S Corp Modernization Introduced!

Just in time for our annual Board meeting, S-Corp Champions Dave Reichert (R-WA) and Ron Kind (D-WI) introduced legislation to improve the rules governing S corporations!  Entitled the S Corporation Modernization Act of 2015 (HR 2788), the legislation would help ensure that the more than 4.6 million S corporations are able to compete and thrive today’s economy.

Back in 2013, a coalition of key business organizations supported similar legislation, noting that many of the rules that govern the day-to-day management of S corporations date back more than half a century.   These outdated rules hurt the ability of existing S corporations to grow and create jobs.  Many family-owned businesses would like to become S corporations, but are unable to get around some of the existing restrictions.  Other S corporations are starved for capital, but find the rules limit their ability to attract investors or even utilize the value of their own appreciated property.  HR 2788 would help address these challenges.  Specifically, the bill would:

  • Modernizing the rules that apply to firms that have selected S corporation status;
  • Increasing the ability of S corporations to access much-needed capital; and
  • Easing and expanding S corporations’ ability to make charitable donations.

In a joint press release, Rep. Reichert described his legislation in these terms:

“There are more than 95,000 S corporations in Washington State,” said Reichert. “And with 1 in 4 workers being employed by these small businesses nationwide, it is absolutely critical that we ensure these businesses have the tools that will promote their growth, not stifle it. This is a common-sense bill, and I am proud to introduce it with my colleague Mr. Kind. We must continue to support our small businesses and allow these proven job creators to access the capital they need to grow, compete, and get Americans back to work.”

Rep. Kind made the following comment:

“It is critical that we ease the tax burden on our small and family owned Wisconsin businesses who are driving our economic growth.  Under this legislation, S corporations will be better able to access credit, invest in their business, and create the good paying jobs that we need.”

With the S-Corp Board in town, we’ll be up on the Hill visiting key tax writers and building support for modernizing the S corporation rules.  Congress needs to pass tax extenders and give certainty to America’s employers, but it is also important for the tax writing committees to seek new provisions that help improve the tax rules governing Main Street businesses. The S Corporation Modernization Act of 2015 includes a number of those improvements, and we’re looking forward to working with our sponsors and other supporters to get them enact this Congress.

Moving on Extenders

Extenders are back in play in the House and Senate.  Finance Chairman Ron Wyden (D-OR) plans to release his package Monday, with amendments due on Tuesday and markup to begin on Wednesday.

Details of the Wyden plan are not available, but early indications are that his package will include most of the tax provisions that expired at the end of 2013 and that they will be extended for both 2014 and 2015.  It doesn’t appear that the Chairman plans to offset the revenue loss of the package unless there are more modifications to the language than a simple date change.

Meanwhile, on the House side, Ways and Means Chairman Dave Camp (R-MI) sent a letter to his colleagues outlining his plan for addressing extenders.  As the letter states:

As such, beginning in April, the Committee will continue its work by going policy by policy to determine which extenders should be made permanent.  That process will include both hearings and markups. Specific dates and topics will be forthcoming.   

Reading between the lines, it appears the Ways and Means Committee will hold hearings on extenders beginning in April to examine the provisions more closely, followed by the introduction of an extender package and consideration by the Committee.  After the examination, we should expect a package that focuses on permanent extensions – keeping in line with the principle of tax reform.

For S corporations, there are a couple items at play here.  First is the extension of built-in gains (BIG) relief, which expired at the end of 2013.  With the expiration of the 5 year BIG holding period, thousands of S corporations that have converted from C corporation status now have to hold on to their appreciated assets for an entire decade or face the BIG corporate-level tax. This causes a prohibitive tax burden where the applicable federal, state and local shareholder taxes exceed 60 percent in many states.   This punitive tax effectively forces these businesses to “lock-up” their assets and capital, inhibiting future investments in the business and employees, as well as potential job creation.

Our Senate champions, including Sen. Ben Cardin (D-MD) and Sen. Pat Roberts (R-KS) who recently introduced legislation together to permanently extend the 5 year recognition period (S. 1855), are steadfast in their support and have called for BIG relief to be part of any extender package that moves forward.  As the snap-back to 10 years is an excessive amount of time to reasonably ask a company to hold a particular asset, Congress has agreed to extend the 5 year period several times and we have had strong bipartisan support for this important relief for many years.

The second item is the extension of the basis adjustment to stock of S corporations making charitable contributions of property, a provision that also expired at the end of last year. With flow-through entities, charitable deductions flow through to the individual tax returns of partners or shareholders.  Prior to the Pension Protection Act (PPA) of 2006, however, if an S corporation made a contribution of appreciated property to charity, its shareholders’ deductions were limited to their basis in the S corporation.  To encourage more charitable giving by S corporations, the PPA temporarily removed this limitation, allowing shareholders to take into account their pro rata share of charitable deductions for contributions of appreciated property.  The provision has been extended with bipartisan congressional support ever since.  It brings consistent treatment of charitable contributions between flow-through businesses, and would allow for America’s S corporations to be more active and supportive of needed charitable activities.

Permanent extensions of these provisions have, of course, been included as part of the S Corporation Modernization package for several congresses – most recently introduced by Reps. Dave Reichert (R-WA) and Rep. Ron Kind (D-WI), as H.R. 892 in the House last year.

Both permanent extensions were included in Chairman Camp’s tax reform discussion draft, along with other S Corporation Association priorities.  The draft would also increase access to capital by extending ownership of an S corporation to non-resident aliens through an electing small business trust (ESBT), ensuring payment of tax at the trust level (at the highest individual tax rate), easing punitive restrictions that apply to converted S corporations regarding passive income limitations, and punishing the unwary with S corp status termination.  Lastly, the draft would encourage philanthropy from S corporations by conforming the rules applicable to ESBTs and individual shareholders of an S corporation.

We plan to keep a close eye on this extender process – particularly our S Corp priorities – and look forward to seeing Chairman Wyden’s package on Monday.

S Corporation Modernization Bill Reintroduced in House

Good news! Last week, S-Corp champions and Ways & Means Committee members Dave Reichert (R-WA) and Ron Kind (D-WI) introduced the latest version of the S Corporation Modernization Act of 2013. Designated H.R. 892, the bill seeks to improve the rules governing S corporations by making permanent the five years BIG holding period, allowing non-resident aliens to invest in S corporations through an EST, and reducing the sting of the “sting tax”, among other provisions.

Specifically, H.R.B 892 would make needed changes to keep S corporations competitive and ensuring continued success of America’s predominant private business model by:

  • Increasing the ability of S corporations to access much-needed capital;
  • Modernizing the rules that apply to firms that have selected S corporation status; and
  • Easing and expanding S corporations’ ability to make charitable donations.

Said Congressman Reichert of the bill in a press release,which also cites our 2011 Ernst & Young study, issued on Thursday:

This tax relief proposal that would make it easier for S corporations to access capital, compete, and hire new workers by modernizing outdated rules that currently stifle their growth. A 2011 independent study revealed tax law dealing with S corporations affects 31 million Americans as S corporations employ one out of four workers in the U.S. private sector.

“S corporations and similar businesses are responsible for more than half of the jobs in Washington State and across America,” Rep. Reichert said. “As our economy continues to struggle to regain sound footing, I’m proud to introduce bipartisan legislation to help these proven job creators access the capital needed to grow, compete, and get Americans back to work. Working with the Ways and Means Committee toward comprehensive tax reform, I am committed to supporting these small businesses by advocating for pro-growth tax policies.”

The Reichert-Kind legislation presents a realistic set of reforms that would improve the ability of 4.5 million S corporations to access much-needed capital and increase their hiring capabilities. These reforms would improve the ability of S corporations to respond to the current business environment and remove impediments that prevent them from competing on a level playing field at home in the United States.

The bill is consistent with legislation introduced in the past, and we’re confident several of these provisions will be seriously considered this Congress. Thank you Mr. Reichert and Mr. Kind!

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