H.R. 4453

S Corporation Permanent Tax Relief Act of 2014

Committee
Ways and Means

Date
June 12, 2014 (113th Congress, 2nd Session)

Staff Contact
Kimberly Betz

Floor Situation

On Thursday, June 12, 2014, the House will consider H.R. 4453, the S Corporation Permanent Tax Relief Act of 2014, under a rule.  H.R. 4453 was introduced on June 5, 2014 by Representative Dave Reichert (R-WA) and combines the texts of both H.R. 4453 and H.R. 4454.  Both H.R. 4453 and 4454 were favorably reported, as amended, by the Committee on Ways and Means by a vote of 21-13[1] and 21-14 [2] respectively.

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[1] http://beta.congress.gov/113/bills/hr4453/BILLS-113hr4453rh.pdf
[2] http://beta.congress.gov/113/crpt/hrpt430/CRPT-113hrpt430.pdf

Bill Summary

H.R. 4453 provides a permanent five year recognition period for built-in-gains of an S corporation.  In addition, the bill makes permanent the treatment of certain basis adjustments to stock of S corporations making charitable contributions of property. Specifically, “the shareholder’s basis in his S corporation stock is decreased by his pro rata share of the adjusted basis of any charitable contributions made by the S corporation, rather than the fair market value.”[3] Both provisions are effective for the tax years beginning after 2013.

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[3] See id at p.2.

Background

According to CRS, S corporations are “closely held” corporations that elect to be treated as pass- through entities.[4]  S corporations issue only one class of stock and are limited to no more than one hundred shareholders.  S corporations do not pay corporate income taxes.[5]  Instead, items of income and loss of an S corporation pass through to its shareholders.[6]

“A corporate level built-in-gains tax, at the highest marginal rate applicable to corporations (currently 35 percent), is imposed on an S corporation’s net recognized gain that arose prior to the conversation of the C corporation to an S corporation and is recognized by the S corporation during the recognition period.”[7]  Allowing S corporations to dispose of unproductive assets after five years would mitigate an impediment to the competitiveness of S corporations subject to the tax without compromising the safeguard against C corporation conversions to escape tax on built-in gains.

With respect to charitable contributions, if an S corporation contributes money or other property to a charity, each stakeholder takes into account his/her pro rata share of the contribution for purposes of determining individual tax liability.  A shareholder reduces the basis in his S corporation stock by the amount of the S corporation’s charitable contribution that flows through to the shareholder. Current law specifies that for contributions made after 2013, the amount of the reduction is the shareholder’s pro rata share of the contributed property’s fair market value.  H.R. 4453 restores the pre-2013 rule that decreases the stock basis by the shareholder’s pro rata share of the adjusted basis of the contributed property, bringing parity to the treatment of charitable contributions between shareholders of an S corporation and partners in a partnership (as well as a limited liability company, which is treated as a partnership for tax purposes).

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[4] See CRS: A Brief Overview of Business Types and Their Tax Treatment,  at p.6.
[5] See http://beta.congress.gov/113/crpt/hrpt429/CRPT-113hrpt429.pdf, at p.3.
[6] See id.
[7] See id.

Cost

According to JCT, permanently lowering the recognition period for built-in-gains to five years will reduce revenues by $1.5 billion over 2014-2024.  With respect to charitable contributions,  JCT estimates that making permanent the treatment of basis in S corporation stock by the pro rata share of the adjusted basis of the contributed property will result in a loss of revenue of $0.6 billion over the 2014-2024 period.

Additional Information

For questions or further information contact the GOP Conference at 5-5107.

Additional Views

STATEMENT OF ADMINISTRATION POLICY
H.R. 4453 – S Corporation Permanent Tax Relief Act of 2014
(Rep. Reichert, R-WA, and two cosponsors)

The Administration strongly opposes House passage of H.R. 4453, which would permanently extend two current provisions of law that offer tax breaks for S-corporations without offsetting the cost, adding to long-run deficits.

If this unprecedented approach of making certain traditional tax extenders permanent without offsets were followed for the other traditional tax extenders, it would add $500 billion or more to deficits over the next ten years, wiping out most of the deficit reduction achieved through the American Taxpayer Relief Act of 2013. Just two months ago, House Republicans passed a budget resolution that required offsetting any tax extenders that were made permanent with other revenue measures. This bill violates that standard.

With this legislation, Republicans are imposing a double standard by adding to the deficit to fund tax breaks for businesses, while insisting on offsetting the cost of measures that help middle-class and working Americans, such as the proposed extension of emergency unemployment benefits. House Republicans also are making clear their priorities by rushing to make business tax cuts permanent without offsets even as the House Republican budget resolution calls for raising taxes on 25 million working families and students by letting important improvements to the Earned Income Tax Credit, Child Tax Credit, and education tax credits expire.

The Administration wants to work with Congress to make progress on measures that strengthen the economy and help middle-class families, including pro-growth business tax reform. However, making traditional tax extenders permanent without offsets represents the wrong approach.

If the President were presented with H.R. 4453, his senior advisors would recommend that he veto the bill.