FEI Members Advance Private Company Tax Agenda

by Arlene Schwartz

FEI member Arlene Schwartz on the impacts of the Tax Cuts and Jobs Act on private companies and the Committee on Private Company Policy's recent visit to Capitol Hill.

Financial Executive International’s Committee on Private Company Policy (CPC-P) consists of business owners and senior financial executives of privately-owned and family businesses. The CPC-P provides advocacy and support for its members by monitoring legislative and regulatory developments and promoting policies that allow private companies to grow and remain competitive.
As a tax professional who has not seen comprehensive tax reform since 1986, I have been delighted to work with the CPC-P over the last year in advising policy makers about the impact of specific proposed -- and later enacted-- tax law changes on private businesses. 

Initial Tax Reform Efforts

My efforts with the CPC-P began in 2017 when I joined the annual Congressional Fly-In event, which provides participants an opportunity to meet law-makers in Washington, D.C. and discuss issues of concern to private businesses. Since tax reform was at the top of the current administration’s agenda and was just beginning to percolate, the timing of our meetings was perfect to initiate a dialogue with the tax law writers. At that time, the only tax proposals under consideration were from the Republican “Blueprint” that House Speaker Paul Ryan had released in 2016, to which we provided a policy paper outlining our concerns. Our efforts were focused on the impact of various tax proposals for private businesses organized as pass-through companies, including the proposed border adjustment tax and a reduction in the corporate tax rate. 

2017 Congressional Fly-in

During the event, FEI arranged meetings with senior tax counsel and staff of both Democratic and Republican House members. We advocated for parity between businesses taxed as C Corporations and smaller pass-through entities in order to keep small businesses competitive. We argued that private businesses are the engine of the U.S. economy, and play a key role in providing jobs, tax revenue and community benefits. Since a tax rate reduction was contemplated for C Corporations, we proposed a comparable tax rate cut in the form of a business equivalent rate for pass-through companies. Following our meetings, the Chief Tax Counsel of the Ways and Means Committee, as well as other Congressional offices, requested additional feedback from the CPC-P in the form of specific examples and suggestions for “guardrails” to prevent abuse of such rules.

Continued Efforts

As the tax proposals evolved, and it became clear that a border adjustment tax (which would have imposed U.S. tax on imported goods and services) would be replaced with a novel territorial tax regime (generally allowing tax-free repatriation of foreign earnings), we kept our focus on the pass-through rate and how the new territorial treatment would impact private businesses operating in pass-through form. 

However, we continued to solicit and present comments from FEI members on other proposals such as immediate expensing for capital expenditures, limitations on deducting interest expense, and estate tax changes under consideration. Over the next few months, I worked with other members of the CPC-P to develop policy white papers and recommendations on how to achieve tax rate reform for small businesses, which Brian Cove of FEI distributed to Congressional representatives. In addition, I made several trips to D.C. with CPC-P colleagues to discuss policy recommendations that we developed and were advocating. In particular, one of the ideas that I discussed with the Ways and Means and Senate Finance staff was in response to their request for anti-abuse rules for a lower business income rate. To combat abuse, we recommended specific rules to distinguish between profits and wages that would be based upon control, reasonable compensation, or a safe harbor rule.

Escalation of Tax Reform

As tax reform efforts on the hill escalated and it appeared passage would be imminent, I again went to D.C. in November, where I was joined by FEI members Mark Smetana of Eby-Brown Company, LLC and Todd Horsager of Compass Strategic Investments, LLC, to present vigorous arguments to House and Senate Republicans that parity was needed between privately-owned and public companies, both in terms of tax rates and territorial tax treatment. Once we learned that the Senate version of the pass-through provisions was going to be included in the final bill, our committee stepped up our advocacy efforts even more.

The new proposal replaced the preferential business tax rate with a deduction for Qualified Business Income (QBI) under new Internal Revenue Code Section 199A, with an exclusion to prevent “specified service trade or businesses” from taking the deduction. In addition, the preferential tax treatment afforded to C Corporations for foreign earnings was not available to pass-through companies in the new bill, creating inequality. FEI held a survey of our members, and drafted an op-ed piece on our positions. Interestingly, the pass-through provisions in the Tax Cuts and Jobs Act (TCJA) were some of the more contentious ones during the bill’s debate, and we reached out to specific Senators that were interested in keeping a comparative tax rate for pass-through companies. Things picked up at lightning speed in December and we were pleased to see that many of our suggestions, including a higher QBI deduction, were included in the legislation that was enacted and signed into law on December 22, 2017. 

Moving Forward 

The TCJA is a comprehensive tax bill with many moving parts, and will impact all individuals and businesses beginning in 2018. My colleagues and I have been analyzing the new rules to determine the full impact upon businesses from all angles. I therefore was pleased to join the CPC-P in this year’s Fly-in event a few weeks ago, which included meetings with Congressional members on both sides of the aisle and senior tax counsel on the Ways and Means and Finance committees, as well as the U.S. Treasury Department. 

We argued that guidance was urgently needed, and I pointed out that the new law does not clearly define what specified service trade or businesses are ineligible for the new QBI deduction, and that the reference to “skill or reputation” of a business owner or employee creates ambiguity. Mark highlighted the need for flexibility and leniency for pass-through companies, especially in the initial year when elections, some of which are irrevocable or semi-permanent, need to be made at a time where there is no guidance. In support of this, we promoted an idea generated by Todd that consideration should be given to permit an annual election to determine entity for tax purposes under an older existing statute Code Section 962. 

We also requested technical corrections be given priority as so many small businesses are struggling with interpretation and compliance with the new law. We were advised by all of the folks we talked to, including Rep. Richard Neal, D-Mass and Rep. Peter Roskam, R-Ill., as well as senior tax counsel at Ways & Means, that they “are in receive mode” and really appreciated our comments. We were asked to provide further comments and examples to them, and I believe this will be an interactive process as we press for corrective measures and clarity. I look forward to continuing my work with the CPC-P committee, which is highly respected among policy makers in Washington and adds much value for its members.

Arlene Schwartz is an FEI member and the owner of Arlene Schwartz, CPA, who, along with many business owners, has not yet determined the full impact of the TCJA on her business and that of her clients.