Senators Snowe and Enzi Take On Small Business Tax Hike
The payroll tax hike in the House-passed extenders bill moves to the front burner in the Senate this week.
Senators Olympia Snowe (R-ME) and Mike Enzi (R-WY) introduced an amendment late last week to strike the provision from the bill. As a potential swing vote on the overall package, Snowe’s opposition in particular is sure to catch Leadership’s eye.
“At a time when Congress continues to dither on enacting a small business jobs bill, Section 413 is a poison pill in this tax bill, robbing American small businesses of the capital they need to create new, good-paying jobs,” Senator Snowe said in a release accompanying the amendment. “Indeed, this is a job-killing tax hike that will force entrepreneurs across the nation to retrench and reconsider any plans for hiring employees or expanding their business.”
Meanwhile, Senator Enzi raised this issue at a Finance Committee hearing last Thursday, first questioning Treasury Secretary Timothy Geithner about it and then entering into a colloquy with Chairman Max Baucus (D-MT). In response to Enzi’s concerns, Senator Baucus made clear his staff was working on an alternative.
The business community has come together as well, with twenty-seven business groups signing a letter spearheaded by the S Corporation Association highlighting the many flaws with the House-passed provision. In addition to focusing on the policy challenges, the letter notes the complete lack of legislative history accompanying this major new tax:
Finally, this new tax is an excellent example of what happens when the legislative process is short circuited. It was never the subject of hearings or public review, it was made public just a few short weeks ago, and it has been attached to legislation that already passed both the House and the Senate. It is an accident of the legislative calendar that we are in a position to offer our views at all.
If it were not for the deliberative nature of the Senate, this provision would have been enacted and signed into law before anybody in the business community—including legal and accounting professionals who advise them—knew it was even under consideration.
The Senate’s rules and the Memorial Day recess delay gave us time to get the message out, however, and we’re beginning to hear from practitioners and affected businesses from around the country. As a Dow Jones Newswire story makes clear, S corporations targeted by this provision extend well beyond the “lawyers and lobbyists” highlighted by the Ways and Means Committee:
Gabriel Durand-Hollis, owner of a San Antonio, Texas-based architecture and interior design firm, is no John Edwards. But he could nonetheless see his taxes rise as a result of a Senate measure that seeks to crack down on a technique Edwards, a former U.S. Senator from North Carolina, once used to avoid paying hundreds of thousands in payroll taxes…. Durand-Hollis, one of two owners of a firm that employees 25, said the provision, if enacted, would boost his federal tax bill by $30,000 or more. “If we had to send a big check like that to the IRS at the end of the year, we’d have to take a hard look at whether we can afford Christmas bonuses, or that new software purchase,” Durand-Hollis said in an interview.
On the process front, we expect Majority Leader Harry Reid (D-NV) to file cloture on the underlying bill (Baucus substitute, really, but we digress) sometime tomorrow or Wednesday. That would set up a key vote on closing debate as early as Thursday. Word is that Senator Reid is short of the 60 votes he needs right now and that changes to the underlying bill will be necessary for him to attract those key swing votes.
With the introduction of the Snowe-Enzi amendment, the odds of positive changes to the small business payroll tax hike shot up dramatically. That’s good for the small business community and good for good tax policy. The House-passed provision is clearly a step backward for taxpayers and the Tax Code. It would impose new costs on small businesses while asking the impossible of the IRS. With the leadership of Senators Snowe, Enzi, and others, we’re hopeful we can fix all that.
Happy 50th, S Corps!
Today marks the 50th birthday of the S corporation! As you can imagine, here at the S Corporation Association we’ve got the cake and candles ready.
Perhaps more importantly, at a time of economic and political uncertainty, the story of the S corporation and its role in making the American economy more diverse and flexible is worth reviewing.
The S corporation was born at a time when the economy was slowing, Americans were losing their jobs, and an unpopular Republican President was being accused of practicing “trickle-down economics” by a Democratic Congress.
President Eisenhower embraced the S corporation — originally an idea proposed by the Truman Treasury Department — as a means of burnishing his Main Street credentials while addressing concerns of Republicans and Democrats alike that too much economic control was being consolidated into the hands of too few wealthy Americans.
Congress passed the provision as a small part of a much larger miscellaneous tax bill and the President signed on September 2, 1958 while on vacation up on Cape Cod.
Over the past fifty years, the S corporation has helped diversify the American economy while becoming an increasingly important player in the lives of millions of Americans.
While the S corporation has always been a successful vehicle for facilitating private enterprise and innovation, its growth accelerated dramatically in the last thirty years as marketing, communication, transportation and other transaction costs for small firms shrank along with the marginal tax rates they paid.
Lower transaction costs means smaller, more diversified firms and a stronger Middle America. Today, there are over four million S corporations, employing millions of workers and contributing significantly to our national income.
As Congress reconvenes next year and considers what to do with the tax code and how to address concerns of economic concentration, it should keep in mind that the S corporation was created by a Democratic Congress intent on countering economic concentration. It worked, as four million businesses spread throughout communities around the country can attest.
Happy 50th, S Corps and many returns!
The Game of LIFO
More movement on the LIFO front. Last week, the Securities and Exchange Commission approved for comment a roadmap to convert US accounting rules for public corporations over to EU rules.
The transition would take place over the next eight years and include numerous steps, including a decision by the SEC in 2011 on whether to proceed, but the bottom line is the accounting community and the people who regulate them are continuing to move away from rules that allow for LIFO accounting.
As S-Corp readers know, a move to eliminate LIFO for book accounting has implications for tax accounting as well, since the tax code requires companies to use the same broad inventory method for both.
While LIFO accounting debates may appear too technical to matter, this issue has the potential to impose a massive tax increase on manufacturers, retailers and wholesalers around the country. A recent revenue estimate for eliminating LIFO suggested it would raise taxes on these businesses by more than $100 billion over the next ten years.
A tax increase that size is bound to be noticed. It threatens a double hit on businesses that would be forced to pay back taxes on accumulated LIFO reserves while also being hit with higher tax levies in future years.
Tax issues were not a major part of the SEC discussion, although the Commissioners are aware of the tie between book and tax accounting on LIFO and suggested maybe the IRS could do something to fix it. Maybe. But, Congress still needs to find revenues over the next couple of years to offset a very expensive agenda of tax relief and spending increases. Whether the IRS comes to the rescue or not, we expect this issue to be debated in Congress beginning next year.
Extender Picture Muddy as Ever
With energy issues on the front lines, a group of 16 Senators has joined together to support a package of energy provisions that includes, well, just about everything — nuclear, drilling, renewables, and an extension of the production tax credit and other energy tax items.
Looking at the past votes on extenders, if you add the Republican members of the Group of Sixteen to the 55 or so Senators who supported the most recent extender package — the one with revenue offsets — Senate Majority Leader Harry Reid now has a roadmap to getting the necessary 60 votes and help take energy issues off the table before the elections.
What does this mean for the broader tax package, including the AMT relief, R&E tax credit and S corporation charitable deduction expansion? It is not entirely clear, but adoption of the very popular production tax credit and other energy tax provisions separately may ease pressure on Reid to move the larger extender bill.
IRS Issues Guidance on S Corporation Rules and Definitions
Yesterday, the IRS released a set of proposed regulations to clarify S corporation family shareholder rules as well as definitions of “powers of appointment” and “potential current beneficiaries” of ESBTs. Changes were also made to Treasury regulations in accordance with the Small Business Job Protection Act of 1996.
The IRS is encouraging public comments on these changes, which must be submitted to the IRS for review by Dec. 27, 2007. A hearing to discuss the proposed regulations is currently scheduled for Jan. 16, 2008 at 10:00am. Comments, along with outlines of topics to be discussed, may be submitted electronically to the IRS at http://www.regulations.gov. As always, we will be sure to keep you informed of any further developments.
Small Business Tax Package — Part II!
House Leadership has indicated that it will attach the $4.8 billion Small Business tax package to the second Iraq supplemental spending bill to be considered by the House this week. The tax package will likely remain the same, while the underlying spending bill will fund operations in Iraq for just three months. This approach will likely pass the House, but it appears to have significant challenges in the Senate and at the other end of Pennsylvania Avenue. As CongressDaily reported yesterday morning:
“McConnell labeled as a “uniquely bad idea” the House proposal backed by Appropriations Committee Chairman Obey to send Bush a compromise supplemental guaranteeing funding for combat operations only through July and then tie additional installments of money to the performance of the Iraqi government.”
White House spokesman Tony Snow has made similar comments.
Which all means that the ultimate fate of the Small Business tax package is an unknown; it could get enacted as part of a broader Iraq funding package that gets signed by the President, it could move separately as a stand-alone minimum wage/Small Business tax package bill, or it could get attached to an as-yet-unknown tax bill to come later.
A S-CORP readers know, we strongly support enactment of this package — especially the S Corporation reform title it contains — and have worked to ensure the final package includes S-CORP priorities of a uniform 2007 effective date and language (currently excluded from the package) to allow foreign investment in S corporations. As this legislative dance continues, we’ll look for opportunities to get these priorities included.
S Corporations and Foreign Investment
As the Small Business tax package is considered, one of the concerns we have heard is that allowing foreign investment in S corporations through a small business trust is somehow a limited or targeted tax benefit.
That’s not our experience. There are 3.8 million S corporations after all, and the idea that only a handful of these businesses feel the pinch of the nonresident alien limitation is simply not possible. Businesses residing on the border, those that serve ethnic communities, and mature family-owned S corporations as they approach their third and even fourth generation of ownership appear to be the most susceptible to running into this unnecessary ownership brick wall.
An indication of the true size of the problem may come from the IRS, which estimated that there were approximately 40,749 foreign partners of domestic partnerships in 1993 (the last numbers available), or about .3 percent of all partners in that year. With 3.8 million S corporations, a similar level of foreign investment in S corporations suggests the nonresident alien ESBT provision will benefit thousands of businesses across the country.
DOES THE NON-RESIDENT ALIEN LIMITATION AFFECT YOUR BUSINESS AND ESTATE PLANNING? PLEASE LET US KNOW SO THAT WE CAN RELAY YOUR CONCERNS TO POLICY MAKERS. Click here to send us an email.
Budget Targets Tax Gap
It is time to start a tally of how many times Congress spends revenues raised from closing the tax gap.
It’s an annual tradition. Each year, Congress picks out its favorite revenue raiser and then uses that revenue over and over again to pay for new spending or tax relief. Past contenders include overturning the Schmidt Baking decision, codification of the IRS’s economic substance test, SILOs, LILOs, COLI, etc. For 2007, the tax gap is the leading contender, and it’s already being used up.
As CongressDaily reported last week, the budget includes more than twenty “reserve funds” that allow for additional spending on a wide range of domestic programs, but only if the additional spending is offset with spending cuts or tax increases. How will all of this new spending get paid for? The tax gap, of course.
“[Senate Budget Committee Chairman] Conrad [contended that] most of the additional revenues required in the next fiscal year could be obtained by closing the “tax gap” by collecting taxes that now go uncaptured, and by curtailing offshore tax havens and tax shelters.
“Frankly, I don’t think it’s very difficult to achieve,” Conrad told reporters afterward. “Anybody who tells me they can’t collect 15 percent of this money that’s in tax havens and tax scams, they better get a new revenue commissioner because it ain’t that hard. I did it when I was a tax commissioner [in North Dakota.]”
The audience of the recent IRS Roundtable on the Tax Gap got a different point of view. From IRS Commissioner Everson to business community representatives such as Macy Davis from the National Federation of Independent Business, the panel uniformly agreed that, while the Congress and IRS should do what they can to ensure people pay what they owe, collecting this revenue is complicated and not pain free, especially for compliant taxpayers who will have to live with the increased reporting and enforcement requirements.
Senator Grassley, Ranking Member on the Senate Finance Committee, has also raised concerns about pressing the tax gap too far. As he stated on the Senate floor this week:
“I find that the tax gap is one of those issues here in Congress that is a little like the weather: Everyone wants to talk about it but no one is doing anything about it. But the way people talk around here, they view that the tax gap is a “cure-all.” Have to pay for AMT? Tax gap. Want to expand spending on health care? Tax gap. Balance the budget? Tax gap. Given the amount of faith people have put into it, tax gap has suddenly become one of those magic elixirs the peddlers used to sell in the old west. ‘It will cure what ails you’ was the slogan the slick salesmen used to say. And so the tax gap has become the elixir for all fiscal problems. I’m surprised folks don’t think the tax gap can cure baldness.”
Of course, the real danger is that Congress pays for its new spending plans with tax increases that have little or nothing to do with the tax gap. We have already seen an increase in S corporation payroll taxes paraded under that banner. Before these new “reserve funds” are funded, we’ll probably see it again.
Is Official Washington Targeting S Corporations? Sure Looks That Way
As our readers know, the IRS is currently targeting S corporations, and only S corporations, for audits as part of its on-going “Tax Gap” research project. And the Joint Committee on Taxation and Treasury Inspector General for Tax Administration have, over the past couple year, proposed to dramatically increase the application of payroll taxes on S corporation income.
Now the Congressional Budget Office issues its new biannual “Budget Options” report, and there, on page 297 is an option entitled, “Repeal Tax-Free Conversions of Large C Corporations to S Corporations.” What follows is a long narrative of the history of C corporation conversions, the advent of LLCs in 1988, and the resulting disparity of converting from C to S verses converting to an LLC.
History aside, the option proposed by the CBO is just another shot at the S corporation community. Their reasoning, apparently, is to level the playing field between the treatment of S corporations and LLCs. As the report states:
“A major advantage of this option is that repealing tax-free conversions by C corporations would treat economically similar conversions — from two-tiered corporate tax systems to single-tiered systems — in the same way. Equalizing that tax treatment would, in turn, allow society’s resources to be allocated more efficiently by making tax considerations less important in decisions about what legal form a business should take.”
If equalizing tax treatment is the CBO’s motivation, why not just allow tax-free conversions of LLCs? The same economic arguments apply. Moreover, what about the myriad of advantages LLCs have over S corporations, like no limitations on the number or types of shareholders, the ability to issue multiple classes of stock and convertible debt, or the passive investment and built-in gains rules that apply to converted S corporations? We looked for CBOs recommendations to level the playing field in these areas, but were unable to find any.
The bottom line is the S corporation community needs to be as active as ever to ensure that Congress has all the facts when considering the rules under which we operate. With S corporations in the cross-hairs, anything less than constant vigilance is simply not going to succeed.
Rangel Ready to Prepare Small Business Tax
Good news for S corporations and other closely-held businesses! Ways and Means Chairman Charles Rangel (D-NY) indicated yesterday that he plans to put together a package of small business provisions to be coupled with the minimum wage increase that has already passed both the House and the Senate. This announcement reverses the previous position of the House leadership, who had indicated they wanted to send the President a “clean” minimum wage bill. As BNA reports:
House Ways and Means Committee Chairman Charles Rangel (D-N.Y.) said Feb. 6 that the House would put together its own tax package to be married with minimum wage increase legislation (H.R. 2) in the Senate, but gave no indication of the size of the package or what it would include. Rangel had previously given little indication of his plans for the future of the minimum wage increase. The House passed a minimum wage increase as a stand-alone measure Jan. 10 and the Senate approved an increase with an $8 billion tax package Feb. 1. He told BNA Jan. 30 that the $8 billion Senate package was too expensive and would use up too many revenue raisers.
Your S Corp team has already started discussions with House tax writers on the importance of including S corporation reforms in this package, and of making sure the provisions take effect immediately to offset any increased labor costs from the higher minimum wage. Expectations is that the Ways & Means Committee will mark-up its bill as early as next week. We’ll keep you apprised of any progress.
S Corp Audits Back in the News
Remember the National Research Program over at the IRS? This project is designed to give the IRS better information regarding tax compliance and the “tax gap.” The NPR began by looking closely at high-income individuals. Next, NPR targeted 5000 S corporations for intensive audits to identify better means of ensuring their compliance with the tax laws.
Yesterday, the Treasury Inspector General for Tax Administration (TIGTA) released a progress report on the audits. While the report itself focuses on the technical challenges faced by auditors, there were a couple of interesting points. First, TIGTA observes that, for 2005, there were 3.6 million S corporations, a significant jump from previous years. We’ll have to update our website! Second, 99 percent of the 5000 audits have been initiated, and 17 percent are complete to date.
Finally, BNA’s coverage of the report reflects one of our principle concerns with the audits. The IRS is looking only at S corporations right now. Partnerships are not being studied, even though the LLC community is, by many accounts, growing faster than the S corporation community.
The S corporation research project emanated from a pilot study conducted in 2004 involving about 130 audits of S corporations and partnerships. IRS decided to focus on S corporations for the NRP project to determine how agency auditors could “do a better job” of auditing the flowthrough entities, IRS Research, Analysis, and Statistics Director Mark Mazur said at an August Senate Finance Committee hearing. The NRP project is auditing about 1,200 taxpayers from tax year 2003 and about 3,800 audits from tax year 2004. The audits will focus on taxpayers’ Forms 1120S.
Do S Corporations Pay the Minimum Wage?
Now that the Senate has adopted a package pairing the minimum wage together with provisions to improve S corporation rules, one of the questions our Capitol Hill friends have asked us is, “Do S corporations pay the minimum wage?” The answer is an emphatic yes. While there are no studies to our knowledge that directly track the payment of minimum wages by businesses structured as S corporations (to be sure, there is little economic data on wage levels period), a couple of items demonstrate that S corporations are more likely to be adversely impacted by an increase in the minimum wage than other forms of business.
According to the IRS, S Corps represented three out of five corporations in 2003 (the last year numbers are available), but only received one dollar out of five. That means the average revenues for a C corporation is six times larger than the average revenues of an S corporation. All things being equal, the average S corporation will be harder hit by an increase in labor costs than the average C corporation.
Moreover, the incidence of minimum wage workers is dominated by industry type. For example, a professional services corporation is less likely to pay at or around the minimum wage than the local Wendy’s. Here’s the breakdown of S corporations in 2003 by industry from SOI (numbers have been rounded):
Agriculture, forestry, fishing, and hunting: 81,000
- Mining 17,000
- Utilities 3000
- Construction 450,000
- Manufacturing 150,000
- Wholesale 190,000
- Retail 375,000
- Transportation & warehousing 103,000
- Information 67,000
- Finance and Insurance 135,000
- Real Estate and Leasing 372,000
- Professional and Scientific 513,000
- Holding Companies 22,000
- Waste and Remediation 168,000
- Education 27,000
- Health and Social Services 208,000
- Arts and Entertainment 74,000
- Food and Accommodation 188,000
- Other Services 196,000
By number of firms, S corporations in minimum wage heavy sectors like agriculture, retail, education, health care services, and other services represent about 45 percent of all S corporations. By total receipts, the prevalence is greater — the retail and wholesale sectors alone comprise 42 percent of all S corporation receipts.
So while S corporations represent a broad swath of the business community, they are characterized by having significantly lower average revenues than C corporations while at the same time having a large presence in sectors more likely to pay the minimum wage. Providing them relief is consistent with the notion of targeting those business most likely to be affected, and it allows Congress to do so in a much broader manner than targeting one specific industry over another, since S corporations are represented in all industry types.
Wall Street Journal on the Tax Gap
Earlier this week, the Wall Street Journal weighed in on the tax gap debate, highlighting the challenge Congress faces as it attempts to address the tax gap in a constructive manner that does more good than harm. As the WSJ noted:
To put the tax gap in perspective, consider that the IRS took in tax receipts in fiscal 2005 of more than $2.2 trillion and that the overall U.S. tax compliance rate is about 85%. This isn’t perfect, but it also isn’t Italy. It’s especially good considering the U.S. tax system is based on voluntary compliance. Nina Olson, the IRS’s taxpayer advocate, told Congress last year that IRS auditors have found that an estimated 94% of noncompliance is the result of honest mistakes by tax filers who simply don’t understand the 17,000-page beast of a tax code.
The WSJ also highlighted the challenge S corporations face in warding off an unfair increase in payroll taxes.
Here’s another bad idea: Many doctors and lawyers who are incorporated under subchapter S will often pay themselves lower wages but higher dividends, in order to reduce self-employment taxes. The law is vague on the limits of this practice, and it is undoubtedly abused. But the Joint Tax Committee’s preferred solution is to make all professional income — even dividend payments — subject to self-employment taxes; this is nothing more than a backdoor tax hike.
The S Corporation Association does not advocate for businesses that fail to pay the proper amount of tax. But fixing tax gap is a complicated matter, and many of the proposals offered up to close the gap are just tax increases in disguise. The S Corporation Association has joined the Coalition for Fairness in Tax Compliance to help play a constructive role in the tax gap debate. This broad-based group includes the NFIB and US Chamber of Commerce and is going to be very active in the ongoing tax gap discussion. We’ll keep you apprised.
Minimum Wage & Small Business Tax Package Update
Just a quick update on the status of the $8 billion small business tax package that may accompany the proposed minimum wage increase. The bill is currently the pending business in the Senate. On Monday, Majority Leader Harry Reid filed a petition to close off the debate and pass just the minimum wage increase, without any offsetting small business tax relief. This vote is scheduled to take place momentarily.
The consensus is that Senator Reid doesn’t have the 60 votes necessary to move the minimum wage package without the offsetting business tax relief, and the vote is being characterized as part of the ongoing tug-of-war between the House and Senate over whether the minimum wage should be paired with any small business tax relief at all. As BNA noted, the vote “is expected to demonstrate that a bill without the tax relief cannot succeed in the Senate.”
Once the clean bill fails in the Senate, debate will begin in earnest on the tax title. As S-CORP readers know, there is an entire title of S corp reforms in the Finance Committee bill, so we’ll be actively engaged in the debate.
Another Tax Gap Hearing
Another page was added in the ongoing search for a plan to close the so-called “Tax Gap” yesterday. The issue previously has been raised in the Senate Finance Committee, where Treasury officials and others have been questioned in hopes of discovering the best means of closing the gap between what taxpayers owe and what they pay.
Yesterday the Senate Budget Committee took its turn on the issue. The Committee held a hearing yesterday morning entitled, “The Growing Tax Gap and Strategies for Reducing It” and invited three experts, Robert McIntyre with the “tax happy” Citizens for Tax Justice, Michael Brostek with the Government Accounting Office, and S- CORP ally John Satagaj with the Small Business Legislative Counsel. Perhaps the most revealing moment of the hearing occurred when Mr. McIntyre observed that compliance would increase if the IRS engaged in “… terrorizing people, ah, that’s the wrong word I suppose. Scaring people out of entering shelters is even better than catching them after they do it.”
Such an approach is a far cry from the dominant view just a few years ago that a more communicative, interactive, and technically nimble tax collection policy would be best. As former Vice President Al Gore and Treasury Secretary Robert Rubin penned in 1998, “For the past five years, this Administration has been committed not just to a fairer tax code, including cutting taxes for middle-class families, but also to fairer tax collection. Our philosophy is simple: the taxpayers don’t work for us, we work for them.”
The hearing itself was a sobering discussion of just how difficult it is to accurately collect taxes under our convoluted and arbitrary tax code. Mr. Satagaj neatly condensed S-CORP concerns about the Tax Gap effort into two sentences – “Honest small business taxpayers are especially at risk of being subjected to needless and unwarranted regulatory burdens in an attempt to capture the few “bad actors” that do not fulfill their tax obligations. Small businesses already bear a disproportionate share of the cost of regulation.”
Beyond new regulatory burdens, John also reiterated our concerns about proposals to increase taxes – like the S corporation payroll tax – being promoted under the guise of reducing the tax gap. As John pointed out, “It is important that we reserve the label “Tax Gap” for only those proposals which are truly related to addressing the “Tax Gap.” We fear we will see various revenue offsets labeled as “Tax Gap” closers. In many cases, the revenue offsets alter long time policies upon which compliant taxpayers have fairly and honestly relied.”
109th Congress Concludes Business
Out with the Old Challenges…
Last week the House and Senate wrapped up the 109th Congress by approving a “continuing resolution” to fund the federal government through February 15th. Doing so leaves major 2007 spending decisions to the new Democratic-controlled Congress when they convene in January.
The House and Senate also approved a $45 million tax bill that extends for two years popular to tax benefits, such as the Research and Development and Work Opportunity Tax Credits, many of which expired at the end of last year. This comprehensive package also included an energy tax title that extended, again for two years, the Production Tax Credit and other energy tax credits last enacted as part of the Energy Policy Act of 2005. Finally, the bill refined and expanded the rules governing Health Savings Accounts, permitting employees to roll Flexible Savings Account balances into an HSA while increasing the overall limit on HSA contributions.
Adoption of these tax extensions creates a new tax policy wall of sorts, where numerous popular tax provisions will again expire at the end of 2007. Over the next two years, the new congressional leadership will face the considerable political challenge of approving (and paying for with corresponding tax offsets) legislation to both address a top tax priority of the Democratic leadership-protecting low and middle-income taxpayers from the alternative minimum tax-together with extending the expiring provisions.
In with the New…
Given the new congressional leadership’s goal of offsetting any new spending or tax relief with spending cuts and tax increases, they are beginning their legislative leadership with a quest for revenue. Where will they find it?
One likely target continues to be the “tax gap” (the difference between taxes legally owed and the amount of taxes collected on a timely basis). Last week, incoming Senate Finance Committee Chairman Max Baucus (D-MT), who has continually focused on the need to address the tax gap this Congress, ended his objection to the confirmation of Eric Solomon as Assistant Treasury Secretary for Tax Policy after receiving a commitment from Treasury Secretary Henry Paulson to testify on the “tax gap” at a Senate Finance Committee hearing next year. (As S-CORP members know, Eric has met with our organization on several occasions and is viewed as a friend to small and closely-held businesses. Congratulations to Eric on his confirmation!)
S-CORP has been focusing on the Finance Committee’s, Joint Committee on Taxation’s (JCT) and Treasury’s work in this area for two years now and has played an active role in opposing the JCT proposal to increase taxes on S corps. As you’ll recall, much of the estimated tax gap is attributed to small and closely-held businesses, and the IRS has begun a program to audit 5000 S corporations in an effort to identify where their enforcement activities could be better targeted.
In recent days, the rest of the business community has come to recognize the challenge it faces. Last week, our friends at the National Federation of Independent Business convened the first of what promises to be many meetings on the tax gap initiatives and the threat they pose to the business community should they reach beyond the established definition of the tax gap into the realm of new tax increases. S-CORP promises to be an active part of these efforts.
New Tax Writers in the Wings…
Another area of interest to S-CORP members is who will sit on next year’s tax panels. Senate Democrats have already named three new Finance Committee panelists (Salazar, Cantwell, and Stabenow), but the new Republican Committee member has not been named yet. Last week we were hearing that Senator Pat Roberts (R-KS) is the lead candidate to fill that vacancy on the Senate Finance Committee. Other names in consideration include Senator George Voinovich (R-OH) and John Ensign (R-NV). Republican Committee assignments might be announced this week or could wait until the new Congress convenes on January 4th.
In the House, the Democratic steering committee met last week to complete appointments of incoming chairmen. This week the Democratic steering committee will consider committee assignments so we will report back to you once there is news about the new members on the tax-writing Ways and Means Committee. The House Republican steering committee completed its work on ranking members and named Rep. Jim McCrery (R-LA) as Ranking Member for the House Ways and Means Committee and Steve Chabot (R-OH) for the Small Business Committee.
The big story in the House has been the Democratic Leadership’s announcement that the House will be in session 5 days a week beginning in January with fewer “recesses” or “district work periods”. Typical workweeks for the Republican-led Congress have been Tuesday-Thursday to allow Members more time in their districts. This new schedule is likely to present both benefits and challenges to the business community as there will be more congressional work days that pro-S corporation and pro-small business legislation can be approved, but that also means more opportunities for revenue offsets to be needed to pay for any new benefits. S-CORP will continue its vigilance on your behalf as we look ahead to the changes the new Congress will bring and focus on finding new friends and allies to support the much-needed reforms to the S corporation structure.
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