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.
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.
Another monkey wrench?
Berman believes Paul Ryan’s elevation to Speaker of the House from his post as chairman of the Ways and Means Committee, which writes tax law, put passage of the year-end tax extenders in even more jeopardy. Berman reasons the new chairman, Texas Congressman Kevin Brady, does not have the background and clout that Ryan has, which could be problematic in negotiations with U.S. Sen. Orrin Hatch, chairman of the Senate Finance Committee, on what might be included in any tax extender bill.
That’s something Brady has not done prior to Ryan becoming speaker, Berman notes, and there are only a few weeks left before the end of the year. However capable Brady might be, Berman says that committee chairmen mark bills with a strong inducement to follow what the chairman wants. With a less experienced Ways and Means chairman, and competing priorities for Ryan as the Speaker, he openly wonders if anything will get done.
“Even though Ryan, as Speaker of the House, will have more power to move bills along, he will also have more competing priorities,” Berman notes. “The issue is where does he spend his political clout?”
While he remains skeptical, Berman did sound an optimistic note after Ryan was elected Speaker, noting that Ryan publicly stated the importance of addressing tax issues. “The biggest change that I have seen is the public comments by Speaker Ryan. He is still presenting tax issues as a high priority. Potentially the extender package, with whatever items may be made permanent, could be a statement of support by the Republicans in both houses for Speaker Ryan.”
For his part, Ryan does not believe the change to Brady, a 10-term veteran lawmaker, will be an issue as it pertains to tax law changes. A spokesperson for Ryan says he has every confidence the new chairman of the Ways and Means Committee will help provide more certainty to job creators. “This is just another example of why we need to make our tax code simpler, flatter, and fairer,” states Ian Martorana, press secretary for Ryan.
The uncertainty over taxes results in frustration among accounting professionals and business owners. Meicher laments the “Washington mentality,” which he characterizes as being preoccupied with the needs of government and big business.
“The perception is they don’t care about small businesses,” he charges, noting that one could make an argument that this is why economic growth is so anemic.
Even though 2015 is not an election year, the presidential campaign is in full swing, and that’s why Gini Hendrickson, an attorney with the Murphy Desmond law firm, doesn’t expect much action. “If they do something, it may be around bonus depreciation, but I’m not hearing that anywhere or seeing evidence of that,” she says. “It would be friendly to the business owners.”
The inaction of Congress does not mean there is no news to report on the business tax front. Based on interviews with our experts, here are the things business owners need to know:
Rising identity fraud:
According to Gordon Meicher, the IRS is experiencing more breaches of confidentiality on personal and business tax returns than ever before. The incidence is perhaps as much as 10 times higher, as criminals are using the IRS’s Get Transcripts application to gain access to personal financial information related to tax returns. The IRS has arranged for victims to receive free identify theft protection through Equifax, which provides consumers with their credit scores, but that doesn’t strike Meicher as preventive medicine.
Meicher spoke to one tax preparer who said he had 30 people file before realizing they all lived at the same address and essentially were using his service for fraudulent returns. “Businesses have to be more aware of identity theft, both personally and corporately, than ever before,” he notes. “When people file electronically, it doesn’t work, or the IRS has two returns for a lot of people if they file manually. It’s just a total mess.”
Changes in corporate tax filing dates:
Beginning in 2017 (for the 2016 tax year), regular corporations will get an extra month to file their taxes, according to Berman. However, entities such as partnerships and S-Corporations, which are prevalent in Wisconsin, will have a due date of March 15, 2017 (for the 2016 tax year), as opposed to the traditional April 15. “Obviously, things have to be done a lot sooner for all S-corporations and partnership tax returns,” Berman notes. “That accelerates the date of partnership returns by one month, which is called tax compression.”
New same-sex marriage rules:
Due to the U.S. Supreme Court ruling that validates same-sex marriage nationally, Berman also notes there are issues to address with regard to employee benefit plan administration “which people better start implementing,” he counsels. “In Wisconsin, we have the issue that same-sex marriage was not recognized until the U.S. Supreme Court changed that on such things as spousal benefits and retirement benefits. All of that now has to be adjusted.”
Higher estate tax thresholds:
Attorney Gini Hendrickson (Murphy Desmond) notes that in October, the government announced the threshold at which the estate tax applies in 2016 will be raised to $5.45 million for singles and to $10.9 million for married couples, while the tax rate will remain 45%.
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