Senate Small Business and Entrepreneurship Committee Hearing
INTRODUCTION
The
The AICPA is the world's largest member association representing the accounting profession, with more than 400,000 members in 128 countries and a history of serving the public interest since 1877. Our members advise clients on federal, state and international tax matters, and prepare income and other tax returns for millions of Americans. Our members provide services to individuals, not-for-profit organizations, small and medium-sized business, as well as America's largest businesses.
We are a long-time advocate for an efficient and effective tax system based on principles of good tax policy. n1 Our tax system must be administrable, stimulate economic growth, have minimal compliance costs, and allow taxpayers to understand their tax obligations. We believe these features of a tax system are achievable if the ten principles of good tax policy are considered in the design of the system:
* Equity and Fairness
* Convenience of Payment
* Simplicity
* Economic Growth and Efficiency
* Minimum Tax Gap
* Certainty
* Economy in Collection
* Neutrality
* Transparency and Visibility
* Appropriate Government Revenues
We, therefore, appreciate the opportunity to provide input as you begin shaping tax reform policy in the small business income tax area.
In the interest of good tax policy and effective tax administration, specifically focusing on the simplification of small business income tax, we respectfully submit comments on the following key issues:
1. Cash Method of Accounting
2. Tangible Property Regulations - De Minimis Safe Harbor Threshold
3. Civil Tax Penalties
4. Permanence of Tax Legislation
5. Retirement Plans
6. Alternative Minimum Tax Repeal
7. Listed Property
8. Tax Return Due Date Simplification
9.
AICPA PROPOSALS
1. Cash Method of Accounting
The AICPA wholly supports the expansion of the number of taxpayers who may use the cash method of accounting. The cash method of accounting is simpler in application than the accrual method, has fewer compliance costs, and does not require taxpayers to pay tax before receiving the income. For these same reasons, we are concerned with, and oppose, any new limitations on the use of the cash method for service businesses, including those businesses whose income is taxed directly on their owners' individual returns, such as S corporations and partnerships. Requiring these businesses to switch to the accrual method upon reaching a gross receipts threshold would unnecessarily discourage growth. A required switch to the accrual method would affect many small businesses in certain industries including accounting firms, law firms, medical and dental offices, engineering firms, and farming and ranching businesses.
The AICPA believes that limiting the use of the cash method of accounting for service businesses would:
1) Discourage their natural business growth;
2) Impose an undue financial burden on their individual owners;
3) Impose complexities and increase their compliance burden; and
4) Treat similarly situated taxpayers differently (because income is taxed directly on their owners' individual returns).
As the AICPA has previously stated. n2 we believe that
2. Tangible Property Regulations - De Minimis Safe Harbor Threshold
The AICPA urges the
Additionally, we recommend adjusting the de minimis safe harbor threshold amount on an annual basis for inflation. n3
We understand that the intent of the
a. Reduction of Administrative Burden
Many small business owners have stated that repairs are consistently over
b. Relation with Section 179
The
Enhanced section 179 relief was also temporary and is, therefore, arguably unreliable. Currently, the section 179 deduction limit is only
c. Clear Reflection of Income Test
To deduct amounts in excess of the
d. Current Capitalization Policies
We also believe the
e. Expansion of the AFS Definition for
The AICPA believes the requirement that a taxpayer have an AFS to use the
3. Civil Tax Penalties
We have concerns n6 about the current state of civil tax penalties and would like to offer the following suggestions for improvement:
a. Trend Toward Strict Liability
The
Over the past several decades, there has been an exponential increase in the complexity of the tax laws and a proliferation of increasingly severe civil tax penalties, with the Internal Revenue Code (IRC or "Code'*) currently containing eight strict liability penalty provisions.
b. An Erosion of Basic Procedural Due Process
Penalties should apply prospectively to future conduct and not retroactively to conduct that was appropriate at the time the conduct occurred. Judicial review of an
Taxpayers should know their rights to contest penalties and have a timely and meaningful opportunity to voice their feedback before assessment of the penalty. In general, this process would include the right to an independent review by the
c. Repeal Technical Termination Rule
We recommend n7 the repeal of section 708(b)(1)(B) regarding the technical termination of a partnership. n8 Under current law, when a partnership is technically terminated, the legal entity continues, but for tax purposes, the partnership is treated as a newly formed entity. The current law requires the partnership to select new accounting methods and periods, restart depreciation lives, and make other adjustments. Furthermore, under the current law, the final tax return of the "old" partnership is due the 15th day of the fourth month after the month-end in which the partnership underwent a technical termination. n9
A technical termination most often occurs when, during a 12-month period there is a sale or exchange of 50% or more of the total interest in partnership capital and profits. Because this 12-month time frame can span a year-end, the partnership may not realize that a 30% change (a minority interest) in one year followed by a 25% change in another year, but within 12 months of the first, has caused the partnership to terminate.
In practice, this earlier required filing of the old partnership's tax return often goes unnoticed because the company is unaware of the accelerated deadline due to of the equity transfer. Penalties are often assessed upon the business as a result of the missed deadline. Although ignorance is not an acceptable excuse, this technical termination area is often misunderstood and misapplied. The acceleration of the filing of the tax return, to reset depreciation lives and to select new accounting methods, serves little purpose in terms of abuse prevention and serves more as a trap for the unwary.
d. Late Filing Penalties of Sections 6698 and 6699
Sections 6698 and 6699 impose a penalty of
The AICPA proposes that a partnership, comprised of 50 or fewer partners, each of whom are natural persons (who are not nonresident aliens), an estate of a deceased partner, a trust established under a will or a trust that becomes irrevocable when the grantor dies, and domestic C corporations, will be considered to have met the reasonable cause test and will not be subject to the penalty imposed by section 6698 or 6699 if:
* The delinquency is not considered willful under section 7423;
* All partnership income, deductions and credits are allocated to each partner in accordance with such partner's capital and profits interest in the partnership, on a pro-rata basis; and
* Each partner fully reported its share of income, deductions and credits of the partnership on its timely filed federal income tax return.
e. Failure to Disclose Reportable Transactions
Taxpayers who fail to disclose a reportable transaction are subject to a penalty under section 6707A of the Code. For penalties assessed after 2006, the amount of the penalty is 75% of the decrease in tax shown on the return as a result of the transaction (or the decrease that would have been the result if the transaction had been respected for federal tax purposes). If the transaction is a listed transaction (or substantially similar to a listed transaction), the maximum penalty is
Under section 6662A, taxpayers who have understatements attributable to certain reportable transactions are subject to a penalty of 20% (if the transaction was disclosed) and 30% (if the transaction was not disclosed). A more stringent reasonable cause exception for a penalty under section 6662A is provided in section 6664, but only where the transaction is adequately disclosed, there is substantial authority for the treatment, and the taxpayer had a reasonable belief that the treatment was more likely than not proper. In the case of a listed transaction, reasonable cause is not available, similar to the penalty under section 6707A.
The AICPA proposes for an amendment of section 6707A to allow an exception to the penalty if there was reasonable cause for the failure and the taxpayer acted in good faith for all types of reportable transactions, and to allow for judicial review in cases where reasonable cause was denied. Moreover, we propose an amendment of section 6664 to provide a general reasonable cause exception for all types of reportable transactions, irrespective of whether the transaction was adequately disclosed or the level of assurance.
f. 9100 Relief
Section 9100 relief, which is currently available with regard to some elections, is extremely valuable for taxpayers who miss the opportunity to make certain tax elections.
g. Form 5471 Penalty Relief
On
4. Permanence of Tax Legislation
Taxpayers and tax practitioners need certainty to perform any long-term tax, cash-flow or financial planning and reporting. n12 The permanence of tax provisions, such as the enhanced section 179 deduction, can have impacts on the growth of small businesses. The section 179 provision allows small and mid-size business owners to immediately take a tax deduction on qualifying equipment, rather than delaying the deduction and taking it in smaller portions over an extended period of years. With the increased section 179 expense provision, business owners could deduct up to
Without permanency in the Code, we are concerned about the following consequences:
a. Impact on a Company's Financial Accounting and Reporting
The retroactive extension of tax deductions and credits has implications for a company's financial accounting and reporting. For financial accounting purposes, "the effect of a change in tax laws or rates shall be recognized at the date of enactment." n13 Accordingly, even if
b. Complexity and Administrative Burden for Taxpayers and the
When
If taxpayers have already filed their tax returns prior to the change in the law, they may need to file amended tax returns, reflecting the newly enacted tax rules for the prior tax year. Those taxpayers may have to pay additional costs for an amended tax return, and the
c. Adverse Impact on Small Businesses and Ultimately Jobs and Growth
These ever-changing, often expiring, short-term changes to the tax laws make it increasingly difficult for small businesses and their owners to perform any long-term tax, cash-flow or financial planning. If businesses are not able to rely on these tax benefits for the long term, they are limited in their ability to plan, invest, grow and expand, and hire additional workers. Therefore, we urge
While taxpayers have come to anticipate the retroactive reinstatement of expiring provisions (e.g., the research and development credit and the enhanced section 179 expense deduction) and may act under the assumption that
d. Effect on Economic Decisions and Tax Payments
Uncertainty concerning whether
e. Lack of Transparency and Certainty with Short-Term, Retroactive Extensions
The AICPA continues to support long-term tax reform simplification efforts as we strongly believe the short-term, retroactive extension of tax provisions on an annual basis is counter to the AICPA's Guiding Principles of Good Tax Policy, which promote certainty, as well as transparency and visibility. We also generally urge
5. Retirement Plans
Small businesses are especially burdened by the overwhelming number of rules inherent in adopting and operating a qualified retirement plan. Therefore, we encourage
a. Create a Uniform Employee Contributory Deferral Plan
The AICPA suggests that
b. Eliminate Certain Nondiscrimination Tests on Employee Pre-tax and Roth Deferrals for 401(k) Plans, Matching Contributions
We propose eliminating the following nondiscrimination tests since they artificially restrict the amount higher-paid employees are entitled to save for retirement on a tax preferred basis by creating limits based on the amount deferred by lower-paid employees in the same plan. The tests result in placing greater restrictions on the ability of higher-paid employees to save for retirement than those placed on lower-paid employees. Although the 403(b) plan is of a similar design, there is no comparable test on deferrals for this type of plan.
Specifically, we recommend elimination of the following nondiscrimination tests:
* The actual deferral percentage (ADP) test - The ADP test limits the amount highly compensated employees can defer pre-tax or through Roth after-tax contributions by reference to the amount deferred by non-highly compensated employees. This test applies only to a 401(k) plan.
* The actual contribution percentage (ACP) test - The ACP test similarly limits, for highly compensated employees, the amount of employer matching contributions and the amount of other employee after-tax contributions (which are based on employee contributions). This test is applicable for both 401 (k) and 403(b) plans.
c. Eliminate the Top Heavy Rules
We propose eliminating the top heavy rules because they constrain the adoption of 401(k) and other qualified retirement plans by small employers. Since the top heavy rules were enacted in 1982, there have been a number of statutory changes which have significantly decreased their effectiveness. The sole remaining top heavy rule is a required minimum contribution or benefit. The determination of top heavy status is difficult and the required 3% minimum contribution is often made for safe harbor 401(k) plans. The effect of the top heavy rules is to deter a small business from adopting a qualified retirement plan, including a non-safe harbor 401(k) plan. Without the top heavy rules, more small businesses would adopt plans to benefit their employees.
6. Alternative Minimum Tax Repeal
The AICPA supports repeal of the alternative minimum tax (AMT). n14 We believe that the current system's requirement for taxpayers to compute their income for purposes of both the regular income tax and the AMT is a far-reaching complexity of the Code. Small businesses, including those businesses operating through pass-through entities, are increasingly at risk of being subject to AMT.
This tax was created to ensure that all taxpayers pay a minimum amount of tax on their economic income. However, small businesses suffer a heavy burden because they often do not know whether they are affected until they file their taxes. They must constantly maintain a reserve for possible AMT, which takes away from resources that could be allocated to business needs such as hiring, expanding, and giving raises to workers.
The AMT is a separate and distinct tax regime from the "regular" income tax. Code sections 56 and 57 create AMT adjustments and preferences that require taxpayers to make a second, separate computation of their income, expenses, allowable deductions, and credits under the AMT system. This separate calculation must be done on all components of income including business income for sole proprietors, partners in partnerships and shareholders in S corporations. Small businesses must maintain annual supplementary schedules used to compute these necessary adjustments and preferences for many years to calculate the treatment of future AMT items and, occasionally, receive a credit for them in future years. Calculations governing AMT credit carryovers are complex and contain traps for unwary taxpayers.
Sole proprietors who are also owners in pass-through entities must combine the AMT information from all their activities in order to calculate AMT. Including adjustments and preferences from pass-through entities contributes to AMT complexity. The computations are extremely difficult for business taxpayers preparing their own returns and the complexity affects the
AICPA supports repealing the AMT for corporations and individuals altogether. As AMT complexities increase, so do the tax regime's impact on unintended taxpayers n15 and related compliance problems.
7. Listed Property
We recommend the removal of "computer or peripheral equipment" from the definition of "listed property" in order to simplify and modernize the traditional tax treatment of computers and laptops. Classifying computers and similar property as "listed property" under section 280F is clearly outdated in a business environment where employees are increasingly becoming expected to work outside of traditional business hours. Various forms of technology, including laptops, tablets and cell phones, are all converging to serve similar purposes and cost roughly the same prices to purchase. The costs for the internet and service plans are now frequently sold in "bundles" and shared between multiple devices so it has become arguably impossible to segregate the cost of service between a cell phone, tablet, and laptop. The AICPA believes legislative change to update the treatment of mobile devices is the best simplification, similar to section 2043 of the Small Business Jobs Act of 2010, where cell phones were removed from the definition of listed property for taxable years beginning after
Additionally, guidance is needed to simplify the determination of when an employer-provided cell phone or similar device is considered a working condition or de minimis fringe benefit under section 132. A safe harbor approach is recommended for simplification purposes and in light of the fact that cell phones often allow for unlimited phone calls making any personal use de minimis. When taxpayers do not meet the safe harbor for treating a device as a non-taxable fringe benefit, additional guidance is needed to help determine the taxable amount of the benefit in a simple manner.
8. Tax Return Due Date Simplification
Taxpayers and preparers have long struggled with problems created by the inefficient timeline and flow of information. Federal Schedules K-ls are often delivered late, sometimes within days of the due date of taxpayers' personal returns and up to a month after the due date of their business returns. Late schedules make it difficult, if not impossible, to file a timely, accurate return. The current inefficient timeline of tax return due dates is a problem for taxpayers as well as their tax practitioners.
The AICPA recommendation would alleviate the problems mentioned above by establishing a logical set of due dates, focused on promoting a chronologically-correct flow of information between pass-through entities and their owners. Our proposal includes the changes as follows:
Current Tax Due Dates:
*
*
Proposed Tax Due Dates:
*
*
*
We recommend the extended due dates to be six months after the original Filing due dates for all these forms, except the trust and estate Form 1041, which we recommend be extended five and half months.
The AICPA supports n16 the proposal to change due dates for tax returns of partnerships, S corporations and C corporations because it would:
* Improve the accuracy of tax and information returns by allowing corporations and individuals to File using current data from flow-through returns that have already been filed rather than relying on estimates;
* Better facilitate the flow of information between taxpayers (i.e., corporations, partnerships, and individuals);
* Reduce the need for extended and amended tax returns; and
* Simplify tax administration for the government, taxpayers, and practitioners.
9.
To further reduce the burdens of income tax compliance, the AICPA urges
In order for small businesses (and their tax practitioners) to receive the assistance they need on tax issues, it is essential for the
The AICPA also recommends that
We are concerned that the
CONCLUDING REMARKS
The AICPA understands the challenges that
The proliferation of new income tax provisions since the 1986 tax reform effort has led to compliance hurdles for taxpayers, administrative complexity, and enforcement challenges for the
n1 AICPA, Guiding Principles for Good Tax Policy: Framework for Evaluating Tax Proposals. 2001
n2 AICPA comment letter on the "Continued Availability of Cash Method of Accounting."
n3 The AICPA previously commented on increasing the safe harbor de minimis. A copy of the letter can be found at the AICPA comment letter on
n4 An applicable financial statement (AFS) is a financial statement that is (i) a financial statement required to be filed with the
n5 All section references in this letter are to the Internal Revenue Code of 1986, as amended, or the Treasury regulations promulgated there under, unless otherwise specified.
n6 See the "AICPA Tax Penalties Legislative Proposals." submitted to
n7 AICPA submitted comments to the
n8 AICPA submitted letters and written statements on Option 1 and Option 2 of Chairman Camp's Small Business Tax Reform Draft: See Option 1 comments at "AICPA testimony on Small Business and Pass-through Entity Tax Reform," dated
n9 For example, a partnership that technically terminated on
n10 AICPA letter on "Tax Reform Administrative Relief for Various Statutory Elections," submitted
n11 AICPA submitted comments to the
n12 For example, see the AICPA testimony before the U.S.
n13
n14 AICPA written testimony before the
n15 Although most sophisticated taxpayers are aware of the AMT and that they may be subject to its provisions, the majority of middle-class taxpayers has never heard of the AMT and is unaware that the tax may apply to them. Unfortunately, the number of taxpayers facing potential AMT liability is expanding exponentially due to: (1) "bracket creep;" (2) classifying as "tax preferences" the commonly used personal and dependency exemptions, standard deductions, and itemized deductions for taxes paid, some medical costs, and miscellaneous expenses; and (3) the inability to use many tax credits to offset AMT.
n16 We are pleased that this due dates proposal has wide bipartisan support and has been included in proposed legislation introduced by
n17 AICPA testimony on the
Read this original document at: http://www.sbc.senate.gov/public/?a=Files.Serve&File_id=7c3cb399-fe0d-4ea0-89c0-e3655fef039e
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