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NRCA Action Alert: New proposed regulations could severely affect your business

August 2016

The Internal Revenue Service (IRS) recently issued proposed regulations the Obama administration says will attempt to stop inversions of U.S. companies. This is the process where domestic companies move their headquarters overseas to take advantage of lower corporate tax rates. However, further analysis of these regulations, if finalized, indicates U.S. businesses structured as S corporations could be negatively affected. NRCA strongly opposes these regulations and urges members to contact their senators and representative to urge them to request that the IRS withdraw the regulations or make changes to protect business activities.

Under the proposed regulations, the IRS would be authorized to reclassify certain related-party debt as equity (stock) in whole or in part for federal income tax purposes. Business owners with a number of entities, including S corporations, who use technical cash pooling arrangements or short-term intercompany loans are at the greatest risk. By reclassifying debt as stock, these S corporations could lose their S status and, therefore, would be taxed as C corporations.

Also included in the proposed regulations is the 72-month "per se" rule. This wide timeframe, with vague exemptions, could lead normal business transactions between related companies to alter a business's corporate status. If debt is issued by a company during the period beginning 36 months before the date of the distribution or acquisition of another company and ending 36 months after the date of the distribution or acquisition, it is treated as being issued with a principal purpose of funding the distribution or acquisition, thereby casting that initial debt as equity.

The effective date also is retroactive for any transactions that occurred after April 4, 2016, the date the proposed regulations were issued. The regulations also require hefty reporting requirements, further adding to the paperwork burden business owners already have to address. For example, businesses would only have 30 days following the issuance of debt to finalize the required documentation substantiating that an instrument should qualify as debt for U.S. tax purposes.

Given the concerns of NRCA and other organizations, bipartisan support for making changes to the proposed regulations is developing among some lawmakers in Congress. However, we need to spread the word to all members of Congress that these regulations could have serious adverse effects that will harm businesses and economic growth in the U.S.

Take Action Now

NRCA opposes the regulations under Section 385 of the tax code and has submitted comments urging they be withdrawn or be amended to include wide exemptions for S corporations. However, IRS officials have said they plan to "move swiftly to finalize" these rules. NRCA needs your help to communicate the roofing industry's opposition to these proposed regulations.

NRCA urges its members to contact their senators and representative to ask them to contact the IRS in opposition to the proposed regulations. Members are asked to convey the following points:
  • As a constituent, I urge you to oppose the Section 385 regulations proposed by the IRS.
  • The proposed regulations do more than target inversions and will harm the normal business activity of domestic companies, like mine, in the U.S.
  • By reclassifying debt as equity, the regulations could force many businesses that are organized as S corporations to become C corporations.
  • The 72-month "per se" rule is far too long a review period and impedes normal business funding operations.
  • Since the proposed regulation was not included in the Department of Treasury's Priority Guidance Plan, businesses had no idea this rule was being formulated and have had no time to plan future business activities accordingly. By retroactively setting the effective date to April 4, 2016, the IRS is penalizing businesses for something deemed acceptable at the time.
  • The short 30-day timeline in which to submit the required documentation puts a heavy paperwork burden on small businesses that already have to comply with a multitude of compliance requirements.
To email your representative, click here, find your representative's website, and copy and paste the message above.

If you don't know the name of your representative, you may find it at the link above by entering your ZIP code in the upper right-hand corner.

To email your senators, click here, find your senator's website, and copy and paste the message above.

You also may contact your representative or senators by calling or visiting their district or state offices. For assistance with finding the district or state offices of your lawmakers, please contact NRCA's Washington, D.C., office.

our representative or senator, call the U.S. Capitol switchboard at (202) 225-3121, ask for the office of your representative or senator, and tell the staff person who answers you are calling in opposition to the "proposed tax regulations under Section 385 issued by the IRS."

Please let NRCA's Washington, D.C., staff know of any communication with your representative or senators by contacting Andrew Felz, Duane Musser or Nathan Pick at (202) 546-7584 or afelz@nrca.net, dmusser@nrca.net or npick@nrca.net.

Thank you for taking the time to contact your lawmakers. Remember, grassroots contacts with members of Congress is critical to supplementing NRCA's efforts in Washington, D.C., on issues of importance to the roofing industry.

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