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The House Ways and Means Tax Policy Subcommittee is “actively working” on provisions to allow small businesses to deduct the interest they pay on debt, Chairman Peter Roskam (R-Ill.) said.
The provision would be a change to the House GOP tax reform plan, which would eliminate the ability of companies to deduct the interest on their loans but allow them to write off all business expenses. The current tax code already allows many small businesses to deduct both business investments and interest expense.
Small businesses, particularly debt-reliant farms, have been clamoring for the ability to keep their interest deductions in recent months. The issue was raised by two Ways and Means members, Reps. Kristi Noem (R-S.D.) and Suzan DelBene (D-Wash.), at a July 13 Tax Policy Subcommittee hearing on small businesses and tax reform.
The parameters of what constitutes a small business “are all under consideration,” Roskam told reporters after the hearing. “There’s a sensitivity to people who have no access to capital in other forms and they need to go out and borrow money, and we need to make sure that they’ve got the ability to acquire that.”
There are several different definitions of “small business” in the tax code. Some tax professionals have suggested that a tax overhaul bill should preserve interest deductibility for companies currently eligible for tax code Section 179 expensing. Companies that buy less than $2 million worth of equipment in 2017 can fully deduct the first $500,000 under Section 179.
The committee is also heeding worries that the special 25 percent passthrough rate in the tax code could lead to gaming. Tax professionals have said having a passthrough rate that is lower than the top individual rate—33 percent in the House plan—could incentivize some people to route income through a limited liability company, rather than treating the money as wages.
“We’re also very mindful of some of the concerns in terms of anti-abuse rules on passthrough treatment,” Roskam said. “Message received. We need to understand that, so it can’t be manipulated.”
Passthrough income is taxed using the graduated individual rates under current law, topping out at 39.6 percent. Distinguishing between business profits and income tied to labor will likely be a heavy lift as lawmakers seek to develop rules that accurately classify business income and wages and are administrable for the Internal Revenue Service.
Roskam said he understands the irony of pushing for anti-gaming rules, which will likely be complex, while also arguing for a simpler tax code.
The attention to passthroughs is a welcome notion to many business groups that have feared in recent years that tax changes could leave out small companies. The U.S Chamber of Commerce Small Business Council sent a July 12 letter to Roskam and committee ranking member Lloyd Doggett (D-Texas) expressing the need for lower tax rates.
The changes to the interest deduction proposal and the announcement to look more closely at anti-abuse rules for passthroughs signal that the Tax Policy Subcommittee is continuing to flesh out the details of its tax plan. Ways and Means Chairman Kevin Brady (R-Texas) told reporters that the carve-out for small business on interest deductibility “makes good sense.”
The controversial border adjustment tax proposal, from which several import-reliant industry groups have requested exemptions, isn’t being discussed, Brady said. The tax would place a levy on imports and exempt exports.
“With border adjustment, we continue conversations with the White House,” Brady said.
Brady has been meeting regularly with White House officials and Senate leaders to come up with a unified framework for tax reform. Republicans have indicated that the results of that plan could come in the fall.
The Tax Policy Subcommittee has scheduled a July 19 hearing on how to simplify the tax code for individuals and families.
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The U.S. Chamber of Commerce Small Business letter is at http://src.bna.com/qJR.
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