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FinCEN in the House
The head of the Financial Crimes Enforcement Network (FinCEN) will testify tomorrow before the House Financial Services Committee (HFSC). The hearing will focus on the Corporate Transparency Act’s implementation and is a good opportunity for Congress to learn more about this trainwreck of a law and why it should be repealed.
The Corporate Transparency Act claims to target so-called shell corporations engaged in illicit transactions like money laundering and terrorism finance, but the law defines a shell company as legal entities with $5 million or less in annual revenues or 20 or fewer employees – in other words, every small business in the United States. These businesses and other entities are required to report the personal information (BOI) of their “beneficial owners,” broadly defined to include not just owners, but every senior employee, board member, and other professionals exercising “substantial control” over the business.
So starting this year, millions of small businesses will need to report the personal information of their owners and significant others to FinCEN, and then keep this information updated on a timely basis, or face thousands in fines and years in jail. In case the law’s threat of fines and felony jail time wasn’t already clear, the description of the bill related to tomorrow’s hearing should dispel any confusion:
In addition, the bill charges the Director of FinCEN to establish a method to track delinquent businesses in its BOI reporting. Once a method is established, the Director must include that delinquency number in the quarterly report. Additionally, the Director will also be required to outline the measures taken to impose civil and criminal penalties on reporting companies that are delinquent in submitting a BOI Report.
Did we say the CTA applies to small businesses only? Not so. A serious challenge to CTA compliance and enforcement is the fact that the law’s employment and revenue thresholds are measured at the entity rather than the establishment level. This is a critical distinction and its significance appears to have eluded both the drafters of the CTA and FinCEN.
For example, you might believe the owner of a manufacturing business with $50 million in revenues and 400 employees would be too large to be a “shell” corporation and would be exempt from reporting under the CTA. You would be wrong. That is because most businesses are not organized as a single entity, but include numerous legal structures to house distinct locations and operations. We generated the illustration below to demonstrate the challenge of aggregation under Section 199A six years ago, but it applies to the CTA as well:
In our example, the business has three locations, each organized as a separate S corporation for legal and liability purposes. It also employs a fourth “administrative” S corporation that houses the payroll, contracts, bank accounts, insurance, and contracts for the business. Our reading of the CTA and FinCEN’s guidance is that the three location entities have no revenue and no employees and are required to report their BOI, as is the holding company in the tier above. This despite the fact that the enterprise as a whole has millions in contracts and hundreds of workers. It is not a “shell corporation” by any measure except under the CTA’s sloppy drafting.
It gets worse. FinCEN has been tasked with educating these businesses regarding their new reporting responsibilities, but the law’s structure makes it impossible for the agency to determine which businesses will need to report. Again, the CTA targets legal entities based on their employment, revenue, and organization. Neither FinCEN, the IRS, Secretaries of State, nor any other government agency has all this information. So how is FinCEN supposed to identify and alert – by its own estimates – 32 million entities that they need to report their BOI this year if they don’t know who to contact?
It gets even worse. The CTA creates a one-stop shopping market for cyber criminals eager to steal the critical personal information of the owners of millions of reporting businesses. Who is concerned about this danger? Here’s the warning message that’s currently emblazoned on FinCEN’s homepage:
We appreciate the warning, but the need to post it just illustrates the danger of putting all this personal information into a single federal database. It also complicates the fantasy expectations of the law’s sponsors to compel the compliance of millions of business owners who don’t know the law exists and who FinCEN can’t identify. It’s like they created the worst dating app in history, only with fines and felony convictions for failure to engage.
One last point. This whole exercise is a complete waste of time. Can somebody please ask tomorrow’s witnesses to explain how collecting the personal information of the owners and employees of 32 million small and large businesses will help identify those few engaged in illicit financial transactions? There is nothing in the collected data that would signal criminal activity to FinCEN, and the actual criminals are highly unlikely to accurately report their criminal operations. What’s a paperwork violation to somebody engaged in terrorism finance?
On the other hand, a paperwork violation that includes large fines and jail time is devastating to real business owners simply trying to make ends meet. Those owners are the real targets of the CTA, and the sooner Congress recognizes this, the sooner we can end this failed experiment.
Talking Taxes in a Truck Episode 34: Piper Sandler’s Don Schneider on the Tax Package’s Fate, Looming Debt and Deficit Crisis, and Monetary Policy Outlook
The House last week moved a large tax package. Will the Senate follow suit? To answer that and other burning questions, we spoke to Don Schneider, Deputy Head of U.S. Policy at Piper Sandler and the former Chief Economist at Ways & Means. Don explains why it might be too early to pop the champagne on the House-passed tax bill. Later he discusses the worsening spending crisis, what to expect from the Fed over the next several months, and the biggest myths he’s encountered on Twitter.
This episode of Talking Taxes in a Truck was recorded on February 1, 2024, and runs 29 minutes long.
Tax Package Heads to the Senate
Yesterday evening the House came out in strong support for the tax relief package negotiated by Chairmen Ron Wyden (D-OR) and Jason Smith (R-MO). Less than two weeks after sailing through the Ways & Means Committee, the bill passed the full House 357-70 and now heads to the Senate. Below is a look at what’s inside the bill, its prospects in the upper chamber, and what it means for the Main Street business community.
Bill’s Provisions
The Tax Relief for American Families and Workers Act is centered on reversing several of the TCJA’s key revenue raisers. The bill allows for immediate expensing of R&E costs, which businesses must currently amortize over several years; reinstates the less punitive “EBIT” cap on interest expense deductions; and restores 100-percent bonus depreciation, which is currently being phased out.
The relief is retroactive and stretches back to tax years starting in 2022, meaning many businesses will be able to claw back some taxes levied in prior years. On the other hand, the changes only run through 2025, meaning the “fiscal cliff” fight we know is coming will be even more consequential.
For families, the headline is a more robust Child Tax Credit. The bill increases the cap on the credit’s refundability, loosens its eligibility requirements, and indexes its value to inflation. Other provisions include tweaks to the Low Income Housing Tax Credit, higher 1099 reporting thresholds, and targeted relief for victims of recent natural disasters. Again, much of the individual relief sunsets in 2025, setting the stage for a major tax battle next year.
While the business provisions enjoy general bipartisan support, the CTC changes have sharply divided conservative groups, with a vigorous debate taking place at Heritage, AEI, and other think tanks. The Speaker’s support and the strong vote last night come despite these concerns opposition.
Offsets
According to the Joint Committee on Taxation, virtually all of the bill’s $78 billion price tag is offset by ending new filings for the Employee Retention Tax Credit (ERC) and ramping up enforcement of “promoters” who may be engaged in encouraging fraudulent claims. As with the CTC, this offset has generated lots of angst in the conservative tax world, and some in the small business community dislike the optics of pairing tax relief that primarily benefits bigger companies with tax hikes generated by ending a small business program.
The SALT caucus also made itself heard, but their objections appear to have been resolved by the promise of a House-vote on a separate SALT relief package. As Miller & Chevalier report:
To help win support for the bill, House Speaker Mike Johnson (R-LA) has fast-tracked action on the SALT Marriage Penalty Relief Act (H.R. 7160). This bill would double the $10,000 cap on the deduction for state and local taxes (SALT) for joint returns effective for 2023. The House Rules Committee is scheduled to consider the bill Thursday. A floor vote is expected soon after.
We’ll be interested to see how successful that effort will be, as the SALT cap enjoys support from both the right and the left.
Prospects
So where does the bill go from here? As noted, the legislation was passed out of the House in a broad bipartisan vote – in the end, 188 Democrats backed the measure, alongside 169 Republicans.
The big show of support was critical because its fate in the Senate is far from assured. While Finance Chair Ron Wyden is pushing hard to get the package across the finish line before we get too deep into the 2023 tax filing season, key Republicans are demanding a full markup and an opportunity to offer amendments, which could result in a modified product being sent back to the lower chamber for another contentious vote.
Opportunities to delay the bill in the Senate are abundant – a motivated minority can force up to seven cloture votes on a single bill – so it’s really a question of how much time the Majority Leader is willing to expend verses how committed members of the minority are to amendments and full consideration. As Punchbowl News points out, the Senate calendar is full already:
- “The Senate is currently in the middle of trying to craft a national defense supplemental, including border security money and aid to Israel, Ukraine and Taiwan. This is the chamber’s top priority right now.
- The federal government’s shutdown deadlines under the current continuing resolution are coming up very soon — March 1 and March 8. Each of these bills include hundreds of billions of dollars in spending, and party leaders will need plenty of time to get them across the floor.
- The FAA’s authority expires March 8. The Senate Commerce Committee has yet to mark up the upper chamber’s version of the FAA reauthorization. But March 8 is a hard deadline for the FAA to be reauthorized.
- Most importantly, if the House impeaches Homeland Security Secretary Alejandro Mayorkas — which could happen as soon as next week — the Senate will need to hold an impeachment trial immediately. Impeachment has the highest privilege in the Senate.”
That also presumes they want a bill – Senator Grassley was quoted saying “I think passing a tax bill that makes the president look good mailing out checks before the election, means he could be reelected and then we won’t extend the 2017 tax cuts.” Senator Tillis has expressed similar concerns, stating he is “not gonna make it easy” for the bill to move in the Senate.
Bottom Line
Despite the remaining obstacles, the odds of tax legislation passing this quarter have increased with the impressive vote in the House. S-Corp supported the package as companies have been hammered with surprise tax hikes resulting from the tighter interest expense caps and R&E amortization rules and a fix is long overdue. On the other hand, these breaks are temporary and our number one priority – Section 199A permanence – remains to be addressed. Safe to say that once the Tax Relief Act is disposed of, we’re going to hit the ground running on 199A permanence.
Talking Taxes in a Truck Episode 33: Eurasia Group’s Jon Lieber on the Tax Package, Elections, and more.
We’re just two weeks into the New Year and Washington is already abuzz with potential deals on spending and taxes. What’s in the bill? What’s out? Can lawmakers get it across the finish line? This week we’re joined by Jon Lieber, head of research and managing director for the United States at Eurasia Group. Jon makes the bull and bear cases for a tax package moving and how it all affects the 2025 fiscal cliff landscape. Later he discusses what’s at stake for Main Street businesses in the upcoming elections and the looming debt crisis facing the American economy.
This episode of Talking Taxes in a Truck was recorded on January 11, 2024, and runs 43 minutes long.
2024 Tax Policy Outlook
It still feels like the calm before the storm, but federal lawmakers are back in town to kick off what could be a surprisingly interesting year for tax policy. Below are a few items we’ll be watching closely on behalf of the pass-through business community.
Tax Package in the Funding Deal?
The big news this weekend was the deal reached by party leaders to keep the federal government funded through 2024. The deal calls for modest increases in defense spending while keeping non-defense outlays at current levels. It also executes some of the targeted spending cuts that were agreed to in the 2023 debt limit bill, most notably a $20 billion clawback of new IRS funding.
Meanwhile, Punchbowl News reports that tax chairs Wyden and Smith may soon announce a package of business tax relief sought by most Republicans along with an expanded child tax credit supported by Wyden and his conference. Smith is scheduled to brief his committee members tomorrow.
Getting a tax package done this late in the process is a long shot, but a public agreement by the two chairs would certainly help move things along. The spending package will need support from Democratic and Republicans alike, so a tax package that appeals to the same voting bloc is unlikely to upset that arrangement.
What might the deal look like? Expect a $50 to $80 billion package evenly divided between business relief — Section 174 R&E expensing, restoring the EBITDA base for 163(j), and bringing back expensing via bonus depreciation – together with an expanded Child Tax Credit.
Does the new Speaker have the votes for the spending deal? Can a tax title catch a ride on a last-minute spending bill? Could it ride alone? Would lawmakers advance tax relief without offsets? Are ERC reforms a viable pay-for? We’ll see in the next couple of weeks.
Tax Panel Turnover
An ongoing challenge all advocates face is the rapid turnover of Members and staff. Just when they begin to understand your issues, they leave! To point, of the twenty four Ways and Means Republicans who crafted the TCJA, only five remain. The turnover of staff is, if anything, more dramatic.
Expect to see lots more of that in the coming year. Of the 27 seats on the Finance Committee, 11 are up for reelection. Three members – Senators Cardin (MD), Carper (DE), and Stabenow (MI) – have already announced their retirements, Senators Brown (OH) and Casey (PA) face competitive races, and Senator Menendez (NJ) is fending off a strong primary challenge.
On Ways and Means, two Republicans are retiring while another three face competitive races. Three Democrats are retiring as well, including Representative Brian Higgins (NY) who plans to depart early next month. A change in control would reset the membership further. Republicans would drop from 24 to 17 seats so that, even with turnover, junior Republicans could lose their seats. Democrats, on the other hand, would need to add at least ten new members.
All of this is to say that, as we inch closer to the “fiscal cliff” in 2025, the education challenge before S-Corp and the Main Street Employers coalition will be daunting. Time to get busy.
Regulatory Activity
Tax Notes has an interesting article on the regulatory outlook at Treasury. As Jonathan Curry reports:
It’s been nearly three years since President Biden took office, but the legislative and regulatory reckoning that many estate planners feared has yet to materialize. And 2024 looks to be no different. A risk-averse Treasury and a divided Congress — in an election year, no less — means wealthy individuals and families shouldn’t expect significant changes in the estate planning advice they receive next year, observers say.
Not to poke a sleeping bear, but Treasury’s lack of aggressive rulemaking has been a welcome respite given everything else going on – COVID, Build Back Better, inflation, supply chain disruptions, labor shortages. Sometimes it is nice to have a little stability, no? Will this period of calm extend through the new year?
Beth Shapiro Kaufman of Lowenstein Sandler LLP also noted that the current IRS and Treasury priority guidance plan contains fairly mundane estate and gift tax items and said it’s unlikely there’s a sleeper project in the works that hasn’t been telegraphed. The government typically doesn’t devote much time to projects that aren’t on the guidance plan unless there’s newly enacted legislation that takes priority, she said.
Tax Notes is focused on estate tax rules, but it could also have applied to other areas of the Code. Compared to other agencies, Treasury has been very restrained. For Main Street, that’s a good thing.
Court Activity
Lots of tax policy before the courts these days, starting with the Moore case. The SCOTUS heard oral arguments back in December and a decision is due this Spring. We’ve written extensively on the case (here, here, here) but suffice to say the feedback from orals is we should expect a modest decision that restores the old definition of income without ending the Tax Code as we know it, as many breathless commentators warned. So that’s that, but Moore isn’t the only case before the courts. Here are three more worth your attention:
- Partnerships and SECA: Tax professionals expect a spike in audits of limited partnerships following a recent tax court opinion. Soroban Capital Partners LP v Commissioner found that LPs are not automatically exempt from SECA. If the ruling survives, many limited partners will no longer be able to claim the SECA exemption. It also opens the door for audits under a compliance campaign launched back in 2018. Just the latest chapter in a long-running campaign to expand the application of payroll taxes to more business income.
- Business Valuation: Business valuations are always contentious. This time, the SCOTUS has agreed to hear Connelly v. United States where the Eight Circuit sided with the IRS that life insurance proceeds used to redeem a deceased shareholder’s stake would increase the fair market value of the business and, as a result, the value of the shareholder’s estate too. Estate planners are watching this one closely. Can you pronounce “amicus”?
- Antio v. Department of Revenue: This Washington State case has implications for investors and fund managers nationwide. In Antio LLC v. Washington, the Washington state Department of Revenue applied the state’s 1.5 percent business and occupation (B&O) tax to the plaintiff’s investment income. Prior to this, most investment income had been exempt from the B&O tax. It’s unclear how the state would apportion the investment income of non-residents, or the gains from funds invested in Washington state businesses, so you don’t need to live in Seattle to care about this. The state supreme court is scheduled to hear the appeal later this Spring.
State Activities
In a recent TTT Podcast (that’s short for “Talking Taxes in a Truck”!), we chatted with Jared Walczak of the Tax Foundation about all the tax policies moving at the state level. As Jared noted, it’s largely a good news story, but there are threats out there:
- Rate Cuts: According to the Tax Foundation, fourteen states will have reduced individual income tax rates this year — Arkansas, Connecticut, Georgia, Indiana, Iowa, Kentucky, Mississippi, Missouri, Montana, Nebraska, New Hampshire, North Carolina, Ohio, and South Carolina. Nice to see Connecticut trying something new! (They also amended their SALT Parity tax to make it elective, just like we suggested…. six years ago.)
- SALT Parity: We are declaring our SALT parity efforts to be over. Of the 41 states where the reform offers benefits, 37 states have acted. The rest can fend for themselves or miss out on the $20 billion a year this effort is saving pass-through businesses. Come to think of it, we’re not done with SALT. We need to educate states on why they should keep the election in place regardless of what happens to the federal cap – you save either way — plus there’s cleanup to do in California, Louisiana, and elsewhere. Nevermind.
- Rate Hikes: A couple of states will increase their rates in 2024 – Michigan and California. The rate hike in Michigan is fairly modest but California’s effort deserves special attention. Their top rate is rising from 13.3 percent to 14.4 percent! That’s about three times the average. Will the last pass-through business operating in California please turn off the lights when you leave? Thank you.
- Wealth Taxes: Last year, there was a concerted effort by a handful of states to push for wealth taxes. As reported by the Washington Post: “A group of legislators in statehouses across the country have coordinated to introduce bills simultaneously in seven states later this week. … Some of the state bills resemble the ‘wealth tax’ that Sen. Elizabeth Warren (D-Mass.) pitched during her 2020 presidential candidacy.”
The good news is these proposals went nowhere and don’t appear to have traction this year either. In California, the notorious “Wealth and Exit” tax – they really expect to tax all those businesses leaving the state (see above) — may be getting its own hearing this week, but Governor Newsom has already killed its chances. “Wealth tax proposals are going nowhere in California,” said his spokesman. Apparently there are limits, even in California.
Conclusion
So plenty of activity on the tax front, even in a “quiet” year where the elections are grabbing all the headlines. We’ll be keeping an eye on these and other developments important to the pass-through business community as 2024 gets into full swing. And we’ll be laying the groundwork for what promises to be a massive undertaking in 2025. As with the TCJA, the coming fiscal cliff poses an existential threat to the pass-through community and Main Street. We plan to be ready.