The Ways and Means Committee began marking-up its long-discussed economic package earlier this morning. The package includes a number of provisions important to the pass-through community, including restoring R&E deductions and offering relief from the tighter interest expense caps. Here’s a quick review of the package and what we expect.
The Ways and Means Committee is currently marking up a three tax bills under the banner of the “American Families and Jobs Act.” The goal is for House Republicans to report them out of committee, combine them with work products from other committees, and then bring that broader package to the full House next week. The three tax bills were made public over the weekend and include:
- H.R. 3936 – Tax Cuts for Working Families Act
- H.R. 3937 – Small Business Jobs Act
- H.R. 3938 – Build it in America Act
The package also would repeal a number of recently enacted tax credits for clean vehicles and clean electricity production. An analysis conducted by the Joint Committee on Taxation estimates this combination of tax cuts and revenue raisers nets out to a roughly $21 billion loss over the 10-year scoring window, so it is not completely “paid for” but it’s close.
For S corporations, key provisions would:
- Increase the Standard Deduction by $4,000;
- Restore the higher, $20,000 reporting threshold for electronic payments;
- Increase the 1099 subcontractor reporting threshold from $600 to $5,000;
- Expand the Section 1202 benefit to include S corporations;
- Increase the Section 179 expensing cap to $2.5 million; and
- Restore the broader EBITDA base for the Section 163(j) interest expense deduction cap.
S-Corp Advisor Lynn Mucenski-Keck was able to testify on the importance of several of these provisions before the House Small Business Committee. As she noted, R&E expensing may be viewed as something that only affects larger businesses, but the reality is that many smaller companies are heavily invested in research as well and need this deduction restored.
Meanwhile, rising interest rates mean the tighter interest deductibility caps are going to hit businesses hard. As she testified, the combination of tighter caps and higher rates means a business that maintains a consistent debt load can still lose valuable deductions. Add the possibility of a recession and lower taxable income into the mix, and many, many companies – even those with low debt loads – could be subject to the cap this year and next.
Finally, the Section 1202 expansion was introduced as a stand-alone bill by Rep. David Kustoff (R-TN) earlier this year. Section 1202 provides tax benefits to small business start-ups that eventually are sold. Those benefits have always been limited to stock issued by C corporations only. This provision would expand the benefit to S corporation stock as well.
What About 199A?
As S-Corp readers know, making 199A permanent is our top priority – we are working to build support for the Daines bill in the Senate and are eagerly anticipating the introduction of its House companion in the coming weeks. The 199A deduction doesn’t sunset until 2026, however, so making it permanent wasn’t included in this package, which is focused on shorter-term challenges.
But while it may not belong in this package, it does belong in the conversation. The tax relief provisions being marked up today are all scheduled to sunset at the end of 2025, adding to the long list of provisions with that expiration date. The net effect would be to create an even larger “fiscal cliff” of expiring tax provisions, creating both a challenge for the pass-through community and, frankly, an opportunity.
The obvious challenge is that pass-through taxes are scheduled to rise dramatically starting 2026. S-Corp is actively working to prevent that. The opportunity, on the other hand, is the cliff gives Congress yet another chance to reset the conversation and consider the best means of taxing business income overall – pass-through businesses and C corporations alike. As you can imagine, we have lots of ideas on that front and will be putting them forward in the coming months.
So does the House bill have legs? As noted, the full House plans to take up the package next week, but after that the path is less clear. The Democrat-led Senate is unlikely to consider anything similar anytime soon, so once the House is done, we could be looking at a delay until this fall or winter before tax policy rises to the surface again.
On the other hand, successful action by the House would significantly increase the odds that we see tax policies enacted by Congress this year. Just as the House-passed debt limit bill resulted in the eventual adoption of a compromise debt bill, a tax package passed by the House might have a similar effect. It would give the Senate a tax vehicle to play with (tax bills need to originate in the House), it would allow the press and business community to focus their attention on one legislative body rather than two, and it should stimulate more aggressive conversations between House and Senate tax writers.
So lots of positive here. The House is focused on issues that directly concern employers both large and small, which should be applauded, and successful action in the House could help catalyze a tax deal between the House and Senate before the end of the year. More to come.