Year-end tax gifts uncertain
Will Congress provide year-end tax relief for businesses? At the moment, the smart money says they’ll get a lump of coal.
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From the pages of In Business magazine.
With the holiday season upon us, small business owners would like to see a few presents under their tree in the form of tax relief. They’ve certainly been nice enough, keeping the economy afloat despite everything that’s been thrown at them in recent years, but unless Congress gets its act together, they might end up with nothing but a lump of coal.
In conversations with four local business tax experts, we found that despite numerous bills floating around Congress — bills that are filled with tax goodies such as the expansion of bonus depreciation on the purchase of new capital equipment — the prospects of year-end action are iffy at best. Congress could have put tax changes in the recently passed budget deal, but other than changing certain audit rules for business partnerships, the budget deal does not feature significant tax changes.
Adding to the existing uncertainty is the elevation of Wisconsin Congressman Paul Ryan to Speaker of the House, which removed him from the powerful House Ways and Means Committee. As chairman of Ways and Means, Ryan had been working to advance pro-business tax measures, but in the view of one of our experts, his departure from that post does not bode well for their advancement.
In any event, tax law experts do not sound very optimistic, including David Reinecke, a partner with Foley & Lardner. Reinecke is preparing to deliver an address before the State Bar of Wisconsin that he knows will be pretty thin on the subject of business tax law changes. “I’ve heard a lot of skepticism from people who don’t think it’s very likely that this will happen, but there are people who have a little more optimism,” he says.
So far in 2015, very little has been enacted or promulgated on the business tax front — whether it’s new legislation or Internal Revenue Service guidance on rules and regulations. In past years, various “tax extenders” have been passed in the week between Christmas and New Year’s Day, but many of them were allowed to expire at the end of 2014.
Gordon Meicher, managing partner for Meicher CPAs, notes there are some 300 proposed tax changes, but he used one word to characterize their status in Congress. “Uncertainty,” he states. That would even include popular measures such as one to make bonus depreciation permanent at 50%, allowing businesses to write off 50% of the purchase of new business equipment with a class of life of 20 years or less.
Under IRS code 1245, the types of products covered under bonus depreciation are copiers, computers, printers, manufacturing equipment, semi trucks, and greenhouses. “The measure has bipartisan support,” says Meicher, noting it would be mandatory to declare it before filing a return with no chance to amend later on. “It stimulates growth and it stimulates jobs.”
It may or may not, however, stimulate Congress to move. The same is true of Section 179 expensing, a perk that pertains to used business property (excluding real estate). The issue is whether to allow the expensing at a higher level than the current $25,000; in the previous five years, it had been extended to $500,000 before it fell back to the current level at the end of 2014.
“For small businesses, it’s significant,” Meicher explains. “If you buy a business, you’re going to buy used equipment, so I believe 179 is even more significant to small business than bonus depreciation.”
Another measure important to Wisconsin businesses is the research and development credit. Its full name is the Research & Experimentation Tax Credit, and it originally was enacted as part of the 1981 Economic Recovery Tax Act to help U.S. companies that incur research and development (R&D) costs. In the credit’s 34-year history, it has expired eight times and been extended 15 times, usually retroactively, and it also faces an uncertain fate.
Ronald Berman, a tax attorney, CPA, and shareholder with the Neider & Boucher law firm, notes that 32 tax extenders expired at the conclusion of 2014. Berman believes that politically, Congress will have to pass some extenders, but he isn’t sure how far lawmakers will go. He also notes that if they only extend certain breaks through 2015 — meaning they would be retroactively applied in most cases — it might not be very helpful to employers or to the economy.
As an example, Berman cites bonus depreciation, which is an economic stimulus to induce companies to buy equipment. “Many companies haven’t bought things because they don’t know whether they will have the bonus depreciation or 179 expensing of capital expenditures,” he notes. “To vote it in during the last month of the year, how much of this equipment can be bought in that time? How much can this stimulate the economy when it only applies, basically, for a short time?
“Now, it will apply for the whole year, so companies that bought things because they needed to will be given a benefit, but not necessarily the ones that held off.”
There is also a possibility that lawmakers, knowing that tax extenders come with a cost and therefore are considered “tax expenditures,” will pluck only the most politically popular ones. “It’s possible that some of these measures will take on their own life independently of the other proposals,” Reinecke notes. “That’s happened in the past. I can think of a few examples when, for some reason or another, an item will get pulled from the broader legislation and get passed.”
A repeal or modification of the so-called Cadillac tax on expensive employer-sponsored health plans has some support, but with the likelihood of a presidential veto it’s not very likely to be part of a year-end tax bill. Businesses have been bracing for the 40% tax, which is applied to premium value, plus employer FSA/HSA contributions, in excess of $10,200 for single coverage and $27,500 for family coverage. It goes into effect in 2018, and employers have been trying to avoid it by making adjustments to their medical insurance plans.
Nor are we likely to see a repeal of the controversial medical-device tax, which like the Cadillac tax is one of the financing provisions of the Affordable Care Act. It is a 2.3% surcharge on the sale price of a taxable medical device paid for by the manufacturer or importer of the device, and the medical device industry has lobbied for its repeal. By a vote of 280–140, one vote shy of a veto-proof majority, a measure to repeal the tax was approved by the full House of Representatives. President Obama, noting that repeal would add $24 billion to the federal deficit over the next 10 years, threatened a veto.