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proposal that would make it easier for S corporations to access capital, compete, and hire new workers by modernizing outdated rules that currently stifle their growth.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!

Congressman Kind Introduces S Corp Modernization Bill

Just before Congress left for the holiday break, Congressman Ron Kind (D-WI) introduced legislation to help improve the rules under which S corporations operate. The bill, H.R. 4840, is entitled the “S Corporation Modernization Act of 2007″ and was cosponsored by a strong bipartisan set of members, including Representatives Jim Ramstad (R-MN), Stephanie Tubbs Jones (D-OH), Allyson Schwartz (D-PA), Phil English (R-PA), Sam Johnson (R-TX), and Steve Kagen (D-WI).

Congrats to the Kind office for introducing this important legislation and putting together this impressive list of cosponsors. Given that most of our S corporation challenges are tax-related, the fact that six of these cosponsors are also members of the powerful Ways and Means Committee is particularly important.

In addition to the S Corporation Association, seven other national business organizations have endorsed the legislation, including the National Federation of Independent Business, the American Council of Engineering Companies, the Associated Builders and Contractors, the Associated General Contractors of America, the National Beer Wholesalers of America, the Independent Community Bankers of America and the Printing Industries of America.

The bill itself includes reforms important to keeping S corporations competitive in coming years, including built-in gains reforms, expanding S corporation ownership through small business trusts and relief from the so-called “sting tax” passive investment rules. As the “Dear Colleague” letter Representatives Kind and Ramstad circulated yesterday outlining the legislation noted:

“Absent change, America’s 3.8 million S Corporations will be handcuffed with outdated rules that hinder their ability to grow and create jobs. That is why we recently introduced, along with our colleagues Reps. Stephanie Tubbs Jones, Sam Johnson, Schwartz, English, and Kagen, H.R. 4840, the S Corporation Modernization Act of 2007. Our legislation would make needed changes to the tax code to keep S Corporations competitive and would help ensure the continued success of America’s predominant small business model by:

 Modernizing the rules that apply to firms that have selected S corporation status;

 Increasing the ability of S Corporations to access needed capital; and

 Encouraging S Corporations to support charity through small business trusts.

These reforms would improve the ability of S Corporations to broaden their ownership and remove impediments that prevent them from competing on a level playing field here in the United States.”

On the Senate side, Senators Lincoln and Hatch have been working on a companion bill. S-Corp is looking forward to seeing that legislation introduced in the coming session. Given the strong support of these offices on S corporation issues in the past, we believe it is safe to say the S corporation community has never had a more active and broad based set of friends on Capitol Hill.

How can you help? S corporations are going to need all the highly-placed friends they can find in the coming years. Let your members of Congress know how these reforms are important to the success of your business and your ability to continue to grow and create jobs, and ask them to cosponsor HR 4840 as well.

Happy Holidays!

Small Business Tax Package Signed Into Law

Congress returns this week following its Memorial Day recess. As expected, the Small Business tax package was signed into law along with the Iraqi War funding just before they left. This package included a number of S corporation reforms that we have been working on for years, and represents a significant improvement to the rules governing how S corporations operate.

Key reforms included relief from the dreaded “sting tax” as well as allowing trusts that hold S corporation stock to deduct their interest expenses, something other trusts have long been allowed to do. And while we did not get everything we sought in the bill, these new provisions are extremely welcome and we appreciate the members and staff who worked to make them happen.

Tax Bills on the Horizon

With the Small Business tax package behind us, it’s time to focus on what comes next. As we have observed, there are lots of actual and potential tax bills on the agenda for this Congress, and keeping track of them is becoming a full time job. Fortunately for S Corp members, that’s what we do. Here’s a list of tax bills to watch:

AMT Reform: Ways and Mean Chairman Rangel previously announced his plans to introduce a permanent fix to the growth of the Alternative Minimum Tax sometime this month. As we’ve written in past Wires, the threat to S corporations is the potential pairing of AMT relief with an increase in individual tax rates, a reduction in the thresholds at which those rates apply, and the change in the tax treatment of capital gains and dividends.

Energy Tax Incentives: Ways and Means is planning to take up tax legislation next week to provide new and expanded incentives for renewable energy sources. Offsets reportedly include denying the manufacturing income tax deduction to oil and gas producers as well as lengthening certain energy depreciation lives. Significantly, the offsets do not appear to include changes to the LIFO inventory accounting method for oil companies or others, at least in the House version.

Extending Family Tax Relief: The budget adopted last month allows part of the tax relief enacted in 2001 and 2003 to be extended past its current December 31, 2010 sunset. Whether Congress actually acts on this issue prior to the 2008 elections is very much up in the air, but the budget gives Congress the ability to move legislation to retain the 10 percent tax bracket, the $1000 child credit, the higher standard deduction and income tax rate thresholds designed to reduce the marriage penalty, and some sort of permanent fix to the estate tax rules. The budget does not make room for extending the lower rates on capital gains and dividends, nor the reduced rates on income taxes above the 15 percent bracket.

SCHIP: The Finance Committee will also consider legislation to expand the Children’s Health Insurance Program. The Senate has already voted to offset the cost of this increase through a tobacco excise tax during debate over the budget resolution.

Technical Corrections: As S Corp readers know, last year’s technical corrections package did not move forward based, in part, on concerns raised about increasing tax rates on exporters who have an IC-DISC. Ways and Means is working on another version, and the most recent word is the IC-DISC provision is still in the package. No word on timing of this package just yet.

Education Incentives: The Senate Finance Committee has been working on legislation to increase and reform the tax incentives for education. A proposed markup on legislation prior to Memorial Day was postponed, but this is a priority for Chairman Baucus, so expect something soon. On the House side, Chairman Rangel joined other Ways and Means members to introduce legislation to fund public school construction and rehabilitation with tax-free bonds. And several House members introduced legislation to increase tax benefits tied to the Hope Scholarship and the Lifetime Learning Credit.

International Tax Reforms: Earlier this year, Congressman Richard Neal (D-MA) introduced legislation (H.R. 1672) to change the tax treatment of dividends for certain hybrid foreign stocks. In May, the Senate Finance Committee held hearings on offshore tax evasion. And this week the Finance Committee will hold hearings on the impact globalization has on the American workforce, with a particular focus on the tax incentives that make up part of our Trade Adjustment Assistance programs. We expect these mutual concerns to coalesce into a package of international tax provisions — mostly revenue raisers — to accompany other tax legislation.

Housing: The implosion of the sub-prime lending market and the general rise in housing and land prices suggest that a housing tax bill or tax title could be considered by this Congress. The House Revenue Measures subcommittee held hearings last month that focused on the Low Income Housing Tax Credit, private activity tax-exempt bonds, and the historic rehabilitation tax credit.

Bottom Line: The combination of lots of tax bills together with the desire to offset any tax decreases with tax increases should make all taxpayers wary, especially those that, like S corporations, have been the target of unwarranted criticism in the past couple years.