Extenders are back in play in the House and Senate. Finance Chairman Ron Wyden (D-OR) plans to release his package Monday, with amendments due on Tuesday and markup to begin on Wednesday.
Details of the Wyden plan are not available, but early indications are that his package will include most of the tax provisions that expired at the end of 2013 and that they will be extended for both 2014 and 2015. It doesn’t appear that the Chairman plans to offset the revenue loss of the package unless there are more modifications to the language than a simple date change.
Meanwhile, on the House side, Ways and Means Chairman Dave Camp (R-MI) sent a letter to his colleagues outlining his plan for addressing extenders. As the letter states:
As such, beginning in April, the Committee will continue its work by going policy by policy to determine which extenders should be made permanent. That process will include both hearings and mark‐ups. Specific dates and topics will be forthcoming.
Reading between the lines, it appears the Ways and Means Committee will hold hearings on extenders beginning in April to examine the provisions more closely, followed by the introduction of an extender package and consideration by the Committee. After the examination, we should expect a package that focuses on permanent extensions – keeping in line with the principle of tax reform.
For S corporations, there are a couple items at play here. First is the extension of built-in gains (BIG) relief, which expired at the end of 2013. With the expiration of the 5 year BIG holding period, thousands of S corporations that have converted from C corporation status now have to hold on to their appreciated assets for an entire decade or face the BIG corporate-level tax. This causes a prohibitive tax burden where the applicable federal, state and local shareholder taxes exceed 60 percent in many states. This punitive tax effectively forces these businesses to “lock-up” their assets and capital, inhibiting future investments in the business and employees, as well as potential job creation.
Our Senate champions, including Sen. Ben Cardin (D-MD) and Sen. Pat Roberts (R-KS) who recently introduced legislation together to permanently extend the 5 year recognition period (S. 1855), are steadfast in their support and have called for BIG relief to be part of any extender package that moves forward. As the snap-back to 10 years is an excessive amount of time to reasonably ask a company to hold a particular asset, Congress has agreed to extend the 5 year period several times and we have had strong bipartisan support for this important relief for many years.
The second item is the extension of the basis adjustment to stock of S corporations making charitable contributions of property, a provision that also expired at the end of last year. With flow-through entities, charitable deductions flow through to the individual tax returns of partners or shareholders. Prior to the Pension Protection Act (PPA) of 2006, however, if an S corporation made a contribution of appreciated property to charity, its shareholders’ deductions were limited to their basis in the S corporation. To encourage more charitable giving by S corporations, the PPA temporarily removed this limitation, allowing shareholders to take into account their pro rata share of charitable deductions for contributions of appreciated property. The provision has been extended with bipartisan congressional support ever since. It brings consistent treatment of charitable contributions between flow-through businesses, and would allow for America’s S corporations to be more active and supportive of needed charitable activities.
Permanent extensions of these provisions have, of course, been included as part of the S Corporation Modernization package for several congresses – most recently introduced by Reps. Dave Reichert (R-WA) and Rep. Ron Kind (D-WI), as H.R. 892 in the House last year.
Both permanent extensions were included in Chairman Camp’s tax reform discussion draft, along with other S Corporation Association priorities. The draft would also increase access to capital by extending ownership of an S corporation to non-resident aliens through an electing small business trust (ESBT), ensuring payment of tax at the trust level (at the highest individual tax rate), easing punitive restrictions that apply to converted S corporations regarding passive income limitations, and punishing the unwary with S corp status termination. Lastly, the draft would encourage philanthropy from S corporations by conforming the rules applicable to ESBTs and individual shareholders of an S corporation.
We plan to keep a close eye on this extender process – particularly our S Corp priorities – and look forward to seeing Chairman Wyden’s package on Monday.