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.

S-CORP Testifies on Built In Gains

Long-time S Corporation Association advisor Jim Redpath testified Tuesday before the Ways and Means Committee in support, among other items, of making permanent the 5-year recognition period for built in gains.

The hearing focused on making permanent a handful of so-called “extenders” that were part of Chairman Camp’s Discussion Draft released earlier this year, including the shorter built-in gains recognition period plus increased deductions for S corporations making charitable contributions.

Jim’s testimony, along with that of the four other witnesses, is available here.  You can watch Jim’s testimony by clicking below:

 

 

The hearing adds to the building momentum in Congress to act on extenders this year.  Just last week, the Senate Finance Committee reported out legislation that would extend nearly all the 50-plus tax provisions that expired at the end of 2013.  As with the Camp Draft, this package includes our BIG tax fix and the basis adjustment for charitable giving by S corporations.

S corporation provisions aside, however, the two packages are significantly different.  The Finance Committee package includes nearly all the expired provisions and extends them through the end of 2015.  The Camp package includes only seven provisions and makes them all permanent.

Their respective plans for moving forward are different as well.  Majority Leader Harry Reid (D-NV) has indicated he would like to consider extenders first thing when the Senate returns after Easter.  Meanwhile, Camp has made clear he intends to move individual provisions through his Committee and to the House floor, starting with legislation to make the higher limits on Section 179 expensing permanent, then the R&E tax credit, and then others.  His goal is to have a package of permanent House-passed provisions to compete with the broader, but temporary, Wyden package.

Given our druthers, we’d take permanent over temporary.  As Mr. Redpath testified Tuesday:

Although much better than the 10 year recognition period, the temporary extension results in tax motivated transactions as the expiration date approaches that may not be in the best interest of the company or its stakeholders.  Making the 5-year recognition period permanent would preserve the original intent of the 1986 Tax Act and provide S corporations stability and certainty, so they can make business decisions that are best for the company, its owners and stakeholders.

Either way, just having Congress take action on these expired provisions is a positive sign.  We’re hoping to see further progress soon.

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