March 13, 2013
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:
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:
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