This week the House Ways and Means Committee held a markup of bills that would make permanent certain tax extenders designed to help small businesses. Two of these bills (H.R. 4453 and H.R. 4454) specifically address tax treatment of S corporations. The tax provisions included in both bills were a part of the S Corporation Modernization Act introduced in 2013.
H.R. 4453 would make permanent the reduced five-year recognition period for built-in gains tax. The built-in gains or “BIG” tax, imposes a corporate-level tax on the built-in gains earned by C corporations that later make a Subchapter S election. The Internal Revenue Code imposes a tax on these built-in gains for a 10 year period form the S election. Over the years, temporary reductions or forbearance of this 10 year recognition period have been passed by Congress. H.R. 4453 would replace the 10 year recognition period with a reduced 5 year recognition period. This permanent reduction has the potential to free up access to the capital assets of many S corporations and could spur economic growth.
H.R.4454 would make permanent a rule regarding basis adjustments to stock of S corporations making charitable contributions of property. Under current law, charitable contributions made by an S corporation were accounted for in calculating the income tax liability of each shareholder based on that shareholder’s pro rata share of the contribution. Each shareholder’s pro rata share of the contribution reduces their basis in the corporation’s stock by the fair market value of the contributed property. In situations where the S corporation contributes appreciated property, shareholders would recognize gain on the sale of their stock due to this basis adjustment based on the fair market value of the property. Prior legislation amended this rule to allowed shareholders to reduce their basis in the stock in accordance with their pro rata share of the adjusted basis in the property. This provision has been extended several times, but expired for tax years beginning after December 31, 2013. H.R. 4454 would make this basis adjustment rule related to charitable contributions of property permanent and would encourage S corporations to increase their charitable contributions by reducing the likelihood that it will subject the shareholders to greater tax liability.
Along with several other business-friendly tax extenders, H.R. 4453 and H.R. 4454 were voted out of the House Ways and Means Committee on April 29th. Both bills, especially the permanent reduction in the BIG tax recognition period have the support of a wide range of industry groups.