo/Gallup, and Thumbtack. Together, these surveys, with different sample populations and varying methods, provide the most complete picture of the small business landscape today. When we examined their findings during the summer, we saw words like “lukewarm”, “uninspiring”, and “more of the same” to describe the private business environment.

For the third quarter of 2015, it’s “more of the same” again.  With minor variations, all three surveys show that business owners are no more confident today than they were during the summer. In particular, economic uncertainty is cited as a top concern:

  • NFIB notes that over 20% of businesses that think it is a poor time to expand cite political uncertainty;
  • 20% of Wells Fargo/Gallup respondents cite the economy or government as their top concern; and
  • Economic conditions had the most business owners worried in Thumbtack’s survey, which had over 6,000 respondents.

So government action, and inaction in some cases, is hurting the small business sector and retarding investment and job creation.  Maybe policymakers on the Hill and in the agencies should take note.

 

Where are the Democratic Tax Plans?

Most Republican presidential candidates have released a tax plan in one form or another to date. They range from Sen. Rubio’s detailed legislative proposal that he co-wrote with Sen. Lee (R-UT) to op-eds in the Wall Street Journal and elsewhere from candidates Chris Christy, Jeb Bush, Donald Trump, and others.  The details vary, but a common theme in all the plans is the need to use the tax code to stimulate investment and job creation.

On the other hand, no candidate on the Democratic side has released a comprehensive plan. Secretary Clinton and Senator Sanders (D-VT) have released targeted proposals calling for profit sharing, as well as higher taxes on financial transactions and capital gains, but not only are these not comprehensive reforms, they would also, as Peter J. Reilly at Forbes writes, only serve to make the tax code more complicated.  Tax policy was largely missing from the recent debate, too.  Other than some vague references to higher taxes for the wealthy—particularly from Sanders — tax policy was a no-show.

Our friends at the Tax Foundation have been scoring and writing on all the Presidential plans.  You can access their chart here.  We expect that as the campaign matures, we’ll see more robust proposals from the Clinton campaign and others in the Democratic field.  Tax policy is always a key part of any presidential run, and we expect 2016 to be no different.

 

Et Tu, CRS? 

Last month, Treasury (or at least the bulk of their tax economist team), released a study on pass through businesses and the taxes they pay.  We raised concerns with the Treasury approach here and here.

Now CRS also has a paper focused on pass through businesses and the challenge they present to reforming the corporate tax code.  As BNA summarized, the basic message of the paper is this:

The 35 percent statutory corporate tax rate tends to be higher than the average marginal statutory rate for noncorporate business, estimated to average about 27 percent, according to data from the Internal Revenue Service. In addition, effective corporate tax rates are higher in most cases and for most assets than effective rates for passthroughs, and administrative and compliance costs would be lower if tax provisions such as depreciation and inventory accounts were harmonized across organizational forms.

As with the Treasury paper that preceded it, however, the lower effective (or average) rate for pass through businesses in the CRS paper is almost entirely due to the inclusion of lower-income sole props and other pass through businesses in their calculation.  In other words, they’ve compared the effective tax rate of Wal-Mart to the handy man down the street and found, not surprisingly, that Wal-Mart pays a higher rate.

One interesting aside is the CRS estimate for shareholder level taxes.  You’ll recall that Treasury estimated dividend and capital gains taxes on C corporation shareholders adds about 9 percentage points to the corporate effective rate.  As we pointed out, Treasury made some very interesting assumptions to get there.

CRS appears to agree with us on that matter.  Their estimate for shareholder level taxes is about one-fourth of Treasury’s, or just 2.3 percentage points.  CRS lists the lower rates on capital gains and dividends, tax exempt shareholders, and capital gains that are passed on as part of an estate as the primary reasons for the lower estimate.

What’s missing from both the CRS and Treasury analyses is a comparison of likes – a large C corporation to a large S corporation in the same industry.  That comparison would inform policymakers as to the respective tax burden of different business forms and help them make better policy decisions, but you are not going to find that sort of comparison in either the CRS or Treasury papers.   Based on our previous work, we’re confident the S corporation in that analysis would pay the higher effective rate.

S-CORP on the Air

February 21, 2014

Earlier this week, S-Corp Executive Director Brian Reardon took to the airwaves to talk all things S-Corp with radio host Mark Kohler.

Kohler hosts a weekly program devoted to tax issues that are important to individuals and businesses. This Tuesday, Mark spent his entire show focusing on S corporations.  Brian carried the S-Corp flag and was the featured guest.

The interview is definitely worth a listen.  You can download it by clicking below:

S Corporation News Clips

Camp Draft Imminent

The long-awaited Camp tax reform plan is expected next week and the press is bulging with details (rumors, really) on what’s in it.  Beyond the broad parameters of a comprehensive plan with lower rates for corporations, pass-through businesses, and individuals, some of the other details coming out include a change to cash basis accounting rules that could cost farmers and larger pass throughs.

There are also a number of stories pointing out that House Leadership is not fully supportive of rolling out this draft right now:

The GOP leadership source said the top Republican ranks are still skeptical that Camp has the support needed to light the tax reform fire, but the chairman had successfully argued that he can’t educate the caucus and build momentum for tax reform without showing his draft.’

It’s not just House Leadership that’s nervous.  As one Wall Street analyst wrote, “What may concern investors is that any draft will be used as a template for not only eventual comprehensive tax reform, but also that various provisions may become targets for offsets on smaller tax legislation in the future.”

President’s Budget

The pending release of the President’s budget is also getting lots of press.  According to recent stories, the Administration intends to drop its chained CPI proposal and call for higher taxes and increased spending instead.  Here’s Politico on the chained CPI:

Gone, the White House said, is Obama’s proposal for chained CPI — an offer to reduce the benefit increases for Social Security and other federal social programs.  And gone with it, senior administration officials said Thursday, is any sense of presidential urgency on long-term entitlement reform.

On the new spending, the Administration says it’ll conform to the spending caps just negotiated by Budget Chairs Ryan and Murray, but that it will also call for $56 billion in additional spending:

But the president’s budget will also call for $56 billion in new spending, paid for by closing tax loopholes and mandatory spending reform. For now, the White House isn’t providing specifics on what either of those would entail.

That new spending would go to Obama’s Opportunity, Growth, and Security Initiative which would, among other things, a new Race to the Top energy efficiency initiative, the manufacturing institutes Obama has called for in his last two State of the Union addresses and universal pre-kindergarten.

The other big item appears to be new rules governing offshore corporate earnings.  Reuters, Bloomberg, and the Wall Street Journal all have stories on that.  As the WSJ noted:

The new White House proposals would, among other things, tighten rules for digital transactions that some companies design to limit the taxes they pay on certain income. It would also address a move by some companies that load up on debt in their U.S. operation—generating large deductions—and then use that capital to shift profits overseas. The changes would also make it more difficult for companies to arbitrage different tax rules in certain countries, where one country might treat a hybrid instrument as debt while another country treats the same instrument as equity.

The Camp discussion draft is expected to address these base erosion issues as well.

Good CRS Report

In the midst of all the tax reform talk, the Congressional Research Service weighed in with a well-written paper on corporate taxes.  Entitled “The Corporate Income Tax System:  Overview and Options for Reform,” the report should be required reading for so-called reformers on the Hill.  Here’s the part on how the corporate double tax hurts the economy:

Subjecting corporate income to two levels of taxation introduces a number of economic

distortions. The current tax treatment of corporate income leads to otherwise similar corporate and non-corporate business being taxed differently; it creates incentives for corporations to retain earnings rather than distribute them; and the ability of corporations to deduct interest but not dividends leads to a preferences for debt over equity financing.

Something to think about as we wait for the Camp discussion draft release.

Pass-Through Reform Issues

A couple of recent publications have highlighted the negative consequences of “corporate-only” tax reform, including a paper put out by Grant Thornton last month that focused on the challenges faced by businesses structured as S corporations, partnerships and sole proprietorships.

The paper, entitled “Business Equivalency Rate: Fairness for Pass-through Businesses” gets right to the heart of the matter in the first couple paragraphs:

Grant Thornton supports tax reform aimed at lowering effective business rates in order to promote global competitiveness for U.S. businesses. Grant Thornton believes that competitive business tax rates are critical for spurring business investment and job creation. We are concerned with tax policy decisions that put U.S. businesses organized as “pass-through” entities at a competitive disadvantage.

Partnerships, S corporations and sole proprietorships are called “pass-through” entities because their income is not taxed at the entity level, but instead is “passed through” and taxed at the individual level. Many of the dynamic U.S. companies that drive economic growth are organized as pass-throughs, and they are a critical part of the U.S. business landscape. There are compelling economic and business reasons for pass-through tax treatment. It should be preserved, and an equivalent rate structure for pass-through income should be reestablished.

The Grant Thornton paper focuses on the impact of effective tax rates - the total amount of tax businesses actually pay - as well as marginal rates. Both rates are important, obviously, but the advocates of “corporate-only” tax reform focus almost exclusively on marginal tax rates even as many of their allies pay very little in actual tax. Here’s how GT addresses the issue of high marginal rates:

The U.S. statutory corporate tax rate is the highest among OECD countries, putting U.S. multinational corporations at a competitive disadvantage. Both Republicans and Democrats have proposed lowering the 35% corporate tax rate through tax reform, with any reduction in government receipts potentially offset through the elimination of tax preferences and incentives.

The 39.6% rate on business income faced by pass-through entities puts them at an even greater global disadvantage than C corporations. Tax reform that lowers only the corporate rate does not address this disparity between pass-through businesses and foreign competitors, and it increases the competitive disadvantage between domestic pass-through businesses and domestic C corporations.

In other words, the same arguments put forward to support reducing top corporate tax rates also apply to pass-through rates.

Meanwhile, the Congressional Research Service raises similar concerns in its report entitled “A Brief Overview of Business Types and Their Tax Treatment” released on June 12th The report shed light on the likely consequences of addressing corporate tax rates while leaving individual rates untouched:

A reduction in the top corporate tax rate without a corresponding reduction in the top individual tax rate could lead to an increase in the number of firms that incorporate to take advantage of the more favorable corporate rate structure. In late 2012, the top individual tax rate was increased above the top corporate rate for the first time since 2002 as the result of the American Taxpayer Relief Act of 2012. If tax reform results in a lower corporate rate while leaving the top individual tax rate unchanged, the incentive to incorporate would increase.

The CRS report also explains a key issue with a number of tax reform proposals that are currently floating around:

Most corporate tax reform proposals offered to date include a reduction in the top corporate rate which currently stands at 35%. It is often proposed that the revenue loss from a reduced corporate tax rate could be offset (either fully or partially) with the repeal or reduction of certain business tax incentives, formally known as tax expenditures. Pass-throughs, however, could experience a tax increase if such an approach were followed. This is because most business tax incentives are incentives that are available to all businesses, not just corporations. Thus, offsetting a corporate rate reduction by curtailing business tax incentives could negatively impact pass-throughs, which do not pay corporate taxes, and therefore would not benefit from the corporate rate reduction.

Exactly. Cutting marginal tax rates for C corporations in isolation means raising effective tax rates on Main Street businesses, which is why Ways and Means Chair Dave Camp is pressing for comprehensive reform that reduces rates on individuals, pass-through businesses, and corporations alike, and why we support him.

Ways & Means Focuses on Base Erosion, Effective Tax Rates

Last week’s Ways and Means hearing on base erosion turned into a pep rally of sorts for Main Street businesses.One member after another expressed support for Main Street businesses and concern that base erosion techniques used by large multinational companies have the effect of shifting the tax burden onto domestic enterprises.

Here’s Chairman Camp:

When you look at the effective tax rates of companies, which is the effective tax burden that they face, it looks like in most countries, if not all countries, the multinationals– which are exposed to international transactions and can therefore play with the different gaps which are there, through transfer pricing rules, tax treaty rules, and domestic legislation, they are exposed to a much lower effective tax rate than domestic companies which cannot benefit from these international instruments. Therefore, the gap is quite significant, and puts domestic businesses at a competitive disadvantage. This is a distortion that is not good from an economic perspective.

And Rep. Todd Young (R-IN):

I think it’s really important that in this country, in the interest of competitiveness, internationally and domestically, we reform not just the corporate code but also the individual code.

Even Rep. Doggett (D-TX):

The real question today about all of the fine print and complicated discussion that we’ve had is whether or not small businesses and individuals ought to bear a greater part of the tax burden so that some of these large, brand-name multinationals can pay less.

Small businesses don’t get the kind of tax breaks that are available to multinationals, and a system that accords General Electric a lower tax rate than the people who clean up the corporate board room, I think is really offensive.

You can watch the whole hearing here. Expect to hear more about effective tax rates, and who’s paying what, in the near future.

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