Built-In Gains Relief in Fiscal Cliff Deal
Happy New Year everyone!
As everyone knows, the President signed into law H.R. 8, the so-called mini deal addressing the fiscal cliff yesterday.
The agreement was the result of negotiations between Vice President Biden and Senate Republican Leader McConnell and effectively reduces tax revenues over the next ten years by just short of $4 trillion dollars.
It passed the Senate easily early New Year’s morning by an 89-8 vote and then, after a little drama with the House Republican conference, passed that body on a much closer 257-167 vote that evening.
For S corporations, the package is a mixed blessing. Under the agreement, top rates are going up for shareholders making more than $450,000 (joint filers) starting January 1st, but those rates were going up anyway had Congress and the Administration failed to come together and now they are offset with permanent AMT relief, permanent estate tax rules, 179 expensing, and lower rates on dividends.
Bottom Line: Compared to where tax policy would have been without an agreement, the S corporation world is in a much better place starting out 2013 with H.R. 8 signed into law.
Specific to the work we’ve been doing, the bill includes an extension of the five-year built-in gains (BIG) holding period for tax years beginning in 2012 and 2013! The specific language is in Section 326 (page 54) of the bill. The bill also extends the basis adjustment to stock of S corporations making charitable contributions of property.
Many, many thanks to our congressional allies, including Sen. Ben Cardin (D-MD), Sen. Olympia Snowe (R-ME), Rep. Dave Reichert (R-WA), and Rep. Ron Kind (D-WI) for helping to ensure the BIG provision was included in the extender package.
Other highlights in H.R. 8 include:
- Permanent extension of the marginal rates for individuals making under $400,000 and couples under $450,000;
- Permanent extension of the PEP and Pease personal exemption and itemized deduction phase-outs for individuals making under $250,000 and couples under $300,000;
- Permanent extension of current capital gains and dividends rates for individuals making under $400,000 and couples under $450,000. (For those over those thresholds, the rate for both cap gains and dividends is 20 percent (plus the new 3.8 percent tax from the healthcare bill));
- Permanent estate tax relief providing for a $5 million exemption ($10 million for couples) and a new top tax rate of 40 percent;
- Permanent AMT relief;
- Tax extenders, including built-in gains relief (generally for 2012 and2013);
- One-year extension of bonus depreciation;
- Five-year extension stimulus bill tax credits;
- One-year extension of unemployment benefits;
- One-year extension of the Medicare reimbursement rate for doctors (“Doc Fix”/SGR) offset with other healthcare related provisions;
- Two-month delay in the sequester offset in part with the new tax revenue generated from the package and inpart with spending cuts; and
- Extension of farm policies through September.
Outlook for 2013
With the fiscal cliff out of the way, attention will now shift to the upcoming debt limit fight and the possible contents of a deficit reduction package to accompany legislation to raise the debt limit.
Treasury announced in late December that federal debt had reached the current limit and that, by using extraordinary measures, it could keep overall debt under the caps only until sometime in late February or early March. Which means that Congress, having just finished the contentious fiscal cliff fight, will have to turn almost immediately to a sure-to-be-just-as-contentious debt limit fight.
Other reasons tax policy will remain front and center in coming months:
- Ways and Means Chairman Dave Camp has promised to consider broad-based tax reform early 2013 – “We can and will do comprehensive tax reform this year, in 2013”;
- The two-month delay in across-the-board spending cuts (sequester) expires on March 1st; and
- The Continuing Resolution funding the federal government sunsets March 27th.
All these events suggest that, whether they want to or not, Congress will be knee deep in tax policy from now until all of this gets resolved. Having just seen S corporation tax rates rise from 35 percent to nearly 45 percent, the S corporation community needs to be as active as ever in making the case why further tax hikes on pass-through employers is bad for jobs and economic growth.
That’s the message we’ll be taking to the Hill… starting now.