The path to 2025 tax reform begins

Author:
The Carta Policy Team
Published date:
May 3, 2024

Congress shines a spotlight on the Corporate Transparency Act.

Topline

• The path to 2025 tax reform begins
• Innovation Coalition engages Congress on tax priorities
• Yellen defends Biden tax proposals
• Congress shines a spotlight on the Corporate Transparency Act

The path to 2025 tax reform begins

Regardless of the outcome of the 2024 elections, tax policy will be a key area of focus as we approach 2025, when many provisions of the Tax Cuts and Jobs Act (TCJA) are set to expire. But the provisions that make their way into the final tax package will be greatly influenced by the political party in charge.

The TCJA, which was passed in 2017, marked the last significant tax reform package to make its way through Congress. To prepare for the upcoming tax policy debate, House Ways and Means Committee Chair Jason Smith established ten “tax teams” composed of committee Republicans to study expiring TCJA provisions, and Senate Finance Committee ranking member Mike Crapo has announced his intention to replicate the House’s initiative. These working groups will begin to research and scope policy proposals to inform the path forward, and committee Democrats will likely support many of the provisions in President Biden’s fiscal year 2025 budget proposal. It will be important that the innovation ecosystem engages earlier and throughout on our key priorities.

Innovation Coalition engages Congress on tax priorities

Tax policy affects nearly every aspect of the innovation ecosystem. As Congress begins tax reform discussions, Carta and its coalition partners are proactively urging lawmakers to prioritize several key pillars that would contribute to fostering growth and American competitiveness:

• Preserve and expand the innovation ecosystem. Founding, investing in, and working for a startup can be riskier than employment by more established businesses. In the earlier stages of a business, tax policy can create more opportunities for companies to grow, attract resources, and boost productivity. The tax code should make it easier for small businesses to access the financing they need to succeed by preserving and expanding the qualified small business stock (QSBS) exclusion, preserving capital gains rate and carried interest treatment, and restoring full expensing of R&D and making bonus depreciation permanent.

• Expand the value of ownership. Equity ownership drives performance, innovation, and economic opportunity. Employee equity helps companies attract and retain the best talent, creating a more engaged workforce that improves company performance. It also aligns interests around the long-term, innovative efforts that the most ambitious startups and small businesses undertake. The tax code can help bolster equity ownership and enable more employees to realize and optimize the full value of ownership by making 83(b) elections electronic and aligning tax liability to the year equity shares are sold, which would make it more affordable for employees to purchase stock options, pay taxes upon equity grant, or exercise incentive stock options (ISOs) within the limited 90-day post-termination exercise period.

• Modernize the IRS. Congress should continue to push the IRS to modernize its systems and technology to improve customer experience; streamline and lower the administrative burdens on startups, small businesses, and employees; and provide greater clarity to all taxpayers.

What’s next: Carta and its coalition partners will advocate for tax policies that promote investment and economic growth as Congress prepares for 2025 discussions. These principles provide a foundation to guide initial discussions on tax policy. If our coalition efforts are of interest to you or you want to join the discussion, please connect with us at policy@carta.com.

Yellen defends Biden tax proposals

At an April 30 hearing held by the House Ways and Means Committee, Treasury Secretary Janet Yellen fielded questions on expiring TCJA provisions and President Biden’s fiscal year 2025 budget proposal, including:

• Business tax: The TCJA permanently reduced the corporate income tax rate from 35% to 21%. Rep. Vern Buchanan questioned Yellen on whether the President would allow the section 199A qualified business income deduction to sunset (a provision that provides tax parity for pass-through businesses). Yellen responded that she would need to get back to Congress on that issue.

• Carried interest: Yellen pledged that closing the “carried interest loophole” and applying the ordinary income rate to carried interest as opposed to the current 20% capital gains rate will be a top priority for Biden. Republicans pushed back, noting that the current treatment provides important support for the innovation ecosystem.

• Individual tax: Yellen reinforced Biden’s pledge to not to raise taxes on households making less than $400,000 a year and suggested the president may support extending certain TCJA provisions—namely, reduced rates for lower tax brackets, the doubled standard deductions, and child tax credits.

What’s next: Extending the TCJA provisions would come at a great cost. According to the Congressional Budget Office (CBO), a full extension of the individual provisions alone is scored at $3.5 trillion over 10 years—a figure that would be increased significantly by adding on extensions of business tax breaks, including accelerated bonus depreciation, net interest expensing, and the R&D provision Carta and industry allies support. When asked about how potential TCJA extensions can be offset, Yellen said the President has proposed a number of revenue raisers in his budget request, including enacting the stock buyback excise tax and corporate alternative minimum tax, and implementing Pillar Two.

Congress shines a spotlight on the Corporate Transparency Act

The House Committee on Small Business held a hearing examining FinCEN’s implementation of the Corporate Transparency Act (CTA), which requires small businesses to report beneficial ownership information beginning this year. Republicans asserted the new requirements and the implementation of the law has been “overly broad and burdensome,” and education efforts to support covered businesses have been poor. The hearing accompanies a series of recent actions on the Hill regarding CTA:

• Rep. Zach Nunn recently introduced a bipartisan CTA bill that will require the U.S. Department of Treasury to improve CTA education to small businesses and submit quarterly accountability reports to Congress with the number of businesses fulfilling the required reporting. This week, Republicans also introduced legislation to repeal CTA.

• Senior Democrats filed an amicus brief in support of CTA. The brief urges the court to uphold the constitutionality of the CTA, which was ruled unconstitutional in a federal court case in Alabama last month.

Why it matters: Despite backlash from Congress and ongoing lawsuits, the Treasury Department has reiterated that new businesses formed in 2024 who are not named plaintiffs in ongoing litigation are still bound by the CTA and should plan to file with FinCEN until further notice. To help ease the burden of compliance, the Carta team has developed a free CTA-compliance tool on our Launch platform, which supplies early-stage founders with free resources to help raise funds and issue equity.

News to know

• Stablecoin bill not likely to move in FAA reauthorization. While there seemed to be an opening for Congress to pass legislation to create a regulatory framework for stablecoins as part of the FAA bill, these efforts have stalled. But bipartisan negotiations on both the frameworks and path forward continue.

• CFTC appoints first chief AI officer. The financial regulator also held an “AI Day” with financial regulators, standard setters, and the private sector to discuss how regulators should be approaching AI in the financial services industry, and more public roundtables are expected to follow.

• SEC charges audit firm with massive fraud. Continuing its focus on gatekeepers, the SEC charged an audit firm and its owner with failing to comply and misrepresenting its compliance with PCAOB standards, resulting in $14 million in penalties and bars to practice before the Commission. The firm was also the auditor for Trump Media.

• Warren pushes annuity companies on incentive options. Sen. Elizabeth Warren is asking over a dozen companies for information on other incentives paid to individuals who sell financial plans and annuities. She is alleging that the incentives may have influenced the advice given to investors.

• IRS wraps Direct File pilot. The IRS’s Direct File pilot program concluded with over 140,000 taxpayers successfully using the direct e-filing system across 12 states. The program was scaled up in mid-March, with the most returns filed in California (33,328), Texas (29,099), and Florida (20,840). The future of the program will be announced later this spring.

• Effective date set for noncompete ban. The Federal Trade Commission’s (FTC) controversial ban on noncompete agreements will be published in the Federal Register on May 7, triggering an effective date of September 14. However, pending legal challenges are likely to result in a delay.

• SEC capital formation panel sets agenda. The SEC’s Small Business Capital Formation Advisory Committee (SBCFAC) will meet on Monday to receive a presentation on Regulation Crowdfunding (Reg CF) and discuss the state of angel investments.