Given the shifting political winds, maybe they won’t be enacted, but the tax and accounting changes that await businesses in 2010 and beyond are said to be “baked” into the federal budget. Some are less menacing than others, but the sheer volume will require planning and adjustment on the part of businesses.
Whether they will kill jobs, as some predict, or actually prove to be manageable costs of doing business, organizations should at least begin planning for them. “There are a number of favorable provisions in the tax laws that are set to expire at the end of 2009 or 2010, so business owners need to really stay on top of that by talking to their advisors,” explained Rick Welsch, a partner in tax and business services for Wegner CPAs and Consultants.
Expiration Dates
Gordon Meicher, managing partner in Meicher and Associates, said the forthcoming changes go beyond allowing the Bush tax rate cuts to expire for the top tax brackets. While those expirations are not causing widespread heartburn, Meicher said President Obama will have to make an adjustment to keep his promise not to raise taxes on people earning under $250,000.
Meicher noted that the Obama administration plans to extend the current rates for lower tax brackets for another 10 years, but he sees a glitch in the government’s plans regarding the higher brackets: “The 33% bracket starts, for married people filing jointly, at $208,000 today,” Meicher stated. “That is going to go to 36% in 2011.”
The chief concern, however, is a series of tax increases and accounting changes that could be part of the federal budget.
One change, which would be effective for the 2012 tax year, would require businesses that do not offer a retirement plan to offer automatic enrollment in an individual retirement account to all employees on a payroll-deduction basis. Under the proposal, which is considered a first step in reforming retirement savings options, employees would be enrolled at a default rate of 3%. Small employers with fewer than 10 employees would be exempt but encouraged to participate. To help defray the costs, employers would be eligible for a temporary tax credit of $25 per enrolled employee — up to $250 each year for two years.
Meicher worries about the potential impact on job creation, especially when the economy is still bleeding jobs. “There is automatic enrollment that you do for employees,” he noted. “In other words, they come to you. They don’t even give you a choice. You’ve got to put them in the pension plan unless they permanently elect out.”
Other possible accounting changes include the 2012 elimination of the LIFO (Last In, First Out) inventory method, and the lower-of-cost-or-market, an inventory practice used by retailers. The LIFO repeal could have a profound impact on auto dealerships because they would have to declare millions of dollars more in income.
Repealing LIFO, which would raise an estimated $65 billion in revenue over 10 years, would partially pay for individual and business tax incentives that include targeted tax cuts to promote research and help C-corporations raise capital.
The proposed change in lower-of-cost-or-market inventory would end the practice of writing down the taxable value of inventories to reflect a drop in price or damage to the goods. Meicher said the repeal of lower-of-cost-or-market “is going to be horrendous,” and added, “Many small businesses are going to have to declare hundreds of thousands of dollars of income they otherwise would not, and it doesn’t matter how much they make.”
Elsewhere, there is still hope for an extension of a valued tax write off, but the clock is ticking. Under current law, business owners can write off the first $250,000 of equipment that they purchase, as long as they buy less than $800,000 worth of equipment in a given year. That is set to expire at the end of this year, and would fall to $125,000 as long as the business buys less than $500,000 worth of equipment in a year.
“Obviously, that’s a big difference if you’re a contractor and you’re looking to buy a $250,000 back hoe,” Welsch said. “It would be kind of nice to know whether you can write off the whole thing, or only half of it in terms of a business deduction.”
The same law would apply to the purchase of capital equipment like computers and any asset that has a useful life of more than one year.
“That’s actually one of the biggest items to look at,” Welsch said. “It has not been extended yet.”
In addition, the gain from the sale of stock or real estate now is taxed is 15%. That will expire, and the capital gains rate will change at the end of 2010. The current thinking is that the rate will be increased to 20%, which could grease the volume of real estate transactions next year.
“That 5% may not sound like much, but it’s a one-third increase,” Welsch noted. “Remember that 5% on a $1 million gain is $50,000. It’s something for business owners to be aware of, especially if they are thinking of disposing some assets. They may want to take advantage of these favorable rates in 2010.”
Tucked away in new laws at both the federal and state levels are a number of new penalties aimed directly at the business class. For example, the state of Wisconsin has new penalties of $250 per case for people that use resale certificates in an attempt to evade the sales tax. While many in the business community may not think their brethren are abusing that law, such transactions are routinely uncovered through an audit, and they occur often enough to generate thousands of dollars in fines.
“They are raising penalties high enough to make sure business people understand that they need to abide by the laws, and there is not going to be a lot of grace or favorable treatment if they catch you,” Welsch said. “Penalties at the state and federal level are getting high enough that you are going to get slapped.”
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State of the Estate Tax
At the moment, uncertainty is causing headaches for those wrestling with estate tax planning, but the smart money is on an extension of the 2009 estate tax rules. Without Congressional action by year’s end, the federal estate tax would be repealed in 2010 and return to pre-Bush levels in 2011, allowing a $1 million exception, and taxing anything over that amount at a 55% rate.
The current exemption is $3.5 million, with a tax of 45% applied on anything above that, with an unlimited marital deduction so that no matter the size of the estate, it can pass to the surviving spouse free of the estate tax. With the health care debate sucking up all the oxygen, much less attention has been paid to a permanent solution, although Congressman Charles Rangel, D-New York and chairman of the House Ways and Means Committee, is drafting legislation to make the current estate tax law permanent.
But few people, including Brian Anderson, attorney and CPA for the law firm DeWitt Ross & Stevens, expect the tax to actually go to zero in 2010. “I think the most likely scenario is an extension of the current rules, and by current I mean 2009 estate tax rules, for one to three years,” Anderson said. “That would give Congress more time to further examine the estate tax overall.”
Meanwhile, Congress wrangles over health care reform. As part of the financing package for the health care bill recently passed by the House of Representatives, there would be a 5.4% surcharge on taxpayers with adjusted gross incomes in excess of $1 million for married couples filing a joint return, and $500,000 for single people. However, Anderson said very few small business owners would be impacted by a surcharge at those income levels.
“I think not, not at those higher-income levels,” he said, “and if it does hit some small business owners, it would be those whose businesses are doing fairly well for the owners to be making that kind of income. A typical small business owner whose business is struggling should not really feel the impact of those increases.”
But Meicher said there is another proposal that would apply a surcharge to people making more than $300,000, which would include small business owners, so it might come down to which approach is included in the final bill. The health care debate has moved on to the U.S. Senate, which is expected to vote on its version health care reform this month.
Incentives Please
Meicher thinks the vast amounts of wealth in money markets, which are looking for a place to go, could be the economy’s saving grace. However, he also believes elected officials at all levels of government must do more to create conditions in which small businesses can do what they do best — serve as the nation’s job-creating engine. “What we need to do to solve this problem is put incentives in for small businesses,” he said, “because right now they are not creating any jobs.”
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