Although it’s not ideal and expires in just two weeks, we are glad to report that the tax extenders bill finally passed in the Senate last night by a 76-16 vote and is on its way to the President’s desk.
Among the 55 provisions included in the bill are the reduced five-year built-in gains holding period and the basis adjustment fix for charitable contributions. The package, however, is a one year retroactive extension of the expired provisions through 2014, and will therefore expire at year’s end.
Interestingly, Senate Finance Chairman Ron Wyden (D-OR) voted against the bill, as did Sen. Rob Portman (R-OH), highlighting the ridiculous nature of a one-year retroactive extension for tax policy. (The 16 “no” votes were a bipartisan affair: 8 members of each party opposed the bill.) Speaking last night, Chairman Wyden said:
“This tax bill doesn’t have the shelf life of a carton of eggs…the only new effects of this legislation apply to the next two weeks.”
Sen. Portman also took to the floor to vent his frustration:
“This is ridiculous because we’re not extending it beyond the tax year and by the time we get back here, it will already be expired for a week or two…it is a failure of Washington again to get its act together and do what should be done.”
That said, we are pleased our S-CORP provisions were included in the package and expect to pick up again next year, as the tax policy conversation will have an early start. Congress is now adjourned for the holidays and will start up again January 6th.
Our thanks go out to all our S-CORP champions, both on and off the Hill, for your continued commitment to the Main Street business cause. We hope that you have very happy holidays and we look forward to our work together in 2015!
A compilation of the business tax related stories that caught our eye
Hatch Tax Reform Report
For weeks, there had been K Street rumors of a “secret” tax reform plan being put together by in-coming Finance Committee Chairman Orrin Hatch (R-UT). Apparently, the “Comprehensive Tax Reform for 2015 and Beyond” report released yesterday is it, although it’s not so much a plan as an analysis of the current code and the challenges policymakers will face in reforming it. After a quick review, it’s obvious the Finance Republican staff spent an enormous amount of time and effort putting this together and it shows. As our friends at Politico summarized:
Before lawmakers can reform the tax code, they need to understand it.
Towards that end, incoming Senate Finance Committee Chairman Orrin Hatch released a nearly 350-page report today on all-things tax reform.
It traces the history of the tax code, and efforts to reform it, as well as issues ranging from patent boxes to refundable credits to the case for moving to a territorial system, along with what, exactly, is a territorial system.
From the pass-through business community’s perspective, there’s lots to like here, particularly the report’s emphasis on integrating the corporate code with the individual code to eliminate the double tax on corporate income. We’ve been advocating for corporate integration for years.
The report also advocates for comprehensive reform, another priority of the Main Street business community. Here’s what it says:
Tax reform also needs to address the more than 90 percent of U.S. businesses organized as pass-through entities, such as partnerships, S corporations, limited liability companies and sole proprietorships. According to recent data, approximately 58 percent of all net business income in the United States is earned by pass-through entities.22 If real estate investment trusts and mutual funds are included as pass-through entities, then the percentage rises to 78 percent.23 Because of these numbers, it is important that we approach tax reform in a comprehensive manner, addressing both the individual and corporate tax systems. As the data show, both systems are intertwined and must be looked at in the whole.
On the other hand, the report does signal just how much work the pass through community has in educating policy makers on the importance of pass through businesses to jobs and investment. The chapter on business tax issues is wholly dominated by corporate concerns, while the subchapter on pass through tax issues is only three pages long. More on this to come.
Ryan Ellis of Americans for Tax Reform reminds us in his recent Forbes article that corporate inversions are driven by bad tax policy, not bad corporations. He writes:
To say the least, the United States has not created a friendly tax environment for our largest employers. They face the highest marginal income tax rate in the developed world (whether they are corporations with a 40 percent rate or flow-through firms with a nearly 50 percent rate).
…There should be a giant notice at the top of every business tax form released by the IRS which says, “Get out of our country, and take your jobs and capital with you.” Corporate inversions are a natural and a regrettable side effect of this treatment.”
Last month, your S-Corp team was popping champagne corks when we learned that congressional leaders had reached an agreement to make permanent several of our priorities – including the five-year built-in gains holding period – as part of a broader extenders package. We then had to put the corks back in the bottles (not easy) when a preemptive veto threat from the White House dismantled the deal.
We are now left with Plan B – an extension of expired provisions for tax year 2014 only. The legislation, which was passed last week by the House, retroactively renews the provisions going back to the start of 2014 and would therefore expire just a few weeks after passage. So starting January 1, we’ll be right back at it.
This week the White House further demonstrated its aversion to permanent tax provisions when it issued a veto threat against legislation that would lock in three charitable provisions. According to the Hill, the bill would “…permanently extend preferences for donations of excess food inventory; waive some limitations for donations of land to conservation easements; and make permanent a provision allowing tax-free donations from Individual Retirement Account funds.” That package is now dead too.
The tax extenders front has been busy in the last couple days. First, there was the rumor Monday that negotiators were close to a deal. Tuesday, details emerged of a $450 billion package mixing ten permanent items with a two-year extension (2014 & 2015) of most other items. And then yesterday evening the White House issued a veto threat against the package, leaving its prospects very much up in the air.
What’s remarkable about the White House veto threat is that it occurred at all. To our recollection, this is the first time in six years the White House and Senate Majority Leader Harry Reid have been publicly crosswise on legislative policy. Reid negotiated the package with House Ways and Means Chairman Dave Camp and it includes several provisions – including making the state and local tax deduction and the mass transit benefit permanent – that Reid and other senior members of his caucus have historically supported. So it’s obvious the Reid office and the White House are no longer in close communication, at least on tax matters. As the Hill reported:
Democratic aides on Capitol Hill said that the White House quickly made it clear Tuesday that it was, in the words of one staffer, “livid” over a deal that would have indefinitely extended tax priorities for both parties. Senior administration officials reached out to Democratic lawmakers to get that message across, aides added, with even Obama and Lew trying to marshal opposition. “This is a terrible deal for Democrats,” one aide said.
Moreover, we’re hearing that part of the White House’s motivation for blocking this package is their belief that doing so will generate momentum for corporate-only tax reform. This kind of reform has been roundly denounced for leaving out and penalizing a majority of the private sector businesses in this country, but the White House and Treasury have been much more active on that front and appear to believe that such a deal is possible. (We don’t.) Here’s what our friends at Capital Alpha had to say about that:
The President is making a deliberate and contemplated move to set the ground rules for discussions of fundamental tax reform and corporate tax reform next year with the incoming Republican majority. The President won’t talk about revenue neutral tax reform in a vacuum. His terms for tax reform include big payoffs for constituencies of the progressive left in terms of policy goals and economic benefits. Such has been his position all along, which is why we have always been skeptical of tax reform next year.
As to the package, it’s broad and includes lots for the pass-through community to like. For starters, it would make permanent two S corporation specific provisions – the shorter holding period for built-in gains and the basis adjustment for charitable donations – as well as popular provisions like the R&E tax credit and small business expensing. Here’s the complete summary from Tax Notes:
The deal would make permanent the following 10 provisions:
- the research credit, simplified according to the provisions in a House-passed bill (H.R. 4438) to make the credit permanent but also including the provision from the Senate Finance Committee package providing start-up businesses the ability to claim the credit against payroll taxes;
- section 179 expensing;
- the state and local sales tax deduction;
- the American opportunity tax credit, indexed to inflation after its renewal in 2018;
- the employer-provided mass transit and parking benefits exclusion;
- the reduced recognition period for built-in gains of S corporations;
- the rules regarding basis adjustments to the stock of S corporations making charitable contributions of property;
- the rule allowing some tax-free distributions from IRAs for charitable purposes;
- the deduction for charitable contributions by individuals and corporations of real property interests for conservation purposes; and
- the deduction for charitable contributions of food inventory.
The remainder of the package will mostly follow the extenders bill the Senate Finance Committee approved this spring to renew through 2015 all but two of the 55 traditional extenders that expired in 2013.
However, the deal will phase out the wind production tax credit, ending the incentive after 2017.
It also includes House-passed modifications to the bonus depreciation provision that would expand the definition of qualified property to include owner-occupied retail stores and lift restrictions to allow for more unused corporate alternative minimum tax credits, which businesses can claim in lieu of bonus depreciation, to be used for capital investment.
So where do things stand? We are hearing conflicting reports. One word from the Hill is that the deal is off and that negotiators will have to start over, probably with a one-year extension for 2014 only (Boo!). Other reports, however, suggest that Senate Democrats are not backing down. It is possible yesterday’s package could move through both the House and the Senate despite the White House’s objections, and we’re hearing some Senate offices are working the membership to make that happen.
With everybody home for Thanksgiving, we won’t have a better idea where the votes are and what Senate leadership decides to do until next week when everybody returns. In the meantime, the tax world has more than just turkey to chew over this holiday! Stay posted.