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Friday, June 7, 2013

Senate Releases Tax Reform Option Paper on Types of Income and Business Entities

Senate LogoThe Senate Finance Committee  yesterday released its Eighth Tax Reform Option Paper on Types of Income and Business Entities:

This document is the eighth in a series of papers compiling tax reform options that Finance Committee members may wish to consider as they work towards reforming our nation’s tax system. This compilation is a joint product of the majority and minority staffs of the Finance Committee with input from Committee members’ staffs. ... The paper notes that tax reform provides an opportunity "to rationalize the patchwork of inconsistent rules regarding the taxation of income, investments, and tax structures."

The paper lists the following broad principles for reform in this area:

  • Simplify the law in order to reduce the cost to businesses and individuals of complying with the tax code;
  • Make the tax code more neutral by reducing or eliminating differences in overall tax burdens across different types of entities, owners, and income; and
  • Reduce or eliminate differences in the tax treatment of debt and equity


The following reform options are listed with more specific proposals detailed for each: 

I.  TAXATION OF DIFFERENT TYPES OF INCOME AND ENTITIES

  • Treat all or most types of income the same, while maintaining the two levels of tax on the earnings of C corporations
  • Fully integrate the corporate and individual income taxes through one of the following approaches
  • Partially integrate the corporate and individual income taxes
  • Redraw line between passthroughs and C corporations
  • Simplify other rules related to types of income and entities

II.  CORPORATE FINANCE DECISIONS

  • Expand thin capitalization rules to limit deductions attributable to excessive debt financing
  • Further limit deductions associated with exempt or deferred income
  • Create greater parity between debt and equity financing for C corporations
  • Create greater parity between retaining and distributing earnings for C corporations and reduce lock-in incentives

III.  COMPENSATION

  • Reform treatment of carried interest and other partnership interests received in whole or in part in exchange for services
  • Reform treatment of S corporation income received in whole or in part in exchange for services

IV.  FINANCIAL PRODUCTS

  • Harmonize the tax rules governing most or all derivatives
  • Reform mark-to-market treatment (section 475)
  • Reform rules governing certain futures and other contracts (section 1256)
  • Simplify and expand hedging treatment
  • Reform treatment of debt
  • Reform “wash sales” rules

http://taxprof.typepad.com/taxprof_blog/2013/06/senate-releases.html

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