Happy New Year! As we’re preparing for the new Congress and the new challenges it brings, we would like to once again thank you for your continued support of the S Corporation Association and to emphasize the important work we do in defense of the S-Corp community.

Perhaps the best that can be said about 2010 is that it showed consistent improvement. The year started with a horrible economy and policy clouds on the horizon. And though some of those policies were enacted – the new 3.8 percent tax on S corporation income, for example – many were defeated and the year ended in a much better place than it began.

Tax hikes were avoided, the rules governing S corporations were improved, and policymakers are better educated about the critical role that flow-through businesses play in creating jobs and economic growth. And through it all, the S Corporation Association was right in the middle, representing our members and protecting the community from policies that would harm our ability to invest and grow.

Key among these victories was the defeat of the $11 billion payroll tax hike on the incomes of certain S corporation shareholders. This policy passed the House earlier in the year and came within one vote of passing the Senate, too. Check out past Washington Wires for the full story, but the short version is the S Corporation Association rallied the business community and our friends and allies in the Senate and, led by Senators Olympia Snowe of Maine and Mike Enzi of Wyoming, was able to ensure that the provision was not included in the final bill. In the process, we helped save S corporation shareholders from higher taxes and higher compliance costs, and ultimately sent a message to the Hill that S corporations, as one of our members eloquently put it, were not to be treated like the government’s private ATM machine.

In addition, the Association successfully championed legislation temporarily reducing the built-in gains holding period from ten years down to five years. This provision has been a multi-year undertaking for us and it builds upon our previous success in lowering the holding period down to seven years in 2010. As a result, thousands of S corporations are free to sell underutilized assets in 2011 and put that money back to work. In an economy starved for capital, what makes better sense than allowing firms to access their own capital?

And finally, S corporations and all flow-through businesses got an early Christmas present when Congress passed a two-year extension of the lower tax rates, including the top marginal tax rates and the 15 percent rate on capital gains, this December. While we advocated for a permanent extension, two years is still one year longer than we hoped for, and it sets the stage for some serious tax policy work between now and the Federal elections in 2012.

Looking forward, our plate is full: extending the five-year built-in gains holding period into 2012 and beyond, fighting efforts to increase S corporation payroll taxes, advocating the repeal of the new 3.8 percent tax, and educating policymakers on the role of Main Street businesses in job creation will be no small task, but not one we’re about to shy away from.

One new issue emerging from the headlines is the push for corporate tax reform this year (see below). We are all in favor of improving the tax code for corporations– as long as it doesn’t hurt the five million or so employers who are not structured as C corporations. That, of course, is the challenge.

Another goal for this year is to pass the full array of reforms included in our S Corporation Modernization Act. This legislation includes several priority items, including allowing S corporations access foreign capital and expanded benefits for S corps that engage in charitable activities.

To champion this bill and our other priorities, we are fortunate that our House team remains intact, with Representatives Dave Reichert (R-WA) and Ron Kind (D-WI) ready to reintroduce our modernization bill early in the 112th. Meanwhile, in the Senate, we are thrilled that our long-time S corporation supporter Orrin Hatch (R-UT) has taken over as Ranking Member on the Senate Finance Committee, and together with Senator Snowe, we are thankful that they will continue to champion our efforts.

Another S-CORP priority this coming year will be to preserve the IC-DISC and its benefits to small and closely-held exporters. Many of you have not heard of the IC-DISC, but if you export, then you know how critical the DISC is to ensuring competitiveness in those foreign markets. Despite being in law since 1984, the DISC has its critics and detractors, but nevertheless, the S Corporation Association will lead an inspired defense in 2011.

Those are the S Corporation Association goals for the 112th Congress. As always, we look forward to working with you in 2011 to defend the greatest vehicle for private enterprise ever invented — the S corporation.

Corporate Tax Reform Front and Center

We are hearing increasing noise that corporate tax reform may see an early push here in the 112th Congress:

  • Treasury Secretary Tim Geithner met with the CFOs of 20 major U.S. companies on Friday, discussing rates and the possibility of reform;
  • The House Ways and Means Committee will hold its first hearing of the year on tax reform and tax complexity on Thursday, January 20th; and
  • President Obama is being encouraged to highlight tax reform in his January 25th State of the Union Address.

For S Corporations, partnerships, and sole proprietorships, the challenges of tax reform were best highlighted by the 2007 bill H.R. 3970 — termed the “Mother of all Tax Bills” by its sponsor Representative Charlie Rangel (D-NY). That legislation would have broadened the tax base for corporations while reducing the top tax rate they pay from 35 to 30.5 percent.

What many did not realize is that the base broadening would have also affected partnerships and S corporations while their rates were scheduled to go up as well! As a result, the Rangel “Mother” bill would have resulted in a dramatic tax burden increase on smaller, privately-held businesses.

The effects of the recent report from the President’s National Commission on Fiscal Responsibility are less clear. Although the Commission called for cutting both corporate and individual rates – a welcomed proposal - it appears that, overall, the report also proposes to shift the tax burden from public companies to individuals and smaller businesses.

As you can imagine, this negative outcome for S corporations has caught our attention, and we are working with other business groups around town to make certain policymakers understand the implications of any reform proposals out there.

Tax reform is great in theory, but if it is used as a cover to raising the overall tax burden, or to shift the tax burden from one sector to another, then policymakers need to be made aware.