We’ll write more about the election in coming months, but wanted to send out a quick summary of how the elections yesterday affect the S corporation community.

We’ve noted several times that President-elect Obama’s tax policies are not friendly to flow-through businesses. The combination of higher tax rates and a broader base has the potential to significantly increase the marginal and effective tax rates paid by S corporations.

One factor that may retard the push towards higher rates is the weakening economy. Now that the credit crisis appears to be under control, investors and businesses are faced with a classic cyclical slowdown that is likely to extend well into next year. Several Obama advisors have noted that raising taxes in such an environment is unwise, suggesting that the expected broad increase in taxes may be put off for a year or two.

One area where we expect quick action will be the estate tax. Several highly placed tax experts have indicated they have little intention of allowing the scheduled repeal to take place in 2010 followed by the Lazarus-like reemergence of the tax in 2011. Action on the estate tax should take place next year, and may include extending the 2009 rules into 2010 or swapping the estate tax with an inheritance tax.

In the Senate, the Democratic majority has 56 seats, with an additional four seats very much up in the air. As of this writing, S-Corp ally Senator Gordon Smith (R-OR) leads his Democratic opponent, Oregon Speaker of the House Jeff Merkley. However, his lead has decreased over the course of the day with a sizable number of precincts in Democratic-leaning Portland remaining to be counted.

In Minnesota, Senator Norm Coleman leads his Democratic challenger Al Franken by 690 votes with 100% of the precincts reporting. This razor-thin margin sets the stage for a mandatory recount that could take up to a month.

In Georgia, Republican Senator Saxby Chambliss has not yet secured over 50% of the vote, which is necessary under law to avoid a runoff on December 2nd. Senator Chambliss is the likely favorite if there is a runoff, given his Democratic opponent likely benefited from high turnout for Obama voters.

Finally, in Alaska, incumbent Senator Ted Stevens beat Anchorage Mayer Mark Begich (D) by just over 3,000 votes despite being convicted of several felonies last week. Senator Stevens now has the difficult choice of resigning his seat or face possible expulsion. It takes 67 votes to expel a Senator. Unlike many other states, Alaska requires a special election, rather than give the governor the power, to fill a vacant Senate seat. Thus, despite rumors, Governor Sarah Palin cannot appoint herself to the Senate, but she could run if she was so inclined. This seat might be vacant for several months.

Depending on how these four states break, Democratic Majority Leader Harry Reid could control anywhere from 56 to 60 votes when Congress returns in January.

In the tax-writing Finance Committee, the three Democrats who were up for re-election won easily — Chairman Max Baucus (MT), John Rockefeller (WV), and John Kerry (MA). Of the three Senate Finance Committee Republicans who were up, Senator Pat Roberts (KS) was re-elected with a solid margin, Senator John Sununu (NH) was defeated, and Senator Smith’s race has not yet been called.

The current ratio on Finance is 11 to 10. Given the new make-up of the Senate, expect a new Committee ratio of 12-10 or 12-9, suggesting that one new Democrat will be appointed while the Republican ranks will hold steady or, if Smith loses, add one. Senators Claire McCaskill (D-MO), Ben Cardin (D-MD), George Voinovich (R-OH) and Mike Enzi (R-WY) lead the list of likely additions.

In the House, Speaker Nancy Pelosi has at least 255 votes in her party, with a handful of seats still undecided. If those seats split evenly, then the Democratic-controlled House will have around 40 votes more than the majority of 218, giving them a very strong majority from which to move legislation. For some issues, they may need those extra votes, as the number of moderate Democrats representing conservative districts has grown dramatically. The centrist Blue Dog coalition has 47 current members, and will likely grow to more than 50 before the new Congress arrives.

On the House Ways and Means Committee, all 22 House Democrats running for re-election won. Today, Committee member Rahm Emanuel (D-IL) accepted an offer to serve as President-elect Obama’s Chief of Staff. There are two other vacancies to fill on the Democratic side due to the retirement of Rep. Michael McNulty (NY) and the death of Rep. Stephanie Tubbs Jones (OH) earlier this year. Meanwhile, two Ways and Means Republicans were not re-elected: Reps. Phil English (PA) and Jon Porter (NV). Additionally, six Republican Members of the Committee are retiring at the end of this Congress.

As for the Committee’s makeup, expect the ratio to move from 24-17 to something closer to two-thirds/one-third. Any combination is possible, but 26-13 sounds about right. Despite losing three Committee seats with the new ratio, Republicans still would need to fill four seats while Democrats would have five seats to fill.

Quick Stimulus Update

More on the possible lame-duck stimulus package courtesy of CongressDaily:

House Speaker Pelosi said this afternoon that the economy will be the major topic of discussion when congressional leaders meet with President-elect Obama, but that “even before that we have an economic stimulus package on the table that I hope Republicans in the Senate will allow to be taken up in a lame-duck session.” Pelosi said “those conversations are still taking place with the White House.” When asked whether two separate stimulus packages may be passed, Pelosi said “it depends on what the White House is willing to do.”