Congress came back from its August break this week and is picking up right where it left off, struggling with the question of what to do with the Alternative Minimum Tax and examining how to appropriately tax the carried interest earned by hedge fund managers and other general partners.

These questions are connected, obviously, in that addressing the AMT will be very expensive while raising the tax rates on carried interest would presumably raise lots of revenue. That’s one reason why both the Ways and Means and Finance Committees held hearings on the issue.

For S corporations, the concern is twofold. First, once Congress begins exploring proposals for widespread changes to the tax code, it’s hard to know where they will stop. As the Wall Street Journal quoted Ways and Means Chairman Charlie Rangel this morning, “If it’s in the tax code, we have an interest in it.” Already they have floated the idea of imposing a four percent surtax on individual incomes above $500,000. As we’ve previously noted, this surtax would impact S corporations and other flow-through businesses, but not C corporations.

Moreover, we continue to hear rumblings about a proposal to increase payroll taxes on S corporation income. This idea was first put forward by the Joint Economic Committee back in 2005, and despite our best efforts to kill it, it keeps coming back.

Given the size of the AMT challenge and the lack of consensus between the House and the Senate on how to address it, we are sticking by our prediction that Congress will stay in session right up until the Christmas holiday and that many, if not all of these tax issues will be rolled into one big omnibus bill, similar to the bill that passed Congress last year in mid-December.

Exporter Tax Increase Back in Play

One component of that omnibus tax bill will likely be a technical corrections title. Remember the aborted “Tax Technical Corrections” bill from last fall? It was proposed in September but never got off the ground, in large part due to a provision that would raise taxes on small and closely held exporters. We’re hearing that congressional tax writers are going to try again, and that the export tax increase,affecting dividends from an IC-DISC, is likely to be part of the proposed package.

Why some in Congress are thinking about raising taxes on exporters is beyond us. Our growing export community is one of the few bright spots in the economy right now. Moreover, there are lots of business groups that oppose this change. A large number of them, lead by your S Corporation Association, recently wrote congressional tax writers asking that they strike this provision from the proposed bill.

You’ll be hearing more about this in the coming weeks.

S Corporation Accomplishments, 1996-2007

Since its inception in 1996, the S Corporation Association has helped guide numerous positive changes to the S corporation rules through the Congress and on to the President’s desk. Recently, one of our members asked us to catalog all the improvements to the S corporation rules since the S Corporation Association has been active in Washington DC.

Here is what we came up with, beginning with the recently enacted “Small Business and Work Opportunity Act,” including an entire title of S Corporation improvements, all the way back to the “Small Business Job Creation Act of 1996.” Since 1996:

  • The number of allowed S corporation shareholders has increased from 35 to 100, and members of the same family now count as just one shareholder;
  • S corporations can now own other businesses, including C corporations, with streamlined rules for allocating income and loss;
  • S corporations’ expanded access to capital, with more types of shareholders allowed to invest in S corporations than ever before, including certain trusts, IRAs, and other tax exempt entities; and
  • C corporations that convert to S status face fewer obstacles, including relief from the “sting tax”

It is important to note that this list does not include other S Corporation Association accomplishments, such as fighting efforts to impose payroll taxes on all S corporation income and broader tax changes that benefit S corporations like lower tax rates and higher small business expensing limits. Back in 1996, for example, the top tax rate on S Corporations was nearly 40 percent. Today, it’s 35 percent.

Take a look at the list, and we think you’ll agree that the S corporation community has benefited greatly from our efforts and those of other small business champions in Congress and elsewhere. This just goes to show what a concerted effort can accomplish for the small business community.