Hill staff and tax practitioners considered how allowing Tax Cuts and Jobs Act (TCJA; PL 115-97) provisions to expire would impact S-corporations — and how best to move forward.
The discussion, which occurred at the American Bar Association’s May Tax Meeting in Washington, DC, on May 3, focused on specific expiring provisions of concern. Moderator Brad Gould of Comiter Singer said the conversations happening now reminded him a lot of those from seven or eight years ago when the TCJA was being enacted. Those past analyses are still applicable, said Gould, so “go back and dust off your stuff.”
House Ways and Means Committee Majority Deputy Tax Advisor Eric Oman recounted the goals of the TCJA: to cut and simplify taxes for families and businesses, to provide “the right environment to allow for economic growth,” and to “put an end to corporate inversion.” Oman noted growth in real median household income, real wages, and domestic investment under the TCJA, saying that the priority over the next year is thinking about expiring provisions and other things that can help maintain that economic environment.
Oman also discussed the newly formed House Republican tax teams that will “review and better understand what happened under TCJA.” He indicated that feedback will be gathered through listening sessions around the country, site visits to businesses of all sizes, and conversations with communities. The goal is to “take a holistic view of not only what’s expiring,” said Oman, but also “thinking broadly about what types of changes might be necessary, what’s working, what’s not working … and things that weren’t touched that should be looked at.”
Senate Finance Committee Majority Tax Counsel Kim Arndt said that though Democrats weren’t really in the room much during the initial TCJA negotiations, they also were looking at the expiring provisions to see which ones “actually helped small businesses” and which were “skewed a little bit more towards high net-worth individuals.”
Sec. 199A.
On both sides of the aisle, the pass-through income deduction under Code Sec. 199A is a key concern for S-corps, said Arndt and Oman. Arndt noted Senator Ron Wyden’s (D-OR) forthcoming proposal on 199A, adding that “we do know that 199A did help small businesses and people making under $500,000.” However, she said, much of the benefits of 199A went to people making $1 million or more, according to the Joint Committee on Taxation. Wyden’s bill, she said, would simplify 199A but maintain the deduction for anyone making under $400,000.
Oman noted a recent Ways and Means hearing where a witness talked about the benefits of the TCJA and specifically, 199A, on his coffee business. Without 199A, said Oman, small businesses could be subject to a tax rate above 40%, which he called “a showstopper” that would lead to closures.
Gould agreed, saying that without 199A and if the tax rates don’t come down, the desire for S-corps is going to go away for some people. “It’s going to be a breaking point,” he added.
SALT cap.
Another provision of concern is the TCJA’s state and local tax (SALT) deduction cap, which limits federal itemized deductions for state and local taxes to $10,000 for most taxpayers. Before the TCJA, there was no cap on the SALT tax deduction — taxpayers could deduct 100% of their state and local taxes paid. Oman noted that members on both sides had a “spectrum of views on how [the SALT cap] should be addressed.” Three Republican bills moved through the Ways and Means committee last summer, he said, and one of them, the Tax Cuts for Working Families Act (S 3936) would increase the standard deduction to $4,000 for taxpayers below a certain income threshold. Oman said that bill “demonstrated that a significant increase in the standard deduction can move quite a few folks who otherwise might be conservative on the SALT deduction cap.”
Oman also noted the SALT Marriage Penalty Elimination Act (HR 7160), which failed to advance to a full vote this February. That bill would raise the SALT cap to $20,000 in tax year 2023 for married taxpayers filing jointly who earn up to $500,000.
Green Book proposals.
Moderator Victoria Glover of Deloitte Tax also brought up proposals in the Biden Administration’s 2025 fiscal year budget/Green Book that are likely to impact S-corps.
One provision not expiring in 2025, noted Glover, is the excess business loss limitation under Code Sec. 461. That provision limits the amount of trade or business losses that noncorporate taxpayers can use to offset non-business income. The Inflation Reduction Act extended the excess business loss limitation through at least 2028, said Glover, and the Green Book would make it permanent. Oman indicated that notwithstanding the 2028 expiration date, the excess business loss would likely be a topic of discussion for House Republican tax teams.
Glover also noted the Green Book proposal to subject all pass-through business income to either net investment income tax or SECA Medicare tax, for taxpayers above set thresholds. This would raise “hundreds of billions of dollars” she said. Glover asked whether in the current environment, “everything has to be paid for,” and if so “is this an easy place to go?” The Hill panelists both welcomed feedback on that proposal and on pain points.
The endgame.
On the pending tax bill, HR 7024, that passed the House earlier this year, Oman said Ways and Means Chairman Jason Smith (R-MO) “is doing everything he can to help get our Senate Republican friends into a good spot” on it.
According to Arndt, the Senate is still exploring different says to move the bill along, including as part of the FAA reauthorization bill or as a standalone. “We do not see it as dead,” she said; “we are still marching forward and doing what we can to get this over the finish line.”
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