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.

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.

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