What Do the Mid-term Elections Have in Store for CPAs?
Some potential bright spots with respect to future federal tax and fiscal policy to start with.
November 11, 2010
After two years of a crushing financial crisis, continuing banking challenges for closely held businesses, huge government deficits and the storm clouds of expiring Bush Tax Cuts [which were passed in June 2001, as the Economic Growth and Tax Relief Reconciliation Act (EGTRRA)], there seems to be little good news for U.S. business owners. However, the mid-term elections at the beginning of this month may offer some potential bright spots with respect to future federal tax and fiscal policy.
With the Republicans gaining sufficient seats in the House to take over the lower congressional chamber, the tax legislative process will likely take on a new life in the coming month. However, due to the Democrats’ continuing control of the Senate and President Obama’s veto power, it is very difficult to predict what the future tax rates and rules will look like in 2011 and beyond.
While this combined legislative and economic landscape presents a challenging year-end tax planning environment for taxpayers and their CPAs, there are also numerous planning opportunities to take advantage of the potential tax hikes associated with the expiration of the Bush Tax Cuts. See Do You Remember? for a helpful review of some of the pre-Bush Tax Cut provisions, which may become operative in 2011.
Since the vast majority of businesses are structured as S Corps, LLCs or Partnerships and these changing rates fall primarily onto individual taxpayers, they will impact tax planning for virtually all business entities and individuals, as well as trusts and estates.
Bush Tax Cuts: Will They Stay or Will They Go?
The Bush Tax Cuts were passed into law in 2001 through the legislative “reconciliation” process, which limits the effective period of most laws to a 10-year period. Therefore, the federal income, estate and gift tax provisions contained in the 2000 legislation will generally run their course at the end of calendar 2010 (Note: The EGTRRA rates will continue to apply to fiscal filing individuals and trusts with tax years beginning in 2010, so adoption of a fiscal year-end trust or newly filing individual can be beneficial) and the various top marginal tax rates will increase as follows:
Based on the materiality of the foregoing increases, it is little wonder that extension of the Bush Tax Cuts for 12 months to 24 months has been a hot topic on the campaign trail. The CBO projects a 0.6 percent to 2.0 percent increase in real U.S. gross national product (GNP) over the next 24 months if there is a full extension of the Bush Tax Cuts through 2012. The logic for extending the current tax rates until the economy recovers in some fashion is championed by most Republicans in Congress, as well as a limited number of Democrats. The argument for not extending the current rates is that the wealthy have had a 10-year windfall from the current rate structure and the federal deficits need to be reeled in quickly.
Alliant Group National Managing Director, Dean Zerbe, believes an extension is likely. Zerbe predicts: "The Republicans campaigned on tax issues and will likely make the Bush Tax Cut extension a top legislative priority. Moderate Democrats in both houses also support a short-term extension of the current rates; therefore, President Obama can expect to see a tax package on his desk in the first few months of 2011. The potential wild card is whether Obama will play the veto card? That appears doubtful based on the voice of the electorate earlier this month."
The fiscal magnitude of extending the current tax rates is projected to add $2.3 trillion to the total 2018 federal debt, according to the Congressional Budget Office (CBO). Of course Supply Side economists such as Arthur Laffer believe that all or a portion of the lost tax revenues associated with the rate differential will be offset by incremental economic activity driven by these same lower tax rates.
2010 Year-End Tax Planning: Flying Without a Net
Due to the fact that the vast majority of new House and Senate legislators will not take their seats until after calendar year-end, and the Congressional Holiday recess will likely mean little legislative action for the remainder of 2010. It is highly unlikely we will see any significant tax changes for the rest of this year and will not have a clear picture of where Congress might settle on future income, estate and gift tax rates.
This leaves taxpayers and their advisors being forced to make some assumptions in how best to defer or accelerate income and expenses at year-end.
Therefore, the year-end planning process for 2010 should be started earlier than normal and time should also be spent on gathering as much information regarding the best estimates of taxpayers’ 2011 taxable income positions.
Forewarned Is Forearmed: The Time to Plan Is Now
Even though the current uncertainty about the 2011 federal tax-rate structure can cause some angst, there are numerous tax planning opportunities that can be considered now to give business owners and individual taxpayers an upper hand in choosing the most tax-effective strategy for reporting income and expenses in the current and future years.
Following are some general tax planning opportunities in light of the rate uncertainty:
Other Year-End Considerations
Regardless of whether taxpayers believe rates are going up or down, with the ability to carry back net operating losses (NOLs) for up to two years, and general business credits back to the 5 prior years, the year-end planning strategies should carefully factor in the ability to recover prior year federal tax liabilities. By claiming the wide variety of accelerated depreciation incentives (other than IRC Section 179 for loss entities), deferring income, accelerating losses on business assets through disposition and accelerating other expenses, business owners and individual taxpayers can often generate tax losses which can immediately be carried back to profitable years and generate significant tax refunds.
Only time will tell how the 2011 tax rates will evolve, but in the meantime and certainly before year-end, CPAs and business owners should be spending the time necessary to ensure that taxpayers are well-positioned whether the current federal rates stay the same or increase significantly — as currently scheduled.
Rate this article 5 (excellent) to 1 (poor). Send your responses here.