House Small Business on CTA
With the Corporate Transparency Act in effect for several months now, the House Small Business Committee convened to discuss how the rollout of the new law is going. The short answer – not so good.
The hearing featured testimony from three small business stakeholders who covered everything from compliance costs to legal and cybersecurity risks posed by the reporting requirements.
The first witness was Carol Roth, whose advocacy on behalf of the Main Street business community we’ve covered previously. Asked by Congressman Dan Meuser whether Treasury had reached out to affected businesses to help them understand their new compliance obligations, she responded:
Not that I’m aware of, and certainly not with the small business owners that I’ve spoken with. For my written statement for the record I submitted almost 450 statements from small business owners across the country who are vehemently opposed to the CTA. Most of them, when I’ve raised this through the media or other ways they’ve come in contact with me, had never heard of it. They also have no idea who FinCEN is
…Your average small business owner is just trying to stay afloat, and isn’t familiar with that division of Treasury. And when they find out they ask, Why is it that the Financial Crimes Enforcement Network is asking for my information? So, the communication hasn’t been there.
Next was Tim Opsitnick, a member of the National Small Business Association and owner of Cleveland-based Technology Concepts & Design whose practice focuses on cybersecurity and data privacy. Tim drew on his background in commenting on the various cyber risks posed by the CTA:
Let me stress – we do not know the database is secure. We further know that the information and/or access to the database will be shared. Every time an owner shares their information, the risk that it will be misused or lost to the dark web significantly increases. FinCEN’s own website opens with an alert about fraudulent solicitations under the CTA.
According to NSBA research, the average cost to remedy a small business data breach is $15,297. In my experience, this is low. I have seen small companies face costs over $100,000. Regardless, either figure could cripple many small businesses, who are cash-flow-sensitive. Small businesses cannot afford to be vulnerable: the majority of small businesses that suffer a breach will be out of business within six months.
The third hearing witness was Roger Harris, an attorney and the president of Padgett Business Services, who refuted the government’s talking point that noncompliance will not be prosecuted:
It’s going to depend on their definition of “willful.” I wish FinCEN was as good at offering definitions of what constitutes willful as Mr. Kalman, because we’ve asked for that guidance and haven’t received it. I’m not sure anyone is out to penalize small businesses just for the sake of penalizing them. But as long as that threat hangs over them, small businesses and firms like ours are going to have to be cautious in how we interpret the law.
Harris raises an important point that deserves to be amplified. The position of CTA supporters appears to be that most violations of the CTA’s requirements will be accidental and would not rise to the level of willful. But one of our complaints of the CTA is how difficult it is to comply, even if you make a reasonable attempt.
For example, the owner of five fast-food franchises will have to report the BOI of himself and anyone that exerts “substantial control”. Exactly what “substantial control” means is famously vague, so it is up to the owner and his advisors to make a determination. Let’s say he decides to report the BOI of the Managers of each franchise, but not the Assistant Managers.
Is that the right decision? Who knows – it will have to be litigated — but what we do know is that it was willful and, therefore, if the owner got it wrong, he’s liable for five counts of failing to comply.
This brings us to the last highlight of the hearing — Congressman Blaine Leutkemeyer’s reflection on how the legislation he once supported has morphed into a compliance nightmare for millions of small businesses:
I’m an interesting guy to be here because I was a sponsor of the Corporate Transparency Act, and my intention was to minimize the effect this had…[The Financial Crimes Enforcement Network] doesn’t need this. They have tools in their toolbox to go to court and get the warrants they need to be able to investigate.
So lots of heartburn and little comfort over the CTA, particularly as lawmakers hear firsthand how businesses are faring under the new compliance regime. The more light we can shed on this poorly-conceived law, the more likely it is that lawmakers provide the relief their constituents badly need.
Main Street Backs CTA Repeal
Today over 100 trade associations, representing millions of small businesses nationwide, strongly supported legislation introduced by Representative Warren Davidson (R-OH) to repeal the Corporate Transparency Act (CTA).
Appropriately named the “Repealing Big Brother Overreach Act”, the legislation would put an end to the onerous and poorly-conceived reporting regime that targets virtually every small business operating in America. That effort will also be joined by Senator Tommy Tuberville (R-AL), who plans to introduce a companion bill in the Senate early next week.
By way of background, the CTA took effect this year and requires small businesses and other covered entities to report the personal information of their owners and managers to the Financial Crimes Enforcement Network at the Treasury Department. As we’ve written extensively, the CTA saddles law-abiding business owners with compliance headaches and criminal penalties while doing little or nothing to combat illicit activity.
The letter signed by NFIB, The Real Estate Roundtable, the National Association of Wholesaler-Distributors, and dozens of other groups, makes clear that CTA is poor policy that needs to be reconsidered:
Despite its unprecedented scope, we expect the CTA to be of little practical use to law enforcement, as criminals are unlikely to accurately self-report their information to FinCEN. Meanwhile, because the CTA targets entities with low revenues and few employees, the brunt of its reporting burden and excessive penalties will be shouldered by law-abiding, Main Street businesses.
Last month, the District Court for the Northern District of Alabama ruled the CTA exceeded the Constitution’s enumerated powers and was therefore unconstitutional, but the resulting injunction applies to the plaintiffs only – members of the National Small Business Association. As a subsequent notice from FinCEN made clear, all other covered entities are still required to file their BOI reports by the end of the year.
The bill introduced by Congressman Davidson would put an end to this unprecedented data grab by repealing the CTA in its entirety. Repeal would give Congress the opportunity to craft a better approach that addresses our national security needs while balancing them with the interests and rights of law-abiding small business owners.
The introduction of this legislation coincides with a Tuesday hearing at the House Small Business Committee to examine the failed rollout of the CTA. As many lawmakers look for ways to implement minor improvements to the CTA, the Davidson bill is a helpful reminder that there is nothing so useless as improving something that shouldn’t be done in the first place. Congress should have never enacted the CTA. This is an opportunity to address that mistake.
Fiscal Cliff Gets Renewed Focus
In a sign that lawmakers are not content simply waiting until next year to address a litany of scheduled tax hikes, House Ways & Means Committee Chairman Jason Smith yesterday announced a series of “tax teams” tasked with identifying legislative solutions to avert the 2025 fiscal cliff.
Ten groups in total, each comprised of at least give Republicans from the panel, will address a specific policy area, from manufacturing to global competitiveness.
The team that caught our eye will focus on Main Street, and is appropriately led by Congressman Lloyd Smucker (PA), a staunch ally of the pass-through business community and leader of the House 199A permanency bill. The other team members are Reps. Greg Steube (FL), Vern Buchanan (FL), Adrian Smith (NE), Jodey Arrington (TX), and Beth Van Duyne (TX), all of whom we’ve had the pleasure of working alongside for years and who we know understand the magnitude of the challenge ahead.
Of course, what we’re referring to is the looming expiration of key provisions for the 2017 tax bill – namely Section 199A deduction, coupled with significant increases in rates – which will hit the vast majority of businesses currently operating in America.
Absent action, the marginal rates faced by millions of pass-throughs are set to spike come the end of 2025 – in many cases to over 41 percent – while large corporations will continue to benefit from the far lower 21-percent rate. That’s an unsustainable gap that puts Main Street at a significant disadvantage and threatens the economic health of thousands of communities nationwide.
Big problems require big solutions, and given what’s at stake we know Congress is going to have to act. So while the Main Street Tax Team and all the other groups have their work cut out, we’re confident in their ability to secure a favorable outcome and we look forward to working with them.
Support CTA Relief
The House Small Business Committee is holding a hearing on the Corporate Transparency Act later this month. One witness will be Carol Roth, a bestselling author and small business advocate who has helped lead the charge against the poorly crafted law.
We’ve covered the CTA at length over the past few years but the bottom line is that while reporting under the CTA started already and the deadline is the year’s end, only a tiny percentage of the targeted 33.6 million small businesses even know it exists. That’s bad because a failure to file is accompanied by thousands in fines and two years in jail.
Carol Roth’s appearance before the Small Business Committee will help us get the message out and she recently issued the following request:
I have been invited to testify in front of the House Small Business Committee on April 30th against the CTA BOI rule that is unfairly targeting small business owners. I am honored to take this step to fight for the Constitutional rights of small businesses owners across the country.
I am also able to submit statements for the record from other small business owners. I want to submit at least 100, but as many as possible, to make an impact. If you own a US-based small business, please consider submitting a statement to me before April 19, 2024.
To make this easy for you, I have created a page to take the submissions, which includes a sample letter (you can borrow as much or as little as you want for the letter- any personal insights are welcome). You can access that here.
As an S-Corp reader, we hope you’ll consider submitting a statement to Carol before the end of the week – it only takes a few minutes and helps ensure your voice is heard on this important issue.
And if you happen to live in Ohio, then it’s doubly important that you get engaged. Senator Sherrod Brown (D-OH) is the chair of the Senate Banking Committee and is the key to moving the Tim Scott delay bill through that body. If Senator Brown supports the bill, it will pass the Senate.
So submit your statement, contact the Brown office, and make sure your voice is heard!
Main Street on the Hill
S-Corp and its friends at the National Federation of Independent Business hosted a Tax Day briefing for Hill staff and other stakeholders yesterday. The topic: the massive tax hikes threatening Main Street at the end of 2025.
As readers know, the expiration of the Section 199A deduction coupled with significant increases in the marginal rates paid by the 95 percent of businesses nationwide is a significant challenge facing Main Street and Congress next year. We know Congress is going to have to act, and we know the issues in play are new to most of the staff and Members currently serving. The education challenge is daunting and yesterday’s briefing is just the first of many education sessions we have planned through the end of the year.
The briefing kicked off with a panel on the history and economics of Section 199A, featuring NFIB’s Vice President for Federal Relations Jeff Brabant, S-Corp President Brian Reardon, and EY QUEST Co-Director and veteran tax pro Bob Carroll.
Brian ran through the ABCs of the pass-through structure, and explained why it remains the choice for virtually every business currently operating in America. The bottom line is that while pass-throughs pay tax once at the owner level on income when it’s earned, C corps pay tax once at the entity level, and once again when those profits are distributed to shareholders.
So why would any company opt in to the distortive corporate double tax? As Brian laid out, that second layer of tax is increasingly discretionary, especially for public companies whose shareholders include qualified retirement plans, charities and endowments, and foreign investors.
As a result, the double tax is largely reserved for private companies only, not public ones, meaning businesses engaged in the same industries can face tax burdens that differ significantly depending on how they are organized. The Section 199A small business deduction is designed to help bridge this gap.
Another key point was the reason why 199A is necessary. Parity is important, as is encouraging economic growth and job creation. Central to the Main Street advocacy back in 2017, however, was the desire to avoid a massive tax hike. That’s because the base broadening included in the TCJA’s corporate reforms affected not only C corporations but pass-throughs too.
On the parity front, EY’s Bob Carroll presented an earlier study quantifying how the marginal rates faced by pass-throughs and C corporations vary depending on their size, the profile of their shareholders, and the presence of 199A.
The clear lesson of this table is that without 199A, private companies will be a significant disadvantage compared to public companies post-2025.
This disadvantage has geographical implications. As Bob’s work shows, private company employment is more evenly spread across the country. Ensuring parity for Main Street businesses is critical to the economic health of thousands of communities.
The day closed out with a presentation from David Winston, founder of the polling and research firm The Winston Group. David summarized the results of his latest polling which found that American voters in key swing states strongly oppose raising taxes on Main Street businesses and are concerned that any tax hikes would be passed on to consumers in the form of higher prices.
Which all leads us back to the focus of our advocacy, the Main Street Certainty Act. We are up to 171 cosponsors of the Smucker bill in the House, and the Smucker staff was on hand to help educate staff on the issue.
So thank you to NFIB, EY, the Winston Group, the Ways and Means Committee, and to the dozens of Hill staff who came out on Tax Day to learn about business taxation and the importance of 199A. When it comes to advocating for Main Street Certainty and a permanent 199A small business deduction, we’re just getting started.