The Experts are Wrong (Part V)
Several months ago, we asked Penn Wharton to help us score some ideas on tax reform. They politely declined. Too busy analyzing the 199A deduction, apparently. Their new paper on the deduction makes two points — the first is wrong and the second, while interesting, is not particularly helpful.
Their first point is that “Section 199A provides a 20 percent reduction in the tax rate for qualified business income relative to ordinary income tax rates.” That’s wrong. The Section 199A deduction reduces a pass-through’s Qualified Business Income, not the tax rate. The deduction makes no claims on tax rates.
This mischaracterization enables the Wharton folks to identify a non-existent “excess” benefit that rhetorically strengthens their case for changing the policy. That was never the policy, however, so there’s no excess benefit and no underlying rationale for the changes.
The straw man gets even more itchy when you incorporate the revenue raisers included in the TCJA. Remember, Section 199A wasn’t just about parity. It was about avoiding a tax hike on Main Street businesses. To calculate the real 199A benefit, you would need to net out base broadeners like the SALT cap, 163(j), the excess loss deduction cap, the loss of the manufacturing deduction, the amortization of R&E expenses, among others.
Finally, Wharton ignores the 199A guardrails. Not everybody gets a 20 percent deduction because QBI excludes foreign income and 1231 gains. So is income excluded from QBI due to the SSTB designation and other guardrails. The result is many larger pass-through businesses see a significantly reduced 199A deduction, while others see no deduction at all.
Add those tax hikes and limitations back into the calculator, and Wharton’s excess benefit quickly becomes a deficit.
Wharton’s second point, meanwhile, is interesting, but not really all that important. They observe that the interaction of 199A and the progressive rate schedule means some business owners with incomes hovering around the bracket inflection points might see a tax benefit that exceeds 20 percent. Setting aside the above objections, what of it? Again, the deduction was set at 20 percent, not the tax benefit. By comparison, the C corporation rate reduction from 35 to 21 percent is 40 percent. Talk about excess benefits!
What’s interesting is that Wharton’s so-called “excess benefit” is concentrated among lower- and middle-income pass-through owners. Larger businesses don’t benefit from this dynamic because their income stays above the top rate threshold, even after the deduction.
So if policymakers follow the Wharton recommendation, smaller pass-through businesses would shoulder the bulk of the tax hike.
In other words, not much to see here, folks. If the Wharton folks wanted to be helpful in this debate, they could study how the double corporate tax distorts behavior and hurts job creation, or how most of the tax benefit of the TCJA went to regular families and small businesses rather than billionaires, or how tax revenues have been strong post-TCJA while spending has spun out of control, or how the tax code favors public companies at the expense of family businesses. Haha, we jest. That’s not going to happen. Might as well ask Jared Bernstein why the government needs to borrow money.
Congress is going to extend the 199A deduction this year, but it will have to be without the help of the experts and the academics.
Talking Taxes in a Truck Episode 40: Decoding the CTA Legal Fight with Caleb Kruckenberg
The Corporate Transparency Act enforcement has been on quite a roller coaster in the past two months, so Main Street businesses can be forgiven if they have lost track of their filing obligations. To help shed some light on the issue, we’re joined by Caleb Kruckenberg, the Center for Individual Rights’ Litigation Director. Caleb breaks down the latest rulings out of SCOTUS and the Texas Eastern District, the interplay between cases currently being appealed in the Eleventh and Fifth Circuits, additional challenges that have been filed across the country, and the Trump administration’s response.
This episode of Talking Taxes in a Truck was recorded on January 27, 2025, and runs 41 minutes long.
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.