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Private Companies Treading on an Increasingly Challenging Terrain

The 2001 and 2003 tax rates expire Dec. 31, and unless new legislation allows for business income to be separated from personal income, all tax rates will need to be extended.

By Tyler Roberts

With much talk recently of the need to protect corporate interests in the United States, the focus has been largely on public companies, often ignoring the challenges faced by America’s privately held and family owned businesses.

Though reforms that will impact private companies are unlikely to happen in 2012, the likelihood of big changes coming in the next couple of years is real. Recent proposals released jointly from the U.S. Treasury Department and the Obama administration paint an increasingly unfriendly landscape for private companies.

So what do private companies need to know and how can they impact the outcome?

 

Needs of Privately Held Companies

Respondents to the recent Financial Executives International/Baruch College of New York survey of chief financial officers overwhelmingly pointed to the 2001 and 2003 tax rates as the key legislative proposal that Congress and the Obama administration should extend and sign into law this year.

At the same time, the administration has made it a priority to not extend the rates for so-called “high earners” — those who earn more than $200,000 per individual and $250,000 for a family. That would negatively impact private companies, since businesses formed as S Corporations, partnerships and sole proprietorships are taxed at these rates.

The two-year extension of the 2001 and 2003 tax rates will expire Dec. 31, and unless new legislation allows for business income to be separated from personal income, all tax rates will need to be extended to protect the interests of privately held and family owned businesses. That likelihood is 50/50, at best. And in raising taxes on the top two tax rates, countless private companies would face an immediate tax increase in 2013.

When tax reform does take place, it will be vital to lower both corporate and individual rates concurrently. Legislative proposals have been discussed that would lower the corporate rate first and the individual rates later. In doing so, many tax provisions used by both public and private companies would likely be traded in exchange for a lower corporate rate that most private companies would not have the opportunity to benefit from.

Private companies could potentially be left with not only a higher rate, but also without many key tax provisions that benefit public companies.

Tax rates aren’t the only concern. Private companies also need the freedom to organize in ways that make most business sense. Recent proposals from Congress and the administration suggest subjecting large private companies to a double taxation or a forced move into a C Corporation structure.

Private companies have been criticized by the administration for their choice in organizing as pass-through entities despite the fact that pass-throughs reported 36 percent of all business receipts and 54 percent of all business net income, and remitted 44 percent of all federal business income taxes, according to Ernst & Young’s April 2011 publication, The Flow-Through Business Sector and Tax Reform.

 

FEI Interacts on Capitol Hill

In late March, members of FEI’s Committee on Private Company – Policy were in Washington, D.C., meeting with officials from the U.S. Department of Treasury and the tax-writing committees of the House of Representatives and Senate. This group holds an annual fly-in to Washington to discuss the issues that impact private companies.

With 2012 an election year, the committee used the event this year to do some behind-the-scenes building on Capitol Hill in order to assure that private company concerns will be addressed by elected officials, assuming tax reform is tackled in 2013.

For example, Mark Smetana, chief financial officer of Eby-Brown Co., recently testified before the House Ways and Means Committee on the treatment of privately held companies in the context of tax reform.

Smetana said: “America’s privately held businesses are the backbone to our economic success story. Recognizing the importance of private companies is vital since any workable tax reform must address businesses regardless of their form of organization.”

It is important for FEI’s private company members to get more involved in issues affecting their companies by working closely with FEI’s Government Affairs office and private company committees to make sure their concerns are being addressed at the national level. Inaction will only further harm private companies and their bottom lines.

 

Tyler Roberts (troberts@financialexecutives.org) is a policy analyst in the Washington, D.C., office of Financial Executives International and liaison to FEI’s Private Company Roundtable.