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.
NEW WAYS AND MEANS COMMITTEE DEMOCRATS ARE ANNOUNCED
While the 109th Congress adjourned last weekend, the Democratic Leadership in the House has been busy this week planning for next year. Speaker-designate Nancy Pelosi has announced nominees for key committees in the House including, of most interest to S-CORP members, the tax-writing Ways and Means Committee.
One of S-CORP’s priorities for 2007 will be to establish constituent relationships with these new committee members, to help further our legislative goals of modernizing S corp rules and blocking unwarranted tax increases. We would very much appreciate your contacting us (at nhawley@vennstrategies.com) if you have a presence in these districts:
· Rep. Earl Blumenauer (OR) represents the 3rd Congressional District of Oregon. His district includes North Portland, Northeast Portland, Southeast Portland, East Portland, Multnomah County, and Clackamas County. Multnomah County and Clackamas County divide the district, with Multnomah being the north side and Clackamas being the south side. The cities of Gresham, Troutdale, Wood Village, and Fairview are all within Multnomah County. On the eastern side of the district lies Columbia Gorge and East County. The city of Sandy and the Mt. Hood corridor are located within Clackamas County.
· Rep. Ron Kind (WI) represents the 3rd Congressional District of Wisconsin. The Mississippi River runs through the district, which lies on the southwestern side of the state. The 3rd district borders Illinois to the south and Iowa and Minnesota to the east. St. Croix, Dunn, Eau Claire, and Clark counties lie in the northern section of the district. Grant, Lafayette, and Iowa counties lie in the southern section. Crawford, Vernon, La Crosse, Trempealeau, Buffalo, Pepin, and Pierce lie of the western side. On the east lie Jackson, Juneau, Sauk, Monroe, and Richland.
· Rep. Bill Pascrell (NJ) represents the 8th Congressional District of New Jersey. Atlantic City lies in the southern end; the cities of Camden and Trenton lie in the western end; Newark, Paterson and Jersey City lie in the northern end. Passaic County and Essex County
· Rep. Shelley Berkley (NV) represents Nevada’s 1st Congressional District. The 1st district encompasses North Las Vegas and extends upwards to Floyd Lamb State Park.
· Rep. Joe Crowley (NY) represents the 7th district of New York. This district includes Queens and the Bronx.
· Rep. Kendrick Meek (FL) represents the 17th district of Florida. The 17th district includes parts of Miami-Dade county and also Broward County. The city of North Miami lies on the southern side, with Hollywood and Pembroke Pines lying on the northern side. Carol City is on the western side and North Miami Beach in on the east.
· Rep. Chris Van Hollen (MD) represents Maryland’s 8th Congressional District. The cities of Rockville, Aspen Hill, Bethesda, and Silver Spring are all inside the 8th district. The 8th district is located inside Montgomery County.
Please also find attached to this email the biographies of these members.
Below is an updated Ways and Means Committee roster with the new members included. We expect the Republicans to have one or two vacancies to fill and will report back with these nominations when they are made.
2007 House Ways and Means Committee
Current Roster (As of 12/12/06)
Incoming Chairman Charles Rangel (NY)
Democrats (24)
Fortney “Pete” Stark, CA
Sander M. Levin, MI
Jim McDermott, WA
John Lewis, GA
Richard E. Neal, MA
Michael R. McNulty, NY
John S. Tanner, TN
Xavier Becerra, CA
Lloyd Doggett, TX
Earl Pomeroy, ND
Stephanie Tubbs Jones, OH
Mike Thompson, CA
John B. Larson, CT
Rahm Emanuel, IL
Earl Blumenauer, OR
Ron Kind, WI
Bill Pascrell, NJ
Shelley Berkley, NV
Joe Crowley, NY
Kendrick Meek, FL
Chris Van Hollen, MD
Allyson Schwartz, PA
Artur Davis, AL
Republicans (15)
Jim McCrery, LA, Ranking Member
Wally Herger, CA
Dave Camp, MI
Jim Ramstad, MN
Sam Johnson, TX
Phil English, PA
Jerry Weller, IL
Kenny C. Hulshof, MO
Ron Lewis, KY
Kevin Brady, TX
Thomas M. Reynolds, NY
Paul Ryan, WI
Eric Cantor, VA
John Linder, GA
Devin Nunes, CA
1-2 Vacancies to be filled
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.
109th Congress Concludes Business
Out with the Old Challenges…
Last week the House and Senate wrapped up the 109th Congress by approving a “continuing resolution” to fund the federal government through February 15th. Doing so leaves major 2007 spending decisions to the new Democratic-controlled Congress when they convene in January.
The House and Senate also approved a $45 million tax bill that extends for two years popular to tax benefits, such as the Research and Development and Work Opportunity Tax Credits, many of which expired at the end of last year. This comprehensive package also included an energy tax title that extended, again for two years, the Production Tax Credit and other energy tax credits last enacted as part of the Energy Policy Act of 2005. Finally, the bill refined and expanded the rules governing Health Savings Accounts, permitting employees to roll Flexible Savings Account balances into an HSA while increasing the overall limit on HSA contributions.
Adoption of these tax extensions creates a new tax policy wall of sorts, where numerous popular tax provisions will again expire at the end of 2007. Over the next two years, the new congressional leadership will face the considerable political challenge of approving (and paying for with corresponding tax offsets) legislation to both address a top tax priority of the Democratic leadership-protecting low and middle-income taxpayers from the alternative minimum tax-together with extending the expiring provisions.
In with the New…
Given the new congressional leadership’s goal of offsetting any new spending or tax relief with spending cuts and tax increases, they are beginning their legislative leadership with a quest for revenue. Where will they find it?
One likely target continues to be the “tax gap” (the difference between taxes legally owed and the amount of taxes collected on a timely basis). Last week, incoming Senate Finance Committee Chairman Max Baucus (D-MT), who has continually focused on the need to address the tax gap this Congress, ended his objection to the confirmation of Eric Solomon as Assistant Treasury Secretary for Tax Policy after receiving a commitment from Treasury Secretary Henry Paulson to testify on the “tax gap” at a Senate Finance Committee hearing next year. (As S-CORP members know, Eric has met with our organization on several occasions and is viewed as a friend to small and closely-held businesses. Congratulations to Eric on his confirmation!)
S-CORP has been focusing on the Finance Committee’s, Joint Committee on Taxation’s (JCT) and Treasury’s work in this area for two years now and has played an active role in opposing the JCT proposal to increase taxes on S corps. As you’ll recall, much of the estimated tax gap is attributed to small and closely-held businesses, and the IRS has begun a program to audit 5000 S corporations in an effort to identify where their enforcement activities could be better targeted.
In recent days, the rest of the business community has come to recognize the challenge it faces. Last week, our friends at the National Federation of Independent Business convened the first of what promises to be many meetings on the tax gap initiatives and the threat they pose to the business community should they reach beyond the established definition of the tax gap into the realm of new tax increases. S-CORP promises to be an active part of these efforts.
New Tax Writers in the Wings…
Another area of interest to S-CORP members is who will sit on next year’s tax panels. Senate Democrats have already named three new Finance Committee panelists (Salazar, Cantwell, and Stabenow), but the new Republican Committee member has not been named yet. Last week we were hearing that Senator Pat Roberts (R-KS) is the lead candidate to fill that vacancy on the Senate Finance Committee. Other names in consideration include Senator George Voinovich (R-OH) and John Ensign (R-NV). Republican Committee assignments might be announced this week or could wait until the new Congress convenes on January 4th.
In the House, the Democratic steering committee met last week to complete appointments of incoming chairmen. This week the Democratic steering committee will consider committee assignments so we will report back to you once there is news about the new members on the tax-writing Ways and Means Committee. The House Republican steering committee completed its work on ranking members and named Rep. Jim McCrery (R-LA) as Ranking Member for the House Ways and Means Committee and Steve Chabot (R-OH) for the Small Business Committee.
The big story in the House has been the Democratic Leadership’s announcement that the House will be in session 5 days a week beginning in January with fewer “recesses” or “district work periods”. Typical workweeks for the Republican-led Congress have been Tuesday-Thursday to allow Members more time in their districts. This new schedule is likely to present both benefits and challenges to the business community as there will be more congressional work days that pro-S corporation and pro-small business legislation can be approved, but that also means more opportunities for revenue offsets to be needed to pay for any new benefits. S-CORP will continue its vigilance on your behalf as we look ahead to the changes the new Congress will bring and focus on finding new friends and allies to support the much-needed reforms to the S corporation structure.
S-CORP OPPOSES EXPORTER TAX INCREASE
Chairman Submits Comments to Tax Writers
S-CORP Chairman Tom McMahon today submitted comments (click here for full text) to the House Ways and Means and Senate Finance Committees opposing a proposed tax increase on small and closely-held exporters. Chairman McMahon observes in his comments:
“I would like to raise serious concerns regarding Section 7 of the Act which, if enacted, would significantly increase taxes on small and closely-held U.S. manufacturing exporters.”
As you’ll recall, the Senate Finance and House Ways and Means Committees introduced companion “tax technical corrections” bills (H.R. 6264 & S. 4026) just before breaking for the elections, requesting that interested parties submit comments regarding the proposed changes prior to October 31st. The plan is to create a technical and non-controversial tax title that would eventually be sent to the President during the final weeks of this Congress.
As we’ve previously pointed out, Section 7 of the bill is neither technical nor non-controversial. It would increase from 15 percent to 35 percent the tax rate on qualified export income for small and closely-held business exporters! As our Chairman observes, “Given the current size of the U.S. trade deficit, it makes little sense for Congress to act unilaterally to harm small and closely-held manufacturers and other exporters.”
As always, the S Corporation Association is working with other affected groups such as the National Association of Manufacturers and the Small Business Exporters Association to ensure that this substantive and controversial amendment does not pass. If you or your clients benefit from IC-DISC, you can send comments directly to the Finance and Ways and Means Committees at the following email addresses:
techcorrections@finance-rep.senate.gov
S-CORP PAYROLL TAX INCREASE BACK IN NEWS
On another front, the Wall Street Journal yesterday reported on the recently published “tax gap” report from Congress’ Joint Committee on Taxation and its potential impact on taxpayers. As S-CORP readers know, this report includes a proposal to apply payroll taxes to all the income of certain S corporations. This proposal is significantly reduced from previous versions – it applies only to personal services bus inesses like law firms and consultants, not manufacturers – that S-CORP opposed. The WSJ summarizes the current proposal like this:
“The report proposes a significant tax -law change for law firms and family-owned personal-service firms, which may face new self -employment tax obligations. Typically, an executive in a “subchapter S corporation,” used by many family businesses, takes a salary and distributes the remaining profit in a dividend that isn’t subject to self-employment taxes, Mr. Smith says. The report suggests a new uniform rule to have these entities covered by the same self-employment tax regime as partnerships or sole proprietors. Not having a uniform rule is a sizable problem: $39 billion of the tax gap was attributable to the self -employment tax and an estimated $15 billion of the tax gap attributable to unemployment taxes. Yet Mr. Smith says in his experience, most people using an S corporation don’t pay themselves “ridiculously low” salaries and take the rest in a tax -advantaged dividend distribution.”
S-CORP is currently polling its members to determine how we should respond to the most recent payroll tax proposal. If you have a view, please let us know.
S Corps Wary of Tax Gap Report and Hunt for Revenue Offsets
This week Congress winds up legislative business so that Members can go home and campaign for re-election. Following Election Day, both the House and the Senate will come back for a “Lame Duck” session of Congress. Depending upon the results of the election, it could be a very interesting session.
During the recess, S-CORP will continue educating congressional staff promoting and building support for the pro-S Corp bills introduced this Congress. If there’s an opportunity to include any of these provisions on moving legislation in the Lame Duck session, we want to be prepared!
Also of interest to S-CORP members, this week the Department of Treasury released “A Comprehensive Strategy for Reducing the Tax Gap.” As you recall, the tax gap (the difference between taxes owed and taxes collected on a timely basis) has been a major focus of Congress as it seeks to find revenue offsets of increased spending and other tax measures. S corporations were specifically targeted last year by both the Joint Committee on Taxation and the Treasury Inspector General in reports to simplify taxes and close the tax gap. S-CORP mounted an aggressive effort to oppose these proposals and so far we have been successful.
The latest Treasury report serves as a good warning that we must continue our efforts to educate Members about the great harm these proposals will have on America’s small and mid-size and family-owned businesses. While the report is fairly general, is does mention expanding the National Research Program audits (which already target S corps). It also confirms that the Treasury Department continues to consider options for tax reform and simplifying the tax code. SCORP is concerned that we will see a more specific tax gap plan come out of Treasury following the elections when potential tax increases will not be a political liability.
Finally, on the topic of tax increases, Tuesday’s Congress Daily PM reported that House Ways and Means Committee Ranking Democrat Charles Rangel (D-NY) noted that “everything is on the table” when it comes to tax increases. If the Democrats take control of the House this election, Congressman Rangel becomes the Chairman and will set the tax agenda in the House. As S-CORP members well know, an increase in personal income tax rates is a tax increase on S corporations . Just one more issue to keep on our radar screens.
Tax Relief Delayed – Pressure for Offsets Grows
Congress returns to legislative business this week following a week long Columbus Day recess. With numerous outstanding issues for Congress to consider before adjourning for the year (possibly by Thanksgiving, but December remains a distinct possibility), the small and family owned business community must continue to be vigilant for any misguided efforts to raise payroll taxes on S Corps and other small businesses.
The first priority of the tax writing committees continues to be legislation to encourage the physical restoration of the areas hit by Hurricane Katrina. Both the Senate Finance Committee and the House Ways and Means Committee are expected to take up hurricane legislation this month.
Growing restlessness among conservative Republicans and Democrats to offset Hurricane Katrina recovery costs – either through increased spending cuts or foregone tax relief – raises the possibility that part or all of this hurricane relief will be paid for through spending cuts and tax increases in other parts of the budget.
It also spells difficulty for the $70 billion tax relief reconciliation bill. After Congress delayed the deadlines once, the House pushed back their deadline further to October 28th, just three weeks prior to the Thanksgiving recess and the date congressional leadership had hoped to finish the session Just how much of the $70 billion in tax relief will survive in the post-Katrina session remains to be seen, but Congresses more emphatic emphasis on deficit reduction once again increases the pressure the tax writers will feel to include revenue offsets, like the JCT’s payroll tax increase on S Corps.
Tax Reform Panel Unlikely to Scrap Tax Code
We are continuing to monitor the progress of the President’s Advisory Panel on Federal Tax Reform recommendations have numerous potential repercussions on S corporations.
First, the tax panel’s mandate to recommend “budget neutral” reforms will force them to fully offset any revenue reduction – like their decision to support eliminating the Alternative Minimum Tax – included in their recommendations. Much of last week’s meeting was spent discussing different ways in which the panel could limit the mortgage interest deduction, cap the amount of employee-health care expenses employers may deduct, and change the manner in which charitable contributions are treated.
Given the sensitivity of these possible changes, the S Corp community needs to be on its toes in case the Panel chooses to take on other sensitive topics as well, including recommendations to overhaul and reorganize the corporate tax structure.
The panel is scheduled to meet on October 18th for what should be its last public meeting before issuing its final recommendations to Treasury Secretary Snow by the November 1st deadline. Other significant tax issues likely to be addressed by the panel include: an expansion of savings incentives, increasing the taxpayer base eligible for charitable deductions, allowing businesses full expensing of equipment purchases, reducing the individual tax on interest income while limiting the corporation interest deduction, moving toward a territorial tax system, and extending the 2001 and 2003 Bush tax cuts. That’s lots of moving parts to keep track of, and the panel’s final report should provide the tax community with lots to talk about. Stay tuned.
Built-In Gains Tax Relief
On a positive S Corp note, legislation has been introduced to provide relief to those S Corps that converted from C corporation status in the past decade. Senator Gordon Smith (R-OR) has introduced a bill to reduce from 10 to7 the number of years a converted S Corp is subject to the built-in gains tax and is working to include this relief in the Finance Committee’s Hurricane Katrina tax bill.
At the October 6th Senate Finance Committee hearing to consider tax initiatives and incentives for businesses in the Gulf Coast region, Senator Smith made the following case for built-in gains relief:
“I’d like to highlight, S. 965, which will provide relief to small business that are S corporations to ensure that now, more than ever, they continue to be the driving force of our economy. Currently, small businesses that changed their tax status (from C corp to S corp) cannot sell off assets for ten years without being double taxed (a regular tax plus a built-in gains tax). The double tax leads companies to hold unproductive assets much longer than they otherwise would just so they do not have this double tax. This directly affects their cash flow by locking up their assets.
It is estimated that there are 400,000 small businesses across the country that are stymied by this double tax. Taking away this double tax is not just important for those small businesses in the Gulf Coast region that want to rebuild. Businesses across the country may be looking to site facilities in that area. My proposal would make it easier for these companies to sell off unproductive assets and use that cash to rebuild, newly build, and create jobs in an economically devastated region. We need to help small businesses restart their engines and that is exactly what my proposal would do.”
A number of S Corps saw significant losses to their businesses after Hurricanes Katrina and Rita. These companies in particular have made their case to Senator Smith, Senator Lincoln and other S Corps allies that built-in gains relief is especially valuable to them now, as they identify ways to reallocate assets and rebuild.
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