S-Corp Testifies

S-Corp President Brian Reardon testified yesterday before the Senate Small Business Committee in a hearing entitled “Tax Reform: Removing Barriers to Small Business Growth.”  As Inside Sources reported:

The hearing primarily focused on ensuring small businesses are considered in the current push to lower corporate tax rates. The Small Business Administration found that small businesses make up a sizable portion of the national economy at 49.2 percent of private-sector employment.

“As we all know, our tax code is in need of reform,” New Hampshire Democratic Sen. Jeanne Shaheen, the ranking member of the committee, said at the start of the hearing. “As Congress considers tax reforms, we need to make sure small businesses are at the table.”

The S-Corp testimony focused on themes familiar to S-Corp readers, including the fact that pass through businesses like S corporations employ the majority of private sector workers, so that any effort to reform the tax code should start with those businesses in mind.

Testifying

You can watch the full hearing here

In addition to tax reform, the testimony touches on other important consistent S-Corp priorities like the S Corporation Modernization Act and the withdrawal of Treasury’s proposed 2704 regulations.  Asked about how we ended up with one of the worst tax codes in the world, Brian made the case for action:

Back in 1986, when we last reformed the code, we brought the corporate rate down from the high 40s down to 35 percent. At the time that was one of the lower tax rates in the developed world. I think the average for the OECD at that time was about 44 percent. Today the average for the OECD is down in the low 20s while we’re still at 35 percent. 

So we’ve been sitting still, both on rates and also this idea of a worldwide tax system. We tax our businesses on their earnings wherever they are made. Most countries in the last 10-15 years have moved to a territorial system. England did. You know, 10 years ago, England (UK) had the same problems we did — they had inversions, companies were moving overseas, they were losing to other countries…they completely revamped their rates, they cut the rates down, they moved to territorial, and now companies are moving to the UK not away from the UK.

You can read Brian’s full written remarks here.

Business Community Support for S Corp Mod

As we reported last week, a bipartisan group of tax writers in the House and Senate have introduced this year’s version of the S Corporation Modernization Act.  The bills (H.R. 1696 & S. 711) are sponsored by Senators John Thune (R-SD) and Ben Cardin (D-MD) and Representatives Dave Reichert (R-WA) and Ron Kind (D-WI).

This week, a group of eighteen Main Street business groups wrote to Congress in support of the legislation, including the National Federation of Independent Business, the Associated Builders and Contractors, the Independent Community Bankers, and the American Council of Engineering Companies.  As the letter states:

Main Street businesses are the growth engine of America’s economy and S corporations are the cornerstone of the business community.  There are more than 4.7 million S corporations nationwide.  They are in every community and every industry and they employ one out of every four private sector workers. 

Yet many of the rules that govern the day-to-day management of S corporations date back more than half a century.   These outdated rules hurt the ability of S corporations to grow and create jobs.  Many family-owned businesses would like to become S corporations, but the rules prevent them from doing so.  Other S corporations are starved for capital, but find the rules limit their ability to attract investors. 

This year’s legislation is the ninth Congress in a row that the S Corporation Modernization Act has been introduced. Over the years, we have had great success getting many of the bill’s provisions enacted into law.  Just last Congress, we saw the shorter built-in gains recognition period and the charitable basis provisions made permanent.

This year’s bill includes provisions that increase access to capital by reducing S corporation ownership restrictions, ease punitive restrictions that apply to converted S corporations and punish the unwary, and level the rules between S corporations and partnerships when their assets are passed on from one generation to the next.

With tax reform on the table, we are hopeful that these provisions can be included in the broader effort. The S Corporation Modernization Act has a strong history of seeing its provisions enacted into law and we’d like to keep that momentum going!

S-Corp Mod Bills Introduced! 

Good news on a hot day in July!  The 2016 version of the “S Corporation Modernization Act” has been introduced the House and the Senate.  Led by Senators Thune (R-SD) and Cardin (D-MD) and Representatives Reichert (R-WA) and Kind (D-WI), the bill includes a half-dozen provisions designed to improve the rules that govern S corporations.

  • You can see the entire bill here
  • You can see the section-by-section analysis here
  • You can see the S-Corp press release here

Yesterday’s introduction of companion bills is the first time in a while that the S corporation community has had this important legislation being championed in both bodies, and we really appreciate the hard work the members and their staffs put in to get the provisions just right.

Of particular note is the fact that Senator Thune is taking on the leadership of the bill from Finance Committee Chair and longtime S corporation advocate Senator Orrin Hatch (R-UT).  South Dakota has a ton of S corporations and ranks second nationally in pass-through employment, so this effort is important to Senator Thune and his state and we look forward to his enthusiastic leadership.  As he noted at the introduction:

Family owned small businesses are the backbone of the U.S. economy and can be located in every corner of the country.  Small towns and rural communities are oftentimes the ideal location for these small- and medium-sized businesses, which is why making these common-sense reforms to S corporations is so important to South Dakota.

Senator Ben Cardin added:

S corporation businesses are critical to the well-being of the Maryland economy and account for more than half of our state’s private-sector workforce.  Unfortunately, our federal tax code has not kept up with the increasingly important role that these types of companies play,” said Cardin.  “The S Corporation Modernization Act contains much-needed changes to the tax treatment of S corporations, allowing them to better attract capital, create jobs, and make charitable investments in their communities.

Key changes in this version relative to past efforts include:

  • Dropping the two provisions – BIG and charitable – that were made a permanent part of the Tax Code last December
  • Moving the Nonresident Alien provision up to the top slot – it is time for direct foreign investment to be available to S corporations; and
  • Including the new internal basis adjustment provision to ensure that S corporation assets receive similar treatment as partnerships.

So your S-Corp team has a new bill, new champions, and new priorities to accomplish in the coming months and years.  The legislative outlook is uncertain, with Congress preparing to break for the party conventions and then, after a short fall session, the November elections.  That doesn’t leave us much time, but as always we will be looking for opportunities to get something done.  With a terrific bipartisan set of advocates on the Hill, we are in a good position to do just that.

 

S-Corp Concerns Dominate 385 Comments

The comment period is closed and the verdict is in – just take S corps out.  That’s what numerous trade associations and other groups recommended to Treasury regarding the pending section 385 regulations.  Here’s what the National Association of Manufacturers had to say:

The proposed regulations also significantly impede the ability of businesses organized as subchapter S corporations to utilize their cash effectively. In particular, the bifurcation rule in the proposed regulations, which allows the IRS to treat a debt instrument as part debt and part stock, could cause a subchapter S corporation to lose its S status and become taxed as a C corporation.

In order to qualify as an S corporation, an entity must have only one class of stock (identical rights to distribution and liquidation proceeds) and must be owned only by eligible shareholders (examples of ineligible shareholders include C corporations, foreign corporations, partnerships, insurance companies and non-resident aliens). The reclassification to stock, or part stock, could inadvertently create an ineligible S corporation shareholder (e.g., if the debt reclassified to stock was held by a C corporation, the C corporation would become an ineligible S corporation shareholder); and/or the reclassification to stock could create a second class of stock via preferred return consideration on the debt instrument….

The proposed regulations do not apply to corporations filing a consolidated tax return. S corporations under common ownership, however, are not permitted to file a consolidated tax return and thus, the proposed regulations apply to commonly-owned S corporations, even those with solely domestic activity. The NAM strongly recommends that subchapter S corporations be exempted from the final regulations.

Other groups made similar arguments and their conclusions were just as strong.  Here’s just a sample:

American Bar Association

Exclude S corporations from the expanded group.

National Retail Federation

We recommend that S corporations be exempted from the application of the regulations.

American Institute of Certified Public Accountants

Provide exceptions to ensure that S corporations do not inadvertently terminate their status when debt is reclassified as equity.

Florida Bar

The rules should exempt S corporations which clearly cannot be a focus for the issues of concern regarding the Proposed Rules.

KPMG

Exclude S corporations, as well as certain other entities, from the ambit of the proposed regulations (i.e., revise Prop. Treas. Reg. § 1.385-1(b)(3)(i)(A) so that it only “turns off” paragraph (3) of section 1504(b)).

The IRS is holding a public hearing on the proposed rules today.  Of the 18 speakers listed, many of them are from groups that support excluding S corporations from the rule.  We’ll be watching closely to what, if any, reaction there is from the Treasury and IRS officials in attendance.  More to come.

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