It’s a big week for S corporations! The House is scheduled to vote on several small business tax items, including permanently higher section 179 expensing limits and S corporation modernization legislation too!
The S corporation bill, newly-named the S Corporation Permanent Tax Relief Act of 2014, will bundle together HR 4453 (permanent 5-year BIG period) and HR 4454 (basis adjustment for charitable contributions). We expect the bill to be considered by the Rules Committee later today with debate and a vote on the bill to take place Thursday.
Making the five-year recognition period for built in gains permanent has been an S-CORP priority for years, and while we have been successful at enacting temporary reductions in the past, this week’s action marks the first time either the House or the Senate has considered a permanent fix.
By way of background, here are some of the documents we have developed over the years to support the shorter holding period as well as the charitable donation provision:
- Business Community Letter in support of HR 4453
- Jim Redpath’s Testimony before the Ways & Means Committee
- Tom Nichols Testimony before the Ways & Means Committee
- One page document in support of HR 4453
The case for the shorter five-year recognition period is strong and is certain to help encourage business investment. As Jim Redpath testified early this year:
I find the BIG tax provision causes many S corporations to hold onto unproductive or old assets that should be replaced. Ten years is a long time and certainly not cognizant of current business-planning cycles. Many times I have experienced changes in the business environment or the economy which prompted S corporations to need access to their own capital, that if taken would trigger this prohibitive tax. This results in business owners not making the appropriate decision for the business and its stakeholders, simply because of the BIG tax.
We are recirculating the business community letter to allow additional groups to sign on is support of BIG tax relief. We’ll post the letter tomorrow and we will be working with our House allies to ensure the vote on Thursday is as broad as possible.
Senate to Vote on Buffett Tax
While the House is working to reduce the tax burden for S corporations, the Senate is seeking to raise them. This week, the Senate will consider legislation to provide student loan relief paid for with our old friend, the so-called “Buffett Tax”.
We’ve criticized both the theory and execution of the Buffett tax in the past (here, here and here), and all those arguments still apply:
- The federal tax code is already steeply progressive;
- The tax code already has three distinct income taxes – the regular income tax, the Alternative Minimum Tax, and the Affordable Care Act investment tax. The Buffett Tax would be a fourth!
- Much of the Buffett tax will fall on the owners of pass-through businesses; and
- For sales of S corporations, the Buffett tax would eliminate the benefit of the lower tax on capital gains.
The Tax Foundation agrees with our concerns, and posted a nice analysis of the provision when it was introduced last month. Here’s what they had to say about the structure of the tax:
Besides the 30 percent effective tax rate in the Buffett rule, there is a phase-in of the tax over $1,000,000 of AGI. This phase-in creates a spike in taxpayer’s marginal tax rate of over 50 percent. Our current tax code is no stranger to hidden marginal tax rates caused by phase-ins and phase-outs. However, these are not positive aspects of the code. They obscure peoples’ true tax burden, add unnecessary complexity, and create marginal tax rate cliffs that incentivize people to change behavior to avoid them.
The Buffett Tax vote is tomorrow. We doubt it will receive the 60 votes necessary for this poorly thought out policy to move forward, but it will be interesting to see who votes to raise taxes on Main Street businesses in order to increase federal spending.