Permanent Built-In Gains Relief Passes Congress! 

After fifteen years of advocacy, one stimulus bill and three extenders, permanent built-in gains relief is just one short ride down Pennsylvania Avenue away from becoming law!

That’s because the Senate just voted 65-33 on passage of a tax extender bill that included numerous provisions important to the Main Street business community, clearing the way for it to go to the President’s desk, where he plans to sign it.

Getting these provisions made permanent is, to paraphrase Donald Trump, a HUGE deal, and should be the cause of celebration for businesses and tax professionals alike at holiday time.  As Politico noted this morning:

Make sure to take extra notice of your surroundings, tax wonks. Because after today the world is likely to look a lot different, with so many of the more popular tax extenders removed, in some cases, from decades’ worth of a stop-and-go cycle.

“Stop-and-go” is an understatement.  In just the past three years, key portions of the tax code, including small business expensing, the research and experimentation credit, our built-in gains relief, and dozens of other provisions taxpayers rely on have simply expired, twice, for the better part of an entire year, only to be reauthorized, retroactively and at the last minute, by Congresses eager to get home for the holidays.

We’re doing that again right now, only included in the package is language making the most important of these extenders permanent, so we won’t have to write this story next year!  We’re confident you are as tired of reading it as we are of writing it.

Before we get to next steps, a note of thanks is in order for our terrific champions on the hill – including Representatives Reichert, Kind, Tiberi, Paulsen, and Neal and Senators Hatch, Cardin, Roberts, and Thune.  In the trade world, we marched shoulder to shoulder with allies over at NFIB, ACEC, ABC, AGC, ICBA, the Beer Wholesalers, the Wine & Spirits Wholesalers, the National Grocers Association, the Multi-Housing Council, and others.  It’s been a long road, and we’re ecstatic it’s coming to an end.

As for next steps, there are numerous ways to improve how S corps are taxed, including the rule prohibiting foreign investment in S corporations.  That rule makes no sense, and precludes the S corporation community from an important source of capital.  You can bet we’ll be up on the Hill pushing for relief from that restriction and others with the goal of making it’s easier for S corporations to raise capital, hire new employees, and succeed at their business.

We will also continue to press for tax reform that treats the pass-through community fairly!  Cutting corporate rates while keeping rates on S corporations and other pass-through businesses high is not tax reform – it’s the exact opposite.  So we’ll spend 2016 working with our allies in the business community to educate tax writers and make sure they understand just how important Main Street businesses are to jobs and investment in this country.

That’s it for now.  Expect lots more from us in 2016 and beyond.  Thanks to everyone for their support, and we sincerely hope everyone has the best of holidays in the coming weeks!

Permanent Built-In Gains in Extender Package

Negotiators agreed to a package of tax and a package of spending provisions last night, and the big news (pun intended) is that the 5-year recognition period for built-in gains (BIG) – something S-Corp has been championing for more than a decade – is made permanent in the tax package!  We’re also happy to see that another priority, a basis adjustment to ensure S corporation owners can receive full charitable deductions on contributions, is also made permanent in this package!

The process from here is that the packages introduced last night will be held over for a couple days so members can review them, and then vote on them separately in the House.  We understand that a vote on the extender package will occur tomorrow, and the spending bill on Friday.

Then, in a move not wholly unusual for this time of year, the House would combine the two packages into one “message” and send them to the Senate.  The combo message accomplishes two things – it means there’s no debate on the motion to proceed (since messages from the House are privileged) and it means there’s only one bill to filibuster, not two.

As a result, the Senate could receive the bill on Friday and vote that day if everyone cooperates, or run the clock on cloture and vote on final passage Sunday or early next week if they don’t.

That’s the process.  What’s in the package?  As we reported several weeks ago, the tax extenders portion has been divided into three parts – those provisions made permanent (R&E tax credit, small business expensing, built-in gains, etc.), those extended for five years (bonus depreciation, CFC look-through, etc.) and those extended for 2015 and 2016 only (everything else).   You can read the full list here.

We don’t do spending here at S-Corp, so we won’t bore you with those details, but both the tax and spending package include a number of extraneous provisions that may be of interest to the business community, including:

  • Lifting the long-standing ban on oil exports;
  • A two year suspension of the medical device tax, as well as the two year delay in the Cadillac tax and annual fee on health insurance providers;
  • REIT-related provisions based on items included in Ways and Means Chairman Brady’s recent proposal, but with further modifications and a transition rule; and
  • Technical changes to the recently adopted partnership audit rules.

Left out of the package were efforts to roll back the Labor Department’s pending fiduciary duty rule or to raise the SIFI threshold for regional banks.  We expect a number of these provisions to raise concerns with specific groups, so it will be interesting to see how the leadership in the House and the Senate cobble together majorities for both the tax and the spending bills.

That said, the tax package represents a major step forward for tax policy and how S corporations are treated.  It gets the business community off the extender rollercoaster we’ve been on for the past three decades while setting the table for broader tax reform in 2017.  We’ve been asking for permanence for years, and now it appears we’re just a couple of days away from getting it.  You can bet S-Corp and our allies will be on the Hill with a message of just how important it is for Congress to enact this package.

Business Community Comes Out in Support of S Corp Reforms…

A broad coalition of business groups came out in support of S corporation reforms today, writing to House of Representatives in support of HR 4453, the S Corporation Permanent Relief Act of 2014.  The House is expected to vote on this measure tomorrow.

As Wire readers know, making permanent the five year recognition period for built-in gains has been a priority of the S Corporation Association for years, and while we’ve been successful in reducing the recognition period on a temporary basis, this is the first time either the House or the Senate has considered a permanent fix.  Given the current softness of the economy, particularly when it comes to business investment levels, acting now makes perfect sense.

Unlike public corporations, these closely-held businesses have little or no access to the capital markets. Instead they rely on banks, relatives, and their own savings to fill their investment and working capital needs. An overly long built-in gains recognition period makes this disadvantage worse by preventing converted S corporations from accessing their own capital and putting it to better use.

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. 

You can read the entire letter here.

…And Against Buffett Tax

In another trade group letter, more than thirty business groups, including the US Chamber of Commerce, the National Association of Manufacturers, the Restaurant Association, and the S Corporation Association, wrote to Senate leaders expressing their strong opposition to the Buffett tax provision included in the student loan bill (S.2432) pending before the Senate.  As the letter states:

Included in S. 2432, the Bank on Students Emergency Loan Refinancing Act, the Buffett tax is a permanent $73 billion tax increase on taxpayers and business owners to pay for new federal spending.  This new tax would be imposed on top of the other taxes business owners must currently pay, resulting in an increase in both the amount they pay and the complexity involved in calculating how much they owe.

As outlined in the bill, the Buffett tax requires those making over $2 million per year to pay a minimum 30 percent effective tax rate on all adjusted gross income.  For taxpayers making between $1 million and $2 million, the bill includes a phase-in period that results in marginal tax rates well in excess of existing tax rates.  While the Buffett tax does make some allowance for charitable contributions, the value of all other deductions and credits, including Section 179 small business expensing and other business deductions, would be reduced or eliminated under this tax. 

The business community’s opposition helped to defeat the legislation, which lost on a procedural vote 56-38 (60 votes were necessary for the legislation to move forward).

So the Buffett tax has stalled for the moment, but the effort to raise tax rates on Main Street businesses will continue.  The Senate has repeatedly attempted to pay for new spending in the past couple years by raising tax rates on individuals and pass-through businesses.  The current Senate leadership supports significantly higher tax rates and that support has already resulted in the tax hike on S corporations following the fiscal cliff negotiations, as well as the new 3.8 percent investment tax used to help pay for health care reform. Both of these tax increases took effect at the beginning of 2013 and resulted in top rates for Main Street businesses rising from 35 percent to nearly 45 percent.

Now they want more, and they will continue to press for more, until the business community steps up and says “enough.”  If it makes sense to reduce tax rates on corporations to “make American businesses more competitive” why doesn’t that same argument apply to pass-through businesses employing the majority of private sector workers?  As we have made abundantly clear, pass-through businesses pay more in taxes, they employ more people, and they are the heart and soul of nearly every community in America.  The S corporation community is 4.6 million strong.  It’s time the Senate started to appreciate that.

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