AICPA Urges Relief for Certain Small Businesses from Definition of Tax Shelter

February 14, 2019

  • TCJA small business simplifying provisions will not apply to certain small businesses unless Treasury and IRS act, AICPA writes

Washington, D.C. (February 13, 2019) – The American Institute of CPAs (AICPA) today wrote the Internal Revenue Service (IRS) requesting relief for certain small businesses from the definition of a tax shelter “to ensure that they will qualify for the small business simplifying provisions” available under the Tax Cuts and Jobs Act (TCJA).

The AICPA noted in its letter that the TCJA contains numerous simplifying provisions for small businesses.  In particular, the letter stated, “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 December 31, 2017.”

However, the AICPA wrote, “A small business that meets the definition of a tax shelter, regardless of its ability to meet the $25 million gross receipts test, is ineligible to use the above simplifying provisions.”

Those small businesses that meet the definition of a syndicate are treated as a tax shelter, the AICPA added.  Internal Revenue Code section 1256(e)(3)(B) 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 entity during the taxable year are allocable to limited partners or limited entrepreneurs.”

In order to allow these businesses to avoid treatment as a syndicate and utilize the simplifying provisions under the TCJA, the AICPA recommended 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.”