In a bit of potential good news for small businesses, the Senate Finance Committee today adopted by voice vote an $8 billion package of small business tax incentives to accompany a planned increase in the minimum wage. Included in the package is a one year extension of the current Section 179 small business expensing limits, an extension of the Work Opportunity Tax Credit through 2012, and an extension of the shorter, 15-year depreciation lives for certain owner-occupied buildings. For S Corps, the package includes an entire title of big and small changes to the rules governing how S corporations operate, including:

  • Easing the rules regarding passive investment income under the “Sting Tax”;
  • Addressing concerns of S corporation banks; and
  • Expanding qualifying beneficiaries of an Electing Small Business Trust

This title reflects lots of advocacy work on the part of the S-Corp Association and other interested groups in town. As S-Corp readers know, two top priorities of the Association are to eliminate the dreaded Sting Tax while allowing non-resident aliens to become S corporation shareholders. With a couple technical challenges, the Finance-passed provisions represent a significant step forward for achieving our goal of parity with LLCs. As our Chairman wrote to Senator Max Baucus today:

Provisions to reduce the impact of the so-called “sting tax” and to expand the eligible population of S corporation shareholders are two priorities for our group and they represent positive steps in the long road towards establishing parity between S corporations and LLC’s. We appreciate your work in including these priorities, and look forward to working with you in the future to address our Association’s other important challenges.

In addition to providing these much needed improvements to the S corporation rules, I would strongly encourage you to establish a uniform effective date for the S corporation provisions — beginning after December 31, 2006 — to ensure that this relief reaches our members in the same year as the minimum wage is increased.

Just where does the package go from here? The House minimum wage bill does not include any tax provisions, and careful readers of the Constitution understand that revenue bills must originate in the House. Meanwhile, a minimum wage increase without any small business tax relief is unlikely to pass the Senate; so, how do small business advocates get around the Constitution and enact much needed tax relief for America’s employers? As CongressDailye reports earlier today:

But Finance Chairman Baucus said it is now up to House and Senate Democratic leaders to resolve a dispute between the two chambers over whether the small business tax breaks should be linked to the minimum wage. “The Senate has made it clear: There aren’t 60 senators who will vote for the minimum wage [increase] unless it includes small business provisions,” Baucus told reporters after the markup. “But at this point, it’s up to Speaker Pelosi and [Majority Leader] Reid as to how they want to work this out.” The House passed a straight minimum wage bill, and House Ways and Means Chairman Rangel has indicated he intends to enforce the House’s constitutional prerogative to initiate tax legislation. “The Senate as a whole still has the opportunity to pass a clean minimum wage bill,” a Rangel spokesman said today.

One possible solution is for the Senate to wait for the energy tax bill scheduled to be considered by the House this week, attach the Senate minimum wage and tax package, and send it back. Under the rules, a tax bill is a tax bill, and there would be no constitutional challenge to the resulting package.