Senate Finance Committee Chairman Max Baucus (D-MT) has again noted his support for tax reform. In a statement released on October 30, Baucus emphasized the need for corporate tax reform, citing examples of companies that have re-incorporated in lower tax jurisdictions such as Ireland. He stated that he would work on parallel tracks with both the newly formed Budget Conference Committee, as well through the Finance Committee. Similarly, House Ways and Means Chairman Dave Camp (R-MI) has continued to state that he will move tax reform legislation through his committee by the end of the year.
The Budget Conference Committee was recently established as part of the deal to end the shutdown and avoid default. The conference – led by Sen. Patty Murray (D-WA) and Rep. Paul Ryan (R-WI) – is charged with reaching a budget proposal by December 13 that could be passed in both the House and Senate. However, this committee could open a path for tax reform to become part of the ultimate budget agreement. Even so, it will be quite challenging for the budget committee to come to some consensus on the budget, much less tax reform. So, while both Baucus and Camp continue to forge ahead with tax reform, there are significant headwinds.
CompTIA has always cautioned that small businesses must remain vigilant. If a tax reform plan includes lowering corporate tax rates in exchange for cutting out loopholes and other tax credits and deductions, this does not necessarily benefit small businesses – many of which pay tax at individual rates on pass-through earnings (e.g., partnerships, S corporations and LLCs). It’s possible for the pass-through entities to lose tax deductions without the benefit of a lower tax rate, because these pass-through entities pay tax at individual tax rates, not corporate rates.
So, while the term tax reform carries a positive connotation, the devil is in the details. What would happen if small tech firms continue paying taxes at the same individual tax rate, but lose deductions and credits such as the Section 179 small business expensing or the research and experimentation tax credit. This would mean that these pass-though entities – many of which are small businesses – would be stuck with higher tax costs.
So, as both the House and Senate grapple with developing their own tax reform proposals, we continue to caution that tax reform should not disproportionately impact small businesses and pass through entities. Any proposals to lower tax rates in exchange for limiting or eliminating tax benefits now available to small businesses and pass-through entities must be analyzed in view of the resulting change in tax burden on such entities.
