After a third attempt to limit debate and advance the tax extenders bill (H.R. 4213) to a final vote failed, Senate Majority Leader Harry Reid (D-Nev.) decided to table the measure until a later date.

After eight-weeks of working on the legislation, the final attempt failed by of vote of 57-41 despite changes—such as easing some of the new tax increases and finding new sources of revenue to fully offset the amendment’s extension of federal Medicaid funding for the states—Senate Democrats made to gain the support of key Republicans.

Specifically, the amendment included minor changes to ease technical concerns about how the bill would tax investment fund managers receiving carried interest. Carried interest is the share of profits—typically 20 percent—that fund managers are allowed to keep as compensation for their services.

The bill would tax 75 percent of carried interest at ordinary income tax rates rather than the much lower capital gains tax rate, but would provide a discount on investments held for at least five years. In those cases, 50 percent of carried interest received would be taxed at ordinary income tax rates.

To address some of the concerns about the provision, Senate Finance Committee Chairman Max Baucus (D-Mont.) modified the carried interest language in his amendment to clarify the treatment of re-characterized income from investment services partnerships. Under the change, 50 percent of income from disposition of an asset or investment services partnership interest held for at least five years, including the treatment of the tax code Section 197 intangibles related to entities providing investment services, would be taxed at ordinary income tax rates, rather than the 75 percent that would normally apply.

The only non-offset provision in the substitute amendment was the extension of federal financing for unemployment insurance benefits, which would have added $33 billion to the budget deficit.

With the extenders bill now sidelined, Reid announced that he would be moving on to a small-business bill. Specifically, the Senate will take up the House-passed Small Business Lending Fund Act (H.R. 5297) and offer its own significantly modified version as a substitute. Reid filed a motion to limit debate on the small-business bill and on June 29 the Senate 66-33 approved the motion and will now proceed to consideration of the bill.

The language of the small-business bill is still being finalized, but is expected to be released in the coming day. Baucus and Finance Committee ranking member Sen. Charles Grassley (R-Iowa), already announced that the bill will include a one-year extension of the bonus depreciation provision that expired at the end of 2009, as well as other provisions included in the House-passed version of the bill. According to the Joint Committee on Taxation, that provision would cost $6.1 billion during the 2010-2020 time period.

Additionally, the House bill featured 100 percent exclusion for capital gains from the sale of certain small-business stock that is held for more than five years and a provision that would increase the deduction for business start-up expenses from $5,000 to $20,000 for tax years 2010 and 2011.

Senate aides have said they expect their version of the bill to be more robust than the House-passed version. However, despite overcoming the procedural hurdle of moving on to the bill, it is unlikely that the small-business bill will be completed ahead of the week-long Independence Day recess, which begins July 5.