The Winds of Change (and Taxes)
The Senate confirmed Scott Bessent to run the Treasury Department yesterday, which means there’s a new sheriff in town. That’s good news for the millions of Main Street businesses targeted by the Biden Administration for higher taxes and more onerous regulations.
But Main Street didn’t have to wait for Bessent’s confirmation to see how the landscape has changed under Trump. We’ve already seen material differences that promise relief now and in the future.
Example one is their approach to Europe’s Pillar 2 minimum tax campaign. Pillar 2 is a poorly disguised effort by the EU to target large US multinationals for more tax, but it has Main Street implications too. Here’s what we told the Global Competitiveness Tax Team last fall:
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 by the indirect owner 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.
There is an additional challenge. Most S corporations with foreign operations make a check-the-box election to treat their foreign subsidiaries as branches and thus all the branch income – less applicable foreign tax credit offsets – flows onto the S corporation return and is taxed at the shareholder level. As currently drafted, however, this foreign subsidiary income is not eligible for the carve-out referenced above where the direct owner of the S corporation is a taxpayer….
Finally, in an issue that affects both S corporations and C corporations, it is unclear whether any Pillar 2-type minimum tax payments would be credited against the company’s US tax liability, as are other foreign taxes paid by US businesses. Ensuring that a business receives credit for the foreign taxes it pays is a critical means of ensuring US businesses are not penalized for operating overseas.
So Main Street businesses with oversees income were at risk of double taxation under Pillar 2. What’s the Trump Administration doing to protect them? Pulling out of Pillar 2. Here’s what the Executive Order issued on January 20 says:
The OECD Global Tax Deal supported under the prior administration not only allows extraterritorial jurisdiction over American income but also limits our Nation’s ability to enact tax policies that serve the interests of American businesses and workers. Because of the Global Tax Deal and other discriminatory foreign tax practices, American companies may face retaliatory international tax regimes if the United States does not comply with foreign tax policy objectives. This memorandum recaptures our Nation’s sovereignty and economic competitiveness by clarifying that the Global Tax Deal has no force or effect in the United States.
Amen to that.
Example two is FinCEN’s recent announcement that it will not challenge a court order blocking enforcement of the Corporate Transparency Act. S-Corp readers know firsthand the roller-coaster of actions by the courts and FinCEN over the past two months, during which the filing deadline was blocked, then stayed, then blocked again, etc. This legal carnival ride over the holidays was harming tens of millions of businesses, but didn’t seem to bother the previous administration. They were determined to implement the CTA regardless of the cost.
No more. Under Trump, the Treasury Department and FinCEN are acting like adults and pausing enforcement until the courts can run through the eleven federal cases challenging the law’s legitimacy. Here’s the announcement:
On January 23, 2025, the Supreme Court granted the government’s motion to stay a nationwide injunction issued by a federal judge in Texas (Texas Top Cop Shop, Inc. v. McHenry—formerly, Texas Top Cop Shop v. Garland). As a separate nationwide order issued by a different federal judge in Texas (Smith v. U.S. Department of the Treasury) still remains in place, reporting companies are not currently required to file beneficial ownership information with FinCEN despite the Supreme Court’s action in Texas Top Cop Shop. Reporting companies also are not subject to liability if they fail to file this information while the Smith order remains in force.
So business owners can return to running their businesses while the courts do their work. How rational.
A final example of how the policy winds have shifted comes from Bessent’s nomination hearing. Under Biden, the focus was on how to raise taxes. Under Trump, its how to keep them low. Here’s the new Secretary:
As we begin 2025, Americans are barreling towards an economic crisis at year’s end. If Congress fails to act, Americans will face the largest tax increase in history, a crushing $4 trillion tax hike. We must make permanent the 2017 Tax Cuts and Jobs Act and implement new pro-growth policies to reduce the tax burden on American manufacturers service workers and seniors. I have already spoken with several members of this Committee, as well as leaders in the House about the best approach to achieving these important goals together.
So lower taxes, less silly regulation, and a stronger defense of our economic interests overseas. It’s early, but clearly a good start for Main Street.
CTA Filing Pause Still in Effect
Good news! While the Supreme Court yesterday sided with the federal government in striking down an injunction against the Corporate Transparency Act, FinCEN quickly stepped in with an announcement that the filing requirements remain on hold so long as a second ruling remains in place. Here’s the notice currently posted on FinCEN’s website:
On January 23, 2025, the Supreme Court granted the government’s motion to stay a nationwide injunction issued by a federal judge in Texas (Texas Top Cop Shop, Inc. v. McHenry—formerly, Texas Top Cop Shop v. Garland). As a separate nationwide order issued by a different federal judge in Texas (Smith v. U.S. Department of the Treasury) still remains in place, reporting companies are not currently required to file beneficial ownership information with FinCEN despite the Supreme Court’s action in Texas Top Cop Shop. Reporting companies also are not subject to liability if they fail to file this information while the Smith order remains in force. However, reporting companies may continue to voluntarily submit beneficial ownership information reports.
As a reminder, yesterday’s SCOTUS decision addressed whether the nationwide injunction against the CTA could remain in place pending the outcome of an appeal in the Fifth Circuit. Here’s how the litigants in the first Texas case described the situation after news of that ruling:
Although the Court’s decision lifts the injunction blocking the enforcement of the CTA in this case, FinCEN is still barred from enforcing the law under a second order issued in January. That second order is not automatically lifted by today’s decision. The ball is now in the Trump administration’s court to extend or stay the filing deadline and protect millions of neighborhood associations, small businesses, and community organizations from the CTA’s unjustified burden, prevent them from incurring billions of dollars in compliance costs, and give Congress the time it needs to reconsider this mistaken policy.
But as the Wall Street Journal points out, a separate ruling issued earlier this month also blocks enforcement of the FinCEN rules, including the January 1 filing deadline:
A nationwide order issued on Jan. 7 by Judge Jeremy Kernodle, also of the Eastern District of Texas, in a separate case challenging the CTA apparently remains in place. That order continues to block the implementation and enforcement of the CTA nationwide. The court docket in the case doesn’t show an appeal by the government.
…“Our position is that our injunction is still in effect,” said Chance Weldon, a lawyer for plaintiffs in the case. Weldon said the government is still within the window to appeal.
And last, the Journal of Accountancy:
However, the Texas Public Policy Foundation (TPPF), which represented the plaintiffs in the second case, Samantha Smith and Robert Means vs. U.S. Department of Treasury, said in a news release Thursday that its case is not affected by the one in which the Supreme Court issued a stay.
“As the judge who issued the order emphasized, TPPF’s case is based on different facts and arguments from the one in front of the Supreme Court,” the release said. In that case, the judge cited 5 U.S. Code Sec. 705, relief pending review, which says a reviewing court “may issue all necessary and appropriate process to postpone the effective date of an agency action to preserve status or rights.”
…”There is still a BOI injunction in place,” Melanie Lauridsen, the AICPA’s vice president–Tax Policy & Advocacy, said in a LinkedIn post.
So while today’s announcement from FinCEN provides some much-needed relief, it’s safe to say confusion still reigns among the Main Street business community, which woke up to the following headlines:
- Washington Post: Supreme Court Clears Ways for Corporate Transparency Law to Take Effect
- Courthouse News Service: Supreme Court lifts pause on Corporate Transparency Act
- Bloomberg Law: Supreme Court Allows Corporate Transparency Act Enforcement
- HBS Dealer: The Beneficial Ownership Information rule is back
The new Trump administration has an opportunity to put the CTA’s filing requirements on hold for good and give Main Street the certainty it needs. One of two possible next steps should do the trick:
- Issue an EO or other statement officially delaying the filing deadline to the end of the year to give businesses certainty and the courts time to work through all the arguments; and/or
- Formally announce it will continue to not challenge the second ruling, leaving that decision intact and the CTA filing requirements on hold.
We know many key members of the Trump administration (including Vice President JD Vance and former SBA Administrator Linda McMahon) already oppose the CTA and its onerous data grab. Yesterday’s court ruling gives them a chance to put that opposition into action. Let’s hope they’re paying attention.
Main Street Tax Certainty in the House (and Senate)
Earlier today Senator Steve Daines and Congressman Lloyd Smucker reintroduced their Main Street Tax Certainty Act, legislation to make permanent the Section 199A deduction. The bills mirror S. 1706 and H.R. 4706 from last Congress, meaning the campaign to protect Main Street from looming tax hikes is once again a bicameral and bipartisan effort.
The legislation introduced today builds on our prior success in a big way. Whereas the previous House bill garnered support from 91 original cosponsors – a significant feat in and of itself – Congressman Smucker’s bill was released today with the backing of 151 original cosponsors. It’s the same story in the Senate, with 36 original cosponsors signing onto Senator Daines’ legislation compared to 14 last time around.
Also notable is the fact that every member of the Senate Republican Leadership team backed the Main Street Tax Certainty Act, as well as the full roster of Republicans on the House Ways & Means Committee. That’s in addition to the more than 235 trade associations that joined our letter thanking Senator Daines and Congressman Smucker on this critical issue.
And it’s not just Congressional tax-writers who support 199A permanence, as we saw during yesterday’s Member Day hearing. Here’s what Congressman Tony Wied (R-WI) had to say:
I strongly support making the 199A tax deduction permanent to provide much needed relief to the small businesses, working families and farmers in my district and across the country. Should Congress fail to renew 199A, 52,230 small businesses in Wisconsin’s 8th District would be hit with an unconscionable 43.4% tax rate. Any limitation or reduction in 199A would unfairly target and hurt middle class taxpayers and the small businesses who are the lifeblood of our economy.
And Congressman Tom Barrett (R-MI):
Our small business owners, the backbone of our local economy, will face even greater challenges. For example, nearly 44,000 small businesses in mid-Michigan will see their tax rate rise to 43% if the Small Business Deduction expires… These numbers are not just statistics—they are stories of struggle and sacrifice. They represent families deciding between paying their bills or putting money aside for the future. Small business owners weighing whether they can afford to expand or hire.
And Congressman Tim Moore (R-NC):
Western North Carolina’s economy also relies on small businesses – our state is home to over 964,000 small businesses, which employ nearly half of our workforce. These business owners have told me that without the certainty of the TCJA’s small business deductions, their ability to invest in new equipment, hire workers, and expand operations would be at risk. Making these provisions permanent isn’t just good policy, it’s essential to their survival. Because if these provisions were to expire, North Carolina would lose 5.9 million jobs, $540 billion in wages, and $1.1 trillion in economic output.
The bottom line is that Section 199A is more than just a tax provision. It protects thousands of local communities from fewer jobs and more boarded up buildings, reduces the tax burden on local businesses to make them more competitive, and allows multi-generation businesses to stay family-owned.
We are extremely grateful to Congressman Smucker and Senator Daines for their leadership on this issue, as well as the dozens of lawmakers that supported the Main Street Tax Certainty Act today. S-Corp and the Main Street Employers Coalition are looking forward to working with all of you to get this critical legislation enacted, before it’s too late.
Main Street Rallies Around 199A Permanence
More than 230 trade associations came out in support today of legislation to make permanent the Section 199A deduction. Appropriately named the Main Street Tax Certainty Act, the bill is set to be reintroduced tomorrow by Senator Steve Daines (R-MT) and Representative Lloyd Smucker (R-PA), two of the Main Street business community’s staunchest allies.
The deduction was enacted in 2017 to encourage job creation and new investment by private businesses. It also helps private companies compete with public corporations. Without the deduction, pass-throughs would face rates up to 16 percentage points higher than their publicly-traded competitors. The challenge is Section 199A will expire at the end of this year absent congressional action.
The letter, led by our Main Street Employers Coalition, makes the case for permanence and was signed by more than two hundred and thirty trade associations, a strong show of support that highlights just how critical the provision is:
Pass-through businesses are the backbone of the American economy. They account for 95 percent of all businesses and employ 63 percent of all private sector workers. They also form the economic and social foundation for thousands of communities nationwide. Absent their efforts, those communities would face a future of lower growth, fewer jobs, and more boarded up buildings.
Despite its importance, the Section 199A deduction is scheduled to sunset at the end of 2025, even as the businesses it supports continue to struggle with rising prices, labor shortages, and supply chain disruptions. A recent EY study found the loss of Section 199A would put 2.6 million jobs at risk.
Making the Section 199A deduction permanent will help Main Street compete with large public corporations, lead to higher economic growth and more employment, and help prevent a significant tax hike on the very businesses we rely on to drive our economy. Numerous studies by economists Barro and Furman, the American Action Forum, DeBacker and Kasher, EY and others found Section 199A permanence would result in improved parity for Main Street businesses and higher levels of economic growth.
You can read the entire letter here. For more information about the Main Street Employers coalition and our efforts to make Section 199A permanent, click here.
The C SALT Loophole
Last month, the Bipartisan Policy Center put forward some suggestions on how to address the pending sunset of the State and Local Tax (SALT) cap, including rolling back the pass-through “SALT Parity” laws we helped enact in 36 states. A couple of thoughts.
Pass-Through Parity
First, the SALT cap played a big role in our efforts to ensure pass-through businesses were treated fairly under the TCJA. The SALT cap raises huge amounts of revenue ($100 billion-plus per year) and about 20-30 percent of that is paid on pass-through income. For comparison, that’s about half the total revenue impact of the 199A deduction, so the loss of SALT deductions significantly undercut any 199A benefit.
For reasons unknown, the TCJA did not extend the SALT cap to so-called “C SALT” — state income taxes paid by C corporations. Those taxes remain fully deductible.
This imbalance – C corporations deduct their SALT, S corporations subject to the cap — exacerbated the rate disparity already imbedded in the TCJA. As we wrote at the time:
[The Senate bill] ignores the effects of repealing the SALT income tax deduction for S corporations while preserving it for C corporations. Preventing businesses from deducting this business expense could raise marginal rates on S corporations significantly, depending on which state they reside in. Those in Wyoming, for example, would see no effect, while those doing business in California would see their marginal rates increased by five-percentage points. On average, SALT repeal raises effective marginal rates by between two- and three-percentage points.
The initial Senate draft called for a top corporate rate of 20 percent, whereas the top pass-through rate was 38.5 percent. Add in the NIIT and the disparate SALT treatment, and the top pass-through rate was around 45 percent. Even companies that received the new 199A deduction paid close to 40 percent – or about twice the corporate rate. (For those worried about the double corporate tax, we addressed that here.)
During Senate consideration, S-Corp and its allies worked to 1) lower the top individual rate and 2) increase and broaden the 199A deduction, resulting in more equitable treatment. We were unable, however, to get the bill’s sponsors to budge on the SALT disparity.
So our Main Street Employer coalition worked with the states to allow S corporations and other pass-throughs to elect to pay their SALT at the entity level, thus restoring their SALT deduction by affording them the same treatment that C corporations receive. Thirty-six states (out of forty-one where they would be applicable) have adopted these laws. (What is your damage, Pennsylvania?)
Which brings us to our first quibble with the BPC write-up. Here’s what they say:
Since the SALT cap was enacted in 2017, pass-through business owners have taken advantage of state government level workarounds to deduct more than the allowed $10,000 in SALT from their federal taxes. Thirty-five states allow pass-throughs to pay SALT at the entity level, meaning individual owners avoid the $10,000 SALT deduction cap. This violates the spirit of TCJA’s SALT cap. Closing state workarounds for pass-through entities would ensure that pass-throughs are subject to the same caps as individuals.
Au contraire. The SALT Parity bills don’t violate the “spirit” or any other aspect of the law. The difference is they can now elect to have their SALT paid by the entity and deductible as a business expense – just like C corporations. Here’s the operative argument in the legal analysis we did for Treasury:
The Internal Revenue Service (the “Service”) has consistently held that income and other taxes imposed upon and paid by pass-through entities are simply subtracted in calculating nonseparately computed income at the entity level, and are not separately passed through or incorporated into the various provisions and calculations applicable to itemized deductions at the individual level, such as the standard deduction, alternative minimum tax and the Pease reduction. In discussing the final provisions of the Tax Cuts and Jobs Act,1 the Conference Committee Report explicitly reiterated and relied upon this principle in describing the scope of new section 164(b)(6) of the Code.
The TCJA’s SALT policy was not that pass-throughs don’t get their deduction anymore, but that SALT paid by individuals would now subject to the cap. SALT paid by pass-throughs directly would still be deducted as business expenses. The Treasury Department agreed with our analysis in Revenue Ruling 2020-75, stating:
In enacting section 164(b)(6), Congress provided that “taxes imposed at the entity level, such as a business tax imposed on pass-through entities, that are reflected in a partner’s or S corporation shareholder’s distributive or pro-rata share of income or loss on a Schedule K-1 (or similar form), will continue to reduce such partner’s or shareholder’s distributive or pro-rata share of income as under present law.”
Long story short, our SALT Parity laws are consistent with the spirit, the letter, and every other aspect of the TCJA.
The Corporate SALT Loophole
Our second quibble with the BPC recommendation is they separate the question of SALT deductions for pass-throughs and C corporations. Their write-up argues:
Closing SALT workarounds for pass-through businesses without addressing C-SALT could lead to more inequitable tax treatment. To address this imbalance, policymakers could eliminate deductibility for SALT on corporate income taxes while continuing to allow corporate deductions for wage, sales, and property taxes paid.
Well amen for somebody recognizing that allowing C SALT deductions while capping everybody else is patently inconsistent. Why should the SALT cap apply to the local hardware store but not Home Depot?
Beyond that, the BPC comes close to the truth but doesn’t quite grasp it. The only reason our SALT Parity reforms work is because C corporations still deduct all their SALT. If Congress were to cap C SALT deductions, they would also cap the deductions of pass-throughs, even for those taxes paid at the entity level.
It’s a C corporation loophole, not a pass-through loophole.
Conclusion
So if the new Congress wants to stop disadvantaging Main Street, it can take one of two approaches. Either keep the status quo where individuals are subject to the SALT cap but businesses – all businesses – are not, or extend the SALT cap to include all taxpayers, including C corporations.
We prefer the first approach as it promises lower taxes for all businesses. If Congress chooses the second approach, on the other hand, it would raise enormous amounts of revenue, all of which should be used to offset the cost to making the 199A deduction permanent. It’s only fair.