Extenders Update

November 26, 2014 by · Leave a Comment 

The tax extenders front has been busy in the last couple days.  First, there was the rumor Monday that negotiators were close to a deal.  Tuesday, details emerged of a $450 billion package mixing ten permanent items with a two-year extension (2014 & 2015) of most other items.  And then yesterday evening the White House issued a veto threat against the package, leaving its prospects very much up in the air.

What’s remarkable about the White House veto threat is that it occurred at all.  To our recollection, this is the first time in six years the White House and Senate Majority Leader Harry Reid have been publicly crosswise on legislative policy.  Reid negotiated the package with House Ways and Means Chairman Dave Camp and it includes several provisions – including making the state and local tax deduction and the mass transit benefit permanent – that Reid and other senior members of his caucus have historically supported.  So it’s obvious the Reid office and the White House are no longer in close communication, at least on tax matters.  As the Hill reported:

Democratic aides on Capitol Hill said that the White House quickly made it clear Tuesday that it was, in the words of one staffer, “livid” over a deal that would have indefinitely extended tax priorities for both parties. Senior administration officials reached out to Democratic lawmakers to get that message across, aides added, with even Obama and Lew trying to marshal opposition.  “This is a terrible deal for Democrats,” one aide said.

Moreover, we’re hearing that part of the White House’s motivation for blocking this package is their belief that doing so will generate momentum for corporate-only tax reform. This kind of reform has been roundly denounced for leaving out and penalizing a majority of the private sector businesses in this country, but the White House and Treasury have been much more active on that front and appear to believe that such a deal is possible.  (We don’t.)  Here’s what our friends at Capital Alpha had to say about that:

The President is making a deliberate and contemplated move to set the ground rules for discussions of fundamental tax reform and corporate tax reform next year with the incoming Republican majority. The President won’t talk about revenue neutral tax reform in a vacuum. His terms for tax reform include big payoffs for constituencies of the progressive left in terms of policy goals and economic benefits. Such has been his position all along, which is why we have always been skeptical of tax reform next year.

As to the package, it’s broad and includes lots for the pass-through community to like.  For starters, it would make permanent two S corporation specific provisions – the shorter holding period for built-in gains and the basis adjustment for charitable donations – as well as popular provisions like the R&E tax credit and small business expensing.   Here’s the complete summary from Tax Notes:

The deal would make permanent the following 10 provisions:

  • the research credit, simplified according to the provisions in a House-passed bill (H.R. 4438) to make the credit permanent but also including the provision from the Senate Finance Committee package providing start-up businesses the ability to claim the credit against payroll taxes;
  • section 179 expensing;
  • the state and local sales tax deduction;
  • the American opportunity tax credit, indexed to inflation after its renewal in 2018;
  • the employer-provided mass transit and parking benefits exclusion;
  • the reduced recognition period for built-in gains of S corporations;
  • the rules regarding basis adjustments to the stock of S corporations making charitable contributions of property;
  • the rule allowing some tax-free distributions from IRAs for charitable purposes;
  • the deduction for charitable contributions by individuals and corporations of real property interests for conservation purposes; and
  • the deduction for charitable contributions of food inventory.

The remainder of the package will mostly follow the extenders bill the Senate Finance Committee approved this spring to renew through 2015 all but two of the 55 traditional extenders that expired in 2013.

However, the deal will phase out the wind production tax credit, ending the incentive after 2017.

It also includes House-passed modifications to the bonus depreciation provision that would expand the definition of qualified property to include owner-occupied retail stores and lift restrictions to allow for more unused corporate alternative minimum tax credits, which businesses can claim in lieu of bonus depreciation, to be used for capital investment.

So where do things stand?  We are hearing conflicting reports.  One word from the Hill is that the deal is off and that negotiators will have to start over, probably with a one-year extension for 2014 only (Boo!).  Other reports, however, suggest that Senate Democrats are not backing down.  It is possible yesterday’s package could move through both the House and the Senate despite the White House’s objections, and we’re hearing some Senate offices are working the membership to make that happen.

With everybody home for Thanksgiving, we won’t have a better idea where the votes are and what Senate leadership decides to do until next week when everybody returns.  In the meantime, the tax world has more than just turkey to chew over this holiday!  Stay posted.

Extenders and Immigration

November 19, 2014 by · Leave a Comment 

Last week, we did a post-election analysis that highlighted the broad implications of the new Republican Congress. A return to “regular order” and increased legislative activity overall, including in the tax space, was our basic conclusion.

One wild card at the time was the possibility of President Obama issuing an Executive Order on immigration. He’s promised to do so and, despite pushback from Republicans and many members of his own party, he appears poised to release something on Friday.

What are the implications of such an action on tax extenders in the Lame Duck? Absent action on immigration, the options for extenders are:

  1. A one-year extension for 2014 only;
  2. A two-year extension for 2014 and 2015; or
  3. A two-year extension together with some provisions being made permanent.

For S corporations, the option Congress embraces makes a big difference. Two S corporation-specific provisions – the shorter holding period for built-in gains and the basis adjustment on charitable donations – are in play. Permanent versions of both provisions passed the House twice this year. Beyond those items, we hear from our members consistently on the importance of the R&D tax credit and the increased limits on 179 expensing. These items, too, are in play to be made permanent.

On which option prevails, there are lots of variables but the key variable is the number of House conservatives – the “Hell No” Caucus – who argue that Congress should do only the minimum on extenders (one year for 2014) and then come back next year and use their new majority to reshape the package with the intent of eliminating certain provisions while making other items permanent.

Right now, it’s wholly unclear just how many conservatives hold this position. Speaker Boehner might be able to move a broader package despite their opposition, but it may take a test vote to find out.

What is completely clear is that membership in the Hell No caucus will grow multi-fold and may include members of the Republican Leadership if the President chooses to go his own way on immigration.

At that point, any prospect of permanence for tax extenders, or even a two-year extension, goes away. Instead, the universe of possible outcomes reverts to a one-year extension of most if not all the provisions or, less likely but also a possibility, no action at all. It’s hard to adopt tax policy if the federal government is shut down, starting December 11th when the current funding expires.

That’s not good for tax policy nor those families and businesses relying on these provisions. Nor is it good for the government or the economy to be moving into crisis mode so quickly after the voters had a chance to express their preferences.

On the other hand, voters also chose to re-elect President Obama, and the ball is in his court on this one.

S-CORP Hosts 2014 Midterm Elections Webinar

November 6, 2014 by · Leave a Comment 

On Thursday, November 6th, the S Corporation Association held a webinar to go over the 2014 midterm elections results and sort out the implications they’ll have on legislation and S-CORP’s priorities going forward.

To watch the video in its entirety, click on the image below: