| WASHINGTON, March 12
WASHINGTON, March 12 The top Republican tax
writer in the U.S. House of Representatives on Tuesday proposed
shaking up taxation of privately held businesses in ways that
would tighten rules on partnerships, such as private equity and
House Ways and Means Committee Chairman Dave Camp laid out
two options - one incremental; one more drastic - to revamp
non-corporate business taxation, with the aim of reducing tax
gaming and simplifying filing for hundreds of thousands of
Camp's plan addresses "pass-through" entities, the biggest
of which are partnerships and S-corporations. Unlike publicly
traded C-corporations, pass-throughs do not retain profits or
distribute them as dividends. Rather, earnings pass through to
the partners, who are taxed on them as personal income.
In general, Camp wants to streamline rules for
S-corporations and tighten rules for partnerships, which have
wide flexibility now in allocating profits and losses.
"We reduce the opportunity to play games in partnerships,
while retaining some legitimate flexibility so that partners can
participate in the business in different ways," said a top tax
counsel for Camp who described the plan to reporters.
The Michigan lawmaker wants to pass tax reform legislation
this year, but he faces deep divisions within his party and with
Democrats, many of whom back raising revenue through reform.
Pass-throughs range from single owner shops to global
private equity firms, hedge funds, law firms and accounting
firms. The owners of pass-throughs file taxes through the
individual tax code and the wealthiest among them now face a top
tax rate of 39.6 percent.
By contrast, the top corporate income tax rate is 35
percent, though many large corporations pay far lower rates
after using tax breaks.
An aide to Camp said the plan would impact hedge funds and
private equity firms because of their use of "special
allocation" rules to trim their tax bills.
Firms have been shifting from C-corp to pass-through status
for years in part to avoid the corporate tax rate. Some of the
Camp proposals could accelerate that trend.
One option that could cause pain for for some partnerships
would require the firms themselves to pay a new withholding tax,
which she said would be an administrative burden, according to
tax attorney Linda Carlisle.
"That is very different from the ways things are now,"
Carlisle said. "That is now instead of me paying tax -- the
partnership would be paying the tax for me."
Small businesses are a frequent sparring topic between the
parties. Republicans oppose higher rates on wealthier
individuals, while Democrats repeatedly have proposed raising
the top tax rates paid by the wealthy.
Democrats won a key round in this fight in January with a
deal ending the 'fiscal cliff' stand-off that raised the top tax
rate on individual income above $400,000.
Camp's draft includes some relatively non-controversial
measures, like making permanent a tax break for writing down the
cost of equipment for certain business and easing rules to allow
some businesses to use cash accounting.
The Obama administration has floated the idea of forcing
large businesses now taxed as pass-throughs to file as
corporations instead, something Republicans have resisted. "That
is not something I am considering at this point," Camp said.
The draft is silent on "carried interest" earned by private
equity and other fund managers that is now taxed at a lower
capital gains rate, as opposed to the ordinary income tax rate.