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More than a Dime’s Worth of Difference

March 14, 2024|

Two events took place this week which demonstrate just how remarkably divergent the potential paths of tax policy are next year.

First, the Senate Finance Committee held a rare hearing Tuesday on the challenges faced by American manufacturers. Senator Steve Daines (R-MT) took the opportunity to highlight the importance of 199A to his manufacturers in Montana and how Congress needs to act to make it permanent.

As Daines noted:

The foundation of businesses in Montana are passthrough businesses. They make up 95 percent of all businesses and employ a majority of workers in our country. In Montana, 75 percent of private sector workers are employed by passthroughs. Back in 2017 we placed these businesses on more equal footing with their C corp counterparts, by providing them a 20 percent tax deduction on their qualified business income.

These businesses are absolutely critical to our communities. You look at data in terms of when you come out of a recession, it’s the passthroughs that take the lead in hiring and growing and so forth faster than the C corps. And that’s why I’m proud to be leading the bill that would make this deduction permanent.

The Main Street Tax Certainty Act protects tens of millions of small businesses, allowing them to make more profits, add new jobs, strengthen the economy. Think about the core word in “capitalism,” which is “capital.” This allows these businesses to have more capital to invest. It allows businesses to decide, and the free markets to decide, where to make these capital investments, versus the federal government taking more of those dollars and allocating them here in this city called Washington, DC.

Later, Senator Ron Johnson (R-WI) made a strong case for comprehensive tax reform. As he pointed out:

Why aren’t we talking about simplifying and rationalizing our tax code? What’s a simple way of taxing American businesses? I would suggest, a really simple way, would be to consider cash income taxable income. Then you wouldn’t have all these issues like R&D tax credit and accelerated depreciation, and by the way it would just be a timing difference…Let’s tax cash income and get rid of all this crap.

So to recap, let’s ensure we don’t raise taxes on millions of small and family owned businesses next year, while simultaneously working to enact comprehensive reforms that put all businesses on a level playing field.  Amen to that. S Corporations for everyone, is what we say.

Meanwhile, the President released his budget this week, which not only assumes the 199A deduction sunsets at the end of 2025 but calls for an additional $5 trillion in tax hikes over the next decade, many of which are targeted directly at Main Street.

As we wrote about these same policies last year:

…the President’s budget would raise the top rates paid by pass-through businesses and corporations alike, increase the Net Investment Income Tax and expand it to cover the active business income of pass-through business owners, make permanent the harmful loss limitation rules, make it harder for family-owned businesses to survive from one generation to the next by gutting the existing grantor trust rules, nearly double the tax rate on capital gains, and impose a new minimum tax on larger family businesses that appears to redefine how income is measured. The combination of these policies would raise top tax rates on these businesses to close to 50 percent, both on their operating profits and on any gain when they sell the company.

Meanwhile, the changes on the corporate side are gathering lots of ink, but the provisions targeted at the pass-through business community are actually bigger. And that comparison excludes the expiration of Section 199A, the grandaddy of all tax hikes, which is assumed in the baseline of the President’s budget.

Fortunately for our members, the Biden budget is dead on arrival.  The House is run by Republicans and that, coupled with a tight Democratic majority in the Senate, means nothing along these lines has a chance this year. That is a huge change from last Congress, when similar policies came within one thin vote (thank you Senator Sinema) of passing both the House and the Senate. The current impasse is welcome relief, albeit transitory.

If we needed a reminder of just how quickly things can change, a recent announcement that Representative Ken Buck will retire next week(!) means the Republican’s House majority is down to just one out of 435 members. That’s as tenuous as you can get.

The elections may go well this November, but they may not, which means the business community needs to be prepared.  We need to arm our allies like Daines and Johnson with the best data and the best arguments, so we increase the odds we end up with a positive result.

The alternative is remarkably unattractive. As the Biden budget demonstrates, there are lots of really bad ideas out there and they are hanging right out there on the horizon, just one or two votes away from being enacted.

Talking Taxes in a Truck Episode 36: The CTA Compliance Wrinkle No One’s Talking About

March 9, 2024|

The Corporate Transparency Act is now in effect, imposing complex reporting requirements on every small business in the country, and many large ones too. But what if the person best equipped to assist those businesses with compliance – your local CPA –wasn’t allowed to do so?

To explore this dynamic, we talked to Jim Hamill, Director of Tax Practice at the Albuquerque-based accounting firm Reynolds, Hix, and Company and an Associate Professor of Accounting at Texas A&M Commerce. Jim explains how the CTA puts tax professionals in a bind and forces them to choose between helping their clients and possibly engaging in unauthorized practices. He also explores how difficult the CTA’s “beneficial owner” definition is to pin down, why compliance will cost small businesses far more than FinCEN estimates, and how it is all unlikely to deter money laundering.

This episode of Talking Taxes in a Truck was recorded on March 6, 2024, and runs 47 minutes long.

CTA’s Prospects, Post-NSBA v. Yellen

March 7, 2024|

Friday’s District Court decision declaring the Corporate Transparency Act (CTA) unconstitutional is garnering lots of attention. As the Wall Street Journal editorial board noted, “The judgment is a legal bullet dodged for millions of small businesses that would be smacked this year by the new reporting requirements.”

The ruling is a massive victory for the Main Street business community, no doubt, but its real-world implications remain to be determined. The ruling is not a nationwide injunction but instead applies narrowly to the suit’s plaintiffs, the members of the National Small Business Association (NSBA). As presiding Judge Liles Burke’s judgement reads:

For the reasons articulated in its March 1, 2024, opinion on the parties’ cross-motions for summary judgment, the Court finds that the Plaintiffs are entitled to summary judgment as a matter of law, and grants the Plaintiffs’ request for relief as follows:

(1) The Court enters this final declaratory judgment: as discussed in the Court’s opinion, the Corporate Transparency Act is unconstitutional because it exceeds the Constitution’s limits on Congress’ power. The Court makes no ruling as to the constitutionality of the Act on any other grounds.

(2) The Defendants, along with any other agency or employee acting on behalf of the United States, are permanently enjoined from enforcing the Corporate Transparency Act against the Plaintiffs. [Emphasis added.]

(3) The Court will hear the parties’ arguments concerning the allocation and amount of costs on a date to be determined.

In response, FinCEN  – the agency tasked with implementing and overseeing data collection under the CTA – announced that it would cease enforcement of the CTA for NSBA members, while continuing to apply the law to everyone else:

It may seem ridiculous that 65,000 NSBA members are now carved out of reporting regime affecting tens of millions of entities – especially as the entire law was declared unconstitutional – but that appears to be the case given FinCEN’s response to the ruling. Could covered small businesses simply join the NSBA and thus exempt themselves from the reporting requirement?  FinCEN says no, only those businesses who were members as of the ruling on March 1 are exempt.

From a practical standpoint, it may not make all that much of a difference. Existing entities have until the end of the year to file their reports, so there’s a good chance the court case will have made its way through the 11th Circuit by that time. As we noted on Friday, the ruling is strong and is likely to be upheld.  At that point, the government will have less of an excuse to continue this information collection regime.

In the meantime, exactly how is FinCEN to know who is and isn’t an NSBA member? Their membership list, like that of most trade associations, isn’t public. Moreover, NSBA is protected from being forced to divulge their membership by the 1st Amendment. (Yes, that pesky Constitution again.) FinCEN can say the relief is limited to NSBA members, but they have no means of distinguishing them from anybody else.

That ignorance applies to the CTA itself. FinCEN has no practical means of assessing which of the millions of entities who might be covered under the CTA are actually obligated to file their beneficial ownership forms. The reporting requirements are premised on the industry, employment, and revenues of each entity, information FinCEN simply doesn’t have. Absent an intrusive audit of every legal entity out there, how will they know?

Who does know? Accountants, but they are being told not to advise their clients on CTA compliance matters as that would constitute practicing law without a license. This reality is just one of many as to why the CTA is doomed to fail as a law enforcement exercise.

It is also one of the reasons why now, two months after the CTA went live, so few businesses have filed or are even aware of the law’s existence.

So where does this leave us?  The Department of Justice is sure to appeal the ruling and, as this case is a matter of law rather than facts and circumstances, it’s possible the appeal will move quickly and be considered prior to the end of the year.  Rapid resolution of this case is in everyone’s interest.

In the meantime, S-Corp and its allies will be pressing our friends in Congress for two actions: 1) use your influence to convince FinCEN to suspend CTA implementation for everyone pending the outcome of the court case and, 2) adopt the Beatty/Nunn bill (HR 5119) to delay CTA reporting by a year. That legislation would give the court process time to work and give FinCEN and the business community more time to educate covered entities as to the CTA’s requirements. The bill passed the House 420-1 last year and currently is pending in the Senate Banking Committee.

Last week’s court decision helps move the ball forward on both of these efforts, even as it increases the chances the whole law falls on constitutional grounds. It is difficult to appreciate just how badly the sponsors failed to take the Constitution into account when formulating this law.  It is like they forgot we had one.

Talking Taxes in a Truck Episode 35: Tax Foundation’s Scott Hodge on the Outsized Role that Taxes Play in Our Daily Lives

March 2, 2024|

Our latest guest is Scott Hodge, who is president emeritus at the Tax Foundation and author of the excellent new book Taxocracy: What You Don’t Know About Taxes and How They Rule Your Daily Life. Through the lens of history’s most ill-conceived taxes – like the “chicken tax” and 17th century “window tax” – Scott explains how tax policy shapes virtually every aspect of our lives and drives human behavior. He and Brian then discuss more recent policies, including the SALT cap and proposed wealth tax, the ongoing (and often misguided) debate over book versus tax accounting, and the pivotal role that S corporations play in all of it.

Scott’s book is available for pre-order and comes out on April 9.

This episode of Talking Taxes in a Truck was recorded on March 1, 2024, and runs 49 minutes long.

Court CTA Ruling a Huge Win for Main Street

March 2, 2024|

Huge news to kick off the weekend — a federal judge just ruled that the Corporate Transparency Act is unconstitutional, marking the end of a 16-month legal battle led by the National Small Business Association and supported by S-Corp and the members of our Main Street Employers coalition.

By way of background, the CTA is a sprawling new data collection regime that would have required more than 32 million entities – including virtually every small business in America – to hand over their sensitive private data to the government. We’ve written about the statute extensively but the bottom line is that the CTA would have saddled law-abiding citizens with compliance headaches and criminal penalties, while doing virtually nothing to combat illicit activity.

Recognizing that the federal government went far beyond their enumerated powers in enacting and implementing the law, the National Small Business Association filed a legal challenge back in 2022, alleging that it violates a laundry list of constitutional protections. S-Corp and our Main Street Employer allies were strong supporters of the suit from the beginning.   

As it turns out, presiding Federal District Court Judge Liles Burke agrees with our concerns. In a ruling issued just this evening, he wrote:

When Congress passed the 2021 National Defense Authorization Act, it included a bill called the Corporate Transparency Act (“CTA”). Although the CTA made up just over 21 pages of the NDAA’s nearly 1,500-page total, the law packs a significant regulatory punch, requiring most entities incorporated under State law to disclose personal stakeholder information to the Treasury Department’s criminal enforcement arm.

By requiring these disclosures, Congress aimed to prevent financial crimes like money laundering and tax evasion, which are often committed through shell corporations. Broadly defined, a shell corporation is a legal entity with no (or minimal) employees, customers, business, or assets. Although shell corporations serve many legitimate purposes, it’s also possible to disguise the identity of interested individuals and the flow of money by layering shell companies on top of each other, “such that each time an investigator obtains ownership records for a domestic or foreign entity, the newly identified entity is yet another corporate entity, necessitating a repeat of the same process[.]” Pub. L. 116-283 § 6402(4).

Yet corporate formation includes far more than for-profit enterprise. Each year, the States grant formal status to millions of entities that can and do serve “any lawful purpose,” including benefit corporations, non-profits, holding companies, political organizations, and everything in between.

With that in mind, this case presents a deceptively simple question: Does the Constitution give Congress the power to regulate those millions of entities and their stakeholders the moment they obtain a formal corporate status from a State? The Government thinks so. While it acknowledges that Congress “can exercise only the powers granted to it,” the Government says that the CTA is within Congress’ broad powers to regulate commerce, oversee foreign affairs and national security, and impose taxes and related regulations.

The Government’s arguments are not supported by precedent. Because the CTA exceeds the Constitution’s limits on the legislative branch and lacks a sufficient nexus to any enumerated power to be a necessary or proper means of achieving Congress’ policy goals, the Plaintiffs are entitled to judgment as a matter of law. As a result, the Court GRANTS the Plaintiffs’ motion for summary judgment and DENIES the Government’s motion to dismiss and alternative cross-motion for summary judgment.

So for now, millions of small business owners can stop navigating FinCEN’s website and go back to running their businesses.

The Department of Justice is almost certain to appeal the ruling, so the court challenge is far from over.  But whichever way it goes, today’s ruling will help focus the attention of the public, the media, and lawmakers as to the threat the CTA and other laws like it pose to the privacy of law-abiding Americans, and it will help us in our efforts to ultimately fight these laws in Congress.

So with the caveat that S-Corp continues to review the ruling to assess its implications – the decision issued tonight is a big win for millions of law-abiding businesses nationwide. More to come.

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