The United States Senate last evening passed a one-year extension of the so-called AMT patch—a higher AMT exemption to protect 20 million or so taxpayers from being subjected to the AMT on April 15th. This bill did not include any offsets and it did not include any additional extenders, either.
Senate Republicans, as well as some Democrats—including Finance Committee Chairman Max Baucus—have observed that, since much of the revenue collected by the AMT is accidental and was not intended by Congress, it is nonsensical to insist that protecting taxpayers from the tax should be offset at all. Apparently, those members prevailed in the Senate.
Leadership in the House, on the other hand, takes a very different view. They continue to insist that any change in the AMT be fully offset.
The expectation is the bill will now go back to the House, where the Ways and Means Committee staff are already at work trying to come up with new offsets that both are acceptable to the Senate and sufficient to cover the $50 billion revenue loss of the AMT patch. The most likely course of action is the House will attach those new offsets to the bill and send it back to the Senate.
What happens to the other tax items—the extender package, the energy tax package, and the technical corrections package also under consideration this fall—is very much up in the air.
What is clear is that if your business or industry has been targeted by a proposed tax increase in the past year, you should pay close attention to the activities in the House. They have to raise $50 billion in taxes on somebody. Just who will be the question.
IC-DISC Comments Posted by Ways and Means
For the second year in a row, the tax writers in the House and the Senate have proposed to raise taxes on small and closely held exporters as part of a technical corrections package. And, for the second year in a row, those exporters and the groups that represent them have sent a torrent of comments opposing that effort to both the Ways and Means and Finance Committees.
The Ways and Means Committee has posted their comments over the last couple of days, and while it does not appear that all the comments have actually been posted to the website (we are aware of many that do not appear), it is clear the IC-DISC issue still dominates the list, representing more than half of all the letters and statements received by the Committee.
If you submitted comments, please check the website to make sure they are posted. If you have an IC-DISC or are an exporter who would like to use an IC-DISC, make sure to contact your Representative and Senators and make them aware of this issue. It’s not too late.
Congress returns Monday with lots to do and just three weeks to do it. Here’s the list of must-pass items we’ve identified:
- AMT Patch
- Tax Extenders (Including the S Corporation Charitable Provision)
- S-CHIP Reauthorization
- All the Spending Bills
- Increase Doctor Payments under Medicare
That’s enough to fill two months of session, let alone 21 days, but there’s more. In addition to these items that most observers agree must get done, there is also a long list of priorities that the majority would like to address before they go home for the holidays, including an energy bill, an agriculture bill, and more.
How will it all work out? We don’t have any clever ideas, although our expectation is that, just before Christmas, Congress may pass a large spending package combined with a one-year extension of the AMT patch. Everything else needs to be offset to one degree or another, and coming up with billions in higher taxes and/or spending cuts that the House, Senate, and President all can agree to has proven to be a daunting task. They may find a way, but it’s not going to be easy.
S-Corp Defends Small Exporters
Speaking of tax increases, remember the misguided effort last year to raise taxes on small and closely-held exporters? Well, its back, and this time the goal is to wholly eliminate the last remaining export tax benefit in the tax code.
Two bills were introduced in recent weeks to raise taxes on exporters. First, both the House Ways and Means and Senate Finance Committees introduced technical corrections bills—HR4195 and S2374—just before the Thanksgiving break that would, among other things, raise the tax rate applied to small exporter dividends from an IC-DISC from 15 to 35 percent!
Second, Ways and Means Chairman Rangel, as part of his big “Mother of All Tax Bills” (HR3970), proposed to completely eliminate all the remaining export provisions under the IC-DISC, raising about $800 million over ten years.
The combination of these two proposals would be to completely eliminate the lone remaining provision designed to help small and closely held exporters compete in foreign markets.
In response, S-Corp Chairman Tom McMahon wrote to Chairmen Baucus and Rangel opposing this provision. His essential point is why, especially now, would Congress choose to raise taxes on American companies creating American jobs by exporting American-made products?
This year, we have allies in high places. Led by Finance Members Maria Cantwell and Gordon Smith, five United States Senators penned a letter this week to Chairman Baucus expressing their opposition to this so-called technical correction. As the senators noted:
U.S. export growth is one of the few bright spots in the current U.S. economy and a critical offset to the on-going problems in the housing and credit markets. Given this environment, we do not believe it is wise for Congress to act unilaterally to increase taxes on U.S. companies that create jobs here in the United States and export their products overseas.
Do you export, or represent companies that do? Then this issue affects you. Send in your comments to the Ways and Means and Finance Committees before the close of business, Monday December 3rd. You can find the submission instructions at:
S-Corp Payroll Tax Increase Unlikely (This Year)
As S-Corp readers know, Congress has for some time contemplated raising payroll tax levies on S Corporation income. Recent consideration of this idea first popped up in a JCT report back in February, 2005. Most recently, a related version of the tax increase was included in Ways and Means Chairman Charlie Rangel’s “Mother of All Tax Bills” proposal introduced a couple of months ago.
The Rangel proposal would impose payroll taxes (including both Social Security and Medicare taxes) on S corporation earnings where 1) the S corporation is primarily a services company and 2) the earnings are attributed to a shareholder who also works at the firm. The S Corporation Association initially sent a letter last month to the Chairman expressing our historic concerns regarding this proposal.
For the past month, your S-Corp team has been busy meeting with staff in the both the House and the Senate to identify exactly what the latest proposal is—for example, what does “primarily” mean—and where it might next surface?
Our latest intelligence is that, while both the Finance and Ways and Means Committees are taking a hard look at this issue, the provision is unlikely to emerge as part of the year-end omnibus tax package. That’s good news, because it gives us more time to understand the proposal under consideration, educate our membership, and work to ensure that companies currently in full compliance with the law are treated fairly.
On the other hand, no tax increase idea ever dies, so we expect this to be an active issue next year and in the next Congress.
For the past few months, we’ve been tracking the progress, or lack thereof, of legislation to protect taxpayers from the growth of the Alternative Minimum Tax. The two principle points of tension were:
- Conflicting approaches between the House and the Senate. The House, under the leadership of Chairman Charlie Rangel, was pressing to do something permanent. The Senate, on the other hand, made it clear that they were only interested in a one or two year “patch” to temporarily stem the growth of AMT taxpayers.
- Conflicting approaches on how to offset the revenue impact of addressing the AMT, or whether to offset the cost at all. Even a one-year AMT patch would reduce revenues by about $55 billion. Coming up with that level of corresponding, and politically salable, tax increases would be extremely difficult.
A couple of events occurred yesterday that brought these two tensions out into the open. First, Chairman Rangel, for the first time, acknowledged that a temporary AMT patch would be necessary this year. While he still intends to introduce a plan to permanently address the growth of the AMT, perhaps as early as next week, he is now suggesting that package may not be considered until next year. For most observers, the need to take up a one-year AMT patch was clear for some time, but this is the first time the House Ways and Means Chairman has confirmed it.
Second, CongressDaily reported this morning that Senator Conrad—Chairman of the Senate Budget Committee and senior member of the Finance Committee—walked out of a Finance members meeting yesterday when he learned that Chairman Baucus did not intend to offset the $55 billion cost of a one-year AMT patch. According to CongressDaily:
“Conrad stormed out of a bipartisan Finance Committee members meeting, telling reporters that the Baucus plan was “unbelievably irresponsible.” “The answer in that room is, ‘Borrow the money from China and Japan and stick the American people with debt as far as the eye can see,’” said a visibly outraged Conrad. According to other sources in the meeting, Baucus proposed to waive pay/go for the one-year AMT patch, while providing offsets for $45 billion in expiring business tax provisions, which would be extended through the end of 2009.”
Exactly what this means for the expected AMT/Extender/Miscellaneous tax package that needs to move before the end of the year is unclear. Congress will have to address the short-term AMT challenge. Otherwise, about 20 million taxpayers, mostly families with children, will see their taxes increase when they file on April 15, 2008. Two possibilities are a compromise between Baucus and Conrad on the level of offsets in the package, or an effort by Baucus to find votes for his package from the Republican members of his Committee.