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…
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.
AMT and Corporate Tax Rates Together? Watch Out…
As we have previously reported, Chairman Charlie Rangel has a deep interest in passing a permanent “fix” to the Alternative Minimum Tax. Meanwhile, Treasury Secretary Paulson has kicked-off efforts to cut the corporate tax rate in order to make our corporations more competitive on the world stage.
Now the word on the Hill is that these two unrelated agendas may collide in the next week or two at a Ways and Means Committee hearing, and possibly at the end of the year as a massive tax reform package.
As BNA reported last week (subscription required), Chairman Rangel has indicated he might be open to cutting the corporate tax rate as part of a broader tax simplification bill to be considered later this year. As BNA noted:
“A committee hearing on corporate taxes could be scheduled later this fall. The Treasury Department has been examining the corporate tax structure as part of an effort to improve competitiveness in the global economy. Rangel said he has been considering potential changes since administration officials said a lower, more competitive rate would be advantageous.
Any changes in the corporate tax structure would come as part of a bill that would reform or possibly eliminate the alternative minimum tax. Rangel has said that measure also would expand the child tax deduction and the earned income tax credit while possibly including provisions to more than double the tax rate paid by private investment managers.”
As a group, the S Corporation Association would support a cut in the corporate tax rate. All things being equal, lower marginal tax rates are better for business, and C corporations are our suppliers, customers, partners, etc. The challenge for S corporations is that, in a pay-as-you-go environment, every dollar in tax relief to corporate America will have to be offset by a dollar tax increase on somebody else.
S corporations are already being targeted to offset part of the cost of AMT reform, either through a 4 percent surtax that would apply to all income above a certain level, including S corporation distributions, or a general increase in the rates of the higher tax brackets. Under an AMT/Corporate Rate package, the additional cost of cutting corporate tax rates would also have to be offset.
Our friends at Treasury are well aware of the important role flow-through businesses play in job creation and economic growth. They have addressed our S-Corp board meetings several times in the last couple years and we had a chance to raise this issue directly with the Secretary.
That said, when the Chairman of the Ways and Means Committee and Secretary of Treasury get together to trade notes, who knows what sort of a bargain may be struck? They don’t call it sausage making for nothing.
Congress’ Must Do List
On a related note, one of the more popular pastimes here in the nation’s capital is guessing when Congress will recess for the winter. Past adjournment dates have ranged from early October (in election years) to a couple days before Christmas.
This year looks more like the latter—it’s not an election year and there’s a long list of must-do items, including:
- Appropriations Bills: Not one (of twelve) has been sent to the President yet, and the fiscal year ends this week.
- AMT Patch: If Congress fails to extend the patch, more than 20 million new taxpayers will be added to the AMT and see their taxes go up April 15, 2008.
- Physician Payments: Medicare payments to doctors are set to be cut next year, but there’s lots of support to block the payment cuts from taking place.
- S-CHIP: The children’s health insurance program expires at the end of the week and the President has said he will veto the current version of the bill when it is sent to him.
Throw in Iraq funding, tax extenders, an energy bill, a possible corporate rate cut and other priorities, and there’s plenty to keep Congress busy right up until Christmas this year. We’re not in the business of making projections, but one senior Senate staffer told us the other day that he booked his Christmas flight home for Saturday, December 22nd.
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.
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