CRS Updates Report on Small Business Tax Preferences

Some policy issues never seem to completely disappear from Congress's legislative agenda. One such issue is the taxation of small firms and its effects on their formation, performance, and growth. In the view of some lawmakers, the current tax burden on small firms, though reduced by existing small business tax benefits, should be reduced further because it hinders their formation and retards their growth. Others see little or no economic justification for additional tax relief for small business owners.

The federal tax code offers numerous benefits of varying importance to small firms, regardless of their lines of business. Most of these benefits take the form of deductions, exclusions and exemptions, credits, deferrals, and preferential tax rates. In addition, some provisions in the tax code grant preferential treatment to small firms in specific industries, such as oil refining and life insurance.

This report describes significant proposals in the 110th Congress to create new small business tax benefits, or enhance existing benefits. It will be updated to reflect significant legislative activity.

The 109th Congress passed two bills that included increased tax benefits for small firms in a wide range of industries: the Tax Increase Prevention and Reconciliation Act of 2005 (TIPRA, P.L. 109- 222) and the Pension Protection Act of 2006 (PPA, P.L. 109-280). TIPRA extended through the end of 2009 the enhanced small business expensing allowance enacted under the Jobs and Growth Tax Relief Reconciliation Act of 2003. PPA extended permanently a non-refundable tax credit for a portion of the start-up costs for qualified pension plans offered by small employers.

Several proposals to expand certain existing small business tax preferences, or create new ones, are being considered in the 110th Congress. Two such proposals are worth noting here because they are influencing the likelihood of the House and Senate agreeing on legislation to raise the federal minimum wage. H.R. 324, introduced on January 9, 2007, by Representative McKeon, would combine an increase in the minimum wage to $7.25 an hour over two years with a package of increased small business tax benefits, including an extension of the current small business expensing allowance through 2010. On January 12, 2007, Senator Baucus unveiled a measure (S. 349) combining a similar increase in the federal minimum wage with several enhanced small business tax benefits and a package of revenue raisers intended to offset the budgetary cost of the benefits. Among the proposed benefits are an extension of the current small business expensing allowance through the end of 2010 and a two-fold increase in the threshold for the use of cash accounting. The Senate Finance Committee approved the measure as a substitute amendment to the version of H.R. 2 passed by the House by a unanimous voice vote on January 17, 2007, and the full Senate passed the amendment by a vote of 94 to 3 on February 1. The version of H.R. 2 passed by the House would increase the federal minimum wage by the same amount, without extending tax relief to small firms affected by the increase.

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Reflecting the powerful allure of small entrepreneurial firms and the considerable political clout of small business owners, the federal tax code contains a number of provisions that target tax relief at small firms in a broad range of industries. Nonetheless, some lawmakers wish to enact further reductions in the tax burden on small business owners. In the 110th Congress, several proposals to enhance certain existing small business tax preferences or create new ones are being considered. This report describes these proposals and discusses how they would change current tax law.

Small business tax benefits differ in kind. Most take the form of deductions, exclusions and exemptions, credits, deferrals, and preferential tax rates. In combination, tax benefits can lower marginal effective tax rates on the income earned by small firms, relative to all other firms.

Still, existing tax benefits for small firms are not confined to those that shrink tax burdens. A few tax code provisions benefit small firms by reducing the cost of tax compliance. Research has shown that this cost tends to be regressive with respect to firm size, which means that tax compliance costs typically claim a larger share of pretax income for small firms than for larger ones.² In addition, other provisions grant tax relief to eligible small firms in exchange for the provision of certain fringe benefits (e.g., pension plans) to employees.

Not only does the federal tax code make no formal distinction between the taxation of small firms and all other firms, it also incorporates no uniform definition of a small firm, nor any consistent criteria for identifying the firms that qualify for current small business tax benefits. As a consequence, eligibility criteria vary from one such benefit to the next. For example, some tax benefits are available only to firms with annual gross receipts below a certain level, while other benefits are restricted to firms under a certain asset or employment size. It may come as a surprise to some that among the eligibility criteria for current small business tax preferences, employment size is seldom found. By contrast, the Small Business Administration relies heavily on employment size to collect and publish data on the economic condition of small business, and to provide support to small business under the programs it administers.³

Existing small business tax benefits also differ in scope and economic importance. Some apply to small firms in specific industries only (e.g., life insurance, banking, and energy production and distribution), while others can affect nearly every small firm. Those benefits with the broadest reach outside agriculture include

• the rules governing the taxation of passthrough entities (including subchapter S corporations),

• graduated corporate income tax rates,

• the expensing allowance for certain depreciable business assets,

• the exemption of small corporations from the corporate alternative minimum tax,

• the amortization of business start-up costs,

• cash-basis accounting,

• the exclusion of gains on certain small business stock,

• and the tax credit for a portion of the start-up costs of pension plans offered by certain small firms.⁴

All small business tax benefits, except those intended to ease the tax compliance burden for small firms, entail a loss of federal revenue, at least in the short run. But owing to a lack of data and disagreement over which provisions in the tax code constitute small business tax benefits, it is difficult to derive an accurate and widely accepted estimate of the revenue cost of existing small business tax preferences. Nevertheless, recent estimates of the revenue loss associated with significant tax expenditures made by the Joint Committee on Taxation and the Treasury Department indicate the cost exceeded $8 billion in FY2005.⁵

Among other things, TIPRA extended for two years (through 2009) the enhanced small business expensing allowance enacted under the Jobs and Growth Tax Relief Reconciliation Act of 2003 (JGTRRA). The allowance was extended through 2007 by the American Jobs Creation Act of 2004 (AJCA).

The PPA permanently extended some of the provisions in the Economic Growth and Tax Relief Reconciliation Act of 2001 concerning pensions, including a nonrefundable tax credit for a portion of the start-up costs for qualified pension plans offered by eligible small employers.

Two such proposals merit discussion because they have a bearing on the likelihood of the House and Senate agreeing on legislation to increase the federal minimum wage. One is a bill (H.R. 324) introduced on January 9, 2007, by Representative McKeon, with the backing of House Republican leaders. The measure combines three key elements: (1) a gradual rise in the minimum wage; (2) three tax preferences intended to benefit small business owners hurt by any increase in the minimum wage; and (3) a removal of the legal obstacles to the creation of association health plans. Only one of the three tax preferences targets most of its benefits at small firms: a one-year extension (through the end of 2010) of the enhanced small business expensing allowance enacted under JGTRRA. The other two -- a reduction in the period for recovering the cost of new restaurant buildings through depreciation allowances from 39 years to 15 years and a repeal of the surtax for the federal unemployment trust fund enacted in 1976 -- theoretically could benefit firms of all sizes.

The second proposal is a bill (S. 349) introduced by Senator Baucus, chairman of the Senate Finance Committee, approved by the committee (S.Rept. 110-1) on January 17, 2007, by a unanimous voice, and passed by the Senate by a vote of 94 to 3 on February 1, 2007. It was adopted by the Senate as a substitute amendment to the version of H.R. 2 passed by the House. The amendment also combines a gradual increase in the federal minimum wage with a package of tax preferences intended to benefit small business owners hurt by any increase. But unlike H.R. 324, it would offset the estimated revenue cost of those preferences with a package of revenue raisers. A primary motive for pairing the tax breaks with an increase in the minimum wage was to secure the 60 votes needed for the measure to pass in the Senate.⁶ On January 10, 2007, the House passed a version of H.R. 2 that would increase the minimum wage by the same amount, but that would offer no tax breaks for small firms likely to be hurt by the increase. It is not clear whether or how the significant differences between the House-passed and Senate-passed versions of the bill might be resolved.⁷

Like H.R. 324, not all of the tax preferences included in the version of H.R. 2 passed by the Senate would benefit small firms only. Three of the proposed preferences would confer most of their benefits on such firms: a one-year extension of the expensing allowance, an increase in the threshold for using cash accounting methods, and a modification of certain rules governing the formation and taxation of subchapter S corporations. But the measure also includes two tax preferences that, in theory, could benefit firms of all sizes: (1) an extension of the 15-year cost-recovery period for restaurant and leasehold improvements through March 2008, and an expansion of the depreciable real property eligible for this treatment to include comparable improvements in retail property and new restaurant construction; and (2) an extension of the work opportunity tax credit for five years (through 2012), and an expansion of the credit to include veterans disabled after September 11, 2001 and certain high-risk youths.

Two other legislative proposals are worth noting here because they were introduced by Democrats in the House and Senate with significant influence over the legislative agenda for small business in the current Congress.

Representative Nadia Velazquez, chairwoman of the House Committee on Small Business, introduced H.R. 46 in early January 2007. Among other things, the bill would allow buyers of eligible small firms to amortize over five years up to $5 million in qualified intangible assets, increase the capital gains exclusion for the sale of eligible small business stock from 50% to 62.5%, raise the minimum home office deduction to $2,500, and expand the maximum number of shareholders for subchapter S corporations to 150.

Senator John Kerry, chairman of the Senate Committee on Small Business and Entrepreneurship, introduced a bill (S. 99) that would create a partially refundable tax credit for eligible small firms that provide health insurance coverage to qualified employees. The credit rate would range from 50% of qualified health insurance expenses for employers with less than 10 such employees to 20% for employers with 25 to 49 such employees.

An explanation of how these and other noteworthy legislative proposals would change current tax law is provided below. The discussion is divided between proposals to enhance current small business tax benefits and proposals to establish new ones.

Current Small Business Tax Benefits

Expensing Allowance Under IRC Section 179. Under IRC section 179, business taxpayers buying qualified assets may write off as a current expense some or all of their cost (depending on the amount) in the year they are placed into service. Certain conditions must be met in order to claim this expensing allowance. For the most part, the qualified assets consist of machinery and equipment, including motor vehicles. Taxpayers unable to claim the allowance may recover the cost of qualified assets over longer periods through allowable depreciation deductions.

Expensing is the most accelerated form of depreciation. As a result, it lowers the cost of capital, simplifies tax accounting, and can boost the cash flow of firms that take advantage of it.⁸

Between 2003 and 2009, the maximum expensing allowance cannot fall below $100,000 for firms operating outside empowerment zones, and it is indexed for inflation. In 2007, the maximum allowance for such firms is set at $112,000. Assuming no change in current law, the allowance will drop to $25,000 in 2010 and beyond, its level before the enactment of JGTRRA.

The allowance begins to phase out, dollar for dollar, when the total cost of qualified assets placed in service in a tax year from 2003 through 2009 exceeds a threshold of not less than $400,000; this amount is also indexed for inflation. In 2007, the phaseout threshold is set at $450,000. Assuming no change in current law, it will fall to $100,000 in 2010 and beyond, its level before the enactment of JGTRRA.

So in 2007, firms that purchase and place in service more than $562,000 in qualified assets may claim no expensing allowance for that investment. Instead, the cost of the assets may be recovered over a longer period through allowable depreciation methods.

H.R. 324, S. 439/H.R. 2 (as amended by the Senate), and S. 299. Each bill would extend the current expensing allowance through 2010, after which the maximum allowance would fall to $25,000 and the phaseout threshold to $100,000, with no indexation for inflation.

S. 269. The bill would raise the maximum expensing allowance to $200,000 and the phaseout threshold to $800,000, and index both amounts for inflation, starting in 2007 and thereafter. It would also make purchases off-the-shelf software for business use permanently eligible for the allowance for each year after 2009.

Cash-Basis Accounting. Under IRC Section 446, business taxpayers have some flexibility in choosing the method of accounting they use to compute taxable income. Nonetheless, regardless of which method of accounting a firm uses for tax purposes, it must clearly reflect all relevant items of income.

Two methods of financial accounting are widely used in the private sector: cash basis and accrual basis. Under the former, which is generally the preferred method for self-employed individuals, income is recorded when it is received in the form of cash or its equivalent, and expenses are recorded when they are paid, regardless of when income is actually earned and expenses actually incurred. Under accrual-basis accounting, by contrast, income and expenses are recorded when the transactions giving rise to them are completed or nearly completed, regardless of when cash or its equivalent is received or paid. In general, a company using accrual accounting records income when its right to receive it is legally established, and expenses when the amounts are fixed and its liability for them is legally established.

Each accounting method has its advantages. Cash accounting is simpler to administer, but accrual accounting often yields a more accurate measure of a firm's economic income, as it does a better job of matching income with expenses. In addition, firms using the cash method have more control over when income is recognized for tax purposes.

Under IRC Section 448, C corporations, partnerships with C corporations as partners, trusts subject to taxation on unrelated business income, and legal tax shelters are barred from using cash accounting. An exception is made for firms engaged in farming or the commercial cultivation of trees and firms organized as personal service corporations. This exception also applies to C corporations and partnerships with C corporations as partners, when those entities have average annual gross receipts in the three previous tax years not in excess of $5 million.

Under IRC Section 471, the IRS may require firms to maintain inventories using the accrual method, to make sure that the accounting method used for tax purposes clearly reflects all relevant items of income. This requirement is generally applied to firms whose income hinges on the production, purchase, or sale of merchandise. Nevertheless, an exception is made for firms in this position whose average annual gross receipts in the three previous tax years do not exceed $1 million: they are free to use the cash method.

S. 349/H.R. 2 (as amended by the Senate). The bill would allow C corporations and partnerships with corporate partners whose average annual gross receipts in the three previous tax years do not exceed $10 million to use the cash method of accounting for tax purposes. It would also raise the threshold for using cash accounting to $10 million for firms that otherwise would be required to maintain inventories using the accrual method. Starting in 2009 and thereafter, the $10 million threshold would be indexed for inflation.

Subchapter S Corporations. Under the federal tax code, firms have the option of being organized as a subchapter S corporation.⁹ S corporations are passthrough entities that are treated like partnerships for federal tax purposes. Unlike C corporations, S corporations do not pay an entity-level tax like the corporate income tax. Instead, their items of income (or loss) are passed on (or through) to shareholders, who must account for them separately on their individual income tax returns. This attribution of income occurs even if the S corporation retains its earnings, instead of distributing them to shareholders. To avoid double taxation of income when a shareholder sells or otherwise disposes of his or her S corporation stock, each shareholder's basis in the stock is increased by any amount included in his or her income in a tax year, or decreased by any loss that is taken into account. A shareholder's loss may be deducted on his or her individual income tax return only to the extent of his or her basis in the stock or debt of the S corporation.

While S corporations generally are not taxed on the income they earn, they are subject to taxation at corporate tax rates on passive investment income in excess of 25% of their gross receipts. S corporations also are subject to a tax on accumulated earning and profits under IRC Section 1375.

Not all firms are eligible for subchapter S status, only those that qualify as a small business corporation. Such a corporation is defined as a domestic corporation with no more than 100 qualified shareholders and no more than one class of stock. Qualified shareholders are estates, certain trusts and tax-exempt organizations, and individuals who are residents or citizens of the United States. Families have the option of being treated as a single shareholder. Partnerships and C corporations cannot serve as S corporation shareholders.

Firms that meet the requirements for classification as a small business corporation do not automatically gain subchapter S status. To gain that status, a qualifying corporation must elect to do so, and all shareholders at the time of the election must consent to the decision. A corporation can lose its lose S status by failing to continue to meet all the criteria for a small business corporation, or by having excess passive investment income and accumulated earnings and profits at the end of the year for three consecutive tax years. Once a firm loses its S status, it (or any successor) must wait five years before it can elect that status again.

For many investors and business owners, a key advantage of seeking S status, rather than C status, is the avoidance of double taxation of business income. In 2007, the maximum individual tax rate is the same as the maximum corporate tax rate: 35%. So avoiding one layer of taxation can have its appeal, especially for individuals taxed at the highest marginal rates. But other tax considerations might lessen this appeal. For example, S corporation earnings passed through to shareholders are not considered dividends, and thus are not taxed at the current 15% rate for dividends. By contrast, C corporation earnings distributed to shareholders as dividends are taxed at that rate.

Another important advantage of S status over C status is that shareholders of S corporations have greater latitude to take advantage of corporate losses. While a C corporation may use net operating losses only to offset income in the last two or next 20 tax years, S corporation shareholders can use corporate losses immediately to offset income from other sources. The ability to use losses immediately is especially valuable to shareholders during the early years of a business, when profits may be meager and shareholders' investment in the business is large enough to allow them to use any losses.

S. 349/H.R. 2 (as amended by the Senate). The bill would make six changes of varying significance in the rules governing the taxation of S corporations. On the whole, the changes seem intended to create a more level playing field among the tax treatment of S corporations, limited liability companies, and partnerships, and to modernize outdated rules and restrictions.¹⁰

One provision of the bill would eliminate gains from the sales or exchanges of stock or securities as a source of passive investment income for S corporations.

Another provision would clarify the status of shares of bank stock owned by directors of banks operating as S corporations. Under the provision, the bank stock would not be treated as a second class of stock, as it currently is; the directors holding the stock would not be treated as a S corporation shareholder, as they currently are; the stock would be disregarded in allocating items of income and loss among shareholders; and the stock would not be considered in determining whether a bank operating as an S corporation holds 100% of the stock of a qualified subchapter S subsidiary.

The bill would also allow banks that convert to S status and wait until the first year of S status to discontinue the reserve method of accounting for bad debts to declare all adjustments from the change in accounting method as income for the year before the conversion, and to pay tax on that income. Such a provision would prevent the transfer of a tax burden to the shareholders that occurs under current law.

Another provision would allow non-resident aliens to become beneficiaries of an electing small business trust (ESBT) that owns stock in an S corporation. The change would enable families who control an S corporation to expand its access to equity capital by inviting family members who are not U.S. citizens and live abroad to participate in the business as shareholders.¹¹

The bill would also modify the tax treatment of the sale of stock in qualified S corporation subsidiaries by the parent S corporation. Under the provision, the sale would be regarded as a sale of an undivided interest in the subsidiary, followed by a transfer of all the assets to a new corporation that is subject to the rules of IRC Section 351.

Another provision concerns some C corporations that once were organized as S corporations. It would allow a C corporation that was not organized as an S corporation after 1996 to reduce its accumulated earnings and profits at the start of the first tax year after the enactment of the provision by any accumulated earnings and profits it had in the final tax year before 1983, when it was organized as an S corporation.

H.R. 46. The bill would raise the maximum number of qualified shareholders for an S corporation from 100 to 150.

New Small Business Tax Preferences

Employees pay no federal income or payroll taxes on employer contributions to health and accident plans in which they participate. This exclusion also applies to certain health benefits received by employees who participate in so-called cafeteria plans operated by employers. In addition, many employers offer health benefits to employees through flexible spending accounts (FSAs). Under such an arrangement, an employee chooses a benefit limit at the start of a calendar year and draws on the funds in the account to pay for medical expenses not covered by employer health plans. FSAs are funded through a combination of wage or salary reductions and employer contributions, both of which are exempt from income and payroll taxes.

Self-employed individuals may deduct the total amount paid for health insurance for themselves and their spouses and dependents from their taxable income. These payments, however, are not exempt from payroll taxes.

Individual taxpayers who itemize on their tax returns are allowed to deduct the total amount paid for qualified medical care (including health insurance premiums) for themselves and their spouses and dependents above 7.5% of their adjusted gross income.

Under the Trade Adjustment Assistance Reform Act of 2002, certain individuals may claim what is known as the health coverage tax credit (HCTC). The HCTC is a refundable credit equal to 65% of the amount paid for qualified health insurance by the following individuals: those receiving trade adjustment allowances (or those who would be eligible to do so if they had not exhausted their regular unemployment benefits); those eligible for the alternative trade adjustment assistance program; and those over age 55 who receive pension benefits through the Pension Benefit Guaranty Corporation.

Finally, under IRC Section 223, eligible individuals with qualified highdeductible health insurance plans (and no other health plan, with certain exceptions) may establish health savings accounts (HSAs). In 2007, qualified plans have minimum deductibles of $1,100 for single coverage and $2,200 for family coverage, and a limit on out-of-pocket medical expenditures of $5,500 for single coverage and $11,000 for family coverage. An HSA is a tax-exempt trust or custodial account. Contributions to a HSA by, or on behalf of, an eligible individual may be deducted from his or her taxable income. Employer contributions to these accounts are excluded from income and payroll taxes. There are limits on annual contributions to a HSA: in 2007, the limits are $2,850 for single coverage and $5,650 for family coverage. Withdrawals from HSAs to pay for qualified medical expenses are not taxed. Excluded from these expenses are health insurance premiums, with some exceptions. Withdrawals from HSAs not used to cover qualified medical expenses are subject to income taxation and a 10% tax penalty.

S. 99. The bill would establish a new refundable tax credit (IRC Section 45O) for qualified small employers that offer health benefits to eligible employees. The credit would depend on a qualified employer's employment size. Specifically, it would equal 50% of employer spending on health insurance coverage, up to a limit of $4,000 for single coverage and $10,000 for family coverage, for qualified firms with fewer than 10 qualified employees. The credit rate would drop to 25% for qualified firms with 10 to 24 such employees, and to 20% for qualified firms with 25 to 49 such employees.

To qualify for the credit, a firm would have to offer health insurance to all qualified employees, pay for at least 50% of the cost of that insurance, have average annual gross receipts of $5 million or less in the past three tax years, and employ an average of 2 to 49 qualified individuals in the previous tax year. Start-up firms could qualify for the credit by demonstrating that they are likely to employ an average of 2 to 49 qualified individuals in the current tax year.

A qualified employee (or individual) is defined as an employee who meets two criteria. First, such an employee is not eligible for health insurance coverage through a health plan offered by a spouse's employer, or through any federal health plan (e.g., Medicare, Medicaid, or military health plans). Second, he or she receives no more than $50,000 in compensation from a qualified employer in a calendar year. This amount would be indexed for inflation.

The cost of the following intangible assets may be amortized over 15 years: "goodwill; going-concern value; work force in place; an information base; any patent, copyright, formula, process, design, pattern know-how, format, or similar item; any customer-based intangible; any supplier-based intangible; any license, permit, or other right granted by a governmental unit or agency; any covenant not to compete entered into in connection with the acquisition of a trade or business; and any franchise, trademark, or trade name."

H.R. 46. The bill would carve out a permanent exception under IRC Section 197 for the depreciation of intangible assets acquired from certain small firms. Specifically, it would allow business taxpayers to amortize over five years -- rather than the 15 years allowed under current tax law -- up to $5 million of the cost of intangible assets they acquire when they purchase firms whose average annual gross receipts in the three tax years before the acquisition do not exceed $5 million. A shorter period for cost recovery might make it easier for owners of small firms with relatively high amounts of intangible assets to sell them, as it would reduce the tax burden of the buyer in the first few years after the acquisition.

Taxpayers may exclude 60% of the gain on QSBS issued by qualified business entities that conduct all their business within federal empowerment zones, as defined under IRC Section 1397C.

The provision is intended to encourage private investment in small start-up firms that may have trouble raising funds in debt and equity markets.

H.R. 46. The bill would permanently increase the share of capital gains on the sale or exchange of QSBS that may be excluded under IRC Section 1202 to 62.5% for QSBS issued by qualified entities operating outside empowerment zones, and to 75% for QSBS issued by qualified entities operating within such zones.

H.R. 578. The bill would create a new non- refundable tax credit under IRC Section 45O for equity investment in certain small firms. The credit would be equal to 25% of each qualified equity investment made by a qualified investor in a tax year, up to a limit of $500,000. A qualified investor could invest no more than $250,000 in a single qualified small business in a tax year.

To qualify for the credit, an investor would have to be an any individual or partnership that qualifies as an "accredited investor" under regulations established by the Securities and Exchange Commission.

Equity investments would qualify for the credit if they were to involve the exchange of cash or its equivalents for the stock of, or an ownership interest in, a qualified small business. Under the bill, such a business is defined as a firm that is based in the United States and meets the appropriate size standard set by the Small Business Administration under Section 3 of the Small Business Act.

An investor would be able to claim the credit for an equity investment in a qualified small business only if the business uses at least 80% of its assets in the active pursuit of a qualified trade or business during "substantially all" of the period the investor holds an equity stake in the enterprise. A qualified trade or business would have the same meaning as a qualified trade or business for the partial exclusion of capital gains on the disposition of qualified small business stock under IRC Section 1202. Activities related to research and development would meet the test of a qualified trade or business for the credit

² Joel Slemrod, "Small Business and the Tax System," in The Crisis in Tax Administration, Henry J. Aaron and Joel Slemrod, eds. (Washington: Brookings Institution Press, 2004), p. 70.

³ CRS Report RL33243, Small Business Administration: A Primer on Programs, by N. Eric Weiss.

⁴ For a description of existing small business tax preferences and the economic arguments that have been raised for and against them, see CRS Report RL32254, Small Business Tax Benefits: Overview and Economic Analysis, by Gary Guenther.

⁵ For FY2005, the projected combined revenue loss for seven of the most important small business tax preferences is $7.960 billion. This estimate applies to the following preferences: partial exclusion of capital gains on small business stock; ordinary income treatment of losses on the sale of eligible small business corporation stock; amortization of business start-up costs; tax credit for start-up costs of small business pension plans; cash accounting for non-agricultural firms; graduated tax rate structure for corporations; and expensing allowance for small business investment in eligible assets. See U.S. Congress, Joint Committee on Taxation, Estimates of Federal Tax Expenditures for Fiscal Years 2005-2009, JCS-1-05 (Washington: GPO, 2005), table 1; and Office of Management and Budget, Analytical Perspectives, Budget of the United States Government, Fiscal Year 2006 (Washington: GPO, 2005), table 19-2.

⁶ Kurt Ritterpusch and Heather Rothman, "Baucus Outlines $10 Billion in Tax Breaks For Small Firms; Offsets Not Announced," Daily Report for Executives, BNA, January 11, 2007, p. GG1.

⁷ Wesley Elmore, "Senate Approves Wage Bill, but Negotiations With House Await," Tax Notes, Feb. 5, 2007, pp. 491-492.

⁸ CRS Report RL31852, Small Business Expensing Allowance: Current Status, and Legislative Proposals, and Economic Effects, by Gary Guenther.

⁹ Business enterprises may be organized for tax purposes as some kind of passthrough entity or a C corporation, which is subject to an entity-level tax on its income. The major categories of passthrough entities are partnerships (including limited liability companies), S corporations, and sole proprietorships. Most firms operate as some kind of passthrough entity. In 2004, the most recent year for which data are available, sole proprietors filed 20.6 million federal tax returns; S corporations, 3.6 million returns, partnerships, 2.5 million returns, and C corporations, 2.0 million returns. See Internal Revenue Service, Statistics of Income Bulletin: Fall 2006 (Washington: 2006), pp. 342-346.

¹⁰ Stephen Joyce, "Minimum Wage Bill Amendment Seen Giving Favorable Tax Treatment to S Corporations," Daily Report for Executives, BNA, Jan. 25, 2007, p. G-13.

¹¹ Ibid., p. G-13.