ALEXANDRIA, VA, June 16, 2010 — The National Society of Accountants (NSA) has sent a letter to U.S. Senators supporting an amendment to the American Jobs and Closing Tax Loophole Act of 2010 proposed by Senators Mike Enzi (R-Wyo.) and Olympia Snowe (R-Maine).
Their amendment to the bill, which was passed by the U.S. House of Representatives, would eliminate Section 413 which, as written, would result in a significant increase in taxes and complexity for S corporations and their shareholders.
The NSA letter states:
“Section 413 would raise taxes by $11.2 billion on privately-held small businesses located in every state of this country. While it has been described as a “loophole closer” and a “payroll tax,” it is neither. It is a new tax on small employers that will overturn more than fifty years of established tax policy. We believe Section 413 is overly broad and will result in more increased tax collections than increased tax compliance.
“This new tax would hurt job creation. It would be imposed regardless of whether the affected firms make distributions to shareholders and partners, or retain that income to reinvest in jobs and capital equipment. Shareholders and partners of “flow-through” businesses are taxed on their firm's income even when that income is not actually distributed. As a result, this provision will reduce the capital these employers have to create jobs and invest in their businesses.
“Just as importantly, the new tax appears to be unenforceable. Section 413 would require firms – regardless of how many employees they have - to test each year to determine whether the “skill and reputation” of one, two, or three key employees is the firm's “principal asset.” The enforcement challenges accompanying this new test and the valuation of intangible assets are too numerous to list. The Internal Revenue Service (IRS) currently uses a “reasonable compensation” test to ensure S corporation shareholders pay the correct amount of tax. Replacing this established test with a “principal asset” test is a step backward for tax enforcement and should be rejected by the Senate.
“Finally, this new tax is an excellent example of what happens when the legislative process is short circuited. It was never the subject of hearings or public review, it was made public just a few short weeks ago, and it has been attached to legislation that already passed both the House and the Senate. It is an accident of the legislative calendar that we are in a position to offer our views at all.
“For these reasons, we respectfully request that you support Senators Snowe and Enzi and remove Section 413 from the bill.”
In offering the amendment, Senator Enzi demanded to know why the provision was necessary, saying the IRS already has audit procedures in place to prevent tax evasion which, coupled with the recent codification of economic substance, should make the S corporation language needless. He added that the S corporation language would be a detriment to small businesses and would harm their ability to reinvest and create jobs.
For more information about the NSA position on this issue, visit www.nsacct.org.
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NSA and its affiliates represent 30,000 members who provide accounting, auditing, tax preparation, financial and estate planning, and management services to approximately 19 million individuals and business clients. Most members are sole practitioners or partners in small- to medium-size accounting firms. NSA protects the public by requiring its members to adhere to a strict code of ethics and maintain an annual continuing education regimen. Learn more at www.nsacct.org.
Fredrick James Tax, Accounting & Consulting