Two members of the House Ways & Means Committee have asked the U.S. Treasury Department to clarify how and whether equipment distributors and rental companies are affected by the new 3.8 percent investment income tax. In a letter to Secretary Jack Lew sent Dec. 2, Reps. Peter Roskam (R-Ill.) and Danny Davis (D-Ill.) said that Congress intended this new 3.8 percent tax to apply to unearned income from investment activity, such as capital gains and dividends.
“We are concerned that legitimate business income earned by companies that rent and distribute equipment will be inadvertently subject to this tax without further guidance from the Treasury,” they said.
The new 3.8 percent “unearned income Medicare contribution tax” was enacted as part of the Affordable Care Act (aka Obamacare) and is now Section 1411 of the Internal Revenue Code. Several equipment industry tax experts have told the Associated Equipment Distributors (AED) that because income from equipment rental activities is considered passive in some cases, rental income could be subject to the new tax. Because the new tax applies only to individuals, it will hit owners of companies taxed as pass-through entities, but not those taxed as corporations.
AED has been ringing alarm bells about the issue on Capitol Hill for more than a year. In creating the new tax, Congress sought to limit its applicability and only ensnare a select group of individuals (those deriving income from passive activities and financial traders). Congress did not intend the law to apply to companies like equipment distributors. However, due to the complexity of the tax code and passive income rules, companies that rent equipment have fallen into a trap and will be forced to pay a tax that was not meant for them.
AED is now working closely with the American Rental Association to fix the problem. Given the legislative logjam surrounding tax issues on Capitol Hill, our near-term objective is to get the Treasury Department and Internal Revenue Service (IRS) to resolve the issue administratively, either through guidance or a rulemaking. In their letter, Roskam and Davis urged Treasury to clarify the applicability of the tax to our industry as part of its ongoing rulemaking on general implementation of the new investment income tax rules.
“While the proposed regulations do address the application of rental activity exceptions in determining when the Section 1411 tax applies to trades or businesses, the rules are silent as to how the law applies when a business rents out large pieces of heavy equipment to a construction contractor or other customer for a period of months,” Roskam and Davis said.
The letter points out that the clock is running down to deal with the issue. “Taxpayers are required to pay this new tax for the 2013 tax year, making the need to clarify the status of equipment rental income urgent,” the letter said. “Time is of the essence in order to ensure that taxpayers and tax administrators have clear rules to apply to these situations.”
How and whether the Treasury Department decides to the deal with the passive income remains to be seen. However, even with Roskam and Davis weighing in, it’s highly unlikely that the issue will be resolved before the end of the year.