House Passes S-Corp Reforms!

It’s a big day for S corporations!  Earlier today, the House voted to adopt HR 4453, the S Corporation Permanent Relief Act of 2014, by a count of 263 to 155. The bill, sponsored by Representatives Dave Reichert (R-WA) and Ron Kind (D-WI) makes permanent the five year built-in gains holding period, and contains a basis adjustment fix for charitable contributions made by S corporations.

These S corporation provisions received strong bipartisan support.  All but two Republicans supported the measure, while forty-two Democrats parted with their leadership and the Administration and voted yes. Ways and Means Committee Chairman Dave Camp kicked off the day by offering these remarks on the House floor:

The bill we have before us today is the right step forward to level the playing field between the small businesses on Main Street and big businesses.   If a small business chooses to operate as an S corporation for tax purposes, we should ensure that they have the ability to access certain capital without tax penalties.  

…This is a bipartisan, commonsense bill that will give small businesses some much needed relief from the burdens of the tax code, and allow them to make new investments and create new jobs. 

Washington State Congressman and S-Corp ally Dave Reichert had this to say:

The BIG tax is a double tax on S corporations who want to sell their assets after converting from C corporation status.

…As we’ve heard from Jim Redpath…who testified before one of our Ways and Means hearings…the BIG tax causes S corporations to hold onto unproductive or old assets that should be replaced. He gave the example of a road contractor which is holding onto old equipment that is sitting in the junkyard…because if he sold them, they would be subject to the BIG, double tax.

 Instead of selling the assets and using the proceeds to hire new workers or invest in new equipment, the business owners sit on the sidelines. This is a perfect example of the tax code influencing business decisions and needs to stop.

Opposition focused on the fact that the legislation included no offset.  The Joint Committee on Taxation estimated the bill would cost $2.1 billion over ten years.  The Democrats offered a motion to recommit – also lacking an offset – that would have extended the two provisions for two years only.  This “no offset” argument also was at the heart of the veto threat articulated by the White House yesterday.

We strongly disagree with these concerns. JCT may score tax legislation on a current law basis but taxpayers, including business owners, live in a current policy world.  Offsetting the cost of extending tax rules these businesses already use, and have used for years, makes little sense.  Moreover, as the motion to recommit demonstrates, many of those opposed to making these provisions permanent were willing to incur the revenue loss of extending them temporarily.  What is the difference between voting once to extend these items without an offset, and doing so repeatedly every year or two?

As far as next steps, the tax world now shifts it gaze to the Senate side, where new Finance Committee Chair Ron Wyden (D-OR) and Majority Leader Harry Reid (D-NV) are working out how to best move forward on their extenders package, which includes two year extensions of these to S corporation provisions. Our best guess is we will have to wait until after the November elections before we see further movement on these items, but that doesn’t detract from the success of the day and it certainly won’t prevent us from continuing to press these issues when we’re up on the Senate side!

Business Community Comes Out in Support of S Corp Reforms…

A broad coalition of business groups came out in support of S corporation reforms today, writing to House of Representatives in support of HR 4453, the S Corporation Permanent Relief Act of 2014.  The House is expected to vote on this measure tomorrow.

As Wire readers know, making permanent the five year recognition period for built-in gains has been a priority of the S Corporation Association for years, and while we’ve been successful in reducing the recognition period on a temporary basis, this is the first time either the House or the Senate has considered a permanent fix.  Given the current softness of the economy, particularly when it comes to business investment levels, acting now makes perfect sense.

Unlike public corporations, these closely-held businesses have little or no access to the capital markets. Instead they rely on banks, relatives, and their own savings to fill their investment and working capital needs. An overly long built-in gains recognition period makes this disadvantage worse by preventing converted S corporations from accessing their own capital and putting it to better use.

Locking up a company’s capital for an entire decade is simply unreasonable.  Past Congresses have recognized that a decade is too long and voted to reduce the recognition period on three separate occasions, but those temporary measures have expired and the 10-year rule is back in effect. 

You can read the entire letter here.


…And Against Buffett Tax

In another trade group letter, more than thirty business groups, including the US Chamber of Commerce, the National Association of Manufacturers, the Restaurant Association, and the S Corporation Association, wrote to Senate leaders expressing their strong opposition to the Buffett tax provision included in the student loan bill (S.2432) pending before the Senate.  As the letter states:

Included in S. 2432, the Bank on Students Emergency Loan Refinancing Act, the Buffett tax is a permanent $73 billion tax increase on taxpayers and business owners to pay for new federal spending.  This new tax would be imposed on top of the other taxes business owners must currently pay, resulting in an increase in both the amount they pay and the complexity involved in calculating how much they owe.

As outlined in the bill, the Buffett tax requires those making over $2 million per year to pay a minimum 30 percent effective tax rate on all adjusted gross income.  For taxpayers making between $1 million and $2 million, the bill includes a phase-in period that results in marginal tax rates well in excess of existing tax rates.  While the Buffett tax does make some allowance for charitable contributions, the value of all other deductions and credits, including Section 179 small business expensing and other business deductions, would be reduced or eliminated under this tax. 

The business community’s opposition helped to defeat the legislation, which lost on a procedural vote 56-38 (60 votes were necessary for the legislation to move forward).

So the Buffett tax has stalled for the moment, but the effort to raise tax rates on Main Street businesses will continue.  The Senate has repeatedly attempted to pay for new spending in the past couple years by raising tax rates on individuals and pass-through businesses.  The current Senate leadership supports significantly higher tax rates and that support has already resulted in the tax hike on S corporations following the fiscal cliff negotiations, as well as the new 3.8 percent investment tax used to help pay for health care reform. Both of these tax increases took effect at the beginning of 2013 and resulted in top rates for Main Street businesses rising from 35 percent to nearly 45 percent.

Now they want more, and they will continue to press for more, until the business community steps up and says “enough.”  If it makes sense to reduce tax rates on corporations to “make American businesses more competitive” why doesn’t that same argument apply to pass-through businesses employing the majority of private sector workers?  As we have made abundantly clear, pass-through businesses pay more in taxes, they employ more people, and they are the heart and soul of nearly every community in America.  The S corporation community is 4.6 million strong.  It’s time the Senate started to appreciate that.

BIG Tax Relief on House Floor

It’s a big week for S corporations!  The House is scheduled to vote on several small business tax items, including permanently higher section 179 expensing limits and S corporation modernization legislation too!

The S corporation bill, newly-named the S Corporation Permanent Tax Relief Act of 2014, will bundle together HR 4453 (permanent 5-year BIG period) and HR 4454 (basis adjustment for charitable contributions). We expect the bill to be considered by the Rules Committee later today with debate and a vote on the bill to take place Thursday.

Making the five-year recognition period for built in gains permanent has been an S-CORP priority for years, and while we have been successful at enacting temporary reductions in the past, this week’s action marks the first time either the House or the Senate has considered a permanent fix.

By way of background, here are some of the documents we have developed over the years to support the shorter holding period as well as the charitable donation provision:

The case for the shorter five-year recognition period is strong and is certain to help encourage business investment.  As Jim Redpath testified early this year:

I find the BIG tax provision causes many S corporations to hold onto unproductive or old assets that should be replaced. Ten years is a long time and certainly not cognizant of current business-planning cycles. Many times I have experienced changes in the business environment or the economy which prompted S corporations to need access to their own capital, that if taken would trigger this prohibitive tax. This results in business owners not making the appropriate decision for the business and its stakeholders, simply because of the BIG tax.

We are recirculating the business community letter to allow additional groups to sign on is support of BIG tax relief.  We’ll post the letter tomorrow and we will be working with our House allies to ensure the vote on Thursday is as broad as possible.

Senate to Vote on Buffett Tax

While the House is working to reduce the tax burden for S corporations, the Senate is seeking to raise them.  This week, the Senate will consider legislation to provide student loan relief paid for with our old friend, the so-called “Buffett Tax”.

We’ve criticized both the theory and execution of the Buffett tax in the past (here, here and here), and all those arguments still apply:

  • The federal tax code is already steeply progressive;
  • The tax code already has three distinct income taxes – the regular income tax, the Alternative Minimum Tax, and the Affordable Care Act investment tax.  The Buffett Tax would be a fourth!
  • Much of the Buffett tax will fall on the owners of pass-through businesses; and
  • For sales of S corporations, the Buffett tax would eliminate the benefit of the lower tax on capital gains.

The Tax Foundation agrees with our concerns, and posted a nice analysis of the provision when it was introduced last month.   Here’s what they had to say about the structure of the tax:

Besides the 30 percent effective tax rate in the Buffett rule, there is a phase-in of the tax over $1,000,000 of AGI. This phase-in creates a spike in taxpayer’s marginal tax rate of over 50 percent. Our current tax code is no stranger to hidden marginal tax rates caused by phase-ins and phase-outs. However, these are not positive aspects of the code. They obscure peoples’ true tax burden, add unnecessary complexity, and create marginal tax rate cliffs that incentivize people to change behavior to avoid them.

The Buffett Tax vote is tomorrow.  We doubt it will receive the 60 votes necessary for this poorly thought out policy to move forward, but it will be interesting to see who votes to raise taxes on Main Street businesses in order to increase federal spending.

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