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.
SBA Administrator Pushed on 199A
Earlier this week the House Small Business Committee held a hearing entitled “Holding the SBA Accountable” which featured testimony from Isabel Guzman, head of the Small Business Administration.
While most of the hearing focused on other issues, there was an important exchange between Administrator Guzman and Congresswoman Beth Van Duyne regarding Section 199A and its impact on the small business community:
Van Duyne: Last week, Senator Wyden held a hearing regarding the 2025 tax debate and where he stated, quote, Congress needs to address the passthrough loophole that Trump created in 2017. He claimed it was all about small businesses, but it was another bait and switch. Do you agree with the Senator that this is a loophole?
Guzman: Look, as I have shared with this Committee before, you know, the I am not here to talk about tax policy. That is not in my policy bandwidth.
Van Duyne: But do you think that small businesses are getting benefit from the Tax Cuts and Jobs Act of 2017?
Guzman: What I will say is that the tax cuts…that lean towards supporting the large with permanent tax cuts for large corporations and temporary tax cuts for small businesses, so that Tax Cuts and Jobs Act is not good for small businesses. [Emphasis added]
That’s an interesting statement given that pass-through businesses – which make up 95 percent of businesses operating in America, the vast majority of which are small – are eligible for the Section 199A deduction. Thanks to the TCJA, these firms saw their top marginal rates go from 39.6 percent down a full 10 percentage points due to the combined lower marginal rates and the 20-percent deduction.
Administrator Guzman is parroting the often-repeated critique that Section 199A disproportionately benefits upper-income taxpayers. But as S-Corp President Brian Reardon pointed out in an op-ed earlier this year, that analysis is deeply flawed:
Large passthroughs do get the section 199A deduction, but only if they employ lots of people or make significant investments. That’s because section 199A imposes so-called guardrails on large passthrough businesses, so, for example, they only get the deduction up to 50 percent of the W-2 wages they pay. A 2019 Treasury study shows how these guardrails exclude about 40 percent of their income from the section 199A benefit, while a recent Congressional Research Service report observes that the section 199A deduction is neutral with regard to progressivity.
Finally, the latest S-Corp Section 199A study rebuffs the Administrator’s claims. As our EY analysis found, Section 199A supports 2.6 million jobs, $161 billion of employee compensation, and $325 billion of GDP. If those figures aren’t good for small businesses and the broader US economy, we’re not sure what is.
S-Corp Submits Comments to Main Street Tax Team
Another update on the Ways & Means “Tax Team” front. The S Corporation Association today submitted its comments making the case for fair treatment of pass-through businesses, including a permanent Section 199A pass-through deduction. The letter is addressed to the Main Street Tax Team, one of ten teams organized by Ways & Means Chairman Jason Smith to identify solutions to the 2025 fiscal cliff, and it covers the various key aspects of how pass-through businesses should be treated under the Tax Code. As the letter begins:
The United States is unique among developed countries in the emphasis it places on pass-through business structures – S corporations, partnerships (including Limited Liability Companies), and sole proprietorships. Pass-through businesses make up 95 percent of all U.S. businesses, they employ 62 percent of private sector workers, and they contribute the majority of business income to our Gross Domestic Product (GDP).
This reliance on pass-through businesses is not an accident. It was done purposefully by successive Congresses seeking to strengthen the role of small- and family-owned businesses in the American economy. These deliberate actions date back to the creation of the S corporation rules in 1958 and they have worked to the benefit of the businesses themselves, the people they employ, and the communities they serve. America has more jobs, higher wages, and a more diverse economy because of the strength of its pass-through business sector.
It is critical for Congress to understand this history as it seeks to address the expiration of provisions under the Tax Cuts and Jobs Act (TCJA), including the Section 199A deduction, next year.
The Correct Way to Tax Businesses
One reason the pass-through business structure has been so successful is that it is the correct way to tax business income. If Congress were to start from scratch, the pass-through treatment of business income, particularly how S corporations are taxed, would be the starting point. As Eric Toder of the Tax Policy Center told the Senate Finance Committee in 2011:
I would… note that the ideal way to tax business income is the way we tax S corporations. We would like to attribute the income to the owners and the only reason we have a corporate tax is for large and frequently traded companies – very hard to do that and identify the owners who would pay the tax. So where you can do that, we should do that, and that is the right treatment.
Pass-through taxation reduces opportunities for gaming and it ensures a more progressive outcome for business owners – those with modest means pay lower rates while wealthy owners pay higher rates.
For public corporations, pass-through treatment may not be feasible. But allowing all closely-held businesses the option to use the pass-through structure improves tax administration, progressivity, and simplicity while making the U.S. more competitive.
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