September Advocacy Roundup: Tax Day Arrives!
After nine months of talks, the “Big Six” — Treasury Secretary Steve Mnuchin, National Economic Chair Gary Cohn, Senate Majority Leader Mitch McConnell (KY), House Speaker Paul Ryan (WI), and the Chairs of the Congressional tax-writing committees, Senate Finance Chair Orrin Hatch (UT) and House Ways and Means Chair Kevin Brady (TX) — released their tax reform framework. The following framework provisions pertain to businesses:
• 25 percent tax rate for pass-through entities, such LLCs, S Corps, Partnerships
• 20 percent tax rate for corporations
• Allows businesses to expense the cost of new investments in depreciable assets other than structures for at least five years
• Reduces the individual tax rates to three brackets – 12 percent, 25 percent, 35 percent
• Repeals the Alternative Minimum Tax
• Repeals the Estate Tax
• Eliminates § 199 manufacturing deduction
• Partially limits the deduction for net interest expense incurred by C corporations
• Implements territorial tax system, where foreign source profits are not subject to U.S. tax upon return
The framework is light on specifics, leaving it up to Congress to determine how the plan will be financed. A preliminary estimate from the nonpartisan Committee for a Responsible Federal Budget indicates it will cost $2.2 trillion over 10 years. The framework also leaves Congress to determine whether or not to create a fourth tax bracket for the nation’s highest earners, and which deductions should be eliminated to streamline tax breaks, given the complexity of the tax code.
The Big Six have an ambitious timeline for tax reform, indicating they would like to have it on the President’s desk for signature before the end of the year. They have stated that the House and Senate should move to pass budget resolutions that include “reconciliation” language during the first two weeks of October. Reconciliation is a legislative process that enables the Senate to pass budget-related bills with a simple majority of 50+1, instead of the usual 60 votes, and can only be used once per fiscal year. House and Senate leaders hope to make the tax overhaul subject to a majority vote through the reconciliation process, rather than a 60-vote majority.
What Comes Next
The next step in this process is for the Congressional tax-writing committees (Senate Finance and House Ways and Means) to draft detailed tax reform legislation. Once drafted, hearings will be held, and passage through Committees and both Houses of Congress are required to make it to the President’s desk for signature. An additional step is agreement between the House and Senate versions of the bill, also called a “conference.”
During this process, AEO will be meeting with members of the tax-writing committees and Small Business Committees to urge increased tax simplification for microbusinesses. While we are encouraged that the framework moves toward parity between corporations and pass-through entity tax rates, AEO supports the inclusion of H.R. 3717, the “Small Business Owners’ Tax Simplification Act of 2017,” into the final tax reform package. Introduced by House Small Business Committee Chair Steve Chabot and Ranking Member Nydia Velazquez, H.R. 3717 will simplify the tax code for small businesses by:
• Aligning 1099-MISCs and 1099k reporting requirements at $1,500. This will eliminate reporting gaps and provide certainty regarding income tax filings.
• Aligning four-month reporting deadlines with the logical end-of-quarter requirements, which will enable small businesses to satisfy all reporting requirements at once.
• Requiring the Secretary of the Treasury to standardize electronic signature rules to create certainty for everyday commerce.
• Enabling entrepreneurs and small business owners to participate in Cafeteria plans, and exclude self-employment income from Social Security Quarters Coverage offered to their employees.
• Allowing voluntary withholding agreements and voluntary training services to be offered to contractors without classifying these individuals as employees.
The Volunteer Income Tax Assistance program (VITA) offers free tax help to people who make under $54,000 and need assistance preparing their taxes. Some of AEO’s partners have suggested that creating a VITA-like program for microentrepreneurs and small businesses, or expanding the current VITA program to include them, would also be a helpful provision to include in tax reform.
Congressional leaders have an ambitious goal of passing tax reform by the end of the year. Given the process described above and the complexity of the tax code, our team thinks that goal is close to impossible. If the Congress is serious about a bipartisan effort to enact this legislation, our experience tells us that this process could take up to a year or two, and it is more than likely that Congress will be debating tax reform well into 2018. No matter how long it takes, AEO will be working the Halls of Congress to ensure a fair and simpler tax code for our nation’s job creators.