Accounting Today - September 27 2010

Congress dithers on Bush tax cuts
taxnews

The continuing inability of Congress to agree on what to do with the expiring Bush tax cuts has real consequences, as small businesses remain stymied in their planning for the future.

And the picture won’t get clearer anytime soon. Congress, back in session now for a brief period before the elections, is unlikely to resolve the situation before a “lame duck” session late in the year.

The National Federation of Independent Business reported that its Index of Small Business Optimism lost 0.9 points in July and reached 88.1 following a sharp decline in June. The index has been below 93 every month since January 2008, and below 90 for 24 of those 30 months. These readings are typical of a weak or recession-mired economy, according to the NFIB. Ninety percent of the decline resulted from deterioration in the outlook for business conditions in the next six months.

Dean Zerbe, former chief counsel to the
Senate Finance Committee and national
managing director for specialty tax services
provider alliantgroup, labeled the uncertainty
surrounding future tax rates, in part, a cause
of the pessimism. “One big reason for the skit-
tishness is that small-business owners have
no earthly idea what their tax structure may
be like next year,” he said. “The top income tax
rate, the small-business tax relief legislation
and a host of credits and incentives are all
being held hostage by election year politics
— they’re literally on edge.”
Zerbe foresees two possible scenarios re-
sulting from the November elections. “If the
Republicans have a strong night, I think they
are going to be pressing very hard for every-
thing to be extended for a year, because they
will feel, with justification, that they’ve won
the issues,” he said.

A “strong night” means that they take over
the House and pick up seven or more Senate
seats, according to Zerbe. “It could also mean
that the Democrats say, ‘Not today, we’re still
running the show.’ That could bring the is-
sue into a new Congress where Republicans
control the House, and have a strong Senate.
Then it’s a real question as to whether the ad-
ministration will come to the table and agree
to an extension of the rates. I’m sure they’ll
remind the president of his quotes about not
raising taxes in a down economy.”
The other scenario, if the Republicans
don’t take the House and they win five or
fewer Senate seats, would result in the Dem-
ocrats feeling that they can go forward with
a compromise position, Zerbe opined. “It
might look something like the Kyl-Lincoln
proposal for estate tax,” he said.
“It’s more than just an argument about the
rates,” Zerbe noted. “If the rates are allowed
to expire, you’re bringing back Pease and PEP
as well.”

PEP is the personal exemption phase-out for higher earners, while Pease is a similar phase-out of the benefits of most itemized deductions for earners above a certain limit. Both are absent for 2010, but will likely be re-instated next year.

BY ROGER RUSSELL

Small businesses are skittish about future tax legislation

a year puts off the inevitable. Capital gains
will go to 20 percent if nothing else changes,
while dividends will go from 15 percent to
re-align with ordinary income rates, which
will top out at 39. 6 percent. Ordinary income
brackets all ratchet up at every level, so every
taxpayer will be impacted by a simple expira-
tion of the Bush tax cuts. The expiration will
raise the rates for everyone, contrary to what
we’ve been hearing.”
Health care reform further changes the
landscape, but not until 2013. “The changes
are significant and will continue to raise taxes
on all income across the board,” explained
Rosica. “There will be a 3. 8 percent rise added
to capital gains, dividends and interest, and
0.9 percent on wages.”
“Overall, the momentum is toward increas-
ing rates, so we have to plan for that environ-
ment,” he said. “The uncertainty has more to
do with the timing, rather than the increase
in rates. The timing of when we implement
the plan will be updated by the kind of leg-
islation we get between now and the end of
the year.”

CORPORATE RETURNS SLIDE

WASHINGTON, D.C. — The number of corporate returns processed annually by the Internal Revenue Service fell 7 percent between January 2005 and December 2009, from almost 2. 2 million to approximately 2 million, according to a report by the Treasury Inspector General for Tax Administration that analyzed IRS data for fiscal years 2005 through 2009.

One factor that may be contributing to the modest decline in corporate return filings is the popularity of organizing a business as a partnership or Subchapter S corporation. According to the IRS, the number of partnerships is expected to increase by 49 percent and the number of Subchapter S corporation filings is expected to increase by 39 percent between 2006 and 2015.

THE EFFECTS OF SUNSETTING

If the tax cuts of 2001 and 2003 are allowed to expire, joint-filers with income above $250,000 and single-filers with income above $200,000 may face an increase in the top income tax rate, a higher tax rate on qualified dividends, an increase in the capital gains rate and a new Medicare tax on net investment income, according to Greg Rosica, tax partner at Ernst & Young and contributing author to the Ernst & Young Tax Guide.

“The certainty is that the Bush tax cuts are
expiring based on current law, so if no one
does anything we know what will happen,”
he said. “When you look at possible planning,
there are a lot of other legislative proposals
floating around.”
“Our planning now is to move forward
with ideas and analysis based on different
scenarios, but we’re not pulling the trigger on
anything,” he said. “We hope that there will be
some clarity before the end of the year.”
Rates will be going up one way or another,
indicated Rosica. “The expiration of the cuts
will bring about a rate increase, but there are
other proposals out there that will bring this
about as well,” he noted. “An extension for

FUTURE STRATEGIES

Among the moves that tax advisors should
consider in the face of rising rates are accel-
erating some taxable items into 2010, Rosica
said. These include:
Accelerating capital gains into 2010 and
deferring capital losses until 2011;

Deferring certain itemized deductions into 2011;

Accelerating compensation into 2010 and reconsidering any deferred-compensation elections;

Accelerating the exercise of stock options into 2010;

Converting from traditional IRAs to Roth
IRAs and paying for the tax conversion in
2010; and,
Revisiting estate plans.

The way that small businesses are impacted by increased tax rates can be at odds with the planning their employees may want to do, Rosica cautioned. “For example, S corporation or partnership employees may want to accelerate bonuses into 2010, but that would give the owner a deduction in a lower tax year. There might be a divergence of goals.” AT

REPORT QUESTIONS IRS
ON STIMULUS FUNDS

WASHINGTON, D.C. — Some $203 million in funding under last year’s Recovery Act for the IRS to reprogram its computer systems and update tax forms, publications and customer service may be at risk due to inadequate oversight, according to another TIGTA report.

As of April 2010, the IRS had initiated or was in the process of initiating 26 procurement actions on Recovery Act program initiatives with a total contract value of $81.9 million. But despite the influx of Recovery Act money, the IRS has not completed steps to improve contract oversight by its contracting officers’ technical representatives, who administer the technical aspects of government contracts following their award, according to the report.

In a 2009 audit, TIGTA found that IRS contracting officers’ technical representatives were not always performing all of their oversight duties. Instead, they limited their involvement to administrative functions and relied on program office employees who lacked delegated authority and training required to determine whether the goods or services provided by the contractor were acceptable.