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.
Small Business Tax Package Passes Senate for Second Time
It’s getting so you can’t tell the tax bills without a program. The Small Business Tax package that includes the S Corporation Reform tax title has been adopted by the Senate for the second time, this time as a Baucus/Grassley amendment to the Iraqi War supplemental.
An earlier version of this package was adopted as part of the effort to raise the minimum wage. Differences between the House and the Senate stalled that bill, and the House attached its version to the supplemental as a means of breaking the stalemate. What happens now is unclear. The supplemental is likely to be vetoed in its current form, while the minimum wage package is being held up in the Senate pending Senate Republicans demand of a pre-negotiated agreement over what the final bill will contain.
The S Corporation Association has weighed in strong support of these improvements to the rules under which S corporations operate. Our Chairman has written a letter of support to the tax writers, we have organized a coalition of business groups to support the provisions, our champions in the Senate have weighed in with their leadership, and our S corporation members have met with their Senators and Representatives to build support for these helpful reforms, including S Corp priorities of reducing the impact of the Sting Tax and expanding the ownership pool for S corporations.
In addition to the Baucus/Grassley amendment, S Corp Champions Senators Smith and Coleman have filed an amendment to harmonize all the effective dates for the S corporation provisions to January 1st, 2007. If our members are going to pay higher labor costs in 2007, it makes sense for all of the offsetting tax relief to begin this year as well.
Despite the current logjam, your S Corp team is confident that these reforms will wind up on the President’s desk this year, in a form that he can sign into law. In the meantime, we’ll keep advocating for these and more. Your advocacy is welcome as always.
Cato on Tax Gap
Cato’s Dan Mitchell has written an excellent summary of the tax gap issue, noting among other things that the U.S. enjoys the smallest shadow economy of any of our major competitors. As Dan writes:
“By global standards, the United States has very little tax evasion. According to the world’s leading expert, Friedrich Schneider of Austria’s Johannes Kepler University, the U.S. shadow economy accounts for just 8 percent of gross domestic product, which compares to an average of 16 percent for 21 major industrial countries he examined. Indeed, Schneider finds that the United States has the smallest shadow economy of 145 nations analyzed.
A comparatively modest tax burden is perhaps the main reason why American taxpayers are less likely to evade taxes than are their foreign counterparts. Table 1 shows that lower-tax nations such as the United States, Singapore, and Switzerland have the least tax evasion. With lower tax burdens, taxpayers have less incentive to hide their money from tax authorities.
However, some U.S. taxes have high marginal rates, which undermines compliance. One study found that a 1 percentage point increase in marginal tax rates is associated with a 1.4 percentage point increase in the underground economy.”
S-CORP Leads Coalition Push for S Corporation Reforms in Minimum Wage Bill
The S Corporation Association (“S-CORP”) today sent a letter to congressional tax writers advocating for the inclusion of S corporation reforms in the final small business tax relief package and for the need to make these provisions effective immediately.
Signed by the S Corporation Association, the Associated General Contractors, the Printing Industries of America, the Independent Community Bankers of America, the Association for Manufacturing Technology, America’s Community Bankers, and the National Roofing Contractors Association, the letter emphasizes the important role S corporations play in the growth of small businesses and the importance of easing the rules under which they operate.
“While the S corporation community has grown, many of the rules governing their operations have remained the same. The Senate-passed package of small business tax relief would address some of these rules, making it easier for S corporations to compete with LLCs and other business forms,” the letter notes. “While these provisions do not address all the challenges faced by S corporations, they are a significant step towards eliminating unnecessary and costly rules that hinder the ability of S corporations to grow and create jobs.”
S-CORP Chairman Tom McMahon observed that several of the provisions included in the Senate package have been long time priorities for the S Corporation Association. “Provisions to reduce the impact of the so-called “sting tax” and to expand the eligible population of S corporation shareholders are two priorities for our group and they represent positive steps in the long road towards establishing parity between S corporations and LLCs, ” McMahon said.
S-CORP Executive Director Brian Reardon pointed out that both history and the economics support making S corporation reforms part of the minimum wage increase. “S corporation reform was a big part of the tax package that accompanied the last increase in the minimum wage,” Reardon observed. “While S corporations appear to be disproportionately represented in industries that pay the minimum wage, the average S corporation has significantly fewer resources than the average C corporation to pay those increased labor costs.”
The S Corporation Association is the only association that speaks exclusively for the national interests of America’s 3.6 million Subchapter S businesses. S-CORP was founded in 1996.
House Passes Small Business Tax Package — What’s the Next Step?
Real quick, the House just passed its small business tax package (H.R. 976) to accompany the proposed minimum wage increase, 360-45. This action follows a very bipartisan markup last Monday, where the tone of the hearing was a dramatic departure from what we’ve come to expect from Ways and Means meetings. That this comity occurred over a $1 billion package that included no S corporation provisions was a little disconcerting, but it is something we will have to work on.
So what’s the next step? The Senate could take up the House-passed bill, substitute in the Senate’s $8 billion small business tax relief package (including the S corporation tax title we care about), and ask for a conference with the House. Or the two bodies could negotiate away their differences now, and then pass the resulting product out of the Senate and House.
Either way, it looks like the tax writers have two or three weeks of work ahead of them to reconcile their differences. Common ground over the competing revenue raisers should be particularly difficult to find. We’ll keep plugging away to ensure the Senate-passed S corporation provisions survive negotiations and that they take effect immediately.
Senators Offer Middle Class Tax Package
Finance member Charles Schumer (D-NY) and five freshmen Democratic members introduced legislation yesterday (S. 614) to target tax relief at middle class families. According to the authors, the bill would reduce revenues by $137 billion over ten years in order to:
o Double the Child Credit to $2,000 for a child’s first year;
o Increase the dependent care credit to 35 percent for certain families;
o Extend AMT relief; and
o Consolidate existing education deductions in a single, $2,500 credit to cover tuition, fees, and books.
So, in the era of PAYGO, how should the Congress offset $137 billion in tax relief? You guessed it — the tax gap. As BNA reported this morning, “Schumer mentioned several possible ways to pay for the middle class relief, including raising income taxes on families making $400,000 per year, repealing oil industry tax breaks, and/or narrowing the tax gap.”
S corporations and small businesses need to be on their guard that talk about reducing the tax gap doesn’t turn into broad-based tax increases on the small business community. The S corporation payroll tax provision, repealing LIFO accounting rules, and raising taxes on small business exporters are all provisions that have been suggested in the context of addressing the tax gap.
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.”
Finance Reports Out Small Business Tax Relief
In a bit of potential good news for small businesses, the Senate Finance Committee today adopted by voice vote an $8 billion package of small business tax incentives to accompany a planned increase in the minimum wage. Included in the package is a one year extension of the current Section 179 small business expensing limits, an extension of the Work Opportunity Tax Credit through 2012, and an extension of the shorter, 15-year depreciation lives for certain owner-occupied buildings. For S Corps, the package includes an entire title of big and small changes to the rules governing how S corporations operate, including:
- Easing the rules regarding passive investment income under the “Sting Tax”;
- Addressing concerns of S corporation banks; and
- Expanding qualifying beneficiaries of an Electing Small Business Trust
This title reflects lots of advocacy work on the part of the S-Corp Association and other interested groups in town. As S-Corp readers know, two top priorities of the Association are to eliminate the dreaded Sting Tax while allowing non-resident aliens to become S corporation shareholders. With a couple technical challenges, the Finance-passed provisions represent a significant step forward for achieving our goal of parity with LLCs. As our Chairman wrote to Senator Max Baucus today:
Provisions to reduce the impact of the so-called “sting tax” and to expand the eligible population of S corporation shareholders are two priorities for our group and they represent positive steps in the long road towards establishing parity between S corporations and LLC’s. We appreciate your work in including these priorities, and look forward to working with you in the future to address our Association’s other important challenges.
In addition to providing these much needed improvements to the S corporation rules, I would strongly encourage you to establish a uniform effective date for the S corporation provisions — beginning after December 31, 2006 — to ensure that this relief reaches our members in the same year as the minimum wage is increased.
Just where does the package go from here? The House minimum wage bill does not include any tax provisions, and careful readers of the Constitution understand that revenue bills must originate in the House. Meanwhile, a minimum wage increase without any small business tax relief is unlikely to pass the Senate… so, how do small business advocates get around the Constitution and enact much needed tax relief for America’s employers? As CongressDailye reports earlier today:
But Finance Chairman Baucus said it is now up to House and Senate Democratic leaders to resolve a dispute between the two chambers over whether the small business tax breaks should be linked to the minimum wage. “The Senate has made it clear: There aren’t 60 senators who will vote for the minimum wage [increase] unless it includes small business provisions,” Baucus told reporters after the markup. “But at this point, it’s up to Speaker Pelosi and [Majority Leader] Reid as to how they want to work this out.” The House passed a straight minimum wage bill, and House Ways and Means Chairman Rangel has indicated he intends to enforce the House’s constitutional prerogative to initiate tax legislation. “The Senate as a whole still has the opportunity to pass a clean minimum wage bill,” a Rangel spokesman said today.
One possible solution is for the Senate to wait for the energy tax bill scheduled to be considered by the House this week, attach the Senate minimum wage and tax package, and send it back. Under the rules, a tax bill is a tax bill, and there would be no constitutional challenge to the resulting package.
Finance Holds Small Business Tax Relief Hearing — S–CORP Submits Testimony
Today, the Chairman of the S Corporation Association Advisory Committee, James Redpath, submitted testimony on S Corp reform to the Senate Committee on Finance. The Senate Finance Committee held the hearing on small business tax relief as part of its preparation for Senate consideration of the minimum wage increase. As Jim pointed out in his testimony:
I am concerned that many of the companies that will bear the impact of this increase in labor costs are closely-held or family-owned businesses structured as Subchapter S corporations. My goal is to provide you with a first hand account of how to offset some of this new labor cost to small businesses by improving the outdated rules currently governing S corporations.
Jim goes on to highlight some of the S Corp priorities that would most improve the ability of today’s S Corp to compete and create jobs, including provisions to ease the burden of the built-in gains and sting taxes, increase their access to capital, and level the rules applying to S Corps and LLCs. The current tax relief plan, as outlined by Chairman Baucus, would reduce revenues by $8 to $10 billion over the next five years and include:
- A one-year extension of Section 179 small business expensing;
- A one-year extension of the lower, 15-year depreciation rules for retail businesses;
- A permanent extension of the Work Opportunity Tax Credit; and
- A higher, $10 million threshold for businesses wishing to use cash accounting.
Chairman Baucus also made clear that this tax relief would be fully offset by other tax increases, but he declined to be more specific. (While we’re told that none of the so-called revenue raisers we’ve worked to oppose will be included — raising payroll taxes on S Corps, LIFO repeal, etc — we’re going to keep working with our allies in the business community to ensure they don’t surface on this bill or any other.) Moreover, the Chairman indicated that they were open to suggestions for other small business friendly provisions that might be included.
On that front, Senator Blanche Lincoln, the sponsor of several S Corp reform bills, spoke up and raised the importance of including S Corp reforms in this legislation, to which the Chairman replied, “Those are great suggestions.” We agree, and we’ll continue to work with Senator Lincoln’s office and other S Corp friends to get these provisions enacted…
One complication is the fact the House is passing a minimum wage increase without any offsetting tax relief. The House bill would increase the wage by the following schedule:
- From $5.15 to $5.85 60 days after the legislation is signed;
- From $5.85 to $6.55 one year later;
- From $6.55 to $7.25 two years later.
Since the Constitution says all revenue bills must originate in the House, we’re interested to see how the House reacts to the Senate-passed tax relief. It could simply refuse to take up the provisions, we’ll be sure to keep you apprised of any developments. Social Security Reform and S Corps
We’ve been hearing all sorts of rumors these days about the direction Social Security reform has taken. Robert Novak reports that Treasury Secretary Hank Paulson has offered an increase in the Social Security Earnings Limit as a means kick -starting reform talks. Our Treasury friends adamantly deny that rumor, saying the Secretary has done no such thing.
In reaction to these rumors, House Republicans yesterday reaffirmed their strong opposition to raising the cap. Meanwhile, the White House renewed its call for the creation of Personal Accounts to accompany Social Security reform. Maybe the earnings cap idea was just a trial balloon to kick start reform talks? If so, it looks like we’re back to square one, with the White House insisting on Personal Accounts and congressional Democrats refusing to talk until the President takes them off the table.
Just to be clear, raising or eliminating the Social Security earnings limit would represent a massive tax increase on individuals and businesses. For example, an S Corp with $120,000 in income would see its tax burden increase in 2007 by nearly $3,000. For perspective, that tax increase more than offsets any tax relief the business enjoyed from the 2003 Tax Relief Act.
The current cap for 2007 is $97,500. Wages up to that point are subject to payroll taxes, totaling 15.3 percent of wages and fund Social Security and Medicare benefits to seniors. Above that level, only the 2.9 percent Medicare tax applies.
A New Congress Brings New Tax Writers
Last week marked the swearing-in of all new Members of Congress and the official change in control of the House and Senate from Republican to Democratic hands. House Democrats elected Nancy Pelosi (D-CA) Speaker of the House and Senate Democrats elected Senator Harry Reid (D-NV) Senate Majority Leader.
On the Republican side, leadership was also elected – Rep. John Boehner (R-OH) is the Minority Leader of the House and Rep. Roy Blunt (R-MO) is Minority Whip –final committee assignments were also announced. Republican members filled the remaining two vacancies on the tax-writing Ways and Means Committee with Reps. Patrick Tiberi (R-OH) and Jon Porter (R-NV).
Rep. Tiberi represents the 12th Congressional District of Ohio – the middle of the state to the north of Columbus, including Delaware County and parts of Franklin and Licking Counties – while Rep. Porter represents the 3rd Congressional District of Nevada, including the Southern tip and parts of Las Vegas, Henderson and Lake Mead.
S Corp members with operations or significant investments in those states are asked to alert us.
Minimum Wage and Small Business Tax Relief as S Corp members know, the House plans to pass a minimum wage increase as part of their “First 100 Hours” legislative push. The bill would raise the minimum wage from the current $5.15 an hour to $7.25 over the next couple years and is scheduled to be taken up Wednesday, January 10th.
On the Senate side, things may proceed slightly more slowly but with a broader effort that includes tax relief. On Wednesday the 10th, the Senate Finance Committee will hold a hearing on what sort of small business tax breaks should accompany an increased minimum wage, apparently with a goal of marking up the proposals on the 17th.
The idea of a small business tax package is to offset the increased labor costs a higher minimum wage imposes on employers most at risk — America’s small and family-owned business community. As America’s most popular form of small business corporation, S Corps have lots at stake in this debate, and we’re working with our friends to ensure S Corp priorities are recognized. More on this to follow….
President Promotes Extending Tax Relief — House Raises a Barrier
In a very unusual move, the President had his own op-ed published in last Wednesday’s Wall Street Journal outlining his domestic policy plans for the upcoming Congress. Chief among his priorities is to make permanent the tax relief enacted in the first six years of his Administration, including the lower marginal tax rates, small business expensing, and health care provisions enjoyed by S corporations and other closely-held businesses. The President wrote:
It is also a fact that our tax cuts have fueled robust economic growth and record revenues. Because revenues have grown and we’ve done a better job of holding the line on domestic spending, we met our goal of cutting the deficit in half three years ahead of schedule. By continuing these policies, we can balance the federal budget by 2012 while funding our priorities and making the tax cuts permanent. In early February, I will submit a budget that does exactly that. The bottom line is tax relief and spending restraint are good for the American worker, good for the American taxpayer, and good for the federal budget. Now is not the time to raise taxes on the American people.
For S Corps of all sizes, extending the tax relief is a matter of great importance. The marginal rates that apply to individual taxpayers apply to S Corp income as well, and while the focus has always been on the top 35 percent rate, the fact is smaller S Corps would be hurt too, as all the rates would revert to their pre-2001 levels.
While the President was advocating extending his tax relief, the House was approving new budget rules that will make it more difficult to extend existing tax provisions or initiate new ones. The new rules, under the title of PAYGO (for pay-as-you-go) will prohibit any bill affecting direct spending or revenues from increasing the budget deficit, which means future efforts to extend tax relief would need be offset with other tax increases or spending reductions.
With big tickets items like protecting families from the Alternative Minimum Tax and extending the R&E tax credit and other expiring provisions on the agenda, these new rules are going to put increased pressure on Congress to identify offsetting provisions that will raise revenues. Proposals like expanding the application of payroll taxes on S Corp income and eliminating IC-DISCs will likely be part of the discussion. Our job is it educate the new Congress as to why these ideas are bad for small businesses and bad for America.
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