Last Friday, longtime S-CORP allies Rep. Dave Reichert (R-WA) and Rep. Ron Kind (D-WI) introduced two pieces of legislation – H.R. 629 and H.R. 630 – to extend tax provisions critical to America’s 4.6 million S corporations.
The bills would make permanent the five-year built-in gains holding period as well as a basis adjustment fix for S corporations making charitable contributions. They build off the momentum from last Congress when identical bills successfully passed the House with broad bipartisan support. These provisions are ones that we’ve championed for years, and go a long way towards making the tax rules for Main Street businesses fair and predictable.
In a joint press release, Rep. Reichert had this to say:
S Corporations are proven job creators and it is our job as legislators to make sure the tax code helps them to access the capital they need to grow, remain competitive and help get Americans back to work. I am pleased to introduce these bipartisan pieces of legislation with my colleague Congressman Kind, because our tax code should encourage growth rather than stifle it. I look forward to working with my colleagues to advance policies that help our small businesses create jobs and support families across the country.
Rep. Kind also added:
These commonsense, bipartisan bills will bring stability and simplicity to the tax code to make it easier for many small businesses to create good jobs and help sustain local communities. There are nearly 60,000 S Corporations in Wisconsin alone, so supporting these job creators is a top priority as we work to strengthen the economy in Wisconsin and across the country.
The broad support these provisions have garnered from the business community and lawmakers reflects the sentiment that these outdated tax rules just don’t make sense and permanent changes need to be made. H.R. 629 would allow S corps increased access to their own capital by providing for a permanent, five-year BIG holding period, rather than the current ten-year period these businesses must endure before they can dispose of appreciated assets without paying a prohibitive tax. As S-Corp Advisor Jim Redpath testified before the Ways and Means Committee last 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.
H.R. 630 is another common sense reform that would encourage S corporations to give back by permanently ensuring S corporations are able to deduct the full value of the stock they donate to charity. This provision would level out the tax treatment of such donations between S corporations and partnerships.
Improving and making permanent the rules for the businesses that drive our economy is critical and we applaud Reps. Reichert and Kind for once again introducing this legislation. We are looking forward to seeing the bills considered and adopted by the House!
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.