Congress Reaches Deal on Stimulus
Sometimes, Congress meets a deadline. Six weeks ago, congressional leadership and the new Obama Administration had set out the Presidents’ Day recess as the deadline for getting the economic stimulus package to the President’s desk.
With the House’s vote on final passage today and the Senate expected to consider the bill as early as this evening, all indications are they’ll make it. Here’s a quick summary of the $789 billion package as outlined by the conferees:
- $301 billion in family and business tax relief (down from $350 billion in the Senate bill).
- $70 billion in renewable and energy efficiency provisions.
- $140 billion in higher payments to states through Medicaid and a new State Fiscal Stabilization Fund.
- Extended unemployment and increased food stamp benefits.
- $45 billion in highway and transit funding.
- $35 billion in Health IT, basic scientific research, and comparative effectiveness.
Here’s a full summary of the Ways and Means and Finance Committee portions of the package and the final JCT table.
Built-In Gains Relief in Final Stimulus Package!
A provision to provide built-in gains relief to hundreds of thousands of S corporations is part of the final stimulus package moving through Congress. The President is expected to sign the package into law early next week.
Once he does, firms that converted to S corporation or existing S corporations that acquired other businesses in the years 2000, 2001, 2002 and — beginning next year — 2003 will be able to dispose of built-in gains assets without paying the punitive level of tax.
This provision, which originated in the Senate and was championed by Senators Blanche Lincoln (D-AR), Orrin Hatch (R-UT), Olympia Snowe (R-ME), Mike Enzi (R-WY) and Ben Cardin (D-MD), survived the conference process between the House and Senate due in large part to our S-CORP Champions in Congress including key House advocates Representatives Ron Kind (D-WI), Steve Kagen (D-WI), Nydia Velazquez (D-NY), Allyson Schwartz (D-PA), and Danny Davis (D-IL). Our House allies sent a letter to House Leadership this week urging for the inclusion of the Senate’s BIG relief provision.
S-CORP Chairman Dick Roderick noted, “Built-in gains relief has been a priority of the S Corporation Association for years. Congress’ adoption of this provision is the result of lots of hard work educating policymakers on the importance of allowing closely-held businesses access to their own capital.”
Roderick also had words of praise for Senator Lincoln and Representative Kind. “Senator Lincoln and Representative Kind have worked tirelessly to improve S corporation rules. They really understand the important role closely-held businesses play in economic growth and job creation.”
Stimulus Update
The Washington Post reports that the Senate Stimulus bill is short of the 60 votes needed for it to move through the chamber. As the Post noted:
Senate Democratic leaders conceded yesterday that they do not have the votes to pass the stimulus bill as currently written and said that to gain bipartisan support, they will seek to cut provisions that would not provide an immediate boost to the economy.
The vote in the House did not help, with all Republicans and 11 Democrats opposing the House version of the package. The unified Republican opposition in the House will likely empower Republicans in the Senate to stand together as well.
But the opposition rests not just with Republicans. Some Democratic members have expressed opposition as well. $800 billion in new spending and tax relief is a huge package, especially with the deficit already projected to exceed $1.1 trillion in 2009.
So what’s likely to happen? Look for moderates in both parties to put together a list of spending items that need to be cut in order for them to support the remaining package. As the Post reports:
Nelson said he and Collins have agreed to “tens of billions” in cuts, although he said he is skeptical that the effort will reach Collins’s target of $200 billion in reductions. The pair has counted up to 20 allies in their effort, with more Democrats than Republicans at this point.
Whether Senators Susan Collins (R-ME) and Ben Nelson (D-NE) find the right balance, or another group of Senators come to the table, we expect a compromise to be worked out over the next couple days. The Senate may be in this weekend, but it’s unlikely to leave without passing some form of the package first.
S Corps Lose an Ally
The S corporation community lost one of its greatest advocates the other day with the passing of Don Alexander. As our friend Martin Vaughn with Dow Jones reports:
Donald C. Alexander, who served as Internal Revenue Service Commissioner from 1973 to 1977, died Monday night at 87. Besides leading the IRS, Alexander held a wide range of other public service positions, including serving on the Commission on Federal Paperwork and as commissioner of the Martin Luther King Jr. Federal Holiday Commission. He was director of the U.S. Chamber of Commerce for five years in the 1980s. Most recently, Alexander was a partner at the law firm of Akin Gump Strauss Hauer and Feld LLP, from 1993 until his death. He was awarded the Silver Star and the Bronze Star for service in the 14th Armored Division during World War II.
Don was always a southern gentleman, and he was always focused on improving the rules for S corporations. He testified on behalf of the community before Congress many times. Here is just one sample of his views.
BIG Reform Included in Finance Committee Mark!
Big news for S corporations! S-CORP champions Senator Blanche Lincoln (D-AR) and Orrin Hatch (R-UT) have succeeded in securing BIG reform in Senator Baucus’ (D-MT) version of a stimulus package! As S-CORP readers know, BIG reform has been a top priority for S-CORP. BIG reform could potentially free up billions in locked-up capital that could be used to buy new equipment, build more plants and hire new workers – exactly what the economy needs during this economic crisis. As the Joint Committee on Taxation describes the provision:
“The proposal would reduce temporarily the S corporation built-in gains holding period from the current 10 year period to a seven-year period for taxable years that begin in 2009 and 2010.”
The Senate Finance Committee is debating the legislation today with the full Senate expected to take up the bill early next week, after which the House and Senate stimulus packages will have to be reconciled. Securing this provision in the Finance Committee mark is a great beginning, and your S-CORP team will be working with our House champions to ensure this provision survives into the final package passed by Congress.
More on Stimulus
One hurdle facing the stimulus package moving through the House is the perception that the fiscal help doesn’t occur rapidly enough. According to the Congressional Budget Office analysis, much of the bill’s $825 billion price tag would not actually get spent or returned to taxpayers until after 2011.
That’s just one more reason to include the BIG relief. As included in the Finance Committee mark, the provision would last for two years, so thousands of companies who converted to S corporation status or acquired another company would be eligible to divest themselves of underutilized assets in the next two years and put those resources to better use immediately. If the economy is suffering from a lack of capital, BIG is a small but important solution.
How many companies would benefit? Analysis from our friends at the Statistic of Income suggests that more than 350,000 firms could be freed to divest themselves of locked in assets. Also potentially benefiting would be those existing S corporations that acquired another company during those years.
| Year | Total S Corps | New S Corps | Newly Formed | Conversions |
| 2003 | 3.3 | 343000 | 253000 | 90000 |
| 2002 | 3.2 | 334000 | 243000 | 91000 |
| 2001 | 3 | 299000 | 206000 | 93000 |
| 2000 | 2.9 | 293000 | 211000 | 82000 |
Even taking into account business failures and other subtractions, the net result is that hundreds of thousands of small and closely-held businesses will potentially benefit from BIG relief in the next two years.
Stimulus Introduced in House
The House Leadership released an outline of its proposed stimulus package yesterday with few surprises. The total package is $825 billion with $550 billion in new spending and $275 billion in tax relief. On the spending side, the package includes $550 billion in spending, and $275 billion for tax cuts. Some of the tax highlights include:
- Making Work Pay Credit - offsets payroll taxes on the first $8,100 of earnings
- Expanded Earned Income Tax Credit
- Bonus depreciation
- A five year carry-back of net operating losses (excluding companies receiving TARP benefits, Fannie Mae, Freddie Mac)
- Extension of increased small business expensing
- Tax-exempt bond provisions to help state and local governments
- Energy tax incentives
As our conversations with folks in both the House and the Senate indicated, the House deferred mostly to the incoming President’s priorities for the stimulus package, while the Senate is likely to take a more critical view of both the size and the content of the package. Fiscal conservatives in the House are already bracing themselves to fight additional tax and spending items added in the Senate.
For example, Obama’s “Make Work Pay” tax credit is still included in the House package although it continues to be the focus of Congressional scrutiny, as economists and policymakers on both sides of the aisle have questioned its efficacy. It’s possible the House included the provision with the expectation that the Senate would replace it with other priorities.
As far as process goes, the Ways and Means Committee is expected to mark-up the legislation next week and have it on the House floor for a vote the week of the 26th. The Senate is expected to mark-up its version of the legislation late next week or more likely, the following week. Their goal is to get the bill finished and signed into law prior to the February recess.
Treasury Helps S Corp Banks as Congress “Approves” New TARP Money
Those watching President Bush’s press conference Monday might have caught this give-and-take:
Q. I’m wondering if you plan to ask Congress for the remaining $350 billion in bailout money. And in terms of the timing, if you do that before you leave office, sir, are you motivated in part to make life a little easier for President-Elect Obama?
THE PRESIDENT: I have talked to the President-elect about this subject. And I told him that if he felt that he needed the $350 billion, I would be willing to ask for it. In other words, if he felt it needed to happen on my watch.
The best course of action, of course, is to convince enough members of the Senate to vote positively for the — for the request. And, you know, that’s all I can share with you, because that’s all I know.
Q. So you haven’t made the request yet?
THE PRESIDENT: Well, he hasn’t asked me to make the request yet. And I don’t intend to make the request unless he specifically asks me to make it.
About thirty minutes later, the Obama team asked the President to make the request and he passed it on to Congress. Three days later, the Senate ratified the request by voting down a motion of disapproval 42-52. The House is expected to do the same next week, after which Treasury will have another $350 billion to invest (or waste if that’s your point of view) in shoring up the financial sector.
For S corporations, that’s important since Treasury also announced this week that it had worked out a plan to allow S corporation banks to access the TARP funds. As we reported earlier, the original construction of the Capital Purchase Program under TARP was for Treasury to inject capital into financial institutions in exchange for shares of preferred stock. Because S corporations are prohibited from issuing preferred shares, they couldn’t participate.
Our friends at the Independent Community Bankers of America made Treasury aware of this oversight and this week, just in time to take advantage of the extra $350 billion, Treasury issued a new term sheet that applies to S corporation banks.
S corporation banks wishing to take advantage of the Capital Purchase Program have until February 13th to apply.
Stimulus Package Discussed
Following a closed-door planning session today of members of the Senate Finance Committee, we expect the Committee will mark-up the tax portions of a stimulus package as early as January 22nd. As we indicated previously, committee members are committed to exerting their jurisdiction over the tax portions of the package. Moreover, there appears to be a growing debate over certain provisions in the Obama plans. As Dow Jones reports this afternoon:
“When asked about specific tax cut proposals made by Obama, Kerry said, “I think there are cuts that are not going to stand the test of whether they will create jobs. Coming in for specific criticism were an Obama plan to give companies a $3,000 tax credit to offset the cost of new hires, and a $500 tax credit for workers that would be spread out over a period of time in take-home pay. “Is a $3,000 tax credit going to get you to hire somebody to build cars that nobody’s buying?” asked Sen. Kent Conrad, D-N.D., speaking to reporters after the committee meeting.”
Exactly what replaces those unpopular tax cuts — more tax relief or more spending — is an open question. Let’s hope it’s more tax relief for businesses. Having both the Ways and Means and Finance Committee members weigh in on the stimulus package, however, gives our S corporation allies a better chance to make the package more small business friendly, especially with regard to built-in gains reform. We expect the Ways and Means Committee to also hold a mark-up as early as the week of the inauguration. S-CORP In the News
Speaking of small business tax relief, the Baltimore Sun published an op-ed by S-CORP Executive Director Brian Reardon highlighting the history of the small business corporation and outlining how Congress can best help ensure the small business community is adequately armed to respond to the on-going economic recession:
What should Congress do? First, follow President-elect Obama’s lead and make small business tax relief the center of any economic stimulus plan. Relief that increases small business’ access to capital would be especially timely. For S corporations, the tax code forces many of them to sit on appreciated assets rather than sell them and put the money to better use. Another rule prohibits them from accepting direct foreign investment. Changing these out-of-date rules would free up capital and encourage new business formation.
Second, keep the rates on small business income low – certainly no higher than what large corporations pay. Actions like these would signal to millions of small businesses that they will not be punished to pay for the excesses of Wall Street, which should make it easier for them to grow their businesses and create jobs.
New Members on Ways and Means
The House Ways and Means Committee for the 111th Congress is now complete, with both Democrats and Republicans announcing their final additions to the committee. House Republicans had six seats to fill and announced their selections yesterday. New members include:
Rep. Charles Boustany (LA-07)
Rep. Ginny Brown-Waite (FL-05)
Rep. Geoff Davis (KY-04)
Rep. Dean Heller (NV-02)
Rep. David Reichert (WA-08)
Rep. Pete Roskam (IL-06)
Earlier this week House Democrats filled their one remaining spot on the Ways and Means Committee with the selection of Linda Sanchez (D-CA), after Representative Raul Grijalva (D-AZ) turned down the position in December. Combined with the Democrats’ earlier additions, that’s a total of 11 new members for the tax-writing Committee.
You can bet your S-CORP team will be reaching out to new and old members alike in coming weeks. Small business tax relief is on the table, and we need to get the message out.
Tax Relief Grows in Proposed Stimulus
Congress is back and ready to legislate. First out of the box will be the long-anticipated economic stimulus package. Unlike previous efforts, the current push has the benefit of support from leadership in the House, Senate, and the new Administration, so we expect a sizable package to reach the President’s desk prior to the February recess.
What exactly will the package include? Details are being negotiated right now but the broad outline remains the same — a large package of spending on infrastructure, relief to cash-strapped states in the form of increased federal Medicaid payments, and tax relief to businesses and families. What has changed is the relative size of the tax relief, which continues to grow as the economy shrinks.
According to our friends in the press, the Obama team is currently targeting a package of $775 billion, including approximately $300 billion in tax relief. On the tax side, contending provisions include:
- Relief to Working Taxpayers: Some variation of candidate Obama’s “Making Work Pay” proposal is likely to form the core of the tax/refund relief, perhaps as a permanent adjustment to employer withholding totaling $500 per taxpayer.
- Small Business Expensing: The higher $250,000 limit on small business expensing expired at the end of 2008. Package will likely include a two year extension of that higher limit.
- Other Business Provisions: In addition to expensing, other business breaks could include extending loss carry-backs, bonus depreciation, tax credits for firms that hire new workers, and other business incentives.
- Local Government Relief: This proposal would remove the applicable Alternative Minimum Tax on certain municipal bonds.
Also part of the mix is the S Corporation Association priority of Built-In Gains tax reform. As S-Corp readers know, such relief would help small businesses strapped for cash access much-needed capital by unlocking valuable assets they have had to hold for an overly restrictive time period.
As far as process goes, negotiators from the pertinent committees and the Obama team are meeting right now. The Senate Finance Committee had earlier indicated it might mark up a stimulus package this Thursday, January 8th. That target date appears to be pushed back to later in the month due to logistical as well as policy concerns, but the Committee has made clear to Senate Leadership and the Obama team that they intend to be part of the process of putting together this bill.
That’s good news for S corporations, since many of our champions on built-in gains and other reforms are Senate Finance Committee members. We’re continuing to reach out to them, our Ways and Means Committee friends, and the Obama economic team to make sure they understand the value to the economy and job creation of helping S corporations better access their capital.
Bottom line – the stimulus package is being actively developed and we expect it to move from proposal to law within the next six weeks.
Bailout Watch
The ongoing soap opera of the auto bailout continues, with Congress failing to find a means of balancing the needs of Detroit with the concerns of taxpayers and Senate Republicans. As a result, the bailout stalled in the Senate last week and the Administration appears poised to step in and use whatever authority it has — TARP, Treasury, Fed — to provide the companies with the liquidity necessary to survive into the New Year and the next Administration. A nice little Christmas present for the Obama economic team, indeed.
Whatever happens, what is clear is that the plight of Detroit will continue into next year and will provide yet another catalyst for a major stimulus package early next Congress. Just how early may surprise folks.
The Senate Finance Committee reportedly plans to begin formal consideration of a stimulus package January 8th, twelve days before President-elect Obama is sworn in. According to our friends at Dow Jones:
The package is expected to include between $600 billion and $700 billion to jump-start the economy, and congressional leaders say they want to pass it before President-elect Barack Obama takes office Jan. 20.
For those of us focused on the tax code, that means the next vehicle for tax provisions will be drafted over the next couple weeks. How much of the package will be devoted to tax relief?
The panel’s chairman, Sen. Max Baucus, D-Mont., said in a news conference last week that tax cuts for businesses and individuals could comprise as much as half of the package. U.S. House Speaker Nancy Pelosi on Monday estimated the tax portion of the package at closer to one-third.
With that time table in mind and with tax policies on the table, we’re working with our allies on the Hill to ensure that S corporation changes to the built-in gains rules are considered as part of this package. If the economy needs capital, S corporations are sitting on lots of it, and BIG relief would help put it to work. Our Hill champions are working the issue, armed with a letter from our association allies as well as a statement of support from four Senators to their leadership.
New Taxwriters Selected
The combination of Democratic gains and lots of retirees means the Ways and Means Committee will be welcoming at least eleven new faces when it reconvenes for the 111th Congress. Democratic gains shifted the ratio of the overall House close to two-thirds/one third, so Democrats last week set the new ratio of Members on the Committee at 26 Democrats to 15 Republicans — up from 24-17 in the 110th Congress — and selected four of the five new members necessary to fill the seats. New Democratic Members include:
Rep. Danny Davis (IL)
Rep. Bob Etheridge (NC)
Rep. John Yarmuth (KY)
Rep. Brian Higgins (NY)
Note: One of the seats was offered to Rep. Raul Grijalva (AZ) but apparently he turned it down, so an additional name will have to be selected. On the Republican side, Representative Dave Camp (R-MI) was selected Ranking Member following the retirement of current Ranking Member Jim McCrery (R-LA). Republicans did not make any other committee membership decisions but rather put off the appointment of six new members to fill the vacancies when Congress returns in January.
On the Senate side, the report is the same as just after the election, with leadership waiting to see how the election in Minnesota goes before setting committee ratios and picking new members. One new development is President Obama’s selection of Senator Ken Salazar (D-CO) to be Secretary of Interior. His departure from the Finance Committee means Democrats will likely have two new members on the committee next year rather than just one.
Estate Tax Update
We’ve forecast that one of the few tax challenges likely to get addressed in 2009 will be some sort of deal on the estate tax. As readers know, the estate tax is scheduled to go out of existence in 2010 only to return from the grave the following year, looking very much like the youthful and hungry estate tax of the year 2000. This repeal and restoration routine gives both sides a strong incentive to come to a compromise — estate tax apologists don’t want to face its repeal in 2010 and estate tax critics don’t want to see its resurrection in 2011.
We noticed that Len Burman over at the left-leaning Tax Policy Center agrees. In an open letter to President-elect Obama, he raises the red flag over the pending estate tax repeal from the pro-estate tax perspective:
One more thing. You probably want to fix the estate tax before the end of 2009. Otherwise, the tax disappears for only a year in 2010, returning in full force in 2011. We just don’t want to see how greedy potential heirs would respond to the incentives created by a one-year “death tax” holiday…
Yeah, Len just wants to make the world safe from greedy heirs. Thanks. Setting aside the obvious question of who’s greedier — individuals with money or policy makers who want to take it from them — his point just reinforces our notion that the estate tax is going to be front and center of policymakers come next summer.
Auto Bailout Stalls Stimulus
Congress is back for the week, but we do not expect much to get done. House and Senate Democrats support allocating $25 billion from the Troubled Asset Relief Program to bailout the Big Three automakers, while the White House, Treasury and Congressional Republicans oppose expanding the program.
The auto bailout could be considered as part of a set of a broader economic stimulus package introduced by Senate Majority Leader Harry Reid (D-NV). We expect the Senate to take up some or all of the Reid Economic Recovery Act in the next couple days, with the House of Representatives stepping aside to see how the Senate debate proceeds. Combined, the Reid package includes:
- An extension of unemployment benefits for seven weeks;
- $38 billion in Medicaid assistance to states;
- $25 billion in loans from the TARP to the Detroit Three;
- An above the line deduction for families who purchase new cars;
- Increased Food Stamp, WIC, and food bank funding;
- Weatherization assistance and subsidies for clean car technologies;
- $5 billion for environmental cleanup;
- $13 billion for highways and other transportation;
- $4 billion or so for housing programs;
- $250 million for military housing;
- $2.5 billion for education and job training;
- $2 billion for NIH, CDC, and pandemic preparedness;
- An expansion of the SBA small business loan program;
- $1 billion for border security and homeland security;
- $675 million for federal science programs;
- Disaster assistance for farmers and communities; and
- Increased funding for consumer protection.
In addition to this long list, Senate Finance Committee Chairman Max Baucus would like to add several tax provisions, including extending bonus depreciation, suspending required IRA dispersals for account holders over 70 ½ years old, and easing pension funding requirements for companies.
While there’s a small chance something might get passed, we believe the stalemate over the auto bailout as well as other funding items is unlikely to get resolved in the next couple days and, as a result, readers should view this broad package as a precursor to Congressional action early next year.
TARP and S Corp Banks
As readers know, Treasury has now officially focused the entire $700 billion TARP fund to be used to inject capital directly into financial institutions under its voluntary Capital Purchase Program. Secretary Paulson has made clear the previously announced Whole Loan and Distressed Asset purchase programs will not be pursued.
For financial institutions organized as S corporations, this new focus presents a particular challenge. As structured, S corporation banks do not qualify for the CPP. According to our friends at the Independent Community Bankers of America, the terms of the CPP require the bank to issue special “preferred” shares in exchange for Treasury’s direct investment. But S corporations are precluded by the tax code from issuing preferred shares and thus are unable to access the CCP.
The Treasury is aware of this issue and is working on new rules that would apply to S corporation and other non-public banks. Part of this failure is simply the result of Treasury’s need to move quickly to restore confidence in the banking system. With 2,500 S corporation banks out there, however, it is an oversight that needs to be fixed.
Second Stimulus on the Horizon
A second stimulus package is being formulated up on the Hill, but is by no means a done deal at this point. Just before adjourning for the election, the House passed a $61 billion bill containing infrastructure spending, aid to state governments and increased unemployment benefits, which will likely serve as a starting point for second stimulus discussion. That package included:
- $30 billion for infrastructure projects including highways, bridges, transit and water projects;
- $1 billion for public housing;
- $2.6 billion for food stamp program;
- A temporary increase in Federal Medicaid assistance to states; and
- An extension in unemployment benefits.
Other items that could be contained in a second stimulus package include the Columbia Free Trade Agreement, middle class tax relief, and changes to the TARP program. Emily Barrett from the Wall Street Journal reports that Treasury is “under pressure to broaden eligibility for assistance to smaller banks, as well as the cash-strapped autos sector.” Other actions related to the stimulus include:
- Speaker of the House Nancy Pelosi and Senate Majority Leader Harry Reid met with the CEO’s of America’s automakers last week to discuss billions of dollars of additional assistance to the industry. The two leaders subsequently asked Treasury to make relief to the automakers part of the $700 billion TARP plan.
- President-elect Obama made an economic stimulus his top priority at last week’s press conference. He indicated if one was not enacted during next week’s lame duck session, he would make it the first order of business in 2009. He also indicated that the package needed to focus on assisting the middle class with job creation and an extension of unemployment benefits.
- RollCall reports that Majority Leader Hoyer (D-MD) is suggesting that, absent an agreement with the Bush administration — which he described as “elusive” — the House might not ask rank-and-file members to come back next week.
All this activity suggests that, while the odds of a package getting enacted are extremely high, it will probably be early next year before anything moves.
Endangered Tax Species — LIFO
Your S-CORP staff is tempted to create an Endangered Species List for tax provisions. Deferral and Section 199 would top the list as the most likely to be extinct before the end of the next Congress.
LIFO accounting is another. A subset of accounting and tax professionals have been pursuing LIFO for years, and they are closing in. The Joint Committee on Taxation — the tax professionals that Congress uses to help them assess changes to the tax code — fired another shot last week.
In its annual “Tax Expenditures” report, the Committee has for the first time (to our knowledge) listed LIFO. For those of you who don’t follow such things, a tax expenditure is a congressional concept identifying tax provisions that divert from the basic approach to taxing income and measuring the revenue lost by those provisions — tax credits, certain deductions, and lower rates on investment income all qualify as tax expenditures. The concept was first introduced into budget speak in the 1960s and has been highly controversial ever since.
Conservatives especially dislike the idea since it implies that all your income is the government’s and if the government chooses not to take it from you, then that’s the equivalent of giving you a subsidy. Supporters argue that the point is to give policy makers better information on how much certain tax policies reduce revenues so they can make better decisions.
Either way, getting LIFO listed as a tax expenditure gives LIFO opponents one more argument to make in attempting to repeal it.
We will write more on this in the future, but suffice to say that LIFO does not belong on the tax expenditures list anymore than FIFO does. Moreover, while the JCT states its goal in revising the methodology of the expenditure report was to create a more neutral approach, we’re not sure they succeeded.
Capital Gains and Dividends
We’ve written about the likelihood that the capital gains rate is going up in the next couple years. Lots of our members would like to know just when that is going to occur so they can plan accordingly.
The economic distress of the last year and the rising deficit opens the possibility that Congress could enact a rate hike next year but make it effective January 1, 2010. The outcome of the prospective effective date would be to stimulate economic activity — and federal revenues — in 2009. A similar rate increase adopted in 1986 (made effective January 1, 1987) resulted in an enormous increase in federal tax revenues in 1986 as taxpayers rushed to sell their assets and qualify for the lower rates.
As S-CORP readers know, we favor lower rates over higher ones, especially when the higher rates only apply to S corporations and not C corporations. That said, encouraging asset sales at a time when many investors and companies are being forced into asset fire sales already might not be the best policy. Encouraging sales of appreciated property into a bear market may have the opposite of the intended economic effect by further driving down asset prices for everyone.
Congress to Consider Lame Duck Session Stimulus
What time is it when the market is down, unemployment is up, personal consumption is falling and manufacturing activity is contracting? Time for another economic stimulus package.
Last week, the Ways and Means Committee confirmed it will hold a hearing on the economic stimulus package on October 29th. The specifics have yet to be worked out and several House and Senate Committees are expected to have a hand in crafting the bill. Politico lists the most likely contenders:
It could include a permanent tax cut for lower- and middle-income families, in addition to the expected extension of unemployment benefits, increased money for food stamps and the states and more federal funds for bridges and other transportation projects.
House Speaker Nancy Pelosi and Senate Leader Harry Reid have made clear in recent days that both the House and the Senate will come back for a lame-duck session. The Senate is scheduled to come back for the week of November 17th. Earlier reports from the House indicated they may convene before the elections, but Speaker Pelosi has refused to put a timeline on consideration of a second stimulus package.
Regardless of the timing, Congress is set to consider another stimulus package following the elections and your S-CORP team is committed to ensure our Built-in Gains (BIG) reforms are included. If the business community needs access to capital, BIG reform can help. Here’s some more on Built-in Gains reform:
- Letter from Associations Supporting for BIG Reform
- Letter from S-Corp Chairman Supporting BIG Reform
- Background on “Small Business Growth & Opportunity Act” — H.R. 3874
- Section by section summary of “S-CORP Modernization Act” – S. 3063
Presidential Candidates Revise Economic Plans
In response to the continuing economic crisis, Senators Obama and McCain have put forward new additions to their economic proposals. Here is a quick summary of each of the candidate’s plans.
Obama’s plan would:
- Create a new temporary tax credit for companies that add domestic jobs. Through 2009 and 2010, existing businesses will receive a $3,000 refundable tax credit for each additional full-time employee hired; eliminate all capital gains taxes on investments made in small businesses and start-ups;
- Create a $25 billion Jobs and Growth Fund for infrastructure projects and schools; $25 billion in aid to states, and $25 billion in loan guarantees for auto companies to retool their plants;
- Instruct the Treasury Department to allow those 70 and ½ and older to delay required withdrawals from their 401(k)s and IRAs and allow others penalty free withdrawals of 15% up to $10,000 from IRAs and 401(k)s (although subject to the normal taxes);
- Direct the Secretaries of Treasury and Housing and Urban Development to aggressively modify mortgages; 10% refundable tax credit on mortgage interest for those who don’t itemize their taxes; Reform bankruptcy code to allow for broader mortgage restructuring; Put in place a 90 day foreclosure moratorium for homeowners who are trying to pay mortgages; and
- Extend Treasury’s authority to purchase assets aside from mortgage backed securities to unfreeze other markets for student loans, car loans and other types of loans.
McCain’s plan would:
- Increase the amount of capital losses which can be used in tax years 2008 and 2009 to offset ordinary income from $3,000 to $15,000;
- Reduce the maximum tax rate on long term capital gains to 7.5 percent in 2009 and 2010;
- Allow up to $50,000 to be withdrawn from IRAs and 401(k)s at a tax rate of 10% through 2008 and 2009; Suspend required withdrawals from IRAs and 401(k)s for seniors over 70 ½;
- Purchase mortgages directly from homeowners and mortgage servicers and replace them with an FHA-guaranteed fixed-rate mortgage.
Whichever plan moves forward – Congressional, Obama, or McCain – will add to the deficit in fiscal year 2009 and put additional pressure on Congress to raise overall tax revenues. As the Washington Post reported Saturday (about two weeks after your intrepid S-Corp team alerted its readers), the federal budget deficit is currently projected at $650 billion in 2009, and is likely to go up from there — to $1 trillion or more.
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