H.R. 636, America’s Small Business Tax Relief Act of 2015

H.R. 636

America’s Small Business Tax Relief Act of 2015

Sponsor
Rep. Pat Tiberi

Committee
Ways and Means

Date
February 13, 2015 (114th Congress, 1st Session)

Staff Contact
David Smentek

Floor Situation

On Friday, February 13, 2015, the House will consider H.R. 636, the America’s Small Business Tax Relief Act of 2015, under a rule.  H.R. 636 was introduced on February 2, 2015 by Rep. Pat Tiberi (R-OH) and referred to the House Committee on Ways and Means. H.R. 636 was marked up on February 2, 2015 and favorably reported by a vote of 24-14.[1]  The bill also includes the provisions of H.R. 629, the Permanent S Corporation Built-in Gains Recognition Period Act of 2015,[2] and H.R. 630, the Permanent S Corporation Charitable Contributions Act of 2015,[3] both introduced on January 30, 2015, by Rep. Dave Reichert (R-WA).

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[1] House Report 114-21, at 7.
[2] House Report 114-15.
[3] House Report 114-16.

Bill Summary

H.R 636 provides that Code section 179 expensing will be made permanent at the 2014 levels. Taxpayers will be able to expense up to $500,000 of investments in new equipment and property per year, with the deduction phased out for investments exceeding $2,000,000 (with both amounts indexed for inflation).  The bill also restores and makes permanent rules allowing computer software and certain investments in real property to qualify for section 179 expensing, subject to the overall expensing limit. The bill will allow investments in air conditioning and heating units to qualify for section 179 expensing. With respect to S corporations, the bill makes permanent the five-year recognition period during which an S corporation is subject to an entity-level tax at the highest corporate rate on certain built-in gains of property that it held while operating as a C corporation.  The bill also makes permanent the basis-adjustment rule for S corporation shareholders, providing consistent treatment of charitable contributions between S corporation shareholders and partners in a partnership. The bill is effective for tax years beginning after 2014.

Background

According to the Committee, under current law, “a taxpayer is allowed to recover, through annual depreciation deductions, the cost of certain property used in a trade or business for the production of income. Under Code section 179, a taxpayer may deduct immediately (expense) the cost of investment in property, equipment, and computer software rather than depreciating such costs over the recovery period of such property under the Code. From 2010 through 2014, the expensing limitation was $500,000 and the phase out threshold was $2 million. For tax years after 2014, the expensing limitation under Code section 179 drops to $25,000 and the phase out begins once investments exceed $200,000. Computer software and certain types of real property (qualifying leasehold improvements, investments in restaurant property and improvements to retail property) were eligible if placed into service before 2015. However, the amount of real property that could be expensed was limited to $250,000. Investments in air conditioning and heating units do not qualify for expensing.”[4]

Immediate expensing helps cyclical businesses, especially farms, to invest in new property and equipment in profitable years, which averages out against the leaner years when cash flow is not as available to make such investments.  Moreover, by indexing the expensing limits, H.R. 636 will ensure that small businesses’ ability to expense new investments in property and equipment will keep pace with the cost of such investments in future years.

S corporations are subject to an entity-level tax at the highest corporate rate on certain built-in gains of property that the S corporation held while operating as a C corporation. The tax applies to gain recognized within ten years from the date that the C corporation elected to be an S corporation. Through 2014, a temporary provision reduced this period to five years.  When an S corporation contributes money or other property to a charity, each shareholder takes into account his pro rata share of the contribution in determining his own income 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. For contributions made in tax years beginning before 2015, the basis reduction in the S corporation stock is equal to the shareholder’s pro rata share of the adjusted basis of the contributed property. For contributions made in tax years beginning after 2014, the amount of the reduction is the shareholder’s pro rata share of the fair market value of the contributed property.

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[4] See Committee on Ways and Means Fact Sheet: The America’s Small Business Tax Relief Act of 2014

Cost

The Joint Committee on Taxation (JCT) has scored each provision of the bill separately:

  • The JCT estimates that enacting Section 2 of the bill (originally H.R. 636, the America’s Small Business Tax Relief Act of 2015) would reduce revenues by approximately $77.1 billion over the 2015-2025 period.[5]
  • The JCT estimates that enacting Section 3 of the bill (originally H.R. 629, the Permanent S Corporation Built-in Gains Recognition Period Act of 2015) would reduce revenues by approximately $1.5 billion over the 2015-2025 period.[6]
  • The JCT estimates that enacting Section 4 of the bill (originally H.R. 630, the Permanent S Corporation Charitable Contributions Act of 2015) would reduce revenues by approximately $0.6 billion over the 2015-2025 period.[7]

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[5] https://www.cbo.gov/sites/default/files/cbofiles/attachments/hr636.pdf
[6] https://www.cbo.gov/sites/default/files/cbofiles/attachments/hr629.pdf
[7] https://www.cbo.gov/sites/default/files/cbofiles/attachments/hr630.pdf

Additional Information

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