January 22, 2016 by admin ·
2015 was a terrific year for the S Corporation Association. We saw the shorter, five-year built-in gains recognition period made permanent, we organized the Main Street business community into a coherent advocacy force, and we successfully blocked misguided efforts to enact President Obama’s corporate-only tax reform plan.
For 2016, our goal is to build on these successes to ensure more legislative wins this year and beyond.
- That means educating policymakers on how taxes on S corps already went up sharply in 2013 and working to enact legislation to repeal that tax hike.
- It means building out our pass-through business coalition to ensure that S corps and other Main Street businesses are at the center efforts to rewrite the Tax Code, not just an afterthought.
- And it means tackling new obstacles to S corp capital accumulation and growth like the prohibition against non-resident alien shareholders and other restrictions unique to S corporations that limit your access to capital.
That’s it in a nutshell. For a more detailed account of our efforts in 2015 and what we have planned in 2016, click here to read our Chairman’s annual letter to the S Corporation Association membership.
Oh, and Happy New Year!
Brady Identifies the Challenge
Will Congress reform our international tax rules this year? Ways and Means Chairman Kevin Brady’s (R-TX) recent interview with Politico’s Ben White gives us some insight. You can watch the entire interview here. Our takeaway was that Brady did a good job of identifying both the opportunities and challenges confronting tax reform advocates this year.
On the opportunity side, Brady announced that he intends to have the Ways and Means Committee mark up an international plan later this year. American companies continue to invert, the BEPS implementation process is moving forward, and a vocal contingent of congressional reform advocates continue to refine their plans, so there are lots of catalysts for action. The Chairman is “optimistic” they can act on international reforms this year, and it’s likely the new Speaker will support him.
But how does action on international fit with the broader tax reform vision Brady laid out in the interview? Brady called for a “tax code built for growth” that is “fair, flatter, and simpler” and where “small businesses aren’t paying more than large businesses.” The Chairman has been a longtime advocate for Main Street businesses – he spoke at the release of our first EY study on pass-through businesses – and he understands the important role these businesses play in job creation and investment.
Those two visions – the desire to move international this year and the recognition that tax reform must address the higher rates imposed on pass-through businesses — highlight the challenge facing the new Chairman. How he resolves it is unclear, but we know Brady understands the position of Main Street employers and we look forward to working with him to craft a solution.
Hatch on the Double Tax
In a positive development, Senator Orrin Hatch (R-UT) and the Finance Committee staff are planning to release a proposal to eliminate the double corporate tax. According to Politico:
Hatch’s plan takes aim at the double taxation of corporate profits, one of critics’ chief complaints about the current business tax system. Details are sketchy, but the Utah Republican is seriously considering giving companies a deduction for the money paid out to shareholders in dividends. That would have the effect of canceling out corporate income taxes.
“The corporation will not have the double taxation anymore,” said Hatch. “It would go a long way towards topping some of these inversions.”
He hopes to release his plan, which is still being written, “in about a couple weeks.”
Tax Notes added:
One tax lobbyist familiar with discussions around corporate integration said Hatch “is looking at this as more of an incremental approach, basically the art of the doable.” He added that Hatch has not given up on “big comprehensive reform, but if it proves to be not much easier even in a new administration, then this could become a fallback to address competitiveness.”
Specifics will have to wait until the plan’s release, but our understanding of the package is that it would:
- Eliminate the double tax through the use of a “dividends paid” deduction;
- Be revenue-neutral without the usual base broadening associated with tax reform; and
- Be a stand-alone proposal that is not accompanied by rate cuts, innovation boxes, or other provisions not directly related to the double tax.
On the surface, this looks like a really worthwhile effort. The benefits of eliminating the double corporate tax are numerous and would accrue to shareholders and workers alike. Our EY study on pass-through businesses made clear that the double tax reduces investment, jobs, and wages. That’s the reason we made its elimination one of the three key principles in our tax reform letter signed by 120 trade groups.
Eliminating the double tax also helps curb inversions by reducing the tax paid by corporations on their overseas income. Right now, if a corporation wants to repatriate income in order to pay a dividend to its shareholders, it would have to pay the US tax on the income, and then its shareholders would have to pay the dividend tax. With corporate integration, only one level of tax would apply.
Finally, integration helps to level the tax imposed on debt versus equity. If a corporation raises capital to pay for a new investment today, the tax code imposes a really high tax on it. But if a corporation borrows the money, the tax is significantly lower, and could be negative (i.e. the taxpayer is subsidizing the investment). The current code encourages businesses to borrow, resulting in higher debt levels and a less secure employment base. Integration reduces this bias.
All in all, this is reform that’s worthy of the name. The details are important – how do they pay for this? — and we’re going to review the proposal closely when it’s released, but it’s encouraging to know the Finance Committee is focused on the underlying disease of how we tax businesses. It’s a good place to start!
December 18, 2015 by admin ·
After fifteen years of advocacy, one stimulus bill and three extenders, permanent built-in gains relief is just one short ride down Pennsylvania Avenue away from becoming law!
That’s because the Senate just voted 65-33 on passage of a tax extender bill that included numerous provisions important to the Main Street business community, clearing the way for it to go to the President’s desk, where he plans to sign it.
Getting these provisions made permanent is, to paraphrase Donald Trump, a HUGE deal, and should be the cause of celebration for businesses and tax professionals alike at holiday time. As Politico noted this morning:
Make sure to take extra notice of your surroundings, tax wonks. Because after today the world is likely to look a lot different, with so many of the more popular tax extenders removed, in some cases, from decades’ worth of a stop-and-go cycle.
“Stop-and-go” is an understatement. In just the past three years, key portions of the tax code, including small business expensing, the research and experimentation credit, our built-in gains relief, and dozens of other provisions taxpayers rely on have simply expired, twice, for the better part of an entire year, only to be reauthorized, retroactively and at the last minute, by Congresses eager to get home for the holidays.
We’re doing that again right now, only included in the package is language making the most important of these extenders permanent, so we won’t have to write this story next year! We’re confident you are as tired of reading it as we are of writing it.
Before we get to next steps, a note of thanks is in order for our terrific champions on the hill – including Representatives Reichert, Kind, Tiberi, Paulsen, and Neal and Senators Hatch, Cardin, Roberts, and Thune. In the trade world, we marched shoulder to shoulder with allies over at NFIB, ACEC, ABC, AGC, ICBA, the Beer Wholesalers, the Wine & Spirits Wholesalers, the National Grocers Association, the Multi-Housing Council, and others. It’s been a long road, and we’re ecstatic it’s coming to an end.
As for next steps, there are numerous ways to improve how S corps are taxed, including the rule prohibiting foreign investment in S corporations. That rule makes no sense, and precludes the S corporation community from an important source of capital. You can bet we’ll be up on the Hill pushing for relief from that restriction and others with the goal of making it’s easier for S corporations to raise capital, hire new employees, and succeed at their business.
We will also continue to press for tax reform that treats the pass-through community fairly! Cutting corporate rates while keeping rates on S corporations and other pass-through businesses high is not tax reform – it’s the exact opposite. So we’ll spend 2016 working with our allies in the business community to educate tax writers and make sure they understand just how important Main Street businesses are to jobs and investment in this country.
That’s it for now. Expect lots more from us in 2016 and beyond. Thanks to everyone for their support, and we sincerely hope everyone has the best of holidays in the coming weeks!
December 16, 2015 by admin ·
Negotiators agreed to a package of tax and a package of spending provisions last night, and the big news (pun intended) is that the 5-year recognition period for built-in gains (BIG) – something S-Corp has been championing for more than a decade – is made permanent in the tax package! We’re also happy to see that another priority, a basis adjustment to ensure S corporation owners can receive full charitable deductions on contributions, is also made permanent in this package!
The process from here is that the packages introduced last night will be held over for a couple days so members can review them, and then vote on them separately in the House. We understand that a vote on the extender package will occur tomorrow, and the spending bill on Friday.
Then, in a move not wholly unusual for this time of year, the House would combine the two packages into one “message” and send them to the Senate. The combo message accomplishes two things – it means there’s no debate on the motion to proceed (since messages from the House are privileged) and it means there’s only one bill to filibuster, not two.
As a result, the Senate could receive the bill on Friday and vote that day if everyone cooperates, or run the clock on cloture and vote on final passage Sunday or early next week if they don’t.
That’s the process. What’s in the package? As we reported several weeks ago, the tax extenders portion has been divided into three parts – those provisions made permanent (R&E tax credit, small business expensing, built-in gains, etc.), those extended for five years (bonus depreciation, CFC look-through, etc.) and those extended for 2015 and 2016 only (everything else). You can read the full list here.
We don’t do spending here at S-Corp, so we won’t bore you with those details, but both the tax and spending package include a number of extraneous provisions that may be of interest to the business community, including:
- Lifting the long-standing ban on oil exports;
- A two year suspension of the medical device tax, as well as the two year delay in the Cadillac tax and annual fee on health insurance providers;
- REIT-related provisions based on items included in Ways and Means Chairman Brady’s recent proposal, but with further modifications and a transition rule; and
- Technical changes to the recently adopted partnership audit rules.
Left out of the package were efforts to roll back the Labor Department’s pending fiduciary duty rule or to raise the SIFI threshold for regional banks. We expect a number of these provisions to raise concerns with specific groups, so it will be interesting to see how the leadership in the House and the Senate cobble together majorities for both the tax and the spending bills.
That said, the tax package represents a major step forward for tax policy and how S corporations are treated. It gets the business community off the extender rollercoaster we’ve been on for the past three decades while setting the table for broader tax reform in 2017. We’ve been asking for permanence for years, and now it appears we’re just a couple of days away from getting it. You can bet S-Corp and our allies will be on the Hill with a message of just how important it is for Congress to enact this package.