There are increased reports in the media about a potential stimulus package to be considered when Congress returns in September (here and here). If Congress does consider another stimulus package and wants to target help at the small business community, it should act to increase the ability of S corporations to access the capital they already own.

A broad and powerful coalition of 14 trade associations is asking Congress to do just that. A letter sent to congressional leaders today makes the case for reforming the built-in gains (BIG) tax as a part of any effort the help our flagging economy. As the letter states:

“Every year, tens of thousands of small businesses elect S corporation status for the first time, which means that hundreds of thousands of S corporations nationwide likely are sitting on billions of dollars in locked-up capital that could be used to grow the business and hire new employees.”

The built-in gains tax forces S corporations to hold on to appreciated assets for the decade after they convert to S status. Given today’s dynamic business environment and the on-going challenges smaller businesses face in accessing capital, shortening this holding period makes imminent sense and would help free up capital at a time when the economy badly needs it.

In addition to the S Corporation Association, those groups signing on to the letter include the Associated General Contractors, the Association For Manufacturing Technology, the Independent Community Bankers, the National Association of Convenience Stores, the National Association of Manufacturers, the National Beer Wholesalers, the National Federation of Independent Business, the National Funeral Directors Association, the National Small Business Association, the Plumbing-Heating-Cooling Contractors-National Association, the Printing Industries of America, the Tire Industry Association, and the U.S. Chamber of Commerce.

Senate to Consider Extenders Again

We are seeing some movement on the tax extender front as well. Majority Leader Harry Reid (D-NV) announced yesterday the Senate would make another run at taking up a $120 billion extender package, this time however with two significant changes.

First, the package would include both the AMT patch and the more traditional extenders such as the R&E tax credit, but would only seek to offset the revenue cost of the traditional extenders. This is a half-step towards the no-offsets position of the Administration, Senate Republicans, and a handful of Senate Democrats.

Second, the package may include some additional provisions that would attract new votes, such as tax relief for states affected by the flooding in the Midwest.

As before, Senator Reid plans to bypass the Senate Finance Committee, bring the bill directly to the floor, and see if he has the 60 votes necessary to move the bill through the Senate.

With both the House and the Senate choosing not to take up the dozen or so annual spending bills this year, finding a solution to the AMT/extender impasse is one of the few remaining obstacles between Congress and adjourning prior to the November elections. The vote next week on this new extender package will be a good indicator on whether Congress will have to come back for a post-election, lame duck session in November or December.

S Corporations and Income Distribution

We previously have written about the growth of the flow-through business community in the past three decades and the distortion that growth has on personal income distribution tables. Here’s a really good illustration from our friends at the Tax Foundation and PWC that makes the point

Today, more business income in the United States is taxed under the individual income tax code than the corporate code. Congress needs to keep this in mind as it considers major changes to the tax code in the next two years.