Congress is back this week, and the pending business before the Senate is the small business tax bill that passed the House last month. Here’s BNA‘s review of the plan:
The Senate is expected to resume consideration July 13 of a small business lending bill with the hope of completing floor debate in only a few days, although a Democratic leadership aide warned that it might depend on Republican cooperation. Currently awaiting consideration is a substitute amendment (S. Amdt. 4402) that carries roughly $12 billion in tax cuts aimed at small businesses, including a highly sought after provision to extend bonus depreciation tax incentives through the end of 2010.
“ We know that the best way to create jobs, innovate, and help our economy recover is through the private sector and we know the engine that runs the private sector is made up of small businesses,” said Reid. The bill, Reid said, will put Americans back to work by providing tax incentives for small businesses, increasing Small Business Administration loan limits, making it easier for small businesses to export goods, and creating a small business lending fund.
The provisions included in the substitute are proven job creators, including expanded section 179 deductions and bonus depreciation, zero capital gains for certain small-business investments, and a shorter built-in gains holding period. With the short three week work period in July, small business advocates on the Hill and off are hoping to see the bill move through the Congress before August.
The biggest threats to quick adoption, ironically, are the other revenue items on the Senate’s “ to-do” list — the extender package and the estate tax fix. CongressDaily is reporting that Senate Majority Reid is considering making another run at the tax extenders package in the next couple weeks:
Senate Majority Leader Reid has told senators he plans to bring up another tax extenders bill in coming weeks that would include billions of dollars in aid to states, despite repeated failures to pass versions of the measure, senators and aides said today. Sen. Amy Klobuchar, D-Minn. said today that Reid has promised to bring up the tax extenders bill once a successor to the late Sen. Robert Byrd, D-W.Va. is sworn in.
A Democratic leadership aide said the bill would include dozens of expiring tax breaks, known as extenders, and assistance to states to avoid layoffs of public employees. Democrats last month failed to line up 60 votes to pass several versions of the measure in the face of objections by Republicans and some Democrats about the bill’s cost.
The question your S-CORP team is asking is, why, with a tax bill on the Senate floor right now, would Senator Reid wait weeks to bring up yet another tax bill? Advocates for the extender package are likely asking themselves the same question. The small business package may be the last tax train leaving the station this session, which means everybody will be looking at it to carry their favorite provision. As a result, its adoption this month is by no means assured.
More on Extending the Bush Tax Cuts
Our friends at International Strategy & Investment (ISI) have an interesting write-up on tax policy for the remainder of this Congress. In general, their conclusions match ours, which is to say that time is short and Congress has yet to take any definitive steps to extending even those tax policies that benefit families making less than $200,000. As ISI notes:
We originally believed that Congress would resolve the tax issue this summer, but now we think it is at least as likely Congress will pass legislation this fall. At this point, neither of the tax committees in the House nor the Senate has passed a bill dealing with the 2001 and 2003 tax cuts (nor have the key people introduced a bill). What’s more, the Democrats in Congress have not been able to find 60 votes in the Senate for any kind of resolution of the estate tax (which temporarily has gone away) or for the ”extender bill” dealing with mostly non-controversial tax credits that expired last December. There is no reason to predict smooth sailing for a bill addressing the Bush tax cuts.
Meanwhile, NFIB’s June Small Business Optimism Survey is a good measure of what happens when Congress doesn’t do its job. Simply put, this survey has never been this low for this long, with a large percentage of this month’s decline due to the sector’s pessimistic policy outlook. As The Atlantic reported:
Economic conditions remain the predominant reason why most firms think it’s not a good time to expand. The next most common reason given was the political climate. Small firms face still face a substantial amount of regulatory and other legal uncertainty.
Faced with record deficits, a massive pending tax hike, and increased regulatory burdens, the small business sector is pulling back. CNBC economic analyst Steve Liesman noted this morning that if the survey were made of chocolate, it would be very dark, dark chocolate.
This inaction and/or impasse is beginning to get the public’s attention. It’s starting to move markets and it’s harming job creation and growth. Congress needs to address this issue in a meaningful way, and soon.
S-CORP Member Weighs in on Tax Picture
Long-time S-CORP member Ron Bullock of Bison Gear & Engineering Corp. penned an op-ed for the Washington Times last week. The piece highlights the benefits of S corporations for American manufacturing and cautioned that the manufacturing sector, where our leadership is in danger of being overtaken by China in the next couple years, would be harmed by the policies outlined in President Obama’s 2011 budget proposal.
As Ron explains, electing S corporation status was integral part of him firm’s success over the past two decades:
By changing to a Subchapter S corporation taxed at the personal rate, I had 7 cents more from every profit dollar to reinvest into the company, which was key to growing the business. This led to growth rates that doubled our sales every five years ongoing and the hiring of an additional 200 employees, who enjoyed 14 percent higher wages than for other private-sector job.
I was not alone in this type of thinking. Today, there are 4 million Subchapter S corporations and 3 million partnerships/LLCs with income passing directly through to their shareholders, who pay taxes at personal income tax rates. These are predominantly smaller, closely held American firms, averaging $12 million to $15 million in annual sales versus C corporations at an average size of $100 million.
Though “ these businesses represent a full 80 percent of all corporations in the United States, accounting for one-third of gross domestic product,” the current landscape is tilted against them:
If Congress does nothing to change the tax provisions of the 2011 budget, those businesses face a 10 percent tax increase in 2011 at the top rate. These millions of American companies are the bedrock of our interconnected economy and, like my company, Bison Gear, are proven job creators, given the right investment incentives.
To highlight the challenge, Ron worked with the Manufacturers Alliance to produce their recent study on impact of President Obama’s tax policies and their impact on S corporations in the manufacturing sector. The study found that under this budget plan, S corporations in the manufacturing sector would see their tax bills go up 14 percent, while the nation’s economic output through 2015 would drop $200 billion on an annual basis and 500,000 fewer American would have jobs.
That’s the bad news. The worse news is that the Obama budget came out before Congress enacted the new, 3.8 percent tax on investment income and chose not to deal with the estate tax. As bad as the Obama budget is for private enterprise, current law is even worse.
Ron’s Bottom Line: America needs a bipartisan effort to ensure continued effective tax incentives to encourage export and manufacturing-sector investment. If not, the United State will lose its 110-year position as the world’s leading manufacturing economy to China – all because of a lack of effective tax and trade policies.