The American Institute of CPAs has urged the Internal Revenue Service to withdraw regulations the IRS and Treasury Department proposed in April for changing the open account debt rules between S corporations and shareholders.
The proposals would narrow the definition of open account debt and change how basic adjustments are made. The proposed regulations mandate that small business owners maintain a running balance of open account debt transactions and treat them as formal, written debt whenever the balance goes over $10,000 at the close of any day within the S corporation's tax year.
The AICPA criticized the proposed regulations as onerous. "We believe that because of the extremely heavy burden these regulations will place on small business owners, they should be withdrawn and the IRS should use other means, such as substance over form or business purpose analyses, to stop abuses," wrote Jeffrey Hoops, chair of the AICPA's Tax Executive Committee, in a letter to the IRS's acting commissioner.
The AICPA suggested that if the proposed regulations are not withdrawn, the IRS should make changes instead, such as raising the threshold from $10,000 to at least $250,000, or preferably $1 million. Another change would minimize the daily monitoring frequency to a quarterly or annual requirement.
The AICPA would also like the IRS to clarify whether or not converted debt is a written instrument for the purposes of receiving sale or exchange treatment under Section 1271, thereby qualifying for capital gains rates. Another suggested change would either clarify or provide transition rules for the effective date. The AICPA also wants the IRS to discuss the recognition and character issues related to repayment in greater detail.
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