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Will the S corporation tax increase stay dead?

June 25, 2010

The "extenders" bill, with its tax increases on small S corporations and private equity, fell three votes short of the 60 needed to move it through the Senate yesterday. The Senate leadership is giving up for now and moving on to other things.

It seems that the S corporation tax increase might have been the deal breaker for Olympia Snowe, the Maine Republican whose opposition sealed the fate of the bill. Tax Analysts reports ($link):

"It certainly could have been different," Snowe said. Snowe claimed that Democratic leaders had broken a promise to abandon a provision that would impose self-employment payroll taxes on many S corporation shareholders.

...

Snowe has said that she would like to refine the definition of reasonable compensation for shareholders. But she said that the S corporation provision as written was a "broadside attack" on small businesses.

That makes me think that the S corporation tax increase won't be back this year. Congratulations and thanks are due to all of you who contacted your congresscritters to fight the S corporation tax.

The outlook for private equity is less clear. The increased tax on "carried interests" might have passed if the S corporation provision hadn't stopped the bill. One private equity manager who I've been updating on the bill said this morning that it's just a matter of time:

Thanks Joe. We have decided to proceed with the sale of _______ for a number of reasons, including the threat of this legislation. I am just going to continue to assume it passes eventually since I believe that the only greater villain in this country than someone who receives income from a carried interest is a Goldman employee who also gets carried interest income.

The rest of the bill might well resurface later this year. There remains plenty of money and influence wanting to push through the 70-odd "temporary" tax breaks in HR 4213, including money for research credits, biodiesel, Nascar and Hollywood. But it clearly is no slam-dunk. For at least a brief golden moment it appears possible that "temporary" tax subsidies will finally become so.

Kay Bell has more. Update: More from the TaxGrrrl.