As Congress moves forward on the stimulus bill, the S Corporation Association continues to push Built-In Gains tax relief as a vital part of the package. If the economy is suffering from a lack of capital, BIG relief can help S corporations access capital currently locked-in by punitive tax rates.

As part of that effort, S-Corp allies Senators Lincoln (D-AR), Hatch (R-UT), Cardin (D-MD), and Snowe (R-ME) sent Senate leadership a letter today advocating for including BIG relief in the stimulus package. Their letter states:

Our proposal, as included in the S Corporation Modernization Act of 2008 (S. 3063), would provide timely relief for many businesses that have converted to S corporation tax status by reducing the BIG tax holding period from 10 to 7 years. This modest reduction preserves the original policy intent of the holding period, while allowing many businesses that have long been S corporations to immediately access their own capital without penalty.

In the meantime, S Corporation Association Chairman Richard Rodrick submitted a letter to Ways and Means Committee Chairman Rangel (D-NY) advocating for BIG’s inclusion, arguing that the benefits of BIG relief would be significant and widespread:

According to government statistics, hundreds of thousands of S corporations nationwide may be sitting on “locked-up” capital that they cannot access or redeploy due to the prohibitive tax implications of BIG. This “lock-in effect” is widespread and results in these businesses unable to access billions of dollars in assets that could be used to grow the business and hire new employees.

Forcing companies to hold on to appreciated assets for a decade is harmful to their businesses and harmful to the communities in which they operate. Congress is coming back in mid-November. Your S-Corp team will work between now and then to build the case for Built-In Gains relief and get it enacted.

Ways and Means Looks at Another Stimulus

So where is the stimulus in the process? With the elections less than a week away, a large number of House members took a break from campaigning today to consider the struggling economy and a possible fiscal stimulus package.

The House Ways and Means Committee held a hearing this morning (and afternoon — it was a very long hearing) on the need for a new fiscal stimulus package as well as exactly how large and what provisions should be in that plan.

Comments by the Chairman and others suggest the Committee is looking at a $150 billion package made up of extended unemployment insurance benefits, expanded food stamp payments, increased spending on highways and other infrastructure, and select tax provisions.

In the meantime, House Minority Leader John Boehner preemptively put forward an alternative package more focused on tax relief, including doubling the $1000 child tax credit, suspending the capital gains tax, and reducing the corporate tax rate from 35 to 25 percent.

As to the timing of congressional action, it appears the Ways and Means Committee intends to act on a package when Congress returns in mid-November, with the full House taking up the Committee-passed package shortly thereafter.

What happens next is unclear. Whether the Senate can take up and pass something depends very much on the content as well as whether the bill has a chance of getting signed into law. The more spending and less tax relief the package includes, the less likely the President will sign it.

Press Secretary Dana Perino suggested last week that the White House would not propose its own stimulus package and, while it remained open to suggestions by Congress, they were not engaged in discussions and would take a critical view of any package put forward.

We remain open to listening to all good ideas that people want to put forward. What we’ve seen so far in regards to what’s been called a second stimulus package is a series of proposals that actually would not stimulate the economy that are being talked about as something that would assist people — but we actually don’t think it would help the economy.

Another possibility is for the Democratic leadership to wait until the new year and the new president to move a sizeable package through both chambers. A President Obama would be more friendly to many of the spending provisions under consideration than the current President. He would also benefit from the timing of coming into office and immediately signing something into law that is designed to help the economy.

Either way, the content, the size, and the timing of a second stimulus are all on the table right now. 

More on Marginal Rates and Small Business

S-Corp allies over at the Tax Foundation have done some more work on the impact raising marginal tax rates will have on America’s small business community. Just to rehash our major points outlined in the past:

  • One half of all business income is taxed under the individual rather than corporate tax codes;
  • Two thirds of business income subject to the individual tax code is subject to the top two marginal tax rates; and
  • 40 percent of all small businesses with between 20 and 250 employees pay the top two rates.

The Tax Foundation paper emphasizes the adverse impact raising marginal tax rates will have on small businesses. As scholar Bob Carroll writes:

The top individual tax rates are particularly important because a disproportionate share of the flow-through income reported by small business owners is taxed at those rates. Among the small share of tax returns that are subject to the top two tax rates, most receive small business income.

Perhaps the most important finding of the new Tax Foundation paper is that of the higher revenues collected by raising the top two individual tax rates, more than one half comes from raising rates on small businesses.

In other words, the core provision in proposals by Senator Obama, Ways and Means Chairman Charlie Rangel, and others is to increase the top two tax rates back to their pre-2001 levels — or even higher — despite the fact that half of that tax increase will be shouldered by small business owners.