S-Corp Comments to Senate Finance

January 17, 2014

Senator Baucus is headed to China but his discussion drafts remain, as does the January 17^th deadline for commenting on them.

So earlier today, the S Corporation Association submitted comments in response to the Senate Finance Committee’s discussion draft on international tax reform. Released late last year, the staff discussion draft was the first in a series of proposals put out by Chairman Baucus to spark conversation about how best to overhaul the tax code.

Generally speaking, the comments provided S-Corp with a good opportunity to educate policymakers (and ourselves) on the presence of pass-through businesses with international sales and operations – there’s more out there than you might think – as well as the particular challenges those businesses present to tax writers as they try to reform the code.

As with the Ways and Means discussion draft, we felt it was important to make clear that S corporations operate under different rules regarding their international operations, so the same reforms that work for C corporations might not apply to S corporations.

The full submission can be viewed here.  If you only have time to read one paragraph, this one is probably the best:

We respectfully request that the guiding principles for development of such a mechanism be that (i) individual shareholders of Subchapter S corporations only be subject to any applicable transition or anti-avoidance provisions contained in the Discussion Draft (or any future version of such draft) if such shareholders also benefit from any applicable tax relief provisions (such as the DRD), and (ii) the unique foreign tax credit rules applicable to individual shareholders of Subchapter S corporations (i.e., that such shareholders are eligible for the Section 901 direct foreign tax credit but not eligible for the Section 902 indirect foreign tax credit) be given particular consideration.

On a related issue, S-CORP helped to organize a group letter from trade groups representing large numbers of exporter to strongly oppose repeal of the Interest-Charge Domestic International Sales Corporation (IC-DISC), a long and cumbersome acronym that describes the most powerful export benefit left in the tax code.  Inexplicably, the Baucus draft would repeal it.  Here’s what the letter says:

Raising tax rates on American exporters makes little sense.  The Committee’s goal for tax reform is to make the U.S. a more attractive place to invest while reducing the incentive for firms to move jobs and facilities overseas.  The IC-DISC was enacted back in 1984 to accomplish exactly these goals.  According to the Joint Committee on Taxation, “IC-DISC was intended to increase U.S. exports and provide an incentive for U.S. firms to operate domestically rather than abroad.”  Repeal of the IC-DISC, on the other hand, would have exactly the opposite effect by raising taxes on dividends derived from exporting activity.

Fewer exports means fewer jobs.  Joining the S Corporation Association in supporting American exporters were fourteen other trade groups, including the National Small Business United, Financial Executives International, the National Tooling and Machining Association, the Metal Service Center Institute, and the Precision Metalforming Association, as well as numerous fishing and agriculture groups.

Longtime readers of the Wire will recall that S-Corp led the successful fight back in 2007 to preserve the IC-DISC.  Then as now, it makes little sense for Congress to unilaterally repeal a tax benefit that helps ensure our manufacturing, fishing and agricultural industries remain competitive in overseas markets.

Finally, the S Corporation Association joined another long list of trade groups, led by the American Institute of Certified Public Accountants, to opposed revisions to the cash accounting rules that would roll back the current cash accounting treatment of larger pass through businesses in the fields of engineering, health, accounting and law.

Camp Video

W&M Chairman Camp, who continues his tireless efforts to educate members and the public on the need for tax reform, released a 2+ minute video this week on reforming the tax code. See or read it here:

You can read the whole script here.  Here’s how it closes:

Fixing our broken tax code is the right thing to do, but we need to act.  Because the longer we wait, the further America will fall behind. Fewer jobs will be created. Take-home pay will remain stagnant. And families will continue to struggle.  America can’t afford to wait. Now is the time for Congress to fix our broken tax code.

Income Inequality & S Corporations 

Lots of press on income inequality.  We expect this issue to be a central part of the President’s upcoming State of the Union speech and the rational for many of his policies moving forward, including raising taxes on pass through businesses.  Here are a couple good WSJ articles on the subject and how it might play out.  The first is an editorial focused on where the right and left agree.  The second by our friend David Malpass focuses on how government programs drive inequality by concentrating wealth.

More on Tax Extenders 

More focus on the expired tax extenders.  We continue to believe their fate remains in limbo pending the broader tax reform discussion and the fact that the House and the Senate don’t speak to one another much these days, but the more press this issue gets, the more likelihood we’ll see action. Roll Call focused this week on how the uncertainty is affecting business behavior and how the change in leadership may accelerate consideration, while Politico suggests we could be in for a long wait.

Big Business Getting Religion on “Comprehensive” Reform 

A year ago, the press was focused on how divided the business community was over comprehensive verses corporate-only tax reform.  Some of the big boys were arguing that Congress should focus on corporate reforms and leave the individual and pass through communities out.  No more.  In the last week, both the Chamber (always our friend on tax reform) and the Business Roundtable (less so) have made clear they support reform that includes all businesses.  Here’s the key graph from the BRT op-ed in the WSJ:

Fortunately, there is broad, bipartisan consensus that current tax rates on businesses of all sizes are too high. Tax reform also means removing barriers to bringing overseas earnings back to the U.S. A study published recently by economists Karel Mertens and Morten Ravn in the June 2013 American Economic Review, for example, shows that a one-percentage-point decrease in the average corporate tax rate would result in an increase in real U.S. GDP of between 0.4 to 0.6 percent within one year. Any serious agenda for economic growth must begin with reforming taxes for all businesses – large and small.