As S-CORP members will recall, S-CORP has been monitoring a number of states considering tax bills that will adversely affect S corporations. We were fortunate to lay the groundwork in Pennsylvania in working with others to Pennsylvania Governor Ed Rendell.
S corporations fared better in Pennsvylania when, following the recommendation for a new entity-level tax in that state, S-CORP and others lobbied to reject proposed tax hikes on S corporations. Following active communications with the Rendell office, S-CORP scored a major victory when Rendell announced in February 2005 that his budget proposal would not embrace new taxes on S corporations. Rendell went so far as to state that,
While the Commission’s approach has merit, imposing a new entity-level tax at this time would not be consistent with the Governor’s economic development goals. Companies organized as LLCs and subchapter S corporations are major job generators and can respond quickly to new economic opportunities. Imposing a substantial new tax on these firms would be counterproductive at this point in the economic cycle.
This is extremely good news, but it is critical to note that prior to our raising the concerns of S corporations, the Governor’s office had not heard from any S corporations in Pennsylvania.
Governor Ed Rendell’s budget and tax reform proposal was recently introduced in the Pennsylvania House as House Bill 1557. Most importantly, we are pleased to report that the bill accurately reflects the Governor’s original proposal (released in February) and excludes S corporations from a new entity-level tax. The Governor’s Deputy Secretary for Tax Policy has told us that the bill’s outlook and timing are “ uncertain” and could certainly “face an uphill battle”. We will continue to monitor to ensure that if the bill moves, the S corporation exemption remains.
S Corporations
IRS Finalizes Rules on Deemed Classification Of Entities Filing for S Corporation Election The Internal Revenue Service May 20 issued final regulations (T.D. 9203) stating that eligible entities that file timely elections to be treated as Subchapter S corporations will be deemed to have elected to be classified as associations taxable as corporations. The rules finalize temporary regulations issued in July 2004 (138 DTR G-2, L-7, 7/20/04).
IRS said the regulations aim to simplify paperwork requirements for entities electing to be classified as S corporations by eliminating the additional requirement of filing an election to be classified as an association. Instead, an eligible entity that makes a timely election to be classified as an S corporation will be deemed to have elected to be classified as an association taxable as a corporation, IRS added.
If the S election and entity classification election are filed late, the entity may need to submit a ruling request to file a late entity classification election and late S corporation election, IRS said. The regulations said Revenue Procedure 2004-48 provides relief for those entities in some cases.B No hearing was requested or held on the temporary regulations, and no written or electronic comments were received, IRS said.
The effective date for the regulations is July 20, 2004.
Text of the regulations is in Section L.
S corporations continue to be under direct fire as state legislatures undertake tax reform.
This week, the Ohio House of Representatives is scheduled to pass its fiscal year 2006 budget bill, a measure that includes a tax reform package which could dramatically increase taxes on Ohio S corporations.
In an attempt to help the struggling manufacturing sector, Governor Bob Taft and the legislature are proposing to eliminate the tangible personal property tax, lower personal income taxes, and pay for this with a new commercial activity tax (CAT) of .26% of a company’s gross receipts. If enacted, the measure will apply to pass-through entities that are already subject to the personal income tax. As such, this would mean that S corporation shareholders would see their tax liability increase as much as 5.95% from Ohio operations relative to C corporations.
Ohio legislators need to hear from S corporations with operations in Ohio NOW about the potential harm this provision would inflict on your business. Please contact Noelle Hawley at S-CORP (202) 466-4771 if you can help!
Over the course of the last year, S corporations have faced the threat of similar tax increases in Kentucky and Pennsylvania and elsewhere. On March 18th, Kentucky Governor Ernie Fletcher (R) signed into law major tax reform legislation that cuts corporate personal and income tax rates but raises taxes on S corporations by imposing a new entity tax on all pass-throughs. The new tax is partially offset by a credit to shareholders, and the new tax also exempts the portion of an S corporation that is owned by a non-taxable entity (such as a trust or an ESOP).
S corporations fared better in Pennsylvania when, following the recommendation for a new entity-level tax in that state, S-CORP and others lobbied Pennsylvania Governor Ed Rendell’s to reject proposed tax hikes on S corporations. Following active communications with the Rendell office, S-CORP scored a major victory when Rendell announced in February 2005 that his budget proposal would not embrace new taxes on S corporations. Rendell went so far as to state that, “while the Commission’s approach has merit, imposing a new entity-level tax at this time would not be consistent with the Governor’s economic development goals. Companies organized as LLCs and subchapter S corporations are major job generators and can respond quickly to new economic opportunities. Imposing a substantial new tax on these firms would be counterproductive at this point in the economic cycle. ” This is extremely good news, but it is critical to note that prior to our raising the concerns of S corporations, the Governor’s office had not heard from any S corporations in Pennsylvania.
While S-CORP does not have an active lobbying force at the state level, we are committed to working with member companies to weigh in on their behalf against proposals that would be harmful to S corporations. Please contact us at (202) 466-4771 should you be aware of such a proposal in your state or wish to get involved with other S corporations that are working on these issues in states where threats like these have emerged.