The Economic Risk of Cliff Diving
A key paragraph from today’s Politico Tax highlights a critical issue for Main Street businesses:
A good number of economists already say that extending the expiring TCJA individual provisions wouldn’t do much to further spur the economy. That’s part of the reason that Trump and his team are plugging some of his more targeted tax cut ideas, while other key Republicans are talking up key tax breaks for businesses, like full expensing for capital investments.
But that focus misses the point entirely. The question isn’t whether extending current policy would provide a bump– it’s whether allowing a massive tax hike to happen would deal a significant blow to the economy and millions of Main Street employers?
The answer is a clear “Yes”: Failure to act means higher taxes, fewer jobs, and lower growth. Our recent EY analysis of the Section 199A deduction shows that as many as 2.6 million jobs, $161 billion in wages, and $325 billion of national income are at risk if Congress fails to extend current tax rates and we ultimately go over the fiscal cliff.
Every state in the country would be adversely affected:
As we’ve written many times before, 199A was enacted to 1) encourage job creation and economic growth, 2) help restore tax parity between pass-throughs and the 21-percent corporate rate, and 3) prevent a massive tax hike on millions of employers.
That last point deserves to be emphasized – the TCJA included revenue raises in addition to tax cuts. Many of those policies – like the cap on interest deductions and R&E amortization – are permanent and apply to pass-throughs just the same as C corporations. They would remain in place even if we go over the fiscal cliff and the 199A deduction is allowed to expire.
That’s may be good news for the Fortune 500, but it’s bad news for the communities and workers who rely on private and family-owned companies.
Fortunately, lawmakers understand the gravity of the situation and are moving quickly on a tax package. The House and Senate have coalesced around a single-bill strategy and we could see a Senate budget vote as early as this week. The stakes are high but recent movement gives us confidence that a favorable outcome is still possible. For the Main Street community, now is the time to connect with your Senator and Representative and make sure they understand the importance of 199A to your business, your employees, and your community. It’s now or never.
Main Street Cheers CTA Relief
Treasury last week made good on its promise to deliver much-needed relief from the Corporate Transparency Act, a move that did not go unnoticed by the Main Street business community. In a letter sent earlier today, over 100 trade associations applauded a new interim rule that exempts American companies from the CTA’s onerous reporting requirements and implements a risk-based enforcement approach instead. The letter reads:
This rule appropriately narrows the scope of entities required to report BOI by exempting domestic reporting companies and U.S. persons who are beneficial owners of foreign reporting companies. By doing so, the Department has alleviated substantial compliance burdens that would have disproportionately affected law-abiding Main Street businesses, while also shifting to a risk-based enforcement protocol that will ultimately strengthen the effectiveness of the CTA.
The original CTA reporting requirements encompassed an estimated 32 million legal entities with 20 or fewer employees or $5 million or less in revenues, effectively targeting nearly every small business in the United States. The interim final rule’s exemption for domestic reporting companies ensures that these businesses can continue to operate without the added complexity and potential penalties associated with BOI reporting. Furthermore, additional narrow exemptions for certain U.S. persons demonstrate a balanced consideration of privacy concerns and the practicalities of compliance.
We believe these revisions will allow the Department to focus its resources on entities that pose genuine risks of money laundering and other illicit activities, thereby enhancing the effectiveness of our nation’s financial crime prevention efforts without imposing undue burdens on legitimate businesses.
FinCEN is accepting comments on the new regulations for 60 days, after which we expect the final rule will be codified as-is.
Meanwhile, proponents of the CTA are not taking the loss well and have signaled a possible legal challenge. The good news is that, as we pointed out recently, the CTA explicitly grants regulators the authority to exempt a class of entities (in this case domestic businesses) from the reporting requirements. Here’s the interim rule with additional details:
The CTA also authorizes the Secretary of the Treasury (Secretary) to exempt any other “entity or class of entities” for which the Secretary, with the written concurrence of the Attorney General and the Secretary of Homeland Security, has, by regulation, determined that “requiring beneficial ownership information from the entity or class of entities . . . would not serve the public interest” and “would not be highly useful in national security, intelligence, and law enforcement agency efforts to detect, prevent, or prosecute money laundering, the financing of terrorism, proliferation finance, serious tax fraud, or other crimes.” In addition, section 5318(a)(7) of the BSA provides that the Secretary may make appropriate exemptions from a requirement in the BSA or regulations prescribed under the BSA. Taken together, these provisions authorize the issuance of regulations that may provide additional exemptions from the requirements of the CTA.
It appears FinCEN is on solid footing here so we’re confident that any legal challenges would be unsuccessful.
Finally, as we wrote earlier this week, while these regulations are a massive step forward it’s now time for Congress and the courts to put the CTA to rest for good. The momentum is certainly on Main Street’s side but as we’ve seen time and time again with this ill-conceived law, it’s critical that we keep up the pressure.
FinCEN Releases CTA Relief Rule
More good news on the battle over privacy. Treasury’s Financial Crimes Enforcement Network on Friday released the following statement:
[T]he Financial Crimes Enforcement Network (FinCEN) is issuing an interim final rule that removes the requirement for U.S. companies and U.S. persons to report beneficial ownership information (BOI) to FinCEN under the Corporate Transparency Act.
In that interim final rule, FinCEN revises the definition of “reporting company” in its implementing regulations to mean only those entities that are formed under the law of a foreign country and that have registered to do business in any U.S. State or Tribal jurisdiction by the filing of a document with a secretary of state or similar office (formerly known as “foreign reporting companies”). FinCEN also exempts entities previously known as “domestic reporting companies” from BOI reporting requirements.
A couple of thoughts. First, this action clears up any remaining confusion as to whether domestic entities needed to file their beneficial ownership information. With Friday’s announcement, filing your information “just to be safe” no longer appears necessary. Big shout out to the new team at Treasury for getting these changes out the door so quickly. It could not have been easy.
Second, while the new rules alleviate the need to file, this relief is temporary. As long as the underlying CTA statute remains in place, a future administration could rewrite the rules to be more expansive.
That means permanent relief will have to come from the courts or Congress. The courts are teed up to act quickly, with pro-business rulings coming from District Courts in Alabama, Texas and Michigan just in the past year. Those rulings focused on the lack of constitutional authority underpinning the CTA as well as the damage it does to the protections of speech, association, federalism, and warrantless searches. As the recent Michigan decision noted:
The CTA’s reporting requirements reach indiscriminately across the smallest players in the economy to extract and archive a trove of personal data explicitly for future law enforcement purposes at an expected cost to the reporting players of almost $22 billion in the first year alone. The Fourth Amendment prohibits such an unreasonable search.
The CTA’s overreach is almost comical – thirty million law abiding small businesses and other legal entities forced to report the personal information of perhaps one-hundred million owners and their employees? The sheer scale of it suggests a successful challenge is a distinct possibility.
Failing that, however, Congress will have to act. It won’t be easy – support for the CTA extends across the aisle – but legislation to repeal the CTA has already been introduced, and the committees of jurisdiction are chaired by strong critics of the law – Representative French Hill of Arkansas and Senator Tim Scott of South Carolina.
An upcoming hearing in the House Financial Services Committee should give businesses a good idea of how the new congressional leadership intends to close the book on the CTA for good. It’s a bad idea that should never have been implemented in the first place.
Congressman Yakym Hosts 199A Roundtable
Members of the Main Street Employers Coalition convened in South Bend, Indiana, today for a roundtable discussion with Congressman Rudy Yakym, who represents the state’s Second District and sits on the tax-writing Ways & Means Committee. The sole focus of the event was the Section 199A deduction, a provision that is central to tens of millions of Main Street businesses organized as pass-throughs.
Photo Credit: James Payne, NECA
The roundtable took place at the offices of electrical services provider Koontz-Wagner, a more than 100-year-old firm that is also a member of the National Electrical Contractors Association, which helped spearhead the effort. During the discussion, business owners from across the region shared their perspectives on how the Section 199A deduction has helped them reinvest in their businesses, hire more employees, and give back to their communities. Many attendees also emphasized that the deduction provides parity between pass-through entities and large, publicly-traded corporations, which benefit from significantly lower tax rates.
As we’ve said several times before, privately-held companies are the backbone of countless local economies nationwide, and the data backs this up. In Congressman Yakym’s district, pass-through businesses employ around 6 out of every 10 workers. That’s not an aberration, either. Nationwide, private companies are responsible for 62.3 percent of all private sector jobs.
For more data showing the economic contribution of the pass-through sector be sure to download our mobile app
Congressman Yakym reaffirmed his commitment to fighting for Main Street businesses, highlighting the importance of making the Section 199A deduction permanent. He also acknowledged that the provision’s looming expiration – and the massive tax hike it represents – heightens the urgency when it comes to swift passage of a tax bill.
Fortunately, today’s roundtable shows that lawmakers are serious about preserving 199A and ensuring Main Street can continue to thrive and lift up the communities in which they operate. We thank Congressman Yakym for hosting this event and keeping the spotlight on 199A, and look forward to working with him to ensure a successful outcome.
Privacy Fight in Australia, Courts Continues
The actions by the new Administration last week to curtail reporting under the Corporate Transparency Act were a huge victory for millions of Main Street businesses, but they were by no means the final word on the subject. To ultimately kill this ill-conceived statute, we need help from Congress or the Courts. On that front, here’s three key events in the last two weeks worth highlighting.
First, any legislative effort to repeal the CTA will have to go through the Senate and get the support of at least 60 lawmakers. Last week’s letter from Senators Sheldon Whitehouse (D-RI) and Chuck Grassley (R-IA) makes clear we have lots of work to do there. Addressed to Treasury Secretary Scott Bessent, the letter challenges the recent decision to suspend enforcement of the CTA and shift to a risk-based regulatory framework:
We acknowledge that the CTA creates a process by which the Secretary of the Treasury may exclude “an entity or a class of entities” from BOI reporting requirements so long as four conditions are met…We request that you provide us the legal basis for the Treasury Department’s policy decision to categorically suspend enforcement of the CTA’s reporting requirements for all U.S. citizens and domestic reporting companies. In addition, we request that you provide us with information about how you intend to satisfy the policy goals of the CTA.
Faced with overwhelming evidence that the CTA is ineffective and unconstitutional, some lawmakers still view it as a useful law enforcement tool (it’s not). The good news is that this letter confirms Treasury does, in fact, have the authority to exempt companies from the CTA. Here’s the statutory text alluded to in the excerpt above, which describes the exemption:
(xxiv) any entity or class of entities that the Secretary of the Treasury, with the written concurrence of the Attorney General and the Secretary of Homeland Security, has, by regulation, determined should be exempt from the requirements of subsection (b) because requiring beneficial ownership information from the entity or class of entities
(I)would not serve the public interest; and
(II)would not be highly useful in national security, intelligence, and law enforcement agency efforts to detect, prevent, or prosecute money laundering, the financing of terrorism, proliferation finance, serious tax fraud, or other crimes. [Emphasis added.]
Second, the court battle continues, with lawsuits pending in a dozen jurisdictions. Most recently, a District Court in Michigan ruled that the CTA violates the Constitution’s Fourth Amendment protections against unreasonable search and seizure. This is the second ruling on the merits that the law is unconstitutional and will help bolster the other cases.
Meanwhile, the Fifth Circuit – where the appeal of the Texas Top Cop Shop case is being litigated – is exploring what the new Treasury approach means for the future of that legal challenge. The court has asked all parties to submit briefs addressing whether the case should proceed in light of the enforcement announcement. The answer is an emphatic “yes” – the CTA is on hold for the moment but that relief depends entirely on who runs Treasury and is by no means a long-term solution.
Finally, the never-ending demand for personal and private business information is not limited to the US. Just this week, S-Corp filed comments with the United States Trade Representative highlighting how Australia’s new and ridiculously comprehensive world-wide reporting regime specifically targets US companies and amounts to a non-tariff trade barrier. As our comments note:
According to the Australian Tax Office, a “Public Country-by-Country (CBC) reporting Ultimate Parent Entities (UPE’s) need to report certain tax information on a CBC basis, to the ATO.” These reports are due as early as July 1, 2026.
…Few private companies will be willing to make the disclosures required by the new rules. This information effectively constitutes trade secrets that are extremely valuable. The ability to keep this information private is one of the benefits of being a private company and helps to offset the inability of private companies to access the global capital markets.
The concerns raised here are not theoretical. In response to the new rules, the S Corporation Association already has had member companies divest themselves of their Australian operations. Others are planning to do the same. The new reports will effectively block many US companies from doing business in Australia.
The USTR had requested feedback on how our trading partners use rules and other requirements to stifle competition, and this is certainly one of them. The new Administration likes reciprocal trade policies – what about reciprocal reporting barriers?
The recent Treasury announcement means domestic business entities don’t need to file under the CTA, for now, but the long term fight to preserve the privacy of individuals and businesses continues.