BNA this morning has additional information about the AMT repeal legislation planned to be introduced tomorrow by Chairman Charlie Rangel. Aside from the offsets we mentioned yesterday – rate increase, LIFO repeal, manufacturing deduction repeal – all of which would raise taxes on S corporations if enacted, another potential offset is the repeal of the R&D tax credit. As BNA reports:

“The enticement will be a lower corporate rate but the pay-fors would mean shutting down loopholes,” Neal said. This includes, Neal said, killing the popular research and development tax credit. A one-year extension of the credit, through 2008, will be included in the larger omnibus tax bill and the smaller bill, dubbed the “child of the mother,” but after that the credit would be eliminated. Most executives, Neal said, reported to the committee they would prefer a lower corporate tax rate to the R&D credit. Lobbyists supporting the credit said they were aware of the proposal but would not comment until it was actually introduced.”

For C corporations, this may be a good deal. Swapping a complicated and more narrow tax credit in for an across-the-board rate cut should benefit many C corporations who use the R&D tax credit. But what about S corporations? According to our technical advisors, the S corporation community is a prominent user of the R&D tax credit.

Once again, it appears the “Mother of All Bills,” or “MOAB” as its being referred to on the Hill, will raise taxes on S corporations in order to cut them for C corporations. Why it makes sense to raise taxes on the family-owned manufacturing firm down the street in order to cut them for Fortune 500 companies is unclear, but that seems to be the path they have chosen. Obviously, we’ll know more when the bill is introduced tomorrow.