Earlier today, the Senate voted earlier on its version of the “extenders plus” bill passed by the House a few weeks back. The vote, on a motion to waive a Budget Act point of order, failed miserably (45-52), indicating the Senate Leadership has a long way to go before they gather the sixty votes necessary to move forward.
With this morning’s vote behind us, the process moving forward is becoming clearer–Finance Chairman Max Baucus (D-MT) is expected to introduce a new substitute today. According to BNA:
Baucus is expected to draw up a new substitute amendment that will be a slimmed-down version of what the Senate defeated. That plan would have added $84 billion to the federal deficit, a figure that Republicans, and some Democrats, said was too high to stomach. Baucus has previously said that he would continue to work with senators of both parties to find 60 votes. Issues that could be modified to secure votes include Medicare reimbursement rates for physicians, unemployment insurance benefits, Medicaid funding to states, and possibly language making it more difficult for S corporations to avoid paying employment taxes.
As BNA indicates, the new effort will likely include a modified payroll tax hike. As with the House-passed provision, however, the new tax has been written behind closed doors and without the benefit of public scrutiny. It might be better than the flawed House effort, but we simply won’t know until it’s offered.
The next key vote will take place tomorrow, when the Senate considers Senator John Thune’s (R-SD) alternative “extender plus” package. This package includes all the tax extenders the business community wants, but strikes all the tax hikes the business community opposes (including striking the $11 billion payroll tax hike). Instead, all the tax relief and spending in the package are offset with spending cuts. As with today’s vote, Senator Thune is not expected to get 60 votes tomorrow, but we’re betting he does better than the 45 votes Senator Baucus got today.
Meanwhile, Senator Olympia Snowe (R-ME) continues her fight on behalf of S corporations. As CongressDaily reported this morning:
Snowe is upset about an $11 billion tax increase on small services firms organized as S corporations; Baucus is preparing some tweaks to that provision, and the chamber’s 63-33 adoption of an amendment she co-sponsored to establish an office within the Treasury Department to help homeowners struggling with mortgage payments can’t hurt. Democratic aides said they still have some work to do on their side of the aisle before working to assuage GOP holdouts.
The S corporation community owes Senator Snowe a big debt. Meanwhile, with the first Baucus substitute gone and the second version “to be introduced,” we will just have to wait to see what they have in mind.
S Corporation Association Chairman Richard Roderick weighed in on behalf of S corporations yesterday regarding the second stimulus package being developed in the House. In a letter to Small Business Committee Chairwoman Nydia Velázquez, Roderick argued that any bill moving through Congress should include assistance to S Corporations.
In particular, the letter advocates for relief from the built in gains tax (BIG) that forces so many S corporations to sit on appreciated assets that could be put to better use. As the letter states:
“According to government statistics, hundreds of thousands of S corporations nationwide may be sitting on “locked-up” capital that they cannot access or redeploy due to the prohibitive tax implications of BIG. This “lock-in effect” is widespread and results in these businesses unable to access billions of dollars in assets that could be used to grow the business and hire new employees.”
While the economic news this week has improved, there remains considerable appetite on the Hill for moving a second package of pro-growth provisions. Given the important role S corporations play in economic growth and job creation, it only makes sense that one of our priorities be included.
Tax Gap and Payroll Taxes and S Corporations
Our friends over at TIGTA (the Treasury Inspector General for Tax Administration) have sent another shot across the bow of the S corporation community regarding the payroll taxes we pay.
In a report released yesterday (Additional Actions are Needed to Effectively Address the Tax Gap), the Inspector writes:
“Similarly, there are potential abuses of employment tax laws caused by misclassified workers and single shareholder owners of Subchapter S corporations. In addition, a prior Treasury Inspector General for Tax Administration audit found that a significant number of single shareholder owners of Subchapter S corporations did not pay themselves salaries to avoid paying employment taxes. We estimated that this would cost the Department of the Treasury approximately $60 billion in employment taxes over 5 years. We believe that the combination of increased transparency through expanded information reporting and targeted legislation aimed at tax abuse loopholes would make the strategy for the Reduce Opportunities for Evasion component more robust.”
As a reminder, the issue is whether some S corporation shareholders who actively work at their business pay themselves a less than market salary in order to avoid paying payroll taxes. In recent years, this issue achieved notoriety during a featured exchange in the Vice Presidential debate in 2004 and later picked up as a possible $57 billion revenue raiser by the Joint Committee on Taxation in 2005.
To date we’ve seen four distinct S corporation targets for increased payroll tax levies:
- The original JCT report would have targeted ALL S corporations;
- The second JCT report focused on personal services businesses similar to those defined by Section 448(d)(2);
- The TIGTA has highlighted single shareholder S corporations; and
- The Rangel bill would affect S corporations engaged in services businesses on the portion of their income that derives from service activity.
S Corp expects that this issue, along with so many tax items affecting our members, will be debated in Congress in the next Congress as part of broader tax reform. However, with the resolution of tax provisions expiring at the end of this year unclear, it could come up sooner. We have weighed in with the tax writers before on this issue. With TIGTA keeping the issue front and center, we plan to do so again.