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26–348 PDF 2017

S. HRG. 115–101 

TAX REFORM: REMOVING BARRIERS TO SMALL 

BUSINESS GROWTH 

HEARING 

BEFORE THE

COMMITTEE ON SMALL BUSINESS 

AND ENTREPRENEURSHIP 

UNITED STATES SENATE 

ONE HUNDRED FIFTEENTH CONGRESS 

FIRST SESSION 

JUNE 14, 2017 

Printed for the Committee on Small Business and Entrepreneurship 

( 

Available via the World Wide Web: http://www.fdsys.gov 

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(II) 

COMMITTEE ON SMALL BUSINESS AND ENTREPRENEURSHIP 

ONE HUNDRED FIFTEENTH CONGRESS 

JAMES E. RISCH, Idaho, Chairman 

JEANNE SHAHEEN, New Hampshire, Ranking Member 

MARCO RUBIO, Florida 

RAND PAUL, Kentucky 

TIM SCOTT, South Carolina 

JONI ERNST, Iowa 

JAMES M. INHOFE, Oklahoma 

TODD YOUNG, Indiana 

MICHAEL B. ENZI, Wyoming 

MIKE ROUNDS, South Dakota 

JOHN KENNEDY, Louisiana 

MARIA CANTWELL, Washington 

BENJAMIN L. CARDIN, Maryland 

HEIDI HEITKAMP, North Dakota 

EDWARD J. MARKEY, Massachusetts 

CORY A. BOOKER, New Jersey 

CHRISTOPHER A. COONS, Delaware 

MAZIE K. HIRONO, Hawaii 

TAMMY DUCKWORTH, Illinois 

SKIFFINGTON E. HOLDERNESS, Republican Staff Director 

SEAN MOORE, Democratic Staff Director 

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C O N T E N T S 

OPENING STATEMENTS

Page 

Risch, Hon. James E., Chairman, and a U.S. Senator from Idaho ..................... 1 

Shaheen, Hon. Jeanne, a U.S. Senator from New Hampshire ............................ 3 

WITNESSES

Nellen, Annette, Chair, AICPA Tax Executive Committee, San Jose, CA ......... 3 

Reardon, Brian, President, S Corporation Association, Washington, DC ........... 25 

Mazur, Mark J., Director, Urban-Brookings Tax Policy Center, Washington, 

DC .......................................................................................................................... 37

ALPHABETICAL LISTING

American Farm Bureau Federation 

Statement Dated June 14, 2017 ...................................................................... 79 

American Institute of CPAs 

Letter Dated June 12, 2017 ............................................................................. 86 

Coalition to Preserve Cash Accounting 

Letter Dated June 28, 2017 ............................................................................. 87 

Kogod Tax Policy Center 

Statement Dated June 28, 2017 ...................................................................... 93 

Mazur, Mark J. 

Testimony .......................................................................................................... 37 

Prepared statement .......................................................................................... 39 

Responses to questions submitted by Chairman Risch ................................. 78 

Nellen, Annette 

Testimony .......................................................................................................... 3 

Prepared statement .......................................................................................... 6 

Responses to questions submitted by Chairman Risch ................................. 70 

Reardon, Brian 

Testimony .......................................................................................................... 25 

Prepared statement .......................................................................................... 27 

Responses to questions submitted by Chairman Risch ................................. 74 

Risch, Hon. James E. 

Opening statement ........................................................................................... 1 

Shaheen, Hon. Jeanne 

Opening statement ........................................................................................... 3 

Small Business Investor Alliance 

Letter Dated June 14, 2017 ............................................................................. 96 

Tax Aggie Coalition 

Letter Dated June 28, 2017 ............................................................................. 98 

The Like-Kind Exchange Stakeholder Coalition 

Letter Dated June 28, 2017 ............................................................................. 111 

Tomasky, Michael 

Article titled ‘‘Finally, Something Isn’t the Matter with Kansas ................. 57 

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TAX REFORM: REMOVING BARRIERS 

TO SMALL BUSINESS GROWTH 

WEDNESDAY, JUNE 14, 2017 

UNITED STATES SENATE, COMMITTEE ON SMALL BUSINESS

AND ENTREPRENEURSHIP, Washington, DC. 

The Committee met, pursuant to notice, at 3:04 p.m., in Room 

428A, Russell Senate Office Building, Hon. James Risch, Chairman 

of the Committee, presiding. 

Present: Senators Risch, Ernst, Inhofe, Young, Kennedy, Shaheen, Cantwell, Heitkamp, Booker, and Duckworth. 

OPENING STATEMENT OF HON. JAMES E. RISCH, CHAIRMAN, 

AND A U.S. SENATOR FROM IDAHO 

Chairman RISCH. Well, this meeting now will come to order, and 

welcome, everyone, this afternoon, and thank you so much for coming. 

Before we get started I would like to recognize that—and I speak 

for both myself, I am sure the Ranking Member also, that our 

thoughts and prayers are with our colleagues who were injured in 

this morning’s horrific attack, as well as with the heroic Capitol 

Police officers who sustained injuries as they took the necessary 

measures to protect our colleagues and the public. I have had an 

opportunity to talk to our colleagues from the Senate who were 

there, and they said if it was not for the Capitol Police this thing 

would have been much, much worse than what it was. So our 

thoughts and our prayers go out to all who were involved and to 

their families. 

With that, again, I would like to welcome everyone to our hearing today, and we are going to talk about tax reform, removing the 

barriers to small business growth. Myself, and I know the Ranking 

Member, likewise, has been in government virtually all of our adult 

lives, and have dealt with business, both small and big business, 

from both sides, and as a result of that we have come to understand the many, many challenges that face small businesses in 

America today. 

Small business owners want to spend their time growing their 

businesses and not taking time away from that effort to figure how 

to comply with the tax code and, more often than not, hiring outside tax help to make sure they are doing what they are supposed 

to do. 

Here is what we know. Tax compliance costs are 67 percent higher for small businesses than they are for big businesses, and roughLAP51NQ082 with DISTILLER

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ly 89 percent of small owners have to rely on outside tax preparers. 

Small businesses spend a lot of time and money that could be spent 

on their businesses trying to understand and comply with the law. 

If Congress is going to take a serious look at reforming the tax 

code, we certainly should look at ways it can be simplified, and how 

compliance costs can be decreased, and permanency provided so 

that small business owners know what rules they are playing by, 

and can do so with decreased cost to their business and, obviously, 

more productivity. 

Another significant issue for small businesses is whether tax reform will reduce rates for pass-through entities. Today, more than 

90 percent of businesses are considered sole proprietorships, or 

pass-through entities, while more than half of business income in 

the United States is earned through small businesses identified as 

one of these types of businesses. 

When we look at these numbers it is clear that if we want tax 

reform to bring growth to our economy, we must look at the individual tax code under which pass-through entities are taxed. We 

have to ensure that the reforms that could provide the most small 

business growth do not get lost in the discussion about tax reform, 

and that is one of the reasons why we are here today, and both the 

Ranking Member and I are absolutely committed to see that we 

hold the people’s feet to the fire that are going to be working on 

tax reform. 

I would like to introduce two of the witnesses and then I am 

going to yield to Senator Shaheen. 

I would like to welcome Ms. Annette Nellen, the Chair of the 

American Institute of CPAs Tax Executive Committee. This committee is the most senior committee of the tax division of the organization, and speaks for them on all matters related to taxation, including tax policy and legislation. She is also a professor at San 

Jose State University, where she teaches a number of tax-related 

courses and directs the graduate tax program. Ms. Nellen is a CPA 

herself, and will bring a wealth of knowledge and expertise to our 

discussions about the compliance issues small businesses face with 

our current tax system, and we are pleased to have her here today. 

I am also pleased to welcome Mr. Brian Reardon, President of 

the S Corporation Association. Mr. Reardon has, through his position with the association, a long history of advocating for 4.6 million S corporations across the country, to make sure their voices 

are heard when it comes to tax issues, and the implications of government mandates for small businesses. He will be able to provide 

the voice of small businesses across the country, across industry, 

of varying sizes, when it comes to the difficulties they have with 

the current tax system. 

I also wanted to recognize Mr. Mazur, the Director of the UrbanBrookings Tax Policy Center, who will be further introduced by 

Ranking Member Shaheen. 

Thank you all, again, for coming here today to join us on this important hearing, and with that, I want to turn the time over to our 

Ranking Member, Senator Shaheen. 

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OPENING STATEMENT OF HON. JEANNE SHAHEEN, RANKING 

MEMBER, AND A U.S. SENATOR FROM NEW HAMPSHIRE 

Senator SHAHEEN. Thank you very much, Mr. Chairman. This is 

an important hearing as we look at how we can remove burdens 

of our tax code on small business. As we all know, our tax code is 

in desperate need of reform. It is too long, too complex, and it creates a burden on middle-class families and small businesses across 

this country. Today’s hearing is an important opportunity for us to 

discuss how we might relieve some of these tax burdens on small 

businesses. 

As I travel around New Hampshire, and talk to small business 

owners, what I hear is that they are concerned about the red tape, 

mostly related to our tax code. According to the National Taxpayer 

Advocate Service, small businesses spend 2.5 billion, with a B, 

hours complying with the IRS rules each year, and, of course, for 

entrepreneurs, time is one of their most valuable resources, so 

every hour spent filling out forms is an hour they do not have to 

think about growing their businesses. 

So as we consider tax reform, we need to put the needs of small 

businesses front and center. We can do that, I think, by taking 

some common-sense steps to simplify taxes for small businesses, to 

relieve the burden that the tax code places on them, and we should 

look at closing loopholes that allow large businesses to avoid paying their fair share of taxes. We must ensure that our tax code is 

up to date, so that it encourages economic growth and competitiveness in emerging sectors of our economy. 

A lot has changed in the last 30 years since we last updated the 

tax code. As Congress considers tax reform, we need to make sure 

that our 29 million small businesses have a seat at the table, and 

so that is why we are looking forward to hearing from our witnesses today. We thank you for being here. 

And I will just point out that Mr. Mazur, who is Director of the 

Urban-Brookings Tax Policy Center is the Director of that center. 

From 2012 until 2017, he was the Assistant Secretary for Tax Policy at the U.S. Department of the Treasury, and he has served in 

the Federal Government for 27 years in various positions that relate, in some way, to our economy and to our tax code. So we are 

delighted to have you here and look forward to hearing your testimony. 

Thank you all, very much. 

Chairman RISCH. Thank you. What we would—I am going to recognize each of you to make an opening statement, if you would, 

please. Please try to keep it to about five minutes. Obviously, any 

remarks that you have we will accept for the record and publish 

it in the record of these proceedings. The members are anxious to 

get to questions that they want to drill down on, so with that, Ms. 

Nellen, we will recognize you first. 

TESTIMONY OF ANNETTE NELLEN, CHAIR, AICPA TAX 

EXECUTIVE COMMITTEE 

Ms. NELLEN. Thank you. Chairman Risch, Ranking Member Shaheen, and members of the Senate Committee on Small Business 

and Entrepreneurship, thank you for the opportunity to testify. The 

AICPA appreciates your leadership in ensuring that tax reform 

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considers ways to reduce the burden and complexity of tax compliance for small businesses and how that burden can hinder business 

growth. 

Today I would like to highlight a few tax reform issues that directly impact small businesses and their owners. First, tax relief 

should not mean a rate reduction for C corporations only. Congress 

should continue to encourage, or at least not discourage, the formation of sole proprietorships and pass-through entities. If Congress 

decides to lower corporate income tax rates, small businesses 

should receive a lower tax rate as well. 

We recognize that providing a reduced rate for income of small 

businesses will place additional pressure on the need to distinguish 

between profits of the business and compensation of the owner-operators. We should continue to use traditional definitions of reasonable compensation for this purpose. Partnerships and sole proprietorships should be required to charge reasonable compensation. 

We should not treat partners and sole proprietors as employees but 

rather as owner-operators whose labor is subject to appropriate 

withholding taxes. 

If Congress decides to use a 70/30 rule, treating 70 percent of 

pass-through income as employment income and 30 percent as return on capital, we urge you to make this proposal a safe harbor, 

rather than a hard and fast rule. A safe harbor would promote simplicity for many businesses without sacrificing fairness for others. 

To minimize controversy, the IRS should take additional steps to 

improve compliance in this area. Reporting requirements to disclose the factors considered and determining compensation would 

help address the enforcement challenges currently faced by the 

IRS. These new reporting requirements would only apply to owneroperators who believe their particular situation warrants treating 

a higher percentage of pass-through income as active business income than is allowed under the safe harbor. 

Next, we are concerned with, and urge you, to oppose any new 

limitations on the use of the cash method of accounting. The cash 

method is simpler in application, has fewer compliance costs, and 

does not require taxpayers to pay tax before receiving their income, 

which is why entrepreneurs often choose the cash method. Forcing 

more businesses to use the accrual method unnecessarily discourages business growth, increases compliance costs, and imposes financial hardship on cash-strapped businesses. 

Another important issue is the ability to deduct interest expense. 

Owners borrow to fund operations, working capital needs, equipment acquisition, and even to build credit for future loans. We 

should not take away or limit this critical deduction for many small 

businesses who with little or no access to equity capital are often 

forced to rely on debt financing. 

Another issue involves taxation of compensation. Congress 

should not reduce an employer’s ability to deduct a compensation 

pay to its employees, whether in the form of wages or fringe benefits. At the same time, it is important to retain the employee fringe 

benefit exclusion. Changes in this area would impact the ability of 

small businesses to attract and return a competitive workforce. 

Just quickly, a few additional items include increasing the startup business deduction to give entrepreneurs the support they need 

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in the early years, simplifying laws for qualified retirement plans, 

and simplifying the penalty system. Also, the AMT should be repealed for individuals and corporations, thereby making the system 

simpler and more transparent. 

Small business owners must deal with many business decisions 

and concerns. They have expertise in their business product and 

services but rarely are they experts in the areas of capitalization, 

retirement plan rules, and alternative income tax regimes. 

Improvement of IRS services would also help small businesses. 

We recommend modernizing IRS business practices and technology. 

For example, a new executive-level practitioner services unit that 

includes an online tax professional account with access to client information should be created. Enhancing the relationship between 

the IRS and practitioners benefits both the IRS and the millions 

of taxpayers, including small businesses, served by the practitioner 

community. 

Finally, we encourage you to enact mobile workforce legislation 

such as S. 540, introduced by Senator Thune. The burden of tracking and complying with all the different State payroll tax laws is 

complex and costly, particularly for small employers. S. 540 provides a uniform national rule for non-resident State income tax 

withholding, and a de minimis exemption from State income tax for 

non-resident employees. 

We provide more details on our tax reform ideas in our written 

testimony. Thank you. I would be happy to answer your questions. 

[The prepared statement of Ms. Nellen follows:] 

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~ AICPA' 

WRITTEN STATEMENT OF ANNETTE NELLEN 

ON BEHALF OF THE 

THE AMERICAN INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS 

BEFORE 

THE UNITED STATES SENATE 

COMMITTEE ON SMALL BUSINESS & ENTREPRENEURSHP 

HEARING ON 

TAX REFORM: REMOVING BARRIERS TO SMALL BUSINESS GROWTH 

JUNE 14,2017 

1455 Pennsylvania Ave. NW, Washington, DC 20004-1081 

T; +1202.737.6600 F: +1 202.638.4512 

aicpaglobal.com 1 cimaglobal.com I aicpa.org i cgma.org 
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AICPA's Written Statement of Annette Nellen, Chair, AICPA Tax Executive Committee 

U.S. Senate Committee on Small Business & Entrepreneurship 

June 14, 2017 Hearing on "Tax Reform: Removing Barriers to Small Business Growth" 

Page 1 of 18 

INTRODUCTION 

Chairman Risch, Ranking Member Shaheen, and Members of the Senate Committee on Small 

Business & Entrepreneurship, thank you for the opportunity to testify today at the hearing on 

"Tax Reform: Removing Barriers to Small Business Growth." My name is Annette Nellen. I 

am a professor and director of San Jose State University's graduate tax program, teaching 

courses in tax policy and reform, tax research, accounting methods, property transactions, 

employment tax, leadership and ethics. I am the Chair of the Tax Executive Committee of the 

American Institute of CP As (AICP A). I am pleased to testify today on behalf of the AICP A. 

The AICPA is the world's largest member association representing the accounting profession 

with more than 418,000 members in 143 countries and a history of serving the public interest 

since 1887. Our members advise clients on federal, state, local 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 businesses, as 

well as America's largest businesses. 

We applaud the leadership taken by the Committee to consider ways to reduce the burden and 

complexity of tax compliance faced by small businesses to ensure that tax rules support rather 

than discourage growth of businesses, particularly small business. Small businesses are the 

backbone of the U.S. economy, accounting for 54% of all U.S. sales and providing 55% of all 

jobs. 1 

Unfortunately, federal tax laws hinder growth for both small businesses and the U.S. economy. 

The increased time and effort needed to comply with the ever changing tax laws forces small 

businesses to devote extra time and dollars to tax compliance instead of growing their 

businesses. Time spent learning and complying with current ta;x laws often does not save time 

in future years as rules and tax compliance may change. According to a National Taxpayers 

Union Foundation study, the U.S. economy loses $233.8 billion annually from dedicating 6.1 

billion hours complying with tax laws.2 

Of course, we recognize that tax compliance is necessary. To help small businesses grow, we 

offer suggestions where Congress and the Internal Revenue Service (IRS) can help reduce the 

compliance burden, increase transparency and provide certainty. 

GOOD TAX POLICY 

First, we should consider the features of an ideal tax system for small businesses. The AICPA 

urges the Committee to consider comprehensive tax reform that focuses on simplification and 

1 U.S. Small Business Administration, Small Business Trends, ''Small Business, Big Impact!". 2 National Taxpayers Union Foundation, Study: $233.8 Billion, 6.1 Billion Hours Lost to Rising Tax Complexity, 

Apri18, 2015. Also see IRS National Taxpayer Advocate Annual Report to Congress, IR-2013-3 (l/91!3). 
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U.S. Senate Committee on Small Business & Entrepreneurship 

June 14,2017 Hearing on "Tax Refom1: Removing Barriers to Small Business Growth" 

Page 2 of 18 

other Principles o[Good Tax Policy3 as explained in a report we recently updated and issued.4 

Our tax system must be administrable, support economic growth, have minimal compliance 

costs, and allow taxpayers to understand their tax obligations. 

We believe these features are achievable if the following twelve principles of good tax policy 

are considered in the design of the system: 

• Equity and Fairness • Certainty 

• Convenience of Payment • Effective Tax Administration 

• Information Security • Simplicity 

• Neutrality • Economic Growth and Efficiency 

• Transparency and Visibility • Minimum Tax Gap 

• Accountability to Taxpayers • Appropriate Government Revenues 

Our profession has long-advocated for a transparent tax system. For example, we urge 

Congress to use a consistent definition of taxable income without the use of phase-outs. 

Provisions, such as phase-out rules, that limit or eliminate the use of certain deductions and 

exclusions for those taxpayers in higher tax brackets, perpetuate the flaws of the current 

system, leading to nontransparent tax results and increased complexity. These rules also create 

marginal rates in excess of the statutory tax rate. In addition, multiple tax regimes, such as the 

alternative minimum tax (AMT), which applies in addition to the regular income tax makes it 

almost impossible for taxpayers, including small business owners, to easily know their 

effective and marginal tax rates. Multiple tax regimes also makes it difficult for owners to 

develop effective businesses plans. We urge Congress to use tax reform as an opportunity to 

remove phase-outs and multiple tax regimes, and develop the best definition of taxable income 

or adjusted gross income by creating simple, transparent, tax rules applied consistently across 

all rate brackets, eliminating additional complex and hidden taxes. 

We also urge you to make tax provisions permanent. For all businesses, and small businesses 

in particular, uncertainty in the Internal Revenue Code (IRC or "Tax Code") creates 

unnecessary confusion and anxiety. Complexity can also result in taxpayers not taking full 

advantage of provisions intended to help them, resulting in higher taxes and greater compliance 

costs. While our Tax Code has always had a tendency to change, in recent years the rate of 

change has accelerated. Statutory changes result in new regulations, revenue procedures, 

notices and new or modified tax forms which take time and resources to understand and 

address. America's entrepreneurs need a Tax Code that is simple, transparent, and certain. 

3 AICPA concept statement, "Tax Policy Concept Statement I, Guiding Principles for Good Tax Policy: A 

Framework for Evaluating Tax Proposals," dated January 2017. 4 For an explanation of why and how the AI CPA Principles of Good Tax Policy were updated. see "Tax Principles 

for the Digital Age," May I, 2017. 
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U.S. Senate Committee on Small Business & Entrepreneurship 

June 14, 2017 Hearing on "Tax Reform: Removing Barriers to Small Business Growth" 

Page 3 of 18 

AICPA PROPOSALS 

In the interest of good tax policy and effective tax administration for small businesses, we 

appreciate the opportunity to address the following issues: 

1. Tax Rates for Pass-through Entities 

2. Distinguishing Compensation Income 

3. Cash Method of Accounting 

4. Limitation on Interest Expense Deduction 

5. Definition of"Compensation" 

6. Net Operating Losses 

7. Increase of Startup Expenditures 

8. Alternative Minimum Tax Repeal 

9. Mobile Workforce 

10. Retirement Plans 

11. Civil Tax Penalties 

12. Tax Administration 

13. IRS Deadline Related to Disasters 

14. Other Small Business Tax Issues 

1. Tax Rates for Pass-through Entities 

As Congress moves forward with tax reform, it is important to recognize that a rate reduction 

for only C corporations is inappropriate. The vast majority of businesses are structured as 

pass-through entities (such as, partnerships, S corporations, or limited liability companies). 5 

In 2014, there were almost 25 million individual tax returns that included a non-farm sole 

proprietorship.6 

Congress should continue to encourage, or more accurately- not discourage, the formation of 

sole proprietorships and pass-through entities because these business structures provide the 

flexibility and control desired by many new business owners as opposed to corporations which 

are subject to more formalities. Entrepreneurs generally do not want to create entities that 

require extra legal obligations (such as holding annual meetings of a board of directors). They 

prefer business structures that are simple and provide legal and tax advantages, such as the 

flow-through of early stage losses. As a business grows, however, it may need to change its 

structure to raise additional equity funding (such as, having employees become shareholders). 

If Congress decides to lower income tax rates for C corporations 7 (which are generally larger 

businesses), all business entity types including small businesses should also receive a rate 

reduction. Tax reform should not disadvantage sole proprietorships and pass-through entities 

5 See Census Bureau, County Business Patterns; Census Bureau, Nonemploycr Statistics. 6 IRS, Sole Proprietorship Returns, Tax Year20l4. 

'House Republican's Tax Reform Task Force, "A Better Wav: Our Vision (or a Confident America," June 24, 

2016. 
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AI CPA's Written Statement of Annette Nellen, Chair, AI CPA Tax Executive Committee 

U.S. Senate Committee on Small Business & Entrepreneurship 

June 14, 2017 Hearing on "Tax Reform: Removing Barriers to Small Business Growth" 

Page 4 of 18 

at the expense of furthering larger C corporations, or require businesses to engage in complex 

entity changes to obtain favored tax status. 

2. Distinguishing Compensation Income 

We recognize that providing a reduced rate for active business income of sole proprietorships 

and pass-through entities will place additional pressure on the distinction between the profits 

of the business and the compensation of owner-operators. We recommend determining 

compensation income by using traditional definitions of "reasonable compensation" 

supplemented, if necessary, by additional guidance from the Secretary of the Treasury. 

Changes to existing payroll tax rules, such as a requirement for partnerships and 

proprietorships to charge reasonable compensation for owners' services and to withhold and 

pay the related income and other taxes, will also facilitate compliance for small businesses. 

We encourage Congress to consider the existing judicial guidance on reasonable compensation 

that reflects the type of business (for example, labor versus capital intensive), the time spent 

by owners in operating the business, owner expertise and experience, and the existence of 

income-generating assets in the business (such as other employees and owners, capital and 

intangibles). 

We acknowledge that reasonable compensation has been the subject of controversy and 

litigation (hence, the numerous court decisions helping to define it). Therefore, the IRS should 

take additional steps to improve compliance and administration in this area. For example, the 

creation of a new tax form (or preferably, modification of an existing form, such as Form 1125-

E, Compensation ofQ!ficers) or a worksheet maintained with the taxpayer's tax records, would 

allow businesses to indicate the factors considered in determining compensation in a 

reasonable and consistent manner. These potential factors include: 

a. Approximate average hours per week worked by all owners; 

b. Approximate average hours worked per week by non-owner employees; 

c. The owner's years of experience; 

d. Guidance used to help determine reasonable compensation for the geographic area and 

years of experience (such as, wage data guides provided by the U.S. Bureau of Labor 

Statistics); and 

e. Book value and estimated fair market value of assets that generate income for the 

business. 

Changes are also necessary for ex1stmg payroll tax rules to require partnerships and 

proprietorships to charge reasonable compensation for owners' services and to withhold and 

pay the related income and other taxes. These types of changes to existing payroll tax rules 

will facilitate small business compliance. The partners and proprietors are not treated as 

"employees," but rather owners subject to withholding- a new category of taxpayer- similar 

to a partner with a guaranteed payment for services. Similar rules requiring reasonable 

compensation currently exist in connection with S corporations and such owners are 
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AICP A's Written Statement of Annette Nellen, Chair, AI CPA Tax Executive Committee 

U.S. Senate Committee on Small Business & Entrepreneurship 

June 14, 2017 Hearing on "Tax Reform: Removing Barriers to Small Business Growth" 

Page 5 of 18 

considered employees of the S corporation. The broader inclusion of partners and proprietors 

in more well defined compensation rules, should facilitate and enhance the development of 

appropriate regulations and enforcement in this area. 

The AICP A believes there are advantages of this reasonable compensation approach for 

owners of all business types. These advantages include: 

a. Fairness that respects the differences among business types and owner participation 

levels; 

b. A reduced reliance by both taxpayers and the IRS on quarterly estimated tax payments 

for timely matching of the earning process and tax collection; 

c. Diminished reliance on the self-employment tax system (since businesses would 

include payroll taxes withheld from owners and paid for owners along with their 

employees); and 

d. Simplification from uniformity of collection of employment tax from business entities, 

and an ability to rely on a deep foundation of case law (in the S corporation and personal 

service corporation areas) to provide regulatory and judicial guidance. 

In former Ways & Means Committee Chairman Dave Camp's 2014 discussion draft, 8 a 

proposal was included to treat 70% of pass-through income of an owner-employee as 

employment income. While this proposal presents a simple method of determining the 

compensation component, it would result in an inaccurate and inequitable result in many 

situations. If Congress moves forward with a 70/30 rule, or other percentage split, we 

recommend making the proposal a safe harbor option. For example, the proposal must 

make clear that the existence and the amount of the safe harbor is not a maximum amount 

permitted but that the reasonable compensation standard utilized for corporations will remain 

available to sole proprietorships and pass-through entities. These rules will provide a uniform 

treatment among closely-held business entity types. Appropriate reporting requirements, 

when the safe harbor option is not used, would also address the enforcement challenges 

currently faced by the IRS. For example, the modification of Form 1125-E would fully 

disclose factors considered in determining compensation that the IRS currently struggles 

to track. 

3. Cash Method of Accounting 

The AICPA 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. Therefore, entrepreneurs often choose this method for small businesses. 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 partnerships and S corporations. Requiring businesses to switch to 

8 H.R. 1 (ll3rd Congress), The Tax Reform Act of2014, Sec. 1502; also see Section-by-Section Summarv, pages 

32-33. 
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U.S. Senate Committee on Small Business & Entrepreneurship 

June 14,2017 Hearing on "Tax Refom1: Removing Barriers to Small Business Growth" 

Page 6 of 18 

the accrual method upon reaching a gross receipts threshold unnecessarily creates a barrier to 

growth.9 

The AICPA believes that limiting the use of the cash method of accounting for service 

businesses would: 

a. Discourage natural small business gro\\ih; 

b. Impose an undue financial burden on their individual owners; 

c. Increase the likelihood of borrowing; 

d. Impose complexities and increase their compliance burden; and 

e. Treat similarly situated taxpayers differently (because income is taxed directly on their 

owners' individual returns). 

The A! CPA believes that Congress should not further restrict the use of the long-standing cash 

method of accounting for the millions of U.S. businesses (e.g., sole proprietors, personal 

service corporations, and pass-through entities) currently utilizing this method. We believe 

that forcing more businesses to use the accrual method of accounting for tax purposes increases 

their administrative burden, discourages business growth in the U.S. economy, and 

unnecessarily imposes financial hardship on cash-strapped businesses. 

4. Limitation on Interest Expense Deduction 

Another important issue for small businesses is the ability to deduct their interest expense. 

New business owners incur interest on small business loans to fund operations prior to revenue 

generation, working capital needs, equipment acquisition and expansion, and even to build 

credit for larger future loans. These businesses rely on financing to survive. Equity financing 

for many start-up businesses is simply not available. A limitation in the deduction for interest 

expense (such as to the extent of interest income) would effectively eliminate the benefit of a 

valid business expense for many small businesses, as well as many professional service firms. 

If a limit on the interest expense deduction is paired with a proposal to allow for an immediate 

write-off of acquired depreciable property, it is important to recognize that this combination 

adversely affects service providers and small businesses while offering larger manufacturers, 

retailers, and other asset-intensive businesses a greater tax benefit. 

Currently, small businesses can expense up to $510,000 of acquisitions per year under section 

179 and deduct all associated interest expense. One tax reform proposal 10 under consideration 

would eliminate the benefit of interest expense while allowing immediate expensing of the full 

cost of new equipment in the first year. However, since small businesses do not usually 

purchase large amounts of new assets, this proposal would generally not provide any new 

benefit for smaller businesses (relative to what is currently available via the section 179 

• A required switch to the accrual method affects many small businesses in certain industries including accounting 

firms, law firms, medical and dental offices, engineering firms, and farming and ranching businesses. 10 House Republican's Tax Reform Task Force, "A Better Way: Our Vision for a Confident America," June 24, 

2016. 
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June 14, 2017 Hearing on "Tax Reform: Removing Barriers to Small Business Growth" 

Page 7 of 18 

expensing rule). Instead, it only takes away an important deduction for many small businesses 

who are forced to rely on debt financing to cover their operating and expansion costs. 

5. Definition of "Compensation" 

Tax reform discussions have recently considered whether the tax system should use the same 

definition for taxable compensation of employees as it does for the compensation that 

employers may deduct. In other words, should businesses lose some of their current payrolltype deductions if employees are not required to report those same compensation amounts as 

income? 

We are concerned, particularly from a small business perspective, about any decrease of an 

employer's ability to deduct compensation paid to employees, whether in the form of wages 

or fringe benefits (health and life insurance, disability benefits, deferred compensation, etc.). 

We are similarly concerned about expansion of the definition of taxable income for the 

employees, or removal of the exclusion for fringe benefits. Such changes in the Tax Code 

would substantially impact the small and labor-intensive businesses' ability to build and retain 

a competitive workforce. 

6. Net Operating Losses 

Congress should also provide tax relief to small businesses in the calculation of benefits related 

to net operating losses (NOLs). An NOL is generally the amount by which a taxpayer's 

business deductions exceed its gross income. Corporations currently operating at a loss can 

benefit from carrying these NOLs back or forward to offset taxable income. According to the 

current rules, these losses are not deducted in the year generated, but carried back two years 

and carried forward 20 years to offset taxable income in such years. 

One of the purposes of the NOL carryback and carryover rules is to allow a taxpayer to better 

reflect its economic position over a longer period of time than generally is allowed under the 

restraint of the annual reporting period. Since 1987, our experience with the 90% AMT 

limitation on the usc ofNOLs shows that this limitation often imposes a tax on corporations, 

especially small businesses in their early growth years, when such businesses are still 

struggling economically. Therefore, a proposal 1 1 for a 90% limitation on NOLs imposes an 

artificial restriction on a company's use of business losses and discriminates against companies 

with volatile income which could potentially pay more tax than companies with an equal 

amount of steady income over the same period. 

For sole proprietors, the calculation of the NOL is overly complicated. Congress should 

simplify the calculation while retaining the carryback option for small businesses. Most startup 

businesses are formed as pass-through entities 12 and the initial startup losses incurred are 

''passed down" and reported on the owners' tax returns. Because individual taxpayers report 

II fd. 

12 Center for American Progress, "Ending the Pass-Through Tax Loophole for Big Business," August 2016. 
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June 14, 2017 Hearing on "Tax Refom1: Removing Barriers to Small Business Growth" 

Page 8 of 18 

both business and nonbusiness income and deductions on their returns, the required 

calculations to separate allowed business losses from disallowed personal activities is 

complex. 13 Individual business owners would benefit from more specific guidance on NOL 

computations. 

7. Increase of Startup Expenditures 

In the interest of economic growth, we encourage Congress to consider increasing the 

expensing amount for startup expenditures. Section 195 allows immediate expensing of up to 

$5,000 of startup expenditures in the tax year in which the active trade or business begins. This 

amount is reduced dollar for dollar once total startup expenditures exceed $50,000, with the 

excess amortized ratably over 15 years. Thus, once startup expenditures exceed $55,000, all 

of these expenditures are amortized over 15 years. The rationale for the $5,000 expensing was 

to "help encourage the formation of new businesses that do not require significant startup or 

organizational costs." 14 These dollar amounts, added in 2004, are not adjusted for inflation. 

Only for tax years beginning in 20 I 0, the $5,000 was increased to $10,000 and the $50,000 

phase-out level was increased to $60,000. This change was described as "promoting 

entrepreneurship." 15 

The AICPA recommends increasing the $5,000 and $50,000 amounts of section 195 and 

adjusting them annually for inflation. These changes will further simplify tax compliance for 

small businesses by reducing (or eliminating) the number of such businesses that must track 

and report amortization of startup expenses over a 15-year period. In addition, as was 

suggested for the 2004 and 20 I 0 legislative changes, the larger dollar amounts will better 

encourage entrepreneurship. Higher dollar amounts also reflect the costs for legal, accounting. 

investigatory, and travel that are frequently incurred when starting a new business. Also, in 

light of the increased, inflation-adjusted dollar amounts under section 179 16 to help small 

businesses, it is appropriate to similarly increase the section 195 dollar amounts and adjust 

them annually for inflation. 

8. Alternative Minimum Tax Repeal 

Congress should repeal AMT for both individuals and corporations. The current system's 

requirement for taxpayers to compute their income for purposes of both the regular income tax 

and the AMT is a significant area of complexity of the Tax Code requiring extra calculations 

and recordkeeping. AMT also violates the transparency principle in masking what a taxpayer 

is allowed to deduct or exclude, as well as the taxpayer's marginal tax rate. Owners of small 

13 IRS Publication 536. 14 P.L. l 08-357 (l 0/22/04), American Jobs Creation Act, Sec. 902; Joint Committee on Taxation, General 

Explanation of Tax Legislation Enacted In the l 08th Congress, JCS-5-05, May 31, 2005, p. 504. 15 The one year change to the§ 195 dollar amounts was made by P.L 111-240 (9/27/10), the Small Business Jobs 

Act of2010, Sec. 2031(a); Joint Committee on Taxation, General Explanation of Tax Legislation Enacted in the 

Ill th Congress, JCS-2-11, March 20 II, p. 474. 16 P.L. 114-113 (12/18115), Sec. 124(a). 
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U.S. Senate Committee on Small Business & Entrepreneurship 

June 14, 2017 Hearing on "Tax Reform: Removing Barriers to Small Business Growth" 

Page 9 of 18 

businesses, including those businesses operating through pass-through entities and certain C 

corporations, are increasingly at risk of being subject to AMT. 

The AMT 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 they could allocate 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. IRC 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 is required for 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. The computations are 

extremely difficult for business taxpayers preparing their own returns and the complexity also 

affects the IRS's ability to meaningfully track compliance. 

9. Mobile Workforce 

The AI CPA supports the Mobile Workforce State Income Tax Simplification Act of 2017, 

S. 540, which provides a uniform national standard for non-resident state income tax 

withholding and a de minimis exemption from the multi-state assessment of state non-resident 

income tax. 17 

The current situation of having to withhold and file many state nonresident tax returns for just 

a few days of work in various states is too complicated for both small businesses and their 

employees. Businesses, including small businesses and family businesses that operate 

interstate, are subject to a multitude of burdensome, unnecessary and often bewildering nonresident state income tax withholding rules. These businesses struggle to understand and keep 

up with the variations from state to state. The issue of employer tracking and complying with 

all the different state and local tax laws is quite complicated, consumes a lot of time and is 

costly. 

11 For additional details, see AJCPA written statement, "AICPA Statement for the Record of the April13, 2016 

Hearing on "Keep it Simple: Small Business Tax Simplification and Reform, Main Street Speaks," dated April 

7, 2016. 
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June 14, 2017 Hearing on "Tax Reform: Removing Barriers to Small Business Growth" 

Page l0of18 

S. 540 would provide long-overdue relief from the current web of inconsistent state income 

tax and withholding rules on nonresident employees. Therefore, we urge Congress to pass 

S. 540 that provides national uniform rules and a reasonable 30 day de minimis threshold before 

income tax withholding is required. 

10. Retirement Plans 

Small businesses are especially burdened by the overwhelming number of rules inherent in 

adopting and operating a qualified retirement plan. Currently, there are four employee 

contributory deferral plans: 40 I (k), 403(b), 457(b ), and SIMPLE plans. Having four variations 

of the same plan type causes confusion for many plan participants and small businesses. 

Congress should eliminate the unnecessary complexity by reducing the number of choices for 

the same type of plan while keeping the desired goal intact: affording employers the 

opportunity to offer a contributory deferral plan to their employees and allowing those 

employees to use a uniform plan to save for retirement. 

Startup business owners are inundated with a myriad of new business decisions and concerns. 

These individuals may have expertise in their business product or service, but rarely are they 

experts in areas such as retirement plan rules and regulations. We encourage Congress to 

consider creating a uniform employee contributory deferral plan to ease this burden for small 

businesses. 

11. Civil Tax Penalties 

Congress should carefully draft penalty prov1s1ons and the Administration should fairly 

administer the penalties to ensure they deter bad conduct without deterring good conduct or 

punishing innocent small businesses owners (i.e., unintentional errors, such as those who 

committed the inappropriate act without intent to commit such act). Targeted, proportionate 

penalties that clearly articulate standards of behavior and are administered in an even-handed 

and reasonable manner encourage voluntary compliance with the tax laws. On the other hand, 

overbroad, vaguely-defined, and disproportionate penalties create an atmosphere of 

arbitrariness and unfairness that can discourage voluntary compliance. 

The AI CPA has concerns 18 about the current state of civil tax penalties and offers the following 

suggestions for improvement: 

a. Trend Toward Strict Liability 

The IRS discretion to waive and abate penalties where the taxpayer demonstrates 

reasonable cause and good faith is needed most when the tax laws are complex and the 

potential sanction is harsh. Legislation should avoid mandating strict liability 

penalties. Over the past several decades, the number of increasingly severe civil tax 

penalties have grown, with the Tax Code currently containing eight strict liability 

18 See AICPA whitepaper, "AICPA Tax Penalties Legislative Proposals," dated April 2013; and the "AlCPA 

Report on Civil Tax Penalties," submitted April 2013. 
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June 14, 2017 Hearing on "Tax Rcfom1: Removing Barriers to Small Business Growth" 

Page 11 of 18 

penalty provisions (for example, the accuracy penalty on non-disclosed reportable 

transactions). 19 

b. An Erosion of Basic Procedural Due Process 

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 IRS 

Appeals office or the IRS's FastTrack appeals process, as well as access to the courts. 

Pre-assessment rights are particularly important where the underlying tax provision or 

penalty standards are complex, the amount of the penalty is high, or fact-specific 

defenses such as reasonable cause are available. 

c. Repeal Technical Termination Rule 

We recommend the repeal of section 708(b)(l )(B) regarding the technical termination 

of a partnership. 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 tiling of the old partnership's tax return often goes 

unnoticed because the business 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. 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 $200 per owner related to late-filed 

partnership or S corporation returns. The penalty is imposed monthly not to exceed 12 

months, unless it is shown that the late filing is due to reasonable cause. 

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, is considered to have met the reasonable 

cause test and is not subject to the penalty imposed by section 6698 or 6699 if: 

'

9 Section 6662A, 6664( d). 
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June 14, 2017 Hearing on "Tax Reform: Removing Barriers to Small Business Growth" 

Page 12 of 18 

• 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 6707 A of the Tax Code. The section 6707 A penalty applies even if there is no 

tax due with respect to the reportable transaction that has not been disclosed. There is 

no reasonable cause exception to this penalty. 

Under section 6662A, taxpayers who have understatements attributable to certain 

reportable transactions are subject to a penalty of20% (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 6707 A. 

For example, a company that engaged in a "listed" transaction which gave rise to a 

deduction of$25,000 over the course of two years and inadvertently failed to report the 

transaction may be subject to a $200,000 penalty per year, for a total penalty of 

$400,000. The penalty can apply even if the deduction is allowable. 

We propose an amendment of section 6707 A 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 inadvertently miss the opportunity to make 

certain tax elections. Congress should make section 9100 relief available for all tax 

elections, whether prescribed by regulation or statute. The AICPA has compiled a list20 

of elections (not all-inclusive) for which section 9100 relief currently is not granted by 

20 AICPA comment letter. "'Tax Reform Administrative Relief for Various Statutory Elections," dated January 

23,2015. 
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June 14, 2017 Hearing on "Tax Reform: Removing Barriers to Small Business Growth" 

Page 13 of 18 

the IRS as the deadline for claiming such elections is set by statute. Examples of these 

provisions include section 174(b)(2), the election to amortize certain research and 

experimental expenditures, and section 280C(c), the election to claim a reduced credit 

for research activities. 

g. Form 5471 Penalty Relief 

On January 1, 2009, the IRS began imposing an automatic penalty of$10,000 for each 

Form 5471, Information Return of U.S. Persons with Respect to Certain Foreign 

Corporations, filed with a delinquent Form 1120, U.S. Corporation Income Tax 

Return, series return. When imposing the penalty on corporations in particular, the IRS 

does not distinguish between: a) large public multinational companies, b) small 

companies, and c) companies that may only have insignificant overseas operations, or 

loss companies. This one-size-fits-all approach inadvertently places undue hardship 

on smaller corporations that do not have the same financial resources as larger 

corporations. The AICPA has submitted recommendations 21 regarding the IRS 

administration of the penalty provision applicable to Form 5471. Our 

recommendations focus on the need for relief from automatic penalties assessed upon 

the late filing of Form 547 I in order to promote the fair and efficient administration of 

the international penalty provisions of the Tax Code. 

l2. Tax Administration 

As we approach the 20th anniversary of the Report of the National Commission on 

Restructuring the IRS ("Restructuring Commission"), we recommend that any effort to 

modernize the IRS and its technology infrastructure should build on the foundation established 

by the Restructuring Commission. The current degradation of the IRS taxpayer services is 

unacceptable. The percentage of calls from taxpayers the IRS answered between 2004 and 

2016 has dropped from 87% to 53%, however, the need for taxpayer assistance increased (the 

number of calls the IRS received increased from 71 million to 104 million).22 

As tax professionals, we represent one of the IRS's most significant stakeholder groups.23 As 

such, we are both poised and committed to being part of the solution for improving IRS 

taxpayer services. We recently submitted a letter24 to House Ways and Means Committee and 

Senate Finance Committee members in collaboration with other professional organizations. 

Our recommendations include modernizing IRS business practices and technology, reestablishing the annual joint hearing review, and enabling the IRS to utilize the full range of 

available authorities to hire and compensate qualified and experienced professionals from the 

21 AlCPA comment letter to the IRS, "Recommendations- Automatic Penalties Assessments Policy with the Late 

Filing of Form 5471," dated March 26,2013. 

''National Taxpayer Advocate, Annual Report to Congress 2016. Executive Summary: Preface Special Focus 

and Highlights, 2016, page 16. 23 60% of all e-filed returns in 2016 were prepared by a tax professional, according to the Filing Season Statistic 

for Week Ending Dec.2. 2016. 24 AICPA comment letter, "Ensuring a Modern-Functioning IRS for the 21st Century," dated April3, 2017. 
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June 14, 2017 Hearing on "Tax Reform: Removing Barriers to Small Business Growth" 

Page 14 of 18 

private sector to meet its mission. The legislative and executive branches should work together 

to determine the appropriate level of service and compliance they want the IRS accountable 

for and then dedicate appropriate resources for the Service to meet those goals. 

Additionally, we recommend the IRS create a new dedicated practitioner services unit to 

rationalize, enhance, and centrally manage the many current, disparate practitioner-impacting 

programs, processes, and tools. Enhancing the relationship between the IRS and practitioners 

would benefit both the IRS and the millions of taxpayers, including small businesses, served 

by the practitioner community. As part of this new unit, the IRS should provide practitioners 

with an online tax professional account with access to all of their clients' information. The 

IRS should offer robust practitioner priority hotlines with higher-skilled employees that have 

the experience and training to address complex issues. Furthermore, the IRS should assign 

customer service representatives (a single point of contact) to geographic areas in order to 

address challenging issues that practitioners could not resolve through a priority hotline. 

13. IRS Deadlines Related to Disasters 

Similar to IRS's authority to postpone certain deadlines in the event of a presidentiallydeclared disaster, Congress should extend that limited authority to state-declared disasters and 

states of emergency. Currently, the IRS's authority to grant deadline extensions, outlined in 

section 7508A, is limited to taxpayers affected by federal-declared disasters. State governors 

will issue official disaster declarations promptly but often, presidential disaster declarations in 

those same regions are not declared for days, or sometimes weeks after the state declaration. 

This process delays the IRS· s ability to provide federal tax relief to impacted businesses and 

disaster victims. Taxpayers have the ability to request waivers of penalties on a case-by-case 

basis; however, this process causes the taxpayer, tax preparer, and the IRS to expend valuable 

time, effort, and resources which are already in shortage during times of a disaster. Granting 

the IRS specific authority to quickly postpone certain deadlines in response to state-declared 

disasters allows the IRS to offer victims the certainty they need as soon as possible. 

This past year, multiple states along Southeastern U.S. were affected by Hurricane Matthew, 

including Florida, Georgia, North and South Carolina, and Virginia. From October 6 through 

I 0, Matthew traveled north along the southeast coast. A federal state of emergency was 

declared for Florida on October 6 and later extended to include Georgia and South Carolina. 

Tax preparers and taxpayers living in the affected regions not only lost access to power and 

the internet, but lost tax documents and financial information due to flooding and destruction 

of both their homes and businesses. On October 13,2016, the IRS issued IR-2016-132 offering 

federal tax relief to regions of North Carolina. The relief arrived two days before the major 

October 15 extended tax filing deadline -which caused tax practitioners unnecessary stress 

and burden for the days leading up to the issuance of the relief. Three days after the extended 

filing deadline, on October 18, the IRS issued relief for Florida and Georgia - which was, 

unfortunately, too late to make a substantial difference. 
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June 14, 2017 Hearing on "Tax Refom1: Removing Barriers to Small Business Growth" 

Page 15 of IS 

More recently, on March 13, 2017, Winter Storm Stella hit the Northeast and Mid-Atlantic 

U.S. covering many states in multiple feet of snow two days before the March 15 business 

return due date. Before 2:00pm (ET) on the first day of the storm, governors in New York 

and other states began issuing emergency declarations while the AICPA and state CPA 

societies along the northeast received calls from members needing federal filing relieffrom the 

IRS. Two days later, at approximately 4:30 pm (ET) on the March 15 filing due date, the IRS 

finally issued IR-20 17-61 offering business taxpayers affected by Winter Storm Stella 

additional time to file. Receiving federal extensions are helpful, but the sooner the IRS can 

grant this relief, the greater the beneficial impact on victims. 

The AICPA has long supported a set of permanent disaster relief tax provisions 25 and we 

acknowledge both Congress's and the IRS's willingness to help disaster victims. To provide 

more timely assistance, however, we recommend that Congress allow the IRS to postpone 

certain deadlines in response to state-declared disasters or state of emergencies. 

14. Other Small Business Tax Compliance Issues 

There are several other small business tax compliance burden proposals that we support, 

including: 

a. Listed Property 

We suggest removing "computer or peripheral equipment" from the definition of 

"listed property" in order to simplify and modernize the traditional tax treatment of 

computers and laptops. 26 Classifying computers and similar property as "listed 

property" under section 280F is clearly outdated in a business environment where 

employees are increasingly 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. The costs for the internet and service plans are 

now frequently sold in "bundles" and shared between multiple devices and 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 December 31, 2009. 

b. Executive Compensation 

The AICPA supports that section 409A requirements should apply only to public 

companies.27 Section 409A, which applies to compensation earned in one year but paid 

in a future year, was enacted to protect shareholders and other taxpayers from 

25 AICPA comment letter, "Request for Permanent Tax Provisions Related to Disaster Relief," dated November 

22,2013. 

26 AICPA written statement, "Targeted Tax Reform: Solutions to Relieve the Tax Compliance Burden(s) for 

America's Small Businesses," dated July 22. 2015. 27 ld 
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Page 16 of 18 

executives guarding their own financial interests without concern for the financial 

interests of the organization, its shareholders or other creditors. 

The rules apply to a broad array of compensation arrangements, including many 

business arrangements that are not thought of as deferred compensation. Nonpublic 

companies often want arrangements with employees to allow for sharing equity or 

providing capital accumulation for long-term employees, and constraining the 

nonpublic business owner by rules designed to protect absentee shareholders should 

not occur. 

Many nonpublic entities have noncompliant plans that are not correctable under the 

existing administrative correction programs. The cost of a noncompliant 409A plan is 

excessive given the unintended violations. In addition to accrual base income 

recognition, the additiona120% tax applies to the recipient, often a person unknowingly 

affected by the violations. Requiring private companies to pay for the specialized tax 

guidance needed to ensure that a compensatory arrangement is 409A compliant should 

not occur. The cost of imposing 409A requirements on nonpublic companies is far in 

excess of any benefit derived. 

c. Elimination of Top-Heavy Rules (for Retirement Plans) 

Small businesses are especially burdened by the overwhelming number of rules 

inherent in adopting and operating a qualified retirement plan. Therefore, we support 

repealing the sole remaining top-heavy rule, which limits the adoption of 401(k) and 

other qualified retirement plans by small employers and requires a minimum 

contribution or benefit.28 The determination of top-heavy status is difficult and the 

required 3% minimum contribution is often made for safe harbor 40 I (k) plans. Without 

the top-heavy rules, more small businesses would adopt plans to benefit their 

employees. 

d. Provide Full Deductibility of Health Insurance 

We recommend allowing full deductibility of health insurance costs in calculating the 

self-employment tax for self-employed individuals.29 This suggestion would provide 

that deductions allowed in determining income subject to Survivors, and Disability 

Insurance (OASDI) and health insurance (HI) taxes remain consistent amongst 

taxpayers regardless of whether they are employees or self-employed individuals. 

Currently, employees receive this deduction for their health insurance costs while selfemployed individuals are not allowed a deduction in determining their net income 

subject to these taxes. The calculation of income subject to a particular tax should 

remain consistent amongst all taxpayers. 

28 Since top-heavy rules were enacted in 1982, there have been a number of statutory changes which have 

significantly decreased their effectiveness. For additional details see AICPA comment letter, "AlCPA 

Suggestions to Tax Reform Working Group on Savings and Investments," dated March 6, 2015. 29 For additional details, see "20 17 AI CPA Compendium of Tax Legislative Proposals - Simplification and 

Technical Proposals", December 14,2016. 
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AICP A's Written Statement of Annette Nellen, Chair, AICPA Tax Executive Committee 

U.S. Senate Committee on Small Business & Entrepreneurship 

June 14, 2017 Hearing on "Tax Reform: Removing Barriers to Small Business Growth" 

Page 17 of 18 

30 Id 

e. Increase the Passive Income Percentage to 60% and Eliminate the Three Year 

Termination for S Corporations 

The AI CPA recommends increasing the threshold of an S corporation's income that is 

considered passive without incurring an entity-level tax to 60% (from 25%). 30 

Additionally we recommend eliminating the current rule that terminates an S 

corporation's pass-through status if the S corporation has excess passive income for 

three consecutive years. 

Currently, if an S corporation has excess passive income for three consecutive years, 

even though incurring a corporate-level tax is a possibility due to the taxable income 

limitation, the Selection is subject to termination, creating uncertainty in S corporation 

operations. Under current law, if the S corporation unknowingly has $1.00 of 

accumulated earnings and profits, the S election is terminated if the S corporation has 

excess passive investment income for three consecutive years. The IRS routinely 

grants waivers of the involuntary termination under section I 362(d)(3). S corporations 

without C corporation earnings and profits may receive an unlimited amount of passive 

investment income and are not subject to the S election termination. 

f. Guidance Needed on Emerging Issues 

Online crowdfunding and the sharing economy are quickly expanding mediums 

through which individuals obtain funds, seek new sources of income, and start and 

grow businesses. Individuals may understand the steps through which they can use 

these new crowdfunding and sharing economy opportunities to their advantage. 

However, many tax preparers and their clients do not have the guidance necessary to 

accurately comply with the complex, out-of-date, or incomplete tax rules in these 

emerging areas. 

Lawmakers and tax administrators must regularly review existing laws, against new 

changes in the ways of living and doing business, to determine whether tax rules and 

administration procedures need modification and modernization. We urge Congress 

and the IRS to develop simplified tax rules and related guidance in the emerging 

sharing economy and crowdfunding areas. 31 Some of the areas in need of 

modernization include information reporting (such as to avoid reporting excluded 

income, such as a gift, as income), simplicity in reporting and tracking rental losses 

from year to year, and simplified approaches for recordkeeping for small businesses. 

Offering clarity on these issues will allow taxpayers to follow a fair and transparent set 

of guidelines while the IRS benefits from a more efficient voluntary tax system. In 

addition, it is not recommended to bypass these evolving opportunities of connecting 

businesses and customers, and generating funds for equity and sales, due to 

entrepreneurs concerned about uncertain tax effects. 

31 AICPA written statement, "The 2017 Filing Season: IRS Operations and the Taxpayer Experience," dated April 

6, 2017. 
24 

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AICP A's Written Statement of Annette Nell en, Chair, AI CPA Tax Executive Committee 

U.S. Senate Committee on Small Business & Entrepreneurship 

June 14, 2017 Hearing on "Tax Reform: Removing Barriers to Small Business Growth" 

Page 18 of 18 

CONCLUDING REMARKS 

Tax compliance requirements have become an everyday burden for small businesses. The 

current complexity and uncertainty of the Tax Code forces small businesses to utilize critical 

resources and can hinder their ability to grow and create jobs. As Congress tackles the complex 

issues inherent in drafting tax legislation, we encourage you to consider tax reform that will 

provide simplicity, certainty and clarity for small business owners. 

The AICPA has consistently supported tax reform simplification efforts because we are 

convinced such actions will significantly reduce small businesses' compliance costs and fuel 

economic growth. The AICPA appreciates the opportunity to testify and we look forward to 

working with the Committee as you continue to address the needs of small businesses and their 

owners. 
25 

Chairman RISCH. Thank you very much. Mr. Reardon. 

TESTIMONY OF BRIAN REARDON, PRESIDENT, S 

CORPORATION ASSOCIATION 

Mr. REARDON. Thank you, Chairman, Ranking Member Shaheen. 

I appreciate the opportunity to testify here today. 

I have managed the S Corp Association for the past 12 years, 

and during that time we have developed a number of research 

pieces, a number of themes to help education policymakers on the 

importance of the pass-through community and on the priorities of 

the pass-through community and tax reform, and I would like to 

hit a couple of those themes here today. 

The first theme is that small business is really big. The passthrough sector—that is S corporations, partnerships, LLCs, and 

sole proprietorships—they employ more people, they employ the 

majority of private-sector workers in the country, and they earn the 

majority of business income in the country. In fact, 57 percent of 

private-sector workers get up every day and they go to work at a 

pass-through business. In some states, some of the states that you 

guys actually represent, they employ nearly 7 out of 10 workers. 

So if tax reform is going to be successful at returning jobs and 

money to the United States, it needs to include pass-through businesses at the beginning of the conversation, and not just as an 

afterthought. 

Second, the business tax base is getting bigger. We hear a lot 

about erosion of the corporate tax base, and the implication is that 

this is a bad thing. But the reality is that since 1986, the business 

tax base, the corporate sector and the pass-through sector, is bigger 

today than it was back in 1986, and growth is completely due to 

the growth of the pass-through sector, and that growth is a good 

thing. It is something to be celebrated. It is not something to be 

worried about. 

The reason that it is something to be celebrated is point three, 

which is moving business activity away from the harmful double 

corporate tax and towards pass-through treatment is good for the 

economy. We hired Ernst & Young back in 2011 to give us a sense 

of both the economic footprint of the pass-through community but 

also the economic contribution, and what they found is that there 

are more jobs and more investment in the economy with the current system, with pass-throughs being a robust part of the economy, than if all businesses were structured as C corporations. 

The fourth point is that pass-throughs pay their fair share. They 

may not pay the corporate tax but they do pay taxes, they do pay 

it when it is earned, and they pay a lot of taxes. We hired a firm 

back in 2013 to measure the effect of tax rates of all businesses by 

structure, so S corp, partnerships, C corp, et cetera. What they 

found is that S corps pay the highest effective tax rate, 32 percent. 

Large S corps, those with more than $10 million in income, pay 

over 35 percent effective tax rate. That is no margin rate. That is 

the effective. That is how much they actually pay. That compares 

to 29 percent for partnerships, 15 for sole proprietorships, and 27 

percent for C corps. The bottom line is the pass-through community 

is paying its fair share in taxes. 

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26 

And then, finally, the last statement is that taxes on those passthrough businesses just went up, starting in 2013. One of the reasons that the effective rate for S corporations and partnerships is 

so high is that they pay higher rates. As a result of the fiscal cliff 

and the Affordable Care Act taxes, the top rates on pass-through 

businesses increased from 35 percent in 2012, to 44 percent in 

2013. When you combine those taxes with State and local taxes, 

some pass-through businesses face marginal rates of over 50 percent, and in the back of my written testimony we have a chart 

showing the marginal rates for each state when you add in the 

local and State taxes. 

With those facts in mind, the Main Street business communities 

coalesced around the following three principles for tax reform. 

First, it needs to be comprehensive. That is, individual, passthrough, and corporate. Second, it needs to lower rates for passthrough and C corps alike, to try to restore the rate parity that we 

had from 2003 to 2012. And then, finally, it should seek to reduce 

or eliminate the double tax on C corporations. Last year, 120 trade 

associations signed on to those three pass-through principles. It includes the Farm Bureau, NFIB, the restaurant associations, most 

of the major national groups. 

The good news is that most of the plans that are under consideration right now embrace those principles. They are comprehensive, 

they all seek to restore rate parity, and they all seek to reduce the 

double tax on C corporations. 

They also include a number of provisions that are important to 

Main Street businesses that Annette mentioned. One is repeal of 

the estate tax, the second is repeal of the AMT, the third is repeal 

of the ACA surtax, and the final one is to increase small business 

expensing beyond its current limits. When you couple those provisions with rate reduction, these provisions would sharply reduce 

the effective tax rates paid by pass-through businesses while dramatically simplifying the tax code. 

So that is it. Those are the priorities for the pass-through community. I really appreciate the opportunity to testify here today 

and I am happy to take any questions. 

[The prepared statement of Mr. Reardon follows:] 

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Testimony before the Senate Committee on Small Business 

"Tax Reform: Removing Barriers to Small Business Growth" 

Brian Reardon ·· President, S Corporation Association 

June 14,2017 

Congress created S corporations over fifty years ago explicitly to encourage private enterprise --

and it worked. Today there are 4.7 millionS corporations.' They are in every community and 

they are engaged in every type of industry. Their emergence has made the US economy larger 

and more flexible, resulting in more employment, more investment, and a stronger safety-net 

against economic downturns like the recent financial crisis. 

Despite this success, the debate over reforming business taxation has focused primarily on C 

corporations and their challenges. US-based C corporations pay some of the highest tax rates 

in the world, and they are hamstrung by an outdated worldwide system that chases their 

income wherever it is earned. As a result, the tax code encourages our public companies to 

shift jobs, investment, and even their headquarters overseas. To address this, Congress needs 

to enact reforms that fix the tax code for C corporations. 

But pass through businesses, including S corporations, face the same challenges as C 

corporations. The C corporation tax rate may be among the highest in the world, but the tax 

rate paid by S corporations is even higher. Moreover, pass through businesses have a bigger 

economic footprint than C corporations- they employ more people and they contribute more 

to national income. So any reform needs to be permanent, comprehensive, and treat pass 

through businesses as equal partners. 

This is an argument we have been making for several years, and during that time we have 

developed a number of themes that help explain both the importance of the pass through 

community to investment and jobs here in the United States, and the reasons why Congress 

should enact permanent, comprehensive tax reform that reduces tax rates for pass through 

businesses and C corporations alike. 

1. Start with S Corporations 

The S corporation structure is the correct way to tax business income. If Congress were starting 

from scratch, it would begin with the S corporation as the base model. There are three key 

reasons why this is the case. 

1 1RSSOI 

1 
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• First, S Corporation income is taxed just once, which is the correct way to tax business 

income. Multiple layers of taxation raise effective tax rates and they distort business 

behavior. There is a reason why only a small minority of C corporations pay dividendsthey are adjusting their behavior to avoid that second layer of tax. Business income 

should be taxed once at a reasonable rate and then that's it. 

• Second, S corporation income is taxed when it is earned and it is taxed regardless of 

whether the income is "distributed" to shareholders. There is no election or deferral in 

paying tax on 5 corporation income. 

• Finally, 5 corporation income is taxed at progressive rates tied to a shareholder's 

income. Wealthy 5 corporation shareholders pay high marginal rates while lower 

income shareholders pay lower rates. This contrasts with the C corporation model 

where, with few exceptions, most C corporation shareholders pay the same marginal 

tax, regardless of their income. 

Congress should keep these advantages in mind as it tackles tax reform. Tax reform should 

move the tax code towards the pass through model, not away from it. 

2. The Business Tax Base is Growing, Not Shrinking 

We often hear observation that the corporate tax base has shrunk since 1986, usually as a 

prelude to calling for expanding the reach of the corporate tax. The reality, however, is that the 

overall business tax base is growing, not shrinking. Businesses play a bigger role in the 

American economy today than they did prior to 1986, entirely due to the contributions of pass 

through businesses, including S corporations. 

Prior to 1986, traditional C corporation income made up approximately 8 percent of GDP while 

pass through income, including S corporations, made up just one percent, for a total of 9 

percent. Today, C corporations contributeS percent of GDP while pass through businesses add 

6 percentage points- a total of 11 percent of GDP. 2 That bigger share of the overall economy 

means more jobs and more investment. 

So instead of decrying the "erosion" of the corporation tax base, the tax community should be 

celebrating the growth of the "business" tax base. It's a good news story. 

3. The Business Community Has Voted for a Single Layer of Tax 

This shift away from the traditional corporate form is reflective of a broader theme, where the 

business community is migrating away from the harmful double corporate tax. For example, 

2 http://taxfoundation .org/ article/ a merica-s-sh rin king-corporatesector?mc_cid=275125da58&mc_eid=8aee3da63d 

2 
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the Tax Foundation found that in 2012 that pass through businesses earned nearly 60 percent 

of business income (single layer) while C corporations earned only 40 percent (double 

taxation).3 These income numbers suggest a majority of business income today is not subject 

to the double tax. 

The shift to a single layer of tax is even more profound than those numbers suggest. The Tax 

Policy Center4 recently reported that only one-quarter of US corporate stock today is owned in 

taxable accounts, down from four-fifths back in 1965. The rest is held by qualified plans, 

endowments, charities, foreign accounts, etc. This suggests that about 90 percent of all 

business income (pass through income plus three-quarters of C corporation income) is subject 

to a single layer of tax. 

Congress may be seeking ways to improve the tax code and reduce the double tax on corporate 

America, but the business community is already there. Proposals to integrate the corporate 

tax, as suggested by Chairman Hatch (R-UT) and the Bush Treasury Department, would help the 

tax code catch up to the reality of business taxation today. 

4. Pass Through Business Employ Most Workers 

While businesses organized as S corporations, partnerships and sole proprietorships are 

generally labeled "small," their cumulative contribution to the economy is large, starting with 

employment. 

The most recent numbers from the Tax Foundation found that 57 percent of private sector 

workers were employed at pass through businesses, with S corporations employing one in 

four5. According to the Tax Foundation: 

• Pass Through Businesses- 73 million (57 percent) 

• S corporations- 33 million 

• Partnerships- 14 million 

• Sole Proprietorships- 26 million 

• C Corporations- 54 million (43 percent) 

States with the highest levels of pass through employment include Montana, South Dakota, 

Idaho and Vermont. Only Hawaii has pass through employment levels below SO percent. large 

pass through businesses are also a significant source of employment, with more than 10 million 

people working at pass through businesses with more than 500 employees. 

3 https://taxfoundati on. org/pass-through-businesses-data-and-policy I 4 http://www. taxpolicycenter. org/taxvox/ only-about-one-quarter -corporate-stock-owned-taxable-shareholders 5 https:/ /taxfoundation.org/pass-th rough-businesses-data-and-policy I 

3 
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5. Pass Through Businesses Pay Their Fair Share of Tax 

A critique of S corporations is that they "avoid" the corporate tax, with the implication being 

that they either don't pay taxes at all or pay insufficient levels of tax. This critique is simply 

untrue. 5 corporations pay taxes on their business income when it is earned, and often at 

higher rates than C corporations. 

In 2013 we asked an econometric firm to measure6 the effective tax rates of businesses by type 

- C corporation, S corporation, partnership, and sole proprietorship. They found that S 

corporations, and particularly large S corporations, pay the highest effective federal tax rate: 

• Sole Proprietorships: 15 percent 

• C corporations: 27 percent 

• Partnerships: 29 percent 

• S corporations: 32 percent 

• large S corporations: 3S percent 

For pass through businesses, these results show what you might expect. Sole proprietorships 

are generally informal smaller enterprises with lower effective tax rates while partnerships and 

S corporations tend to be larger and more formal, so they tend to have higher effective tax 

rates. 

And while effective rates on C corporations have been studied extensively with varying results, 

the point here is that pass through businesses, and in particularS corporations, already pay 

their fair share and then some. Policymakers should keep this in mind as they seek to reform 

how businesses pay tax. 

6. Pass Through Taxes Just Went Up 

Finally, it is important to remind policymakers that, as a result of the resolution of the fiscal cliff 

and the implementation of a new Affordable Care Act tax, marginal tax rates on pass through 

businesses went up sharply beginning in 2013. 

First, top marginal rates on pass through businesses rose from 35 to 39.6 percent. Second, the 

restoration of the Pease limitation on itemized deductions has the effect of increasing marginal 

rates by another 1.2 percent. And finally, the implementation of the new ACA Investment 

Surtax adds another 3.8 percent on S corporation shareholders who do not work at the 

business. 

6 http://www.s-corp.org/wp-content/uploads/2013/08/Quantria_Study_ETR_8-6-13_Final_pm.pdf 

4 
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The cumulative effect of these changes was to raise the top marginal rate on 5 corporation 

shareholders and other pass through business owners from 35 to more than 44 percent. 

The resulting high rates drain working capital from these businesses. One of our members, 

McGregor Metal Working, testified back in 20157 that prior to 2013 they were able to retain up 

to 66 cents of every dollar of after-tax earnings for working capital and hiring new workers. 

Post 2013, they only are able to retain up to 59 cents, a decrease of 16 percent in retained 

earnings potential. That is a huge reduction, and it means fewer jobs and less investment. 

Pass Through Businesses and Tax Reform 

Beginning in 2011, the Treasury Department began to push the idea of "corporate-only" tax 

reform. Under this plan, the business tax base would be broadened by eliminating certain 

deductions and tax credits with the resulting revenue used to pay for lower rates for C 

corporations. 

The challenge this approach poses to pass through businesses is obvious. They use the same 

deductions and credits as C corporations, but unlike C corporations, their rates just went up, 

not down. The result would be pass through businesses paying top tax rates 15 to 20 

percentage points higher than C corporations. This disparity would be simply unsustainable. 

To assess how harmful this approach would be to pass through businesses, we asked Ernst & 

Young to study8 the effect of corporate-only tax reform. They found that corporate-only reform 

would increase the tax burden on pass through businesses by about $27 billion per year. 

Industries most affected would include agriculture, construction, and retail. 

Consider the impact on McGregor. The fiscal cliff raised their effective tax rate (including 

federal, state and local) from 34 to 41 percent. If Congress enacted corporate-only reform that 

lowered the corporate rate while eliminating McGregor's access to UFO, section 199, and the 

R&E tax credit, their effective rate would rise to over 50 percent. 

No amount of small business expensing or cash accounting could help to offset that tax hit. 

Pass Through Principles for Tax Reform 

So the pass through community opposes corporate-only tax reform. What do we support? In 

2016, more than one hundred trade groups, including the National Restaurant Association, the 

National Federation of Independent Business, and the American Farm Bureau, signed a letter 

articulating the following three principles for tax reform: 

7 https:/ /smallbusi ness. house.gov /uploadedfiles/ 4-15-2015 _mcgregor_ testimony .pdf 8 EY reference 

5 
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1. Reform needs to be comprehensive and improve the code for individuals, pass through 

businesses, and corporations alike; 

2. Reform should reduce rates on individuals, pass through businesses, and corporations 

and seek to restore the rate parity that existed from 2003 to 2013; and 

3. Reform should continue to reduce or eliminate the double tax on corporate income. 

The difference between a "corporate only" approach that treats pass through businesses as an 

afterthought and true comprehensive reform that treats them as equal partners is rate 

reduction. Tax reform needs to reduce rates on corporations and pass through businesses alike 

and seek to restore the rate parity that existed prior to 2013. 

Capping Pass Through Rates 

One option to achieve this parity is to create a special, lower rate for pass through businesses. 

The House "Blueprint", the plan outlined by Senators Rubio (R-FL) and lee (R-UT), and the 

Administration's tax reform outline all call for a new, lower top pass through rate. But 

separating pass through business and individual rates brings its own challenges- defining the 

new pass through tax base and including enforcement provisions to prevent cheating. 

For the first, the tax base for pass through businesses should mirror the tax base for 

corporations and include all the active business income earned by S corporations and other 

pass through businesses. Provisions to limit the new rate's application based on shareholder 

status or the size of the business are inappropriate. Senators Susan Collins (R-ME) and Ben 

Nelson (D-FL), along with Representative Vern Buchanan (R-Fl), have introduced legislation that 

demonstrates how the pass through tax base can be defined effectively. 

For the second, establishing a separate rate for pass through business income creates an 

enforcement challenge by taxing active pass through business income at a lower rate than 

individual wage and salary income. The bigger the difference in rates, the bigger the 

enforcement challenge. 

In addressing this challenge, Congress needs to make sure it doesn't undermine the value of the 

lower rate to business owners. Separating the return on owner's labor from the return on their 

investment in the business is not easy, but guidelines to reinforce the new pass through rate 

should include: 

1. Exempting non-active owners from the enforcement provisions. If an owner of a pass 

through business does not materially participate in the operation of the business, then 

there is no issue. 

2. Recognizing the investment pass through businesses make in their capital and 

employees. The new rule needs to recognize that some businesses make significant 

6 
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investments in both capital and employees and that much of the business' profits derive 

from these investments. 

3. Ensuring the new rules are easier to comply with-- and enforce-- than the existing 

"reasonable compensation" rules the IRS uses today. 

S Corporation Modernization 

Beyond tax reform and rate reduction, there are other ways Congress can encourage the 

creation and growth of Main Street businesses. Since its inception, the S Corporation 

Association has promoted legislation to improve the rules that govern 5 corporations, some of 

which date back over half a century. This Congress, the S Corporation Modernization Act (H.R. 

1696 and S. 711) was sponsored by Senators Thune (R-SD) and Cardin (D-MD) and 

Representatives Reichert (R-WA) and Kind (D-WI). 

Key provisions in the bill would enable S corporations to attract foreign investment, reduce the 

bite of the so-called "Sting Tax" on excessive passive income, and ensure that S corporation 

assets passed on from one generation to the next are treated similarly to assets held by a 

partnership. The S Corporation Association is working with our sponsors to include these 

provisions in the tax reform legislation to be considered by Congress later this year. 

Withdraw Section 2704 Rule 

Finally, not all tax issues critical to S corporations fit under the umbrella of tax reform. Last 

August, the Treasury Department proposed changes to Section 2704 that would, if left intact, 

result in increased estate and gift tax valuations of family-controlled businesses of 30 percent 

or more. 

The S Corporation Association has vigorously opposed these rules since their publication, 

submitting extensive comments, speaking at the public IRS hearing held in December, and 

organizing a trade association letter to congressional leadership requesting their assistance in 

defeating the rules. 

Most recently, we released a critical study sponsored by the S Corporation Association and 

several other trade groups. Authored by Clinton Administration economist Robert Shapiro, the 

study quantifies the economic harm the pending rules would have on employment and 

economic output. As the study concludes, over the next decade the rule would: 

• Reduce GDP by $154 billion; and 

• Reduce employment by 105,990 jobs. 

The Trump Administration supports estate tax repeal and has asked Treasury to list out those 

existing and pending regulations that should be repealed or, in the case of pending rules, 

7 
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withdrawn. The S Corporation Association has encouraged Treasury to include the 2704 rules 

on that list and intends to continue to press this issue until they are withdrawn. 

Conclusion 

Constructed correctly, tax reform can literally take us from one of the worst tax codes in the 

world to one of the best, but only if Congress pursues permanent, comprehensive reform that 

builds on the remarkable success of the S corporation. 

By adopting reforms that conform to the three pass through principles articulated above, 

Congress can completely redo how we tax business activity in the United States, helping to 

ensure that all businesses, public and private, large and small, are able to compete and grow on 

a level playing field. 

In turn, those businesses and the people who run them will respond with more investment, 

more jobs, and higher wages than if Congress did nothing. Tax reform is a generational 

opportunity, and like the 5 corporation, it needs to start on Main Street. 

8 
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Employmentby (lusiness Form and State (2014) C Corporation~ Pa~s~Tryr~ue:l! Bu~inesses So.le PrO:prietorships Partnerships S Corporatlqns 

;Al~bama 

State SJw:.o 42.1%. ~ 

728,300i 

Slw:.o;~ 

57.9%, 1,003,534· 

SJw:.o 20.0%; ~ 

347,124 

SJw:.o 11.3% ~.Slw:.o 

194,876. 26.7%' 

~ 

461,534 

'Alaska 403'JL 114,853! 59.7%, 169,812. ?4,4~1.: 10.9%. 3~po_o, ~ 2.~.1%! 74,371 

l~.~-~?-~!1 .. 43.6~~ -~·9~?.i8z:_ ~?·~~: ___ . ·--~-~.3 _?- ,,•-260~~!.-- 440,937~ 13.9%· 339_!1~4_, __ 2~.4% 593,348 

Arkansas 43.2% "'~ ~~2~""-~~9~:~ ~ 2~&%L~~ _ __ _ -,·- )J.l~.~~-1-,". _ .H-1'/'i>.:_ _ ~!?,4.f)_L~~,2S:~~t _"2.~~ •. 4~5 

~c~I~f~f~~ -~~-~ 4ii%'' .?A?Q~W-~!t.:. s.?·~!!-. _ -~~E~~~t-~j -_- .2~-?% 1 3,'!Q~~.~1~.:... ~~:-~~- !~~9.h~S.L~ ?5:~%: .. _ . ~~!3~.~s3 Colora~.o. 4~5%. 969,705. 59.5% 1,422,209 18.7% 447,853 13.9% 332,792, 2~.8%: 641,564 

:connecticut 43,7% 643,274; 5_6_.3~ 828,756 20.9% 307,921, 1K1% 237,400 19.3~; 283,435 

·Delaware 49.1% 195,702 50.9% 203,009 13.7% 54,655 14.7% 58,509 225% 89,845 

DlstrlctofColu~ 43.9% 161,660 56.1%, 206,418) 17.0% 62,430. 22.6% 83,082 16.5% 60,906, 

:Florida 41.2% 3,557,508' 58.8%, 5,082,343 20.1% 1,739,731 10.4%, 901,517 28.3%~ 2,441,095 

~~f&ia 42.7% 1,707,995 1 57.3% 2,295,527; 21.6%' ~65,04:8: 10.5% 421,~~9 2~p%! ~,008,510 

!H~waii... 50.1% 21~,21~j 49.9%. -~?1.48~; 2i.o%' 1.14,377; 10.5%; 5?,Q2_1, 18.~%; 100,088, 

.Jdaho 34.6% 2t;J2,031_ 65.4% 381,233: 21.0%] 122,439 1 15.4% 89,817 29.0%· 168,977 

:Illinois _ .~~}~~ • •• _2.~~~?~~.1.3: 55.7% ~~9?!!~~~9,~. .E:?'!ii ~f?.~.L~! 10.6% -~~!t~~~-+··-· E·!~i 1.~.23.?03 ln~!ana 40.3% 1,056/015 59:7%:~ 1,565,634: 16.4%: 431,261 12.6% 331,?5~ 3q.6%; 803,022 

'Iowa 45.1% 577,921 54.~_'1-!, 704,151: 17.4% 222,456 9.5% 12219?2 28.1% 359,633 

Kansas 45.1~: 539,954· 54.9% 656,641 17.9% 214,777· 11.8%, 140,8~?. 2.5.2.%; 300,978 

Kentucky 43.6% 694,931 56.4%, 897,393, 19.2% 305,141 12.2% 194A88, 25.0%. 397,764 

:louisiana 38.3% 710,963 61.7% 1,143,685 20.5% 380,761 14.9% 276,817. 26.2%j 486,107 

iMaine 35.2% 174,319' 64.8% 320,459 24.3% 120,135 9.6%. 47,503. 30.9% 152,821 

\!vt~!Y~.~:nd. " ... _40.8%. ~~7,363: 59.2%' 1,374.460; )1.2%: 492,043 11.4% ~~5,56~: 26.6%! 6.16,855 

:Massachusetts: 4.5.0% 1,307,633: 55.0% 1,595,143: 18.5% 537,166; 10.5%: 304,834 ~5.9%;. 753,143 

!~i~·~t$~!L 4:.?·?'l>.L . J.!?s;.12t".~ ~ .~?~~2L. ?:1Qi(~~1L ~ .. ~~.·1,?5o~ ~-~~~,_SA9~ t~.o~- . ·~:~?.it1?iL ,_?~.~~~.~ t,_qp,3s6_ 

~~.~!!~!'!.~.?.~- .: .. --.... 1.2:~?L , __ ;.!Q1.~·9?3·,. '"~}~?.~,:-~. ,;(~~!12.~~--.. 11.1%· _ 1~1.(~o} _ ~:19:6.... 231,374 3t~~~J- . .71~~~;;o 

;M~~ .. s!~.~lJ?P~- ~~·9"!< _ 4~~.954, 58.1% ."57~.?1~;. -.2i~~; -- 230,761 11.9% -· · '!1'?·;~~7" .. · 22.8%' 224.435 

~Mlssouri 44.7% 1!075,71!JL 55,3%" 3}3.4~.4; 18.6%. 448,452 i 11.1% .2~~.~.:4~_, 2~.7%~- 618,429 

:~~:~snk: !~:~~ ~!::;~~: ~::::: !~:!::1 ~~:;:] 1:;::~:: ~:~:: :~:~~~ :::::; ~~~:;:~ Nevada 44.4% 550,067, 55.6% 688,633 175%· 216,355, 15.6% 192,972 22.5%: 279,306 

N~.Ha.ll)p_sh!~~ 41.0% 233,811 59.0% 335,830: _ 21.4% 121,83( 11.6%: 6~ 0~?.- 26.0%' 147,977 

:New Jersey 41.7% 1,561,231, 58.3% 2.i8£;2~5: 18.3% 686,26~, 15.8% 59?,017 _ 24.1%- 901,943 

;.~-~-¥-~L~~---; .. " .~9.~~; ....... 254,_?.!!~) . so.z%: ..... __ ~-~'!·12.~;. ~;:;%: 135,060 .13:~-~; ....... s~.~?_?~" 2_?,.2.~j 160,934 

L~~-~~. ____ ,.0, ___ 3

4

.9

4

.:4

7

%% .•. __ _3

1

,,,

6

J:0

8 

.. ~!.9.3

3 .. .~ §~:?.~~--- 1,76_?~?03: ____ z~~Q~:- i~~~~~99_o; ~}:8"??.: h~ .. 5.~~"L_ .. ~2~~~- ~ _21q??._849 

:I'!C?r!~-<:.a!QI_i~¥1 .. ; . s5.3%: ... , ___ 2,0841595T 19:?.%: 739,2Bi 9.8% 370.051 2S.9%l 975,331 

::~-~~_kota !!:~: 2,~i~:~~~j :~:~=~ · 2,i~~:;::: i;:ci~\ s!;:~;~·· ~i:~:: s!~:~~;~ ~~:~:! ;~~~::;~ Oklahoma 40.4% 589,800) 59,6% 868,975: 20.1%' 293,582; 14.3% 208,895. 25.1%1 366,498 

1

0regon 40.0% 594,809' 60.0% 893,557, 20.0%\ 297,526 12.1%, 180,4p; 27.9%1 415,620 

·~~O!lSYIV~nia 43.2%, 2,167,764 56.8%, 2,855,287: 18.2% 913,043: 11.3%, 565,105 27.4% 1,377,139 

:Rhode Island 37.3%. 151,488! 62,7% 254,172: 18.8% 76,184; 9.6% 38,964 34.3% 139,024 

'South Carolina : 43.6%: 

; ~-q~!h__Q~_k!?~ _::~ ' "',3 ~ .. ?% :. ' 

Tent:~ess~ . _ 46.8% 

:J:exa~ ~~.4%; 

:~~-- -~" -"+ .. ~ _41.0~-- :Vermont 34.8% 

\V!r$in,i'a 44.5% 

:.washifl~.n 43.0% 

~~~t~~gtni.a_~ : 46_.2% 

~Wisconsin 42.1% 

:!YV2!!!!!l.IL. -~-~~~.'~~; 

766,549 

' ;~~t4:?.~ ~. 

~.p4,105 

4,;~~:;:,ci~· 90,263. 

1,477,090: 

1,109,811: 

258,872i 

998,866 

~.8 .. .?!?" 

989,824 19.4% 

~?!.1?~.... 20.2%' 

1,391,440 'li9% ~.1~?.2~1, 21.1%. 

7~2,88~ 1~.~~: 

168,826 27.2% 

1,840,105: 17.9%: 

1,470,607 18.5%' 

301,326 19.5% 

1,374,710 16.4% 

~~2_,12~ 19.0% 

) ... ,,,.,,!, '" ; .. , : . > 

341,492: 

67,386 

573,331, 

2(~57AJ0_4 ~ 

187,055. "- ·7o,s.ss··, 

593,351t 

477,960( 

109,046' 

39_0.~12; 

45,798 

11.3% 

-~2-?%. 

16.4% 

~.?·~.% 

15.7% 

-93%: 

11.1% 

11.6%, 

12.7% 

10.1%, 

13.8<J? 

198,321 25.6% 

''!0.~_2.3' ?.3:9_%: 

429,666 1.4.9%; 

1_.71?,!8~,.- 19.~%. ~ 

191,879 . ~8_._1~~ 

24,212 28.6%; 

367,790 26.5%; 

298,092 26.9%: 

71,038 21.6%: 

238,~~6~ .~}:4%' 

?}.~.~?: ~9.:~%,:" 

§our.f~:J:a~ F.~!::l~~~ti_on_ c_als_~!.a_tl_O!)~ !:Jas~ (lfl ~~s~s _county Bu!lnE";SS Patterns (2014) al'_ld N9n~Employe_r Statistics (2_Q14) 

.No}e: ~~~.!9 .. ~.a_~ ~onstr~_lf.!!S•.SC?'~- e~ploy~. may ?e collry.t~ ~or~.~an_~fl~e 

9 

450,011 

113,159 

388,443 

2,122,281 

~ 343,952 

74,029, 

878,964 

694,555 

121,242 

745,732 

7?,171 
36 

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RP 

L Combined Top Marginal Tax Rate on Pass-through Businesses by State, 2016 \~~~~~ ~ --- --- soTe ·prop·rieto·rs ·arurGenera·i · ---Active-s corpo-ration-·--- ; ·passrve ·s·corporation ·sharehOfders , 

'Alabama 4S.6~2%i ~ ~ ~~ 42.64%: ~46.44%1 

1

,\Jas.ka. 42.58%j 39.60%: 43.40% 

!~!~~~-~-~----- --------!--- 46.51%! 43.53%,: 47.33%: 

;Arkansas ~ .. j ..... ~ ..... ~.·~····~~······ 4793%T .. ~ ... ~~:9~~(~ ~· 4856% rc:;iiiOffii··--~~ . ···~··~--=~l:so%.L::::-.=:~. 48.82% ····· -·~~·52~62%' 

[~""L;;·,.~:.=::= .. :~ ........... _ ~ ........ 4.~6~L... .... . ~. ..~3~~s'J6.':.L:~== :=:~::~ · ····4738%: iConnectlcut 47.93% 44.96% .••. 48.76%' 

!Delawarej Di_~~riCt of Colum-bia 

,Florida 

rGeorg~a·· ______ L. 

JHawaii-- 1 

~~~==~~--~-----··---=-~:~~-==;~- ;Illinois 

llowa 

;Kan~~s 

LK~nt_~~~y 

'louisiana 

'Maine 

f~~a~fh~;~~:~----~ 

f~[ill&i~ ~~ 

!Minnesota 

; Mississippi 

J~is_souri 

; ~.~n~~,a~ ~-... 

}-~~brask~~~--~~·---~-~ .. ~·_J~· 

L~~~~-~-·~ .. ~.,-- ........ f,. .. ,. ~~~ !::!~!!~P~~~~~ 

~~~~!~~~~ 

rNewMexico 

!New-YOrk 

iNOr-th.Carolina 

!_~~~~~~i-~o}~­

L~hJ:!~~~~,.--~ .... l i()~l_a.ll.o.m.a .. ·~ . . ... .. . . ,! 

;Oregon 

f:~~J/~:~J~ 

I So_~~~ ~rolin~ i South Dakota !Tennessee-·---- -

47:so%! 44.83%' 48.63% 

49.17%1 46.19%; 49.99% 

42.58%1 39.60%1 43.40%1 

"47.39%' 44.41%: 48.21% 

......... :: 4.~2~~.. . .. ·~ ·--~~--~~:??96l. ..... 49.57% 48.24%1 ...... <\5:2.6~:. .. ···---··~···49~()6%1 

· ····~:46:or%, ......... - uo5% 46.85% 

45.97% 42:99%! 46.79% 

47.08% 

42.58%; 

47.79% 

49.72%1 

46.79%: 

47.46%i 

_47,93%! 

47.90%. .................. 42:58%:~ 

''''42:58%\ .. 

49,18"; 

46.73%! 

49.55% 

47,24%[ 

45.71%' 

·~···£.~i .. 46.94% 

49.75%'. 

46.04%: 

47.38% 

48.00%. 

42.58%, 

42.58%• 

~~·~8%.: .. 46.79% 

49.17%! 

47.24% 

42.58%1 

47.69% 

44.10%' 47 .9o% 

39.60%, 43.40% 

44.81%, 48.61% 

42.98%; 46.78% 

45.11%1 48:91% 

4s.os%r· 

43:87%1 

-- ~- --- - 1-~ 

43.42%, 

. 46j4%1 . ' 43.81%: 

44,48%1 

44.96%1 

44.92%1 ··~ ·39:6o%i ~ 

39.6o%·· 

46.21%1 

43:75%' 

46.57%: 

44.26%\ 

42.73%' 

44.28%' 

43,96%· 

46.77%' 

43.07%1 

.44.41%: 

45.02%1 

39.60%1 

39.60%: 

39.6o%: 

''"43:81%1 

... 46:1.9%) 

44.26% 

39.60%1 

44.71%: 

"48:88% 

47.67%1 

47.22% 

. 50:54%. 

47.61%~ 

48.28%1 

48.76%: 

48.72%• --- "'- ~"~-~-~~-~---~--~, 

43.40%1 

so:oi%' 

··47.55%, 

50.37% 

48.06% 

~653"· 

48.08% ~- -- ~~-~---l 

47.76%. 

46.87% 

48.21% 

48.82% 

43.40% 

· ~· 43:4o% 

. .. ~ ...........•.......• ~~ 4,3,<)0% 

47.61%' . .. ... 49:99% 

48,06% 

43.40%• 

48:51%' 

48.39%' 45.41%[ 49.21% 

4i.58%i 39:6o%i 43.4o% 

.......... ·- . :.'~Z:mL1o. . ··~ ...•. ~tJI?Z§J. ... ~·· ........ ···~. .. ~~ c'"·''"":'"'~''"'J'~:t~&r~!~ !:.~~!?!~·- marsL~·.2 .. ~~J!~!'!f~~-~-~~.!!~~~- !£ .. P~-~~=~~!_<?~S-~-~-~~Lry~~! !.!15_1?~!':!3!.~~-~t!!l,._j_~~- ~~~~- .. 
37 

Chairman RISCH. Thank you very much. 

Mr. Mazur. 

TESTIMONY OF MARK J. MAZUR, DIRECTOR, URBAN– 

BROOKINGS TAX POLICY CENTER 

Mr. MAZUR. Thank you, Chairman Risch, Ranking Member Shaheen, members of the Committee. Thank you for inviting me here 

today to discuss tax reform in small business. I just want to emphasize that the views I express are my own and should not be attributed to Tax Policy Center, the Urban Institute, their boards, or 

their funders. 

There is broad consensus that the current system for taxing businesses is in dire need of reform. The U.S. tax system was last overhauled in 1986, and the current system, especially as it applies to 

business income, is woefully out of date. Three decades of changing 

business practices, increased globalization, and expanding aggressiveness of tax planning activities have led to the current situation. 

If you look at the U.S. tax system, it is characterized by high 

statutory marginal tax rates for corporations; a large number of 

special tax provisions in the code that ensure most businesses do 

not pay at that top rate, incentives for multinational firms, both 

U.S.-based and foreign-based, to locate deductions in the United 

States, and locate income in lower-tax jurisdictions; incentives for 

certain firms to organize as pass-throughs and to escape corporatelevel taxation; and substantial complexity throughout the tax system to the point where some taxpayers cannot even understand 

what their obligations are. Tax reform should seek to address some 

or all of these issues related to business taxation. 

Tax policies we think of as guided by three basic notions: efficiency, equity, and simplicity. Efficiency means the tax system that 

raises the appropriate amount of revenue with as little economic 

distortion as possible. It is often characterized as relatively low tax 

rates, broad tax base, a portfolio of revenue sources, and a deep understanding of the incentives that are associated with the tax system. 

Equity, the second principle, has two components: horizontal equity, treating similarly situated taxpayers in a similar manner, and 

vertical equity, that taxpayers who have a greater ability to pay 

taxes should shoulder a larger share of the provision of public services. 

And the third component, simplicity, is important because if the 

tax code is too complex, taxpayers cannot understand their obligations, cannot comply with the tax law. 

A lot of complexity just reflects our complex economic system. 

There are an infinite number of transactions people in businesses 

can enter into. But another large part represents the decisions, deliberate decisions, to run substantial portions of our social policy 

through the tax code, and each of those brings in their own set of 

qualifications and rules and so on. 

An important thing to keep in mind is all three of these principles matter, and all come into play when you are designing tax 

policy, and really the art of policymaking is figuring out the right 

balance between these principles. 

LAP51NQ082 with DISTILLER

38 

What I want to do is turn to just a few facts on businesses. As 

pointed out by some of the other witnesses, business can be organized by sole proprietorships, partnerships, limited liability companies, traditional C corporations, or S corporations. The traditional 

C corporation is subject to a separate level of tax, so two levels of 

tax, one at the entity level, one when those earnings are passed on 

to the owner. All the other types are pass-through businesses, 

where the income or loss is passed through to the tax return of the 

owners. All these business types can be small, large, or very large. 

The most prevalent form of business is sole proprietorship. That 

is responsible for the largest number of returns of businesses. However, it is responsible for the smallest fraction of business activity. 

One thing to keep in mind is the largest share of this activity is 

attributable to traditional C corporations. So an important 

takeaway here is most businesses are small, most business activity, 

whether in corporate form or pass-through form, is in big businesses. 

It is not the case that pass-through businesses equal small businesses, and that is one takeaway that you all should get from 

today. There are many types of large pass-through businesses, 

well-known companies, pipelines, accounting firms, law firms, that 

engage as pass-through businesses and are not really a small business. 

When we look at who owns pass-through businesses, we see a 

similar fact. Most pass-through businesses are small, owned by taxpayers of modest means, but the largest and most profitable are 

owned by very high income tax payers, and just one takeaway here 

is about two-thirds of the income of S corporations and partnerships accrues to the top 1 percent of the income distribution. So a 

tax cut for large pass-throughs is a tax cut for the top 1 percent. 

And a final point I want to make today is when you look at base 

broadening as part of tax reform, that affects both the tax base of 

corporate taxpayers, traditional corporate taxpayers, and passthroughs. And so it is a difficult balancing act to say what are we 

going to do if we broaden the tax base, lower the corporate rate, 

what happens to pass-through businesses compared to today? Left 

untouched, they would have a slightly higher, or a larger tax burden. 

However, there are some specific steps you can take, and Ms. 

Nellen referred to a couple of these, that would provide simplicity 

for smaller businesses and lower their tax burden essentially giving 

you a double benefit for smaller businesses, and these are things 

like expanded cash accounting and expanded expensing. 

I want to thank you all for your attention today. I would be 

happy to take your questions. 

[The prepared statement of Mr. Mazur follows:] 

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Options for Small Business Tax Reform 

Mark J. Mazur* 

Robert C. Pozen Director ofthe Urban-Brookings Tax Policy Center 

Before the 

Committee on Small Business, 

United States Senate 

TAX REFORM: REMOVING BARRIERS TO SMALL BUSINESS GROWTH 

Wednesday, June 14,2017 

Chairman Risch, Ranking Member Shaheen, and Members of the Committee, thank you for 

inviting me to appear today to discuss the impact of the tax system on small business and options 

for reform. The views I express are my own and should not be attributed to the Tax Policy 

Center, the Urban Institute, their boards, or their funders. 

There is a broad consensus that the current system for taxing businesses is in dire need of 

reform. The US tax system was last overhauled in 1986, and the current system, especially as it 

applies to business income, is woefully out of date. Three decades of changing business practices, 

increased globalization, and expanding aggressiveness in tax planning activities have led us to a 

situation where we have very many critics of the current business tax system and precious few 

defenders. 

*The views expressed are my own and should not be attributed to the Tax Policy Center or to the 

Urban Institute, its trustees, or its funders.l thank Len Burman, Bob Williams, James Nunns, and 

Joseph Rosenberg for helpful comments and Fiona Blackshaw and Yifan Zhang for help in 

preparing this testimony. 
40 

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Mark J. Mazur, Robert C. Po zen Director, Urban-Brookings Tax Policy Center 

Complaints about the business tax system include a maximum statutory corporate income 

tax rate that is among the highest in the world; a large array of special tax provisions that permits 

many firm to pay an effective tax rate far below the statutory rate; incentives for US-based 

multinational firms to shift profits abroad and to claim they are permanently reinvested there; an 

incentive for multinational firms (both domestic and foreign-parented) to locate deductions in 

the United States and income in lower-taxed jurisdictions; incentives for certain firms to 

organize as pass-through entities in order to avoid corporate-level taxation; and immense 

amounts of complexity that make compliance difficult and raise questions about the tax system's 

administrability and fairness. 

Tax reform should address some of or all these complaints. Ideally, it would do so without 

creating offsetting problems elsewhere that overshadow any progress made in the name of 

reform. 

My testimony today has four parts: 

1. a review of the principles of tax policy, to provide a set of agreed-upon goals to guide any 

reform effort; 

2. some basic findings about businesses in the United States to ground the tax reform 

discussion in fact; 

3. a discussion of how the tax system affects smaller businesses and how a tax reform effort 

may affect them; and 

4. a summary of several specific tax reform proposals that are intended to ensure that 

smaller businesses are not inappropriately disadvantaged by efforts at broader tax 

reform. 

Tax policy is guided by three basic notions: efficiency, equity, and simplicity. An ideal tax 

system would advance all three goals to some extent, while recognizing that sometimes the goals 

conflict. Similarly, a tax reform effort would acknowledge that all three goals are important but 

would manage trade-offs among them. 

An efficient tax system would distort economic choices as little as possible while raising 

the appropriate amount of revenue. Typical characteristics of an efficient tax system are 

relatively low tax rates, broad bases for taxation, a portfolio of different types of taxes to limit 

reliance on specific revenue sources, and an understanding of the incentives provided by the tax 

system so that policymakers minimize the enticements for taxpayers to reduce their tax bill 

though otherwise uneconomic actions. 

TAX POLICY CENTER ! IN BAN INSliTUff & RROOKINGS INSliTUTIOC. 
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Equity, as applied in tax policy, has two components: horizontal and vertical. Horizontal 

equity means that taxpayers in similar economic circumstance are treated similarly. In income 

taxation, this usually boils down to treating taxpayers with equal incomes equally. Strictly 

speaking, this would mean that the source of income would be disregarded in determining tax 

treatment and, ultimately, tax liability. Vertical equity means that tax liability should be 

distributed in accordance with the ability to pay taxes. That implies that those with larger 

incomes have a greater ability to pay taxes and therefore should shoulder a larger than 

proportionate share of the cost of pubic goods and services. This concept is associated with a 

progressive tax system, where the average tax rate paid {or average effective tax burden) goes 

up with a taxpayer's incomes. As a concept, vertical equity makes more sense when applied to the 

individual income tax or to the entire tax system than when applied to the corporate income tax. 

The US federal individual income tax is progressive throughout almost the entire income 

distribution. The overall US tax system is similarly progressive. 1 

Simplicity is the third principle of desirable tax policy. One way to promote simplicity is to 

reduce the compliance burden that the tax system imposes. The Internal Revenue Service {IRS) 

regularly assesses the overall burden of the US tax system by the number of hours required to 

understand one's tax obligations, keep appropriate records, file the necessary tax forms, and 

interact with the IRS after filing. Individual taxpayers spend around 2 billion hours a year 

complying with the individual income tax, and the cost to businesses is estimated to run to over 

$100 billion annually. 

But beyond the hours and dollars, there is a sense among taxpayers and tax policy 

observers that the tax code is too complex for ordinary Americans to understand their tax 

obligations and comply with them. This sense of extreme complexity is evidenced by the robust 

tax preparation and tax software industries, as well as a sense among taxpayers that they are 

missing out on benefits being claimed by others. A lot of the existing complexity merely reflects 

the increasingly complex world in which we live. Individuals and businesses can enter into a 

nearly limitless number of possible economic transactions. These possibilities reflect economic 

and social complexity, globalization, and long-standing efforts at financial engineering. Congress, 

however, is complicit in this sense of growing complexity; the past three decades have been 

characterized by increasing amounts of social policy being run through the tax code. While this 

can be an efficient method of delivering benefits to particular taxpayers, every one of these 

provisions carries with it eligibility rules and benefit calculations that can overwhelm taxpayers. 

This proliferation of tax expenditures itself fosters complexity. 

But tax incentives should not be avoided simply because they lead to complexity. In some 

instances, overriding public policy considerations argue for deviating from one or more of the 

TAX POLICY CENTER I URBAN INSTITUTC & BROOKINGS INSTITUTION 
42 

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Mark J. Mazur, Robert C. Po zen Director, Urban-Brookings Tax Policy Center 

three major tax policy principles. For example, our economic system by itself may lead to an 

insufficient amount of activities with important spillover benefits (such as basic research) or to 

over-consumption (or provision) of some activities with negative spillover benefits (like tobacco 

or alcohol consumption). In these cases, specific provisions in the tax code (such as the research 

and experimentation tax credit or excise taxes on alcohol or tobacco purchases) can address 

under- or over-supply. 

It is important to be aware of the trade-offs among tax policy principles. An optimal 

system will seek to balance out the contributions of each dimension and carefully weigh 

deviations. When Congress enacted the 1986 Tax Reform Act, it devoted much time and energy 

and debate to considering the degree to pursue each of these desirable traits in the legislation. 

Given three decades of incrementally moving away from the 1986 agreement on each of these 

policy goals, it is time to refocus attention on designing a tax system that meets them to the 

maximum extent possible. 

FACTS ON BUSINESSES 

The taxation of business largely depends on the choice of organizational entity for the business. 

A business can be owned by one person and operated as a sole proprietorship, with all the net 

profits or losses passing through to the owner. A business can be established as a partnership of 

two or more people or entities. Partnership agreements can be flexible about the share of profits 

or loss and the source of those flows that goes to each partner. The tax consequences of the 

businesses activities of the partnership pass through to the partners in accordance with the 

partnership agreement. 

Limited liability companies (llCs) are a relatively recent phenomenon, where the 

members/owners of the company can elect to be treated as a partnership or as a traditional 

corporation for income tax purposes. But the members/owners can still benefit from the limited 

liability they receive from a traditional corporation without paying a separate corporate income 

tax. If members/owners elect to treat the LLC as a partnership, then the net profits and losses of 

the entity and their character, are passed through to the owners in accordance with the legal 

agreement establishing the LLC. 

A traditional corporation, often called a C corporation (after the section of the tax code 

that governs it) pays an entity-level tax each year on its net profits. Distributions to the 

corporation owners in the form of dividends are taxed at the shareholder level. Thus, there is the 

potential for a second layer of taxation-one at the entity level and another at the shareholder 

level-on the income earned by a traditional corporation. A special category of corporation, 

called an S corporation (again, after the relevant section of the tax code) does not pay tax on net 

income at the entity level. like partnerships, the net profits and losses are passed through to the 

owners. But, unlike a partnership, which may allocate profits according to any agreed-upon 

TAX POLICY CENTER I URBAN INSTITUTC & BROOKINCS INSTITUTION 
43 

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formula, the pass-through amounts in an S corporation must be proportional to ownership 

shares. S corporations also have limits on the total number of shareholders, placing a limit of the 

use of this form of entity. 

Owners of pass-through businesses are taxed more favorably than owners of traditional C 

corporations because they pay only the individual income tax on business earnings, while the 

profits of C corporations are taxed at the corporate level and then again at the individual level 

when paid out as dividends or realized as capital gains. For example, consider a business owner in 

the top individual income tax bracket receiving net taxable profits of $1 million from ownership 

shares of an S corporation. This owner would report $1 million of business income and pay a tax 

of $396,000 at the top individual tax rate of 39.6 percent. There would be no additional income 

tax if the S corporation distributes some of its earnings to the owner. Now consider a similar 

owner of a traditional C corporation, also with $1 million in net taxable profits. At the current 

corporate income tax rate of 35 percent, the corporation would pay $350,000 in income tax. If 

the remaining $650,000 is distributed to the owner as a dividend, it would be subject to 

individual income tax at a maximum rate of 23.8 percent, for an additional liability of $154,700. 

This puts the total income tax payments related to the original $1million in business income at 

$504,700. This additional tax liability may provide a disincentive for the traditional C 

corporation form, affecting the choice of entity by individuals who are forming businesses. 

Most business returns are sole proprietorships, followed by S corporations, partnerships 

(including most LLCs that elect to be treated as partnerships), and traditional corporations. 

While most businesses are pass-through entities, most economic activity (though a declining 

share) is associated with traditional C corporations, where it is subject to an entity-level tax 

(table 1). 

TABLE I 

Distribution of Returns Filed And Business Receipts by 

Business Return Type, 2014 

Source: Prisin:zano et at (2016, Table 1). 

This situation has changed somewhat over time: the composition of business income has 

changed over the past few decades, with the dominance of traditional C corporations declining 

since 1980 (figure 1). This shift reflects several factors: shifts in tax rates for individuals and 

corporations that affect the desirability of organizing as a traditional C corporation; tax law 

loosening the ownership limits of S corporations; state law changes accelerating the adoption of 

TAX POLICY CENTER I URBAN INSTITUTE & BROOKINGS INSTITUTION 
44 

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Mark J. Mazur, Robert C Pozen Director, Urban-Brookings Tax Policy Center 

LLCs; and greater acceptance by individual taxpayers of the complexities associated with 

investments in pass-through entities. 

Figure 1 

Share of Total Business Net Income (less deficit) 

1980-2013 

100% 

90% 

80% 

70% 

60% 

50% 

40% 

30% 

20% 

10% 

0% 

-10% 

1980 1983 1986 1989 1992 1995 1998 

Source: Nelson (2016). 

2001 2004 2007 

Note: Shares do not include regulated investment corporations (R!Cs) and real estate investment trusts {RE!TS), c. and 

S·corporation income includes officer compensation. 

2010 2013 

Each type of business entity-sole proprietorship, partnership, LLC, S corporation, and 

traditional C corporation-can be almost any size. But the distribution of businesses by type, like 

many other distributions in economics, has a large fraction of small entities carrying out 

relatively small amounts of activity, with the bulk of the economic activity carried out by a 

relatively small number of the very largest enterprises. 

The largest number of entities are in the smallest size categories, but the bulk of total 

economic activity is accounted for by the relatively small number of the largest entities (table 2). 

While most businesses are small (including pass-through businesses), it is incorrect to equate 

small business with pass-through business. In fact, many large pass-through businesses are major 

players in such industries as accounting, law, financial management, natural resources, pipelines, 

and real estate. 

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TABLE2 

Distribution of Partnerships, S Corporations, and C Corporations 

Returns, Business Receipts, and Net Income by Asset Size (in percent), 

2013 

BusineSs reeeipU 

Net busin..Otn¢eme* 25JJ% -4.5% a2,8'% Source: tntema! Revenue Service, Statistics of Income, at http://www.irs.gov/uac/SOl~Tax~Stats»Partnership-Oata~by--Slze--of~ Total-o.Assets; 

http://www.lrs.gov/uac/SO!-Tax-Stats~Nonfarm-So!e-Proprietorship-Statistlcs; httpY/www.lrs.gov/uac/SO!~Tax·Stats-Corporation~Soorce·Book:­

NotU! *Equals net profits for firms wlth positive profits mlnus net losses for firms with losses. 

Other important facts are who ultimately owns pass-through businesses and the marginal 

tax rates faced by these owners. In a technical report published last year, the Office of Tax 

Analysis in the Department of Treasury found that most tax returns with pass-through income 

are filed by individuals with a marginal tax rate of 15 percent or lower (figure 2). But the vast 

majority of income is reported by those in the highest income tax brackets (35 percent, or 39.6 

percent subject to the alternative minimum tax).ln fact, among firms with pass-through income, 

the 3 percent of individual income tax filers in the 35 percent or 39.6 percent tax brackets 

receive 51 percent of the total income from all pass-through entities. So, pass-through income is 

highly concentrated at the top of the income distribution. The degree of concentration is 

illustrated by the fact that over two-thirds of the total amount of S corporation and partnership 

income accrues to the 1 percent of taxpayers with the highest incomes. 

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Mark J. Mazur, Robert C. Pozen Director, Urban-Brookings Tax Policy Center 

Pass-Through Income by Statutory Marginal Tax Rate 

50% 

40% 

30% 

20% 

10% 

0% 

0% 10% 15% 25% 28% 33% 

Statutory Marginal Tax Rate 

Source: Prisinzanoet aJ. (2016, Table 10). 

Note: lndudesincome or loss from Sch. C, Sch. F, and Sch, E rental, partnership, and $-corp income. 

HOW TAX REFORM CAN AFFECT SMALL BUSINESS 

35%/ 

39.6% 

AMT 

Traditional tax reform broadens the tax base, which expands taxable income and allows for 

lowering the statutory tax rates on that income without losing revenue. The 1986 Tax Reform 

Act, for example, broadened the income tax base enough to support a revenue-neutral reduction 

in the corporate income tax rate from 46 percent to 34 percent and a reduction in the top 

individual income tax rate from 50 percent to 28 percent. Even though more income (and more 

business income) was subject to tax, the related tax rates were dropped substantially. 

With business tax reform, many base-broadening proposals would increase the size of the 

tax base across the board: for small and large businesses and for traditional C corporations and 

pass-through entities. This might disadvantage smaller C corporations unless the tax rates 

applied to lower-income corporations (already below the statutory maximum) also were 

reduced. Such a reform also would certainly broaden the tax base for pass-through businesses. 

These entities could see an increase in tax liability for their owners, unless individual income tax 

rates were also correspondingly reduced. 

Policymakers would need to grapple with the issue to reach an accommodation, because 

this illustrates the trade-offs in designing tax policy. If the steps taken to broaden the tax base 

under reform more accurately measure income, then these changes should be encouraged as 

increasing horizontal equity between those who earn income from business activities and those 

who earn salary or wage income. Similarly, if the net effect of the base-broadening and lowering 

corporate tax rates is to decrease the tax advantage that pass-through entities have over 

traditional C corporations, then that also could be a positive step for economic efficiency. But if 

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these changes dissuade business formation by entrepreneurs or discourage innovative activities 

that have positive spillover effects, then there could be an offsetting effect. 

It is important to focus on the innovation and business formation activities rather than on 

the size of the businesses involved. Small businesses have many attractive attributes for society, 

but the public policy focus on designing tax policy should be on aspects of the business activity 

that spill over to the larger community and are not perfectly captured by the business owners 

themselves. For instance, economic research has shown that innovation is often associated with 

new firms, which can drive industry-wide or economy-wide change, opening up new markets or 

unlocking efficiencies. Thus, there is a reasonable economic argument for encouraging new firms 

and start-up firms and individuals exploiting their entrepreneurial ideas. The current tax code 

does some of this, providing significant benefits to successful start-up entrepreneurs.2 

APPROACHES TO SMALL BUSINESS TAXATION 

In evaluating reforms, it is useful to consider the benefits that small businesses might obtain from 

specific proposals and then consider whether these benefits advance the tax policy goals of 

efficiency, equity, and simplicity. If the important public benefits of tax policy changes are 

associated with new forms that can drive innovation, then a few specific polices stand out as 

being supportive in this area. 

Increased limits for start-up and organizational expenses can help businesses form and 

commence operations. These types of expenses generally are limited to new firms that are 

establishing themselves as operating entities. Under current law, an entity can immediately 

expense (deduct) up to $5,000 in start-up expenses and another $5,000 in organizational 

expenses. These amounts could be combined and the aggregate amount increased to provide a 

larger tax benefit for starting up a new business. This change could also provide some 

simplification by permitting an immediate deduction instead of amortization (cost recovery) over 

a period of years. 

Under Section 179 of the tax code, a business may immediately expense up to $500,000 

of qualifying property and equipment each year. This immediately deductible amount is phased 

out if the amount of qualifying property placed in service exceeds $2 million. So, this provision is 

targeted at smaller firms by design and encourages these firms to make capital investments that 

can embody the newest technology. Congress set the amount at $500,000 (adjusted for 

inflation) in 2015, but a reexamination of this provision may be warranted, since it clearly 

simplifies the tax calculations for affected entities and could also help spur innovation. 

Calculating depreciation expenses and maintaining adjusted basis for assets owned are a source 

of significant complexity for small businesses. 

2017) at 

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Mark J. Mazur, Robert C. Pozen Director, Urban-Brookings Tax Policy Center 

Smaller businesses often have a larger per-unit cost of complying with the tax code than 

larger businesses. One major area of complexity is accrual accounting, which often requires 

sophisticated financial skills. Under current law, businesses must undertake a series of 

calculations involving gross receipts, type of business activity, entity type, and sometimes 

ownership interests to determine whether they must use accrual accounting or if they are 

eligible for the simpler cash accounting method. These restrictions are meant to ensure some 

measure of horizontal equity for different types of taxpayers, but Congress may wish to review 

the various constraints to see if they still function as desired. One possible approach would be to 

set a dollar threshold where firms with smaller amounts of gross receipts could use a simplified 

method of cash accounting (similar to maintaining a checking account). This approach could 

simplify tax compliance for many smaller businesses at the cost of a loss of horizontal equity. 

A final area for Congress to consider that relates to ease of tax compliance is the 

establishment of basic income reporting rules for payments between businesses. Congress has 

established thresholds for reporting miscellaneous income to individual recipients using Form 

1099 and has established thresholds for debit and credit card reporting. Pushing a little further 

on information reporting could provide taxpayers (particularly entrepreneurs and smallerfirms) 

with the information necessary to fulfill their tax compliance obligations at relatively low social 

cost (especially where electronic information already exists). And it would help improve 

horizontal equity by treating taxpayers with similar amounts of income similarly. 

In the ongoing discussion of business tax reform, several proposals have been made to 

establish a special preferential tax rate for income from pass-through businesses. These 

proposals are often characterized as providing support for small businesses. However, as the 

basic facts on US businesses show, most small business owners pay income tax at a modest rate 

and so would not benefit from a reduction in the maximum tax rate applied to pass-through 

income. But most pass-through income accrues to individuals who are subject to the top 

individual income tax rates. That means providing a preferential pass-through business income 

tax rate would be expensive in terms of forgone revenue. And a preferential tax rate for this type 

of business income would create a huge tax wedge between income earned as salaries and wages 

and income classified as pass-through business income. By itself, this would exacerbate concerns 

about horizontal equity as people with similar overall incomes could be treated quite differently. 

But a large wedge between ordinary income tax rates and the new preferential tax rate on passthrough income would create a huge incentive for inappropriately characterizing ordinary 

income as lower-taxed pass-through income. This could add substantial amounts to the potential 

revenue cost. 3 

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SUMMARY 

In determining how to move ahead on tax reform, policymakers should be aware that reform can 

have disparate effects on different participants in the economy. The three guiding principles of 

tax policy-efficiency, equity, and simplicity-provide a framework for evaluating policy choices. 

And some facts about US businesses can help guide the ongoing tax reform discussions: 

• most businesses are small (traditional corporations and pass-through businesses); 

• most economic activity takes place in larger enterprises (traditional corporations and passthrough businesses); 

• pass-through businesses overlap with, but are not identical to, small businesses; and 

• most income from pass-through businesses accrues to individuals at the top of the income 

distribution. 

These facts, combined with the tax policy principles articulated, can help inform the policy 

debate and evaluate policy alternatives. 

11 TAX POLICY CENTER I URRAN INSTITUTE & BROOKINGS INSTITUTION 
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Chairman RISCH. Thank you very much. Mr. Reardon—we will 

now have a round of questions. Mr. Reardon, you made a reference 

that I would like you to maybe put a little meat on the bones. You 

made reference to expense deductions and the limits on them that 

should be expanded, that is limits should be withdrawn or raised 

or something like that. 

Mr. REARDON. Mm-hmm. 

Chairman RISCH. Did I pick that up correctly? 

Mr. REARDON. Yes. 

Chairman RISCH. What were you referring to there? Could you 

do a—just—— 

Mr. REARDON. I think under current law, there is Section 179, 

which allows businesses to expense immediately capital investments up to a certain level. 

Chairman RISCH. I see. Okay. So you are talking about capital 

expenditures. 

Mr. REARDON. Capital expenditures. 

Chairman RISCH. Okay. 

Mr. REARDON. And most of the proposals that are out there 

would either increase that limit or simply move to pure expensing, 

so that, you know, if businesses invest in, you know, equipment, inventory, et cetera, they could write it off immediately. I think the 

House plan includes real estate and other things as well. So it is 

very dramatic in the ability of companies to write off immediately 

what they are investing in. 

The Tax Foundation, just today, put a nice blog post up, talking 

about the economic benefit of that, and I think the Tax Foundation 

argues that moving towards expensing is actually more beneficial 

to the economy than a significant rate reduction in C corporations. 

It is pretty powerful stuff. 

Chairman RISCH. And is that—is the advocacy for that small 

businesses as well as large businesses? 

Mr. REARDON. So I used to work at the National Economic Council, back in 2003, when we were cutting taxes, and we went around 

the country talking to businesses, and that is when we were doing 

the 50 percent bonus depreciation in expanding the expensing opportunities for businesses. And what I found was that while most 

businesses would take expensing if they could get it, it is the nonpublic sector, it is the private companies that really seem to value 

it more, and I think that is because they do not have access to the 

capital markets, cash flow is much more of a challenge to smaller 

businesses than it is to larger businesses. And so the ability to go 

out and buy a piece of equipment, write it off immediately, start 

getting returns on that equipment before you have to start making, 

you know, real payments, real cash outlays, is a significant advantage to that. 

Chairman RISCH. I understand the argument and I subscribe to 

that argument. I suspect somewhere along the way they are going 

to find some example that somebody that should be paying taxes 

will not be, because they are able to do this, perhaps even on an 

ongoing basis, and that will cause people’s hair to catch on fire 

around here, has been my experience. 

Mr. REARDON. Yeah, I think the House has run into that with 

the blueprint, where, you know, they are moving from an income 

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tax base to a cash flow tax base, and yet people in there are analyzing the plans to look at it as if it is income. Well, why are you 

not paying taxes if you have income? Well, it is a different base, 

and so you have to look at it differently. 

Chairman RISCH. Thank you very much. Senator Shaheen. 

Senator SHAHEEN. Thank you, Mr. Chairman, and thank you all 

for your thoughtful testimony. 

I recently talked to New Hampshire Small Business Person of 

the Year, a man named Jake Reder, who is the CEO of Celdara 

Medical, which is an innovative biomedical company in Lebanon, 

New Hampshire, and right now Jake’s firm pays Federal taxes but 

it also pays taxes in New Hampshire, Maryland, New York City, 

New York State, and Massachusetts. And Jake said, ‘‘This is not 

about paying less taxes. This is about spending less time and energy on taxes and knowing we are doing them right.’’ I thought 

that was a very—that comment reflected what I hear from other 

small businesses. 

So you all have suggested some ways that we might simplify the 

tax code. Can you also talk about how much of the burden on small 

businesses is the result of having to comply with multiple jurisdictions, and if there are any ways that we could encourage states and 

local governments to help small businesses with filing their taxes. 

As we think about what we need to do here, what else should we 

be looking at? 

Chairman RISCH. Jump ball. 

Ms. NELLEN. Okay. Thank you. You are getting at the point of 

certainty and people would like to have certainty, because having 

this sense of doubt, did I do it correctly, is costly in many ways, 

because you have the risk of error, plus sometimes you might not 

do a transaction because you might not feel confident you know 

what the answer is. So it can be costly in many ways. 

As far as simplification, I think many things that AICPA has 

been promoting for some time, keeping and expanding the use of 

the cash method of accounting; expensing, so you do not need to 

keep records in expense, I think, as widely as you can. Yes, expensing does primarily benefit those with high capital needs, you know, 

equipment and all of that. We have a lot of service-based businesses today as well. But the simplification of the expensing, that 

would include the startup costs, organizational costs, an increasing 

of the 179. We know we just expense it. That makes it easy to not 

worry about how to classify for depreciation purposes. That all goes 

away. 

Repeat of the AMT, because you are just doing extra calculations. 

There is extra record-keeping. You have separate record-keeping 

for, you know, any NOL you had, the passive activities, and just 

trying to explain to the small business owners, just trying to pay 

their taxes correctly, why they thought they were going to get a deduction for something, and then they did not because it is not allowed for AMT and they owe AMT. And obviously a lot of passthroughs and sole proprietors are paying AMT and it is just a confusing state, and a lot of time involved in dealing with the AMT 

as well. 

I think making sure there is sufficient guidance, you know, some 

way that, you know, we know that, you know, IRS the resources 

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to provide the guidance for items. We have actually seen that 

where, you know, changes come up and we actually sometimes saw 

the initial instruction from the IRS was actually in the instructions 

to the forms, when it really should be in regulations with public 

comment first, many times. So that can delay, and then you are 

asking your practitioner, ‘‘How do I use, for example, this credit— 

research credit against my payroll tax?’’ The practitioners, like we 

do not have all the guidance yet, yet it is time to file the return 

and take advantage of that. 

Senator SHAHEEN. Right. And one of the things that we know is 

that the resources available to the IRS are significantly less than 

they were 10 or 20 years ago, in terms of the ability to respond to 

phone calls and to actually provide that kind of guidance. 

Let me go to another question, because when we last updated the 

tax code in 1986, there were approximately 4 million women-owned 

businesses. Today there are more than 11.3 million women-owned 

businesses. They represent about 38 percent of all firms in this 

country. But there are institutional barriers, especially in our tax 

code, that really affect women-owned businesses. 

There was a report that was done by the American University’s 

Tax Policy Center, and it showed that Congress and the Administration do not have sufficient information about how the tax code 

treats women-owned firms in order to put in place reasonable policies that would encourage them to grow. 

Can any of you comment on what you have seen in this area? 

Mr. REARDON. Sure. I think it is part of the good-news story that 

we have seen since 1986. You know, the big reform in 1986 was 

that it brought down top rates on pass-through businesses, down 

to, and actually, at that time, below where the C corporate rate 

was, which is the reverse of where it was before. Prior to 1986, C 

corps paid significantly less, and most business activity was under 

the C corp structure, which was not a good thing because the C 

corp structure is not a very efficient structure with a double tax. 

What it meant was that people would set up C corps, they would 

try to stick as much income as they possibly could in the C corps, 

and then they would try to figure out ways to get value of the C 

corp without having to pay the second layer of tax. There was a 

lot of gaming going on. And the beauty of the pass-through structure is that it eliminates that gaming. You know, you make money, 

you pay the tax when it is owed, and then that is it. You can do 

whatever you want with the earnings after that, and you do not 

have to worry about the tax consequences. 

And the net result of that, we saw an explosion in the number 

of LLCs and in S corporations. It just made entrepreneurship easier, and which meant that you had an opportunity for, you know, 

people of all genders to go out and start businesses. It reduced the 

barrier to starting a business significantly, and the net result is 

you have a bigger business community today than you did back 

then. 

Senator SHAHEEN. Well, except that one of the contentions in 

this report is that what we have in our current tax code are institutional barriers to those women-owned firms. So I do not know. 

Does any—Mr. Mazur. 

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Mr. MAZUR. I think this is just an area where additional research 

and work could be done. This is an area where I think—you mentioned the IRS has been under-funded. The IRS has an opportunity 

to do research on the tax information that there is and determine 

what the barriers are, and then essentially propose either legislative changes or administrative changes to address those barriers. 

But given kind of a lack of funding, that never gets to the top of 

the to-do list for the agency. 

Senator SHAHEEN. Thank you all. 

Chairman RISCH. Senator Kennedy. 

Senator KENNEDY. Thank you, Mr. Chairman. Can you hear me 

okay? 

Tell me—I want to talk about a solution in a second but first I 

am going to talk about the problem. How did we get the worst tax 

code in the world? Anybody. 

Mr. REARDON. Well, I will start. By sitting still. Back in 1986, 

when we last reformed the code, we brought the corporate rate 

down form the high 40s down to 35 percent. At the time, that was 

one of the lower tax rates in the developed world. I think the average for the OECD at that time was about 44 percent. Today the 

average for the OECD is down in the low 20s, I believe. We are 

still at 35. So we have been—— 

Senator KENNEDY. Before or after the exemptions? 

Mr. REARDON. Those are the marginal rates, but even when you 

look at effective tax rates, when you take those into account, we 

are still at the very high end of the worldwide average. 

So we have been sitting still, both on rates and also this idea of, 

you know, there is this concept of, you know, now we have a worldwide tax system. We tax, you know, our businesses on their earnings wherever they are made. Most countries in the last 10, 15 

years have moved to a territorial system. England did. You know, 

10 years ago, England, the UK had the same problems we did. 

They had inversions. They had companies moving overseas. They 

were losing out to other countries, in terms of when companies 

were up for sale, or you had competition in markets. 

They completely revamped their rates. They cut their rates 

down. They moved to territorial, and now companies are moving to 

the UK, not away from the UK. So we sat still; everybody else got 

busy reforming their tax code. 

Ms. NELLEN. We also added more rules to the law since 1986, of 

multiple—added more rules, you know, multiple education provisions, just retirement plans, a child credit. So additional rules, we 

have to figure out what those mean, so that adds to the complexity 

as well. 

Senator KENNEDY. Okay. 

Mr. MAZUR. I just think one thing, as Brian mentioned, if you 

look at the 1986 Tax Reform Act, that was where the U.S. actually 

reformed its tax system and got to a reasonably good place. The 30 

years since then, essentially, we have been going the wrong direction, adding a number of special interest provisions to the law that 

are complex, hard to navigate, and, as Brian pointed out, having— 

keeping our tax rate—corporate tax rate higher. 

So instead of broadening the tax base and lowering the rate, we 

have been narrowing the tax base and keeping the rate higher, and 

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it just means that in a complex world where there is lots of 

globalization, companies and their advisors take advantage of 

many of these opportunities or mismatches, and it makes it incredibly complex for everybody to comply with. 

Senator KENNEDY. Secretary Mnuchin testified the other day, in 

our Banking Committee, and I asked him what he thought about 

going to the companies overseas that have made money, but if they 

bring it back, under our—what I will call our non-territorial system 

of taxation—if they bring it back they have got to pay tax on it. 

I asked him what he thought about the idea of going to them and 

giving them an incentive, a lower tax to bring it back, and then 

using that money for infrastructure. He was polite but he did not 

seem to think that was too good of an idea. 

I kind of like it. What do you think about it? 

Mr. REARDON. I do not really get into the spending side of things. 

I am more on the tax side of things, so I will leave the—— 

Senator KENNEDY. Well, a tax exemption is an expenditure. You 

are aware of that. 

Mr. REARDON. It is not collecting tax that you might otherwise 

receive. That is correct. But I am a big believer in the idea that, 

you know, until we take it from somebody it is their money, right? 

Senator KENNEDY. I agree with you. Radical. Radical. 

Mr. REARDON. Yeah. Radical. Yeah. You know, the first time we 

did repatriation was when I was at the NEC, and the White House 

was divided on it. I think, at the end, we did not support it. I personally, you know, I would much rather that the companies have 

full access to this money by bringing it back, you know, and you 

have to put air quotes around that because sometimes the money 

is right here in a U.S. bank. It is just not in the bank account of 

the parent rather than the subsidiary—and have full access to 

that, and be able to do whatever they want with it, and there is 

concern, well, maybe they will just pay dividends to their shareholders. Well, fine. They will give it to the shareholders and the 

shareholders put it in the bank, and then it is available to somebody else to do stuff with. 

I do not have a problem with that, but I do know that, you know, 

we do need to eliminate the incentive for companies to make money 

overseas and then just sit on it overseas. It makes no sense. We 

need to move away from the worldwide system. 

Chairman RISCH. I think the division has kind of disappeared 

here. Most people want to bring it back. The problem is, what do 

you do with it when you get here. 

Senator KENNEDY. Yeah. 

Chairman RISCH. As Senator Kennedy suggested, the people who 

want it for infrastructure are interested in that, but I have heard 

at least—that it has been spent six times and it has not even 

shown up yet. 

Mr. REARDON. Yes. Right. 

Chairman RISCH. I am sorry I cut into your time, Senator Kennedy. Go ahead. Senator Kennedy, you are still up. 

Senator KENNEDY. I think I am over, Mr. Chairman. Thank you 

for your time. 

Chairman RISCH. All right. Thank you. We appreciate it. Those 

are good thoughts. 

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Senator Booker. 

Senator BOOKER. Thank you very much, Mr. Chairman. I am 

blessed to hold a seat from somebody that is kind of a political hero 

of mine, Bill Bradley, and I am really proud of the work he did in 

1986. But since then, we have screwed things up, remarkably, and 

you all put it right. We have seen a lot of special interest groups 

come in here, narrowing our tax base, keeping it where it was, 

which is the highest corporate tax rate, as far as I know, on the 

planet Earth, and it is ridiculous. And you have some businesses 

paying extraordinary taxes, others who have had great lobbyists 

come down here and champion ways to create loopholes, have effective tax rates of zero. 

And, you know, I, like many of my colleagues, have come from 

local government or being governors, where you do not have the 

privilege of doing the kind of games we play here. You have got to 

balance your budget every single year, and create reasonable tax 

policy. 

And I represent, before I came to the Senate, a poor city, struggling, population was decreasing for 60 years, its tax base was disappearing. We had to figure out a way, through a storm, and effectively we were just as bankrupt as the Federal Government is, and 

we made tough decisions. 

I actually challenge that. I wonder if my colleagues can beat this, 

but I do not think anybody in the United States Senate right now 

has cut government more than I had to do, the painful, gut-wrenching cuts, but we cut my government 25 percent, but we also strategically raised taxes. 

I watched, in astonishment as the first time in the history of our 

Nation we went to an expensive war and we cut taxes at the same 

time, creating massive deficits. I could not understand why basic 

economics did not work here, that you have got to pay for what you 

do. 

And so I think tax policy here has been screwy and the American 

people are paying for it, and we cannot compete now with our global competitors who make strategic investments that we do not 

make anymore. They are out-America-ing America. 

If you look at the World Economic Forum, they said that this 

country was the best competitive democracy—we were the best 

leading up until recent time. We were the best in investing in our 

infrastructure. China and Europe outdo us now. We were the best 

in investing in education. Now other countries are outperforming 

us in education. We were the best investing in research and development. Heck, private sector gains in this country, just the device 

I am holding, all comes from battery life, touch screen, GPS, all 

from government strategic investments that fueled our economy. 

And so it is outrageous to me that we still have philosophy controlling our government and our tax policy here, and not what actually works. And who is suffering from it? Small businesses in my 

city of Newark and my State. 

And so, Mark—I have now lectured too long, but I would like for 

you to just respond to something to me that was a philosophy that 

was put in place that just did not work. I would like to submit, for 

the record, a New York Times article on the so-called Kansas Experiment, where you have folks with their philosophy coming in 

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56 

and saying, ‘‘Let us cut all taxes.’’ Massive tax cuts. The cumulative cut was $3.9 billion, biggest of any State. 

And I just want you to comment in the minute and a half I have 

left you, Mark, you know, when you have this—what was the result 

of this experiment, in terms of just—because I wish we could get 

back to a pragmatic, basic balance sheet analysis of how to run this 

country, because we are running it really irresponsible now, but 

how to create growth, how to create opportunity, how to create 

jobs. Can you talk about how the Kansas Experiment, based on 

philosophy, went tragically wrong, and your thoughts on it? 

Mr. MAZUR. Sure. So I think just some of the facts on the Kansas 

Experiment. In 2012, Kansas reduced its individual tax rates 

across the board, but it reduced its taxes on pass-through businesses to zero, from 5 or 6 percent to zero. Predictably, what happened is you got more pass-through businesses, but you got way 

less in revenue, because ordinary taxpayers created a pass-through 

business to shelter some of their income. Whether you were an accountant or a sports coach, or whatever you could do, you would 

put your activity in a limited liability company and claim that you 

were tax exempt. 

And so the situation in Kansas was you reduced a lot of the investments that they made, across the board in education, infrastructure, and so on, to the point where I think the Kansas citizens 

thought that was a bad tradeoff. They would prefer to have slightly 

higher taxes and better services—better education, better infrastructure, better health care, better public protection. 

Senator BOOKER. So I will end with just this statement. But 

whatI failed to mention was the growth of that statement. 

Mr. MAZUR. Oh, if you compare to other states, neighboring 

states, Kansas is not as good as the neighboring states. So you 

have almost a natural experiment there. 

Senator BOOKER. And so I am a pro-growth guy. I want this 

economy to grow, and I just want to point to Kansas as an example 

that we have to start thinking of a balance sheet analysis of our 

country—where we should be investing, how we should be doing 

this, to create growth, and a country that does not invest in infrastructure, that does not invest in science or technology, who does 

not invest in education, is not going to grow compared to what our 

competitor peers are doing. We have got to find the right balance. 

Taxes are too high—I will admit that—but we have got to find the 

right balance and focus on jobs, because that is what people want, 

at least my constituents in New Jersey. They want jobs, economic 

growth, and opportunity. 

Thank you very much. 

Mr. REARDON. Can I—— 

Chairman RISCH. Thank you, Senator Booker, and we will include that article in the record. 

Senator BOOKER. Thank you. 

[The article follows:] 

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6/29/2017 Finally, Something Isn't the Matter With Kansas *The New York limes 

itbeNew!iforklimes ; https://nyti.ms/2tbymot 

The Opinion Pages OP-ED CONTRIBUTOR 

Finally, Something Isn't the Matter With 

Kansas 

By MICHAEL TOMASKY JUNE 12, 2017 

The most momentous political news of the past week? For my money, it wasn't 

James Corney's Senate testimony, riveting as it was. It was the Kansas Legislature's 

decision to defy the governor and raise income taxes - a move that could well be the 

first step in a transformation of American politics much more far-reaching than 

anything that could come from Russiagate. 

Hear me out. Kansas, under Gov. Sam Brownback, has come as close as we've 

ever gotten in the United States to conducting a perfect experiment in supply-side 

economics. The conservative governor, working with a conservative State 

Legislature, in the home state of the conservative Koch brothers, took office in 2011 

vowing sharp cuts in taxes and state spending, except for education - and promising 

that those policies would unleash boundless growth. 

The taxes were cut, and by a lot. The cumulative cut was forecast to be $3.9 

billion by 2019. A fellow at a right-leaning Missouri think tank said in 2015 that Mr. 

Brown back's cuts were "the biggest tax cut of any state, relative to the size of its 

economy, in recent history." 

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The cuts came. But the growth never did. As the rest of the country was growing 

at rates of just above 2 percent, Kansas grew at considerably slower rates, finally 

hitting just 0.2 percent in 2016. Revenues crashed. Spending was slashed, even on 

education: In March, the State Supreme Court ruled that state-level school spending 

was unconstitutionally low. The court is ideologically mixed, but its ruling was 

unanimous. 

The experiment has been a disaster. Mr. Brownback is widely disliked. Ifhc has 

anything to be grateful for, it's the existence of Gov. Chris Christie, Republican of 

New Jersey, who recently swiped from him the title of the nation's most unpopular 

governor, which Mr. Brownback had held for the better part of three years. 

Finally, even the Republican Kansas Legislature faced reality. Earlier this year it 

passed tax increases, which the govemor vetoed. Last Tuesday, the legislators 

overrode the veto. 

Not only is it a tax increase it's even a progressive tax increase! A married 

couple filing jointly and earning $30,000 will pay an additional $120, which is 0-4 

percent of total income, while the same couple earning $100,000 will fork over 

$755, or o. 755 percent. More than half of the Republicans in both houses voted for 

the increases. 

There's the background. Now, why is this a big deal? 

Because Republicans are not supposed to raise taxes, ever. In Washington or in 

the states. This goes back to President George H. W. Rush's agreeing to a bipartisan 

tax increase in 1990 after famously saying in his 1988 campaign, "Read my lips: no 

new taxes." Afterward, the conservative group Americans for Tax Reform, led by 

Grover Norquist, started making Republican candidates for Congress and state 

houses sign a no-tax pledge. 

Ever since, with scattered exceptions, no Republican member of the House or 

Senate has voted for a tax increase. For 27 years. If you wonder why problems arise 

and Congress never does anything about them, the tax pledge is usually the answer, 

or at least an answer. 

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6/29/2017 Finally, Something Isn't lhe Matter With Kansas • The New York Times 

Think we need to build bridges and roads and lay freight rail lines? Of course we 

do. But we can't. It would require a tax. Think rural Americans need better access to 

broadband? You bet they do. But doing it right would need a tax. Think we ought to 

be spending far, far more than we are currently on this hideous opioid crisis, with 

drug overdoses now being the leading cause of death for Americans under 50? We 

most surely ought to be. But no - gotta pass those tax cuts. 

The Republican no-tax position even bears a share of the blame for our current 

polarization. Republicans once recognized the principle that public purposes 

sometimes justified the raising of additional revenue. They might have balked at the 

specific number the Democrats proposed, but they accepted that taxes were 

negotiable. 

This made compromise possible. The agreement between President Ronald 

Reagan and Speaker Tip O'Neill in 1983 to save Social Security? It's a famous deal, 

among insiders, who point to it often as they lament the lost art of the horse trade. It 

involved benefits cuts - an increase in future retirement ages - and increases in the 

payroll tax. 

Why can't they make those kinds of deals today, you ask, for any number of 

issues? It's not because there's something in the water. It's not because of cable 

news, or social media or even the corrupting influence of big money in politics. It's 

because Republicans won't agree to a penny in tax increases of any kind - income 

taxes, payroll taxes, the gasoline tax, anything. 

So here's hoping that Kansas represents a breakthrough moment. The effects of 

our failure to invest in ourselves are all around us. Change won't come fast- for one 

thing, very few Americans know the above, because no one talks about it (hello, 

Democrats). But at least for nuw we can say, for the first time in a long time, that 

something finally isn't the matter with Kansas. 

Michael Tomasky is a columnist for The Daily Beast, the editor of Democracy: A Journal 

ofldeas and the author, most recently, of"Bill Clinton." 

A version of this op-ed appears in print on June 12, 2017, on Page A21 of the New York edition with the 

headline: A Tax Revolt in Kansas. 

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Chairman RISCH. Senator Inhofe. 

Senator INHOFE. Thank you, Mr. Chairman. You know, I came 

from the House to the Senate in 1994, so I have been hanging 

around here for, what 22, 23 years. And I always remember, because my House district was in primarily just a metropolitan area. 

It was primarily Tulsa, Oklahoma. And so I got in my little plane 

and I started going out West, and I remember the first trip was 

to Shattuck, Oklahoma. I do not think there is anyone in this room 

who has ever been to Shattuck, Oklahoma, or ever heard of 

Shattuck, Oklahoma. 

But that was when I had my rude awakening of the reality of 

what really is important. We are a farm State. We are a rural 

State, Oklahoma, and in Shattuck I can remember a guy, and, 

John, he had tears in his eyes, and he was talking about how his 

farm has been in their family for so many generations and all that, 

but they were going to lose it. They were going to lose it because 

of the death tax, the inheritance tax. 

Since that time—that has been over 20 years—I cannot go into 

any of our rural areas and have a meeting without that rising as 

the number one issue. I mean, over and above everything else it 

always does. It surfaces. And I think we know the arguments 

there, that, you know, it is an immoral tax, we have already paid 

money on that, and all that. 

So, you know, I would kind of like to get an idea of what you 

think about that. What would be the effect—the President now has 

in his budget to eliminate that tax. What would be the results of 

that, do you think? 

Mr. REARDON. I think, particularly for family businesses and 

large family businesses it would be significant. I think there is an 

under-appreciation for how much of American economy, how much 

employment is based in family controlled businesses. We just put 

out a study, based on the 2704 regs, that Treasury proposed back 

in August, to highlight the contribution of family controlled businesses. It is significant. 

Senator INHOFE. It is. 

Mr. REARDON. And the reality is that if the business is large 

enough, they have to go and buy back a certain portion of that 

business from the Federal Government every generation that it 

survives. Public companies do not have to do that. And what that 

means is that their planning for succession is just a continuous 

process. You know, some of our they have got, you know, hundreds 

of family members who are shareholders in these companies and 

they are just continuously planning for succession, succession, succession. And what that means is that they are draining off revenue 

from the company, not to go buy boats or do something like that. 

They are certainly not hiring or building the business. They are 

doing it just to pay the tax that they know is going to come due 

the next generation. 

Senator INHOFE. Any other thoughts on that? That is really a significant thing, and anymore, that is the only question I get when 

I am in rural areas, in terms of tax policy. 

Another one I keep hearing, and fortunately I do not mean this 

offensive to anyone, but I am glad that Obama is gone and the war 

on fossil fuels is officially over, I hope. So when people are talking 

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about the various deductions that are out there as maybe a way 

to pay for some of this stuff, I like to bring up the intangible drilling costs and the expensing of that. 

You know, I have heard, and I have heard their arguments, and 

you folks probably have some thoughts on this too, that it really 

is not going to have any positive effect in accomplishing—if you are 

doing it for the purpose of offsetting some of the other deductions 

by doing away with that, until you are against a rate of 20 percent 

or less, and, of course, the chances of that happening are very remote. 

Any thoughts on that particular thing? That is the number one 

concern, the deduction of the intangible drilling costs for the oil 

and gas industry. 

Mr. REARDON. Sure. I appreciate that that is a priority for the 

industry. I cannot speak directly to that. I can say that, you know, 

sort of one of the positive aspects of this discussion right now is 

that we seem to be moving towards faster cost recovery, not slower 

cost recovery, which would, you know, suggest that they would preserve that maybe and enhance it. 

One of my complaints with the Kemp draft that came out several 

years ago, we worked with them extensively, was that, you know, 

after all the work that they put into it, at the end of the day the 

cost of capital under their plan was higher. That is, the cost of investing in the United States was higher than it was under the existing code. So they did all that work to reform the tax code and 

they made it more expensive to invest in the United States. 

In my mind, that is the bottom line measure. I mean, either we 

make it so that companies and investors want to invest here and 

want to create jobs here, or we have failed, and, you know, eliminating or making it more difficult to recover your costs is not going 

to move in the correct direction. 

Senator INHOFE. That is a good argument. Ms. Nellen, you were 

talking a little bit about the complicated system that we have, and 

I have always thought of that as being discriminatory against 

small businesses. They cannot afford to have the resources to handle the complicated system, and, consequently, they do not do a lot 

of the expanding and normal things that they would be doing. 

Has anyone ever put together a study to determine just what we 

are losing by—with this overly complicated system that is, in my 

opinion, discriminatory against small business? 

Ms. NELLEN. There probably have been studies and certainly, 

you know, the data that was mentioned here, about the number of 

hours spent on complying, you know, the National Taxpayer Advocate talks about that if they put that into an industry it would be 

like the sixth largest industry in the country, so far as the compliance. So that is one way to quantify what is lost on that. 

I think, also, the time they are spending. AICPA has been a longtime advocate of simplification, and sometimes people might wonder, well, is not that against your interests? 

Senator INHOFE. Yeah, because you guys that are CPAs, you 

know, you make it simpler and they do not need you as much. 

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ing by not being able to spend that money on someone that can 

help them to grow and make their business more effective. 

Senator INHOFE. Thank you. 

Chairman RISCH. Thank you very much, Senator Inhofe. I doubt 

the CPAs are worried that we are going to put them out of business. 

Senator INHOFE. No, and I will tell you what surprises me. I 

know a lot of CPAs. I have not met one CPA that does not want 

it simplified. I always kid them, and I say, ‘‘Oh, you do not really 

want that. You know, why do we need you?’’ 

Ms. NELLEN. Well, it is also risk of complexity too, risk of getting 

the wrong answer for a client, and all that. 

Senator INHOFE. Yeah. Good point. 

Chairman RISCH. Senator Heitkamp. 

Senator HEITKAMP. Thank you, Chairman Risch and Ranking 

Member Shaheen for holding the hearing. North Dakota is a small 

business State. Small firms account for 96 percent of businesses 

and they employ over 200,000 workers, spanning a variety of industries, including farming, manufacturing, and health care services. 

When we talk about tax reform, I believe we should start and 

end the conversation on how it is going to affect small businesses 

in America. That makes sure we are simplifying compliance, and 

including the right mix of tax incentives for entrepreneurs to take 

risk and innovate and grow. I think most importantly, we should 

be doing tax reform in a bipartisan way so that we have a lasting 

structural change to the code that can provide small firms with the 

certainty they need to grow their business. 

I do not think there is any doubt about it. I think, just kind of 

for the record, I used to be on the other side of this. I was actually 

North Dakota State Tax Commissioner for six years, and before 

that I was a tax attorney, and I just want to point out one thing, 

Mr. Reardon. Interestingly enough about the President’s budget, 

where he professed to eliminate the estate tax, he kept the revenue 

from it. I do not know how that works, but it certainly would make 

you scratch your head, would it not? 

Mr. REARDON. Yes, on many things. 

Senator HEITKAMP. The other thing I want to just point out—the 

other thing I do want to point out is the basis adjustment that 

would go with elimination of the estate tax, and the need to actually have an honest conversation with small businesses. A farmer 

in my State may actually find the basis adjustment to be more onerous by having to take it at a basis which their grandfather held 

that property, might be more onerous to them, looking forward, 

than actually an estate tax liability. And so we need to be really 

careful about how we approach the estate tax. But that is neither 

here nor there. 

I am interested in the definition of what is a small business for 

tax reform purposes. Can anyone want to take that challenge? 

Mr. MAZUR. So there is no obvious definition that is in the tax 

code where you can look and say here is a small business. But if 

you just look at the distribution of businesses across the spectrum, 

you would probably land somewhere around $10 million gross receipts, maybe a little more, but not a lot more than that. And that 

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really would be sort of the smaller, not quite mom-and-pop, but bigger than mom-and-pop business, but not a giant business, by any 

stretch of the imagination. 

Senator HEITKAMP. There are varying definitions, whether based 

on the number of shareholders, number of—dollar amount of assets. One thing I also want to point out, as far as what the dollar 

amount is, it is—I would say it is actually probably more than $10 

million. But something also to bear in mind, some places in the 

law, where we actually, years ago, defined a small business, those 

dollar amounts are not adjusted for inflation. 

For example, under Code Section 448, that $5 million threshold 

for when a C corp can—has to move on to an accrual method, that 

is about $11 million today if it was inflation-adjusted. So I think 

we also have to factor in any dollar amount we come up with, it 

should be inflation-adjusted so it can remain relevant for—continue 

to help small business. 

Mr. Reardon. 

Mr. REARDON. Yeah. I think any effort to sort of draw a bright 

line is going to be necessarily artificial. So, for instance, you know, 

Mark’s $10 million threshold, you know, what is the difference between a company that makes $9 million and a company that makes 

$11 million? Do they behave differently? Are they managed or governed differently? Not really. 

Plus, if you do a revenue threshold—— 

Senator HEITKAMP. Well, Koch Petroleum, maybe under your definition, would be a family held business. Are they a small business? 

Mr. REARDON. No. They are not a small business, but they are 

family held, and that gets to my point, which is, I think the one 

bright line that is out there is the distinction between public companies and private companies, because public companies do, in fact, 

behave differently than private companies do. They have different 

regulatory obligations. They have access to markets that private 

companies do. 

So in my mind, you know, I think there is a reason why, for instance, NFIB, the big small business group in town, is called the 

National Federation of Independent Business, not the National 

Federation of Small Business. It is because private companies are 

distinct from public companies, and I would draw the line there. 

Senator HEITKAMP. Yeah. I just think that we need to be really 

careful. I mean, I want—I think we all can recognize that at a certain level, incentivizing behavior, incentivizing investment is a goal 

of all of ours in helping small businesses grow, helping especially 

family owned small businesses grow. But at some point we cross 

the line, whether it is Cargill, whether, you know, Hess. I mean, 

I can give you any number, especially in the oil and gas industry, 

which I am well familiar with, where you would not consider them 

small business but they are independent businesses. 

I want to just associate myself with Senator Shaheen’s comments 

about compliance costs. I think it is something that maybe Jean 

and I sometimes feel lonely in our caucus, talking about this, because I think if you have never done this the way I have, you have 

no understanding or appreciation for the complexities. And I would 

maintain today that without tax preparation software, it would be 

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really hard for a small business or for even a sole proprietor, filing 

a Schedule C, to actually file their own tax returns. 

How do we solve that problem without—just for a minute, you 

know, when you look at the social engineering and the cost of providing tax benefits, which incentivize behaviors, which is another 

way of expenditure of Federal money, right? We would all agree tax 

expenditures are included in the challenges that we have, and 

there has been a recent report saying tax expenditures are not exceeding regular expenditures on domestic policy. 

And so, you know, we understand that there is a whole lot of 

public policy that is embedded. How do we unravel that history to 

get to a rate and a formula that is simple and that is fair? 

Yeah, Mark. 

Mr. MAZUR. I think the example of the 1986 Tax Reform Act was 

one that is instructive there, that, at that time, in a bipartisan 

way, Congress and the Administration made a huge effort to get 

as many of the special provisions out of the tax code as they could, 

in an effort to lower rates. But you need to do something like that. 

It is almost a Herculean effort but it takes a lot of people working 

together to make those tradeoffs. 

Senator HEITKAMP. Annette, have you seen any proposal out 

there that you say, ‘‘There is something everybody can get behind?’’ 

Ms. NELLEN. As far as a tax reform, I think probably bits and 

pieces, but, again, it is probably a work in process. 

One comment I want to make is also we should not forget how 

technology might help on some of the compliance. You had mentioned before about the multistate compliance. You know, technology would help sometimes, perhaps, the tax agency needs that 

upgrade in the technology as well, to help the practitioner be able 

to use the technology that is out there. That could streamline a lot 

of the compliance and the cost. 

Senator HEITKAMP. Brian. 

Mr. REARDON. So your comment about, you know, technology is 

right on point. I think without, you know, sort of TurboTax and the 

other software out there we would have a taxpayer revolt. I know 

I could not do my taxes without it. 

I do not have any specific, kind of other than, you know, sort of 

one of the reasons why, you know, we have been pushing for sort 

of rate parity in terms of the top rate, and not just for businesses 

but for individuals, and also if you eliminate the double tax on corporations you could have dividends and cap gains all at the same 

rate. If every type of income paid the same top rate, you could 

eliminate dozens and dozens and dozens of sections of the tax code, 

and you would make the tax compliance, the tax forms so much 

shorter, for people with that type of income, because it would not 

matter anymore if, you know. 

Right now, you know, one of the things we struggle with is this 

idea that, you know, people who own S corps and work there can 

have their income look like profits as opposed to wages, and they 

save some—you know, they save their HI taxes. Right? And it is 

a huge problem, and it is something we struggled with. 

Well, if you did not have that differential, you would not have 

that issue, and you would not have to do the enforcement and all 

the other stuff. You would not have to have all the C corp, you 

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know, personal holding company rules. You could eliminate all that 

stuff. But it would just be by, let us decide what the rate is—I do 

not care, 28, 30, whatever the rate is—and let us apply that to all 

the income, and we could eliminate—I guarantee you you could 

eliminate half of the tax code. 

Senator HEITKAMP. Mr. Chairman, just with your indulgence, I 

once asked a farmer if he would agree to a 2 percent rate per gross 

receipts—not profitability but just gross receipts, 2 percent. He 

said, ‘‘Sounds like a good idea.’’ I said, ‘‘Tell that to Wal-Mart.’’ 

Right? Because obviously Wal-Mart operates on a very small margin. And so the complexity of American business makes this so 

much harder, and I think it is going to take good-thinking people, 

at this table and hopefully at podiums like this, to come up with 

that dialog and to do the back-and-forth. And the frustration that 

I have is that I do not—I mean, I see a lot of pie in the sky and 

not a lot of hard work. 

So thank you, Mr. Chairman, for indulging me the extra minutes. 

Chairman RISCH. Yes. That is no problem, but let me say this. 

In our caucus, that is a lonely position when you are arguing for 

compliance costs, and we have more room, just in case—— 

[Laughter.] 

Thank you so much, Senator Heitkamp. Good remarks. 

Senator Shaheen, I know you have to be excused to go to another 

meeting. Did you have any remarks you wanted to make? 

Senator SHAHEEN. No. Just thank you all very much and I think 

it has been a good discussion, and hopefully—the challenge I think 

we have is making sure, as there are serious discussions about tax 

reform, that small businesses are at the table, and that is what 

this committee is here to try and make sure, and why we appreciate your voices, so that we can carry with us the changes that 

need to happen to support small business. 

Thank you. 

Chairman RISCH. One of the purposes—before you leave, Senator 

Shaheen, one of the purposes of this meeting is the fact that people 

are actually starting to talk about tax reform at this point. Even 

though we do not have the first problem behind us, they are moving to another one. And, you know, the big businesses, there is an 

army of lawyers in this town that are going to represent them at 

the table, and it is going to be up to us, on this committee. 

So we are looking for practical suggestions, and we are also looking to prioritize the kinds of things that we need to insist are going 

to be in any tax reform that will help small businesses, because the 

voice for small business is probably going to come out of this committee more so than anywhere else, and I can assure you this is 

not a partisan issue. This is a bipartisan issue, and Senator Shaheen and I will be working on that together. So Senator Shaheen, 

thank you. 

Senator Duckworth, welcome. 

Senator DUCKWORTH. Thank you. Thank you, Mr. Chairman. I 

too am worried about tax reforms for small businesses, to make 

sure that they also get a part of any type of an effort. 

Mr. Mazur, as you noted in your testimony, more and more businesses are choosing to structure themselves as S corps. There are 

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many benefits that come with this choice. Liability protection and 

avoiding double taxation. These benefits allow small businesses to 

use capital to hire workers, buy new equipment, invest in longterm growth. 

But, unfortunately, pass-through entities are not limited to just 

these Main Street companies, small businesses. Certain large businesses that employ hundreds of workers earning millions of dollars 

of profits each year can also be structured in this way. 

According to a Washington Post article from August 10 of last 

year, 2016, the Trump organization is made up of over 200 passthrough entities, all of which enjoy the same Federal tax benefits 

as the mom-and-pop small business owners that I represent. 

My question is, how can we make sure that small- and mediumsized businesses are receiving the benefits of the S corp and passthrough structures provided while making sure that large entities 

such as the Trump organization are paying their fair share? 

Mr. MAZUR. That is a difficult area, and you have to—it involves 

a number of tradeoffs. Basically, you want to treat similarly situated businesses in a similar manner. Typically, what we do is we 

do not look at the size of the organization but we look at the income of the organization to determine what the tax liability should 

be. Under current law, we have partnerships, LLCs, and S corporations that are pass-throughs, and they get taxed at the individual 

level. 

What has happened over the last three decades is it has become 

easier for larger businesses to set themselves up as a pass-through 

organization, either through legislation that Congress has passed, 

or through State organizational laws, or even just through technology, where investors are much more comfortable dealing with a 

1,000-person partnership than they were 30 years ago. So you can 

have larger businesses in there. 

I think that is one of the things that Congress should address, 

that we just make sure—we should make sure that we are aware 

small business does not equal pass-through business, as you say, 

and make a conscious choice of what policies we think are helpful. 

For smaller business, it seems to me things like simplification, in 

terms of additional access to cash accounting, or checkbook accounting is a plus for small businesses. Greater expensing limits 

for capital equipment helps them avoid dealing with depreciation 

and maintaining basis of these assets. Those are things that can 

help small businesses actually grow and take away some of their 

complexity. It is probably a step in the right direction. 

Senator DUCKWORTH. Thank you. Ms. Nellen, Chicago is one of 

the largest and most densely populated cities in the United States. 

I represented, when I was in the House, one of the largest concentrations of tool-and-die manufacturers in the Nation, was in my 

little congressional district. We had many, manufacturing businesses who have skilled job openings to this day. In fact, the American Manufacturing Association has said that the largest, greatest 

impediment to them gaining in market share is actually access to 

a skilled workforce. 

At the same time, Chicago and Cook County saw the largest population loss than any other county in 2016, with unemployment 

being one of the reasons cited as to why people were leaving. This 

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is a dichotomy, particularly troubling as Illinois has one of the 

highest unemployment rates among black and brown communities, 

in particular. 

And so from your extensive experience working with tax policy, 

are there specific tax provisions on the books that you would add 

to incentivize STEM education, technical training, hiring of veterans, economically disadvantaged, and those who have committed 

a criminal offense, to allow them to re-enter society? Let’s take advantage of that workforce that is not getting the training that they 

need. Are there any tax incentives you can come up with that 

would help with that educational process? 

Ms. NELLEN. Yes. In the line with education provisions and the 

AICPA has commented on mainly the complexity of all of those, 

but, so, yeah, as part of tax reform that would be one big area, certainly, to look at, because it is a lot of complexity. It is benefiting, 

actually, for higher education, why just higher education so far as 

college education. If you are talking about a skilled workforce that 

perhaps does not need a college education but needs advanced education, perhaps if the education credits stay they should be more 

broadly focused on preparing people for jobs out there, as opposed 

to only subsidizing higher education. 

But the whole realm of education provisions does need to be simplified, and yes, it would absolutely be a benefit to small business 

if they had a better assurance of seeing a skilled workforce available that they can hire in a local area. 

Senator DUCKWORTH. What do the manufacturers do if the average starting salary of someone on their assembly line, because they 

are such highly technical manufacturing businesses is $60,000, 

which is a pretty good salary to making for someone without a 

four-year university education. I have run out of time. I yield back, 

Mr. Chairman. Thank you. 

Chairman RISCH. Thank you very much, Senator. 

Well, thank you to our witnesses for being here. As I said, our 

charge here, I believe, is to represent small businesses as we wade 

into this, when small businesses will not have the voice that some 

of the larger businesses do. We are committed to do that. We want 

to hear ideas about it. For that reason, we are going to keep the 

record open for another couple of weeks for you, or anyone else, 

really, to provide us with their thoughts on how we ought to do this 

as we wade into tax reform. 

So with that, thank you again, everyone who participated, and 

with that the hearing will be adjourned. 

Ms. NELLEN. Thank you. 

[Whereupon, at 4:12 p.m., the Committee was adjourned.] 

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APPENDIX MATERIAL SUBMITTED 

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w AICPA' 

August9,2017 

The Honorable James Risch 

Chairman 

Committee on Small Business & Entrepreneurship 

United States Senate 

428A Russell Senate Office Building 

Washington, DC 20510 

RE: Answers to Follow-Up Questions for the Record, June 14, 2017 Hearing on "Tax Reform: 

Removing Barriers to Small Business Growth" 

Dear Chairman Risch: 

As requested in your letter dated July 26, 20 17, attached are the American Institute of CP As 

(AICPA) answers to the five questions posed by you. 

The AI CPA is the world's largest member association representing the accounting profession with 

more than 418,000 members in 143 countries and a history of serving the public interest since 

1887. Our members advise clients on federal, state, local 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 businesses, as well as America's 

largest businesses. 

please feel free to contact me at ( 408) 924-3508, or 

llllilffiMl'~!!@i§J!lcl!&s!!J; or Melissa Labant, AI CPA Director of Tax Policy & Advocacy, at (202) 

Sincerely, 

Annette Nellen, CPA, CGMA, Esq. 

Chair, AlCPA Tax Executive Committee 

1455 Pennsylvania Ave. NW. Washington. DC 20004·1 081 

T: +1 202.737.6600 f: +1 202.638.4512 

aicpaglobal.com cimaglobal.com 1 aicpa.org cgma.org 
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AICPA Answers to Follow-Up Questions for the Record 

U.S. Senate Committee on Small Business & Entrepreneurship 

June 14, 2017 Hearing on "Tax Reform: Removing Barriers to Small Business Growth" 

Page 2 of4 

Answers to Follow-Up Questions 

Cash Method Accounting for Small Businesses 

Businesses making less than $5 million may use cash accounting rather than the more complicated 

accrual method. The cash method more accurately reflects small business expenses and reduces 

record-keeping and paperwork costs. Raising the threshold for businesses who can use cash 

accounting would help many small businesses. 

QUESTION 1: 

The AICPA supports the expansion of the number of taxpayers who can use cash method 

accounting, which is often used by small businesses. What kind of expansion of the use of cash 

method accounting does AICPA support or suggest is reasonable? Would AICPA support an 

increase in the threshold for businesses who can use this method of accounting above the current 

$5 million? 

ANSWER 1: 

The AICPA strongly believes that sole proprietors, pass-through entities and qualified personal 

service corporations should not have any dollar cap or threshold on the use of the cash method. For 

those businesses subject to a threshold, AICPA believes that adjusting any dollar cap annually for 

inflation is important. In addition to greater simplicity, the cash method involves fewer 

compliance costs and prevents businesses from having to pay tax on income prior to receiving it. 

The AI CPA believes it is important that tax reform not restrict use of the cash method. We believe 

that forcing more businesses to use the accrual method of accounting for tax purposes increases 

their administrative burden, discourages business growth in the United States economy, and 

unnecessarily imposes financial hardship on cash-strapped businesses. As noted in our testimony, 

we support expansion ofthe number of taxpayers who may use the cash method of accounting. 

Compliance Issues for Small Businesses 

Tax compliance costs are 67 percent higher for small businesses than for big businesses. 

Complying with tax laws and regulations costs small business owners $18 to $19 billion per year. 

Paperwork costs come to $74.24 per hour. 

QUESTION 2: 

You've outlined a number of small business compliance issues, including rules for retirement 

plans, listed property, and executive compensation to name a few. Can you describe what you 

believe are the top three compliance issues for small businesses that, if addressed, would most help 

small business growth moving forward? 

ANSWER2: 

The top three compliance issues for small businesses are: 

I. Alternative minimum tax (AMT) compliance (the AICPA supports repeal of the AMT). 

2. Figuring out and complying with the myriad of state tax rules regarding withholding for 

mobile employees (the AICPA supports S. 540, Mobile Workforce State Income Tax 

Simplification Act of 20 17). 
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AI CPA Answers to Follow-Up Questions for the Record 

U.S. Senate Committee on Small Business & Entrepreneurship 

June 14, 2017 Hearing on 'Tax Reform: Removing Barriers to Small Business Growth" 

Page 3 of 4 

3. Dealing with temporary provisions (the AI CPA finds that uncertainty of the tax law creates 

unnecessary confusion and increased compliance costs). 

Difficulty Dealing with the Internal Revenue Service (IRS) 

Few small businesses have accounting or human resources specialists to handle taxes, so 

administrative tasks fall to owners, diverting them from their core businesses. Because they lack 

tax expertise (and do not have in-house tax expertise), 89 percent of small business owners rely on 

outside tax preparers. Compliance issues also include anecdotal evidence from small businesses 

about their difficulty working with the IRS. 

QUESTION 3: 

In your testimony, you discuss some of the compliance issues small businesses face with the 

current tax code. With all of these issues, and knowing that the great majority of small businesses 

rely on outside tax preparers to help them with their tax issues, can you speak to difficulties CPAs 

and small businesses have dealing with the IRS? How could the IRS help make compliance easier 

for small businesses? 

ANSWER3: 

Small businesses and their CPAs face challenges in effectively interacting with the IRS. The 

percentage of calls from taxpayers that the IRS answered between 2004 and 2016 dropped from 

87 percent to 53 percent. Comparing 2004 to 2016, the number of calls the IRS received from 

taxpayers increased from 71 million to I 04 million. yet the number of calls answered by telephone 

assistors declined from 36 million to 26 million. 1 

Our recommendations include modernizing IRS business practices and technology, re-establishing 

the annual joint hearing review, and enabling the IRS to utilize the full range of available 

authorities to hire and compensate qualified and experienced professionals from the private sector 

to meet its mission. 2 

Additionally, we recommend that Congress direct the IRS to create a new dedicated practitioner 

services unit to rationalize, enhance, and centrally manage the many current, disparate practitionerimpacting programs, processes, and tools. Enhancing the relationship between the IRS and 

practitioners would benefit both the IRS and the millions of taxpayers, including numerous small 

businesses, served by the practitioner community. As part of this new unit, the IRS should provide 

practitioners with an online tax professional account with access to all of their clients' information. 

The IRS should offer robust practitioner priority hotlines with higher-skilled employees who have 

the experience and training to address complex issues. Furthermore, the IRS should assign 

customer service representatives (a single point of contact) to geographic areas in order to address 

challenging issues that practitioners could not resolve through a priority hotline. 

1 See National Taxpayer Advocate, "Annual Report to Congress 20!6 Executive Summary: Preface Special Focus 

and Highlights," page 6, 2016. 2 For additional details see A! CPA letter, "Ensuting a \1odcrn-F!Inctioning IRS for the 21st Century." April 3, 2017. 
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AI CPA Answers to Follow-Up Questions for the Record 

U.S. Senate Committee on Small Business & Entrepreneurship 

June 14, 201711earing on "Tax Reform: Removing Barriers to Small Business Growth" 

Page 4 of 4 

Need for Small Business Review Panels 

Small Business Review panels ("SBREFA" Panels) are currently only in place to review the 

regulatory flexibility analyses that the Environmental Protection Agency, Occupational Safety and 

Health Association, and Consumer Financial Protection Bureau perform for their proposed rules. 

Two entities that the Office of Advocacy has cited as frequently failing to perform their regulatory 

flexibility analyses are the Fish and Wildlife Service (FWS) and the IRS. You have legislation to 

expand the use of the SBREFA panels to FWS and IRS, to help ensure that they fully consider the 

effects of their rules on small entities. 

QUESTION 4: 

The rulemakings at the IRS have significant effects on small businesses, creating large compliance 

burdens. Since the IRS frequently fails to perform regulatory flexibility analyses for their proposed 

rules, do you think that small business review panels for major rules would give small businesses 

a voice in the financial regulatory process? 

ANSWER4: 

The AICPA has not studied or worked with these types of panels. We do not have a position on 

Question 4. 

Eliminating the AMT 

The AMT requires taxpayers to calculate their taxes a second time over, using a complicated set 

of rules and definitions. Even though only 3.9 million taxpayers end up owing the AMT, over 9.7 

million taxpayers are required to go through the arduous steps of calculating their possible AMT 

liability each year. 

QUESTION 5: 

In your testimony, you detail the heavy burden AMT places on small businesses and recommend 

repeal of the AMT. Can you estimate how many small businesses are faced with this challenge 

and how many small businesses pay AMT each year? How significant a burden is the AMT for 

small business owners? 

ANSWERS: 

The AI CPA believes that the AMT is a significant burden for small businesses and their owners. 

While small C corporations have an exemption from AMT (section 55( e)), most small businesses 

operate outside of the C corporation form. Any sole proprietor with income near or above the 

AMT exemption amount for individuals is burdened with AMT rules and recordkeeping even if it 

is not owed. Partnerships and S corporations are similarly burdened with AMT reporting and 

recordkeeping as these entities do not always know if their owners are subject to AMT. 
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Senate Committee on Small Business and Entrepreneurship Hearing 

June 14, 2017 

Follow-Up Questions for the Record 

Questions for Mr. Brian Reardon 

Questions from: 

Chairman Risch 

On the Need for Reforming the Individual Code 

Today. 95 percent of businesses are considered to be sole proprietorships or pass through 

entities. More than 50 percent of business income in the U.S. comes from small businesses 

designated as sole proprietorships or pass through entities. 

QUESTION 1: 

We're here today to discuss the issues small businesses face with the current tax code and the 

need to consider reforming the individual code in any tax reform discussion. Can you discuss the 

consequences that would result if we only reform the corporate code and do not consider the 

individual code, through which most small businesses are taxed? 

The idea of corporate-only tax refonn was first floated by the Obama Administration in 20 II and 

it immediately raised alarms. A reform that broadens the tax base for all businesses but only 

reduces corporate tax rates would result in higher taxes on pass through businesses and put them 

at a competitive disadvantage. 

To find out what this would mean to the Main Street business sector and the economy, we asked 

Ernst & Young to measure the economic footprint of the pass through community and the 

implications of corporate only reform. Their findings: 

• Fifty-four percent of all private sector workers (69 million) work for flow-through 

businesses. 

• One out of four private sector workers (31 million) is employed by an S corporation. 

• Nearly one in six private sector workers (20 million) works for a flow-through business 

with more than I 00 employees. 

• States with the highest rate of flow-through employment- with more than 60 percent of 

the private workforce- include Idaho, Maine, Montana, South Dakota, Vermont and 

Wyoming. 

These same employers would be asked to pay sharply higher rates on a significantly broader base 

of income under corporate-only tax reform. According to the study: 

• Pass-through businesses will see their tax burden rise by eight percent ($27 billion) per 

year under budget neutral, corporate-only tax reform. 
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• Their tax base would increase through the elimination of numerous businesses deductions 

and credits, including accelerated depreciation, the domestic production activities 

deduction, and changes to inventory accounting rules. 

The bottom line is that the majority of workers are employed by America's pass through 

businesses, so any reform of the tax code needs to treat them as equal partners and reduce their 

rates right alongside rate cuts for C corporations. 

QUESTION2: 

Idaho is one of the states with the highest level of pass through employment, and I have a great 

interest in making it easier for Idahoans to grow their businesses and spend less time complying 

with the tax code. Further, I'd like to see a simpler system with lower rates. Can you expand on 

what you've heard from your membership are their top issues with the tax code and what a 

simpler individual code with certainty would do for pass throughs across the country? 

Simplification is often described as reducing the number of tax rates, but what about tax codes? 

If you define a tax code as a distinct set of rates applied to a distinct definition of income, then 

we have at least five tax codes at the federal level: 

• Income Taxes 

• Payroll Taxes 

• ACA Investment Surtax 

• Estate Taxes 

• Alternative Minimum Taxes 

Five! That's simply too many. And unlike brackets, taxing the same income multiple times 

really does contribute to complexity. The more layers of tax, the more taxpayers adjust their 

behavior to avoid them. And like drug interactions, there is no way to be certain that the net 

result of all those tax codes is to hurt the very thing you are trying to help. 

For example, the regular tax code offers businesses a lax credit for research expenses; the goal is 

to incent research and development here in the United States. But the R&E tax credit is not 

available under the Alternative Minimum Tax, so business owners who plan out their research 

and incur the investment costs often learn, after the fact, they don't qualify for the credit for no 

other reason than they are paying taxes under the wrong tax code. 

The estate tax is another needless complication. Advocates of the estate tax argue that it helps 

raise revenue while reducing income inequality. It does neither to any significant degree, but as 

a tax on capital, it hurts investment and job creation while making life more difficult for families 

when their father or mother dies. 

The challenge of the estate tax is easy to identify nobody knows when they are going to die and 

very few people know exactly how much their estate is worth, so we have created a tax where 

the taxpayer doesn't know when the tax will be due or how much it will be. That uncertainty 

results in excessive and often wasted tax planning costs. 
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A simple solution would be to trade the estate tax for a capital gains tax applied when the assets 

are sold. Such an approach would be more humane and it would eliminate the uncertainty and 

planning expenses of the estate tax. 

So real simplification would eliminate the AMT, the investment surtax, and the estate tax and 

reduce the number of tax codes to one or two, not five. 

Reducing the layers of tax should be another priority. Income should be taxed once when it is 

earned, not two or three times. The most prominent example of multi-layered taxes is how we 

tax corporate income. Corporate income is first taxed at the business level, and then again when 

it is distributed to the corporation's shareholders. 

Tax and economic literature (and political discourse too) is rife with examples of how this 

double corporate tax reduces hiring and investment by altering taxpayer behavior. Corporate 

executives make specific investment and hiring decisions in order to avoid the double tax. 

Shareholders forgo or delay selling shares for the same reason. People behave differently to 

avoid tax liability and, as a result, the economy suffers. 

Any real tax reform would eliminate the double tax on corporate profits and tax all business 

income only once when it is earned, and at reasonable rates. 

Another contributor to complexity is the practice of taxing different forms of income at different 

rates. Prior to the Reagan tax relief in 1981, individual income was taxed at a top rate of 70 

percent, while corporate income was taxed at a much lower rate. Over time, wealthy taxpayers 

made sure to shift the bulk of their income into the corporate structure to access the lower rate. 

They would also push as many costs as possible into the corporation. 

Back then, the IRS spent much of its time auditing and disallowing "business" expenses 

including cars, boats, vacations and homes. Congress enacted numerous administrative reforms 

to crack down on gaming. 

The tax reform of 1986 largely equalized the top rates paid on wage, investment, and business 

income, the gaming stopped, and taxpayers focused their attention on making business decisions, 

not tax decisions. 

Real reform would restore rate parity, so that the top rates on all forms of income would set at 

similar, reasonable rates. 

QUESTION3: 

Small businesses create the majority of new jobs in the country and account for over half of all 

U.S. sales. This is true with the current tax structure that is complicated, burdensome and 

difficult to comply with. What do you think would happen in the small business sector if tax 

reform were to be accomplished with lower rates and a simplified code? What kind of growth do 

you think we'd see? 
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The growth potential of the economy is limited in the long term to the growth in hours worked 

plus increases in productivity- in other words, increases in labor and capital. But that's the long 

term, and that is the potential. The simple reality is that the United States' economy has been 

growing below potential for a long time, and there's a lot of room to play catch up. Labor 

participation is down sharply from its highs, while productivity growth is at historic lows for this 

stage of the recovery. As the BLS reported: 

These historical comparisons make it clear that the shock to output growth which took 

place during the Great Recession has not been resolved. The fact that output growth has 

not risen above 3. 2 percent in any single year since the recession underlines the fact that 

the higher-than-average growth rates which would be necessaryfor the US. economy to 

climb back to pre-recessionary trends have not been present during this recovery. At this 

point in the recovery, it would require a dramatic increase in output growth rates to 

resolve this situation. 

In simple terms, this gap between actual and potential economic output means a robust tax 

reform unleashing the full potential of American businesses large and small and could result in 

years of economic growth of three percent, four percent, or more. Growth at this level would 

help to restore wage growth for American workers while encouraging more Americans to return 

to the workforce. 
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Question for: Mr. Mark J. Mazur1 

Question from: Chairman Risch 

On Section 179 Expensing for Small Businesses 

Section 179 expensing allows a small business to immediately deduct the cost of investing in 

their business-up to $500,000 of qualifying property and equipment each year. This deduction 

puts money back into the small business for investment rather than spreading the deductions 

out over a long depreciation schedule. Expensing also reduces tax complexity by eliminating the 

paperwork and record-keeping burden associated with longer depreciation periods. 

QUESTION 1 

In your testimony, you discussed Section 179 expensing and how small businesses use this 

deduction. You also mention a reexamination of this provision may be warranted to increase 

simplification and spur innovation: can you expand on this statement and discuss any concrete 

suggestions you have for this provision were it reevaluated? 

RESPONSE 

Section 179 expensing is an important incentive for capital investment made by smaller firms. It 

is also a source of simplification, because firms taking advantage of it do not need to keep track 

of accumulated depreciation and maintain records indicating the adjusted basis of their 

productive physical assets. Increasing the current law $500,000 limitation to $1 million (and 

indexing the amount for future inflation) would help ensure that smaller businesses can make 

significant capital investments in a tax-advantaged way and would expand the simplification 

benefits provided by Section 179 to these firms. In addition to increasing the limitation, 

increasing the dollar threshold on investment where the benefit begins to phase out from the 

current law $2 million (indexed for inflation, so the value is $2,030,000 in 2017) to a larger 

figure (such as $3 million, also indexed for inflation) would ensure that more smaller firms can 

benefit. 

1 The views expressed are those of Mr. Mazur and should not be attributed to the Tax Policy Center, the Urban Institute, the 

Brookings Institution, their boards, or their funders. 
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Statement of the 

American Farm Bureau Federation 

SUBMITTED FOR THE HEARING RECORD 

UNITED STATES SENATE COMMITTEE 

ON SMALL BUSINESS AND ENTREPRENEURSHIP 

"TAX REFORM: REMOVING BARRIERS TO SMALL BUSINESS 

GROWTH" 

JUNE 14,2017 

Submitted By: 

The American Farm Bureau Federation 

l p ll 
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The American Farm Bureau Federation is the country's largest general farm organization, with 

nearly 6 million member families and representing nearly every type of crop and livestock 

production across all 50 states and Puerto Rico. Our members grow and produce the food, fiber 

and fuel that propel our nation's economy as well as putting food on our tables. According to 

USDA, 11 percent of U.S. employment comes from the agriculture and food industry, 

accounting for 21 million jobs of which about 18 million are off-the-farm positions. 

Federal tax policy affects the economic behavior and well-being of farm households as well as 

the management and profitability of farm and ranch businesses. Farm Bureau supports replacing 

the current federal income tax with a fair and equitable tax system that encourages success, 

savings, investment and entrepreneurship. We appreciate the opportunity to file this statement 

explaining the importance of tax reform and highlighting tax code provisions important to the 

long-term financial success of farm and ranch businesses. 

Farms and ranches operate in a world of uncertainty. From unpredictable commodity and product 

markets to fluctuating input prices, from uncertain weather to insect or disease outbreaks, 

running a farm or ranch business is challenging under the best of circumstances. Farmers and 

ranchers need a tax code that recognizes the financial challenges that impact agricultural 

producers. They want a simpler more transparent tax code that doesn't make the challenging task 

of running a farm or ranch business more difficult than it already is. 

Farm Bureau supports tax laws that help the family farms and ranches that grow America's food 

and fiber, often for rates of return that are modest compared to other business 

opportunities. What is needed is tax reform that supports high-risk, high-input, capital-intensive 

businesses like farms and ranches that predominantly operate as sole proprietors and passthrough entities. We believe that tax reform should be equitable and designed to encourage 

private initiative and domestic economic growth. 

Farm Bureau commends the Committee on Small Business & Entrepreneurship for holding this 

hearing on ways to encourage small business growth. Many tax code changes under discussion 

will be beneficial to farmers, including reduced income tax rates, reduced capital gains taxes, 

immediate expensing for all business inputs except land, and the elimination of the estate tax. 

Proposals to end the loss of the deduction for business interest expense and the deduction for 

state and local taxes, however, are a cause for concern. Also important to farming and ranching 

is the continuation of stepped-up basis, preserving cash accounting and maintaining like-kind 

exchanges. 

The statement that follows focuses on and provides additional commentary on the tax reform 

issues most important to farmers and ranchers. 

COMPRHENSIVE TAX REFORM WILL BOOST FARM AND RANCH BUSINESSES 

Any tax reform proposal considered by Congress must be comprehensive and include individual 

as well as corporate reform and rate reduction. By far, the most common form of farm ownership 

is as a sole-proprietor. In total, farms and ranches operated as individuals, partners and S 

corporation shareholders constitute about 97 percent of our nation's 2 million farms and ranches 
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and about 85 percent of total agricultural production. Because many business deductions and 

credits are used by both corporate and pass-through businesses, their elimination without 

substantial rate reduction for all business entities could result in a tax increase for the vast 

majority offarmers and ranchers. 

LOWER EFFECTIVE TAX RATES WILL BENEFIT FARM AND RANCH BUSINESSES 

Farm Bureau supports reducing tax rates and views this as the most important goal of tax reform. 

While lower tax rates are important, the critical feature for farmers and ranchers is the effective 

tax rate paid by farm and ranch businesses. Tax reform that lowers rates by expanding the base 

should not increase the overall tax burden (combined income and self-employment taxes) of 

farm and ranch businesses. Because profit margins in farming and ranching are tight, farm and 

ranch businesses are more likely to fall into lower tax brackets. Tax reform plans that fail to 

factor in the impact oflost deductions for all business entities and for all rate brackets could 

result in a tax increase for agriculture. 

Farming and ranching is a cyclical business. A period of prosperity can be followed by one or 

more years oflow prices, poor yields or even a weather disaster. Without the opportunity to even 

out income over time, farmers and ranchers will pay more than comparable non-cyclical 

businesses. Tax code provisions like income averaging allow farmers and ranchers to pay taxes 

at an effective rate equivalent to a business with the same aggregate but steady revenue stream. 

Farm savings accounts would accomplish the same object plus allow a farner or rancher to 

reserve income in a dedicated savings account for withdrawal during a poor financial year. 

Installment sales ofland benefits both buyers and sellers by providing sellers with an even 

income flow and buyers with the ability to make payments over time. 

ACCELERATED COST RECOVERY HELPS FARMERS REMAIN EFFICIENT 

Farmers and ranchers need to be able to match income with expenses in order to manage their 

businesses through challenging financial times. Expensing allows farm and ranch business to 

recover the cost of business investments in the year a purchase is made. In addition to Sect. l 79 

small business expensing, the tax code also provides immediate cost recovery through bonus 

depreciation and through long-standing provisions that allow for the expensing of soil and water 

conservation expenditures, expensing of the costs of raising dairy and breeding cattle and for the 

cost of fertilizer and soil conditioners such as lime. Farm Bureau supports the expansion of 

immediate expensing. 

Because production agriculture has high input costs, Farm Bureau places a high value on the 

immediate write-off of all equipment, production supplies and pre-productive costs. While Sect. 

179 does provide full expensing for most small and mid-size farms, USDA reports that almost a 

quarter of the large farms that account for nearly half of all agricultural production made 

investments exceeding the expensing limit in 2015. Thus, an expansion of immediate expensing 

has the potential to change the investment behavior offarms responsible for a significant amount 

of agriculture production. 
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When fanners are not allowed immediate expensing they must capitalize purchases and deduct 

the expense over the life of the property. Accelerated deductions reduce taxes in the purchase 

year, providing readily available funds for upgrading equipment, to replace livestock, to buy 

production supplies for the next season and for farmers to expand their businesses. This is a not 

only a benefit to production agriculture; a journal Agricultural Finance Review study found that 

for every $1,000 increase to the Section 179 expensing amount, farms that had been previously 

limited by the expensing amount made an incremental capital investment of between $320 and 

$1,110. 

CASH ACCOUNTING HELPS FARM AND RANCH BUSINESSES TO CASH FLOW 

Cash accounting is the preferred method of accounting for farmers and ranchers because it 

allows them to match income with expenses and aids in tax planning. Farm Bureau supports the 

continuation of cash accounting. 

Cash accounting allows farmers and ranchers to improve cash flow by recognizing income when 

it is received and recording expenses when they are paid. This provides the flexibility fanners 

need to plan for major business investments and in many cases provides guaranteed availability 

of some agricultural inputs. 

Under a progressive tax rate system, fanners and ranchers, whose incomes can fluctuate widely 

from year to year, will pay more total taxes over a period of time than taxpayers with more stable 

incomes. The flexibility of cash accounting also allows farmers to manage their tax burden on an 

annual basis by controlling the timing of revenue to balance against expenses and target an 

optimum level of income for tax purposes. 

Loss of cash accounting would create a situation where a farmer or rancher might have to pay 

taxes on income before receiving payment for sold commodities. Not only would this create cash 

flow problems, but it also could necessitate a loan to cover ongoing expenses until payment is 

received. The use of cash accounting helps to mitigate this challenge by allowing fann business 

owners to make tax payments after they receive payment for their commodities. 

DEDUCTING INTEREST EXPENSE IS IMPORTANT FOR FINANCING 

Debt service is an ongoing and significant cost of doing business for farmers and ranchers who 

must rely on borrowed money to buy production inputs, vehicles and equipment, and land and 

buildings. Interest paid on these loans should be deductible because interest is a legitimate 

business expense. According to USDA Economic Research Service, the interest expense 

accounts for 17.9 percent of fixed expenses for farms and ranches. Immediate expensing will not 

offset the loss of this deduction, especially for the bulk of farmers and ranchers currently covered 

under Sect. 179 small business expensing. 

Fann and ranch businesses are almost completely debt financed with little to no access to 

investment capital to finance the purchase of land and production supplies. In 2015, all but 
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5 percent of farm sector debt was held by banks, life insurance companies and government 

agencies. Without a deduction for interest, it would be harder to borrow money to purchase land 

and production inputs and the agriculture sector could stagnate. 

Land has always been farmers' greatest asset, with real estate accounting for 79 percent of total 

farm assets in 2015. Since almost all land purchases require debt financing, the loss of the 

deduction for mortgage interest would make it more difficult to cash flow loan payments and 

could even make it impossible for some to secure financing at all. The need for debt financing is 

especially critical for new and beginning farmers who need to borrow funds to start their 

businesses. 

REPEALING ESTATE TAXES WILL AID IN FARM TRANSISTIONS 

Estate taxes disrupt the transition of farm and ranch businesses from one generation to the next. 

Farm Bureau supports estate tax repeal, opposes the collection of capital gains taxes at death and 

supports the continuation of unlimited stepped-up basis. 

Farming and ranching is both a way of life and a way of making a living for the millions of 

individuals, family partnerships and family corporations that own more than 99 percent of our 

nation's more than 2 million farms and ranches. Many farms and ranches are multi-generation 

businesses, with some having been in the family since the founding of our nation. 

Many farmers and ranchers have benefited greatly from congressional action that increased the 

estate tax exemption to $5 million indexed for inflation, provided portability between spouses, 

and continued the stepped-up basis. Instead of spending money on life insurance and estate 

planning, farmers are able to upgrade buildings and purchase equipment and livestock. And more 

importantly, they have been able to continue farming when a family member dies without having 

to sell land, livestock or equipment to pay the tax. 

In spite of this much-appreciated relief, estate taxes are still a pressing problem for some 

agricultural producers. One reason is that the indexed estate tax exemption, now $5.49 million, is 

still catching up with recent increases in fannland values. While increases in cropland values 

have moderated over the last three years, cropland values remain high. On average cropland 

values are 62 percent higher than they were a decade ago. As a result, more farms and ranches 

now top the estate tax exemption. With 91 percent offarm and ranch assets illiquid, producers 

have few options when it comes to generating cash to pay the estate tax. 

REDUCED TAXATION OF CAPITAL GAINS ENCOURAGES INVESTMENT 

The impact of capital gains taxes on farming and ranching is significant. Production agriculture 

requires large investments in land and buildings that are held for long periods of time during 

which land values can more than triple. USDA survey data suggestsabout 40 percent of all 

family farms and ranches report some gain or loss, more than three times the average individual 

taxpayer. Farm Bureau supports reducing capital gains tax rates and wants an exclusion for farm 

land that remains in production. 
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Capital gains taxes are owed when farm or ranch land, buildings, breeding livestock and some 

timber are sold. While long-term capital gains are taxed at a lower rate than ordinary income to 

encourage investment and in recognition that long-term investments involve risk, the tax can still 

discourage property transfers or alternatively lead to a higher asking price. 

Land and buildings typically account for 79 percent of farm or ranch assets. The current top 

capital gains tax is 20 percent. Because the capital gains tax applies to transfers, it provides an 

incentive to hold rather than sell land. This makes it harder for new farmers and producers who 

want to expand their business, say to include a child, to acquire property. It also reduces the 

flexibility farms and ranches need to adjust their business structures to maximize use of their 

capitaL 

STEPPED-UP BASIS REDUCES TAXES FOR THE NEXT GENERATION OF PRODUCERS 

There is also interplay between estate taxes and capital gains taxes: stepped-up basis. Step-up 

sets the starting basis (value) of land and buildings at what the property is worth when it is 

inherited. Farm Bureau supports continuation of stepped-up basis. 

Capital gains taxes on inherited assets are owed only when sold and only on gains over the 

stepped-up value. If capital gains taxes were imposed at death or if stepped-up basis were 

repealed, a new capital gains tax would be created and the implications of capital gains taxes as 

described above would be magnified. This is especially true for the vast majority of farmers and 

ranchers who are both under the estate tax exemption and have the benefit of stepped-up basis. 

Stepped-up basis is also important to the financial management of farms and ranches that 

continue after the death of a family member. Not only are land and buildings eligible for 

stepped-up basis at death but so is equipment, livestock, stored grains, and stored feed. The new 

basis assigned to these assets resets depreciation schedules, providing farmers and ranchers with 

an expanded depreciation deduction. 

LIKE-KIND EXCHANGES HELP AG PRODUCERS STAY COMPETITIVE 

Like-kind exchanges help farmers and ranchers operate more efficient businesses by allowing 

them to defer taxes when they sell assets and purchase replacement property of a like-kind. Farm 

Bureau supports the continuation of Sect. 1031 like-kind exchanges. 

Like-kind exchanges have existed since 1921 and are used by farmers and ranchers to exchange 

land and buildings, equipment, and breeding and production livestock. Without like-kind 

exchanges some farmers and ranchers would need to incur debt in order to continue their farm or 

ranch businesses or, worse yet, delay mandatory improvements to maintain the financial viability 

of their farm or ranch. 

FARMERS AND RANCHERS PAY SIGNIFICANT STATE AND LOCAL TAXES 

Farm Bureau supports continuation of the deduction for state and local taxes. Loss of the 

deduction for state and local taxes paid would have a significant impact on farm and ranch 
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businesses. According to USDA Economic Research Service, state and local property taxes 

account for 16 percent of fixed expenses for all farms. An additional, important contributing 

factor is that taxes are often built into the price of rent and lease payments, which are substantial 

for farms. Therefore, losing the state and local tax deduction would likely cause higher rent and 

lease payments. It should be noted that the figures for taxes mentioned above are only for real 

estate and property taxes and do not include any state income taxes if those exist. Therefore, the 

overall local and state tax burden is likely higher then stated above. 

SUMMARY 

Farm Bureau supports replacing the current federal income tax with a fair and equitable tax 

system that encourages success, savings, investment and entrepreneurship. We believe that the 

new code should be simple, transparent, revenue-neutral and fair to farmers and ranchers. Tax 

reform should embrace the following overarching principles: 

Comprehensive: Tax reform should help all farm and ranch businesses, including soleproprietors, partnerships and sub-S and C corporations. 

Effective Tax Rate: Tax reform should reduce combined income and self-employment 

tax rates low enough to account for any deductions/credits lost due to base broadening. 

Cost Recovery: Tax reform should allow businesses to deduct expenses when incurred, 

including business interest expense. Cash accounting should continue. Sect. I 031 likekind exchanges should continue. There should be a deduction for state and local taxes. 

Estate Taxes: Tax reform should repeal estate taxes. Stepped-up basis should continue. 

Capital Gains Taxes: Tax reform should lower taxes on capital investments. Capital gains 

taxes should not be levied on transfers at death. 
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~ AICPA 

June 12, 2017 

The Honorable James Risch 

Chairman 

Committee on Small Business & Entrepreneurship 

United States Senate 

428A Russell Senate Office Building 

Washington, DC 20510 

The Honorable Jeanne Shaheen 

Ranking Member 

Committee on Small Business & Entrepreneurship 

United States Senate 

428A Russell Senate Office Building 

Washington, DC 20510 

RE: June 14,2017 Hearing on "Tax Refom1: Removing Barriers to Small Business Growth" 

Dear Chainnan rusch and Ranking Member Shaheen: 

On behalf of tbe American Institute of CPAs (AICPA), I have been invited to testify at the Senate 

Committee on Small Business & Entrepreneurship hearing on "Tax Reform: Removing Barriers to Small 

Business Growth" on June 14, 2017. 

The AI CPA respectfully submits tbe enclosed written statement for the record. We appreciate tbe efforts 

of the Committee for their commitment to reducing the tax compliance burden on small businesses. 

The AI CPA is the world's largest member association representing tbe accounting profession witb more 

than 418,000 members in 143 countries and a history of serving the public interest since 1887. Our 

members advise clients on federal, state, local 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 businesses, as well as America's largest businesses. 

lfyou have any questions. please feel free to contact me at (408) 924-3508, 

or Melissa Labant. AICPA Director of Tax Policy & Advocacy, 

melissal.labant@aicpa-cima.com. 

Sincerely. 

Annette Nell en, CPA, CGMA, Esq. 

Chair, AICPA Tax Executive Committee 

1455 Pennsylvania Ave. NW, Washington, DC 20004-1081 

T: +1 202.737.6600 f: +1 202.638.4512 

aicpagklbal.com cimaglobal.com 1 aicpa.org : cgma.org 
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The Honorable James Risch 

Chairman 

Senate Committee on Small Business 

& Entrepreneurship 

428A Russell Senate Office Building 

Washington, D.C. 20510 

June 28, 2017 

The Honorable Jeanne Shaheen 

Ranking Member 

Senate Committee on Small Business 

& Entrepreneurship 

428A Russell Senate Office Building 

Washington, D.C. 20510 

Dear Chairman Risch and Ranking Member Shaheen: 

In connection with the Senate Committee on Small Business & Entrepreneurship's June 

14, 2017 hearing on Tax Reform: Removing Barriers to Small Business Growth, we are 

submitting as a statement for the record the attached letter urging you to preserve the ability of 

farmers, ranchers, and service pass-through businesses to use the cash method of accounting. 

Thank you for your consideration and your leadership on these important issues. 

Sincerely, 

The Coalition to Preserve Cash Accounting 
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The Honorable James Risch 

Chairman 

Senate Committee on Small Business 

& Entrepreneurship 

428A Russell Senate Office Building 

Washington, D.C. 20510 

June 28, 2017 

The Honorable Jeanne Shaheen 

Ranking Member 

Senate Committee on Small Business 

& Entrepreneurship 

428A Russell Senate Office Building 

Washington, D.C. 20510 

Dear Chairman Risch and Ranking Member Shaheen: 

On behalf of the Coalition to Preserve Cash Accounting ("the Coalition"), we are writing 

to explain why it is important to continue to allow farmers, ranchers, and service provider passthrough businesses to continue to use the cash method of accounting as part of any tax reform 

plan. The Coalition applauds your efforts to improve the nation's tax code to make it simpler, 

fairer and more efficient in order to strengthen the U.S. economy, make American businesses 

more competitive, and create jobs. We appreciate the opportunity to provide these comments. 

The Coalition is comprised of dozens of individual businesses and trade associations 

representing thousands of farmers, ranchers, and service provider pass-through entities across the 

United States that vary in line of business, size and description, but have in common that our 

members rely on the use of cash accounting to simply and accurately report income and expenses 

for tax purposes. Pass-through entities account for more than 90 percent of all business entities 

in the United States. A substantial number of these businesses are service providers, farmers, 

and ranchers that currently qualify to use cash accounting. They include a variety of businesses 

throughout America - farms, trucking, construction, engineers, architects, accountants, lawyers, 

dentists, doctors, and other essential service providers - on which communities rely for jobs, 

health, infrastructure, and improved quality of life. These are not just a few big businesses and a 

few well-to-do owners. According to IRS data, there are over 2.5 million partnerships using the 

cash method of accounting, in addition to hundreds of thousands of Subchapter S corporations 

eligible to use the cash method. 

About the Cash Method of Accounting 

Under current law, there are two primary methods of accounting for tax purposes -cash 

and accrual. Under cash basis accounting, taxes are paid on cash actually collected and bills 

actually paid. Under accrual basis accounting, taxes are owed when the right to receive payment 

is fixed, even if that payment will not be received for several months or even several years; 

expenses are deductible even if they have not yet actually been paid. 

The tax code permits farmers, ranchers, and service pass-through entities (with individual 

owners paying tax at the individual level) of all sizes- including partnerships, Subchapter S 

corporations, and personal service corporations - to use the cash method of accounting. Cash 

accounting is the foundation upon which we have built our businesses, allowing us to simply and 

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accurately report our income and expenses, and to manage our cash flows, for decades. It is a 

simple and basic method of accounting - we pay taxes on the cash coming in the door, and we 

deduct expenses when the cash goes out the door. No gimmicks, no spin, no game playing- cash 

accounting is the very essence of the fairness and simplicity that is on everyone's wish list for 

tax reform. 

Some recent tax reform proposals would require many of our businesses to switch to the 

accrual method of accounting, not for any policy reason or to combat abuse, but rather for the 

sole purpose of raising revenues for tax reform. Forcing such a switch would be an effective tax 

increase on the thousands upon thousands of individual owners who generate local jobs and are 

integral to the vitality of local economies throughout our nation. It would also increase our 

recordkeeping and compliance costs due to the greater complexity of the accrual method. 

Because many of our businesses would have to borrow money to bridge the cash flow gap 

created by having to pay taxes on money we have not yet collected, we may incur an additional 

cost with interest expense, a cost that would be exacerbated if interest expense is no longer 

deductible, as proposed under the House Republicans' Better Way blueprint ("the blueprint"). 

Some businesses may not be able to borrow the necessary funds to bridge the gap, requiring 

them to terminate operations with a concomitant loss of jobs and a harmful ripple effect on the 

surrounding economy. 

Tax Reform Proposals and Cash Accounting 

The blueprint moves toward a cash flow, destination-based consumption tax. The cash 

flow nature of the proposal suggests that the cash method of accounting would be integral and 

entirely consistent with the blueprint since it taxes "cash-in" and allows deductions for "cashout," including full expensing of capital expenditures. While we understand that they are 

different proposals, the "ABC Act "(H.R. 4377), a cash flow plan introduced by Rep. Devin 

Nunes (R-CA) in the I 14th Congress, required all businesses to use the cash method. However, 

the blueprint does not provide details regarding the use of the cash method, including whether all 

businesses would be required to use it, whether businesses currently allowed to use the cash 

method would continue to be allowed to do so, whether a hybrid method of cash and accrual 

accounting would apply, or some other standard would be imposed. 

President Trump's tax reform plan is not a cash flow plan and takes a more traditional 

income tax-based approach, yet the principles articulated in the Administration's plan are 

entirely consistent with the continued availability of the cash method of accounting. Growing 

the economy, simplification, and tax relief are exemplified by the cash method of accounting. 

Requiring businesses that have operated using the cash method since their inception to suddenly 

pay tax on money they have not yet collected, and may never collect, is an effective tax increase, 

and will have a contraction effect on the economy as funds are diverted from investment in the 

business to pay taxes on money they have not received or as businesses close because of 

insufficient cash flow and inability to borrow. It is important to note that cash accounting is not 

a "tax break for special interests;" it is a simple, well-established and long-authorized way of 

reporting income and expenses used by hundreds of thousands offamily-owned farms, ranches, 

businesses, and Main Street service providers that are the backbone of any community. 

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Several recent tax reform proposals, including Senator John Thune's (R-SD) S. 1144, the 

"Investment in New Ventures and Economic Success Today Act of2017," would expand the use 

of cash accounting to allow all businesses under a certain income threshold, including those 

businesses with inventories, to use cash accounting. Such proposals aim to simplifY and reduce 

recordkeeping burdens and costs for small businesses, while still accurately reporting income 

and expenses. A few of these proposals (not S. 1144) would pay for this expansion by forcing all 

other businesses currently using cash accounting to switch to accrual accounting. We do not 

oppose expanding the allowable use of cash accounting, but it is unfair and inconsistent with the 

goals of tax reform to pay for good policy with bad policy that has no other justification than 

raising revenues. When cash accounting makes sense for a particular type of business, the size 

of the business should make no difference. Further, there have been no allegations that the 

businesses currently using cash accounting are abusing the method, inaccurately reporting 

income and expenses, or otherwise taking positions inconsistent with good tax policy. 

Tax reform discussions seem to be trending toward faster cost recovery than under 

current law. For example, the blueprint allows for full expensing of capital investment, Senator 

Thune's bill makes bonus depreciation permanent, and comments from Administration officials 

suggest that the President and his team prefer faster write-offs of capital assets. Such policies 

benefit capital intensive businesses. However, service businesses by their very nature are not 

capital intensive, so it would be unfair to allow faster cost recovery for some businesses while 

imposing an effective tax increase and substantial new administrative burdens on pass-through 

service providers - who will not benefit from more generous expensing or depreciation rules - by 

taking away the use of cash accounting. 

Other Implications of Limiting Cash Accounting 

In addition to the policy implications, there are many practical reasons why the cash 

method of accounting is the best method to accurately report income and expenses for farmers, 

ranchers, and pass-through service providers: 

The accrual method would severely impair cash flow. Businesses could be forced into 

debt to finance their taxes, including accelerated estimated tax payments, on money we 

may never receive. Many cash businesses operate on small profit margins, so 

accelerating the recognition of income could be the difference between being liquid and 

illiquid, and succeeding or failing (with the resulting loss of jobs). 

Loss of cash accounting will make it harder for farmers to stay in business. For farmers 

and ranchers, cash accow1ting is crucial due to the nwnber and enormity of up-front costs 

and the uncertainty of crop yields and market prices. A heavy rainfall, early freeze, or 

sustained drought can devastate an agricultural community. Farmers and ranchers need 

the predictability, flexibility and simplicity of cash accounting to match income with 

expenses in order to handle their tax burden that otherwise could fluctuate greatly from 

one year to the next Cash accounting requires no amended returns to even out the 

fluctuations in annual revenues that are inherent in farming and ranching. 

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Immutable factors outside the control of businesses make it difficult to determine income. 

Many cash businesses have contracts with the government, which is known for long 

delays in making payments that already stretch their working capital. Billings to 

insurance companies and government agencies for medical services may be subject to 

new billing codes or be disputed or discounted. Service recipients, many of whom are 

private individuals, may decide to pay only in part or not at all, or force the provider into 

protracted collection. Structured settlements and alternative fee arrangements can result 

in substantial delays in collections, sometimes over several years; therefore, taxes owed 

in the year a matter is resolved could potentially exceed the cash actually collected. 

Recordkeeping burdens, including cost, staff time, and complexity, would escalate under 

accrual accounting. Cash accounting is simple - cash in/cash out. Accrual accounting is 

much more complex, requiring sophisticated analyses of when the right to collect income 

or to pay expenses is fixed and determinable, as well as the amounts involved. In order 

to comply with the more complex rules, businesses currently handling their own books 

and records may feel like they have no other choice than to hire outside help or incur the 

additional cost of buying sophisticated software. 

Accrual accounting could have a social cost. Farmers, ranchers, and service providers 

routinely donate their products and services to underserved and underprivileged 

individuals and families. An effective tax increase and increased administrative costs 

resulting from the use of accrual accounting could impede the ability of these businesses 

to provide such benefits to those in need in their local communities. 

Conclusions 

The ability of a business to use cash accounting should not be precluded based on the size 

of the business or the amount of its gross receipts. Whether large or small, a business can have 

small profit margins, rely on slow-paying government contracts, generate business through 

deferred fee structures or be wiped out through the vagaries of the weather. Cash diverted 

toward interest expense, taxes, and higher recordkeeping costs is capital unavailable for use in 

the actual business, including paying wages, buying capital assets, or investing in growih. 

Proposals to limit the use of cash accounting are counterproductive to the already agreedupon principles of tax reform, which focus on strengthening our economy, fostering job growth, 

enhancing U.S. competitiveness, and promoting fairness and simplicity in the tax code. Accrual 

accounting does not make the system simpler, but more complex. Increasing the debt load of 

American businesses runs contrary to the goal of moving toward equity financing instead of debt 

financing and will raise the cost of capital, creating a drag on economic growth and job creation. 

Putting U.S. businesses in a weaker position will further disadvantage them in comparison to 

foreign competitors. It is simply unfair to ask the individual ovmers of pass-through businesses 

to shoulder the financial burden for tax reform by forcing them to pay taxes on income they have 

not yet collected where such changes are likely to leave them in a substantially worse position 

than when they started. 

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As discussions on tax reform continue, the undersigned respectfully request that you take 

our concerns into consideration and not limit our ability to use cash accounting. We would be 

happy to discuss our concerns in further detail. Please feel free to contact Mary Baker 

(mary.baker@klgates.com) or any of the signatories for additional information. 

Thank you for your consideration of this important matter. 

Sincerely, 1 

Americans for Tax Reform 

American Council of Engineering Companies 

American Farm Bureau Federation 

American Institute of Certified Public Accountants 

American Medical Association 

The American Institute of Architects 

The National Creditors Bar Association 

Akin Gump Strauss Hauer & Feld LLP 

Baker Donelson 

Debevoise & Plimpton LLP 

Dorsey & Whitney LLP 

Foley & Lardner LLP 

Jackson Walker L.L.P. 

K&L Gates LLP 

Kilpatrick Townsend & Stockton LLP 

Lewis Roca Rothgerber Christie LLP 

Littler Mendelson P.C. 

Miles & Stockbridge P.C. 

Mitchell Silberberg & Knupp LLP 

Morrison & Foerster LLP 

Nelson Mullins Riley & Scarborough LLP 

Ogletree, Deakins, Nash, Smoak & Stewart, P.C. 

Perkins Coie LLP 

Quarles & Brady LLP 

Rubin and Rudman LLP 

Squire Patton Boggs (US) LLP 

Steptoe & Johnson LLP 

White & Case LLP 

1 Although not a signatory to this letter. the American Bar Association (ABA) is working closely with the Coalition and has 

expressed similar concerns regarding proposals to limit the ability of personal service businesses to use cash accounting. The 

ABA's most recent letters to the House Ways & Means and Senate Finance Committees arc available here and here. 

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U.S. Senate Committee on Small Business and 

Entrepreneurship 

Tax Reform: Removing Barriers for Small Business Growth 

Statement for the Record 

Professor Caroline Bruckner, Executive-in-Residence, Accounting and Taxation and 

Managing Director, Kogod Tax Policy Center, Kogod School of Business, American 

University. 

June 28, 2017 
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Kogod Tax Policy Center Prof. Caroline Bruckner, Statement for the Record, June 28,2017 

Members of the U.S. Senate Committee on Small Business and Entrepreneurship (the 

"Committee") and staff, my name is Caroline Bruckner and I am a tax professor at American 

University's Kogod School of Business. I am also the Managing Director of American 

University's Kogod Tax Policy Center (KTPC), which conducts nonpartisan policy research on 

tax and compliance issues specitic to small businesses and entrepreneurs. At the KTPC, we 

applaud the Committee's initiative in identifying barriers to small business growth as part of its 

contribution to the tax reform debate. 

This Committee has a long history, dating back to its days as a select Senate committee, of 

working on behalf of America's small businesses on tax issues. Beginning in 1953, this 

Committee prepared a comprehensive survey of the impact of federal taxes on small businesses, 

culminating in a report to the Senate with key recommendations. Since then, this Committee 

has held at least 40 hearings over the years on tax-related concerns of small businesses. As 

Congress moves forward with tax reform, this Committee will continue to play a vital role in 

infortning Congress and its tax-writing committ.c,es on tax and compliance challenges facing 

small businesses under the current system, however, with respect to women-owned firms, there 

is significantly more work to be done. 

l.!li£1;;,:5J'-.!!.!H11il!'JI.J..1a!,~:Llf':i!l!'E!L.l2!!!E!J.q,g_SJE!!l§J.:;r, which we released on J nne 12, 2017, identifies a 

number of barriers to small business growth that impact women-owned firms, the 

overwhelming majority of which are small businesses. Moreover, our report assesses how the 

U.S. tax code's more than $255 billion of tax expenditures targeted to help small businesses 

grow and access capital impact women-owned firms and makes the following findings. 

• \JC'hile women-owned fitms have increased to now total more than 11 million (or 38% 

of all U.S. firms), the majority of women business owners are small businesses operating 

in service industries and they continue to have challenges growing their receipts and 

accessing capital. 

• At the same time, three of the four small business tax expenditures we assessed are so 

limited in design that they either (i) explicitly exclude service firms, and by extension, 

the majority of women-owned firms; or (ii) could effectively bypass women-owned 

firms who are not incorporated or who are service firms with few capital-intensive 

equipment investments altogether. 

• Our survey data of 515 experienced, engaged women business owners corroborates 

these findings, and nevertheless suggests that when women-owned firms can take 

advantage of tax breaks, they do. However, neither Congress nor Treasury or IRS or 

SRA, has ever measured how the tax code in1pacts women business owners. 

• For example, we identified only three women business owners who had ever used 

Internal Revenue Code Section 1202- a $6 billion tax break- to raise capital for their 

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Kogod Tax Policy Center Prof. Caroline Bruckner, Statement for the Record, June 28, 2017 

firm>. \l(lhile we expect that more than three women-owned firms have uged this 

provision since 1993, we don't have publicly-available taxpayer data to prove it This 

example highlights why we need tax research on women business owners. Similarly, 

our survey found that women business owners use Section 179 at significantly lower 

rates than existing government research find> for businesses generally. This tax break 

is one of the most expensive (it will cost $248 billion from 2016-2020), and yet we don't 

have any research on how it benefits women business owners. 

• Our findings raise question> as to (i) whether the U.S. tax code's small business tax 

expenditures are operating as Congress intended for these small businesses; and (ii) 

whether the cost of thege expenditures has been accounted for in terms of their uptake 

by women-owned firms. 

In answering these questions impacting millions of women business owners, we found that 

Congress and stakeholders have a billion dollar blind spot when it comes to understanding how 

effective small business tax expenditures are with respect to women-owned firms. 'Ibis blind 

spot indicates Congress does not have data or research to make evidence-based tax policy 

decisions with respect to these small businesses. Ultimately, we recommend the following 

strategies for this Committee to employ to develop necessary research on these issues including: 

1. Requesting the Congressional tax-writing committees hold joint hearings together with 

this Committee on the small business tax issues identified in our report; 

2. Ret1uesting the Joint Committee on Taxation develop estimates on how small business 

expenditures impact women-owned firms; 

3. Requesting the federal Commission on Evidence-Based Policymaking develop 

strategies for developing the data we need to measure these expenditures in terms of 

women-business owners; and 

4. Requesting the nomination and confirmation of a new Director of the Census Bureau. 

Congress, and specifically this Committee, has demonstrated time and again its commitment to 

alleviating the tax burdens faced by small businesses. So much so, that under current law, 

taxpayers will forego more tl1an $255 billion from 2016 to 2020 just on the four small business 

tax expenditures assessed in our report And yet there has been no formal accounting as to 

whether and how these expenditures impact or are distributed to or among women-owned 

firms-99% of which are small businesses, according to SBA's Office of Advocacy's latest 

report on women-owned firms. :\s a result, Congress doesn't know whether the money it has 

spent trying to help smaller firms access capital and grow has been well spent with respect to 

women-owned firms. The absence of research on these issues is contrary to recent 

Congressional efforts to engage in evidenced-based policy making going forward and means 

Con~o>ress docs not have adequate data to understand the barriers to growth impacting more 

than 11 million small businesses. This Committee can and should immediately work to develop 

the needed research to understand the tax barriers facing these small businesses. 

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The Honorable James Risch 

Chairman 

Committee on Small Business and 

Entrepreneurship 

United States Senate 

Washington, DC 20510 

June 14,2017 

Dear Chairman Risch and Ranking Member Shaheen: 

The Honorable Jeanne Shaheen 

Ranking Member 

Committee on Small Business and 

Entrepreneurship 

United States Senate 

Washington, DC 20510 

The Small Business Investor Alliance (SBIA) is the leading association of private funds 

investing in domestic small business. SBIA's members provide capital to small businesses to 

help them grow from small businesses into medium-sized businesses. These growing small 

businesses are the basis for the nation's economic and job growth. We applaud your support of 

small businesses by holding tbis hearing on "Tax Reform: Removing Barriers to Small Business 

Growth." The United States needs a tax code that promotes small businesses and grov,1h-not 

the current one that is impossibly complicated and slows growth. 

The SB!A supports robust, pro-growth tax reforms. There is no question the current tax 

code needs major simplification and reform. There are many good and promising reforms that 

are being debated and discussed: lowering rates, simplifying the code, treating pass through 

entities fairly, among others. While we will not comment on each proposal, there is one change 

that is being discussed that could hnrt smaller businesses that are not able to readily access liquid 

equity markets-the removal of the deductibility of interest expense. 

Small businesses employ different capital strategies to finance growth and SBIA' s funds 

support many of them, such as equity, debt, unitranche, and debt with equity features. Smaller 

businesses regularly rely on debt to finance their operations, to grow, and to create jobs. Debt 

capital is a fundamental and healthy part of many businesses' capital structure. Growing small 

businesses need debt capital to finance scaling up and to maintain greater internal control of their 

business. Without debt, many small businesses would not be able to grow. 

Since the advent of the income tax, interest expense has been recognized as a normal and 

fully deductible expense. Far from being a special interest carveout, the ability to deduct the 

interest from loans is a universal bedrock business practice. Eliminating the deductibility of 

interest would have significant adverse effects on how growing businesses finance their 

operations. Debt is simply the most accessible form of capital for small and medium-sized 

businesses. Removing interest deductibility will only make it more expensive for these growing 

businesses to access their primary form of external growth capital. It is important to note that in 

many cases, small and medium-sized businesses do not even have access to liquid equity 

markets, so this change would make more expensive their only choice in accessing external 

growth capitaL Moreover, any changes to deductibility of interest would penalize smaller, more 

1100 H Street, N.W. Suite 1200 Washington, D.C. 20005 (202) 628-5055 SBIA.org 
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dynamic companies that are reliant upon external financing to manage cash flow, ilmovate, 

expand, and create jobs. 

SBIA strongly supports reforming and rationalizing the tax code to support domestic 

investment and growth. All reforms should promote growth and investment and not punish 

American businesses, particularly small and medium-sized businesses, by limiting interest 

deductibility. We ask that this committee keep a spotlight on the impact of all aspects of tax 

reform on small businesses as it works it way through the process. 

We appreciate your supp01t of small business and your consideration of these comments. 

Sincerely, 

Brett Palmer 

President 

Small Business Investor Alliance 

cc: Members of the Committee on Small Business and Entrepreneurship 
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June 28,2017 

The Honorable Jim Risch, Chairman 

Senate Committee on Small Business and Entrepreneurship 

428A Russell Senate Office Building 

Washington, DC 20510 

The Honorable Jeanne Shaheen, Ranking Member 

Senate Committee on Small Business and Entrepreneurship 

428A Russell Senate Office Building 

Washinl,>ton, DC 20510 

Re: Hearing on Tax Reform: Removing Barriers to Small Business Growth 

Dear Chairman Risch and Ranking Member Shaheen: 

We commend the Senate Small Business and Entrepreneurship Committee for your recent hearing 

regarding tax reform and the removal of barriers to small business growth, and want to participate by 

offering comments on several items of particular interest to agricultural producers and rural small 

business owners. 

The following letters were originally submitted for the record to the House Ways and Means Committee 

May 18, 2017 hearing on how tax reform will grow our economy and create jobs across America. While 

it is not our intent to offer a comprehensive statement on tax reform, we believe that the views of these 

organizations on the unique circumstances of small businesses that serve rural communities and the 

unique business structures and diversity of farms and ranches would be of interest to your Committee in 

considering small business tax reform issues. 

Thank you for your time and attention to this matter. 

Sincerely, 

Danielle Beck 

Director of Government Affairs, National Cattlemen's Beef Association 

On behalf of the Tax Aggie Coalition 
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June I, 2017 

The Honorable Kevin Brady, Chairman 

House Committee on Ways & Means 

I I 02 Longworth House Office Bui !ding 

Washington, DC 20515 

The Honorable Richard Neal, Ranking Member 

House Committee on Ways & Means 

ll39E Longworth House Office Building 

Washington, DC 20515 

Dear Chairman Brady and Ranking Member Neal: 

On behalf of our nation's family farmers and ranchers, we come together now to ask your support for 

including permanent repeal of the estate tax in any tax reform legislation moving through Congress this 

year. In addition, we ask your help to make sure that the benefits of repeal are not eroded by the 

elimination of or restrictions to the use of the stepped-up basis. 

Family farmers and ranchers are not only the caretakers of our nation's rural lands but they are also 

small businesses. The estate tax is especially damaging to agriculture because we are a land-based, 

capital-intensive industry with few options for paying estate taxes when they come due. Unfortunately, 

all too often at the time of death, farming and ranching families are forced to sell off land, farm 

equipment, parts of the operation or take out loans to pay off tax liabilities and attorney's fees. 

As you know, the American Taxpayer Relief Act of2012 (ATRA) permanently extended the estate tax 

exemption level to $5 million per person/$! 0 million per couple indexed for inflation, and maintained 

stepped up basis. While we are grateful for the relief provided by the A TRA, the current state of our 

economy, combined with the uncertain nature of our business has left many agricultural producers 

guessing about their ability to plan for estate tax liabilities and unable to make prudent business 

decisions. Until the estate tax is fully repealed it will continue to threaten the economic viability of 

family farms and ranches, as well as the rural communities and businesses that agriculture supports. 

In addition to full repeal of the estate tax, we believe it is equally as important for Congress to preserve 

policies which help keep farm businesses in-tact and families in agriculture. As such, tax reform must 

maintain stepped-up basis, which limits the amount of property value appreciation that is subject to 

capital gains taxes if the inherited assets are sold. Because farmland typically is held by one owner for 

several decades, setting the basis on the value of the farm on the date of the owner's death under 

stepped-up basis is an important tax provision for surviving family members. 

U.S. farmers and ranchers understand and appreciate the role of taxes in maintaining and improving our 

nation; however, the most effective tax code is a fair one. For this reason, we respectfully request that 

any tax reform legislation considered in Congress will strengthen the business climate for farm and 

ranch families while ensuring agricultural businesses can be passed to future generations. 
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Thank you for your continued efforts in support of our nation's agricultural producers. We look forward 

to working with you on this very important issue. 

Respectfully, 

Agricultural & Food Transporters Conference 

Agricultural Retailers Association 

American Farm Bureau Federation 

American Sheep Industry Association 

American Soybean Association 

American Sugarbeet Growers Association 

Livestock Marketing Association 

National Association of State Departments of Agriculture 

National Barley Growers Association 

National Cattlemen's Beef Association 

National Cotton Council 

National Council of Farmer Cooperatives 

National Milk Producers Federation 

National Peach Council 

National Pork Producers Council 

National Potato Council 

National Renderers Association 

National Sorghum Producers 

National Turkey Federation 

Panhandle Peanut Growers Association 

South East Dairy Farmers Association 

Southwest Council of Agribusiness 

U.S. Apple Association 

U.S. Canola Association 

U.S. Rice Producers Association 

U.S. Sweet Potato Council 

United Egg Producers 

United Fresh Produce Association 

USA Rice Federation 

Western Growers 

Western Peanut Growers Association 

Wf><;;tf':rn lJnitPcl nr~irvmf':n 
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June 1,2017 

The Honorable Kevin Brady, Chairman 

House Committee on Ways & Means 

II 02 Longworth House Office Building 

Washington, DC 20515 

The Honorable Richard Neal, Ranking Member 

House Committee on Ways & Means 

I !39E Longworth House Office Building 

Washington, DC 20515 

Dear Chairman Brady and Ranking Member Neal: 

On behalf of our nation's family farmers and ranchers, the undersigned groups would like to thank you 

for your efforts to reform the U.S. tax code in a meaningful way for individuals, corporations, and small 

businesses alike, including the 3.2 million farmers who generate food, fuel, and tiber for Americans and 

people around the world. With that in mind, we write today to express our concerns regarding the House 

Committee on Ways and Means blueprint proposal to eliminate the deduction for interest payments as a 

business expense. 

Agricultural production is capital intensive. While financing requirements will vary among the different 

commodities, the majority of family-owned farming operations are heavily reliant on credit. Even for 

everyday business, agricultural producers utilize credit in the form of operating and inventory loans. 

According to the United States Department of Agriculture (USDA), net farm income in 2017 is forecast 

to decline for the fourth consecutive year by 8.7 percent to $62.3 billion. In a weak farm economy, 

income is restricted to cover family farmers' living expenses and the repayment of debt. During tough 

times, producers are often forced to take on substantial annual interest expense. Interest paid on these 

loans should be deductible because interest is, and has historically been, considered a legitimate business 

expense. 

In addition, family farmers continue to grow their operations in order to remain profitable. Equipment 

and land acquisition necessary for long-term expansion is only possible through financing. USDA 

predicts that in 2017, farm real estate debt will reach a historic high of$240.7 billion, a 5.2 percent 

increase from 2016. Eliminating the interest deduction will place further financial stress on an already 

debt-burdened industry, and prevent producers from staying profitable in challenging economic times. 

Finally, the need for debt financing is particularly important for the next generation of agricultural 

producers. Less than 2 percent of the U.S. population is directly employed in agriculture. Consistent 

with a 30-year trend, the average age of principal farm operators is 58, making farmers and ranchers 

among the oldest workers in the nation. As older producers exit the workforce, financing will be 

critically important for new and beginning farmers and ranchers looking to establish businesses. 

Eliminating interest deductions creates a significant barrier for the next generation. 
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As Congress works to enact comprehensive tax legislation. the positive reforms made should not be 

undennined by negative, unintended consequences as a result of eliminating the business interest 

deduction for agricultural entities. It is our hope that future legislative proposals do not ignore this 

important sector of the nation's economy, and that they will consider the unique utilization and 

importance of credit management across the entire agriculture sector. 

Thank you for your continued efforts in support of our nation's agricultural producers. We look forward 

to working with you on this important issue. 

Respectfully, 

Agricultural & Food Transporters Conference 

Agricultural Retailers Association 

American Farm Bureau Federation 

American Mushroom Institute 

American Sheep Industry Association 

American Soybean Association 

American Sugarbeet Growers Association 

California Association of Winegrape Growers 

Co bank 

Farm Credit Council 

National Barley Growers Association 

National Cattlemen's Beef Association 

National Corn Growers Association 

National Cotton Council 

National Council of Farmer Cooperatives 

National Peach Council 

National Pork Producers Council 

National Potato Council 

National Renderers Association 

National Sorghum Producers 

Panhandle Peanut Growers Association 

Southwest Council of Agribusiness 

South East Dairy Farmers Association 

United Egg Producers 

United Fresh Produce Association 

U.S. Apple Association 

U.S. Canota Association 

U.S. Rice Producers Association 

U.S. Sweet Potato Council 

USA Rice Federation 

Western Growers 

Western Peanut Growers Association 
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June I, 2017 

The Honorable Kevin Brady, Chairman 

House Committee on Ways & Means 

1 102 Longworth House Office Building 

Washington, DC 20515 

The Honorable Richard Neal, Ranking Member 

House Committee on Ways & Means 

1139E Longworth House Office Building 

Washington, DC 20515 

Dear Chairman Brady and Ranking Member Neal: 

America's farmers and ranchers rely on various tax code provisions to survive the constant financial and 

economic ups and downs that come with farming and ranching. The undersigned agricultural groups ask 

for your robust support of these critical provisions that ensure their long-term financial well-being. 

Cash accounting allows farmers and ranchers to improve cash flow by recognizing income when it is 

received and recording expenses when they are paid. This provides the flexibility needed to plan for 

future business investments and in many cases provides guaranteed availability of agricultural 

inputs. Loss of cash accounting would create a situation where a farmer or rancher would have to pay 

taxes on income before receiving payment for sold commodities. 

Like-kind exchanges help farmers and ranchers operate more efficient businesses by allowing them to 

defer taxes when they sell land, buildings, equipment, and livestock or purchase replacement property. 

Without like-kind exchanges some farmers and ranchers would need to incur debt in order to continue 

their farm or ranch businesses or, worse yet, delay mandatory improvements to maintain the financial 

viability of their farm or ranch business. 

Farm and ranch businesses operate in a constant world of uncertainty with ongoing expenses and a 

fluctuating income. Income averaging, which permits revenue to be averaged over three years, allows 

farmers and ranchers to level out their tax liability and produces a more dependable and consistent 

revenue stream that aids financial management. 

As Congress moves forward with its tax reform proposals and debate, we urge your support for these 

important tax provisions. Thank you for your continued efforts to support our nation's farmers and 

ranchers whose work allows us to enjoy the safest, most abundant and affordable food supply in the 

world. We look forward to working with you on these important issues. 

Sincerely, 

Agricultural & Food Transporters Conference 

Agricultural Retailers Association 

American Mushroom Institute 
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American Sheep Industry Association 

American Soybean Association 

American Sugarbeet Growers Association 

California Association of Winegrapc Growers 

Co bank 

National Barley Growers Association 

National Cattlemen's Beef Association 

National Corn Growers Association 

National Cotton Council 

National Council of Farmer Cooperatives 

National Peach Council 

National Pork Producers Council 

National Potato Council 

National Renderers Association 

National Sorghum Producers 

Panhandle Peanut Growers Association 

Southwest Council of Agribusiness 

South East Dairy Fanners Association 

United Egg Producers 

United Fresh Produce Association 

US Apple Association 

U.S. Canola Association 

U.S. Rice Producers Association 

U.S. Sweet Potato Council 

USA Rice Federation 

Western Growers 

Western Peanut Growers Association 

Western United Dairymen 
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June l, 2017 

The Honorable Kevin Brady, Chairman 

House Committee on Ways & Means 

1102 Longworth House Office Building 

Washington, DC 20515 

The Honorable Richard Neal, Ranking Member 

House Committee on Ways & Means 

1139E Longworth House Office Building 

Washington, DC 20515 

Dear Chairman Brady and Ranking Member Neal: 

On behalf of the nation's farmers and ranchers, the organizations listed below are writing today 

regarding one of our priorities for federal tax reform: a reduction in capital gains taxes. 

Capital gains taxes have a significant impact on production agriculture and producers' long-term 

investments in land, breeding livestock and buildings. We believe a reduction of the tax rate on capital 

gains and assets indexed for inflation would enable producers to better respond to new market 

opportunities and facilitate the transfer ofland to young and beginning farmers. 

Taxation for capital gains upon the sale of farm assets creates a number of problems, particularly when 

an asset sale causes a sharp transitory spike in income that pushes farmers and ranchers into a higher 

than usual tax bracket. USDA has found that 40 percent offamily farms have reported some capital 

gains or losses, compared to 13.6 percent for an average individual taxpayer. 

Another problem is the "lock-in" effect where the higher the capital gains tax rate, the greater 

disincentive to sell property or alternatively to raise the asking price. In today's agriculture economy, 

starting a farm or ranch requires a large investment due to the capital-intensive nature of agri-business, 

with land and buildings typically accounting for 79 percent of farm and ranch assets. Given the barrier 

created by the capital gains tax, landowners are discouraged to sell, making it even more difficult for 

new farmers to acquire land and agriculture producers who want to purchase land to expand their 

business to include a son or daughter. This lose-lose scenario also interferes with capital that would 

otherwise spur new and more profitable investments. 

At a time of heightened financial stress in our agriculture economy, it is more critical now for farmers 

and ranchers to have the flexibility to change their operations to respond to consumer demand in an 

increasingly dynamic market. Because of the capital gains taxes imposed when buildings, breeding 

livestock, farmland and agricultural conservation casements are sold, the higher the tax rate the more 

difficult it is for producers to cast off unneeded assets to generate revenue, upgrade their operations and 

adapt to changing markets. 

As you continue your work on legislation to reform the tax code, we urge you to carefully consider our 

recommendations to address these concerns regarding the inadequacies and inefficiencies of current 
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capital gains tax provisions. We acknowledge the extremely complex task of crafting legislation to adopt 

comprehensive tax reform and appreciate your support of America's farmers and ranchers. 

Sincerely, 

Agricultural & Food Transporters Conference 

Agricultural Retailers Association 

American Farm Bureau Federation 

American Farmland Trust 

American Mushroom Institute 

American Sheep Industry Association 

American Soybean Association 

American Sugarbeet Growers Association 

California Association of Winegrape Growers 

Cobank 

National Barley Growers Association 

National Cattlemen's Beef Association 

National Corn Growers Association 

National Cotton Council 

National Council of Farmer Cooperatives 

National Milk Producers Federation 

National Peach Council 

National Pork Producers Council 

National Potato Council 

National Renderers Association 

National Sorghum Producers 

Panhandle Peanut Growers Association 

Southwest Council of Agribusiness 

South East Dairy Farmers Association 

United Egg Producers 

United Fresh Produce Association 

U.S. Apple Association 

U.S. Canola Association 

U.S. Rice Producers Association 

U.S. Sweet Potato Council 

USA Rice Federation 

Western Growers 

Western Peanut Growers Association 

Western United Dairymen 
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June I, 2017 

The Honorable Kevin Brady, Chairman 

House Committee on Ways & Means 

II 02 Longworth House Office Building 

Washington, DC 20515 

The Honorable Richard Neal, Ranking Member 

House Committee on Ways & Means 

1139E Longworth House Office Building 

Washington, DC 20515 

Dear Chairman Brady and Ranking Member Neal: 

On behalf of our nation's family farmers and ranchers, the undersigned agricultural producer groups 

urge your support for maintaining the Section 199 deduction for domestic production activities income 

as part of any tax reform plan. 

The Section 199 deduction was enacted as part of the American Jobs Creation Act of2004 as a domestic 

production and jobs creation measure. The deduction applies to proceeds from agricultural or 

horticultural products that are manufactured, produced, grown, or extracted in the United States, 

including dairy, grains, fruits, nuts, soybeans, sugar beets, oil and gas refining, and livestock. Farmerowned cooperatives are able to apply their wages to the calculation of the deduction, and then choose to 

pass it through to their farmer members or keep it at the cooperative level, making it extremely 

beneficial to both. 

The Section 199 deduction is limited to the lesser of9 percent of adjusted gross income or domestic 

production activities income or 50 percent of wages paid to produce such income. Reducing or 

eliminating the domestic activities deduction would result in a significant increase in taxable income for 

all farms that currently employ non-family labor. On the other hand, the benefit of the deduction would 

increase if agricultural producers were able to count non-cash wages paid, such as crop share payments 

of commodities. 

The Section 199 deduction serves as both a domestic production and jobs creation incentive and has 

provided needed relief for producers in times when prices are depressed. Section 199 benefits are 

returned to the economy through job creation, increased spending on agricultural production, and 

increased spending in rural communities. 

Thank you for your continued efforts in support of our nation's agricultural producers. We look forward 

to working with you on this important issue. 

Respectfully, 

Agricultural & Food Transporters Conference 

Agricultural Retailers Association 
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American Farm Bureau Federation 

American Mushroom Institute 

American Sheep Industry Association 

American Soybean Association 

American Sugarbeet Growers Association 

California Association of Winegrape Growers 

Co bank 

National Barley Growers Association 

National Cattlemen's Beef Association 

National Corn Growers Association 

National Cotton Council 

National Council of Farmer Cooperatives 

National Milk Producers Federation 

National Peach Council 

National Pork Producers Council 

National Potato Council 

National Renderers Association 

National Sorghum Producers 

Panhandle Peanut Growers Association 

Southwest Council of Agribusiness 

South East Dairy Farmers Association 

United Egg Producers 

United Fresh Produce Association 

U.S. Canola Association 

U.S. Rice Producers Association 

U.S. Sweet Potato Council 

USA Rice Federation 

Western Growers 

Western Peanut Growers Association 

Western United Dairymen 
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Junel,2017 

The Honorable Kevin Brady, Chairman 

House Committee on Ways & Means 

II 02 Longworth House Office Building 

Washington, DC 20515 

The Honorable Richard Neal, Ranking Member 

House Committee on Ways & Means 

1139E Longworth House Office Building 

Washington, DC 20515 

Dear Chairman Brady and Ranking Member Neal: 

The undersigned agricultural organizations urge your support for several tax provisions related to 

renewable energy and environmental mitigation as part of any broader tax reform plan taken up by 

Congress. 

U.S. farmers and ranchers and the companies that process agricultural products provide food, feed, fiber 

and fuel for our nation and the world. Like all businesses, we must continue to innovate, establish new 

markets, and improve efficiency to remain viable and competitive in today's global market. Whether it 

is to help reduce regulatory compliance costs or to incentivize renewable energy and conservation 

benefits, there are a number of tax provisions that have been implemented or proposed for agricultural 

products and practices. 

In recent years, regulators have applied increasing pressure on the agriculture sector to reduce output of 

nutrients like nitrogen and phosphorus to improve water quality in various watersheds around the 

country, from the Chesapeake Bay to the Great Lakes region. To help solve this problem, tax-writers in 

Congress have introduced bipartisan legislation to spur adoption and help cover the upfront capital costs 

of nutrient recovery technologies, as well as biogas systems that mitigate the environmental impacts of 

farming by transforming manure into stable fertilizer for crops, bedding for cows, and fuel and 

electricity for farms and nearby homes. 

Tax incentives, such as the biodiesel tax credit, have also existed to support renewable energy and fuel 

derived from agricultural feedstocks, including animal fats. These renewable energy sources help 

diversify our fuel supply, establish new markets and add value to farm products, create jobs, and boost 

economic development, particularly in rural America. U.S. biodiesel producers have unused production 

capacity that stands ready to be utilized. Putting that capacity to work will encourage further market 

growth for agricultural products and create thousands of new jobs and billions of dollars in economic 

activity. 

As you move forward with tax proposals, U.S. farmers and ranchers support the inclusion of these tax 

provisions that help our businesses meet regulatory requirements, provide conservation benefits and 

incentivize renewable energy production. Thank you for your continued efforts in support of our 
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nation's farmers and ranchers. We look forward to working with you as the process on tax refonn 

continues. 

Respectfully, 

Agricultural & Food Transporters Conference 

Agricultural Retailers Association 

American Farm Bureau Federation 

American Mushroom Institute 

American Sheep Industry Association 

American Soybean Association 

American Sugarbeet Growers Association 

Co bank 

National Barley Growers Association 

National Corn Growers Association 

National Council of Farmer Cooperatives 

National Milk Producers Federation 

National Peach Council 

National Pork Producers Council 

National Renderers Association 

Panhandle Peanut Growers Association 

Southwest Council of Agribusiness 

South East Dairy Farmers Association 

United Egg Producers 

United Fresh Produce Association 

U.S. Canola Association 

U.S. Rice Producers Association 

U.S. Sweet Potato Council 

USA Rice Federation 

Western Growers 

Western Peanut Growers Association 

Western United Dairymen 
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The Honorable James Risch 

Chairman 

Senate Committee on Small Business 

& Entrepreneurship 

428A Russell Senate Office Building 

Washington, D.C. 20510 

June 28, 2017 

The Honorable Jeanne Shaheen 

Ranking Member 

Senate Committee on Small Business 

& Entrepreneurship 

428A Russell Senate Office Building 

Washington, D.C. 20510 

Dear Chairman Risch and Ranking Member Shaheen: 

In connection with the Senate Committee on Small Business & Entrepreneurship's June 

14, 2017 hearing on Tax Reform: Removing Barriers to Small Business Growth, we are 

submitting as a statement for the record the attached letter urging you to preserve the current 

availability of like-kind exchange treatment as part of any business tax reform. Thank you for 

your consideration and your leadership on these important issues. 

Sincerely, 

The Like-Kind Exchange Stakeholder Coalition 
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THE LIKE-KIND EXCHANGE STAKEHOLDER COALITION 

November 29, 2016 

Mr. Jim Carter 

Tax Policy Lead 

Presidential Transition 

I 800 F Street NW 

Washington, DC 20006 

Dear Mr. Carter: 

As you consider ways to create jobs, grow the economy, and raise wages through tax reform, we 

strongly urge that current law be retained regarding like-kind exchanges under section I 031 of 

the Internal Revenue Code ("Code"). We further encourage retention of the current unlimited 

amount of gain deferral. 

Like-kind exchanges are integral to the efficient operation and ongoing vitality of thousands of 

American businesses, which in turn strengthen the U.S. economy and create jobs. Like-kind 

exchanges allow taxpayers to exchange their property for more productive like-kind property, to 

diversify or consolidate holdings, and to transition to meet changing business needs. Specifically, 

section I 031 provides that taxpayers do not immediately recognize a gain or loss when they 

exchange assets for "like-kind" property that will be used in their trade or business. They do 

immediately recognize gain, however, to the extent that cash or other "boot" is received. 

Importantly, like-kind exchanges are similar to other non-recognition and tax deferral provisions 

in the Code because they result in no change to the economic position of the taxpayer. 

Since 1921, like-kind exchanges have encouraged capital investment in the U.S. by allowing 

funds to be reinvested back into the enterprise, which is the very reason section I 031 was 

enacted in the first place. This continuity of investment not only benefits the companies making 

the like-kind exchanges, but also suppliers, manufacturers, and others facilitating them. Likekind exchanges ensure both the best use of real estate and a new and used personal property 

market that significantly benefits start-ups and small businesses. Eliminating like-kind exchanges 

or restricting their use would have a contraction effect on our economy by increasing the cost of 

capital, slowing the rate of investment, increasing asset holding periods and reducing 

transactional activity. 

A 2015 macroeconomic analysis by Ernst & Young found that either repeal or limitation of likekind exchanges could lead to a decline in U.S. GOP of up to $13.1 billion annually. 1 The Ernst & 

Young study quantified the benefit of like-kind exchanges to the U.S. economy by recognizing 

that the exchange transaction is a catalyst for a broad stream of economic activity involving 

businesses and service providers that are ancillary to the exchange transaction, such as brokers, 

appraisers, insurers, lenders, contractors, manufacturers, etc. A 2016 report by the Tax 

1 Economic Impact of Repealing Like-Kind Exchange Rules, E~"'ST & YOUNG (March 2015, Revised November 

2015), at (iii), available at http://www. I 031taxreform.com/wp-content/uploads/Ling-Petrova-Economic-lmpact-ofRepealing-or-Limiting-Section-l 031-in-Real-Estate.pdf. 
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Foundation estimated even greater economic contraction- a loss of 0.10% of GDP, equivalent to 

$18 billion annually? 

Companies in a wide range of industries, business structures, and sizes rely on the like-kind 

exchange provision of the Code. These businesses-which include real estate, construction, 

agricultural, transportation, farm I heavy equipment I vehicle rental, leasing and manufacturingprovide essential products and services to U.S. consumers and are an integral part of our 

economy. 

A microeconomic study by researchers at the University of Florida and Syracuse University, 

focused on commercial real estate, supports that without like-kind exchanges, businesses and 

entrepreneurs would have less incentive and ability to make real estate and other capital 

investments.3 The immediate recognition of a gain upon the disposition of property being 

replaced would impair cash flow and could make it uneconomical to replace that asset. This 

study further found that taxpayers engaged in a like-kind exchange make significantly greater 

investments in replacement property than non-exchanging buyers. 

Both studies support that jobs are created through the greater investment, capital expenditures 

and transactional velocity that are associated with exchange properties. A $1 million limitation of 

gain deferral per year, as proposed by the Administration\ would be particularly harmful to the 

economic stream generated by like-kind exchanges of commercial real estate, agricultural land, 

and vehicle I equipment leasing. These properties and businesses generate substantial gains due 

to the size and value of the properties or the volume of depreciated assets that are exchanged. A 

limitation on deferral would have the same negative impacts as repeal of section I 031 on these 

larger exchanges. Transfers of large shopping centers, office complexes, multifamily properties 

or hotel properties generate economic activity and taxable revenue for architects, brokers, leasing 

agents, contractors, decorators, suppliers, attorneys, accountants, title and property I casualty 

insurers, marketing agents, appraisers, surveyors, lenders, exchange facilitators and more. 

Similarly, high volume equipment rental and leasing provides jobs for rental and leasing agents, 

dealers, manufacturers, after-market outfitters, banks, servicing agents, and provides inventories 

of affordable used assets for small businesses and taxpayers of modest means. Turnover of assets 

is key to all of this economic activity. 

In summary, there is strong economic rationale, supported by recent analytical research, for the 

like-kind exchange provision's nearly I 00-year existence in the Code. Limitation or repeal of 

section I 031 would deter and, in many cases, prohibit continued and new real estate and capital 

investment. These adverse effects on the U.S. economy would likely not be offset by lower tax 

rates. Finally, like-kind exchanges promote uniformly agreed upon tax reform goals such as 

economic growth, job creation and increased competitiveness. 

2 Options for Reforming America's Tax Code, Tax Foundation (June, 2016) at p79, available at 

http://taxfoundation.org/article/options-reforming-americas-tax-code. 

3 David Ling and Milena Petrova, The Economic Impact of Repealing or Limiting Section !031 Like-Kind 

Exchanges in Real Estate (March 2015, revised June 2015), at 5, available at http://www.I031taxreform.com/wpcontent/uploads/Ling-Petrova-Economic-lmpact-of-Repealing-or-Limiting-Section-1 031-in-Real-Estate.pdf. 4 General Explanations of the Administration's Fiscal Year 20!7 Revenue Proposals, at 107, available at 

https://www.treasury.gov/resource-center/tax-policy/Documents/General-Explanations-FY2017.pdf. 

2 
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Thank you for your consideration of this important matter. 

Sincerely, 

Air Conditioning Contractors of America 

American Car Rental Association 

American Rental Association 

American Seniors Housing Association 

American Truck Dealers 

American Trucking Associations 

Associated Equipment Distributors 

Associated General Contractors of America 

Avis Budget Group, Inc. 

Building Owners and Managers Association (BOMA) International 

C.R. England, Inc. 

Equipment Leasing and Finance Association 

Federation of Exchange Accommodators 

International Council of Shopping Centers 

NAIOP, the Commercial Real Estate Development Association 

National Apartment Association 

National Association of Home Builders 

National Association of Real Estate Investment Trusts 

National Association of REAL TORS® 

National Automobile Dealers Association 

National Business Aviation Association 

National Multifamily Housing Council 

National Ready Mixed Concrete Association 

National Stone, Sand and Gravel Association 

Truck Renting and Leasing Association 

3