The Parity for Main Street Employers issued the following statement in response to the release of the HEROES Act:
“The HEROES Act includes 1800 pages of legislative text and $3 trillion of relief, nearly all of it designed to help families, businesses, nonprofits, and governments survive the response to COVID-19. The repeal of the CARES Act NOL and loss limitation provisions, however, has exactly the opposite effect by raising taxes on family businesses who suffer losses this year.
“This proposed repeal is deeply disappointing. It runs counter to the bipartisan support similar policies have received in the past (including the House Democratic alternative bill released on March 23rd), it tilts the field by allowing public companies to carry back losses while blocking the same treatment for smaller family-owned businesses, and it extends the tax hike out beyond 2025, when the existing limitations were set to expire.
At a time when 20 million Americans are out of work and millions of businesses are closing their doors, the HEROES Act would raise their taxes. The Main Street Employers coalition strongly supports the NOL and loss limitation relief provided by the CARES Act and calls on Congress to keep this important relief intact as it considers additional responses to COVID-19.”
What is a Net Operating Loss (NOL) Carryback? An NOL is the amount by which a company’s expenses exceed its income. An NOL that is “carried back” may be deducted from income earned in previous years, resulting in a refund of tax payments a company made in the past. Similarly, an NOL that is “carried forward” may be deducted from income in future years.
For example, if a C corporation made $200,000 in profits every year for five years, but then suffered a $1,000,000 loss in the sixth year, a 5-year NOL carryback would allow that business to apply the loss against its prior earnings, generating a refund for the taxes paid in previous years.
Since the C corporation earned no income over a six-year period ($1,000,000 in income less $1,000,000 in losses), it makes sense that its net income tax liability should be zero. Good tax policy should level long-term tax burdens to reflect long-term income.
Deductions of current losses applied against past income are no longer available in the future. The $1,000,000 loss our example corporation carried back would have otherwise been carried forward. At its core, the policy is a timing shift that lowers taxes now and increases them in the future.
What did the CARES Act do? The CARES Act includes a 5-year carryback for losses incurred in 2018, 2019, and 2020. It also suspends the loss limitation rules for those years. Absent the loss limitation relief, pass-through businesses with large losses would have be unable to use the NOL relief in the example. One-hundred and twenty national business trade groups asked Congress for this provision, and it was included in every CARES Act draft leading up its adoption.
Is this a partisan policy? No. There is a longstanding history of bipartisan support for NOL relief during economic crisis. The “alternative” bill released by Speaker Nancy Pelosi on March 23rd includes the same policy — a five-year carryback of net operating losses. Additional bipartisan bills that expanded NOLs include:
- Worker, Homeownership, and Business Assistance Act of 2009: Temporarily extended NOL carrybacks from 2 years to 5 years. Passed the House of Representatives by a vote of 403-12, and passed the Senate unanimously, 98-0.
- The Gulf Opportunity Zone Act of 2005: Temporarily extended NOL carrybacks from 2 years to 5 years for taxpayers affected by hurricanes Katrina, Rita, and Wilma. Passed the Senate by Unanimous Consent, and passed the House of Representatives by Unanimous
- The Job Creation and Worker Assistance Act of 2002: Temporarily extended NOL carrybacks from 2 years to 5 years. Passed the House of Representatives by a vote of 417-3, and passed the Senate by a vote of 85-9.
Opponents claim they were “unaware” this provision was included in the CARES Act. Were they also unaware when it was adopted in previous years? No. When the Worker, Homeownership, and Business Assistance Act of 2009 passed (under Democratic control of the House, Senate, and White House), President Obama’s White House press office said:
“The bill provides an expanded tax cut to tens of thousands of struggling businesses, providing them with the immediate cash they need to pursue an expansion or avoid contracting or furloughing their workers…Business
losses incurred in 2008 or 2009 can now be used to recoup taxes paid in the prior five years. This provision is a fiscally responsible economic kick-start, putting $33 billion of tax cuts in the hands of businesses this year when they need it most, while enabling Treasury to recoup the majority of that funding in the coming years as these businesses regain their strength and resume paying taxes.”
Speaker of the House Nancy Pelosi said: “The bill also has the net operating loss carryback, which businesses tell us is necessary for them to succeed and to hire new people, and also to mitigate some of the damage that has been done to the economy from past policies.”
Then Representative Chris Van Hollen said: “This legislation will provide needed liquidity to cash-strapped businesses by giving companies a one-time opportunity to carry back their operating losses for five years in order to further support our economic recovery.”
How did the 2017 Tax Cuts and Jobs Act affect NOL carrybacks for C-Corporations and Pass-Through businesses? The Tax Cuts and Jobs Act (TCJA) eliminated carrybacks of NOLs while capping the ability of pass-through business owners to offset active business losses against other forms of income. At the time, critics pointed out that these changes introduced a “pro-cyclical” bias back into the tax code that would harm taxpayers in the next recession. As Bill Gale and Yair Listokin wrote at the time:
Under prior law, firms losing money owed no income tax for the current year, and they could obtain cash refunds for taxes paid in the previous two years. Firms used this provision more in recessions than in booms, and it served as an automatic stabilizer. To stimulate the economy after the financial crisis, Congress temporarily expanded the carryback period for net operating losses to five years. The 2017 tax cuts, however, repealed carrybacks of losses for most businesses. As a result, as income turns down in a future recession, firms with losses will no longer be able to claim refunds for previous tax payments and therefore will face tighter cash constraints.
Why did the Joint Committee on Taxation (JCT) score the loss limitation relief as a large revenue loss? NOL carrybacks and loss limitation relief is simply a timing shift, allowing taxpayers to recoup their losses against taxes paid in the past, rather than carrying them forward. So over time, the revenue impact of the NOL carryback and loss-limitation provisions should be minimal. The only explanation for the high revenue estimate (subsequently revised downward, but still high) is the JCT believes the COVID-19 virus will result in massive losses and bankruptcies this year, so that tax benefits received today will not be repaid in future years. But that’s an argument for more relief, not less.
Is this provision targeted at hedge funds and real estate investors? No, it applies to all corporations and pass-through business who are suffer losses and are able to meet the passive activity, at-risk and other tests ensuring the losses are from an active trade or business.
What’s different now? Some commentators who have been raising concerns about this provision, such as Steve Rosenthal at the Tax Policy Center, previously said positive things about NOL carrybacks:
“By allowing businesses to deduct their current losses against past profits, the [pre-TCJA] rules provided economic help for struggling businesses via an immediate cash infusion, said Steven Rosenthal, a senior fellow at the Urban-Brookings Tax Policy Center. “That softens the blow to the direness of that [situation],” he said.”
“The fact that it would reduce revenues right now would be a feature, not a bug,” said William Gale, a senior fellow at the Brookings Institution, who has long worried about the country’s long-term budget deficits. “The economy is more important than the budget, basically. And people’s health is more important than the economy.” Bill Gale, Brookings, Wall Street Journal
Yesterday, the Parity for Main Street Employers coalition sent a letter to House tax writers raising serious concerns with their plan to provide temporary relief from the SALT deduction cap by permanently raising the top tax rate applied to pass-through business income.
The bill, titled the “Restoring Tax Fairness for States and Localities Act”, is scheduled to be considered by the House Ways & Means Committee today and voted on by the full House next week. The bill includes one year of marriage penalty relief and then repeals the SALT cap for two years, all paid for by increasing the top individual income tax rate of 37 percent to 39.6 percent and reducing the dollar amounts at which the 39.6 percent bracket begins.
The PMSE coalition raised serious concerns with the bill, particularly the restoration of the higher top tax rate that applies to pass-through businesses and individuals alike. As the letter states:
Individually and family owned businesses organized as S corporations, partnerships and sole proprietorships are the heart of the American economy. They employ the majority of workers, and they contribute the most to our national income. They also pay the majority of business taxes. A recent study by EY found that pass-through businesses pay 51 percent of all business income taxes.
The legislation introduced today would raise these taxes by 1) increasing the top rate pass-through businesses pay from the current 37 percent to 39.6 percent and 2) lowering the income threshold of the top rate from $622,050 to $496,600 (Joint) for the years 2020 through 2025, after which the 37 percent rate is scheduled to expire under current law.
You can read the whole letter here.
The Parity for Main Street Employers coalition and the S Corporation Association hosted a Hill lunch on October 24th, 2019. The briefing focused on the pass-through sector and how it has fared under tax reform. Speakers included Senator Steve Daines (MT), Marty Sullivan with Tax Analysts, Bob Carroll with EY, David Winston with the Winston Group, Brian Reardon of S-Corp, and Chris Smith with PMSE.
Click here to see a replay and additional analysis.
The Parity for Main Street Employers coalition and the S Corporation Association will host a Hill lunch briefing at noon on October 24th in the Kennedy Caucus Room (SR-325).
The briefing is open to Hill staff and tax professionals, and will focus on the pass-through sector and how it has fared under tax reform. Speakers include Senator Steve Daines (MT), Marty Sullivan with Tax Analysts, Bob Carroll with EY, and David Winston with the Winston Group. Box lunches will be provided.
For Tax Day, Parity for Main Street Employers Executive Director Chris Smith’s has an opinion piece in The Hill addressing recent calls for tax increases and highlighting the introduction of The Main Street Tax Certainty Act of 2019 to make the 20 percent pass through deduction permanent. As the piece argues:
“Tax reform is just over a year old, yet already there are calls to discard it and raise taxes on incomes, estates, capital gains, accumulated wealth, and even financial transactions. It is a veritable tax hike bidding war that overlooks the harm these policies would impose on jobs and wages. The tax code should encourage hard work and success rather than punish it.
“That is why more than a hundred business groups are joining together this week in support of the Main Street Tax Certainty Act of 2019. Sponsored by Representatives Jason Smith and Henry Cuellar, along with Senator Steve Daines, this critical bipartisan legislation would make permanent the 20 percent pass through deduction enacted as part of tax reform…
“Main Street deserves a tax cut instead of a tax hike. The 20 percent pass through deduction is essential to provide tax parity for these employers. By making the deduction permanent, tax reform can fulfill its promise to encourage all employers to succeed in the long term. That is good for all businesses, and it is good for the people in the communities they serve.”
You can read the full piece here.
Today over a hundred business groups released a joint letter in support of the Main Street Tax Certainty Act of 2019. Sponsored by Representatives Jason Smith (MO), Henry Cuellar (TX) and Senator Steve Daines (MT), this bipartisan legislation would make permanent the 20-percent pass-through deduction enacted as part of tax reform. All Main Street businesses are at risk of losing the deduction when it is scheduled to expire in 2026.
In addition to Parity for Main Street coalition members, the groups include the U.S. Chamber of Commerce, the National Federation of Independent Businesses, and the American Farm Bureau.
Raising taxes on Main Street was not the intent of Congress when they enacted tax reform, and it shouldn’t be our policy now. To avoid that bad outcome, Congress needs to make Section 199A permanent. As the support expressed by such a broad cross section of the American business community attests, the economic benefits of providing certainty to Main Street businesses would also be widespread.
Also posted today was a new “whiteboard” video designed by the Parity for Main Street Employer coalition to illustrate the impact and challenges from tax reform for pass-through businesses.
Analysis Paves Way for Other States to Act
The Parity for Main Street Employers coalition of national trade groups today released a new analysis by the Wisconsin-based law firm Meissner Tierney Fisher & Nichols highlighting the legal basis for state efforts to preserve the federal deduction for state and local taxes (SALT) for employers organized as pass-throughs.
To date, two states (Wisconsin and Connecticut) have adopted new laws that would effectively restore the federal deduction for SALT paid by businesses organized as S corporations and partnerships, while two other states (Arkansas and Oklahoma) are actively considering similar bills.
Recent news stories have cast doubt on these efforts by raising the specter of possible action by the IRS to invalidate the new laws. At issue is whether taxes paid by pass-through entities are subject to the new $10,000 deduction cap that applies to individual taxpayers.
The analysis released today addresses these concerns by making a strong legal case for the deductibility of the new entity-level tax enacted in Wisconsin. It summarizes:
State income taxes paid by S corporations and partnerships, limited liability companies and other entities… should not be subject to the new $10,000 state tax deduction limitation under section 164(b)(6) of the Internal Revenue Code…. The Internal Revenue Service (the “Service”) has consistently held that income and other taxes imposed upon and paid by pass-through entities are simply subtracted in calculating nonseparately computed income at the entity level, and are not separately passed through or incorporated into the various provisions and calculations applicable to itemized deductions at the individual level, such as the standard deduction, alternative minimum tax and the Pease reduction. In discussing the final provisions of the Tax Cuts and Jobs Act, the Conference Committee Report explicitly reiterated and relied upon this principle in describing the scope of new section 164(b)(6) of the Code.
While the analysis focuses on the new Wisconsin law, its findings are relevant to Connecticut and other states considering similar legislation.
Chris Smith, PMSE Executive Director
“A Section 199A deduction that applies broadly to Main Street Employers organized as passthroughs is essential to maintain parity with C corporations and the new 21-percent rate. While the final rules provide some additional clarity, the Treasury chose not to adopt recommendations of the Main Street community on important issues, including aggregation and de minimis rules.”
“The economic response to tax reform has been relatively muted in part because the tax relief targeted at pass-through businesses – who employ the majority of private sector workers — is complicated, limited, and temporary. This was a missed opportunity to simplify and broaden that relief.”
“To maximize tax reform’s impact, 199A should be amended to be broader, simpler, and permanent. We stand ready to work with Congress to provide the tax relief that Main Street employers and workers deserve.”