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.

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.

Ways & Means Votes for Permanent BIG Relief!

Earlier today, the House Ways and Means Committee voted out a number of business-friendly tax provisions, including two S corporation reforms introduced by Reps. Dave Reichert (R-WA) and Ron Kind (D-WI). You can click here to watch the video of the markup in its entirety.

The first bill (H.R. 4453) makes permanent a five-year built-in gains recognition period while the latter (H.R. 4454) does the same with a basis adjustment for charitable giving by S corporations. Both provisions were included in Chairman Camp’s tax reform draft and were voted out of Committee with comfortable majorities.

In a related effort, two dozen industry groups and trade associations wrote to the Ways and Means Committee members in support of permanent BIG tax relief, including the National Federation of Independent Business, the National Wholesalers, the American Trucking Associations, and the S Corporation Association.  As the letter to the tax committee states:

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.

Enacting a permanent shorter recognition period would sustain the original intent of the rule while providing S corporations with much needed certainty. It would allow them to make decisions based on what is best for the company rather than the dictates of the tax code. At a time when our economy badly needs increased investment, allowing more companies to access their own, locked-up capital is an important step.

As for next steps, we understand the House plans to take up some or all of the six tax bills voted out today sometime in May.

Meanwhile in the Senate, Majority Leader Harry Reid says he wants to bring an extenders bill to the floor in the next month, but exactly how he is able to bring Republicans (and some members of his own party) along is unclear.  The big hurdle here is how he plans to handle amendments.  Given the dearth of amendable tax bills in recent years, Members will be itching for the opportunity to offer amendments to the extenders package.  How to manage the onslaught while protecting vulnerable Senators from difficult votes will be the challenge.

Given that challenge, the odds for action on extenders still favor movement sometime after the election, but each tangible step forward, like today’s successful markup, increases the chances that something happens sooner.  That’s good news for S corporations sitting on locked-up assets, and its good news for good tax policy too.

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