This week Ways and Means Member Pat Tiberi (R-OH), one of our more vocal S-Corp champions, introduced legislation (H.R. 4196) to extend 100 percent bonus depreciation through the rest of this year. Bonus depreciation allows businesses of all sizes to immediately expense the cost of property purchased and placed into service. S-Corp Advisor Tom Nichols spoke of the advantages of expensing in his testimony before the Ways and Means hearing last week.

“Probably the most important of these proposals for most closely-held businesses would be the possibility of extending and/or expanding the option of expensing investments in capital equipment under, among other provisions, Sections 179 and 168(k) of the Code. Most closely-held business owners intuitively evaluate their business on the basis of cash flow, rather than financial statement net income. This is especially important for them because they often do not have access to substantial cash reserves or credit, especially in times of stress where cash flow is threatened.

I learned this lesson early in my career. A client, who had just earned his first million dollars, had then spent the money on equipment and other capital expenditures that were sorely needed in his rapidly-growing business. He called me after the end of the year to discuss the “problem” raised by his accountant that he now owed income tax. Trained as I was in tax law and accounting, I calmly explained to him that the reason he owed tax was that these capital expenditures still had value at the end of the year and would be depreciated for tax purposes only as they were consumed in the business over the next several years. Less calmly, he said to me ‘Tom, you don’t understand. I have no cash.’

Over the years, I have come to more fully appreciate the wisdom of his statement. Most closely-held business owners correctly think of money spent on equipment and other capital expenditures as still at-risk in the business, and as not “earned” until it comes back to the business in the form of collections upon sales. From a tax policy perspective, allowing businesses to deduct their equipment and other capital expenditures makes more intuitive sense when you consider the fact that the seller of the equipment or other item will be required to take the entire sales proceeds into income. This is consistent with the perspective of many closely-held business owners, i.e., that it is the seller that experiences the income in this transaction.”

Observers know that this provision was allowed to lapse at the end of 2011 when tax extenders were left out of the payroll tax extension package, despite the support of the Congress, the business community, and the Administration and broadly within the business community. Congressman Tiberi agrees, saying at the time of the bill’s introduction:

“I’ve heard time again from small business owners in Ohio, that extending bonus depreciation is the single, biggest factor in allowing their businesses to grow this year,” said Congressman Tiberi, Chairman of the Ways and Means Subcommittee on Select Revenue Measures. “Allowing job creators to use these tools for capital reinvestment is a common-sense way to encourage job creation.”

With real tax reform still at least a year away, we’re glad to see Mr. Tiberi, and other S-Corporation allies like Rep. Erik Paulsen (R-MN.), continuing to push this important issue.

Hassett and Viard Agree with Us

Great piece by Glenn Hubbard and Kevin Hassett in the Wall Street Journal earlier this week.  Here’s the core of their argument:

First, U.S. tax policy can no longer treat the U.S. as a closed economy. Capital and business activity are increasingly mobile across national boundaries and highly responsive to variation in the net tax paid across locations. Second, the word “business” is not synonymous with “corporation” pass-through (noncorporate) businesses are almost as important in the aggregate as old-fashioned corporations. Third, economic research has stressed that both corporate taxes and investor-leveltaxes on dividends and capital gains contribute to the tax burden on corporate equity. Investors factor in the total capital tax, both individual and firmlevel, when making decisions.

Sound familiar? It should to Washington Wire readers, since we’ve been pointing this out for a year. Tax “reform” that ignores the importance of pass through businesses to employment and income and ignores the effect shareholder taxes have on business investment decisions is mindless and counterproductive. Here’s more from the authors:

Mr. Obama’s plan, as if designed by Rip Van Winkle, is blind to this major shift and is thus a weak tonic for the flagging economic recovery. While the president proposes reducing the corporate tax rate, other changes that are portrayed as “loophole closing” on multinational firms make his plan a net increase in corporate taxes collected.

Mr. Obama, ignoring the second reality, would also raise taxes on noncorporate business, in the interest of requiring the “rich” to pay for the “privilege” of being an American, to paraphrase a recent statement by Treasury Secretary Tim Geithner. Noncorporate business accounts for 36% of business receipts, 44% of business taxes, and 54% of private-sector employment.

A unifying characteristic of the many types of noncorporate businesses is that their owners pay taxes at individual rates. A substantial body of economic research has found that changes in individual marginal tax rates clearly impact noncorporate firms’ investment levels, hiring practices and wages.

And finally:

A 21st-century business tax policy would recognize the roles of globalization, the side-by-side organizations of corporate and noncorporate business, and double taxation of corporate equity returns. Mr. Obama’s tax reform proposal takes a wrong turn in each area and appears motivated by a poor understanding of the impact of capital taxation on business behavior and the welfare of middle-class Americans.