S-CORP Clips | Week of December 12

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. 

Inversions

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.”

Extender Recap

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.

Charitable

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.

 

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.

Business Groups United Against Payroll Tax Hike

In advance of next week’s vote to raise taxes on S corporations by $9 billion, a group of 38 business associations wrote Senate leadership strongly opposing the provision. Signed by S-Corp, the US Chamber, NFI and other leading groups, the letter details the numerous flaws in the provision. As reported in The Hill:

A coalition of business groups is pushing back against a Democratic proposal to pay for lower student loan rates with tax revenue. The U.S. Chamber of Commerce, along with roughly three dozen other groups, said ‘the plan could increase the payroll tax burden on business owners who are already fully complying with the law. For those businesses, this provision represents a tax increase rather than a clarification of existing tax burdens,’ the groups wrote in a letter to Senate leaders.

Under current law, S corporations pay taxes through the individual code. Democrats say that some business owners are underpaying their payroll taxes by counting certain income as company profits that have passed through to the owner. The Democrats say their proposal, which is scheduled for a vote next week, would end that practice for those making more than $250,000 per year. But Republicans have said that the Democratic efforts would undercut entitlement programs because the payroll tax helps fund Social Security and Medicare.

And this in the National Journal:

In a letter to Senate Majority Leader Harry Reid, D-Nev., and Minority Leader Mitch McConnell, R-Ky., the business groups said they opposed legislation supported by Democrats that would cover the $6 billion cost of keeping interest rates on federal student loans from doubling by subjecting S Corporations to payroll taxes.

They said the bill would make tax collection “less enforceable than current law and will do little to increase compliance.”

The Senate plans to take up the student-loan legislation, with the S Corporation pay-for, next week. … Increasing taxes on S Corporations has long been viewed as a potential revenue raiser, but the offset is unlikely to survive at this time.

As the Journal indicates, they are scheduled to vote on Tuesday on cloture to close out debate on a motion to proceed to the bill. It takes 60 votes to close debate in the Senate, and we expect they are well short of that level of support for raising taxes on closely-held businesses. The underlying student loan issue is popular, however, so assuming this version fails, we expect a scramble by both House and Senate leadership to identify a $6 billion offset that can clear the Senate. Let’s hope the new version doesn’t target Main Street.

Senators Come Up BIG!

On the positive front, four S-Corp champions in the Senate — Senators Cardin (D-MD), Snowe (R-ME), Roberts (R-KS), and Landrieu (D-LA) — wrote to the Finance Committee Chairman this week in support of extending the shorter, five-year built in gains provision.

As Washington Wire readers know, this shorter holding period expired at the end of last year along with all the other so-called tax extenders and itb’s been a priority for us to see it renewed. This letter in the Senate builds on the testimony last week in the House by Congressman Reichert (R-WA) and sends the signal that BIG relief enjoys strong support in both bodies.

According to the letter:

S corporations are the cornerstone of the business community. Such corporations are located in every state, participate in a broad range of industries, and employ one out of every four private-sector workers. For many of these Main Street businesses, access to capital is a primary challenge that inhibits their ability to invest, expand, and create jobs. Much like bonus depreciation, the shorter, five-year holding period serves as a powerful incentive for these closely-held businesses to increase their investment efforts.

Could not have said it better ourselves. Thanks to all the Senators who signed the letter. We’ll be working to build on that support this spring and summer.

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