Over 20 Years of Legislative Achievements for America’s Most Popular Business Structure
Since its inception in 1996, S-CORP has compiled a long list of legislative victories that have improved the rules governing America’s small business corporations, while blocking poorly-conceived efforts to raise their taxes. Some of S-CORP’s most notable achievements include:
The CARES Act created the Paycheck Protection Program (PPP) and made clear that any loan forgiveness would be tax-free. Despite this clear intent, the Treasury Department insisted on disallowing deductions related to PPP loan forgiveness, a decision that effectively dropped a $120 billion surprise tax hike on the front steps of 5 million struggling businesses. In response, S-Corp and its allies were able to rally over 800 trade organizations, representing millions of businesses, and successfully reverse the Treasury position.
Net Operating Loss/Loss Limitation relief in the CARES Act allowed businesses to carry back losses they were incurring in COVID-infected 2020 and apply them against income they earned in prior years. This effort to level out tax burdens over time is a longstanding anti-recession policy with a history of bipartisan support. At a time when millions of businesses were suffering unprecedented losses, however, some lawmakers labeled the provision a loophole that was “snuck” into the bill and should be repealed. S-Corp helped lead the defense against repeal, speaking out in the press to educate the public, and organizing the business community to support preserving the measure. Ultimately, the relief bill passed at the end of 2020 kept these rules in place.
S-Corp’s SALT Parity advocacy efforts date back to 2018, but many states have delayed taking action due to concerns that the IRS would disallow the reforms. Recognizing this obstacle, S-Corp Board member Tom Nichols drafted legal arguments defending SALT Parity, while S-Corp staff and its members took the case to the public, providing testimony, writing op-eds, and reaching out to their state legislatures. These efforts paid off when, in November 2020, Treasury issued guidance blessing S-Corp’s SALT Parity reforms. S-Corp ended 2020 having assisted successful SALT Parity campaigns in seven states (Connecticut, Wisconsin, Oklahoma, Louisiana, Rhode Island, New Jersey, and Maryland). With the IRS blessing, we are working in more than a dozen additional states that are actively considering SALT Parity in 2021.
The Tax Cuts and Jobs Act created a new excise tax on excess compensation earned by executives at applicable tax-exempt entities (ATEO). However, guidance issued by federal regulators in 2019 introduced an overly-broad interpretation of the statute, which applied the tax to private operating companies who share directors, officers, and staff with an ATEO. It also deemed these individuals “covered employees” regardless of whether they stopped working or volunteering at the ATEO, which would have forced businesses to dissolve the ATEO in order to avoid the tax. S-Corp flagged these concerns for Treasury and the IRS and, together with its allies, worked with regulators to improve the guidance. The final rule issued in 2020 took into account many of these concerns and provided important exceptions that helped S corporations and other private businesses dodge this unintended excise tax.
Throughout the tax reform debate in 2017, the S Corporation Association played a central role in the fight to ensure millions of family businesses could retain their current pass-through structure, and not be forced into the harmful double corporate tax. Since then, S-Corp has helped defend and improve the 199A pass-through deduction, which is critical to achieving these goals. In 2019, S-Corp published a study showing the importance of the deduction, held briefings on the Hill to amplify our message, and produced a video articulating the unique challenges faced by Main Street businesses. At the same time, S-Corp and its allies worked with Treasury to craft rules that allowed most businesses to benefit from the 199A deduction.
The Tax Cuts and Jobs Act imposed a $10,000 cap on state and local deductions, but created an unlevel playing field for employers by only applying the cap to pass-through businesses, and not C corporations. Since 2018, S-Corp and the Parity for Main Street Employers coalition have been at the forefront of efforts to restore the federal SALT deduction to businesses organized as S corporations, partnerships, and LLCs. We led efforts in Michigan and Wisconsin, built support for the Governor’s proposals in Connecticut, and publicized draft legislation and talking points that could serve as a model for states considering similar reforms.
As part of the Tax Cuts and Jobs Act, the S Corporation Association worked with Senator John Thune (R-SD) to include two key improvements to the rules governing S Corporations. Most significantly, for the first time since they were created by Congress in 1958, the bill gives S corporations the ability to attract foreign investment by allowing for non-resident aliens to own S corporations through an Electing Small Business Trust (ESBT). In addition, the new law ensures that shareholder who own an S corporation through an ESBT get a full deduction for the value of S corporation stock given to charity, just as they would if they owned the shares directly.
Since 2011, S-CORP has been organizing the business community to support tax reform parity for Main Street businesses organized as pass throughs – S corporations, partnerships and LLC’s. Begun in reaction to an Obama Administration proposal to cut tax rates for businesses organized as C corporations only, S-CORP funded and promoted research demonstrating how pass through business pay their fair share in taxes and how raising their rates hurts job creation. We followed up this effort with additional research demonstrating that the businesses left behind by corporate-only tax reform employed the majority of workers and contributed the most to the American economy.
In 2016, we formalized these efforts by launching the Parity for Main Street Employers (PMSE) coalition, a group with more than one hundred trade associations supporting the group’s three key principles of tax reform – comprehensive, rate parity, and eliminate the double tax. Since its launch, PMSE has been the voice of the Main Street business community, advocating on the Hill and educating members and the business community alike as to the economic importance of closely-held businesses. We employ most workers, and we contribute the most to the economy.
Over the years, S-CORP supported and saw enacted several reductions in the recognition period for built-in gains. Built-in gains are appreciated assets held by companies when they convert to or are acquired by an S corporation. The old recognition period was 10 years, which was simply too long to block S corporations from accessing their own capital. In 2010 and again in 2011, S-CORP and its allies successfully won reductions in this holding period, first to seven years and then to five.
This multi-year effort culminated in 2015 with the adoption of a permanent 5-year holding period as part of the Protecting Taxpayers from Tax Hikes Act. Thanks to the work of our congressional champions – Representatives Reichert (R-WA), Kind (D-WI), Tiberi (R-OH) and Paulsen (R-MN) and Senators Hatch (R-UT), Roberts (R-KS), Cardin (D-MD) and Thune (R-SD) – and all our association allies, the adoption of this provision as part of a large package of tax extenders rounds out a 15-year effort to provide permanent built-in gains relief and opens the door for other S-CORP priorities to take center stage.
The same package that made permanent our 5-year BIG recognition period also made it easier for S corporations to deduct charitable donations. Prior to the Pension Protection Act (PPA) of 2006, if an S corporation made a contribution of appreciated property to a charity, its shareholders’ deductions were limited to their basis in the S corporation. Championed by S-CORP, the PPA temporarily removed this basis limitation to encourage more charitable giving by S corporations. As part of the Protecting Taxpayers from Tax Hikes Act, S-Corp successfully won a permanent repeal of this limitation, beginning in 2015.
Having failed to raise taxes on S Corporations back in 2010, the Senate tried again in 2012. As before, there were no hearings, no debate, and no opportunity for amendments. And as before, the business community and its friends in the Senate rallied to the cause and defeated this attempt to raise taxes on service sector S corporations in order to pay for unrelated programs.
Not only did we defeat this poorly thought out idea for the second time, but we gained votes in the process. In 2010, we prevailed by a single vote, with the provision gaining 59 of the 60 votes necessary to pass the Senate. This time the margin was seven, with only 53 senators supporting the tax hike.
Under the banner of closing a “loophole”the House of Representatives proposed and adopted a $10 billion payroll tax hike on service sector S corporations as part of a broader tax extenders package, without the benefit of hearings, a markup, or any other public notice or scrutiny.
Given just days to educate policymakers on the critical flaws in the new proposal, the S Corporation Association rallied the business community, analyzed the proposal, and educated policymakers — particularly in the Senate — on how the House-passed provision was less enforceable than current law and would raise taxes on S corporation shareholders fully complying with the law.
Armed with our arguments, Senate allies took to the floor and singled this provision out as the reason for their opposition to the entire bill. Unable to overcome their opposition, Senate leadership dropped the provision from the tax extenders package, providing the S corporation community with an opportunity to revisit this issue in a more controlled and transparent way.
After a decade of debate over the minimum wage, Congress acted in 2007 to raise the minimum wage while targeting substantial tax relief towards small employers to offset their higher labor costs. Part of this tax relief was a long list of S corporation reforms championed by S-CORP and its allies for almost as long as the minimum wage debate lasted.
Key reforms included relief from the dreaded “Sting Tax”, a new interest deduction for small business trusts, and relief for S corporation banks. The S Corporation Association championed the adoption of this package, making the case that an increase in the minimum wage would disproportionately hurt S corporations and organizing a coalition of business groups to support the measure
S-CORP worked with our champions in the United States Senate, including Senators Lincoln (D-AR) and Hatch (R-UT), to include the repeal of the onerous “Sting Tax” in the 2005 tax reconciliation bill.
The Sting Tax imposes a punitive level of tax on converted S corporations with excess passive income. The Tax Relief Act of 2005, as approved by the Senate, included a critical provision to provide relief to S corporations from obsolete and burdensome restriction that place their firms at risk and limit their ability to grow. The Senate provision raised the threshold of the tax, eliminated the “three and out” test, and changed the definition of “passive income” to exclude the sale of stock.
Assisted by a large group of association allies, S-CORP led the charge to move this provision through the Senate, setting the stage for further improvements to the Sting Tax structure and other S-CORP challenges
Some bad ideas never die. The idea to increase payroll taxes on S corporation income has been beaten back repeatedly since the Clinton Treasury Department first proposed it back in 1993. Yet every year, someone in the tax writing community will put this misguided idea forward as the latest plan to reduce the deficit, close the tax gap, and otherwise raise taxes to pay for additional federal spending.
Since its inception, S-CORP has led the fight in Washington to prevent this massive, unfair tax increase on the S corporation community, mostly recently blocking its inclusion in the 2005 tax reconciliation bill.
A giant step forward for the S-CORP community, The American Jobs Creation Act of 2004 contained numerous S-CORP priorities including:
- Increasing the S corporation shareholder limit to 100;
- Members of family treated as 1 shareholder; and
- Allowing S corporation banks to have IRA shareholders.
Moreover, the Job Creation Act included many other S-CORP-friendly provisions, such as extending the $100,000 small business expensing limit for two years, providing American manufacturers with much needed rate relief, and much more.
S-CORP helped ensure the passage of the Jobs and Growth Act of 2003. The bill, signed into law on May 28, 2003, reduced marginal tax rates for S corporations, reduced the tax rates on their investment income, including S corporation capital gains, and increased the small business expensing limit to $100,000.
S-CORP made a concerted effort to assist Administration and Congressional promoters of the Tax Rate RELEIF Act of 2001, enacted in May of that same year, which would reduce S corporation shareholders’ tax rates and phase out estate taxes over the next several years.
In its very first year, S-CORP spearheaded the promotion and passage of the S Corporation Reform Act of 1996, contained in the Small Business Jobs Protection Act of 1996. The bill allowed S corporations to form ESOPs, to be financial institutions, to grow ownership from 35 to 75 shareholders, and to simplify tax preparation, among other things.