More Tax Reform Comments!

October 9, 2018 by · Leave a Comment 

Everything has its season, and for tax reform, this is the season of sending comments to Treasury.  This week, the S Corporation Association submitted comments on Treasury’s proposed rules implementing the so-called “toll charge” repatriation tax under Section 965.

To recap, one of the selling points of tax reform was the move from a system that taxed all the income of U.S. taxpayers, regardless of where it was earned, with a system that focused primarily on taxing income earned with our borders.  This new territorial approach was supposed to make U.S. businesses more competitive overseas.  Only time will tell whether that proves to be the case.

What is most certainly the case is that individuals and S corporations were blocked from the territorial treatment yet subjected to the new taxes that accompanied it.  These taxes include the toll charge under Section 965, the GILTI tax to help shore up the territorial treatment, and the BEAT tax to protect against base erosion.  So, S corporations don’t get the good international stuff in tax reform, but they must pay the extra taxes anyway.  Not the best outcome.

These general concerns are outside the scope of Treasury’s regulatory process, however.  In the proposed rules, S-Corp focused its recommendations to two specific items:

  1. Treasury needs to clean up the mess about overpayments and deferred taxes under Section 965; and
  2. Treasury needs to discard new language that would needlessly accelerate payment of the Section 965 toll charge on S corporations.

Those S corporations with overseas operations should pay attention, as these items will affect you in the coming months and years.  You can read the full comments here.

S-Corp and U.S. Chamber Join Forces on Overpayments

S-Corp co-authored a separate letter with the U.S. Chamber of Commerce on the toll-charge tax and the question of what should happen to overpayment by taxpayers.  Signed by 30 trade groups, the letter highlights business community concerns on the overpayment issue and why the IRS needs to revisit its position.  As the letter states:

Taxpayers often overpay their tax liabilities, either through excessive estimated tax payments or through amendments to earlier returns. The policy articulated in FAQ 13 and 14 would require that these overpayments be applied to any outstanding §965 liabilities, even if the taxpayer had elected to defer those liabilities under §965(h) and (i). That result is simply not consistent with the clear reading of §965(h) and (i) nor with the policy goals Congress articulated when it adopted the deferral election.

An accompanying press release included the following quotes:

  • “The current IRS guidance creates a sweeping, negative impact on business operations of all sizes and across all sectors,” said U.S. Chamber Vice President for Tax Policy and Economic Development and Chief Tax Counsel Caroline Harris. “This new tax code is designed not to pick winners and losers, but the IRS’s current guidance for overpayments does just that. We urge the IRS to change course and to implement this provision the way Congress intended – to grow and strengthen American businesses.”
  • “S corporations were excluded from the new territorial system, so Congress reasonably exempted them from the toll charge tax as well,” S Corporation Association President Brian Reardon said. “A policy of applying tax overpayments to these deferred 965 liabilities effectively undermines congressional intent and should be reversed. S corporation owners should not have to pay a ticket for a ride they don’t get.”

The overpayment issue is obviously a big deal to C corporations with overseas operations.  It’s a bigger deal to S corporations.  For them, it’s the difference between paying no tax and paying the full tax.

You can read the full letter here.  Expect to hear lots more on this issue as Treasury finalizes its Section 965 rules and tax overpayments.

S-Corp Comments on Proposed 199A Rules

October 1, 2018 by · Leave a Comment 

The S Corporation Association today submitted comments on Treasury’s proposed rules implementing the new, 20-percent pass-through deduction.

S-Corp readers know the 20-percent deduction was designed to preserve rate parity between pass-through businesses and the new, 21-percent rate on S corporations.  But how is the deduction going to be calculated?  How many pass-through businesses will qualify?  Our comments kick off by emphasizing just how important the deduction is to keeping Main Street competitive.

As our recent EY study made clear, pass-through businesses receiving the full deduction still will pay an effective tax rate that is 1.3-percent higher than the rate paid by the average C corporation.  Pass-through businesses not receiving the full deduction, or those precluded from receiving any deduction, will pay rates significantly higher. 

Broad access to the Section 199A deduction is also pivotal in order for Tax Reform to achieve its fundamental goals of job creation and economic growth.  Pass-through businesses represent 95-percent of all business entities, employ over half of private sector workers in the United States, and contribute a majority of business income to our gross domestic product.  Much of the economic potential of Tax Reform will be lost if the Main Street community is not a full partner in the reforms.   

So the rules out of Treasury on how to calculate the new 199A deduction are critical.  How did they do?  Generally, the S-Corp comments paint a positive picture of the proposed rules.  Treasury made a good-faith effort to get the new regime right.  But with any new proposal this big, there are lots of details to work out, and the S-Corp comments include a number of recommendations as to how Treasury can improve the final rules.

You can click here to read the full S-Corp comments.  And stay tuned for more on this topic.  These rules have to be in place before the New Year, so we expect Treasury to move fast.

Proposed 199A Rules Released

August 8, 2018 by · Leave a Comment 

It’s not late Friday afternoon, so why is Treasury releasing important new rules on the pass-through deduction?  We’re not sure, but we like it!

The rules themselves look pretty good too, and our members’ initial reaction to the rules was mostly positive.  Here’s the statement S-Corp released earlier today:

 “Treasury’s proposed rules are a good start to making the pass-through deduction workable for Main Street businesses.  There are many important details to clarify and we have specific concerns about some of the definitions and reporting requirements, but the overall approach taken by Treasury is positive and should be applauded.  Our goal is to make certain the 20-percent deduction is available to real businesses with real employees.  We think these rules are a good beginning, and we will use the comment period to clarify our remaining concerns.” 

Today’s release was broader than what we expected, and appears to be designed to give most businesses the details they need to file next year, including a refined definition of “trade or business,” clarification on which industries are “specified services” and therefore precluded from the deduction, and a new approach to when business owners may aggregate or group together separate legal entities to calculate the deduction.

S-Corp has championed the aggregation issue since the beginning of the year and the proposed rules are generally consistent with our recommendations.  They cut a middle ground between a narrow interpretation severely limiting the ability of owners to aggregate and a broad approach with few limitations, as under Section 469.  The resulting approach looks like a good-faith effort to allow owners to aggregate groups of businesses when it is appropriate.

Here are some of the details:

  • The rule defines what qualifies as a trade or business, and then requires that any aggregated group only include trades or businesses.
  • The same group of owners must own a majority stake of each business in the aggregated group. Owners are allowed to apply family attribution rules to measure their ownership stake, and minority owners may rely on the ownership of the entire group to qualify for aggregation.
  • None of the aggregated businesses may be a “specified services” business.
  • Each business in the aggregated group must meet at least two of the following three factors:
    • Provides products and services that are the same or customarily provided together;
    • Shares facilities or centralized business elements (personnel, accounting, purchasing etc.); and
    • Operates in coordination with, or reliance upon, other businesses in the aggregated group (supply chain, vertical integration, etc.).
  • Owners of the same businesses are not required to coordinate their aggregation approach, so each may choose different groups.
  • Aggregated groups must be consistent year to year, with proposed rules on when owners are allowed to adjust a group.

Left out of the rule was guidance on how to address tiered ownership and how to stop owners from gaming the rules by disaggregating their businesses.  Moreover, while the proposed rules better defined the population of “specified services” that don’t qualify for the deduction, many business activities remain in limbo, not sure which side of the line they fall.  That’s not Treasury’s fault – it’s the concept of a specified services that’s problematic, not the rules that follow.  One bit of good news is that Treasury narrowly defined when a business’ “principal asset is the reputation or skill of one or more of its employees.”  That language has always been impossible and should be discarded by Congress.

In other good news, the proposed rules clarify that Electing Small Business Trusts get the deduction, just like any other owner of a pass-through business.

Treasury has set a 45-day comment period on the rules and scheduled a public hearing at the IRS on October 16th.  S-Corp will be providing detailed comments on the rules and expects to testify on the 16th as well.  Getting these rules right is our number one priority for the year.  The proposals out of Treasury today are a good start – we will be working with them and the Hill over the next two months to make sure the details are just as good.

Pass-Through Parity Briefing

August 2, 2018 by · Leave a Comment 

The S Corporation Association participated in a Hill briefing Tuesday highlighting new work for Ernst & Young on the challenge of establishing parity for pass-through taxation.

The analysis, authored by Robert Carroll of EY, focused on all the complexities confronting pass-through businesses under the Tax Cuts and Jobs Act, and the resulting matrix of possible tax outcomes for pass-through businesses.  As the table shows. Effective tax rates on successful S corporations (and other pass-through businesses) are consistently higher than the average C corporation, even after adjusting for the double corporate tax and other variables.

These findings are particularly important right now, as Treasury and the Office of Management and budget are working on regulations that would detail how business owners are to calculate the new 20-percent pass-through deduction under Section 199A.  The EY analysis demonstrates that how Treasury determines the deduction should be calculated could mean the difference between getting the full deduction or none at all for some businesses.

The briefing, held in the Capitol Visitors Center with about 75 attendees, began with Senator Ron Johnson (R-WI) summarizing the last fall’s tax debate and the need for Congress to continue to focus on reforming how businesses are taxed.  As summarized in BNA:

Congress should consider taxing C corporations like pass-through businesses—at the individual owner level—to create a more level playing field between the two types of entities, Sen. Ron Johnson (R-Wis.) said July 31 at an event on Capitol Hill.

The 2017 tax law (Pub. L. No. 115-97) didn’t take this approach, but Johnson said he still believes that such a change would offer the best solution for simplifying and rationalizing the tax code. The senator said he hasn’t received a revenue score for the proposal but expects it would raise money that could be put toward other tax code changes.

Dr. Carroll then presented his analysis, followed by a panel of discussants including Richard Rubin of the Wall Street Journal, Doug Holtz-Eakin of the Americans for Tax Reform, and Brian Reardon of the S Corporation Association.  You can watch the entire briefing here:


S-Corp’s New York SALT Comments

July 11, 2018 by · Leave a Comment 

Today the S Corporation Association submitted comments to the New York Department Taxation and Finance on their proposed SALT fix for partnerships.

Following hard on the heels of the new Connecticut SALT fix, New York asked stakeholders for feedback on their draft to restore the State and local tax deduction for New York partnerships.  In its comments, S-Corp made clear its support for the proposal with the following three improvements:

  • “Expand the UBT to include S corporations as well as partnerships.  There are 410,000 S corporations in New York State, employing more than two million people.  These S corporations face the same challenges with the new policy as partnerships and they should be included in the reform. 
  • Allow for S corporations and other pass-through businesses to elect out of the UBT on an annual basis.  There are several reasons why a pass-through business may choose not to be taxed at the entity level.  They should be given that flexibility.  Making the UBT an election is essential to avoiding unintended and unnecessary hardships. 
  • Maintain current levels of revenue.  The purpose of this reform should be to restore legitimate business deductions to New York’s Main Street community, not to raise new revenues.”  

With the New York legislature out for the year, this proposal will have to wait until next year, but the request for comments demonstrates that the state-based fix to the SALT mess continues to have legs in New York and elsewhere.

You can read the full S-Corp comments here.  Other affiliated groups submitting comments include our Parity for Main Street Employers coalition and the STAR Partnership.

The effort to restore SALT deductions continues!

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