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AICPA outlines ideas for tax reform to Senate leaders

Tammy Whitehouse | July 19, 2017

As the prospects for healthcare reform fall into a crater of uncertainty, the accounting profession is offering Senate leaders some ideas to help get tax reform off the ground.

The American Institute of Certified Public Accountants sent a letter to Sen. Orrin Hatch (R-Utah), chair of the Senate Finance Committee, outlining suggestions for how to overhaul tax requirements for the sake of business, individuals, families, and even tax administrators. With respect to business, the letter focuses on some areas that have been subject to debate and exploration as tax reform prospects rose with the November election outcome, including the deductibility of interest expense, the use of net operating losses to offset income, and the alternative minimum tax.

The AICPA says it opposes any limitation on interest expense deduction, saying it’s an important benefit particularly to smaller companies and professional service firms. If the interest deduction were eliminated and depreciable property were allowed to be written off immediately as also debated, the tax benefit would be big for larger manufacturers, retailers, and other businesses that purchase large amounts of high-dollar assets. For smaller companies, however, removing the deduction, coupled with a general lack of equity financing for that sector, would steer such companies to reliance on debt financing to cover operating and expansion costs, the AICPA says.

The accounting group is advocating for tax relief in the form of allowances for net operating losses to offset taxable income. NOL carry-back and carry-forward provisions enable taxpayers to better reflect their economic positions over longer periods than a single year, the AICPA says. That’s generally more reflective of how companies operate their businesses. Limiting NOL provisions would unfairly penalize companies with volatile income, the group says.

With respect to the controversial alternative minimum tax, the AICPA is advocating for repeal. It’s an area of complexity and opacity that makes it difficult for taxpayers to understand their true tax obligation, especially for smaller businesses. “The AMT violates the transparency principle because it masks the amount a taxpayer can deduct or exclude, as well as the taxpayer’s marginal tax rate,” the AICPA says.

The National Venture Capital Association also submitted its wish list for tax reform to Hatch, focusing its attention on the “entrepreneurial ecosystem.” Smaller and start-up companies need more access to research and development credits, easier use and expanded eligibility for qualified small business stock rules, and greater use of net operating losses to offset income, NACV says. 

The group also is advocating an allowance for employees at startups to defer taxes on certain stock options, preservation of capital gains treatment on carried interest, and a significant differential between the capital gains rate and the top ordinary income rate to encourage investment.