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October 17, 2016

Treasury Department Exempts S Corporations From New Earnings Stripping Rules

Last week, the U.S. Treasury Department released its final regulations dealing with corporate earnings stripping and, as MSCI’s partners at the S-Corp Association explained, the department listened to representatives of family-owned businesses and exempted S corporations from the new regulations. (The draft rule, issued earlier this year, would have applied to S corporations.) 

According to the S Corp Association, had the Treasury Department included S corporations in its rules “S corporations would have suffered through the new reporting requirements and limitations on cash pooling and related party loans just like their C corporation counterparts” and “also would have faced the prospect of losing their S corporation status, together with the multitude of tax and penalty implications associated with that.” In its final draft, the Treasury department also eased documentation requirements and eliminated the “bifurcation rule” that threatened smaller domestic businesses. 

While the exemption of S corporations is welcome news, there are still significant concerns about the regulations. House Ways and Means Committee Chairman Kevin Brady (R-TX) said, “By rushing the review process—despite the extensive comments received—and finalizing these regulations so quickly, it appears that the Obama Administration has ignored the real concerns of people who will be most impacted by these far-reaching rules.” 

Other critics noted that the only way to address earnings stripping and corporate inversions is through comprehensive tax reform. According to The Hill, while complimentary of the Treasury Department’s efforts, Senate Finance Committee Ranking Member Ron Wyden (D-OR) agreed with that assessment. The new regulation will take effect next April. 

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