Back in April, Chairman Jason Smith announced the formation of ten tax teams designed to identify legislative solutions to avert the coming 2025 fiscal cliff.
In addition to engaging directly with Main Street employers through hearings and roundtables (see here, here, here, and here), the effort requested feedback from stakeholders as to their priorities for the coming year. S-Corp and its allies responded with numerous comments, including:
- Main Street Comments on Section 199A
- S-Corp Comments on Section 199A and other Priorities
- S-Corp Comments on International Tax Changes
- S-Corp Comments on Excess Loss Provisions
With the submission deadline closing today, here’s a quick recap of our comments and the key issues we face heading into next year.
199A Permanence
S-Corp joined with its allies in the Main Street Employers Coalition to press for making Section 199A permanent before it expires come the end of next year:
The Main Street Employers Coalition (MSEC) is comprised of dozens of trade associations representing businesses operating in virtually every industry and community across the country. The vast majority of these businesses are structured as pass-throughs – S corporations, partnerships, and sole proprietorships – and they rely on the Section 199A pass-through deduction to help them grow, create jobs, and remain competitive.
Getting 199A made permanent is going to be a big challenge. The good news is that the Main Street Tax Certainty Act has garnered unprecedented levels of support. In the House, the bill led by Congressman Lloyd Smucker has 191 cosponsors, while Senator Steve Daines’ companion legislation has support from 34 cosponsors. There’s work to be done, particularly after the November elections, but the support shows lawmakers fully grasp the situation and are prepared to prevent a tax hike on tens of millions of Main Street businesses next year.
S-Corp Priorities
S-Corp comments to the Main Street tax team highlight the fact that the pass-through deduction supports 2.6 million jobs – jobs that would be at risk if Congress allows the deduction to expire at the end of next year:
A recent study by EY highlights this point. According to EY, Section 199A supports 2.6 million jobs, contributes $161 billion to employee compensation, and adds $325 billion to the national economy. Regarding jobs, the study finds Section 199A supports 1.1 million jobs directly, 590 thousand jobs through increased employee compensation, and another 853 thousand jobs from related consumer spending increases. These results highlight the importance of Section 199A to the economy and how the expiration of the deduction threatens these jobs. Absent congressional action, 2.6 million jobs will be at risk.
The letter raises other concerns. If Congress fails to act, the numerous permanent base-broadening provisions included in the TCJA will, absent the offsetting lower rates, raise taxes on millions of Main Street businesses – higher taxes relative to the pre-TCJA baseline.
The comments also make the case for why Congress should oppose the Biden Net Investment Income Tax (NIIT) tax hike and instead support our S Corp Mod legislation. Finally, they make the case for SALT Parity and the pass-through entity tax enacted by 36 states in recent years.
As with our other submissions, these comments are a reminder that next year’s looming tax hikes present not just a challenge, but also an opportunity to improve the rules that govern S corporations.
Global Competitiveness
The S corporation community has a large international presence, and it faces significant challenges under the new, territorial tax system. As our comments to the Global Competitiveness Tax Team state:
The TCJA set the foundation for a more competitive international tax system. Next year’s fiscal cliff is an opportunity to build on that foundation and fix several imbalances in the treatment of S corporations and other pass-through businesses that operate internationally. It is also an opportunity to address pending challenges with the Pillar 2 process and make certain that family businesses are not penalized for how they are organized.
Specific challenges identified in the comments include:
- The pass-through deduction (Section 199A) is applicable to domestic income only.
- S corporations are excluded from the TCJA’s territorial treatment and must pay tax on their foreign source income immediately (even if they are organized as a CFC) and at the highest marginal rates.
- The Pillar 2 world-wide minimum tax has the potential to double tax the domestic and international earnings of S corporations and other pass-throughs.
To fix these challenges, the comments recommend the Section 199A deduction be expanded to include foreign-source income, the TCJA territorial system be expanded to fully include pass-through businesses, and the Pillar 2 pass-through carve-out be expanded to include S corporations and other pass-through businesses with indirect owners.
Excess Loss Limitations
Finally, S-Corp submitted comments on the TCJA’s Excess Loss Rules. 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 its consideration. It’s also a solution in search of a problem. As our comments note:
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 make three recommendations for fixing this errant 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.
Conclusion
As the Committee website makes clear, the tax teams process has generated an enormous amount of welcome attention and study regarding the challenge of next year’s fiscal cliff. S-Corp appreciates the tireless efforts of Chairman Smith and the members of the Ways & Means tax teams. We’re grateful for the opportunity to share these perspectives and look forward to working with them to secure a favorable outcome next year.