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Small Businesses Need a ‘Future-Proof’ Tax System, AICPA Says

Posted on May 8, 2020

Congress needs to modernize the U.S. tax system now so that small businesses can better weather future economic crises created by major disasters like COVID-19, according to the American Institute of CPAs.

“The pandemic spotlighted barriers the tax system creates when small businesses encounter a global risk, and our federal tax laws should adjust to reflect this changed environment,” the AICPA said in a May 7 letter to the leaders of the congressional taxwriting committees.

With a tax system in perpetual catch-up mode, the coronavirus pandemic “highlighted the antiquated nature of some of these provisions, and modernizing these for small businesses ensures that the system is proactive in responding to future events,” the AICPA added.

The group outlined how Congress can “future-proof” the tax system by modernizing existing code provisions and making technical corrections to the Coronavirus Aid, Relief, and Economic Security (CARES) Act (P.L. 116-136).

According to the AICPA, the provisions that need updating include the alternative minimum tax, the $10,000 state and local tax deduction cap, syndicate rules, depreciation rules, the home office deduction, deduction limitations for organizational and start-up expenses, loss limitation rules, and small business employee benefit plans.

The uncertainty of continually expiring tax provisions creates another barrier for small businesses, the AICPA said. “The tax extender legislation of expiring provisions injects systematic uncertainty for future business planning and practitioners working to advise taxpayers,” it explained.

Permanent provisions would allow businesses to appropriately plan both capital expenditures and workforce needs to minimize future disruptions, the AICPA said.

To future-proof the federal and state tax systems, Congress should also enact a uniform national standard for nonresident state income tax withholding and a de minimis exemption from the multistate assessment of state nonresident income tax, according to the AICPA.

“The current situation of having to withhold and file many state nonresident tax returns for just a few days of work in various states is too complicated and burdensome for both small businesses and their employees,” the group said. It added that employers’ obligations to track and comply with all the different state and local tax laws gets even more complicated when employees are ordered to work from home to comply with shelter-in-place orders.

“Consistent and clear rules governing the tax treatment would create a 21st Century tax system reflective of how employees work today and in the future,” the AICPA wrote.

CARES Act Corrections

The AICPA suggested several technical corrections to CARES Act provisions, including an elimination of the section 382 limitation as it applies to refundability of the corporate AMT credit.

Congress should also extend the benefits of the Small Business Administration’s Paycheck Protection Program (PPP) to section 501(c)(6) organizations and expressly allow deductions for expenses paid with loan amounts forgiven under the PPP, the AICPA said. “The PPP loans are intended to help small businesses, and the ordinary business expense rules should apply to enable full benefit of Congress’s intention,” it said.

Lawmakers should implement a rule providing that amounts repaid by some PPP borrowers on or before the May 14 safe harbor deadline are to be recycled into the PPP, the AICPA said.

The group further said an exception should be provided to the section 52 aggregation rule for the employee retention credit so that companies that don’t obtain PPP loans but are related to companies that did obtain them may still use the credit. It said Congress could do this by applying a narrower relationship rule, such as the 80 percent ownership rules under section 414(b) and (c).

Congress should also amend section 172 to allow taxpayers to use net operating losses to offset only income that isn’t global intangible low-taxed income, the AICPA said. “Allow NOLs to be carried to other years without regard to a taxpayer’s current or prior-year GILTI,” it added.

The AICPA said the CARES Act definition of coronavirus-related distribution should be tweaked to include distributions to an individual if the individual, spouse, or dependent of the individual experiences adverse financial consequences because of the coronavirus, including a reduction in compensation.

For partnerships and S corporations that have made a section 444 election to use a tax year other than the required tax year, Congress should suspend until May 15, 2021, any required payment under section 7519 that was originally due May 15, 2020, and has been extended until July 15, the AICPA said.

“This change would provide economic assistance to partnerships and S corporations by permitting them to defer payments that would otherwise temporarily be paid to IRS and permit the business to use the payment directly in its business operations for this year,” the group explained.

The AICPA also suggested that Congress enact various provisions that would help small businesses and their employees, such as a tax credit for companies that invest in technology and provide virtual offices, a repeal of the flexible spending account caps, and simplifications of the rules regarding retirement plans.

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