Payroll Tax Hike Taken Up in the Senate
The Senate began debate on the bloated tax extender package today. The House passed its version 215-204 shortly before leaving for the Memorial Day recess on May 28th.
That vote was supposed to take place earlier in May, leaving time for the Senate to take action, but opposition to the tax hikes and higher deficits called for in the bill delayed consideration until the Leadership was able to cobble together the votes. As a result, the Senate had already left town and is just now taking up the bill today.
Regarding the schedule, Senator Reid faces a tight window to get the bill done: he needs every Democrat plus at least one Republican to move this, but Senator Lincoln (D-AR) is back in Arkansas for today’s run-off tomorrow and won’t be available until tomorrow.
Meanwhile, there are no votes on Friday or next Monday and debate on Senator Murkowski’s Resolution of Disapproval (climate change) is set to consume much of Thursday.
That basically leaves Wednesday as the only day this week where Senator Reid might have the votes to move the process along, and it’s apparent from the news today that he’s not there yet. Senator Snowe (R-ME), a long-time S-CORP champion, indicated as much to CongressDaily:
Snowe said on Monday she was still waiting to see details. But she said the combination of deficit spending and tax increases, such as a new 15 percent payroll tax on small services-providers organized as “subchapter S” corporations, were giving her pause. “Pretty far from it at this point,” Snowe said, when asked about her comfort level with the bill, adding that it was unlikely to pass this week.
On the policy side, the delay in the House has been a boon for good tax policy, since the longer this payroll tax provision is out there, the worse it appears. Swapping a “reasonable compensation” standard for a “principal asset” test is not an improvement to the Tax Code. Exactly how is the IRS supposed to enforce an annual valuation of the “skill and reputation” of a firm’s three key employees?
Tom Nichols, a long-time S corporation attorney and head of the ABA’s Tax Section on S Corporations penned a letter to Congress making this point and many others. Meanwhile, the blogs of tax practitioners across the country are beginning to weigh in, raising numerous concerns that should have been dealt with through the normal legislative process — except there wasn’t one. The blog Tax Prof has links to a long list of critical commentators. As one observed:
But even assuming that you should hit service providers with self-employment tax on all of their K-1 income, you should do so in a way that is fair, understandable to taxpayers, and enforceable by the IRS. The S corporation provision in H.R. 4213 is none of these.
The Senate being the Senate, we expect this issue to be debated into the next week at least, and we plan to use that time to educate policymakers and improve the bill. There are taxpayers out there that use the S corporation to block payroll taxes they otherwise owe, and we support going after them, either through increased use of the “reasonable compensation” standard by the IRS or though a well-thought and well-targeted statutory provision. The provision before the Senate right now doesn’t meet that test.
Reasonable Compensation Standard in Action
Speaking of the “reasonable compensation” standard, the following post showed up in BNA this morning–as it makes clear, the IRS can and does go after payroll tax scofflaws using the “reasonable compensation” standard:
The U.S. District Court for the Southern District of Iowa May 27 held that David E. Watson P.C. must pay employment taxes on “all remuneration for employment.” David Watson incorporated an accounting firm as an Iowa professional corporation and chose to be taxed as an S corporation. Watson authorized himself a salary of $24,000 a year and he paid federal employment taxes on that amount. In addition to his salary, Watson received more than $200,000 in what he claimed were dividend payments. The Internal Revenue Service determined the dividend distributions should be recharacterized as wages, subject to employment taxes. (David E. Watson PC v. United States)
A fair reading of the House-passed bill is that the new, untested “principal asset” test for S corporations would be much more difficult for the IRS to enforce than the existing standard being used here. It would also be more costly for firms, as they would be required to value all their assets every year to determine if they are subject to the new tax. In order to enforce this new rule, the IRS would need to do the same.
The bill is now before the Senate, which has a reputation for debate and deliberation. We are hoping they expend a little deliberation on this provision. It could use it.
S-CORP Opposes Extender Pay-For
Your S-CORP team has been busy hitting the Hill in opposition to this payroll tax provision in recent days. Late last week, the House Ways and Means Committee released its package of tax extenders, partially offset by an expansion of the S corporation payroll tax to firms in service industries.
While the S corporation community knew the payroll tax hike was under consideration, this was the first time we had seen an actual proposal and it took us a couple days to get a read on who would be affected.
The provision is much broader than advertised. It begins by defining the population of firms targeted — professional or personal services firms in the area of law, engineering, architecture, performing arts, etc. The Committee’s choice to create a new definition for “Professional Services Business” was, we believe, predicated on the desire to target financial services firms as well as athletes, movie stars and other highly compensated individuals who might use an S corporation to block payroll tax obligations.
Once you fall into the “Professional Services Business” pool of S corporations, the provision asks, is your firm the partner in a service partnership and does that partnership consume substantially all of the activities of the S corporation? This test is targeted directly at the “John Edwards case” where a successful lawyer used the S corporation to block payroll taxes on his legal fees. Our members have raised few concerns about this test.
The second test, however, is more troubling. It would apply to “any other S corporation which is engaged in a professional services business if the principal asset of such business is the reputation and skill of 3 or fewer employees.” It took us a couple reads to realize this provision is not nearly as narrow as it first appears.
First, the test is not limited to firms with three or fewer employees. Firms with numerous employees could be affected, as long as only three are “key.”
Second, “principal asset” does not mean their skill and reputation comprises the majority of the value of the firm. Instead, that asset just has to be bigger than all the other assets of the firm. So, a business at which the largest asset is equal to 10 percent of the firm’s value would be affected if the “skill and reputation” of three employees are worth 11 percent.
With that as background, here is a list of concerns we’ve shared with the Committee over their new, never-before-seen provision to tax service S corporations:
- The provision would require a “disqualified” small business to determine whether its principal asset is the “skill and reputation” of fewer than three employees. This would require every “disqualified” small business to get a valuation of each of its significant assets every year in order to determine which asset is its “principal” asset.
- The provision arbitrarily discriminates against small businesses. It taxes businesses with three key employees at higher tax rates than businesses that are identical in every respect, except they have four key employees.
- The provision tests for highly-skilled “employees” rather than shareholders. Why? Is there evidence that indicates that highly-skilled employees are underpaid by S corporations?
- The provision requires difficult legal conclusions about uncertain areas, such as whose asset is an employee’s “skill and reputation”– the employee’s? Or the company for which the employee works?
- The provision provides no definition of “asset”– it isn’t clear, for example, whether all of a corporation’s computers and furniture are aggregated into a single “asset” for purposes of determining the “principal asset” of a company.
- The provision would discriminate against family-owned S corporations by applying payroll taxes to family members not active in the business. This provision would reduce the ability of S corporations to raise capital from family members.
- And finally, how exactly does one go about establishing the value of “skill and reputation” of employees on a widespread basis? This, and the other undefined terms used in this provision are simply inviting litigation.
All of these technical challenges beg the question: What problem is the second test designed to solve? The first test, after all, captures the “John Edwards case” that everybody, including S-CORP, would like to address. What is the magic value of “three or fewer” employees? 60 90 percent of S corporations are owned by three or fewer shareholders. Is it just a money grab?
Beyond the policy, the lack of process or public review should be enough to bring about this provision’s defeat. No specific hearings on the proposal, no markups, no floor debate, not even a draft bill to comment on, and yet this $11 billion tax hike is supposed to be considered by the House and the Senate before the Memorial Day recess.
The IRS already has the tools to go after John Edwards and others like him. It has successfully litigated cases where taxpayers have taken compensation that was less than reasonable. Spicer Accounting Inc. v. US, 918 F2d 90 (9th Cir. 1990); Dunn & Clark, PA v. US, 853 F. Supp. 365 (D. Idaho 1994); Radtke v. US, 712 F. Supp. 143 (ED Wis. 1989) , aff’d per curiam, 895 F2d 1196 (7th Cir. 1990) Veterinary Servs. Corp., PC, 117 TC 141 (2001) . Veterinary Surgical Consultants, P.C., 117 TC 141 (2001) , aff’d, 54 Fed. Appx. 100, 2003-1 USTC ¶ 50,141 (3d Cir. 2002).
We’re not in the business of proposing tax hikes on our members, but if the problem resides with single shareholder S corporations in the service sector, why not start with that population and whittle it down from there? And what about an employee threshold? Who is going to hire lots of people at market salaries in order to reduce their personal tax rate by a little more than 2 percent?
We understand Congress needs revenue to offset its priorities, but to try to raise $11 billion on the backs of closely-held businesses without having one public review of the policy strikes us as a little much. Take a little time, engage the public, and you might get a better product.
Extender Package Stalls in the House
On a related note, timing for consideration of the “extender plus” package is very much up in the air. It was supposed to go to Rules earlier this week with floor consideration today or tomorrow, but that might not happen.
Although members are concerned with the offsets in the package, it is the number of extraneous items and their cost to taxpayers that is slowing any progress at this point. In addition to extenders, the package includes a UI extension, Cobra benefits, the Doc Fix, and other expensive items. The size of the package is causing moderate members concern:
“I’m concerned about it,” said Sen. Ben Nelson, D-Neb. When combined with “emergency”-designated extensions of unemployment insurance and COBRA health benefits for laid-off workers, Medicaid assistance to states and perhaps Temporary Assistance for Needy Families funds, the unpaid-for cost of the bill could top $170 billion. “Obviously, my preference is to have offsets, and look hard at nonemergency issues. Everything can’t be called an emergency to avoid having offset requirements,” Nelson said.
And:
Sen. Kent Conrad, chairman of the Senate Budget Committee, said Tuesday he has concerns with the size of a large tax and benefit bill Democratic leaders hope to pass this week, casting doubt on the chances of the legislation being approved. Mr. Conrad (D., N.D.) said the current net cost of the measure to public finances—$141 billion over a five-year period—was too high.
So the package is getting larger, but only those provisions extending tax benefits for families and employers are going to be offset, and those provisions will be offset with tax hikes on families and employers.
To put this discussion into perspective, the current extender package extends provisions that expired last year. The extension is only twelve months, which means Congress will have to come back later — most likely in a Lame Duck session — and pass another extension if all these tax provisions are not to expire at the end of 2010. The tax hikes, on the other hand, are permanent.
Groups targeted for tax hikes in this bill need to be wary. Taxwriters will be on the hunt for another $30 billion in just a few months, so any deal cut today will be revisited tomorrow.
Estate Tax Update
The inability of any estate tax proposal to garner 60 votes in the Senate is becoming increasingly apparent. There’s still a chance for a breakthrough, but time is getting short and opposition is getting more vocal.
As reported in numerous publications, estate tax negotiators have hit a wall in crafting a compromise plan that can pass. As Dow Jones reported last week:
Senators that want to reduce estate tax rates even further have in the past two weeks closed in on a compromise that would not add any more to the deficit, at least in the short-term, than Obama’s plan. The plan would start at Obama’s proposed levels in 2011, but gradually phase down to a 35% rate and a $5 million exemption level.
But Tuesday they said that a proposed compromise is in limbo. “Nothing is clear about how the estate tax will be considered,” said Sen. Jon Kyl (R., Ariz.), the lead Republican in the negotiations. “Last week I believed there was an agreement on what the details were going to be. That may not be the case now.”
“There’s no agreement on estate tax, neither on substance nor on process. None whatsoever,” said Senate Finance Committee Chairman Max Baucus (D., Mont.), who is one of two Democrats involved in the talks, the other being Sen. Blanche Lincoln (D., Ark.).
Meanwhile, the lack of progress and the short calendar is emboldening the opposition. According to CongressDaily:
That would be fine with Sen. Bernie Sanders, I-Vt., who said reverting to pre-2001 law would only affect about 2 percent of the nation’s estates. When asked about a plan to reduce the tax to 35 percent and lift the exemption to $5 million, Sanders replied: “I will do everything I can to stop that.”
CongressDaily goes on to quote another Senator as estimating that up to 80 percent of the Democratic conference is opposed to any sort of estate tax compromise. While he quickly backed off that estimate, anywhere near that level of opposition would doom an estate tax compromise this year and allow the pre-2001 rules to take effect beginning in 2011.
This stalemate also is blocking the Senate small business tax package, including built-in gains relief, from moving forward. The package has been negotiated between Finance Committee Democrats and Republicans and was ready to be marked-up last week until the estate tax roadblock emerged.
At this point, the path forward is unclear. Taxwriters could resolve their differences on the estate tax or they could agree to set that issue aside and let the small business package proceed (perhaps directly on the Senate floor). A third option would be to resolve nothing and let both estate tax relief and the small business package die. Let’s hope it’s not option three.
Bailout Takes Center Stage
Our friends at the Treasury spent the weekend working primarily with the House Financial Services Committee to refine the Administration’s emergency plan to purchase hundreds of billions of dollars worth of mortgage backed securities.
According to Bloomberg, the scope of the proposal has expanded to include other troubled assets, including credit card debts and car loans. Members of Congress are also weighing in, seeking to add additional provisions such as limits on executive compensation and the cramdown of loan balances under bankruptcy.
The goal of these talks is to get a relief package through Congress and implemented before Congress leaves for the elections at the end of the week. As you can imagine, adding this 800 pound legislative gorilla to the existing long list of must-do items on Congress’ calendar has the potential to push the current session well into next week. At this point, Congress simply cannot leave without taking some form of action on this issue.
That’s not to say it’s a done deal. There is focused opposition to the expansive scope of the Treasury proposal that gives the Secretary of the Treasury unprecedented authority to purchase private sector securities and other assets. The broad nature of this authority should be viewed both as an expression of the enormous scope of the problem as well the size of the obstacle of getting it enacted.
How will this plan impact S corporations? A couple of thoughts:
Liquidity: The rational for the bailout is that the subprime contagion afflicting Wall Street was spreading to Main Street, infecting local banks and insurance companies and threatening your business’ line of credit, insurance policies, pension funds, retirement plans, and bank accounts. Presumably, the government purchase of these securities would cure the financial world and allow the sector to return to health.
It had better.
As we have discussed with our S Corp friends on the Hill and over at Treasury, after this plan, Treasury and the Fed will have used every tool they have, and several new ones they had to invent, in their efforts to restore confidence and order to the financial markets. Once some form of this proposal is enacted, there is no Plan B.
Tax Bills: While the ultimate cost of the proposed bailout to taxpayers is unclear (the taxpayer could actually see a profit when the multi-year process is complete) the initial cost of the plan will act as a massive drain on the budget.
A similar effect occurred during the Thrift bailout in the late 1980s and early 1990s. The ultimate cost of the bailout to taxpayers was around $150 billion, but Treasury had to spend many times that amount initially to pay off insured depositors of failed Thrifts. In later years, money from the sales of foreclosed properties resulted in revenues coming in to the Treasury. The net effect was a significant increase in deficits in the early years of the bailout and just as significant decrease in deficits as the process wound down
The deficit for 2008 is already projected to rise dramatically, from $161 billion to over $400 billion. Adding hundreds of billions of bailout expenses — or even a fraction of those costs, depending on how the CBO chooses to score the plan — will drive the deficit to records levels over the next couple years. These record deficits will squeeze Congress’ ability to move other priorities like extending portions of the Bush tax relief, stemming the growth of the AMT, or increasing federal spending for health care and other items.
The current setup reminds your S-CORP staff of the 1992 election, when candidate Clinton ran on a package of middle class tax cuts, but President Clinton pushed through tax increases instead. At the time, he argued that the deterioration in the budget made the tax hikes necessary. While there’s some debate over just how badly the deficit deteriorated between 1992 and 1993, there will be no debate next year. This bailout has the potential to double the federal deficit or more.
The net result is that once enacted, this bailout reduces the chances that Congress will act next year to reduce taxes or increase spending. The deficit, just like in the mid-nineties, will take center stage in budget and economic politics, placing additional pressure on tax rates to rise over the next couple years.
Senate Passes AMT
The United States Senate last evening passed a one-year extension of the so-called AMT patch—a higher AMT exemption to protect 20 million or so taxpayers from being subjected to the AMT on April 15th. This bill did not include any offsets and it did not include any additional extenders, either.
Senate Republicans, as well as some Democrats—including Finance Committee Chairman Max Baucus—have observed that, since much of the revenue collected by the AMT is accidental and was not intended by Congress, it is nonsensical to insist that protecting taxpayers from the tax should be offset at all. Apparently, those members prevailed in the Senate.
Leadership in the House, on the other hand, takes a very different view. They continue to insist that any change in the AMT be fully offset.
The expectation is the bill will now go back to the House, where the Ways and Means Committee staff are already at work trying to come up with new offsets that both are acceptable to the Senate and sufficient to cover the $50 billion revenue loss of the AMT patch. The most likely course of action is the House will attach those new offsets to the bill and send it back to the Senate.
What happens to the other tax items—the extender package, the energy tax package, and the technical corrections package also under consideration this fall—is very much up in the air.
What is clear is that if your business or industry has been targeted by a proposed tax increase in the past year, you should pay close attention to the activities in the House. They have to raise $50 billion in taxes on somebody. Just who will be the question.
IC-DISC Comments Posted by Ways and Means
For the second year in a row, the tax writers in the House and the Senate have proposed to raise taxes on small and closely held exporters as part of a technical corrections package. And, for the second year in a row, those exporters and the groups that represent them have sent a torrent of comments opposing that effort to both the Ways and Means and Finance Committees.
The Ways and Means Committee has posted their comments over the last couple of days, and while it does not appear that all the comments have actually been posted to the website (we are aware of many that do not appear), it is clear the IC-DISC issue still dominates the list, representing more than half of all the letters and statements received by the Committee.
If you submitted comments, please check the website to make sure they are posted. If you have an IC-DISC or are an exporter who would like to use an IC-DISC, make sure to contact your Representative and Senators and make them aware of this issue. It’s not too late.
Another Tax Gap Hearing, Another Standoff
In case you didn’t already catch the Senate Finance Committee hearing featuring Treasury Secretary Henry Paulson yesterday, here’s a quick summary.
The hearing itself was pretty entertaining and highlighted the on-going stand-off between Paulson and Finance Chairman Baucus. Baucus set a timetable for results saying that he wants a 90% voluntary compliance rate by the year 2017 – placing the responsibility on the Treasury to come up with this plan and deliver it in 90 days – July 18th – to the Committee. Paulson responded that he would be more than happy to come back in 90 days to present their current plan again. Paulson also stressed the difficulty of reaching the 90% rate without delving into the under-reported income area that is responsible for over 80% of the current tax gap – which will cause a lot of pain and require draconian measures.
Other highlights:
- Tax havens were a hot topic during the hearing – raised by Senators Conrad, Stabenow and Baucus. Baucus said there is “a lot of angst in Congress” over these issues.
- Senator Wyden asked Paulson about the status of Treasury’s response to the Tax Reform Panel’s report. Paulson stated that there “isn’t a major tax reform proposal being put forward and I don’t see it happening in the near future” and that the Treasury is focusing on more incremental steps toward tax reform.
- Senator Grassley raised hedge funds with Paulson. He asked if Treasury studied hedge fund tax policy in its financial markets study. Paulson said no, but Assistant Secretary Eric Solomon added that Treasury and the IRS are independently looking at hedge fund issues.
More AMT News
Meanwhile, CongressDaily reports that House Democrats are closing in on their plan to permanently address the Alternative Minimum Tax. For our new members, the AMT is an alternative tax system originally designed to ensure that a few rich taxpayers pay at least a minimum level of income taxes, but the combination of poor design and lower tax rates under the regular code have resulted in the unprecedented growth of the AMT among taxpayers whose incomes are decidedly middle class.
As outlined, the plan right now would eliminate the AMT for all taxpayers earning below $250,000 and reduce it for taxpayers with incomes between $250,000 and $500,000. Presumably, the AMT would be left in place for taxpayers earning above $500,000. To offset the revenue impact of AMT relief, the House is apparently looking at raising income tax rates on taxpayers earning more than $1,000,000 a year. Chairman Rangel’s comments also suggest they may still look at adjusting the rate thresholds, as we reported earlier.
While the story to date has focused on the trade-off between reducing taxes for middle-income AMT taxpayers and raising regular income taxes on wealthier taxpayers, we think it’s important to point out that the math simply doesn’t add up. The reported cost of the AMT plan is about $1 trillion over ten years. It will be simply impossible to raise that much revenue by just focusing on millionaire taxpayers. According to our friends at Statistics of Income, of the 132 million taxpayers who filed in 2004, only 240,000 reported incomes exceeding $1 million. To raise $1 trillion, the annual tax increase for each of these taxpayers would exceed $400,000 a year. To achieve that, the top tax rate of 35% would have to be raised to something around 50% for this group.
You don’t have to be a disciple of the Laffer Curve to recognize that marginal tax rates in the vicinity of 50% will result in serious economic dislocation. It will also hurt small businesses. As we’ve mentioned many times before, S corporations pay their taxes at the individual rates, so raising tax rates on millionaires means raising tax rates on successful small and closely held businesses — the very businesses we rely upon to create most of the jobs in this country.
Marginal tax rates of that magnitude are also politically unfeasible in today’s environment. The last time Congress raised the top tax rate (from 31% to 39.6%) in 1993, the majority lost both the House and the Senate in the subsequent elections. Many House members, including Ways and Means Chairman Charlie Rangel, were around in 1993, and they are unlikely to go down that path again.
Nevertheless, the current rhetoric is beginning to sound very much like 1993, when President Clinton promised to raise taxes on millionaires only and wound up signing a bill that raised taxes on just about everybody. The old line about robbing banks because “that’s where the money is” is overused, but it definitely applies here. Taxing millionaires to cut taxes on the middle-class makes for nice press releases, but when Congress seriously looks to raise revenue, it inevitably looks to the middle class, because that’s where the money is.
As long as the House insists on offsetting any changes to the AMT, the story will not be about rich verses middle class. Instead, it will be about how Congress rearranges tax collections on the same group of taxpayers — those in the middle and upper-income tax brackets. Some will see their taxes fall, and some will see their taxes go up. S corporations need to stay on alert.
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.”
Senators Gordon Smith and Blanche Lincoln Introduce the BOOST Act!
Congress is back in session, and we’ve got good news! Senators Smith and Lincoln yesterday introduced S. 3857, the “Bringing Opportunities to Our Small-Business Taxpayers (BOOST)” Act. This legislation is designed to help all closely held businesses continue to grow and thrive. For our S-CORP members, the BOOST Act contains an entire section devoted to S-CORP priorities, including provisions to make it easier businesses to convert to S corporation status and provisions to increase S-CORP access to capital by reducing ownership restrictions on S corporations.
Combined with previous bills introduced by Congressman Clay Shaw (H.R. 4421), Congressman Jim Ramstad (H.R. 2239), and Senator Orrin Hatch (S. 3838), S-CORP now has four major pieces of legislation focused on its priorities together with numerous champions positioned on the critical tax writing committees in the House and Senate. We’ll continue to work to ensure these provisions are considered by Congress when the next tax bill is debated. Many thanks to our friends on the hill – Congressmen Shaw and Ramstad and Senators Smith, Hatch, and Lincoln – for taking the lead on these important issues.
Tax Bill Outlook
Now that Congress is back, what’s the outlook for a tax bill? Yesterday’s Wall Street Journal makes clear that there’s still potential for legislative action on the tax front:
Down in polls and divided internally, Republicans want to block debate on domestic policy and shift attention to national-security issues that command more party unity. But census data last week highlighted the economic squeeze on many families, and House leaders are considering a pre-election bid to make permanent the $1,000 child tax credit and marriage penalty relief provisions enacted in 2001. Like most of the Bush administration’s tax breaks, these are due to expire at the end of 2010, when top rates for the wealthy and capital gains also will be in play. The strategy has been to wait until close to the deadline and then call up all of these issues at once, making it harder for Democrats to resist. But in the current political climate, the leadership could accelerate action on provisions for middle income taxpayers if it means preserving Republican control of Congress in November.
Other possibilities include Senate reconsideration of the so-called “trifecta” bill (estate tax, minimum wage, and tax extenders like the R&D tax credit). That legislation failed to gain the necessary 60-votes prior to the August break, but leadership staff indicates Senator Frist may move to reconsider that vote in September. In yesterday’s CongressDaily, Senator Frist discussed the possibility of adding the tax permanence provisions to the trifecta bill to gain the necessary votes:
Senate Majority Leader Frist also said he is looking for a chance to make permanent the child tax credit increase, tax cuts for married couples and the 10 percent tax bracket, although no decision has been made as to whether the Senate will vote on those provisions before it recesses for the elections. “I believe to get some certainty into people’s lives, we want to go ahead and make those permanent as soon as possible. Whether or not they will be brought up for a vote, it’s too early to tell right now,” Frist told reporters. Aides said Republicans are mulling whether to add tax cut permanency provisions to the so-called trifecta package, which includes a permanent reduction in the estate tax, minimum wage increase and tax extenders. They also might act on making tax cuts permanent as standalone legislation, these sources said.
In the meantime, the Senate Finance Committee is expected to hold a third hearing on tax reform issues later this month…. So, while elections and security issues have taken center stage in Washington, tax issues important to S Corps and the small business community are continuing to percolate…
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