Congress returns Monday with lots to do and just three weeks to do it. Here’s the list of must-pass items we’ve identified:
- AMT Patch
- Tax Extenders (Including the S Corporation Charitable Provision)
- S-CHIP Reauthorization
- All the Spending Bills
- Increase Doctor Payments under Medicare
That’s enough to fill two months of session, let alone 21 days, but there’s more. In addition to these items that most observers agree must get done, there is also a long list of priorities that the majority would like to address before they go home for the holidays, including an energy bill, an agriculture bill, and more.
How will it all work out? We don’t have any clever ideas, although our expectation is that, just before Christmas, Congress may pass a large spending package combined with a one-year extension of the AMT patch. Everything else needs to be offset to one degree or another, and coming up with billions in higher taxes and/or spending cuts that the House, Senate, and President all can agree to has proven to be a daunting task. They may find a way, but it’s not going to be easy.
S-Corp Defends Small Exporters
Speaking of tax increases, remember the misguided effort last year to raise taxes on small and closely-held exporters? Well, its back, and this time the goal is to wholly eliminate the last remaining export tax benefit in the tax code.
Two bills were introduced in recent weeks to raise taxes on exporters. First, both the House Ways and Means and Senate Finance Committees introduced technical corrections bills—HR4195 and S2374—just before the Thanksgiving break that would, among other things, raise the tax rate applied to small exporter dividends from an IC-DISC from 15 to 35 percent!
Second, Ways and Means Chairman Rangel, as part of his big “Mother of All Tax Bills” (HR3970), proposed to completely eliminate all the remaining export provisions under the IC-DISC, raising about $800 million over ten years.
The combination of these two proposals would be to completely eliminate the lone remaining provision designed to help small and closely held exporters compete in foreign markets.
In response, S-Corp Chairman Tom McMahon wrote to Chairmen Baucus and Rangel opposing this provision. His essential point is why, especially now, would Congress choose to raise taxes on American companies creating American jobs by exporting American-made products?
This year, we have allies in high places. Led by Finance Members Maria Cantwell and Gordon Smith, five United States Senators penned a letter this week to Chairman Baucus expressing their opposition to this so-called technical correction. As the senators noted:
U.S. export growth is one of the few bright spots in the current U.S. economy and a critical offset to the on-going problems in the housing and credit markets. Given this environment, we do not believe it is wise for Congress to act unilaterally to increase taxes on U.S. companies that create jobs here in the United States and export their products overseas.
Do you export, or represent companies that do? Then this issue affects you. Send in your comments to the Ways and Means and Finance Committees before the close of business, Monday December 3rd. You can find the submission instructions at:
S-Corp Payroll Tax Increase Unlikely (This Year)
As S-Corp readers know, Congress has for some time contemplated raising payroll tax levies on S Corporation income. Recent consideration of this idea first popped up in a JCT report back in February, 2005. Most recently, a related version of the tax increase was included in Ways and Means Chairman Charlie Rangel’s “Mother of All Tax Bills” proposal introduced a couple of months ago.
The Rangel proposal would impose payroll taxes (including both Social Security and Medicare taxes) on S corporation earnings where 1) the S corporation is primarily a services company and 2) the earnings are attributed to a shareholder who also works at the firm. The S Corporation Association initially sent a letter last month to the Chairman expressing our historic concerns regarding this proposal.
For the past month, your S-Corp team has been busy meeting with staff in the both the House and the Senate to identify exactly what the latest proposal is—for example, what does “primarily” mean—and where it might next surface?
Our latest intelligence is that, while both the Finance and Ways and Means Committees are taking a hard look at this issue, the provision is unlikely to emerge as part of the year-end omnibus tax package. That’s good news, because it gives us more time to understand the proposal under consideration, educate our membership, and work to ensure that companies currently in full compliance with the law are treated fairly.
On the other hand, no tax increase idea ever dies, so we expect this to be an active issue next year and in the next Congress.