Family Business Valuation under Attack?
In a development that could harm valuations of S corporations and other family-owned businesses, the Treasury Department appears poised to issue guidance limiting discounts under section 2704. Such action has been hinted at for a while, but people began to pay real attention following comments from Catherine Hughes, head of Estate and Gift Tax Attorney-Advisor at Treasury, before the ABA’s Estate Planning breakfast back in April.
It’s not exactly clear what the Treasury has in mind, but Hughes referred the ABA audience to proposals the Administration included in their annual budget offerings prior to 2014. We took a hard look at those proposals back in 2013, and if you’re looking for an indicator of where Treasury is headed, that’s a good place to start. MPI, a business valuation and advisory firm, has a nice overview on their blog.
For months, we’ve been hearing that tax writers would like to couple some version of tax reform with a long-term highway bill. What the tax reform package would look like was unclear (international, patent box, extenders?) as was the funding source for the highway bill (deemed repatriation?).
Back-to-back hearings on highway funding next week should shed a little light on the latest thinking. Both the House Ways and Means and Senate Finance committees are holding hearings exploring the various options Congress could use to pay for highways. As Senator Hatch pointed out, “While many in Congress agree we should aim for a long-term highway bill, the problem is often agreeing on how to pay for it.” As usual, it’s all about the payfors.
The Ying-Yang of Tax Reform
McConnell focused on the challenges, particularly in bridging the policy gulf between President Obama and Republican Congress. “The President is not interested in revenue neutrality, and he’s not interested in treating all taxpayers the same, so I don’t think we’ll get there on comprehensive [tax reform].”
Ryan, meanwhile, continued to accentuate the positive. “The question is: Can we take a couple of steps in the right direction?” Ryan made clear he believes the answer is “yes”, particularly with international tax policy and extenders. So international, extenders, and highways? Something to watch.
Tax Foundation on Revenue Neutral Corporate Tax Reform
The Tax Foundation released another study on pass through businesses this week. You’ll recall they put out a really great paper on pass-through taxation in January that focused on the state of the pass through business community. Our summary – it’s large, dynamic, and employs a lot of people!
This new study dives right into the policy debate over corporate tax reform. Should Congress enact deficit neutral legislation that cuts the rates for C corporations only? According to the Tax Foundation, the answer is “no” unless you’re willing to raise taxes on pass through businesses in the process. They conclude “the impact of the elimination of business tax expenditures for pass-through businesses with no rate offset could reduce the size of the economy by 0.5 percent [or $84 billion in the long-run].”
Small Business Confidence
There’s a growing number of small business confidence surveys out there.
The Grand Daddy is NFIB’s Small Business Optimism Survey, which has been reporting quarterly since 1973 and monthly since 1986. NFIB uses a sample of nearly 4,000 small businesses, typically with a 15% response rate, and releases the information on the second Tuesday of each month.
This week’s survey gives a lukewarm assessment of the economy—“it’s moving ahead, but at an uninspiring pace” while the outlook for Q3 is “more of the same.” Two bright spots came in earnings and wages, which posted their best survey readings since October 2005 and January 2008, respectively.
A second survey, from Wells Fargo and Gallup, has been released on a quarterly basis since 2003. Their data is drawn from over 600 phone interviews with small business owners. While optimism among small businesses recorded a slight decline this Spring, overall “there’s more certainty in today’s economy than at this time last year, and we’re seeing more promising trends,” according to Lisa Stevens, head of Small Business at Wells Fargo.
Finally, there’s a brand new survey from Thumbtack, which focuses on hard-to-reach businesses such as seasonal employers and large swath of sole proprietors. Using their online community of professionals, Thumbtack is able to receive over 10,000 responses to their survey. The populations might be different, but Thumbtack’s results mirror those of NFIB—business owners are “somewhat positive” about the economy. Exploring the state-level results reveals some interesting data, particularly the discrepancies in ease of hiring and doing business in states with low regulatory burden compared to those with more red tape, typically in the Northeast and on the West Coast.
We’ll be keeping track of these surveys in future posts. Perhaps it’s time for a survey of the surveys?