Extenders Update

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.

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!

Extenders in Play

Tax extenders have gone from the back bench to a starring role in recent weeks. The latest news is that the Ways and Means Committee will hold a markup next Tuesday where they will consider seven separate bills to make permanent certain extender items – including the built in gains tax relief provision and the basis adjustment for S corporation donations that were originally included in Chairman Camp’s tax reform discussion draft. According to our friends at Politico:

EXTENDERS BUZZ. Congress is back next week and the House Ways and Means Committee is kicking up its review of the only tax legislation with a prayer’s chance this year: tax extenders. A mark-up is expected on a batch of corporate breaks on Tuesday, according to lobbyists and others in-the-know. Potential first ups include those debated at the hearing earlier this month, such as the beloved R&D tax credit and the one for active financing income. 

The plan is for the Committee to pass these provisions out next Tuesday and then for the House to take them up later in May.

Meanwhile, on the Senate side the extenders picture is a little less clear. The Finance Committee reported out a much broader list of extenders prior to the Easter recess, and Majority Leader Reid has the legislation on a longer list of items he would like the Senate to take up in May, but exactly how that all happens is still a bit of a mystery.

The House strategy of moving permanent extensions of just six provisions (rather than the full extender package of 50-plus) accomplishes two goals important to them. First, by focusing on just those provisions in the discussion draft, it keeps the focus on their tax reform efforts, which is obviously a priority for the Chairman. Second, it gives them a “House Position” if and when they get into negotiations on extenders later this year. Last go around, there was no House bill, and they were forced to just accept the Finance-approved product. As you can imagine, they would like to avoid that outcome this time.

So there’s lots of work to be done and differences to close, but the headline here is progress is being made and the table appears to be set for more meaningful action, either sometime this summer or post-election. That’s good news indeed.

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