Good news for investment and S corporations! The House yesterday adopted a five-year holding period for built-in gains as part of a larger small business tax bill; the temporary one-year provision would take effect in 2011. The bill now heads to the President and should be signed into law on Monday. As BNA reported:

The House voted 237-187 Sept. 23 to pass a small business bill (H.R. 5297) that includes $12 billion in tax cuts. The legislation includes a one-year extension of the 50 percent bonus depreciation provision created in the American Recovery and Reinvestment Act (Pub. L. No. 111-5), an increase in tax code Section 179 expensing limitations up to $500,000, and an increase in the phase-out threshold amount to $2 million for 2010 and 2011.

Reducing the holding period on built-in gains has been an S-CORP priority for years. This Congress, Senators Blanche Lincoln (D-AR), Orrin Hatch (R-UT), Chuck Grassley (R-IA) and Olympia Snowe (R-ME) led the charge by introducing this provision in their respective bills and working to see it enacted on the Senate side, while Ways and Means members Ron Kind (D-WI) and Dave Reichert (R-WA) led the effort in the House.

As a result of their work, tens of thousands of small corporations will have the freedom to access their own capital starting next year. In an economy short of capital, what could be better?

Rate Bill, Estate Bill, Stalled in Senate

The week began with the Senate awaiting legislation from Finance Chairman Max Baucus (D-MT) to extend many of the expiring tax provisions. According to press reports, the bill would:

  • Extend the lower rates and tax credits for families making less than $250,000;
  • Make permanent a 20 percent rate for both capital gains and dividends; and
  • Clarify the rules for the estate tax for 2010 and beyond.

But its Friday now, and Majority Leader Reid made clear yesterday that the Senate would not take up the Baucus bill or related legislation before it adjourns for the elections, which will most likely occur at the end of next week.

This decision was foretold in recent days by a growing number of Senators saying that there just isn’t time to take up the issue. DowJones quoted one Senator yesterday saying, “I can see the value in that (taking up the bill), but because of the short time frame, it may be difficult.”

Your S-CORP team would point out that time isn’t short. Congress sets its own schedule. It’s not like farming, where if you delay you might miss the growing season. If they wanted to get this done, they would stay. The Chairman’s own comments are more to the point: as he told BNA yesterday, “We’re ready, but people want to leave town.” We’re with the Chairman.

So while everybody focuses on the top few tax rates, there is a growing chance that Congress may fail to act at all, allowing all the tax hikes to take place. Economist Mark Zandi examined the effects of inaction in his recent research. According to Zandi:

Based on a simulation of the Moody’s Analytics macroeconomic model, an across-the-board tax increase would precipitate a double-dip recession during the first half of 2011; the hit to after-tax income would undermine fragile consumer confidence and spending. Employment would decline throughout much of 2011, bottoming out some 8.6 million jobs below its late-2007 peak. Unemployment would remain near double digits into late 2012. Under this scenario, the economy does not return to full employment until 2015, eight years after the Great Recession began.

If the Senate needs to stay in an extra week to avoid a massive tax hike on families and businesses, it’s in their power to stay, and they should.