In a letter sent to the IRS last week, AICPA Tax Executive Committee Chair Annette Nellen explained that while the Tax Cuts and Jobs Act includes new conditions for SMBs to easily prepare their taxes, many cannot use those provisions because they fit the definition of a “syndicate,” and are being treated as 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 Dec. 31, 2017.” the letter stated, according to Accounting Today.
The letter went on to explain that an SMB that meets the definition of a syndicate would instead be treated as a tax shelter. In fact, 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 [an] entity during the taxable year are allocable to limited partners or limited entrepreneurs.”
To remedy this issue, the AICPA has requested that the U.S. Department of the Treasury 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.”