Many small business benefits incorporated into the Tax Code are complicated and, arguably, in need of reform. House Ways and Means Committee chair Dave Camp, R-Mich., recently released a draft proposal containing numerous tax reform measures specifically designed to simplify taxation of small businesses and partnerships. According to a report by the National Federal of Independent Business, cited by Camp, small business owners spend approximately $18 to $19 billion every year in tax compliance costs. Camp’s proposal addresses this and other issues by recommending lower tax rates, permanent Code Sec. 179 expensing, expansion of the cash accounting method, unification of tax filing rules for S corps and partnerships, and more.
Camp’s dedication to tax reform, if not his specific proposals, carry credibility on both sides of the aisle on Capitol Hill. If the momentum toward tax reform continues to grow, Camp’s current efforts will likely shape at least a portion of its overall framework.
Code Sec. 179 expensing – The American Taxpayer Relief Act of 2012 (ATRA) extended the $500,000 expensing limit and $2 million dollar limit through the end of 2013. Camp’s proposal would make permanent Code Sec. 179 expensing for certain depreciable business property for businesses, but would lower the limits allowed for costs of qualifying property placed in service after 2013. A business would be allowed to deduct the costs of up to $250,000 in qualifying property placed in service during a tax year after 2013 (down from $500,000 in 2013). The allowance would be subject to a dollar limit threshold of $800,000 under the proposal (down from $2 million in 2013). The proposal would also provide for an annual adjustment of the limits for inflation.
Cash method of accounting – Camp’s proposal would expand availability of the cash method of accounting for certain business entities that do not currently have the option to use the simpler cash method under which items of income accrue when received and expenses are counted when actually paid.
Uniform capitalization rules – Camp’s proposal would expand the number of business taxpayers exempt from the Code Sec. 263A uniform capitalization rules (UNICAP) that require businesses to capitalize certain direct and indirect costs for items such as materials, labor, or production that are allocable to real or tangible personal property that the taxpayer produced for certain trade, business, or resale purposes.
Current law provides an exception for small businesses that have average annual gross receipts of less than $10 million and acquire property for resale. Camp’s draft proposal would expand the exception to also cover small business producers of real or tangible property.
Start up expenses – Camp’s proposal would simplify the Tax Code’s current treatment of the $5,000 deduction for start-up expenses by consolidating the provisions of Code Secs. 248 and 709, which govern organizational expenditures for corporations and partnerships, under the start-up expense deduction provisions of Code Sec. 195. The draft proposal would also increase the current Code Sec. 195 deduction limit from $5,000 to $10,000, subject to a phaseout limit of $60,000 (up from $50,000).
Business tax return deadlines – Camp’s proposal would shift due dates for Form 1065, U.S. Return of Partnership Income, Form 1120S, U.S. Income Tax Return for an S Corporation, and, with respect to C Corporations, Form 1120, U.S. Corporation Income Tax Return. The deadlines would change from April 15 (Form 1065) and March 15 (Forms 1120 and 1120S) to March 15 (Form 1065), April 15 (Form 1120) and April 1 (Form 1120S). The proposal would also provide an option to file six-month extensions for all three forms.
Passthrough entities such as S Corps and partnerships are stymied by the Tax Code’s complexity, according to Camp. Because an estimated 65 percent of new jobs over the past 17 years were created by small businesses formed as unincorporated passthrough entities, Camp’s proposal set forth several recommendations for drastic reform of the current passthrough regime such as enacting a shorter recognition period for a newly elected S Corp’s built-in gains under Code Sec. 1374 and increasing the threshold at which an S corporation’s net passive income becomes subject to the highest corporate tax rate.
Alternatively, Camp has also proposed a drastic rewrite of current Subchapters K and S, which govern taxation of partnerships and S Corps. The Tax Code would contain one unified set of rules under a new Subchapter K for taxation of partnerships and passthrough corporations. The new Subchapter K would expand eligibility of most passthrough corporations to elect S Corp treatment, loosen current restrictions on who may be an S Corp shareholder, impose a withholding requirement on a passthrough with respect to certain amounts of each passthrough owner’s distributive share, and more.