In response to concerns that “[t]he proliferation of new income tax provisions since the 1986 tax reform effort has led to complex compliance hurdles for taxpayers, administrative complexity and enforcement challenges for the Internal Revenue Service,” the AICPA submitted recommendations for tax reform to five of the 11 working groups the House Ways and Means Committee has formed.
The AICPA has consistently supported tax reform efforts, as it believes that they will “significantly reduce taxpayers’ compliance costs, encourage voluntary compliance through an understanding of the rules, and facilitate enforcement actions,” as explained by Jeffrey Porter, chair of the AICPA’s Tax Executive Committee, in his each of his letters submitting comments to the various working groups.
The AICPA recommended the following legislative changes to the Small Business/Passthroughs Tax Reform Working Group:
- Provide parity between the self-employed and employees by permitting the self-employed to deduct the cost of health insurance from their net earnings from self-employment that are subject to Self-Employment Contributions Act (SECA) tax.
- Allow unused partnership losses to be transferred between spouses or ex-spouses under Sec. 1041(a) as is presently permitted for unused S corporation losses.
- Clarify that spouses who jointly run a business can qualify for the simplified reporting requirements under Sec. 761(f) as a qualified joint venture even if they operate their business in an entity that is a partnership or limited liability company under state law.
- Permit an offset for the built-in gains tax a former C corporation pays for charitable contributions and foreign tax credits from tax years when it was a C corporation.
- Add a new 120-day post-termination transition period (PTTP) for former S corporations to permit the special treatment that already applies in this period to be available when the former S corporation files an amended return.
- Allow S corporations to have nonresident aliens as shareholders and potential current beneficiaries of electing small business trusts, provided the Code is also amended to require withholding under Sec. 1446 for effectively connected income allocable to the nonresident shareholders.
- Repeal the provision that terminates an S election if a former C corporation with undistributed C year earnings and profits has more than 25% of its income from passive sources for three consecutive years. Failing that change, the threshold should be raised to more than 60%, instead of more than 25%.
In the education and family benefits area, the AICPA recommended:
- Tax benefits for higher education should be simplified and harmonized by replacing current tax incentives (i.e., Hope credit, American opportunity tax credit, lifetime learning credit, and the tuition and fees deduction) intended to help taxpayers meet current higher education expenses with one new or revised credit, and to make other changes. The current complexity results in a number of qualifying taxpayers’ not claiming the benefit while a number of unqualified taxpayers receive benefits they are not entitled to.
- Simplify the “kiddie tax” by removing the link with parents’ and siblings’ returns and by applying estate and trust tax rates.
- Allow consistent amounts for mileage expenses, which are currently different for mileage for charitable purposes (14 cents per mile set by statute), mileage for employment-related expenses (which the IRS is allowed to adjust when circumstances warrant and is currently 56.5 cents per mile), and another rate for medical and moving expenses (currently 24 cents per mile). Under the proposal, there would be one rate for business expenses and another for all nonbusiness expenses, which would be a percentage of the business rate. The rates would be adjusted annually and could be adjusted midyear.
- Attorneys’ fees and court costs incurred in litigation that produces taxable awards should be deductible above the line and not be subject to the 2% floor on itemized deductions.
- Borrowers should not be issued a Form 1099-C, Cancellation of Debt, unless their legal obligation to repay a loan has been terminated.
The Income and Tax Distribution Tax Reform Working Group was advised to adopt a uniform system to determine whether an annual adjustment for inflation is necessary to the various dollar amounts provided in the Code. While many amounts in the Code are adjusted for inflation, some provisions, such as the $1 million limit under Sec. 1244 for losses on small business stock enacted in 1958, have never been adjusted.
According to the AICPA, the Charitable/Exempt Organizations Tax Reform Working Group should work on the following changes:
- Standardize the mileage rate for charitable deductions (see above).
- Exempt from the Sec. 6034(a) filing requirement trusts with charitable deductions only from flowthrough entities.
- Standardize the filing extension for all Form 990 series and other forms so an automatic six-month extension will be available for all information, excise, and income tax returns.
- Reinstate and make permanent the Sec. 512(b)(13) fair market value exception that excepts payments between related entities from unrelated business income tax and remove the binding contract requirement.
- Expand the Sec. 509(f)(2) exception, which prohibits an organization from qualifying for Sec. 509(a)(3) status if it accepted certain gifts, to be consistent with the change made to Sec. 4958(c)(3)(C) (exempting supported noncharitable organizations from the excess benefit transaction rule).
Finally, the AICPA made these recommendations to the Pensions/Retirement Tax Reform Working Group:
- Repeal the requirement that benefits become fully vested upon a partial termination of a qualified retirement plan.
- Consolidate and simplify the multiple types of tax-favored retirement plans (e.g., 401(k), 403(b), 457, and SIMPLE plans) and the rules governing them.
- Amend the law to permit administrative relief for certain late qualified terminable interest property (QTIP) and qualified revocable trust (QRT) elections.
- Provide consistent treatment of all federal tax payments of trusts and estates.
- Amend Sec. 67(e) to simplify the law and allow estates and nongrantor trusts to fully deduct the cost of complying with fiduciary duties in administering estates and trusts (i.e., not be subject to the 2%-of-adjusted-gross-income limitation).
—Sally P. Schreiber (firstname.lastname@example.org) is a JofA senior editor.