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Talking Taxes in a Truck Episode 25: “A Quiet Place”
With the 118th Congress underway, there’s a general sentiment that the next two years of divided government will be a quiet place for tax policy. To explore that question we invited Marc Gerson, Miller & Chevalier’s Tax Department Chair and longtime S-CORP ally, for a return visit to the podcast. Marc breaks down the tax policy to-do list facing Congress, runs through the actions Treasury might take in lieu of congressional action, and reminds us that, in Washington, no bad idea ever truly dies. Brian and Marc also cover the House rules package, the 2025 fiscal cliff, and the upcoming Nats season.
This episode of the Talking Taxes in a Truck podcast was recorded on January 12, 2023, and runs 27 minutes long.
Your State Could Be Costing You Millions
To mark the five-year anniversary of the Tax Cuts and Jobs Act, Tax Notes recently released a podcast reflecting on the 2017 bill, with a focus on how states have responded to its $10,000 cap on state and local tax (SALT) deductions. It’s a great reminder of how much the S Corporation Association has helped accomplish in that time, the billions of dollars being saved by businesses each year, and the confounding fact that a dozen states are still missing out on these benefits.
For those new to the issue, the SALT cap put S corporations and partnerships at a competitive disadvantage – while C corporations could continue to fully deduct their SALT as a business expense, pass-through business owners were subject to the new $10,000 limitation.
As readers know, the S Corporation Association has been at the forefront of the effort to restore the deduction for pass-through entities, or what we’ve taken to calling “SALT Parity.” Under our approach, pass-throughs can elect to pay their SALT at the entity level, thus restoring the deduction at the federal level while maintaining revenue neutrality for the state.
To date, 29 states have adopted our reforms. The Wall Street Journal estimates these bills are saving eligible businesses more than $10 billion each year, a figure we estimate is likely very conservative.
Asked whether he was surprised at how many states have passed SALT Parity bills, podcast guest Steve Wlodychak, a former EY practitioner and an expert in this field, responded:
I wasn’t very surprised. Because if you look at the enactment of the pass-through entity taxes, it’s no cost to the state. And the states recognize that. As proponents of these taxes have pointed out, there would be no net loss – and perhaps a slight revenue increase – to the states by enacting these pass-through entity taxes.
Despite the commonsense nature of these reforms, the road to widespread adoption has not been smooth. For years, two critical questions have loomed large over states looking to take action: (1) will Treasury challenge the approach and, (2) will Congress act to undo the broader SALT cap?
Early on, we saw firsthand just how much reticence that first question engendered. By 2019, five states had enacted SALT Parity bills, but the federal government’s silence on the issue came up time and time again in meetings with state lawmakers and Department of Revenue staff. It wasn’t until late 2020 – when Treasury issued guidance concurring with our legal opinion and blessing our legislative approach – that this concern was finally put to rest.
The second impediment was the concern that Congress would ease or even do away with the SALT cap altogether, thus rendering the reforms unnecessary. But despite recent efforts of the so-called SALT Caucus, a group of lawmakers from high-tax states who vowed to block this year’s budget reconciliation bill if it did not address the cap, the provision remains in place. At this point, it’s pretty clear that the SALT cap is here to stay, at least for the foreseeable future.
The point of that bit of historical context is not to toot our own horn – well, maybe a little – but rather to highlight that the remaining barriers to SALT Parity adoption no longer exist. Which begs the question: Why hasn’t every eligible state taken up these reforms?
By our count, 41 total states could benefit from our SALT Parity approach. That means 12 states – including Montana, North Dakota, Nebraska, and Maine – are literally leaving money on the table and costing Main Street businesses millions of dollars each year. For those states, it is time to get busy.
Main Street Backs CTA Legal Challenge
This week, the Main Street business community voiced its support the National Small Business Association’s lawsuit challenging the constitutionality of the Corporate Transparency Act (CTA).
The letter was signed by more than 45 trade associations, including the International Franchise Association, National Roofing Contractors Association, the National Association of Wholesaler-Distributors, and the Real Estate Roundtable. These trades represent businesses from every state and nearly every sector of the economy.
As the letter makes clear, the CTA is poorly constructed, overly burdensome, and threatens the owners of literally millions of small businesses across the country:
The CTA represents an unprecedented attempt by the federal government to gather the personal information of millions of law-abiding citizens and residents who own or control small businesses and other covered entities, disproportionately targeting our members and subjecting them to increased paperwork, privacy risks, and potentially devastating fines and prison terms.
It also is in clear violation of several fundamental constitutional principles, including the protection against unreasonable search and seizure:
…the CTA exceeds the confines of the Constitution by collecting, for law enforcement purposes, the personal information of millions of individuals without establishing any reasonable suspicion of wrongdoing.
The stated goal of the Corporate Transparency Act is to crack down on criminals who use shell companies to launder money. But the statute’s approach to combatting illicit activity relies on bad actors self-reporting their crimes, rendering it wholly ineffective. Criminals engaged in serious felonies are hardly going to worry about committing a simple paperwork violation. As a result, the law is unlikely to improve compliance while its burden will fall on legitimate businesses and their owners.
S-CORP and its allies have fought the CTA since it was first introduced. Unfortunately, the legislation was passed after being tucked into a broader defense spending bill back in 2020, in a process very similar to the one being attempted with the related ENABLERS Act.
The NSBA filed the lawsuit last month in the U.S. District Court for the Northern District of Alabama is our final attempt to put this harmful statute to rest. We’re confident the courts will recognize that the CTA is a blatant overreach of federal power and will strike it down. Expect to hear more on this front in the coming months.
Talking Taxes in a Truck Episode 24: “I’m Worried About Everything”
If you operate a business, your inbox is probably full of solicitations from firms promising a big payday through the Employee Retention Credit. We receive several a day, which got us wondering – what’s the real story here? To address that question and more, we invited Lynn Mucenski-Keck, a Principal at Withum and prolific writer on federal tax policy to discuss the history of the ERC, the interplay between the credit and the Section 199A deduction, and why promises of free ERC money should be approached cautiously. We also discuss the lame duck Congress, the prospects for a holiday tax package, and her latest go-to winter recipes.
For those interested, Lynn’s Forbes article referenced by Brian can be accessed by clicking here.
This episode of the Talking Taxes in a Truck podcast was recorded on December 6, 2022, and runs 42 minutes long.
ENABLERS Targets Main Street, Not Oligarchs
A recent op-ed in the Washington Post has all the earmarks of blatant government overreach disguised as national security advocacy. The op-ed, Congress is Letting International Money Launderers off the Hook supports the so-called ENABLERS Act and hits all the key words – “Putin,” “kleptocrat,” “ill-gotten gains,” “basic due diligence” – on the partisan FACT Coalition bingo card. What it fails to do is explain how the bill will make Americans safer or our financial system more secure.
The photo accompanying the story is a good example of just how badly the law will fail. It shows the massive yacht Amadea, which is stuck in a dispute between the US government and its putative owners. As the website Autoevolution summarizes:
That seems to be the case with Amadea, the stunning $325 million superyacht that crossed the Pacific a few weeks ago, allegedly seeking a safe haven. The U.S. authorities tried to pounce on it as soon as it arrived in Fiji, claiming that it’s owned by Suleiman Kerimov, known as Russia’s gold tycoon.
The High Court in Suva ordered that Amadea could not leave Fiji until the U.S. claims were settled. But in a new plot twist, Kerimov’s defense lawyer is apparently claiming that the vessel is owned by another Russian mogul, Eduard Khudainatov, who happens to not be sanctioned.
So U.S. officials have a sanctioned target in mind, they have an valuable asset within a friendly jurisdiction, and they still can’t close the deal? How exactly is the ENABLERS Act going to fix this? It is not. At its core, ENABLERS relies on criminals, including the lawyers and other financial professionals who assist them, to voluntarily provide an accurate picture of their activities to Treasury. As we’ve noted previously, Tony Soprano is not going to self-report his crimes. Nor will his crooked attorney Neil Mink.
The irony is that Congress has already passed rules that take a more practical and effective “follow the money” approach. The Customer Due Diligence (CDD) rules that took effect in 2018 require banks to verify the identities of anyone with a 25-percent ownership stake in a client company, as well as at least one executive officer with significant control over the entity or managerial responsibilities.
Instead of building on the CDD, Congress snuck the Corporate Transparency Act (CTA) into the 2020 National Defense Authorization Act (NDAA). The CTA shifts the core CDD reporting requirements from the banks to their customers. Beginning in 2024, more than 32 million Main Street businesses and others will be required to report their owners’ personal information to Treasury or face fines and years in prison, all under the assumption that a few of them may be engaged in financial crimes.
Now Congress is rushing to sneak another reporting requirement into this year’s NDAA. Proponents of the ENABELRS Act argue the bill will target so-called gatekeepers like lawyers and financial professionals who help facilitate illicit transactions. But a plain reading of the House-passed bill makes clear the provision would impact any business that engages in a wide array of mundane and commonplace activities, such as forming a business or processing payments.
The case for rushing to enact the ENABLERS Act is undermined by the complete lack of a legislative record. If the ENABLERS Act is so important, why has so little attention been paid to it? No hearings, no markups, no floor debates. Instead, the language was tucked into the House NDAA (sound familiar?) at the last minute as part of a larger block of hundreds of provisions.
That’s hardly a process that promises an effective or just law. But then the ENABLERS Act and the Corporate Transparency Act that preceded it are not about just results any more than they are about catching Russian oligarchs.
We understand why the FACT Coalition supports the ENABLERS Act. They want to create a database to “name and shame” business owners whose politics they disagree with. What we don’t understand is why Republicans like Senator Roger Wicker are helping them. The burden of this legislation, as with the CTA before it, will fall on millions of law-abiding small business owners in Mississippi and elsewhere, not Russian oligarchs.
The best defense against money laundering and terrorism financing is to follow the money. Let’s stick with that approach and leave Main Street alone.