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How AICPA Wants to Simplify Business Income Tax

Apr 2nd 2015
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In a letter submitted on Tuesday to the Senate Finance Committee Tax Reform Working Group on Business Income Tax, the American Institute of CPAs (AICPA) made the following four recommendations about how to simplify business income tax.

1. Cash method of accounting. The AICPA supports the expansion of the number of taxpayers who may use the cash method of accounting, which is simpler in application than the accrual method, has fewer compliance costs, and does not require taxpayers to pay tax before receiving the income.

2. Tax return due date simplification. The AICPA recommends establishing a logical set of due dates for the tax returns of partnerships, S corporations, and C corporations that are focused on promoting a chronologically correct flow of information between pass-through entities and their owners so that the problems created by the current inefficient flow of information would be resolved.

3. Alternative minimum tax repeal. The AICPA supports repeal of the alternative minimum tax for corporations and individuals.

4. Pass-through business income taxation. The AICPA recommends 18 essential components to pass-through tax reform. They are:

  • Allow subchapters K and S to remain as separate subchapters.
  • Retain the flexibility of the Subchapter K model (including special allocations and outside basis for partnership-level debt).
  • Retain the check-the-box rules.
  • Obtain tax rate parity between pass-through business entities and C corporations.
  • Repeal Section 1372: Partnership rules to apply for fringe benefit purposes for S corporations.
  • Make permanent the reduced recognition period for built-in gains for S corporations.
  • Allow full consideration of net realized built-in loss for S corporations.
  • Increase the passive income percentage to 60 percent and eliminate the three-year termination for S corporations.
  • Simplify partnership audits and adjustments.
  • Repeal partnership technical termination rule.
  • Make remedial allocations mandatory for partnerships with greater than 5 percent nonresident alien individuals as partners.
  • Eliminate the Section 751(b) calculation on disproportionate distributions.
  • Oppose any proposal for tax treatment of “large” partnerships as corporations.
  • Require mandatory adjustments to basis of partnership property in case of transfer of partnership interests and mandatory adjustments to basis of undistributed partnership property.
  • Allow accumulated earnings and profits withdrawal from S corporations with certainty.
  • Reduce realized built-in gains of S corporations by the amount of accrued state income tax.
  • Allow incentive deductions permitted by the Internal Revenue Code to flow through to taxpayers without basis limitations.
  • Repeal the prohibition of Section 179(d)(4) for estates/trusts; alternatively, allow pass-through entity allocation and amortization at the estate/trust level.

The Tax Reform Working Group on Business Income Tax is one of five bipartisan groups launched by Senate Finance Committee Chairman Orrin Hatch (R-UT) and Sen. Ron Wyden (D-OR), the top Democrat on the panel, at the start of the year to spur congressional comprehensive tax reform efforts.

The working groups will analyze current tax law and examine policy trade-offs and available reform options within the group's designated topic areas. Each group will be co-chaired by one Republican and one Democrat member. The co-chairs for the Business Income Tax working group are Sen. John Thune (R-SD) and Sen. Ben Cardin (D-MD).

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