03/13/2013 | by
Nareit Staff

Tax Reform: Small Business Discussion Draft Released

March 13, 2013


House Ways and Means Chairman Dave Camp Releases Tax Reform Discussion Draft for Small Business and Passthrough Entities
Does Not Address REITs or Mutual Funds

Over the past year, Representative Dave Camp (R-MI), Chairman of the House Ways and Means Committee, has begun to release a series of discussion drafts relating to tax reform. In past months, he released papers focused on international taxation as well as derivatives and financial products. Yesterday, he released a third discussion draft and accompanying draft statutory language aimed at "creating a simpler and fairer tax code for small businesses." The new paper (the Small Business draft) is focused on small business and passthrough entities. Because neither REITs not RICs (mutual funds) are passthrough entities, the paper does not address them.

Two Options for Reforming Rules for Partnerships and S Corporations

Among a number of other potential changes for small businesses, the Small Business Draft contains two discussion options for modifying the current tax treatment of S corporations, partnerships, and limited liability companies.

Option 1: Revisions to S Corporation and Partnership Rules

Option 1 of the Small Business Draft would make changes to the existing Code by including certain provisions of the S Corporation Modernization Act, H.R. 892, introduced by Representatives Dave Reichert (R-WA) and Ron Kind (D-WI), as well as several changes applicable to partnerships, such as:

  • Reduce permanently from ten to five years the period following a conversion from C corporation status to S corporation status during which an S corporation must pay the highest corporate tax rate on certain built-in capital gains.
  • Require that partners contributing property with built-in gains or losses be subject to tax on the pre-contribution gain or loss when the partnership distributes such property without the current limitation of seven years for recognition of such pre-contribution gains or losses.
  • Repeal the guaranteed payment partnership rules.
Option 2: Unified Rules for "Passthroughs"

Option 2 of the Small Business Draft would repeal the existing tax rules for S corporations and partnerships and replace them with a unified system of taxation for "passthroughs." Passthroughs would include both partnerships and electing so-called passthrough corporations. Specifically, Option 2 would exempt a passthrough from entity-level tax. Notably, under this option, a passthrough corporation could not be publicly traded. Also, in a major departure from current law, a passthrough would be required to withhold taxes on an owner's distributive share of passthrough income.

Next Steps

The purpose of Chairman Camp's discussion drafts is to foster constructive and informed dialogue between interested parties and members of the House Ways and Means Committee. Consequently, NAREIT will organize a task force to analyze the new draft and it welcomes participation by its members in the process.

Chairman Camp recognizes that the Small Business Draft leaves unanswered a number of questions, including:

  • Employment and self-employment taxes of partners and shareholders, both under Option 1 (which would preserve Subchapters K and S) and under Option 2 (which would require new rules for the employment and self-employment taxes of owners).
  • The effect of the proposed threshold for cash accounting on other provisions of the tax code not directly related to accounting methods.
  • Transition rules necessary to facilitate the adoption of new provisions by existing small businesses and passthrough entities, with a goal of minimizing disruption.
  • The proper treatment of and potential problems faced by foreign partners in U.S. partnerships and U.S. partners in foreign partnerships in the context of a unified passthrough regime (Option 2).
  • Mergers, divisions, and reorganizations, with respect to Option 2.
  • Conforming changes in Option 2 to integrate the new unified regime into the related tax rules.
  • Other areas of small business taxation that are not addressed in the discussion draft.
As NAREIT analyzes the Small Business Draft in more detail, we will provide additional information to you.


If you would like to participate on the Small Business Draft Task Force, please contact Dara Bernstein at dbernstein@nareit.com or 202.739.9446.