AICPA asks the IRS to treat fewer small businesses as tax shelters

The American Institute of CPAs has sent a letter to the Internal Revenue Service asking the IRS to exclude some types of small businesses from being treated as tax shelters under the Tax Cuts and Jobs Act.

AICPA Tax Executive Committee chair Annette Nellen pointed out in the letter Wednesday that the new tax law includes a number of provisions for small businesses that make it simpler to prepare their taxes, but instead many are prevented from using those provisions because they fit the definition of a “syndicate” and are treated as if they were tax shelters.

“Small businesses that meet the $25 million gross receipts test have the ability to use the overall cash method of accounting; account for inventory under special rules of Section 471(c); receive an exemption from the uniform capitalization rules; receive an exception for certain construction contracts from using the percentage-of-completion method; and receive an exemption from the Section 163(j)1 limitation on business interest deduction for years beginning after December 31, 2017.” the letter pointed out.

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It went on to note, however, that a small business that meets the definition of a syndicate, regardless of its ability to meet the $25 million gross receipts test, isn’t eligible to use those provisions, and would instead be treated as a tax shelter. Section 1256(e)(3)(B) of the Tax Code defines a syndicate as “any partnership or other entity (other than a corporation which is not an S corporation) if more than 35 percent of the losses of such entity during the taxable year are allocable to limited partners or limited entrepreneurs.”

To allow these businesses to avoid treatment as a syndicate and use the simplifying provisions of the new tax law, the AICPA recommended the Treasury Department and the IRS “use their authority under Section 1256(e)(3)(C)(v) to provide relief from the definition of syndicate to small business entities that meet certain conditions. The first condition is that an entity must qualify under the gross receipts test. Secondly, an entity must meet the definition of a syndicate. Finally, an entity must not qualify to make an election as an electing real property business or electing farming business. If a small business satisfies these three conditions, then the secretary should determine that all interests in the entity are treated as held by partners or owners who actively participate in the management of such entity.”

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