CRS on Marginal Rates
As Congress puts together the big tax bill, CRS just produced another reminder of why making the Section 199A pass-through deduction permanent needs to be part of the package. This chart says it all:
The rates reflected here are important because they measure the overall tax burden imposed on new investment. As CRS notes: “The marginal effective tax rate (METR) is a forward-looking measure that estimates… the share of the rate of return on a prospective investment that is paid in taxes over the life of that investment.”
So under current law, C corporations enjoy a marginal effective tax rate that’s a full one-quarter lower than the rate paid by pass-through businesses organized as S corporations, partnerships, and LLCs. That’s now, with 199A in place. If we go off the cliff, that gap is going to grow dramatically.
What parameters did CRS use to drive these numbers? Here’s the statutory rates they used:
And here are their estimates for effective rates on corporate dividends and capital gains:
A couple points of emphasis. First, the rate estimates include all pass-through income, so the 28 percent statutory rate is a blend reflecting all the individual rates, including the lower rates paid by small pass-through businesses. For companies whose owners pay the top rates, the gap is larger.
Second, the table shows the effective rates on corporate dividends and capital gains are just above 3 percent, or a fraction of the 23.8 percent statutory rate. That is largely due to all those C corporation shareholders who don’t pay taxes, the low percentage of corporate income paid out as dividends, and the deferral benefit of capital gains.
These low rates also explain why the double tax hits family businesses hard. Public C corporations enjoy discounted rates because so many of their shareholders pay little or no tax, whereas the owners of family businesses are almost always full taxpayers. They really do pay the full double tax.
So just in time for the tax debate, our friends at CRS provide strong evidence as to why Congress needs to act. Absent 199A and rate permanence, Main Street businesses just won’t be able to compete.
Treasury Expands CTA Relief
The millions of businesses that rode out the recent roller-coaster of court rulings and chose not to file their CTA reports to date should be feeling pretty good right now. Fresh on the heels of FinCEN’s announcement that it was pausing enforcement of the Corporate Transparency Act pending the enactment of new regulations, the Treasury Department yesterday shed some additional light on what the new reporting regime will look like. Here’s the press release:
The Treasury Department is announcing today that, with respect to the Corporate Transparency Act, not only will it not enforce any penalties or fines associated with the beneficial ownership information reporting rule under the existing regulatory deadlines, but it will further not enforce any penalties or fines against U.S. citizens or domestic reporting companies or their beneficial owners after the forthcoming rule changes take effect either. The Treasury Department will further be issuing a proposed rulemaking that will narrow the scope of the rule to foreign reporting companies only. Treasury takes this step in the interest of supporting hard-working American taxpayers and small businesses and ensuring that the rule is appropriately tailored to advance the public interest.
So anyone concerned about the Trump administration’s position on the CTA – particularly after FinCEN appealed a ruling that had prevented the reporting requirements from taking effect – can breathe a sigh of relief. Here’s how President Trump reacted to the announcement yesterday:
And Treasury Secretary Scott Bessent:
This is good news all around. Not only is Treasury taking aggressive action to limit the damage the CTA poses to the small business community, but it’s evident our concerns about the law are shared by some pretty important people.
There are, however, some open questions as to how things play out from here. The Administration clearly has the ability to amend regulations issued by their predecessor, but what about the underlying statute? And what about the many court cases pending that challenge the CTA based on fundamental constitutional issues?
Our plan is to press forward in supporting the court challenges while working with Congress on repeal language. Yesterday’s announcement provides the business community with immediate relief from this onerous and unconstitutional data grab. Now it’s our job to make that relief permanent.
Treasury Pauses CTA Enforcement!
The Treasury Department’s Financial Crimes Enforcement Network (FinCEN) announced yesterday that it is ceasing enforcement of the Corporate Transparency Act (CTA) while it crafts a new set of regulations that will ultimately narrow the scope of the reporting regime. It’s a huge win for Main Street, particularly as the CTA’s reporting requirements were scheduled to take effect once again beginning March 21st.
Here’s the key passage from FinCEN’s release:
FinCEN announced that it will not issue any fines or penalties or take any other enforcement actions against any companies based on any failure to file or update beneficial ownership information (BOI) reports pursuant to the Corporate Transparency Act by the current deadlines. No fines or penalties will be issued, and no enforcement actions will be taken, until a forthcoming interim final rule becomes effective and the new relevant due dates in the interim final rule have passed. This announcement continues Treasury’s commitment to reducing regulatory burden on businesses, as well as prioritizing under the Corporate Transparency Act reporting of BOI for those entities that pose the most significant law enforcement and national security risks. [Emphasis added.]
The agency also made clear that a new proposed rule will be unveiled next month, and will likely include significant changes to the existing reporting regime:
No later than March 21, 2025, FinCEN intends to issue an interim final rule that extends BOI reporting deadlines, recognizing the need to provide new guidance and clarity as quickly as possible, while ensuring that BOI that is highly useful to important national security, intelligence, and law enforcement activities is reported.
FinCEN also intends to solicit public comment on potential revisions to existing BOI reporting requirements. FinCEN will consider those comments as part of a notice of proposed rulemaking anticipated to be issued later this year to minimize burden on small businesses while ensuring that BOI is highly useful to important national security, intelligence, and law enforcement activities, as well to determine what, if any, modifications to the deadlines referenced here should be considered.
The relief is precisely what the Main Street business community requested earlier this month. So hats off to Treasury Secretary Scott Bessent for recognizing the significant burden the CTA places on millions of law-abiding Americans and for taking swift action.
In the meantime, we look forward to reviewing the proposed regulations and remain hopeful that they will risk-based protocol for enforcement, something we’ve advocated for since Day One.
Strong Business Community Support for House Budget Resolution
The Main Street business community has come out in strong support of the House Budget Resolution scheduled to be considered this week. The simple reality is there will be no tax bill unless Congress adopts a budget that calls for one. As Karen Kerrigan noted in her letter to House leaders:
This must be a priority for Congress…passing the budget resolution is a vital first step toward that end. Renewing expiring small business provisions in the TCJA such as the 20% small business deduction, lower individual income tax rates, higher threshold exemptions on death taxes, and restoring incentives such as immediate R&D expensing and bonus depreciation, are critical to America’s innovative entrepreneurs.
For that reason, more than 100 Main Street trades and business organizations signed a letter to Speaker Johnson and Democratic Leader Jeffries in support of the budget resolution before the House. As the letter argues:
Absent action, millions of Main Street businesses organized as S corporations, partnerships, and sole proprietorships will see their taxes go up sharply next year. Taxes on these pass-through businesses will go up when they earn profits, when they invest, and when they pass their businesses on to the next generation.
Signatories of the letter include manufacturers, roofers, wholesalers, franchisers, contractors, engineers, retailers, and just about every other part of the American economy. These member businesses are located in every community in the country, and they support every aspect of life in those communities.
House members thinking about opposing this budget are setting the table for a massive tax hike on these businesses that represent 95 percent of all businesses and employ 63 percent of all private sector workers.
Congress needs to act to stop that tax hike and it needs to do it quickly to give the business community the certainty it needs and deserves.
Is There a Silver Lining in the CTA Cloud?
Yesterday’s District Court decision lifting the injunction against the Corporate Transparency Act (CTA) is a setback for Main Street.
The Texas court lifted the second and only remaining injunction blocking filing under the CTA, again forcing millions of small (and not-so-small) businesses to report all their beneficial ownership information (BOI) to the Financial Crimes Enforcement Network (FinCEN) or face fines and jail time. As the Court ruled:
In light of the Supreme Court’s order in McHenry v. Texas Top Cop Shop, Inc., the Court has determined that the motion should be, and hereby is, GRANTED. The Court’s January 7, 2025 order granting preliminary relief is STAYED pending the disposition of the appeal.
The result is filing will resume in 30 days, per guidance posted on the FinCEN website today:
With the February 18, 2025, decision by the U.S. District Court for the Eastern District of Texas in Smith, et al. v. U.S. Department of the Treasury, et al., 6:24-cv-00336 (E.D. Tex.), beneficial ownership information (BOI) reporting requirements under the Corporate Transparency Act (CTA) are once again back in effect. However, because the Department of the Treasury recognizes that reporting companies may need additional time to comply with their BOI reporting obligations, FinCEN is generally extending the deadline 30 calendar days from February 19, 2025, for most companies.
So that’s the bad news – the CTA is back in effect.
What’s the silver lining? Several opportunities for success remain. First, bipartisan legislation recently passed the House that would delay filing until the end of the year. A companion bill has been introduced in the Senate by Banking Chair Tim Scott. This legislation is unlikely to move forward on its own, but it could catch a ride on a must-pass bill like the upcoming CR. Yesterday’s ruling could be the catalyst to get that done.
Second, today’s statement from FinCEN also opens the door for further administrative relief:
Notably, in keeping with Treasury’s commitment to reducing regulatory burden on businesses, during this 30-day period FinCEN will assess its options to further modify deadlines, while prioritizing reporting for those entities that pose the most significant national security risks. FinCEN also intends to initiate a process this year to revise the BOI reporting rule to reduce burden for lower-risk entities, including many U.S. small businesses.
What exactly they have in mind is unclear, but both the 30-day grace period and the recognition that the current CTA rules overreach is a massive step forward and a signal that the new Administration intends to take a more business-friendly approach to the CTA. Is a further filing deadline delay part under consideration?
Finally, yesterday’s ruling is not the final say in the courts either. By our count, there are eleven challenges to the CTA pending in federal courts and the lead case – NSBA v. Treasury – is awaiting a decision by the Eleventh Circuit any day now. We have a good chance to win that decision but the case is all but guaranteed to end up before the Supreme Court this year either way.
So the courts might save us from this poorly-conceived law in the end, but in the meantime we need help from the Administration. Vice President Vance and Secretary McMahon have already weighed in against the CTA. Yesterday’s court ruling means it’s time for our friends at Treasury to do the same in a meaningful way.