Congress Needs to Simplify Business Income Taxation, Enforcement

The new Congress must consider sweeping changes to the federal tax code to simplify taxation of business income. Treasury Department regulations for these federal tax laws also require a drastic streamlining. These transformations would encourage business taxpayers to comply without excessive burdens and, just as importantly, help the IRS administer the tax system efficiently.

What we have now is a system where business taxpayers either devote enormous time and money for advisers to address—really to circumnavigate—the federal tax rules to minimize their impact, or to simply ignore them. The IRS doesn’t have the resources to ensure 100% compliance.

Simplification doesn’t mean a flat tax. We have that now at least with respect to C corporations, with their uniform 21% rate. That isn’t the problem. Rather than eliminate the income tax on business income and replace it with another revenue source, Congress should do a better job addressing real problems with our tax system vis-a-vis businesses with thoughtful solutions, and the Treasury should do its part by drafting workable regulations.

For example, before the 2017 Tax Cuts and Jobs Act, US companies were at a competitive disadvantage with foreign competitors that weren’t subject to home country taxation of income from offshore subsidiaries. US companies often evaded paying federal income tax on their foreign subsidiary earnings by avoiding distributions to the US corporate shareholder. The latter is known as the lock-out effect.

Congress’ solution was a paradigm of complexity encompassing a transition tax, a participation exemption, a global intangible low-taxed income framework, and a foreign derived-intangible income incentive.

Lawmakers could have more easily addressed the problems of US companies facing a tax disadvantage with foreign rivals (and the lock-out issue pre-Tax Cuts and Jobs Act) by subjecting foreign subsidiary earnings to immediate federal income taxation at a rate a few points lower than that for domestic income, as well as a fairer and simpler foreign tax credit system.

Instead, we have a plethora of very intricate regulations—including a recently issued, mind-numbing set of proposed regulations addressing what is known as previously taxed earnings and profits, whose complexity is due in considerable part to the GILTI enactment.

Outgoing IRS Chief Counsel Marjorie Rollinson acknowledged the problem with business tax laws and regulations, saying that “the tax law is way too complicated” and citing several hundred pages of proposed regulations addressing another tax provision, the corporate alternative minimum tax enacted in 2022.

The New York State Bar Association Tax Section echoed Rollinson’s message in a January 14 report, which stated that “the framework for the corporate AMT that was mandated by Congress, as accentuated to an extent by the rules to be adopted in the proposed regulations, is exceedingly complex, riven with uncertainties, and likely to consume lots of time, effort, and money by taxpayers in complying with the rules and by the government in enforcing them.”

In this instance, Congress may have been correct in determining there was a sound policy reason to have a backstop corporate minimum tax for highly profitable companies based on book income. The Treasury Department, however, should have done a better job making taxpayer compliance with this provision—and IRS administration of it—as easy as possible.

The Tax Cuts and Jobs Act a contained another byzantine provision: the qualified business income deduction favoring certain forms and types of business income over others. This should be modified if not eliminated. Taxation of partnership income is another area requiring statutory and regulatory simplification.

There will always be some complexity with many aspects of business income taxes, but Congress needs to give careful thought to reducing rather than exacerbating the problem in any new tax legislation. The Treasury also must do its part by promulgating regulations that can be complied with and administered in the least onerous manner possible.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Philip G. Cohen is professor of taxation at Pace University Lubin School of Business and was previously vice president of tax and general tax counsel at Unilever United States.

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