By KENT HOOVER
khoover@bizjournals.com

Retailers may like the House's latest tax bill, but real estate developers and venture capitalists hate it.

Also upset are U.S.-based multinational corporations and small professional services firms that operate as S corporations.

The House, in a 215-204 vote, passed legislation May 28 that extends various tax breaks and provides additional weeks of unemployment benefits for out-of-work Americans.

The National Retail Federation supported the bill because it extended a tax break that allows retailers and restaurants to depreciate the cost of renovations over 15 years instead of the usual 39 years.

Other business groups, however, opposed the legislation. That's because it would raise taxes on a wide range of businesses to help pay for its $90 billion cost. Business lobbyists hope to stop these tax hikes when the Senate takes up the legislation.

Higher taxes for VCs, developers

One of the bill's biggest changes in tax law would be how carried interest is taxed. Carried interest is the share of an investment fund's profits that is paid as compensation to the fund's general partner. This compensation currently is treated as capital gains, which are taxed at lower rates than ordinary income. The House bill would tax 50 percent of this compensation as ordinary income in 2011 through 2013. After 2013, 75 percent of carried interest would be taxed as ordinary income and only 25 percent as capital gains.

Supporters of this tax change contend the current tax treatment of carried interest provides an unjust tax break to wealthy hedge fund managers.

"A basic tenet of tax policy is that compensation for services rendered should be taxed as ordinary income, not capital gains, and carried interest seems to fall into that category," said Chuck Marr, director of federal tax policy at the Center on Budget and Policy Priorities.

But real estate developers and venture capitalists contend that higher taxes on fund managers would discourage investment in new projects and new technologies.

"This is a severe blow to entrepreneurs who would otherwise be contemplating new deals," said Thomas Bisacquino, president of NAIOP, a commercial real estate trade association.

The tax change would affect more than 1 million real estate investment partnerships around the country, according to the Real Estate Roundtable.

The National Venture Capital Association, meanwhile, contends that taxing a large chunk of carried interest as ordinary income would create a disincentive for long-term investments in businesses.

Multinationals would pay more

The high-tech industry was pleased the House bill finally renewed the research-and-development tax credit, which expired at the end of 2009.

"Still, to wait this long and then pass a one-year extension seriously undermines the potential of the credit to help drive American innovation and recovery," said Phil Bond, president and CEO of TechAmerica, a technology trade association.

Plus, he said, the positive impact of the R&D tax credit would be limited by the $14 billion in tax increases imposed on U.S. companies with operations in other countries.

House Rules Committee Chairman Louise Slaughter, D-Fairport, said the bill "cracks down on corporations by closing tax loopholes that have encouraged companies to ship jobs overseas."

Business groups contend the tax increases would make U.S.-based companies less competitive with their global counterparts.

Bad precedent for S corporations?

Small businesses, meanwhile, are upset that the legislation would force small professional services firms that are S corporations to pay payroll taxes on their profits, beyond what is paid to their owners in salary. The change would apply to professional services firms whose business is based on the skills of three or fewer individuals.

Many architectural firms fit that category, which is why the American Institute of Architects is upset about this provision.

"Now is the worst time to raise taxes on a sector of the economy that is a catalyst for job growth in the design and construction industry," said Paul Mendelsohn, AIA's vice president of government and community relations.

The National Federation of Independent Business is concerned this change sets a bad precedent in how S corporations - a common form of organization for small businesses - are taxed. In S corporations, business income is taxed at the individual level. The Internal Revenue Service already has the power to make sure that S corporation shareholders take a reasonable salary, instead of sheltering too much income from employment taxes.