More groups are coming out in support for the provisions contained in H.R. 892, the S Corporation Modernization Act of 2013, sponsored by S-Corp champions Representatives Reichert (R-WA) and Kind (D-WI).

As you recall, S Corporation Modernization made up a significant part of Option One of the Ways & Means Pass-Through Discussion Draft. Now, a group of 19 business groups, including the National Federation of Independent Business, the National Restaurant Association, the National Roofing Contractors, the Printing Industries of America, and the S Corporation Association sent a letter to Congress expressing their strong support for the modernization of outdated S corporation rules. As the letter states:

Main Street businesses are the growth engine of America’s economy and S corporations are the cornerstone of the business community. There are more than 4.5 million S corporations nationwide. They are in every community and every industry and they employ one out of every four private sector workers.

Yet many of the rules that govern the day-to-day management of S corporations date back more than half a century. These outdated rules hurt the ability of S corporations to grow and create jobs. Many family-owned businesses would like to become S corporations, but the rules prevent them from doing so. Other S corporations are starved for capital, but find the rules limit their ability to attract investors or even utilize the value of their own appreciated property.

Next, the American Bar Association Section on Taxation also submitted comments supporting reform to the S corporation rules. Under the heading of “Options for Tax Reform in Subchapter S” the authors list out a number of reforms to the rules governing S corporations that are consistent with many of the provisions included in H.R. 892, including Sting Tax Relief. According to the authors:

Without a clear rationale for continuing the tax on excess net passive income, we believe that its repeal simplifies Subchapter S, eliminates traps for the unwary, reduces the administrative and recordkeeping requirements for S corporations, and promotes use of Subchapter S and the economic growth of small business corporations, without an appreciable loss of revenue.

Finally, an independent group of former and present chairs of the S Corporation Committee of the American Bar Association Tax Section submitted independent comments to the Pass-Through Working Group in support of reforming the rules governing S corporations. As their letter states:

“We support permanently reducing to five years (from ten years) the built-in gains recognition period – the period following a C corporation’s conversion to S corporation status during which it must pay a corporate-level tax on certain net realized built-in gains. The impact of the built-in gains tax may be quite significant when coupled with the individual-level tax imposed on the built-in gain passed through to the shareholders. As a consequence, S corporations may avoid or delay restructurings or dispositions of assets no longer required or needed in the operation of the business, which can have an adverse effect on the business, and, in turn, can adversely affect the economy at large. We believe that, once a reasonable period has passed to accomplish the purposes behind the built-in gains tax, the tax laws should no longer discourage sales of assets that no longer serve a productive purpose in the operation of a closely held business. We further believe that a five-year period is sufficient to accomplish the purposes of the built-in gains tax, and that a longer period might well be counterproductive.

Regarding other provisions included in the S Corp Modernization Act (as well as Option One of the Pass-Through Discussion Draft), the S corporation experts support many of those as well:

We also support the proposals with respect to charitable contributions, specifically modifying the shareholder basis adjustment rules for S corporations making charitable contributions and allowing a U.S. electing small business trust (an “EST”) to deduct charitable contributions made by the S corporation subject to the contribution limits and carryover rules applicable to individual donors. We also support the proposal permitting non-resident aliens to be S corporation shareholders through an EST. Because an EST is separately taxed on income earned from the S corporation, non-resident aliens will be subject to U.S. tax on their interests in S corporation income.

The S Corporation Association, with the help of its allies on and off the Hill, has been successful in its work to enact several of the S Corporation Modernization provisions over the years. With strong support like that expressed above, we are hopeful we can repeat that success in the future.