NSBA TAX REFORM UPDATE TAX REFORM & PASS-THROUGH BUSINESSES JUNE 7TH, 2018

Courtesy of CHRIS SMITH EXECUTIVE DIRECTOR Who We Are § PMSE is a coalition of national trade groups representing American Main Street businesses. § Steering Committee Members include: American Council of Engineering Companies § Associated Builders and Contractors § Associated General Contractors of America § Independent Community Bankers of America § National Association of Wholesaler-Distributors § National Beer Wholesalers Association § National Electrical Contractors Association § National Roofing Contractors Association § S Corporation Association § Wine and Spirits Wholesalers of America What We Believe §We continue to press for tax parity for all business types §True reform would establish the same top tax rate for all businesses while eliminating multiple layers of tax §Key steps towards parity are to make permanent the pass-through provisions while implementing rules that are pro-growth and pro-Main Street Results of TCJA §Big legislative accomplishment, that boosts the economy by: §Lowering taxes on individuals and families §Lowering taxes on business and investment rules that are pro-growth and pro-Main Street Results of TCJA §Big legislative accomplishment, that boosts the economy by: §Lowering taxes on individuals and families §Lowering taxes on business and investment Lower Taxes For C Corporations 1. A sharply lower top rate of 21% 2. More balanced treatment of equity and debt 3. Territorial tax treatment on international income 4. Simplification through the elimination of numerous deductions and credits, including the elimination of the Corporate AMT More Complicated Results For Pass-Throughs 1. 37% individual rate + 20% deduction = Top rates on pass-throughs from 29.6% to the mid-40s 2. New territorial tax treatment doesn’t apply 3. Individual AMT, Estate Tax, and Net Investment Income Tax remain in place 4. Loss of SALT deduction 5. Temporary-pass through deduction sunsets in 2026 New 20% Deduction §New benefit, but with significant limitations above income thresholds: §“Specified Service Businesses” excluded §Businesses where their “principal asset” is the “reputation or skill of a single employee” §Deduction subject to wage test and alternative capital test § “Reasonable comp” applies for S Corps– so deduction does not apply to what would Example ? Owner A is above the income threshold and owns 33% of a manufacturing S Corp ? S Corp has $3000 in net income, $900 in total W-2 wages and $10,000 of qualified capital ? Owner A’s share of pass-through income is $1000, so preliminary deduction is $200 (20% x $1000) ? That’s weighed against 50% of his share of W-2 wages: $300 * 0.5 = $150; or 25% of W-2 wages plus 2.5% of qualified capital: $300*0.25 + $3333*.025 = $158 ? Instead of a 29.6% rate, Owner A is subject to a 31.2%  rate. §All businesses affected by: § Interest Expense Deduction Limitation §199 Deduction Repeal §But pass-throughs: §Lose State & Local income tax deductions (SALT) §Pass-Through Loss Limitation §Loss of $1 deduction costs C Corps 21 cents-- pass-throughs lose 29.6 to 40 cents or more Tax Reform and Rate Parity §The new law results in high effective tax rates for pass-throughs vs. C Corps PMSE survey found six in ten respondents don’t expect any deduction, don’t expect a full deduction, or simply don’t know 

Priority #1: Permanence §The 2026 tax hike reduces the economic benefits of the tax overhaul (Barrow-Furman 2018) Priority #2: Grouping ? Many businesses are organized like this “Brother and Sister Structure" ? The use of multiple entities combined with the deduction’s “guardrails” can result in businesses losing some or all of the pass-through deduction. Broad Support ? PMSE letter signed by 40+ associations calls on Treasury to allow grouping of similar business interests under 199A ? S-Corp, the US Chamber, AICPA, and the ABA all submitted comments Restoring SALT ? We have proposed model state legislation to: ? Shift incidence of state taxes from the owner to the entity level, making those taxes deductible at the Federal level ? Give owners a credit for the taxes paid ? Recognize credits paid by other states ? Connecticut is the first state to pass this type of reform