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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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Click here to download the full letter
CTA Update | September 16, 2024
Notable Developments
- Main Street backs latest delay effort
- CTA gets high profile callout
- FinCEN issues updated guidance
- All-cash homebuyers get BOI treatment
Legislative Update
Following Congressman Zach Nunn’s (R-IA) introduction of the Protect Small Businesses from Excessive Paperwork Act (H.R. 9278) – legislation which would delay the CTA’s reporting requirements by one year – S-Corp joined with more than 150 trade associations to support the bill.
As our post notes, The Nunn bill is in keeping with legislation (H.R. 5119) passed by the House last year in a near-unanimous vote of 420-1. Despite that overwhelming show of support, H.R. 5119 remains stalled in the Senate due to opposition from Banking Committee Chairman Sherrod Brown (D-OH). At this point, Senator Brown is the only thing standing between 30 million small businesses and a one-year reprieve from the CTA’s onerous reporting requirements.
Media Update
Vice Presidential candidate JD Vance called out the CTA last week as part of a thread on X.com. Responding to a position paper released by VP Harris’ campaign, Vance took aim at a section entitled “grow small businesses and invest in entrepreneurs,” writing:
Vice President Harris claims she’ll “take on the everyday obstacles and red tape that can make it harder to grow a small business.”
However, under her administration, the SEC has promulgated at least 47 rulemakings… and we’ve seen Treasury enact burdensome compliance regulations, with some even aimed at small businesses, like the Administration’s preferred implementation of the Corporate Transparency Act.
This doesn’t sound like cutting red tape to me. It sounds like the opposite: enacting overbearing regulations that stifle innovation and kill job creation. [Emphasis added.]
The mention is notable not just because it comes from the presidential ticket, but also for the stark contrast it draws between Vance and his Ohio Senate colleague, Sherrod Brown, who continues to single-handedly block a one-year delay of the CTA’s reporting requirements.
Regulatory Update (Part 1)
On August 29th FinCEN published a final rule requiring additional disclosures of personal information for certain real estate transfers. Here’s JD Supra with an overview:
The Rule will be effective December 1, 2025, and will require a suspicious activity report (a “Real Estate Report”) to be filed with FinCEN under the Bank Secrecy Act (“BSA”) for non-exempt transfers consummated without mortgage or financial institutional financing. The Real Estate Report is more extensive than the Beneficial Ownership Report (“BOIR”) filed under the Corporate Transparency Act (the “CTA”), but will contain some of the information in a BOIR.
Expect to see more reporting rules based at least in part on the CTA in the years to come.
Regulatory Update (Part 2)
On September 10th FinCEN issued updated FAQs regarding short-lived entities and foreign companies. Here’s Accounting Today’s writeup of the changes:
One of the most significant clarifications from this FAQ update pertains to entities that cease to exist shortly after creation or registration — does an entity still have to file if it ceases operation before its reporting deadline? The updated guidance establishes a clear mandate: Regardless of how quickly a company winds up its affairs, it must fulfill BOI reporting obligations.
So given the opportunity to provide relief to the owners of entities that no longer exist, Treasury decided to move in a completely different direction. On the foreign entity front, Accounting Today observed:
…Addressing a critical gap in understanding for foreign entities operating in the U.S. market, FAQ C.16 is new. While the FAQ only asked whether foreign companies were required to report BOI if they had ceased operations before the BOI effective date of Jan 1, 2024, the guidance addresses when foreign companies are subject to BOI reporting requirements.
The three key points from C.16 regarding foreign entities are:
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Foreign companies are exempt from BOI reporting if they ceased U.S. operations before Jan 1, 2024;
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FinCEN considers a foreign company to have ceased U.S. operations when it completes the formal and irrevocable withdrawal of all U.S. registrations; and
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BOI filing is required for foreign companies registered to do business in the U.S. on or after Jan 1, 2024. Even if they subsequently withdraw registration or had already wound up affairs before that date, they must file a BOI report.
Legal Update
As we outlined in a previous edition, the Eleventh Circuit Court of Appeals announced a hearing in NSBA v Yellen, the case challenging the constitutionality of the CTA, will take place on September 27. While the court is working under an expedited timeline, that date is just three months ahead of the year-end filing deadline for existing entities.
For a solid summary of the NSBA case against the CTA and where it stands, this write-up from the Federalist Society is a must read. As the article notes:
The government has appealed to the Eleventh Circuit, briefing is complete, and oral argument is set for September 27, 2024, in Birmingham, AL. While that oral argument looms, five other challenges to the CTA’s constitutionality have been filed in federal courts, including in Maine, Texas, and Michigan.
Since the article was drafted, a seventh and eighth case have been filed, this time in Utah and Oregon. Here are the links:
- Utah: Taylor v Yellen (7/29/2024)
- Oregon: Firestone v Yellen (6/27/2024)
- Massachusetts: BECMA et al v Yellen (5/29/2024)
- Texas: NFIB et al v Yellen (5/28/2024)
- Maine: William Boyle v. Yellen (3/15/2024)
- Michigan: Small Business Association of Michigan et al v. Yellen (3/1/2024)
- Ohio: Robert J. Gargasz Co., L.P.A. et al v. Yellen (12/29/2023)
- Alabama (appealed): NSBA et al v. Yellen (11/15/2022)
199A EY Study: Briefing Recap & Recording
Earlier this week S-Corp hosted a briefing to present the results of its latest study, which illustrates just how much economic activity is supported by the Section 199A deduction. The event featured Bob Carroll, Co-Director of EY’s US National Tax Quantitative Economics and Statistics Group (QUEST) and author of the new report, who walked through his findings. (Click here to watch a replay of the briefing.)
The key takeaway is that Section 199A supports 2.6 million jobs, drives $161 billion of employee compensation, and is responsible for $325 billion of GDP. Conversely, if 199A is allowed to expire at the end of next year as currently scheduled, it would put these jobs – which make up a sizeable portion of the private-sector workforce – at risk, along with the economic expansion the provision has engendered.
Also on hand at the briefing were Caroline Oakum, tax counsel for Senator Steve Daines (R-MT) and Noelle Britton, deputy chief of staff for Congressman Lloyd Smucker (R-PA). The two offices are the lead sponsors of the Main Street Certainty Act (S. 1706 / H.R. 4721) to make the Section 199A deduction permanent.
In an accompanying press release, those offices offered broad support for the study and its importance to the fight to make 199A permanent:
“This report underscores what I have heard directly from small and family-owned businesses in my community and across the nation. Section 199A allows main street businesses to grow, create jobs, and invest in their community. Making Section 199A permanent will prevent a massive tax hike and provide small business owners and their employees the certainty they need to thrive,” said Rep. Lloyd Smucker (PA-11), a member of the tax-writing Ways and Means Committee and lead sponsor of the Main Street Tax Certainty Act in the House.
“It’s no surprise that when we provide our small businesses with much-needed tax relief, they not only thrive, but they help the whole economy grow. It’s time this tax deduction is made permanent so that Montana small and family-owned businesses can continue to create jobs, serve their communities and spur economic activity,” Senator Daines said.
On behalf of the 95 percent of businesses operating as pass-throughs, thank you to Representative Smucker and Senator Daines for their unwavering commitment to preserving Section 199A, and thank you to Bob Carroll and the team at EY for another excellent report. As we approach the 2025 fiscal cliff, S-Corp will continue to arm our allies with the information they need to win this important battle for Main Street.
S-CORP Briefs Tax Team on 199A Study
Earlier today S-CORP President Brian Reardon was on Capitol Hill to brief members of the Main Street Tax Team on our new study that quantifies the economic footprint of the Section 199A deduction.
Congressman Lloyd Smucker, Chair of the Main Street Tax Team and lead sponsor of our 199A permanence bill in the House, led the meeting and was joined by Representatives Ron Estes of Kansas, Greg Murphy of North Carolina, and Kevin Hern of Oklahoma. Representative Murphy recently hosted us for a roundtable event in his home state of North Carolina while Kevin Hern is a former business owner and employer, so the group was well prepared to hear the details of the new study.
In addition to the S-Corp testimony, Members and staff heard from other business groups, including the American Council of Engineering Companies, Nareit, and the Energy Infrastructure Council, all representing critical industries that support making Section 199A permanent.
The S- Corp study conducted by EY demonstrates that the total economic activity supported by the deduction is broad and meaningful. The numbers are staggering – the study found that Section 199A supports 2.6 million jobs, contributes $161 billion to employee compensation, and adds $325 billion to GDP.
With the Section 199A deduction scheduled to expire at the end of next year, the threat is clear. All those jobs will be put at risk if Congress fails to act and sends us over the fiscal cliff. The result would be less employment, lower wages, and a smaller economy.
Thank you to Chairman Smucker and the Members and staff who gathered today to hear this important message, and we look forward to working with you to get the word out on the importance of Section 199A.
Click here to download the full study
Millions of Jobs at Risk without Section 199A
Today, S-Corp released its latest study in support of the Section 199A deduction for small and family-owned businesses. Authored by Robert Carroll at EY, the study focuses on the economic footprint of the 199A deduction and answers the question: “Just how much economic activity is supported by Section 199A?”
You can access the full report here: As it states:
This report estimates the US economic activity – jobs, employee compensation, and gross domestic product (GDP) – supported by the Section 199A deduction in 2024. Specifically, this analysis provides a snapshot of the economic activity supported at businesses directly benefitting from the 199A deduction, as well as the economic activity connected to this economic activity (i.e., related supply chain activity and consumer spending).
What did EY find?
According to EY, Section 199A supports 2.6 million jobs, contributes $161 billion to employee compensation, and adds $325 billion to the national economy. This table summarizes the study’s findings:
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 and how the expiration of the deduction threatens these jobs. Absent congressional action, 2.6 million jobs will be at risk.
To put these numbers in perspective, there are 140 million private sector jobs, of which 88 million (or 62 percent) are located at pass-through businesses (the businesses eligible for Section 199A). Allowing Section 199A to expire would put more than one percent of all pass-through jobs and nearly 2 percent of all private-sector jobs at risk.
Bottom Line:
- The Section 199A small and family business deduction supports 2.6 million jobs in the United States.
- Allowing 199A to sunset puts all those jobs at risk, resulting in less employment, lower wages, and a smaller economy.
- Congress needs to protect Main Street and the people who work there by adopting the Main Street Certainty Act and make permanent the 199A deduction.
These results will become a key part of our 199A advocacy campaign moving forward as Congress works to avoid next year’s fiscal cliff.