Groups support striking S corp. tax from extenders

June 14, 2010

The Hill

Jay Heflin

A diverse collection of small business advocates on Friday sent a letter to Senate Finance leaders urging their support for an amendment striking the tax increase on S corporations from the so-called tax extenders bill.

"While it [the tax increase] has been described as a 'loophole closer' and a 'payroll tax' it is neither," the letter states. "It is a new tax on small employers that will overturn more than 50 years of established tax policy."

Groups like the American Institute of Architects, the U.S. Chamber of Commerce and the Wine & Spirits Wholesalers of America sent the letter to Senate Finance Chairman Max Baucus (D-Mont.) and committee ranking member Chuck Grassley (R-Iowa).  

Sens. Olympia Snowe (R-Maine), Mike Enzi (R-Wyo.) and John Ensign (R-Nev.) filed an amendment to the so-called tax extenders legislation that would strike the tax from the bill. The provision would raise approximately $11.2 billion by requiring principals in professional-service S corporations to pay employment taxes on a firm's profit.

As the tax is currently written, it applies to retained earnings, which the groups contends will hurt job creation. They also argue that the IRS already has the tools it needs to clamp down on S corporation tax cheats by employing the "reasonable compensation" test, which determines if S corp owners are paying their fair share of taxes.

"Replacing this established test with a 'principal asset' test is a step backward for tax enforcement and should be rejected by the Senate," the letter states.

It goes on to criticize lawmakers for never hosting a hearing on the tax that could have addressed its many problems.

"It was never the subject of hearings or public review," the letter states, adding, "This new tax is an excellent example of what happens when the legislative process is short circuited."

The Senate is expected to continue debate on the bill next week, at which point the senators' amendment that would strike the tax could be voted on.

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