The House of Representatives passed the Permanent S-Corporation Built-in Gains (BIG) Recognition Period Act of 2014 (H.R. 4453) on June 12. The purpose of this piece of legislation is to make permanent two current provisions which affect S-Corps by: 1) putting into place a five-year recognition period for built-in gains to replace the current ten-year recognition period and 2) making it practice for the shareholder’s basis in his S-Corp stock to be decreased by his pro rata share of the adjusted basis of any charitable contributions made by the S-Corp, rather than the fair market value. Both provisions are to be effective for tax years after 2013.
Congressman David Reichert (R-Wash.), a member of the House Committee on Ways and Means, is the sponsor of this legislation.
Without this legislation in place, any small business that decides to operate as an S-Corp is subject to an entry-level tax at the highest corporate rate (35 percent) on certain built-in gains of property held while it was a C-Corp. The tax applies to gains recognized within ten years of the date that the business became an S-Corp. To lessen the impact on businesses seeking S-Corp status, Congress voted to temporarily reduce the recognition period to five years. Although these measures were renewed twice, they expired at the end of 2013.
With respect to charitable contributions, if an S-Corp contributes property to a charity, each shareholder determines individual tax liability of his/her pro rata share of the contribution. Current law specifies that for contributions made after 2013, the amount of the reduction is based on 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. This provision ensures that S-Corp would receive the same treatment as partnerships and limited liability companies (LLCs) with respect to charitable donations.
H.R. 4453 is supported by 35 groups representing thousands of privately held and family-owned businesses who believe that legislation such as this is necessary to combat the fact that tax compliance costs are 65 percent higher for private companies than for larger corporations. Once relieved of these unnecessary tax burdens, it is argued, S-Corps will have more funds available for the creation of new jobs and further support of charitable activities.
Despite the support behind H.R. 4453, the Obama Administration has threatened to veto the bill due to the absence of a budgetary offset. The administration reminded House Leadership that two months ago that they passed a budget resolution requiring that any permanent tax extenders be offset with other revenue measures. The Joint Committee on Taxation (JCT) projects that this bill will reduce federal revenue by approximately $2.1 billion over 2014-2024. The Obama Administration fears that H.R. 4453 will cause a domino effect resulting in the potential loss of over $500 billion in revenues to other temporary tax extenders made permanent.
Jame Alt is and intern in the Government Affairs office at Financial Executives International and a senior at the University of Iowa.