S Corp News Clips

June 26, 2015 by · Leave a Comment 

More on Tax Reform

We’ve previously commented on Chairman Paul Ryan’s desire to do as much as he can this Congress to lay the groundwork for comprehensive tax reform in 2017. Now, in the Wall Street Journal, he gives us a better sense of what that groundwork looks like.

“There’s a big difference between our view and the president’s view. He believes we should have higher tax rates on individuals. We think they should be lower. And when eight out of 10 businesses in America are what we call pass-throughs, LLCs, sole proprietors, sub S corporations, their top effective tax right now because of this president is 44.6%.

The international average tax rate on businesses is 25%. So we have to get these rates down across the board. That is something that the administration doesn’t share with us. So there’s an impasse.

The question is what can we do in the meantime that gets us a step in the right direction.

And as we’re looking at that, we’re looking at the international system. We want to move to an exemption system [where companies can repatriate foreign earnings without paying U.S. taxes on them]. We want to make every day a repatriation day for firms.”

Rep. Ryan’s remarks included his refusal to enact business tax reform without lowering the rates for pass-throughs, saying that corporate-only reform would “exacerbate the disparity” in rates between C corporations and pass-throughs.  Amen to that!

On extenders:

Ryan told the Journal audience that the Ways and Means Committee intends to address expired tax deductions, credits, and incentives “as early as possible in the fall” to avoid a repeat of last year’s legislative process in which “taxpayers had to wait until December 11 to find out if these provisions were being extended.” He also emphasized that some temporary tax provisions, such as the research and experimentation credit and enhanced section 179 expensing, should be extended permanently.

With comprehensive reform unlikely until 2017, extenders and international reform appear to be the next-best options for action this year.  S-Corp has commented extensively on the unique place S corporations with foreign operations have in the Tax Code (herehere, and here) and we’ll be spending the next several weeks highlighting those comments with the Ways and Means Committee and other tax writers.


Highway Trust Fund Funding

For months now, we’ve been hearing of an idea to use deemed (read “forced”) repatriation of overseas corporate earnings to help pay for a multi-year extension of the highway funding.  To give readers an idea of the challenge, policymakers would need to raise $92 billion in new revenues to keep highway funding level for six years.  According to the JCT, a properly structured repatriation could raise twice that amount.

At a June 24th hearing, the Ways and Means Subcommittee on Select Revenue Measures more closely analyzed the use of repatriation for highways and the net result was to leave attendees even more in doubt that this was the best source of the funding.

Chairman Reichert cautioned against standalone repatriation in his opening statement:

“However, as you will hear today, current repatriation proposals are not that simple nor are they without serious policy implications. That is why we are having this hearing-to drill down on what people mean when they say repatriation and how the different forms of repatriation work. A key, but often overlooked, part of this is that repatriation includes taxing earnings that have been reinvested abroad.

“What we know to be true is that repatriation cannot be done as a standalone; it must be part of a transition to a more competitive system. I expect to hear today that, taken outside of the context of a transition, mandatory repatriation would be a tax increase. A tax increase that American companies would be forced to pay unlike their foreign competitors.”

In his testimony, Curtis S. Dubay, Research Fellow in Tax and Economic Policy at The Heritage Foundation, echoed Rep. Reichert:

“If Congress changed repatriation policy as a stand-alone measure to cover a hole in the HTF, it would create less incentive to change the tax policy from a worldwide system to a territorial system. Instead, Congress should focus on establishing a territorial system and reserve changes to repatriation policy for aiding that sizable improvement to the tax code.”

Meanwhile, several large trade groups, including the National Association of Manufacturers and the National Retail Association, submitted strong statements against using repatriation for highways, leading Republican Tom Reed to observe that “If the stakeholders are going to be adamantly against [repatriation], it’s going to be difficult.”

So, if repatriation will not be used for funding the HTF, what will? And would any of these measures affect businesses? Deloitte’s summary of hearings from the previous week touch on a wide variety of potential funding sources:

Witnesses at the hearings – who, in addition to former Transportation Secretary LaHood, included president of the American Trucking Association and former Kansas Gov. Bill Graves, CBO officials, and think tank policy analysts – discussed a variety of other options for long-term funding, including mileage-based user fees, financing mechanisms such as Build America bonds and municipal bonds, devolving infrastructure responsibility to the states, public-private partnerships, and raising money from oil drilling rights on some federal lands. However, they noted that these methods would generally take time to implement and/or scale up and so were not immediate solutions.

Without a consensus, another short-term extension seems likely-the signal from Rep. Ryan is that it’s “unavoidable.”


Where the top 2016 Candidates Stand on Taxes-So Far

Wondering what the presidential candidates are doing on the tax front.  With official announcements from Hillary Clinton and Jeb Bush in the past week, we thought it would be a good time to review where the major candidates stand:

  •          Rubio’s plan, which we analyzed in an earlierWashington Wire, is the most in-depth. Check out thescoring from our friends at the Tax Foundation for a refresher-in short, it’s one of the most pro-growth, pass-through friendly plans we have seen in a while.
  •          The Tax Foundation also looked at Rand Paul’s plan, which would be a complete overhaul of the current code in favor of a flat tax on individuals and a type of VAT on corporations. While the Tax Foundation determined Paul’s plan would bring over 9% of additional growth in the economy over 10 years, the revenue loss, even using dynamic analysis, is over $1 trillion!
  •          Rand Paul is not the only candidate with a flat tax proposal-Ben Carson has one, as does Sen. Ted Cruz.
  •          Christie’s plan came in the form of a Wall Street Journal Op-Ed. It appears to be a close cousin to Rubio-Lee, and would reduce the marginal individual rate to 28%.
  •          Mike Huckabee would scrap the income tax altogether in favor of the “FairTax,” a national sales-tax. He ran on this platform in 2008, when he generated some early momentum against Sen. John McCain.
  •          Republican contenders Jeb Bush and Scott Walker have yet to release their own tax plans. It’s still early, so we’ll be sure to provide analyses as these campaigns heat up.
  •          On the Democratic side, neither Hillary Clinton nor Sen. Bernie Sanders have released full plans. During her campaign announcement last week in New York, Clinton promised to rewrite the tax code so that it “rewards hard work, and not quick equities trades or money stashed away overseas.” The only specific so far is a $1,500 tax credit for each apprentice that a business hires-a measure similar to bills introduced by Sens. Tim Scott and Cory Booker as well as Sens. Maria Cantwell and Susan Collins.
  •          As for Sanders, all indications from his interviews and record in the Senate point to increasing revenue for the government. During an interview on Charlie Rose, Sanders said that he would raise the marginal tax rate for individuals “above 50%.”  Ouch.

S Corp Modernization Introduced!

June 17, 2015 by · Leave a Comment 

Just in time for our annual Board meeting, S-Corp Champions Dave Reichert (R-WA) and Ron Kind (D-WI) introduced legislation to improve the rules governing S corporations!  Entitled the S Corporation Modernization Act of 2015 (HR 2788), the legislation would help ensure that the more than 4.6 million S corporations are able to compete and thrive today’s economy.

Back in 2013, a coalition of key business organizations supported similar legislation, noting that 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 existing S corporations to grow and create jobs.  Many family-owned businesses would like to become S corporations, but are unable to get around some of the existing restrictions.  Other S corporations are starved for capital, but find the rules limit their ability to attract investors or even utilize the value of their own appreciated property.  HR 2788 would help address these challenges.  Specifically, the bill would:

  • Modernizing the rules that apply to firms that have selected S corporation status;
  • Increasing the ability of S corporations to access much-needed capital; and
  • Easing and expanding S corporations’ ability to make charitable donations.

In a joint press release, Rep. Reichert described his legislation in these terms:

“There are more than 95,000 S corporations in Washington State,” said Reichert. “And with 1 in 4 workers being employed by these small businesses nationwide, it is absolutely critical that we ensure these businesses have the tools that will promote their growth, not stifle it. This is a common-sense bill, and I am proud to introduce it with my colleague Mr. Kind. We must continue to support our small businesses and allow these proven job creators to access the capital they need to grow, compete, and get Americans back to work.”

Rep. Kind made the following comment:

“It is critical that we ease the tax burden on our small and family owned Wisconsin businesses who are driving our economic growth.  Under this legislation, S corporations will be better able to access credit, invest in their business, and create the good paying jobs that we need.”

With the S-Corp Board in town, we’ll be up on the Hill visiting key tax writers and building support for modernizing the S corporation rules.  Congress needs to pass tax extenders and give certainty to America’s employers, but it is also important for the tax writing committees to seek new provisions that help improve the tax rules governing Main Street businesses. The S Corporation Modernization Act of 2015 includes a number of those improvements, and we’re looking forward to working with our sponsors and other supporters to get them enact this Congress.

S Corp News Clips

June 12, 2015 by · Leave a Comment 

Family Business Valuation under Attack?

In a development that could harm valuations of S corporations and other family-owned businesses, the Treasury Department appears poised to issue guidance limiting discounts under section 2704. Such action has been hinted at for a while, but people began to pay real attention following comments from Catherine Hughes, head of Estate and Gift Tax Attorney-Advisor at Treasury, before the ABA’s Estate Planning breakfast back in April.

It’s not exactly clear what the Treasury has in mind, but Hughes referred the ABA audience to proposals the Administration included in their annual budget offerings prior to 2014.  We took a hard look at those proposals back in 2013, and if you’re looking for an indicator of where Treasury is headed, that’s a good place to start.  MPI, a business valuation and advisory firm, has a nice overview on their blog.


Highway Funding

For months, we’ve been hearing that tax writers would like to couple some version of tax reform with a long-term highway bill. What the tax reform package would look like was unclear (international, patent box, extenders?) as was the funding source for the highway bill (deemed repatriation?).

Back-to-back hearings on highway funding next week should shed a little light on the latest thinking.  Both the House Ways and Means and Senate Finance committees are holding hearings exploring the various options Congress could use to pay for highways.  As Senator Hatch pointed out, “While many in Congress agree we should aim for a long-term highway bill, the problem is often agreeing on how to pay for it.”  As usual, it’s all about the payfors.


The Ying-Yang of Tax Reform

Senate Majority Leader Mitch McConnell and House Ways and Means Chairman Paul Ryan talked tax reform outlook this week.

McConnell focused on the challenges, particularly in bridging the policy gulf between President Obama and Republican Congress.  “The President is not interested in revenue neutrality, and he’s not interested in treating all taxpayers the same, so I don’t think we’ll get there on comprehensive [tax reform].”

Ryan, meanwhile, continued to accentuate the positive.  “The question is: Can we take a couple of steps in the right direction?” Ryan made clear he believes the answer is “yes”, particularly with international tax policy and extenders.  So international, extenders, and highways?  Something to watch.


Tax Foundation on Revenue Neutral Corporate Tax Reform

The Tax Foundation released another study on pass through businesses this week.  You’ll recall they put out a really great paper on pass-through taxation in January that focused on the state of the pass through business community.  Our summary – it’s large, dynamic, and employs a lot of people!

This new study dives right into the policy debate over corporate tax reform.  Should Congress enact deficit neutral legislation that cuts the rates for C corporations only?  According to the Tax Foundation, the answer is “no” unless you’re willing to raise taxes on pass through businesses in the process.  They conclude “the impact of the elimination of business tax expenditures for pass-through businesses with no rate offset could reduce the size of the economy by 0.5 percent [or $84 billion in the long-run].”


Small Business Confidence

There’s a growing number of small business confidence surveys out there.

The Grand Daddy is NFIB’s Small Business Optimism Survey, which has been reporting quarterly since 1973 and monthly since 1986. NFIB uses a sample of nearly 4,000 small businesses, typically with a 15% response rate, and releases the information on the second Tuesday of each month.

This week’s survey gives a lukewarm assessment of the economy—“it’s moving ahead, but at an uninspiring pace” while the outlook for Q3 is “more of the same.” Two bright spots came in earnings and wages, which posted their best survey readings since October 2005 and January 2008, respectively.

A second survey, from Wells Fargo and Gallup, has been released on a quarterly basis since 2003. Their data is drawn from over 600 phone interviews with small business owners. While optimism among small businesses recorded a slight decline this Spring, overall “there’s more certainty in today’s economy than at this time last year, and we’re seeing more promising trends,” according to Lisa Stevens, head of Small Business at Wells Fargo.

Finally, there’s a brand new survey from Thumbtack, which focuses on hard-to-reach businesses such as seasonal employers and large swath of sole proprietors. Using their online community of professionals, Thumbtack is able to receive over 10,000 responses to their survey. The populations might be different, but Thumbtack’s results mirror those of NFIB—business owners are “somewhat positive” about the economy. Exploring the state-level results reveals some interesting data, particularly the discrepancies in ease of hiring and doing business in states with low regulatory burden compared to those with more red tape, typically in the Northeast and on the West Coast.

We’ll be keeping track of these surveys in future posts.  Perhaps it’s time for a survey of the surveys?