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Subchapter S Reform Passes Key Committee

WWR Article

October 31, 2003

Subchapter S Reform Passes Key Committee

The ICBA praised House Ways and Means chairman Bill Thomas (R-CA) for his committee's passage of the American Jobs Creation Act of 2003 (H.R. 2896). The bill, which includes more than $1.2 billion in ICBA-backed S corporation tax relief measures, cleared Ways and Means by a 24-15 vote on October 28.

The subchapter S reforms in the bill were the ones outlined in ICBA's comprehensive tax relief study released last January. ICBA chairman Rusty Cloutier testified in June before a Ways and Means subcommittee chaired by Rep. Jim McCrery (R-LA) to urge enactment of the reforms. McCrery was instrumental in getting them included in H.R. 2896.

To date, more than 1,850 community banks have converted from C corporations to S corporations and eliminated punitive double taxation of earnings by paying tax only at the individual shareholder level. The tax savings from subchapter S availability has greatly preserved and improved the competitive viability of the community-banking sector. Recent tax relief laws that lowered the individual income tax rates made Subchapter S status even more beneficial and attractive.

Key reforms passed in H.R. 2896 include increasing the number of subchapter S corporation eligible shareholders to 100 from 75; counting all family members (3 generations) as only one shareholder (for an unlimited number of families); permitting S corporation shares to be held in existing IRA accounts; and easing restrictive passive income and bank director share rules.

The bill now must pass the full House and then be conferenced with any Senate-passed version. While House leadership has shown interest in moving the legislation in the remaining weeks of this congressional session, any conference and final passage will likely be completed by March of 2004. The U.S. faces the threat of $4 billion in pending European Union sanctions unless H.R. 2896 is passed by that date. Please contact your member of Congress and urge passage of H.R. 2896, including beneficial subchapter S reforms. Additional information can be found at www.icba.org, under "Email Congress" and legislative issues.