By Roman A. Basi
The tax landscape in the United States continues to show the potential of changing in the very near future. As we saw with the House Ways and Means Committee’s report last summer, followed up by the President’s tax proposal this Spring, and now the issuance of Executive Order 13789, the commitment to change and restructure our current tax laws is gaining momentum. Published in Volume 82, number 79 in the Federal Register on Wednesday April 21, 2017, Executive Order 13789 orders the Secretary of the Treasury to review “all significant tax regulations issued by the Department of the Treasury on or after January 1, 2016”.
The order goes on further to state, “in consultation with the Administrator of the Office of Information and Regulatory Affairs, Office of Management and Budget, identify in an interim report to the President all such regulations that: (i) impose an undue financial burden on United States taxpayers; (ii) add undue complexity to the Federal tax laws; or (iii) exceed the statutory authority of the Internal Revenue Service.”
The policies to be advanced are to lessen tax burdens, promote economic growth and unleash business from fines, complicated forms and frustration.
The interim report is due to the President in 60 days from the date of the order which put the report due on June 20th, 2017. As of the date of authoring of this article, the interim report has not been made public.
While the House Ways and Means Committee has put together what they call “the Blueprint” (https://waysandmeans.house.gov/taxreform/), the President has his position as well. The two plans are similar in nature and thus we should expect some change in the Internal Revenue Code in the near future.
One item that could be on the chopping block is IRC Section 199. The House Ways and Means Committee through the Blueprint expresses on page 27 the following:
“Today, the tax code is littered with special-interest deductions and credits that are designed to encourage particular business activity. These provisions create incentives for businesses to make decisions because of the tax consequences rather than because of the underlying economics”.
“For example, the domestic production (“section 199”) deduction would no longer be necessary. Section 199 effectively provides a small rate reduction for income from certain specific activities, including domestic manufacturing, production, growing, and extraction. For corporations, the deduction effectively reduces the rate on such income from 35 percent to about 32 percent. For passthrough entities, the top rate is reduced from 39.6 percent to about 36 percent. But section 199 is highly complex, often frustrating both those businesses that fail to qualify as well as businesses that do qualify but only after navigating a substantial paperwork burden. By cutting the corporate rate to 20 percent, and by cutting the top rate on the active business income of pass-through entities to 25 percent, the Blueprint makes section 199 unnecessary.”
This is an extremely popular section of the Internal Revenue Code and is used by a lot of our clients. Not only does it apply to traditional manufacturers it applies to many broadly defined firms that would otherwise not be considered manufacturers. Items such as growers, software firms, and construction and even automotive rebuilders can be considered manufacturers.
Another identifiable issue is the Earned Income Tax credit. The Blueprint states:
“The IRS makes billions of dollars in improper payments through the programs it administers, particularly the Earned Income Tax Credit (EITC). At 24 percent, the EITC has the highest level of improper payments of any Federal program, with nearly $15.6 billion in improper payments in fiscal year 2015, nearly double the rate of the next highest program.”
This Executive Order and the House Ways and Means Committee’s Blueprint means that tax reform will come. This reform will have an impact on transferring businesses across the United States. Many Companies and business owners across the country are on the edge of selling their business and/or retiring and transferring it to the next generation. It is very possible that we will have more favorable tax rates in the near future. With the two primary catalysts of tax reform lining up their proposals in similar methods, and with the White House requesting for simplification of overly burdensome taxes and regulations, there has never been a better time to position your company or your business for its succession to the next generation or for the sale of it on the open market.
Roman A. Basi is an expert on closely held enterprises. He is an Attorney, CPA, Real Estate Broker, Title Insurance Agent, and the President of The Center for Financial, Legal & Tax Planning Inc.