Effort to Close Tax Loop Hole Removed from Bill

A state bill meant to close tax loopholes went forward yesterday. But House members removed a provision that would have changed how some family businesses are taxed.

The change would make “family-owned non-corporate entities” pay franchise and excise business taxes on the rental income from commercial property. That change was edited out of the administration’s “technical correction” revenue bill.

House Democratic leader Gary Odom says he first was told the tax change would impact 2,000 businesses. Now, he’s hearing it’s more like 8-thousand.

“If it’s four times the number of businesses, then its got to be at least four times the original fiscal impact that you indicated, which would make it, very conservatively, more than sixty million dollars. And to me that’s a significant change in the tax code, and deserves more attention than just the last hours of a General Assembly.”

Revenue Commissioner Reagan Farr disagrees. His department is expected to attach the new law to another bill.

The National Federation of Independent Business has criticized that “technical correction” as a re-write of tax law.

Web Extra

When the annual administration bill to close tax loopholes came out this month, House Democratic Leader Gary Odom had to learn a new term.

A FONCE is a family-owned, non-corporate entity.

It’s like a “Limited Liability Corporation” with passive income. But LLC’s are required to pay franchise and excise taxes under laws passed in the year 2000. These family-owned businesses were made exempt from F&E taxes, but this year the Department of Revenue decided to strip that exemption in the annual “technical corrections” bill.

Farr says the department of Revenue had identified 8,636 FONCEs. But he has no idea what any of them own, and so, he says, the department is standing by the original $15 million tax income he believes will result from the change. It is only the two thousand (estimated) FONCEs that the department believes hold commercial property that would be liable for the tax, he says.

Farr has a tighter definition for a FONCE.

A FONCE is any entity that provides limited liability protection, that’s family-owned, and more than two-thirds of its income is passive investment income. So there’s FONCEs that hold stocks and bonds, there’s FONCEs that hold bank accounts, there’s FONCEs that hold residential property, and then there’s FONCEs that hold commercial property.

The National Federation of Independent Business (small business) has worried publicly over the new provision but despite warning notes to its membership hasn’t turned up a lot of members who will be affected.

The Farm Bureau has monitored the “loophole closer” carefully because many family farms are in similar, but not identical, business structures.