Troy K. Lewis, CPA, CGMA, immediate past chair of the American Institute of CPAs’ (AICPA) Tax Executive Committee, encouraged the Senate Finance Committee at its “Business Tax Reform” hearing today to take a “holistic approach to provide tax reform to all of America’s businesses.” (Testimony attached.)

“Fair and equitable tax reform will drive economic growth and enhance the competitiveness of all types of American businesses not only in the U.S., but also abroad,” Lewis stated.  “We need a tax system that is fair, stimulates economic growth, has minimal compliance costs and allows taxpayers to understand their tax obligations.”

Lewis, who is a sole practitioner and an Associate Teaching Professor at Brigham Young University, highlighted several tax reform issues that directly impact businesses and their owners in his testimony.

First, he said, the AICPA is opposed to any new limitations on the use of the cash method of accounting.  “The cash method is simpler in application, has fewer compliance costs, and does not require taxpayers to pay tax before receiving their income.  Forcing businesses to switch to the accrual method, unnecessarily discourages business growth, increases compliance costs, and imposes financial hardship on cash-strapped businesses,” Lewis stated.

Next, he emphasized that tax relief should not mean a rate reduction for C corporations only.  “Congress should encourage, or at least not discourage, the formation of pass-through entities,” Lewis testified.  “Inequities would also arise from having significantly different income tax rates for business income, based on an overly simplistic approach, such as one centered solely around the structure, sector or the general nature of a business’ activities,” he explained.

“Excluding professional service firms reflects a view of the service industry that does not represent the current global environment,” Lewis stated.  “In today’s economy, professional service firms are increasingly competing on an international level with businesses organized as corporations.  They also require a significant investment, and rely on the contribution of employees to generate a substantial portion of the revenue.  Artificially limiting the use of a lower business rate, regardless of industry, would penalize a business for operating as a pass-through entity,” he emphasized.

“Professional service firms are an important sector in our economy and heavily contribute to the nation’s goals of creating jobs and better wages,” Lewis stressed.  “Without the benefit of a fair and consistent rate reduction for all pass-through entities, the incentive to start or grow a business is diminished, with a corresponding loss of jobs and reduction in wages.”

If Congress moves forward with a fixed percentage split for business income, such as treating 70 percent of pass-through earnings as employment income and 30 percent as return on capital, Lewis said the AICPA recommends making the proposal a safe harbor rather than a hard and fast rule.  “A safe harbor would promote simplicity for many businesses without sacrificing fairness for others.  It would also provide a uniform treatment among closely-held business entity types,” he stated.

Another important issue Lewis identified is the ability to deduct interest expense.  Lewis said, “Business owners borrow to fund operations, working capital needs, equipment acquisition, and even to build credit for future loans.  These businesses rely on financing to survive.  Equity financing for many start-up businesses is simply not available.  At a minimum, we should not take away or limit this critical deduction for many small and mid-sized businesses who, with little or no access to equity capital, are often forced to rely on debt financing.”