Daily Tax Update - February 29, 2012: Ways & Means To Hold Hearing on the Treatment of Closely-Held Businesses in the Context of Tax Reform

WAYS & MEANS TO HOLD HEARING ON TREATMENT OF CLOSELY-HELD BUSINESSES IN THE CONTEXT OF TAX REFORM:  On March 7, the House Ways and Means Committee will hold a hearing on how accounting rules cause different types of businesses – specifically, publicly-traded and closely-held businesses – to evaluate tax policy choices differently.  This hearing will "focus on the special challenges faced by small and closely-held businesses that are less concerned with financial accounting rules but must confront tremendous complexity in dealing with tax accounting and various choice of entity regimes."  The witness list has not been announced.

  • In announcing this hearing, Chairman Camp said, "Closely-held businesses – including millions of small and family-owned businesses – form the backbone of our economy, but our current tax code imposes a variety of burdens on them that public companies do not face.  Tax compliance costs are especially high for small and closely-held businesses, and complex rules often prevent them from maximizing their ability to invest and create jobs.  Higher marginal rates on individuals, as have been proposed by others, would stunt their growth even more.  As part of comprehensive tax reform, the Committee must determine how best to reduce tax compliance costs and tax rates on closely-held businesses so that they can devote their resources to innovation and job creation, rather than to tax compliance and tax planning."

LEVIN URGES STOCK OPTION "LOOPHOLES" BE CLOSED:  Today, in remarks on the Senate floor, Senator Carl Levin (D-MI) urged Congress to pass his "CUT Loopholes Act," which is aimed at limiting corporate deductions of nonstatutory stock options to $1 million and redefine "applicable employee remuneration" under section 162(m) to include stock options.

  • Levin said, "Last week, President Obama released a framework for business tax reform that took aim at many corporate tax loopholes.  I look forward to working with the administration and with my colleagues in the Senate to make real reform a reality — reform that brings greater fairness to the tax code, eliminates incentives for moving jobs and assets overseas, restores revenue lost to unjustified tax loopholes, and helps us reduce the deficit without damaging vital programs for education, transportation, health care and national security."  Levin argued that Congress should close a "stock-option loophole [that] allows corporations to compensate their executives with stock options, report a specific stock option expense to their shareholders, and then later take a tax deduction for typically a much higher amount.  Stock options grants are the only kind of compensation where the tax code allows companies to claim a higher expense for tax purposes than is shown on their books.  Our Subcommittee found that the difference between what US corporations tell the public and what they told the IRS was as much $61 billion in one year."  Levin added, "Senator Conrad and I earlier this month introduced S.2075, the Cut Unjustified Tax Loopholes Act, or CUT Loopholes Act. This bill, similar to legislation that I have introduced in the past few Congresses, would close this loophole.  Under our bill, corporations would no longer be allowed to claim tax deductions for options that are larger than the expense they report to their shareholders and to people considering buying their stock.  It also would subject stock options to the same $1 million cap on deductions for executive compensation that now applies to other forms of compensation.  At the same time, and this is important to know Madam President, our bill would leave unchanged the way the law applies to individuals who receive stock options, and it would leave in place incentive stock options often used by start-up companies.  We would not affect that."
  • The remarks can be accessed here.

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