Washington loves small businesses, at least in its rhetoric.B April 20-26th was Small Business Week.B The annual event is devoted to recognizing the “determination and ingenuity of America’s workers and entrepreneurs who play a vital role in building a more prosperous future for our country.”

Since 1963, every President has declared National Small Business Week to formally recognize the important role of small businesses in America.

In a discussion with small business owners, President Bush argued that “every day ought to be Small Business Day in America” and that government’s role should be “to create an environment in which the entrepreneurial spirit flourishes.”

In many ways, that is what the Congress accomplished when it created the S Corporation back in 1958.B By combining liability protection with simple tax rules, Congress created a regulatory environment that allowed the S corporation community to thrive. Fifty years after its creation, more than four million S corporations are busy investing and creating jobs.

But not all is well.B Many of those rules are outdated.B And many favorable rules are set to expire, resulting in higher taxes on America’s job creators.B The President addressed the difficulties of S corporations specifically when he pointed out that raising tax rates on individuals would not only affect wealthy taxpayers, but also S corporations and partnerships that pay tax at the individual rates.

More Sound and Fury (and Inaction) on Extenders

Speaking at the end of Tax Week in Washington, President Bush warned of the looming uncertainty of the tax code for small businesses.B Lower individual rates, estate tax, and small business expensing provisions all expire at the end of 2010.

It is increasingly apparent that this uncertainty may last for a while.B The budget passed by both the House and the Senate remains unfinished, evidently doomed by a disagreement on whether to offset the costs of extending expiring tax provisions like the higher Alternative Minimum Tax exemption and the R&E tax credit.

As we have written previously, the question is whether extending expiring tax policies need to be offset is a manner similar to a spending increase.B Critics argue that the net effect of offsetting these provisions is a continuously higher tax burden on families and businesses.

Yesterday, forty-one Republican senators – including Republican Leader Mitch McConnell (R-KY) and Finance Committee Ranking Member Charles Grassley (R-IA) – weighed in on the issue, sending a letter to Majority Leader Harry Reid (D-NV) opposing any offsetting of extensions for these expiring provisions.

While the letter fails to outline what those forty-one senators would do if confronted with a “take-it-or-leave-it” vote that included offsets, on its face, forty-one senators is sufficient to block any tax bill that includes a tax increase from moving through the Senate.

The impasse between the House and the Senate on the budget (and tax extenders) just got more complicated.

You Bet Your LIFO

A group of concerned small business groups, including your intrepid S Corporation Association team, visited the SEC last week to discuss its plans regarding the financial accounting rules it imposes on publicly held companies and the effect any changes may have on private companies.

The SEC is currently reviewing these rules with an eye towards merging them with those used in the European Union. This January, SEC Chairman Chris Cox told the CPAs that he was “doing everything within our power to ensure that financial reporting information from different countries is comparable and reliable.”

The burning question is whose rules will prevail? The Europeans outlawed Last-In, First-Out valuation rules for their inventories several years ago, and if the SEC outlaws LIFO for large publicly held companies, it will be very difficult for FASB (the accounting oversight organization) to maintain LIFO for private companies.

S corporations that use LIFO need to pay attention. Repeal of LIFO by the accounting for book purposes means you cannot use LIFO for tax purposes either. That means higher taxes on your income going forward, as well as paying back taxes on your LIFO reserves. If your company has been on LIFO for a long time, your reserves may be more than your company’s net worth.

While the SEC is focused on large companies and their reporting requirements, it needs to take into account the impact any rule changes it mandates might have on closely-held businesses. LIFO repeal would be the single largest tax increase many of these companies have ever faced.