Before a South Lawn crowd today, President Bush signed into law H.R. 4297, the “Tax Increase Prevention and Reconciliation Act of 2005″. Cumbersome name aside, the bill is a relatively streamlined effort to extend several expiring tax provisions, including the lower tax rates on capital gains and dividends, and middle-class protection from the Alternative Minimum Tax.

S-CORP’s focus now turns to the second tax bill, known in tax circles as the “trailer package”, and the open question of which of the provisions excluded from the first bill will make it into the second (“trailer trash”). S-CORP continues to work with friends in the House and Senate, including Senators Hatch and Lincoln, to include the Senate-passed “Sting Tax” and Built-In Gains relief provisions in the final bill. S-CORP members who would benefit from these provisions are encouraged, as always, to let us know.

The consensus view is that this second round of tax provisions will be included in the pension bill (H.R. 2830/S. 1783) currently in conference between the House and the Senate. No word yet on when this conference report might be finalized, but it could be as early as next week. We’ll keep you apprised.

Tax Increase for Government Contractors

On a cautionary note, a so-called revenue raiser to impose tax withholding on government payments to contractors was included in the reconciliation bill. This provision, which raises $7 billion over ten years, was in neither the original House nor Senate-passed bills.

S-CORP is actively working with other business groups to prevent two patently unfair and unwise tax increases from being considered in future tax bills - a proposal to apply payroll taxes to ALL S corporation net income, and a proposal to repeal the LIFO accounting method (see below). Although neither provision has been adopted by the House or the Senate to date, we’re taking the lesson of the Government Contractor Withholding provision to heart and continuing our campaign to educate policy makers on why these proposals are bad policy.

You never know when a tax increase is going to pop up.

Senate Continues “Tax Gap” Focus

Speaking of tax increases, CongressDaily AM reported this week that Senate Finance Chairman Grassley and ranking member Max Baucus continue their focus on the tax gap (the difference between the amount of taxes owed and the amount actually collected in a timely way.) They are planning a hearing on the tax gap issue next month and are expected to make other legislative proposals to address the tax gap later this year.

As S-CORP members will recall, last year we learned that Chairman Grassley was very close to including a

provision on the Senate reconciliation tax bill that would increase the payroll tax burden on S corporations. That idea was most recently proposed by the Joint Committee on Taxation as a response to help close the tax gap.

Congress Seeks to Eliminate the Use of LIFO Accounting

S-CORP has joined with other affected groups to fight efforts in Congress to repeal “last-in, first-out” (LIFO) inventory accounting for S corporations and other businesses. Like the mole game at the carnival, this proposal keeps popping up, only to be beaten back by the business community. First, the Senate version of the tax reconciliation bill included a provision restricting the use of LIFO for the five largest oil companies. This provision did not make it into the final bill just signed into law. Second, Majority Leader Frist included a full repeal of LIFO as an offset for his energy plan released two weeks ago. Several days later, he announced he was not going to pursue this provision. More recently, Chairman Grassley appeared on C-SPAN and made the following statement:

“The mistake that I made in the first tax bill, on taxing oil companies, was that we were changing the taxation of inventory different than all other corporations. If we had changed it for all corporations the same way, I think I could have justified it the to the House conferees but when you just go after the oil companies, it was you know, why segment the oil companies who are making maybe 14 percent profits, and let the pharmaceuticals go when they are making 18 percent profits?”

Hearings on this proposal are expected in the Senate Finance Committee as early as next month. S-CORP will

continue to stay vigilant and involved in the LIFO Tax Coalition that is fighting this proposal. For our S-CORP news release, please see the attachment or our website