CTA Update | October 2, 2024
Notable Developments
- Weak compliance numbers heighten concern
- Appeals court hears oral arguments
- Full court press in Ohio
- CTA is not a tax enforcement exercise
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Regulatory Update
New filing data from FinCEN is out and it paints a bleak picture when it comes to nationwide compliance rates. As the linked data shows, the vast majority of businesses required to file under the CTA have not done so – despite just three months to go before the year-end filing deadline – meaning millions of small business owners and their employees will become de facto felons come that start of 2025.
Also worth noting is that fact that Ohio, whose Senator Sherrod Brown continues to block our CTA delay bill, ranks near the bottom when it comes to compliance. It’s the inevitable consequence of a sweeping new reporting regime that no one has heard about. It also highlights the need to pause enforcement of the CTA for a year at the very least.
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Media Update (Part 1)
Couple big items to report on the press front. First, the Associated Builders and Contractors are out with a fantastic new ad in Ohio that urges legislative action to either repeal or delay the CTA:
Second, the Job Creators Network has this well-written piece in the Columbus Dispatch, which gets right to the point:
Ohio’s small businesses are being threatened by a new federal law set to take effect at the end of this year. Entrepreneurs who don’t fully comply will face steep fines and even jail time. As chairman of the Senate Banking Committee, Sen. Sherrod Brown (D-OH) should help delay – if not outright repeal – the misguided law.
Finally, former member of Congress and current CEO of the Ohio Chamber of Commerce Steve Stivers is out with an op-ed in the Herald-Star calling out the CTA. It leads with:
As a former member of Congress and president and CEO of the Ohio Chamber of Commerce, I’ve seen many bad bills enacted into law. The Corporate Transparency Act is one of the worst.
Why is it so bad?
The CTA is the first law I have ever seen that explicitly exempts big businesses while targeting Main Street job creators. It applies to entities with 20 or fewer employees or $5 million or less in revenues. Treasury estimates more than 32 million entities will be required to file this year, including hundreds of thousands located in Ohio.
Again, the low compliance numbers in Ohio – and every other state, for that matter – show just how few covered entities have even heard of the CTA, much less know how to navigate its complex requirements.
With penalties of up to $590 per day, or even felony charges and two years in jail, S-Corp and its allies plan to continue the pressure in Ohio and elsewhere until Main Street sees much-needed relief from this ill-conceived statute.
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Legal Update
The Eleventh Circuit Court of Appeals heard oral arguments last week in NSBA v Yellen, the ongoing suit that seeks to strike down the CTA on constitutional grounds. While the plaintiffs secured a favorable ruling from a lower court in March, FinCEN quickly appealed the decision to the 11th Circuit, which brings us to the current state of play.
For a recap of the proceedings be sure to check out this piece from Thompson Reuters. Though the DOJ attorneys landed some punches when it comes to that earlier decision, the 11th Circuit can still consider arguments that the CTA violates several constitutional protections as outlined in NSBA’s original suit. Long story short, anything can happen and we expect a ruling sometime in December, right before the year-end deadline.
You can listen to a recording of the full oral arguments here.
As a reminder, there are now eight pending cases in various courts across the country. S-Corp’s focus remains on the NSBA suit, but there’s still hope in other potentially friendly jurisdictions such as Texas. Here are the links:
- Utah: Taylor v Yellen (7/29/2024)
- Oregon: Firestone v Yellen (6/27/2024)
- Massachusetts: BECMA et al v Yellen (5/29/2024)
- Texas: NFIB et al v Yellen (5/28/2024)
- Maine: William Boyle v. Yellen (3/15/2024)
- Michigan: Small Business Association of Michigan et al v. Yellen (3/1/2024)
- Ohio: Robert J. Gargasz Co., L.P.A. et al v. Yellen (12/29/2023)
- Alabama (appealed): NSBA et al v. Yellen (11/15/2022)
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Media Update (Part 2)
Tax Notes recently covered the Oregon suit challenging the CTA – here’s a line from the article that caught our eye:
Designed in part to combat tax evasion, the CTA requires corporations, limited liability companies, and similar entities to disclose information about beneficial owners to Treasury’s Financial Crimes Enforcement Network, which can then release the information to government authorities and financial institutions.
No, not – the CTA was never designed to combat tax evasion. In fact, until the bill reached conference, the IRS wasn’t listed as one of the many regulatory and law enforcement agencies granted access to the CTA database. The inclusion of the IRS was a last second decision with the goal of making look like the CTA had something to do with tax enforcement. It doesn’t.
S-Corp Submits International Tax Team Comments
More on the Ways & Means “Tax Team” front. The S Corporation Association today submitted its comments to the members of the Global Competitiveness Tax Team.
For many readers, the idea that the S corporation community has a large international presence may come as a surprise, but they do and the issues surrounding their treatment under Section 199A, GILTI, the IC-DISC, and Pillar 2 are substantial and worthy of Congress’ attention. As the comments state:
The S Corporation Association has a long history of advocacy on international tax issues. While this discussion typically focuses on C corporations, many S corporations and other pass-through businesses engage in international commerce as exporters, owners and operators of foreign branches, and the owners of controlled foreign corporations (CFCs). As such, these businesses face many challenges specific to their pass-through status that should be understood by the Global Competitiveness Tax Team.
One example of a challenge is the current Pillar 2 plan, which appears to seek fair treatment of pass-through businesses but only if they get the details right. This from the comments:
The current plan includes a carve-out for business income in the US that passes through to a taxpayer when the taxpayer pays a sufficiently high effective tax rate. For those pass-through businesses, they effectively would be exempt from the proposed Pillar 2 minimum tax regime.
The carve-out, however, only applies if the direct shareholder of the pass-through entity pays tax, either as an individual or a trust (such as an ESBT). In situations where an S corporation has trust ownership where the trust is not taxed directly — such as a grantor trust where the grantor pays the tax rather than the trust – the taxes paid would not count towards the minimum tax, so a family businesses with trust ownership would be at increased risk of paying the Pillar 2 top-up taxes.
This is just one example of how our international rules may shortchange S corporations. The comments include several others. By way of recommendations, the comments ask for five specific actions by Congress:
- The Section 199A deduction should be expanded to apply to foreign-source income;
- S corporations making the Section 962 election should be given access to the Section 245A dividends received deduction, together with rules ensuring the repatriated earnings are subject to US tax when they are distributed to the domestic parent corporation shareholders;
- Congress should reaffirm its support for small and closely-held exporters by supporting the IC-DISC;
- The Pillar 2 pass-through carve-out be expanded to include S corporations and other pass-through businesses with both direct and indirect owners that pay taxes at a high marginal rate; and
- Pillar 2 minimum tax payments should be credited against US tax liabilities.
As always, S-Corp appreciates the work of the Tax Teams and the opportunity to comment on these important issues. You can read the full comments here.
S-CORP Jobs App is Live!
Just in time for the fiscal cliff battle, the S-Corp Mobile App lets users see detailed employment data on pass-through businesses in their states and congressional districts, all on your phone and at the push of a button.
The goal here is to arm our allies and key stakeholders with the information they need as we head into the 2025 fiscal cliff battle. Backed by data from EY, the app provides advocates with state- and district-level data on just how many jobs S corporations, partnerships, sole props, and LLCs provide. It’s a stark reminder that these businesses supply the majority of private-sector jobs in America and have the most to lose with the looming expiration of Section 199A and other key tax provisions.
The app is available for download at the Apple App Store and on Google Play via the links below:
Whether you’re meeting with your elected officials or just want to learn more about the importance of the pass-through businesses to your community, this app ensures the information you need is at your fingertips.
S-CORP Allies Trumpet 199A
It’s been a busy month on the 199A front, thanks partially to our latest study showing the large amount of economic activity supported by the provision and the importance of making it permanent. (See here, here, and here for more on that.) Before the month wraps, we wanted to highlight a trio of additional 199A news items that caught our attention.
The first is Fox Business’ coverage of a press conference hosted by NFIB during their congressional fly-in this week. As correspondent Hillary Vaughn reported, NFIB members were in town to talk about the importance of making the Section 199A deduction permanent and, conversely, the consequences of allowing the provision to expire. Here’s how Vaughn described the situation:
What will happen if [Section 199A] goes away? Nine out of ten small businesses use this deduction – more than half would have to increase their sticker price without this deduction. More than half of businesses say they would delay or cancel investments in their business, and around 30 percent said they would have to put off hiring new workers or stop hiring altogether.
But if that wasn’t persuasive enough, here’s small business owner Candace Price on how the scheduled tax hike would hit her company:
If this deduction goes away, and prices continue to climb, it can literally be the difference between a small business staying open or closing its doors forever and going out of business.
The second item was an appearance by S-Corp friend and ally Liam Donovan, with the Associated Builders and Contractors, also on Fox Business.
Asked about the looming 2025 fiscal cliff, Liam delivers a succinct summary of what’s at stake, including a reference to our earlier employment data to drive home his point:
The corporate piece of this – the ticker symbols you see scrolling across your screen – those companies absent congressional action keep their 21 percent rate…meanwhile the individual rates for all of us – everyone on camera, everybody at home – will go up absent congressional action.
If you think about how businesses pay taxes, 9 out of 10 businesses in the United States actually pay through the individual side of the code. They employ 62 percent of Americans. So when kamala Harris says she will raise taxes on people making more than $400,000, she is talking about raising taxes on Main Street, an average 20 percent increase in taxes on small businesses, family-owned businesses, Main Street Businesses.
It’s not just in the construction industry…think about anything downtown and on Main Street that isn’t a big box retail store. They are independent businesses paying at the individual rate – that is what is at stake when you’re thinking about going to the polls in November.
Exactly.
Finally, Michelle Gallagher, long-time S-Corp Advisor and Principal at the accounting firm Gallagher, Flintoff & Klein, also has a great video out on the looming 199A expiration, which she says will hit upwards of 80 to 90 percent of businesses in America:
Drawing from her extensive experience helping family business clients, Michelle drills down on the importance of 199A, a message she shared when she recently briefed Ways and Means members as part of the ongoing Tax Teams process:
What it allowed businesses to do over the last 8 years is to incentivize employers to invest back into their employees and grow their business, by employing more people and buying more equipment – capital investment. We have a number of studies that we are sharing with the Congressional Budget Office that show it worked. If you look at employment and capital investment, the business owners did go out and do what they were supposed to with [Section 199A]. So that’s a key selling point for keeping that portion of the Act in place and making it a permanent provision.
Tax policy often involves a disconnect between the statutory fine print of a specific policy and the very real effect that policy has on everyday Americans. Candace, Liam and Michelle do an excellent job bridging that gap and we hope lawmakers will take their message to heart.
S-CORP Submits Excess Loss Comments
As part of the on-going Tax Team process in the House, the S Corporation Association today submitted comments focused on the Section 461(l) Excess Loss Limitation provision created by the Tax Cuts and Jobs Act (TCJA). This provision targeted pass-through businesses solely and has been the subject of much controversy, most particularly due to the wildly inaccurate scoring that accompanied the provision’s consideration by Congress.
S-Corp has been critical of Section 461(l) from its inception, both as a response to its lack of a solid policy justification – what problem was it trying to solve? — and to its hugely inflated revenue estimates. On the policy front, the comments note:
The excess business loss provision is a dramatic departure from general tax policy principles that active losses can be applied to active income. In the corporate context, generally related companies may elect to file a return that consolidates all the businesses together and nets income and loss. Section 461(l) introduces a substantial new tax burden on small and closely-held business owners—in direct contradiction to Congress’ broad goal of supporting small business.
What makes the new loss limitation even more perplexing is that it serves no useful policy purpose. Instead, Section 461(l)’s excess-business-loss limitation violates a foundational income tax precept by preventing a taxpayer from netting all of the costs of producing income against gross receipts. In so doing, the new rule causes such a taxpayer to be taxed on an amount greater than their income. Indeed, in some cases, it requires a taxpayer to pay federal income tax even though the taxpayer incurs a loss for the year. This accelerates negative economic impacts and slows economic recovery by delaying loss deductions at least a year.
The comments also review the scoring issue tied to Section 461(l), and how errant revenue estimates resulted in two misguided but successful efforts to extend the policy beyond its original 2026 sunset:
Under IRC §461(l), as enacted in the TCJA and amended by the CARES Act, for tax years beginning after 2020 and before 2029, an “excess business loss” from a trade or business of a noncorporate taxpayer cannot be deducted in the current year. This limitation does not apply to C Corporations, which are generally allowed to net losses against income broadly. However, any disallowed excess business loss is treated as a net operating loss (NOL) carryover. In TCJA, the provision was scored as raising $149.7B/10 years.
The excess business loss provision was originally enacted in the TCJA, then delayed by the CARES Act until 2021. The original expiration was extended twice, first by one year in ARPA ($31.008B/10 years JCT score), then again in the Inflation Reduction Act (IRA) for two additional years ($52.759B/10 years JCT score). As a result, the provision no longer aligns with the expiration of most of the individual tax provisions in TCJA. The JCT recently scored extending the provision through 2034 as raising only $21.837B/10 years – though only six years of the extension are in the window. Note the dramatically reduced revenue estimate as compared to the original or two extensions. Given the fact the excess losses become NOLs, that reduction seems more reasonable and the original scores appear to have far exceeded the actual revenues.
The letter closes with three recommendations for fixing this policy – proactively repeal the Section entirely, allow it to sunset as scheduled starting in 2029, or, failing those, mitigate its harm by allowing capital gains invested back into the business to be netted out against any losses.
Next year’s fiscal cliff will force Congress to make many difficult decisions both large and small. The Excess Loss provision is one of the issues – it is poorly conceived policy largely driven by errant revenue estimates. Congress should take a hard look at this provision next year and fix it.