On May 1, President Bush, as expected, vetoed the Iraq war supplemental funding bill (H.R. 1591) that included $4.84 billion in small business tax breaks.  House Democrats are planning an override vote today but it is expected that the Bush veto will be sustained.  A bipartisan group of congressional leaders will meet today with the President in an attempt to reach agreement on a second bill that will meet with the President's approval.  The fate of the minimum wage and tax provisions contained in the bill is unclear but Bush didn't indicate that these measures were part of the reason he vetoed the bill.  The President stated that “Congress should debate these spending measures on their own merits and not as part of an emergency funding bill for our troops.” Republicans in Congress believe that once the President vetoes the bill, Democrats will have to sit down and compromise on a package that the President will sign.

H.R. 1591 contains a $4.84 billion package of small business tax incentives, as well as an increase in the federal minimum wage. Formally called the “Small Business and Work Opportunity Act,” the small business tax incentives package would, among other provisions:

• Extend the work opportunity tax credit (WOTC) for 3.5 years with liberalized rules for hiring disabled veterans and workers in “outward migration counties.”
• Increase the Code Sec. 179 expensing limit to $125,000 and the investment-based expensing phaseout to $500,000, both effective for tax years beginning after 2006, and extend expensing for another year (through 2010).
• Allow employers to receive a full tip credit despite the federal minimum wage increase.
• Permit an unincorporated business owned jointly by a married couple to file as a sole proprietorship instead of as a partnership.
• Liberalize several S Corp rules, including eliminating stock or securities capital gains from the definition of passive investment income.

These tax breaks would be paid for with a variety of offsets, including:

• Raising the kiddie tax age from under-18 to under-19 (under-24 if a student).
• Eliminating the requirement that IRS hold a collection due process hearing before issuing a levy on delinquent employment taxes.
• Expanding preparer penalties to all types of tax returns (e.g., employment, excise, exempt orgs., estate and gift tax) and increasing the penalty amounts.
• Creating a new penalty on claims for refund that are filed without any reasonable basis.