Today, the Chairman of the S Corporation Association Advisory Committee, James Redpath, submitted testimony on S Corp reform to the Senate Committee on Finance. The Senate Finance Committee held the hearing on small business tax relief as part of its preparation for Senate consideration of the minimum wage increase. As Jim pointed out in his testimony:

I am concerned that many of the companies that will bear the impact of this increase in labor costs are closely-held or family-owned businesses structured as Subchapter S corporations. My goal is to provide you with a first hand account of how to offset some of this new labor cost to small businesses by improving the outdated rules currently governing S corporations.

Jim goes on to highlight some of the S Corp priorities that would most improve the ability of today’s S Corp to compete and create jobs, including provisions to ease the burden of the built-in gains and sting taxes, increase their access to capital, and level the rules applying to S Corps and LLCs. The current tax relief plan, as outlined by Chairman Baucus, would reduce revenues by $8 to $10 billion over the next five years and include:

  • A one-year extension of Section 179 small business expensing;
  • A one-year extension of the lower, 15-year depreciation rules for retail businesses;
  • A permanent extension of the Work Opportunity Tax Credit; and
  • A higher, $10 million threshold for businesses wishing to use cash accounting.

Chairman Baucus also made clear that this tax relief would be fully offset by other tax increases, but he declined to be more specific. (While we’re told that none of the so-called revenue raisers we’ve worked to oppose will be included — raising payroll taxes on S Corps, LIFO repeal, etc — we’re going to keep working with our allies in the business community to ensure they don’t surface on this bill or any other.) Moreover, the Chairman indicated that they were open to suggestions for other small business friendly provisions that might be included.

On that front, Senator Blanche Lincoln, the sponsor of several S Corp reform bills, spoke up and raised the importance of including S Corp reforms in this legislation, to which the Chairman replied, “Those are great suggestions.” We agree, and we’ll continue to work with Senator Lincoln’s office and other S Corp friends to get these provisions enacted.

One complication is the fact the House is passing a minimum wage increase without any offsetting tax relief. The House bill would increase the wage by the following schedule:

– From $5.15 to $5.85 60 days after the legislation is signed;

– From $5.85 to $6.55 one year later;

– From $6.55 to $7.25 two years later.

Since the Constitution says all revenue bills must originate in the House, we’re interested to see how the House reacts to the Senate-passed tax relief. It could simply refuse to take up the provisions, we’ll be sure to keep you apprised of any developments. Social Security Reform and S Corps

We’ve been hearing all sorts of rumors these days about the direction Social Security reform has taken. Robert Novak reports that Treasury Secretary Hank Paulson has offered an increase in the Social Security Earnings Limit as a means kick -starting reform talks. Our Treasury friends adamantly deny that rumor, saying the Secretary has done no such thing.

In reaction to these rumors, House Republicans yesterday reaffirmed their strong opposition to raising the cap. Meanwhile, the White House renewed its call for the creation of Personal Accounts to accompany Social Security reform. Maybe the earnings cap idea was just a trial balloon to kick start reform talks? If so, it looks like we’re back to square one, with the White House insisting on Personal Accounts and congressional Democrats refusing to talk until the President takes them off the table.

Just to be clear, raising or eliminating the Social Security earnings limit would represent a massive tax increase on individuals and businesses. For example, an S Corp with $120,000 in income would see its tax burden increase in 2007 by nearly $3,000. For perspective, that tax increase more than offsets any tax relief the business enjoyed from the 2003 Tax Relief Act.

The current cap for 2007 is $97,500. Wages up to that point are subject to payroll taxes, totaling 15.3 percent of wages and fund Social Security and Medicare benefits to seniors. Above that level, only the 2.9 percent Medicare tax applies.