Brady Elected Chairman of Ways and Means

On Wednesday, the Republican Steering Committee tapped Rep. Kevin Brady (R-TX) to succeed Speaker Ryan as the committee’s chairman. Both he and his challenger, Rep. Pat Tiberi (R-OH), are strong allies of S corporations and pass-through businesses, so we excited to see him take on the gavel.

What does Brady’s ascension mean for tax policy?  The Wall Street Journal has an interview with the new Chairman this morning, where Brady makes clear he wants to move a robust tax extender package (yea!) this fall then spend next year pushing the “step one, step two” plan for tax reform outlined by Paul Ryan in the past year:

Q: What’s the first thing you’re going to try to get accomplished this year?

A: We’re going to continue to tee up pro-growth tax reform. There’s two steps we can take that are real, one of them immediate, which is to negotiate a package of permanent provisions among those [expired tax breaks]. One, because it creates certainty for the economy. Two, you get a better bang for the buck for the tax provisions. And three, it’s honest scorekeeping. It identifies what truly are permanent parts of the code. I will pick that up and see if we can’t conclude a package that works for both parties.

The second one in 2016 is to conclude discussion on international tax reform and an innovation box. It could be a significant down payment on overall tax reform, done right, allow U.S. companies to bring those stranded profits home to reinvest in the U.S. and ensure America isn’t isolated on the innovation side of the economy.

We applaud the new Chair’s focus on extenders and pressing the case for making as many of these provisions permanent as possible.  On the international front, everyone is waiting to see the revised “innovation box” proposal from Representative Charles Boustany (R-LA) and how willing the Administration is to seriously negotiate something the business community can support.  Most everyone supports making our tax code more competitive, but exactly how much progress can be made with the current Administration remains to be seen.


White House Opposes Rate Cuts for Pass Thrus

Speaking of the White House, recent comments by the President’s chief economic advisor make clear the gulf between the White House and Congress approaches over tax reform continues to be the principal reason Congress has been unable to do anything meaningful this year.

Jason Furman, Chairman of President Obama’s Council of Economic Advisors, spoke to the Brookings Institute Tax Policy Center earlier this week and gave the Administration’s take on tax reform, identifying the key area of disagreement with Congress:

But there was an “impasse” over whether to lower individual rates, which some Republicans argued was necessary to maintain the competitiveness of large businesses that filed through the individual side of the code.

To cut the top individual tax rate as Republicans want is impossible without tilting the tax code in favor of the rich, Furman said at Tuesday’s event.

The continued opposition of the Obama Administration to rate cuts isn’t news, but the disconnect between their insistence on corporate cuts yet opposition to similar cuts for domestic pass through businesses is head scratching.  Why is one important and economically necessary but the other just a give-away to the rich?   Recall that those pass through businesses employ more people and contribute more to the national economy than their corporate cousins.  Apparently, the opposition stems from the myth that private businesses don’t pay their fair share:

He also suggested that cutting the tax rates of businesses that filed as individuals would work against the purpose of tax reform. Furman cited Congressional Budget Office statistics indicating that the owners of those companies, known as “pass-throughs,” pay lower effective tax rates than do the owners of companies arranged as corporations, even though pass-throughs have lower rates on paper.

This is an argument the CBO has made in the past, as have recent papers from CRS and Treasury. We have a number of critiques of these papers, but the primary concern is that they fail to compare apples to apples or, in this case, businesses of similar size.  When you do that, as our study from Quantria did, you find that large S corporations pay the highest effective rate of all business types.  Policymakers need to be aware of that as they debate the future of tax reform.


Valuation Discount Update

Are you asking yourself what happened to those new regulations out of Treasury on minority discounts?  We are.

As we previously reported, for the past year Treasury has been working on new rules limiting the ability of family-owned businesses to apply minority discounts under certain circumstances.  Exactly what those regulations would do and when they would be released, however, has always been a mystery.

Now BNA reports that a senior IRS official this week provided a little clarity on both fronts.

Guidance on restrictions on estate valuation discounts for certain corporations and partnerships is expected very soon and won’t be based on previous administration proposals, Leslie Finlow, an IRS senior technician reviewer, said today.

Tax code Section 2704(b) gives the Treasury Department the power to issue new regulations disregarding additional restrictions on liquidations of interests if the restrictions reduce the value of the transferred interest but not the value of the interest to the transferee.

However, Finlow told certified public accountants at the American Institute of CPAs Fall Tax Division Meeting, that the Internal Revenue Service isn’t looking to a 2013 Obama administration proposal that called for further restrictions on valuations of family business interests. Instead, she said the guidance will focus on “the statute as it looks now.”

So the rules are due soon, but it appears they won’t be as expansive as previous Obama Administration budget proposals.  Something to keep an eye out for.

What’s On Deck for the Rest of 2015

Speaker Boehner had a three step plan at the beginning of October: 1) Resign at the end of the month; 2) Clear the legislative decks of controversial and difficult items; 3) Turn the gavel over to a new Speaker to begin their tenure with a clean slate.

Looking back, he pretty much pulled it off.  Sure, the Speakership went to Paul Ryan, not Kevin McCarthy, and not all the tough legislative items cleared Congress, but the simple fact is that Speaker Ryan begins his term with a much more manageable set of issues than the laundry list of must pass items that confronted Boehner at the beginning of October:

  • Federal Funding
  • Debt Limit
  • Highway Funding
  • Tax Extenders
  • Medicare Premium Hike
  • Social Security Disability Fund

Of these, the deal brokered by Boehner, McConnell and the White House takes care of the debt limit, the looming Medicare premium hikes, and the depletion of the Social Security Disability Fund.  It also raises spending caps for discretionary funding next year by $50 billion, making the job of passing all those spending bills – most likely in the form of a single, massive omnibus spending bill – before the December 11th deadline much, much easier.

Which means between now and the end of the year, the remaining must pass items are largely limited to three – 2016 spending bills, highway reauthorization, and tax extenders.  The House highway bill is up this week, and appropriators are busy working to have appropriation bills ready for consideration later this month.  Other items, like Ex-Im Bank reauthorization, may likely catch a ride on one of these vehicles.

Which leaves extenders.  Once again, Congress has waited until the last days to adopt extensions of tax provisions that have already expired.

That to-do item will fall on the plate of the incoming Ways & Means Committee Chairman.  The election to replace Ryan will take place on Wednesday and Politico has a terrific story this AM on the race.  Here’s the key paragraph:

With just days left, lots of people think that the race between Kevin Brady of Texas and Pat Tiberi of Ohio to replace Ryan as Ways and Means chairman remains too close to call. Both Brady and Tiberi are well-liked by colleagues, and have pretty similar policy views on the issues under Ways and Means’ jurisdiction. That means this contest could be decided on issues more on the margins, like fundraising prowess and even sheer geography.

For S corporations, both candidates are terrific and have a long history of supporting independent businesses and their communities.  Let’s hope whoever wins, their first action item is to markup a tax extender package that makes as many provisions permanent as possible.  A little tax certainty would go a long way at a time when the economy looks iffy at best, and it would be a terrific start to a new era at the tax writing committee.


Rubio on Pass Thrus

Senator Marco Rubio did a post-debate interview with CNBC last week where he made a vigorous defense of his tax proposal, as well as the importance of S corporations and other pass through businesses to the economy and jobs:

“…I think we also need to lower taxes on pass-throughs, which is where the vast majority of American business activity is happening. You know, I have gentleman–I mentioned him last night–he’s the dry cleaner where I take my clothes in Miami. He’s an S-corp and he’s a small business and he’s probably paying a much higher rate, in fact almost guaranteed he’s paying a higher rate than a chain-owned company down the street somewhere, and that’s unfair. I think we have to make an equal playing field for pass-through companies, where a lot of working Americans are drawing their income, and have been placed at a competitive disadvantage now because of regulations, because they don’t have access to community banking the way they once did, and because of the tax code that actually treats them differently…”

As readers know, we initiated the “Pass Through Principles” letter four years ago in an effort to define what sort of tax reform the pass through business community would support.  This year, 120 groups signed the letter, which calls for making tax reform comprehensive, restoring tax rate parity for all businesses, and reducing or eliminating the double corporate tax.

The Rubio tax plan comes very close to meeting those three priorities.  It would eliminate the harmful double tax on corporate profits while leveling the tax rates paid by pass through businesses and their C corporation competitors.  Senator Rubio’s team spent an enormous amount of time working with the business community to craft their plan, and it shows.

S-CORP Clips | October 1-10

A compilation of the business tax related stories that caught our eye


Administration on Tax Reform

The President’s economic advisors have been unusually busy in recent weeks.  National Economic Council Director Jeffrey Zients was firm in his conviction that tax reform could get done in the new Congress, citing the “remarkably overlapping” approaches of Obama’s plan and the Camp draft.

It is true there are some common themes in the Camp and Administration proposals, but also there are major – and fatal – differences as well, including:

  • The Camp Draft is budget neutral while the Administration’s plan would raise revenue;
  • The Camp Draft adopts a territorial tax system while the Administration appears to strengthen our world-wide system; and
  • The Camp Draft is comprehensive while the Administration plan would reduce rates on corporations only – an approach rejected by Democrats and Republicans alike.

Add to those differences the fact that the Administration’s draft landed with a thud when it was released back in 2012 and has barely been discussed since, and the idea of House Republicans and the Obama Administration coming together on tax reform in the next Congress seems laughably remote.

Meanwhile, Council of Economic Advisers Chair Jason Furman spoke in New York the other week on tax reform, offering additional context to the Administration’s tax reform proposal and addressing some of the concerns that have been raised.  We’ll have more to say about this later, but this paragraph caught our eye:

On the economic merits, it is important to remember that C corporation income is partially taxed at two levels while pass-through income is only taxed at one level. As a result, today C corporations face an effective marginal rate that is 6 percentage points higher than that on pass-through businesses. Although the President’s Framework would cut and simplify taxes for small business, including small pass-through entities, for larger businesses we should be moving towards greater parity—with the goal of equal effective rates on an integrated basis, a goal that would not be served by parallel reductions in individual and corporate tax rates.(Emphasis added)

That’s not exactly true.  Recall that our study on effective tax rates released last year found that S corporations face the highest effective tax rate of any business type.  Those estimates were based on real businesses and actual tax returns.

The numbers Jason is referring to are based on hypothetical future investments.  They can be found in a three-year-old Treasury analysis under the heading of “Effective Marginal Tax Rates on New Investment.”  Jack Mintz authored a comprehensive critique of these estimates for the Tax Foundation last February, some of it pretty damning.

For our purposes, we will just point out that Treasury’s analysis, correctly done, would be appropriate if you wanted to measure the tax burden on marginal investment decisions – should we build that new facility, should we buy that piece of equipment, should we use debt or equity? – but it doesn’t support the notion that C corporations today pay a higher effective rate than pass-through businesses.  You need to estimate average effective tax rate to make that claim, which is what our study does.

Jason is right to point out that the double tax on corporations hurts US competitiveness.  That’s the reason the pass-through business community advocates for its reduction as an essential goal of tax reform.  There’s little point in reforming the tax code if the result doesn’t reduce the tax on investing in the United States, and the best path to achieving that is to tax business income once at reasonable rates and then leave it alone.  That’s how S corporations are taxed today, and real reform would move C corporations in that direction.


Ryan on S Corporations

Contrast the Administration’s approach with that of Representative Paul Ryan (R-WI), a leading contender to take the gavel as the next Chairman of the Ways and Means Committee.  He recently gave a speech at an event hosted by the Financial Services Roundtable in which he made clear the importance of improving the tax code for all businesses, including S corporations and other pass-through businesses. Here’s what he had to say:

“Tax reform is one of those things that we don’t know if we’re going to be there at the end of the day, because we want to make sure that, as we lower tax rates for corporations, we do the same for pass throughs.

You know, a lot of people in the financial services industry – banks – are subchapter S corporations.

Where Tim [Pawlenty] and I come from, “overseas” is Lake Superior, and Canadians are taxing all of their businesses at 15 percent. And our subchapter S corporations, which are 90 percent of Minnesota and Wisconsin businesses, are taxed at as high as a 44.6 percent effective rate.

So we have to bring all these tax rates down, but we have a problem with the Administration being willing to do that on the individual side of the tax code.”

We’ve been beating the “comprehensive tax reform” drum for three years now and it’s nice to see key policymakers embrace the message.


American Progress on S Corp Payroll Taxes

Meanwhile, Harry Stein of the Center for American Progress is out published a report with broad recommendations on how to best reform the tax code. Among its suggestions is one to close the “Edwards-Gingrich loophole,” an issue we’ve covered extensively in the past. On that subject, the S Corporation Association has developed the following position:

  1. We don’t support using the S corporation structure to avoid payroll taxes.  We represent businesses that comply with the law, not sneak around it.
  2. It’s not a loophole, its cheating.  This issue is often described as a loophole, but that’s not accurate.  Underpaying yourself in order to avoid payroll taxes is already against the rules.
  3. The IRS has a long history of successfully going after taxpayers who abuse the S corporation structure.  The current S corporation rules on this have been in place since 1958.
  4. Any “fix” needs to improve on the current rules.  That means they need to be easier to enforce and they need to target wage and salary income only.  Employment taxes should apply to wages only, not investment (including business) income.


Thune Files S-CORP Amendment

More good news on the tax front.  Senator John Thune (R-SD) has filed an amendment making permanent two key S corporation reforms.  Joined by Senators Ben Cardin (D-MD) and Pat Roberts (R-KS), the Thune amendment would make permanent the shorter, five-year recognition period for built-in gains as well as an improved basis adjustment for charitable contributions by S corporations.

The text of the amendment is identical to the text of H.R. 4453 and H.R. 4454, legislation sponsored by Representatives Dave Reichert (R-WA) and Ron Kind (D-WI) that passed the Ways & Means Committee earlier this month and are due to be considered by the House of Representatives in coming weeks.

As with the Reichert/Kinds bills, a large coalition of business organizations wrote in support of the Thune amendment.  The letter, signed by the American Trucking Association, the Associated Builders and Contractors, the S Corporation Associations, and twenty-one other organizations, closes, “On behalf of America’s Main Street business community, we respectfully ask that you support the Thune amendment and permanently extend the 5-year recognition period for built-in gains.”

The Thune/Cardin amendment would makes changes to the tax extenders package currently being considered by the Senate, That package already includes two-year extensions of the BIG and charitable provisions, but it faces an uncertain future.  Earlier reports suggested Republicans would vote en bloc against closing out debate to protest their on-going inability to offer amendments on the Senate floor.

The latest news, however, suggests that Republicans may support closing debate in order to ensure that the extender package keeps moving through the legislative process.  As National Journal reported earlier today:

Usually when Majority Leader Harry Reid prevents Republicans from offering amendments, GOP senators block the underlying bill. At least, that was how Republicans handled the recently dispatched energy-efficiency bill, which went down earlier this week.

“There’s probably a lot more support among Republicans for tax extenders than there perhaps was for energy efficiency,” said Sen. John Thune of South Dakota, the chamber’s No. 3 Republican.

The difference, according to lawmakers, is that some of the roughly 60 provisions in the tax-extenders package benefit constituents in some way. Thune also said that members view extending current tax policy differently than they do enacting new energy legislation.

“I just think you’re talking about tax policy,” Thune said. “You’re talking about extending tax policy. And many of them are things that our members are supportive of.”

The tax provisions that expired at the end of 2013 are extremely popular with the business community and, now that tax reform has been set aside, the only real opportunity to see them extended would be for the House and the Senate to come together on a package and send it to the President.  With strong leadership in both the House and the Senate, these two S corporation provisions are well positioned to be part of that package.

Ways & Means Votes for Permanent BIG Relief!

Earlier today, the House Ways and Means Committee voted out a number of business-friendly tax provisions, including two S corporation reforms introduced by Reps. Dave Reichert (R-WA) and Ron Kind (D-WI). You can click here to watch the video of the markup in its entirety.

The first bill (H.R. 4453) makes permanent a five-year built-in gains recognition period while the latter (H.R. 4454) does the same with a basis adjustment for charitable giving by S corporations. Both provisions were included in Chairman Camp’s tax reform draft and were voted out of Committee with comfortable majorities.

In a related effort, two dozen industry groups and trade associations wrote to the Ways and Means Committee members in support of permanent BIG tax relief, including the National Federation of Independent Business, the National Wholesalers, the American Trucking Associations, and the S Corporation Association.  As the letter to the tax committee states:

Locking up a company’s capital for an entire decade is simply unreasonable. Past Congresses have recognized that a decade is too long and voted to reduce the recognition period on three separate occasions, but those temporary measures have expired and the 10-year rule is back in effect.

Enacting a permanent shorter recognition period would sustain the original intent of the rule while providing S corporations with much needed certainty. It would allow them to make decisions based on what is best for the company rather than the dictates of the tax code. At a time when our economy badly needs increased investment, allowing more companies to access their own, locked-up capital is an important step.

As for next steps, we understand the House plans to take up some or all of the six tax bills voted out today sometime in May.

Meanwhile in the Senate, Majority Leader Harry Reid says he wants to bring an extenders bill to the floor in the next month, but exactly how he is able to bring Republicans (and some members of his own party) along is unclear.  The big hurdle here is how he plans to handle amendments.  Given the dearth of amendable tax bills in recent years, Members will be itching for the opportunity to offer amendments to the extenders package.  How to manage the onslaught while protecting vulnerable Senators from difficult votes will be the challenge.

Given that challenge, the odds for action on extenders still favor movement sometime after the election, but each tangible step forward, like today’s successful markup, increases the chances that something happens sooner.  That’s good news for S corporations sitting on locked-up assets, and its good news for good tax policy too.

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