With Congress finally home for the holidays, S-CORP has begun to focus on its 2006 agenda. Before we embark on the year ahead, however, we wanted to take a moment to recap for member companies some of our 2005 milestones. The year was extremely active and largely positive for S-CORP and our members. Among the most noteworthy developments we marked were:

  • Blocking Proposed Payroll Tax Hikes on S Corp Shareholders

As members recall, we began the year with a very real threat to S corporations in the form of two proposals - one from the Treasury Department and another from Congress’ Joint Committee on Taxation - that sought to increase payroll taxes on S corporation shareholders by at least 2.9 percentage points. The proposals were particularly attractive to Congress because, by applying health insurance taxes to the full distributive share of most or all S corporation shareholders’ earnings (whether distributed or not), they promised to yield new revenues of some $56 billion. Given the magnitude of this threat, we immediately mobilized a coalition of some of the largest and most influential business groups in Washington, DC, and numerous smaller organizations - called the S Corp Alliance — to educate policy-makers about the dangers of this proposal.
We leveraged the Alliance and its reach, orchestrating a massive Congressional education campaign and focusing on Members who serve on tax-writing Committee and leadership offices. When we began, few Congressional offices and few business associations recognized why such proposals - which were being touted as “anti-abuse” initiatives b- are in fact poorly designed, patently unfair, and anti-small business. Through our campaign, we have made tremendous progress, and have amassed a core group of educated allies (or neutralized would-be opponents) who will be crucial to our ongoing fight.
This education campaign paid off in particular this past fall, when we learned that Senate Finance Committee staff were planning to include the S corporation payroll tax increase, in some form, as part of the year-end budget legislation. By most counts, the tax hike was needed as a revenue-raiser (to pay for other tax cuts in the bill) for the costly measure. When all was said and done, S-CORP and our Alliance had blocked the inclusion of the payroll tax completely from the 2005 budget bill.
Even so, we will have to redouble our efforts on this front in the year ahead. Congress is planning at least one, and perhaps multiple, tax bills in 2006 that will need revenue offsets in the form of tax hikes. The S corporation payroll tax proposal remains attractive by that measure alone, and we can expect to be on the defensive again, fighting proposed tax hikes on your companies next year and perhaps beyond.

  • Continued Vigilance Against Tax Hikes on S Corps at the State Level

Not only are S corporations vulnerable at the federal level, in this time of state budget deficits and fiscal crises, many states continue to look for additional revenues and are undertaking tax reforms that could have a negative impact on S corporation owners and employees.

For example, this year Ohio approved, as part of its fiscal year 2006 budget bill, a tax reform package which raises taxes on Ohio S corporations, and disadvantages S corporations relative to C corporations. As a result of the new measure, which took effect July 1st, S corporation shareholders will see their tax liability increase as much as 5.95% from Ohio operations as the new commercial activity tax is phased in over the next four years. Particularly troubling is that the proposal was supported by the business community, because an active voice for S corporation interests was not engaged in Ohio. Indeed, the effect of this proposal on S corporations was not even considered by businesses or legislators until it was too late!

While we recognize that disadvantageous tax changes may be unintended, as they appear to have been in Ohio, S corporations learned a dangerous lesson from this case: We cannot afford to rise up after the fact! Because S-CORP is not a state-based lobbying organization, we urge our members to stay alert for tax reform proposals in their states and to keep us apprised. S-CORP can engage when we are alerted to a threat, but we are far more powerful when we engage early.

With help from our members and advisors, S-CORP continues to monitor other states to ensure that we are aware of and can respond to this new wave of dangerous proposals to impose higher taxes on S corporations at the state level. Our members are often our best source of information on what is happening in their states. Please do not hesitate to let us know if your state is undertaking corporate tax reform this year that could harm S corporations.

  • Advancing Legislation to Give S Corporations Parity With LLCs

Back on the federal front, we made major progress by advancing legislation that will help create more parity in operating and financing rules between S corporations and LLCs. This is a very important area for many of our member companies, and we will continue this work into the year ahead. S-CORP secured allies in the House and Senate (Reps. Clay Shaw and Jim Ramstad, and Senators Blanche Lincoln, Orrin Hatch and Gordon Smith) for new legislation that will eliminate the most onerous restrictions on S corporations and allow your S corporation to do much, if not all, that an LLC can already do. In the fall, we secured the introduction of H.R. 4421, the S Corporation Reform Act, that contains nine such provisions, ranging from a provision that would substantially lessen built-in gains restrictions to one that would allow foreign shareholders of S corporations. A companion bill is in the works, and we expect it to be introduced in the Senate in early 2006.

Even more exciting, we were able to move two provisions contained in the S Corporation Reform Act separately, as part of the larger year-end budget bill that the Senate worked on just before adjourning. Contained in that $70 billion tax cut bill, due to aggressive advocacy for S-CORP by Senators Lincoln, Hatch and Smith, are a provision that fixes outdated and onerous passive investment restrictions - what we have aptly named the “sting tax”! - and another provision included to allow donations of S corporation stock to charitable organizations at fair market value.

Though the Senate passed its budget bill, work on the budget was not completed in December, and Congress will have to get right back to work finalizing a budget deal when it returns later this month. In order to continue to advance our call for S corporation/LLC parity, as well as to generate benefits for our members of the two provisions we were able to secure in the Senate bill, S-CORP will be working actively to try to convince the House to accept these two provisions in a final House/Senate measure.