Yesterday, by a vote of 244-185, the House approved the long-delayed tax reconciliation bill (H.R. 4297) following an agreement between House Ways and Means Committee Chairman Bill Thomas (R-CA) and Senate Finance Committee Chairman Chuck Grassley (R-IA) that a follow-up tax extenders bill may be attached to pension reform legislation.

The reconciliation tax bill includes a two-year extension of the reduced tax rate on capital gains and dividends, a one-year extension of alternative minimum tax relief for middle-income tax payer, a two-year extension of increased small-business expensing under section 179, and extension of the subpart F exemption for active financing income.

Fourteen revenue offsets are also included that raise $13 billion over the next 10 years. The Senate is expected to vote on the bill today. It needs a simple majority to pass the Senate, and a few Republican defections are expected, while a few Democrats are expected to vote for the bill.

For the Joint Committee on Taxation Estimated Revenue Effects Of The Conference Agreement For The “Tax

Increase Prevention And Reconciliation Act Of 2005:


Revenue Offset In Tax Cut Bill Impacts Domestic Manufacturing Deduction for S Corporation Manufacturers

S Corps engaged in production activities should probably take a look at Section 514 of the reconciliation tax bill. This section modifies the wage limitation for the domestic manufacturing deduction enacted in the 2004 American Jobs Creation Act. The Jobs Creation Act allowed manufacturers to take a deduction against qualified production income, but limited that credit to no more than 50% of the wages paid to all employees that year. H.R. 4297 would limit the deduction to workers directly involved with producing the qualified property. This change will definitely be an administrative challenge and could reduce the benefits of the deduction for companies with significant nonproduction wages.

The provision also includes a simplification measure repealing the special limitation on wages treated as allocated to partners or shareholders of pass-through entities. S-CORP Advisory Board Chairman Jim Redpath noted this is a “good simplification move for S corporations.”

S-CORP recently heard from Eric Solomon, newly nominated by the President to head up the Treasury

Department’s Office of Tax Policy, regarding their plans the issue final regs on Section 199. This provision is a big change to Section 199, and observers now expect that schedule to get pushed back.


S-CORP Continues Efforts on “Sting Tax Relief”

Despite the best efforts of S-CORP members and allies, the final reconciliation tax bill left out the Senate-passed provision to provide relief from the “sting tax” on excess passive income held by S corporations. The good news is that the Sting Tax provision continues to be in play, and is being considered for a second bill that is still being negotiated. The second bill is expected to include provisions that were removed from the reconciliation bill to keep that bill’s cost under the $70 billion cap set by the fiscal year 2006 budget resolution. The “trailer package” is expected to an extension of several popular business tax cuts, including the research credit, the work opportunity tax credit, the state and local tax deduction, and the above-the-line deduction for teacher classroom expenses.

S-CORP Board of Directors and Advisory Board Capitol Hill & Administration Visits

Last week S-CORP’s Board of Directors and Advisory Board held their annual Washington, DC meeting. We were privileged to meet with key Administration personnel to update them on our members’ priority issues: preserving the tax status of S corporations, fighting proposed increases on S corporations, and promoting initiatives that will allow S corporations to grow and prosper.

We briefed Members of Congress and their staff on the benefits of H.R. 4421, the S Corporation Reform Act. We are pleased to announce that S-CORP Chairman Tom McMahon’s (Barker Company in Keosauqua, Iowa)

representative, Congressman Jim Leach (R-IA) quickly signed on as a cosponsor of the bill. We continue our efforts to increase cosponsors for this important legislation.