AMT and Other Updates
Just after Thanksgiving, we put together a list of the must-pass items that Congress would turn to in December, including the AMT/Extender package, omnibus spending bill, farm bill, S-CHIP, energy bill, and Medicare Doctors payment legislation.
With just a few hours to go in this congressional session, it looks like many of these items will clear the Congress—in one form or another—and be sent to the President. In just the last day, the two bodies dealt with the omnibus spending bill (including $70 billion to fund the war in Iraq), a six-month extension of doctors’ payments under Medicare and an 18 month extension of the State Children’s Health Insurance Program. Meanwhile, the President signed a slimmed-down energy bill this morning.
For S corporations, perhaps the biggest news is that the House adopted today a one-year extension of the higher exemption under the Alternative Minimum Tax. This higher exemption will apply to individual taxes due for tax-year 2007 (the current year) and it will protect 20 million-plus taxpayers from having to pay a higher tax bill under the AMT when they file this spring. As recently as Monday, there was some doubt whether this much needed extension would actually take place.
Just this morning, the cloud in this silver lining was that the House would include a new rule that will apply to next year’s tax bills. In effect, the rule would have required the House to “make up” the $50 billion revenue impact of extending the AMT patch before additional tax items can be adopted in 2008. This plan fell through, however, and the House has just adopted a clean one-year AMT extension.
That’s particularly good news for the package of extenders that were left undone this year, including the R&E tax credit, state and local sales tax deduction, and the S corporation charitable donation provision. It will also put less pressure on Congress next year to adopt tax increases on S corporation payroll taxes, LIFO repeal, or repeal of the IC-DISC.
Tax Victory for S Corp Exporters!
In case you missed it, the truncated 2-week comment period for the Tax Technical Correction Act of 2007 ended on December 3rd. Despite the tight window (that included the Thanksgiving holiday break), dozens of exporters and trade associations from around the country weighed in with the Finance and Ways and Means Committees to oppose the proposed tax increase.
Did the tax writers pay attention? You bet they did. Yesterday, the House adopted a technical corrections bill that did not include the rate increase on US exporters.
Many Senate and House offices weighed in with concerns about raising taxes on exporters. Special thanks go out to the offices of Senators Cantwell (D-WA), Smith (R-OR), Wyden (D-OR), Specter (R-PA), and Kohl (D-WI), whose letter to the Finance Committee raised the concern about this provision to the member level. On the House side, senior Ways and Means Member Jim McDermott (D-WA) weighed in directly with Chairman Rangel and let him know the adverse impact this provision would have on exporters in his district.
The net effect of all these communications was the House tax writers decided, earlier this week, to forego the IC-DISC technical correction, preserving this extremely important benefit for America’s small and closely held exporters.
This is a BIG victory for exporters and those whose jobs rely on the growth of American exporting. Congrats to those companies and trade associations who worked so hard together to block this harmful tax increase. Of course, now we have to prepare for next year…
Senate Passes AMT
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.
The End is Near (of the First Session)
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:
techcorrections@finance-dem.senate.gov
http://waysandmeans.house.gov/submissions.aspx
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.
Taxpayer Expectations and the Rangel Surtax
We have had a chance to digest a bit more of the Rangel bill introduced last week.
There was a lot to digest. Repealing section 199, LIFO, and IC-DISC, while extending the depreciation period for intangibles will all adversely impact our members to one degree or another. The fact that these tax increases are being used to offset a rate cut for C corporations doesn’t help matters.
Focusing on the individual side, the bill would substitute a new four-percent surtax on individuals and businesses earning more than $150,000 in order to offset the cost of repealing the individual Alternative Minimum Tax (AMT).
Whether this is a good trade-off depends on your particular circumstances. Some taxpayers will see their overall tax burden increase while some will see their burden go down. The Tax Policy Center has an excellent analysis that breaks out just who benefits under HR 3970 and who will be harmed.
One challenge Chairman Rangel faces in selling this trade off is the question of competing baselines. Congress operates under a current “law” baseline. If the AMT is going to expand from 5 to 25 million taxpayers next year, preventing those 20 million taxpayers from having to pay the AMT is scored as tax relief.
Taxpayers, however, operate under an “expectations” baseline. The 20 million taxpayers who didn’t pay the AMT last year do not expect to pay the AMT this year either. In their view, protecting them from the AMT isn’t tax relief, it’s the status quo.
So if Chairman Rangel successfully substitutes a 4 percent surtax for the AMT, few taxpayers are likely to give him credit for saving them from the AMT, while all the taxpayers subject to the new surtax will know just who to credit.
The tension between these two approaches is captured by two tables in the Tax Policy Center’s report. One uses Congress’ baseline and shows that only 18 percent of taxpayer’s earning between $200,000 and $500,000 will see their taxes increase, while the other uses the expectations baseline and shows that over 50 percent of those taxpayers will see a tax increase.
That’s been the challenge with the AMT all along. Some have observed that since we never intended to collect all this revenue in the first place, we shouldn’t have to offset its repeal. Given the challenge of the competing baselines and the size of the alternative surtax, this perspective is likely to get a lot more popular over the next few weeks.
Congress Returns
Congress came back from its August break this week and is picking up right where it left off—struggling with the question of what to do with the Alternative Minimum Tax and examining how to appropriately tax the carried interest earned by hedge fund managers and other general partners.
These questions are connected, obviously, in that addressing the AMT will be very expensive while raising the tax rates on carried interest would presumably raise lots of revenue. That’s one reason why both the Ways and Means and Finance Committees held hearings on the issue.
For S corporations, the concern is twofold. First, once Congress begins exploring proposals for widespread changes to the tax code, it’s hard to know where they will stop. As the Wall Street Journal quoted Ways and Means Chairman Charlie Rangel this morning, “If it’s in the tax code, we have an interest in it.” Already they have floated the idea of imposing a four percent surtax on individual incomes above $500,000. As we’ve previously noted, this surtax would impact S corporations and other flow-through businesses, but not C corporations.
Moreover, we continue to hear rumblings about a proposal to increase payroll taxes on S corporation income. This idea was first put forward by the Joint Economic Committee back in 2005, and despite our best efforts to kill it, it keeps coming back.
Given the size of the AMT challenge and the lack of consensus between the House and the Senate on how to address it, we are sticking by our prediction that Congress will stay in session right up until the Christmas holiday and that many, if not all of these tax issues will be rolled into one big omnibus bill, similar to the bill that passed Congress last year in mid-December.
Exporter Tax Increase Back in Play
One component of that omnibus tax bill will likely be a technical corrections title. Remember the aborted “Tax Technical Corrections” bill from last fall? It was proposed in September but never got off the ground, in large part due to a provision that would raise taxes on small and closely held exporters. We’re hearing that congressional tax writers are going to try again, and that the export tax increase—affecting dividends from an IC-DISC—is likely to be part of the proposed package.
Why some in Congress are thinking about raising taxes on exporters is beyond us. Our growing export community is one of the few bright spots in the economy right now. Moreover, there are lots of business groups that oppose this change. A large number of them, lead by your S Corporation Association, recently wrote congressional tax writers asking that they strike this provision from the proposed bill.
You’ll be hearing more about this in the coming weeks.
S Corporation Accomplishments, 1996-2007
Since its inception in 1996, the S Corporation Association has helped guide numerous positive changes to the S corporation rules through the Congress and on to the President’s desk. Recently, one of our members asked us to catalog all the improvements to the S corporation rules since the S Corporation Association has been active in Washington DC.
Here is what we came up with, beginning with the recently enacted “Small Business and Work Opportunity Act” –including an entire title of S Corporation improvements–all the way back to the “Small Business Job Creation Act of 1996.” Since 1996:
- The number of allowed S corporation shareholders has increased from 35 to 100, and members of the same family now count as just one shareholder;
- S corporations can now own other businesses, including C corporations, with streamlined rules for allocating income and loss;
- S corporations’ expanded access to capital, with more types of shareholders allowed to invest in S corporations than ever before, including certain trusts, IRAs, and other tax exempt entities; and
- C corporations that convert to S status face fewer obstacles, including relief from the ‘sting tax”
It is important to note that this list does not include other S Corporation Association accomplishments, such as fighting efforts to impose payroll taxes on all S corporation income and broader tax changes that benefit S corporations like lower tax rates and higher small business expensing limits. Back in 1996, for example, the top tax rate on S Corporations was nearly 40 percent. Today, it’s 35 percent.
Take a look at the list, and we think you’ll agree that the S corporation community has benefited greatly from our efforts and those of other small business champions in Congress and elsewhere. This just goes to show what a concerted effort can accomplish for the small business community.
Treasury Conference on Corporate Tax Policy
Your S-Corp Association friends attended the Treasury conference on corporate tax policy last week, rubbing shoulders with the Secretary of the Treasury, Alan Greenspan, and others. As expected, the bulk of the speakers focused on tax issues of most concern to Fortune 500 companies—the corporate rate, the treatment of foreign earnings, etc. There’s growing concern that our corporate tax rate is out of whack with the rest of the developed world and this forum served to highlight the benefits of a corporate tax rate cut.
One of the invited speakers, however, S-Corp ally John Satagaj from the Small Business Legislative Council, focused his comments entirely on the state of flow-through businesses and his concern that they not harm the small business community as they work to fix the corporate code.
Also of note was the very friendly attention flow-through businesses received in the background document Treasury prepared for the conference. Chapter 3 of the report exclusively addresses the role S corporations and other flow-through businesses play in our growing economy and it includes lots of helpful statistics on the state of small businesses structured as S corporations, partnerships, and sole proprietorships. A couple of the more compelling facts:
- “93 percent of all businesses in the United States pay their taxes at the individual income tax rates.”
- “The share of S corporation returns as a percentage of all business returns grew from 4 percent in 1980 to 12 percent in 2004.”
- “The number of taxpayers who receive more than half their income from their business was 11.9 million in 2006. Of those, more than a million were subject to the top two income tax rates.”
As the report notes, flow-through businesses are an increasingly important sector of the U.S. economy. Let’s hope the policies coming out of Washington in the next few years reflect that.
Tax Outlook Summary
With the August break upon us, here’s another quick look at all the tax activity on the legislative calendar. We have updated our tax chart, here.
Perhaps the most significant event in recent days was to see how quickly the farm bill managed to turn into a tax bill with the addition of a $4 billion offset for some food stamp additions — no hearings, no warning, and suddenly there’s a $4 billion tax increase on the House floor. Something to keep in mind as the session continues. Here are the current tax highlights:
AMT Reform: This broad, $500-750 billion package is now being discussed as a fall or winter bill in the House. In the Senate, the tax writers are increasingly making it clear they have little or no intention of doing anything permanent on the AMT this year. Smart observers are expecting that another so-called AMT patch—a temporary increase in the AMT exemption levels to restrain the growth in the number of AMT taxpayers—will be adopted late this session, likely just before everybody goes home for Christmas.
Energy Tax Incentives: The House plans to take up the energy bill this Friday, with a $15 billion energy tax package of renewable and conservation incentives included. Offsets to the incentives are targeted at the oil and natural gas industries. Oil Patch Democrats have insisted that the tax provisions be voted on separately, however, so they can support the broader energy bill while opposing the tax package. The total package is expected to pass, but similar concerns in the Senate derailed the Senate energy tax package.
SCHIP: The House and Senate are considering the bill right now. While the bill might succeed in passing the House and Senate, the President has promised a veto. Odds that the current proposal—including the $50 billion tax increase on tobacco—can survive a veto and becomes law are slim to none.
Technical Corrections: Look for this package to be introduced and open to comment in the fall. Last year’s technical corrections package included an IC-DISC provision that would have raised taxes on small and closely held exporters. This provision is likely to be part of the initial bill, but we’re working to keep it out.
Small Business Tax Package Signed Into Law
Congress returns this week following its Memorial Day recess. As expected, the Small Business tax package was signed into law along with the Iraqi War funding just before they left. This package included a number of S corporation reforms that we have been working on for years, and represents a significant improvement to the rules governing how S corporations operate.
Key reforms included relief from the dreaded “sting tax” as well as allowing trusts that hold S corporation stock to deduct their interest expenses, something other trusts have long been allowed to do. And while we did not get everything we sought in the bill, these new provisions are extremely welcome and we appreciate the members and staff who worked to make them happen.
Tax Bills on the Horizon
With the Small Business tax package behind us, it’s time to focus on what comes next. As we have observed, there are lots of actual and potential tax bills on the agenda for this Congress, and keeping track of them is becoming a full time job. Fortunately for S Corp members, that’s what we do. Here’s a list of tax bills to watch:
AMT Reform: Ways and Mean Chairman Rangel previously announced his plans to introduce a permanent fix to the growth of the Alternative Minimum Tax sometime this month. As we’ve written in past Wires, the threat to S corporations is the potential pairing of AMT relief with an increase in individual tax rates, a reduction in the thresholds at which those rates apply, and the change in the tax treatment of capital gains and dividends.
Energy Tax Incentives: Ways and Means is planning to take up tax legislation next week to provide new and expanded incentives for renewable energy sources. Offsets reportedly include denying the manufacturing income tax deduction to oil and gas producers as well as lengthening certain energy depreciation lives. Significantly, the offsets do not appear to include changes to the LIFO inventory accounting method for oil companies or others, at least in the House version.
Extending Family Tax Relief: The budget adopted last month allows part of the tax relief enacted in 2001 and 2003 to be extended past its current December 31, 2010 sunset. Whether Congress actually acts on this issue prior to the 2008 elections is very much up in the air, but the budget gives Congress the ability to move legislation to retain the 10 percent tax bracket, the $1000 child credit, the higher standard deduction and income tax rate thresholds designed to reduce the marriage penalty, and some sort of permanent fix to the estate tax rules. The budget does not make room for extending the lower rates on capital gains and dividends, nor the reduced rates on income taxes above the 15 percent bracket.
SCHIP: The Finance Committee will also consider legislation to expand the Children’s Health Insurance Program. The Senate has already voted to offset the cost of this increase through a tobacco excise tax during debate over the budget resolution.
Technical Corrections: As S Corp readers know, last year’s technical corrections package did not move forward based, in part, on concerns raised about increasing tax rates on exporters who have an IC-DISC. Ways and Means is working on another version, and the most recent word is the IC-DISC provision is still in the package. No word on timing of this package just yet.
Education Incentives: The Senate Finance Committee has been working on legislation to increase and reform the tax incentives for education. A proposed markup on legislation prior to Memorial Day was postponed, but this is a priority for Chairman Baucus, so expect something soon. On the House side, Chairman Rangel joined other Ways and Means members to introduce legislation to fund public school construction and rehabilitation with tax-free bonds. And several House members introduced legislation to increase tax benefits tied to the Hope Scholarship and the Lifetime Learning Credit.
International Tax Reforms: Earlier this year, Congressman Richard Neal (D-MA) introduced legislation (H.R. 1672) to change the tax treatment of dividends for certain hybrid foreign stocks. In May, the Senate Finance Committee held hearings on offshore tax evasion. And this week the Finance Committee will hold hearings on the impact globalization has on the American workforce, with a particular focus on the tax incentives that make up part of our Trade Adjustment Assistance programs. We expect these mutual concerns to coalesce into a package of international tax provisions — mostly revenue raisers — to accompany other tax legislation.
Housing: The implosion of the sub-prime lending market and the general rise in housing and land prices suggest that a housing tax bill or tax title could be considered by this Congress. The House Revenue Measures subcommittee held hearings last month that focused on the Low Income Housing Tax Credit, private activity tax-exempt bonds, and the historic rehabilitation tax credit.
Bottom Line: The combination of lots of tax bills together with the desire to offset any tax decreases with tax increases should make all taxpayers wary, especially those that, like S corporations, have been the target of unwarranted criticism in the past couple years.
KEY NEW SENATE POSITIONS ANNOUNCED
The “Lame Duck” session of Congress convened this week to tackle a number of organizational and legislative priorities. The 109th Congress must wrap up the remaining 2007 fiscal year spending bills or at least pass a “continuing resolution” to fund the government through the rest of the fiscal year while also preparing for the 110th Congress with leadership elections and committee assignments.
Yesterday Senate Democrats voted for leadership positions electing Senator Harry Reid (D-NV) as the new Majority Leader and Senator Dick Durbin (D-IL) as Assistant Majority Leader. The Senate Democratic Steering Committee also tentatively announced which Democrats will serve on key committees. For S corps, new members on the critical Senate Finance Committee – which has oversight of the S corp tax structure and other tax matters – will be Senators Debbie Stabenow (D-MI), Ken Salazar (D-CO), and Maria Cantwell (D-WA).
Meanwhile, Senate Republicans today announced their new leadership team. As expected, Senator Mitch McConnell (R-KY) will be the new Republican Leader, while Senator Trent Lott (R-MS) survived a one-vote victory over Senator Lamar Alexander (R-TN) to be the Whip.
On the other side of the Capitol, House Democrats will elect new leaders on Thursday, while House Republicans are scheduled to do the same on Friday. No challenges are expected to Congresswoman Nancy Pelosi’s (D-CA) bid to be Speaker of the House. The Republican race for House Minority Leader is still led by current House Majority Leader John Boehner (R-OH), but he is being challenged by Reps. Mike Pence (R-IN) and Energy and Commerce Committee Chairman Joe Barton (R-TX). Once House leaders are named, new House committee assignments will be made.
LAME DUCK TAX BILL?
Will a tax bill pass in the last weeks of the 109th Congress? That’s the question on the minds of many affected businesses right now. The news over the last couple of days is that Senators Grassley and Baucus would like to pursue a wrap-up package that includes tax extenders (like the R&D tax credit), some miscellaneious trade provisions, tax technical corrections, and some agreed-to extra items. While this list sounds a little long to squeak through in the waning days of this Congress, S-Corp readers know there is pent up demand to get some of these tax provisions done, so anything is possible.
Just to make things more complicated, we’re also hearing there may be an effort to pass a minimum wage increase coupled with small business tax provisions as well.
For S corps, we are presented with both a challenge and an opportunity. We’ve been assured that any tax package moving before the new year will NOT have any revenue raisers (like the S corp payroll tax hike or LIFO repeal, or higher taxes on exporters who use IC-DISCs), but we’re still planning to keep a close eye on any talks to make sure these unfair tax increases don’t sneak into a bill at the last minute. That’s the challenge. The opportunity is to get some of our priorities included, like built-in gains relief, sting tax relief, and allowing IRAs and non-resident aliens to be S corp shareholders. The larger the tax package, the better the odds we will succeed. We will keep you apprised of any new developments.
S-CORP OPPOSES EXPORTER TAX INCREASE
Chairman Submits Comments to Tax Writers
S-CORP Chairman Tom McMahon today submitted comments (click here for full text) to the House Ways and Means and Senate Finance Committees opposing a proposed tax increase on small and closely-held exporters. Chairman McMahon observes in his comments:
“I would like to raise serious concerns regarding Section 7 of the Act which, if enacted, would significantly increase taxes on small and closely-held U.S. manufacturing exporters.”
As you’ll recall, the Senate Finance and House Ways and Means Committees introduced companion “tax technical corrections” bills (H.R. 6264 & S. 4026) just before breaking for the elections, requesting that interested parties submit comments regarding the proposed changes prior to October 31st. The plan is to create a technical and non-controversial tax title that would eventually be sent to the President during the final weeks of this Congress.
As we’ve previously pointed out, Section 7 of the bill is neither technical nor non-controversial. It would increase from 15 percent to 35 percent the tax rate on qualified export income for small and closely-held business exporters! As our Chairman observes, “Given the current size of the U.S. trade deficit, it makes little sense for Congress to act unilaterally to harm small and closely-held manufacturers and other exporters.”
As always, the S Corporation Association is working with other affected groups such as the National Association of Manufacturers and the Small Business Exporters Association to ensure that this substantive and controversial amendment does not pass. If you or your clients benefit from IC-DISC, you can send comments directly to the Finance and Ways and Means Committees at the following email addresses:
techcorrections@finance-rep.senate.gov
S-CORP PAYROLL TAX INCREASE BACK IN NEWS
On another front, the Wall Street Journal yesterday reported on the recently published “tax gap” report from Congress’ Joint Committee on Taxation and its potential impact on taxpayers. As S-CORP readers know, this report includes a proposal to apply payroll taxes to all the income of certain S corporations. This proposal is significantly reduced from previous versions – it applies only to personal services bus inesses like law firms and consultants, not manufacturers – that S-CORP opposed. The WSJ summarizes the current proposal like this:
“The report proposes a significant tax -law change for law firms and family-owned personal-service firms, which may face new self -employment tax obligations. Typically, an executive in a “subchapter S corporation,” used by many family businesses, takes a salary and distributes the remaining profit in a dividend that isn’t subject to self-employment taxes, Mr. Smith says. The report suggests a new uniform rule to have these entities covered by the same self-employment tax regime as partnerships or sole proprietors. Not having a uniform rule is a sizable problem: $39 billion of the tax gap was attributable to the self -employment tax and an estimated $15 billion of the tax gap attributable to unemployment taxes. Yet Mr. Smith says in his experience, most people using an S corporation don’t pay themselves “ridiculously low” salaries and take the rest in a tax -advantaged dividend distribution.”
S-CORP is currently polling its members to determine how we should respond to the most recent payroll tax proposal. If you have a view, please let us know.
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