It’s been an active week for supporters of an extension of built-in gains (BIG) tax relief.
First, Sens. Olympia Snowe (R-ME) and Mary Landrieu (D-LA) worked to find another way to highlight an extension of built-in gains relief, culminating in a package of small business tax and other provisions that got 57 votes on the floor today.
Together with Sens. Ben Cardin (D-MD) and Pat Roberts (R-KS), our Senate allies have continued to press the need to extend this important access to capital provision for small and closely-held businesses, and we appreciate their efforts.
Second, Reps. Jim Gerlach (R-PA) and Ron Kind (D-WI) introduced a bill last night to permanently extend several important small business provisions that have expired, including BIG relief. In addition to permanently extending the five year holding period for built-in gains assets, the bill, H.R. 6102, would also extend on a permanent basis the:
- 100 percent exclusion of gain on certain small business stock.
- 5-year carryback of general business credits of eligible small businesses
- Alternative minimum tax rules for general business credits of eligible small businesses
- Increased expensing limitations and treatment of certain real property as section 179 property made permanent
- Special rule for long-term contract accounting made permanent
- Increase of amount allowed as a deduction for start-up expenditures made permanent
- Allowance of deduction for health insurance in computing self-employment taxes made permanent
Third, we’ve added some cosponsors to the S Corporation Modernization Act, H.R. 1478, introduced by Reps. Dave Reichert (R-WA) and Ron Kind (D-WI) which also includes a permanent extension of the five year holding period. Rep. Richie Neal (D-MA) and Pete Sessions (R-TX) have been added to the cosponsor list, and we are thankful!
Three cheers for our BIG supporters in the House and Senate! Now, let’s keep our fingers crossed for some action on important provisions like BIG in the near future!
S Corp in the News
Just 173 days until we reach the Fiscal Cliff, and the volume of the debate has picked up sharply.
The S Corporation Association was featured on NPR’s “Marketplace“ Wednesday. The story, authored by Mitchell Hartman, focused on the national debate over tax rates and their impact on jobs, and provided S-Corp with a good opportunity to highlight our new Ernst & Young numbers on how many S corporations are harmed by the higher rates.
Mitchell Hartman: I started with a group called the S Corporation Association. They represent business owners who pass their business’s income through a corporation, partnership or sole proprietorship. Then they file a personal income tax return. These are the people whose taxes might go up.
There are 25 million of them, says executive director Brian Reardon.
Brian Reardon: Of those 25 million, 2.1 make more than the $250,000 threshold.
Mitchell Hartman: The other 23 million? They don’t make enough to get dinged under the president’s proposal. Let’s ignore them.
But not all the business owners who make $250,000 actually pay the top rate. A lot of them pay the alternative minimum tax. So the real number whose taxes might go up? Just under a million.
Still, they’re important, says Reardon. Their businesses make most of the profits and employ half of all American workers. But would they slow down their hiring if they had to pay more in taxes?
Our take-away from this story is how much education we still need to do on the impact higher taxes, and particularly higher tax rates, have on the decisions employers make. And, by the way, those 1.2 million AMT-paying business owners aren’t out of the woods thanks to the new healthcare law and the impending 3.8 percent investment income tax hike.
There remains a consistent theme in certain circles of, “Oh, don’t worry. It’s only a small percentage of taxpayers that could get hit.” Well, that small percentage of taxpayers is generating more than 50 percent of pass-through business income. Does America need that much of its economy to be hit with higher taxes? You can guess what our answer is.
We would rather incent them to keep investing and creating more jobs – not less.
New Tax Foundation Numbers
A new report by the Tax Foundation gets it right. Here are the operative paragraphs:
It is often assumed that a tax increase on high-income individuals will have little impact on business activity because only 2 or 3 percent of taxpayers with business income are taxed at the highest rates. While this statistic is true, the more economically meaningful statistic is how much overall business income will be taxed at the highest rates. For example, Treasury data for 2007 indicates that 50 percent of all pass-through income is earned by taxpayers subject to the top two tax brackets of 33 percent and 35 percent.
As Table 1 indicates, the vast majority (66 percent) of pass-through business income was reported by taxpayers earning more than $250,000. Millionaire tax returns earned 36 percent of this private business income while taxpayers earning between $250,000 and $1 million earned 30 percent. Meanwhile, taxpayers with incomes below $100,000 earned 13 percent of all private business income.
These numbers are consistent with the estimates Ernst & Young produced for us earlier this week and make clear the threat raising top rates poses for pass-through business owners in general, and S corporation shareholders in particular - not to mention the broader economy.