Congress May Tackle ‘C’ Corp Tax Reform After Vacation

Fixing the tax code for U.S. businesses will be at the forefront when Congress returns from vacation next month, with many lawmakers focusing on “C” corporations, despite new data showing a continuing decline in their numbers.

Most of America’s biggest and most powerful businesses, from Apple Inc. to Wal-Mart Stores Inc., are C corporations.

The profits of C corporations, which are taxed separately from their owners, have soared since the 1980s, though the sheer numbers of these businesses have declined and their proportional contribution to federal tax revenues has slipped.

New Internal Revenue Service data shows that the agency received 1.6 million income tax returns from C corporations in 2012, the latest year available, down from 2.1 million in 2002.

The debate in Congress on tax reform, which will resume on Sept. 8 when Congress reconvenes, is expected to focus heavily on the comparatively small and shrinking slice of the U.S. tax revenue pie that is paid by C corporations.

Democrats and Republicans concur that the income tax rate paid by C corporations is too high and should be reduced, though they disagree on how far to cut it.

The tax-writing Ways and Means Committee of the House of Representatives on Thursday said in a statement its top priority in months ahead will be “international tax reform,” an issue that directly affects the profits of C corporations.

The Republican-controlled panel said that means it will weigh proposals such as giving C corporations a tax break on foreign profits; taking steps to halt C corporations from reincorporating abroad to cut U.S. taxes, and giving C corporations a tax break on intellectual property profits.

The focus of Congress on C corporations reflects the ability of their well-paid lobbyists to capture and hold Washington’s attention.

Today, the vast bulk of federal revenue comes from the individual income tax, social insurance tax and other taxes.

The U.S. government still gets from 7 percent to 14 percent of its revenue from the corporate income tax, depending on the economy’s health and corporate profits. In the 1960s and 1970s, that range was 14 percent to 23 percent.

Meanwhile, while the number of C corporations has been going down, the number of so-called S corporations has been going up, partially because company owners using that designation can avoid paying a corporate tax, according to researcher Steven Rosenthal at the Urban-Brookings Tax Policy Center.

In 2012, the IRS received 4.2 million returns from S corporations, up from 3.2 million a decade ago. S corporations, which pay no income taxes themselves, pass profits directly from the company to the owners, who pay an individual income tax on those profits.

The number of limited liability companies, sole proprietorships and other business structures, has also surged. They do not pay corporate income tax, either.

No mention was made in the Ways and Means Committee’s statement of reducing taxes on ordinary wage earners and owners of S corporations and other so-called pass-through businesses.

Kyle Pomerleau, economist for the Tax Foundation’s Center for Federal Tax Policy, said the two political parties disagree on individual tax code reforms more than on corporate reforms.

“How are you going to capture pass-through income correctly?” Pomerleau said. “It’s not clear to me whether anyone has come up with a good solution for that.”

(Editing by Kevin Drawbaugh and Steve Orlofsky)