Inside the Beltway: What's Up with Congress?
- Direct expensing provisions. Over the last 10 years, the ability of business to write off capital expenses in a single year has ranged from $25,000 to $125,000. And now, Congress is toying around with allowing a 100% write-off for capital expenses in 2011 and 2012.
- Tax rates. Until the Bush tax cuts in 2003, the top tax rate was 39.5%. For the last few years it was 35%. And now, maybe it will be 35% for some and higher for others. Who knows? Only time will tell.
- Capital Gains & Taxes on Dividends. 20% until 2003, 15% since then and maybe 15 or 20% this year or next.
And the most egregious vacillation and the most costly to small business, our old friend the estate tax. Formerly the tax was set at 55% with a $1 million exclusion. Then in 2003, the rate began to drop and the exclusion started rising until this year when it disappeared all together. And it’s scheduled to reappear on Jan. 1, 2011 at the old 55% rate and $1 million exclusion. This after years of trying to convince Congress to change this onerous tax to something everyone could live with – permanently. So what do we have, an administration and Republican agreement to move to a 35% rate and a $3.5 million exclusion – but only for two years. Leaving everyone hanging in mid-air during the two years. Except for the estate planning lawyers who will make who knows how many millions adjusting our estate plans to meet the new situation.
Here’s our plea: Please let small businesses off the estate tax planning treadmill and pass permanent estate tax relief. It is time folks understood that it is as much about the stupid and wasteful estate planning things small business owners do to avoid having their heirs close or sell the business in order to pay the estate tax as it is about how many pay the tax.
Small businesses crave certainty. Earlier in this Congress Senators Kyl and Lincoln had been promoting a proposal that would phase in a permanent $5 million dollar exemption and a lower top rate. If you have to phase it in, that is fine with us, but the goal is certainty and permanence. Nothing happened.
It is time to give small businesses estate tax peace of mind. Let them off the expensive rollercoaster of temporary estate tax policy.
I’m afraid that we’re not likely to have this seasonal prayer answered anytime soon. The Democrats see no reason to do anything because it is losing revenue for the feds, and the Republicans, as powerful as they might be now in the House, will never be able to get the D’s in the Senate to give in on this.
About This White House -Republican Tax Compromise
In case you may have missed it (maybe as the latest Geico commercial says, you live under a rock), here's a recap of the White House/Congress passed compromise on the extension of various tax breaks that passed in late December.
First and foremost on the topic of major concern to all business, the compromise legislation does not include a repeal of the Form 1099 requirement at this time. According to a senior Treasury official, “the White House was not the problem.”
The Senate passed a repeal bill in late January but the future of that repeal in the House of Representatives is far from certain.
The following are the provisions of most interest to small business:
- Temporarily extends the 35% bracket: This proposal extends the 35% individual income tax bracket for two years, through 2012.
- Temporarily extends the capital gains and dividend rates: Under current law, the capital gains and dividend rates for taxpayers below the 25% bracket is equal to 0%. For those in the 25% bracket and above, the capital gains and dividend rates are currently 15%. The current capital gains and dividends rates for all taxpayers are extended for an additional two years, through 2012.
- Two-year Alternative Minimum Tax (AMT) patch: The proposal increases the exemption amounts for 2010 to $47,450 (individuals) and $72,450 (married filing jointly) and for 2011 to $48,450 (individuals) and $74,450 (married filing jointly).
- Deduction of state and local general sales taxes. The bill extends through 2011 the election to take an itemized deduction for state and local general sales taxes in lieu of the standard deduction permitted for state and local income taxes.
- Temporary estate, gift and generation skipping transfer tax relief. There is a two-year extension, and it comes with a couple of positive twists. But it is not permanent! The proposal sets the exemption at $5 million per person and $10 million per couple and fixes a top tax rate of 35% for the estate, gift, and generation-skipping transfer taxes for two years, through 2012. The exemption amount is indexed beginning in 2012.
- Extension of bonus depreciation. The bill extended and temporarily increased this bonus depreciation provision for investments in new business equipment. For investments placed in service after Sept. 8, 2010, and through Dec. 31, 2011, the bill provides for 100% bonus depreciation. For investments placed in service after Dec. 31, 2011, and through Dec. 31, 2012, the bill provides for 50% bonus depreciation.
- Temporarily extend the increase in the maximum amount and phase-out threshold under section 179. This proposal extends the 2007 maximum amount at $125,000 and phase-out threshold at $500,000 for taxable years beginning in 2012, indexed for inflation. The proposal is effective for taxable years after Dec. 31, 2011.
- Temporary reduction in employee-paid payroll taxes. Under current law, employees pay a 6.2% Social Security tax on all wages earned up to $106,800 (in 2011) and self-employed individuals pay a 12.4% Social Security self-employment taxes on all their self-employment income up to the same threshold. The bill provides a payroll/self-employment tax holiday during 2011 of two percentage points. This means employees will pay only 4.2% on wages and self-employment individuals will pay only 10.4% on self-employment income up to the threshold.
- Exclusion of small business capital gains. The provision extends the 100% exclusion of the gain from the sale of qualifying small business stock that is acquired before Jan. 1, 2012, and held for more than five years.