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House Ways and Means Hearing II on Tax, Accounting and Tax Reform: Small and Closely Held Businesses

Congressman Dave Camp (R-MI), Chairman of the House Committee on Ways and Means, has announced that the second in a set of two hearings examining tax, accounting and tax reform will take place this week. The hearing, set for Wed. March 7 at 10am EST, will focus on small and closely-held businesses. (See FEI's summary of the first of the two hearings, which focused on publicly held companies.)

As noted in the Hearing Advisory for the House W&M March 7 hearing

Unlike publicly-traded companies, closely-held companies often rely less on Generally Accepted Accounting Principles (“GAAP”) to report information to owners and creditors, although there are exceptions. (For example, a non-public entity with outside investors or a closely-held entity that issues debt instruments might be required to provide GAAP-compliant statements.) Instead, closely-held entities tend to focus almost exclusively on how tax policy changes affect cash flows. Closely-held companies, however, face their own set of challenges with regard to tax complexity and uncertainty. These challenges range from compliance with complicated rules on inventory accounting and cost recovery to numerous sets of tax rules governing different business forms. 

My two cents - cent 1 (see disclaimer posted on the right side of this blog): The above paragraph is particularly interesting, in light of another arena: the current examination being undertaken by the Financial Accounting Foundation (FAF), parent of the FASB, on how to improve the accounting standard-setting process for private companies. Among the points made by some of the FAF and FASB's constituents, increasingly so in recent years, has been the impact on the cost-benefit of use of GAAP by private companies, given questions as to the usefulness of the some of the reported information by users of private company financial statements, in combination with the complexity of costliness of providing that information. As a result, a Blue Ribbon Panel on Private Co. Standard-Setting was formed a couple of years ago, issued its recommendations last year, and the FAF released a proposed to address this matter last year. The FAF received thousands of comment letters on its proposal, entitled the FAF's Plan to Establish the Private Company Standards Improvement Council (PCSIC),  and recently concluded a series of four public roundtables to gain additional feedback on its proposal. (SeeFAF webpage.)

The House W&M March 7 Hearing Advisory continues:

The three major business forms from which closely-held companies must choose for federal tax purposes are C corporations, S corporations, and partnerships, although a number of other types of business entities exist to serve specific purposes. While C corporations are subject to entity-level tax and shareholders are again subject to tax on dividends and capital gains, S corporations and partnerships are “pass-through” entities that do not pay entity-level tax – rather, partners and shareholders pay tax on their share of the entity’s income on their individual tax returns (and therefore under the individual rate schedule). Companies must choose to operate under one of these regimes, and this choice can have significant tax consequences. Many commentators recommend modifications to the choice of entity rules to reduce the potential distortions introduced by such rules – with ideas ranging from consolidating existing pass-through rules into a “unified pass-through regime,” making it easier for closely-held C corporations to convert to pass-through status, or even subjecting some existing pass-through entities to double taxation as C corporations. On the other hand, tax reform proposals that create too large a spread between the top corporate rate and the top individual rate risk exacerbating these distortions rather than reducing them.

In announcing this hearing, Chairman Camp said, “Closely-held businesses – including millions of small and family-owned businesses – form the backbone of our economy, but our current tax code imposes a variety of burdens on them that public companies do not face. Tax compliance costs are especially high for small and closely-held businesses, and complex rules often prevent them from maximizing their ability to invest and create jobs. Higher marginal rates on individuals, as have been proposed by others, would stunt their growth even more. As part of comprehensive tax reform, the Committee must determine how best to reduce tax compliance costs and tax rates on closely-held businesses so that they can devote their resources to innovation and job creation, rather than to tax compliance and tax planning.

...The hearing will examine how the tax code affects closely-held businesses in particular, and how tax reform might improve their ability to grow and create jobs. To this end, the hearing will consider how and under which sets of rules closely-held entities should be taxed, as well as general burdens imposed on closely-held businesses such as high compliance costs and tax rates.
 

My two cents-(same disclaimer as noted above) cent 2: another interesting intersection between tax and accounting came up during FASB's deliberations on, and constituent comments related to, FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes (FIN 48), particularly in the latter rulemaking phases as related to private companies and pass-throughs. As previously reported, FIN 48 was selected by the FAF for the first post-implementation review (PIR) of a FASB standard, and the resulting inaugural PIR report on FIN 48 was issued earlier this year. 

FEI Member Among Those Testifying
FEI member Mark Smetana, CFO, Eby-Brown Company, is among those testifying at the House Ways and Means Committee's March 7 hearing, as shown on the hearing witness list. (Note: Smetana is testifying in his personal capacity, although he may also cite formal positions taken in FEI committee comment letters. Smetana is the former chair of FEI's Committee on Private Company-Policy (CPC-P) and served as one of the thought leaders behind the formation of FEI's Private Company Roundtable. Separately, included among FEI's other committees, is its Committee on Taxation (COT). (Questions about FEI's CPC-P or FEI's Private Co Roundtable should be directed to Tyler Roberts in FEI's Washington, DC office.)

Others testifying include:  Dewey W. Martin, CPA;  Stefan F. Tucker, Partner, Venable, LLP; Jeffrey L. Kwall, Kathleen and Bernard Beazley Professor of Law, Loyola University School of Law; Tom Nichols, Meissner Tierney Fisher & Nichols S.C.; and Martin A. Sullivan, Contributing Editor, Tax Analysts.
 

Posted: 3/5/2012 4:20:41 PM by Edith Orensetin | with 0 comments
Filed under: Committee on Private Company-Policy,Committee on Taxation,Mark Smetana,private companies,private company roundtable,small companies,tax reform,COT,CPC-P,FAF,FASB,FEI,tax,closely held businesses


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Edith Orenstein