2015 was a terrific year for the S Corporation Association. We saw the shorter, five-year built-in gains recognition period made permanent, we organized the Main Street business community into a coherent advocacy force, and we successfully blocked misguided efforts to enact President Obama’s corporate-only tax reform plan.
For 2016, our goal is to build on these successes to ensure more legislative wins this year and beyond.
- That means educating policymakers on how taxes on S corps already went up sharply in 2013 and working to enact legislation to repeal that tax hike.
- It means building out our pass-through business coalition to ensure that S corps and other Main Street businesses are at the center efforts to rewrite the Tax Code, not just an afterthought.
- And it means tackling new obstacles to S corp capital accumulation and growth like the prohibition against non-resident alien shareholders and other restrictions unique to S corporations that limit your access to capital.
That’s it in a nutshell. For a more detailed account of our efforts in 2015 and what we have planned in 2016, click here to read our Chairman’s annual letter to the S Corporation Association membership.
Oh, and Happy New Year!
Brady Identifies the Challenge
Will Congress reform our international tax rules this year? Ways and Means Chairman Kevin Brady’s (R-TX) recent interview with Politico’s Ben White gives us some insight. You can watch the entire interview here. Our takeaway was that Brady did a good job of identifying both the opportunities and challenges confronting tax reform advocates this year.
On the opportunity side, Brady announced that he intends to have the Ways and Means Committee mark up an international plan later this year. American companies continue to invert, the BEPS implementation process is moving forward, and a vocal contingent of congressional reform advocates continue to refine their plans, so there are lots of catalysts for action. The Chairman is “optimistic” they can act on international reforms this year, and it’s likely the new Speaker will support him.
But how does action on international fit with the broader tax reform vision Brady laid out in the interview? Brady called for a “tax code built for growth” that is “fair, flatter, and simpler” and where “small businesses aren’t paying more than large businesses.” The Chairman has been a longtime advocate for Main Street businesses – he spoke at the release of our first EY study on pass-through businesses – and he understands the important role these businesses play in job creation and investment.
Those two visions – the desire to move international this year and the recognition that tax reform must address the higher rates imposed on pass-through businesses — highlight the challenge facing the new Chairman. How he resolves it is unclear, but we know Brady understands the position of Main Street employers and we look forward to working with him to craft a solution.
Hatch on the Double Tax
In a positive development, Senator Orrin Hatch (R-UT) and the Finance Committee staff are planning to release a proposal to eliminate the double corporate tax. According to Politico:
Hatch’s plan takes aim at the double taxation of corporate profits, one of critics’ chief complaints about the current business tax system. Details are sketchy, but the Utah Republican is seriously considering giving companies a deduction for the money paid out to shareholders in dividends. That would have the effect of canceling out corporate income taxes.
“The corporation will not have the double taxation anymore,” said Hatch. “It would go a long way towards topping some of these inversions.”
He hopes to release his plan, which is still being written, “in about a couple weeks.”
Tax Notes added:
One tax lobbyist familiar with discussions around corporate integration said Hatch “is looking at this as more of an incremental approach, basically the art of the doable.” He added that Hatch has not given up on “big comprehensive reform, but if it proves to be not much easier even in a new administration, then this could become a fallback to address competitiveness.”
Specifics will have to wait until the plan’s release, but our understanding of the package is that it would:
- Eliminate the double tax through the use of a “dividends paid” deduction;
- Be revenue-neutral without the usual base broadening associated with tax reform; and
- Be a stand-alone proposal that is not accompanied by rate cuts, innovation boxes, or other provisions not directly related to the double tax.
On the surface, this looks like a really worthwhile effort. The benefits of eliminating the double corporate tax are numerous and would accrue to shareholders and workers alike. Our EY study on pass-through businesses made clear that the double tax reduces investment, jobs, and wages. That’s the reason we made its elimination one of the three key principles in our tax reform letter signed by 120 trade groups.
Eliminating the double tax also helps curb inversions by reducing the tax paid by corporations on their overseas income. Right now, if a corporation wants to repatriate income in order to pay a dividend to its shareholders, it would have to pay the US tax on the income, and then its shareholders would have to pay the dividend tax. With corporate integration, only one level of tax would apply.
Finally, integration helps to level the tax imposed on debt versus equity. If a corporation raises capital to pay for a new investment today, the tax code imposes a really high tax on it. But if a corporation borrows the money, the tax is significantly lower, and could be negative (i.e. the taxpayer is subsidizing the investment). The current code encourages businesses to borrow, resulting in higher debt levels and a less secure employment base. Integration reduces this bias.
All in all, this is reform that’s worthy of the name. The details are important – how do they pay for this? — and we’re going to review the proposal closely when it’s released, but it’s encouraging to know the Finance Committee is focused on the underlying disease of how we tax businesses. It’s a good place to start!