The Obama presidency is still in its infancy, but businesses are bracing for possible changes that could affect dayto-day operations and yearly records. Some anticipated changes include payroll tax increases; the reduction of the maximum tax bracket for corporations and the raising of the maximum tax bracket for individuals; the elimination of some deductions; and the reinstatement of prior tax laws that were not extended. As of this writing, little has been decided or formalized; however, business owners should contact their tax advisers now and proactively monitor potential changes that may affect them.
“A new president is often successful in converting his agenda to law, so many of the proposed tax changes are likely to come to fruition,” says J. Steven Awalt, a shareholder with Briggs & Veselka Co.
Smart Business spoke with Awalt about the potential tax law changes and their effects.
What tax changes are being deliberated?
In an effort to stimulate the economy, President Obama has proposed the following tax cuts for individual taxpayers with hopes they will be enacted early in his administration:
- Tax relief for middle-income taxpayers
- Expanding the refundable earned
- Removing the repayment requirement
on the $7,500 first-time homebuyer credit
- Exempting seniors with less than
$50,000 of income from income tax
- Providing employees with a modest payroll tax credit (rather than a rebate) that would appear in their paychecks ($500 per individual; $1,000 per family)
Will there be tax increases?
Proposed tax increases for upper income taxpayers will most likely not be enacted in 2009, due to the economic conditions, and may be deferred until 2010 or 2011. This will likely restore the former 36 percent and 39.6 percent tax brackets for taxpayers with adjusted gross incomes of more than $200,000 for single taxpayers and $250,000 for married taxpayers.
Upper income filers may be required to pay increased payroll taxes. Limitations on itemized deductions and personal exemptions (which will disappear in 2009 under current rules) are likely to be reinstated by Congress. Capital gains and dividends will likely also face an increased 20 percent tax rate (presently 15 percent) for those with mid- or upper-level incomes.
It is likely that the 2009 system for estate tax will be made permanent (a 45 percent flat rate tax on a decedent’s net worth over the $3.5 million exemption amount; it could increase to 50 percent for higher value estates). Legislation has also been introduced to eliminate the ability to use valuation discounts with respect to transfers of family-controlled businesses and partnerships.
What possible tax changes could affect businesses?
- The Obama administration is considering the following tax adjustments for businesses:
- Possible reduction of the 35 percent
maximum corporate tax rate
- Elimination of the 6 percent domestic
- Ending LIFO inventory valuation (i.e.,
the use of FIFO inventory valuation would
be phased in over eight years)
- Eliminating tax breaks for oil drilling
and production activities
- Imposing higher self-employed Social
Security taxes on owners of S corporations
and partnerships (extending the tax to limited partners and S corporation owners rendering services)
- Allowing companies with net operating
losses incurred in 2008 and 2009 (other than
those receiving financial bailout funds) to
apply those losses to their prior five years
for refund of previous taxes, rather than two
years under current law
- Extending for one year the $250,000 Section 179 first year depreciation deduction and 50 percent bonus depreciation that were enacted in the Emergency Economic Stabilization Act of 2008
Many of these items are included in the current economic stimulus proposals recently introduced by Congressional leadership that would provide tax relief of about $275 billion. Congress and the new president are targeting this legislation for enactment as soon as possible.
What benefits could businesses see from these tax changes?
The extension of the $250,000 Section 179 first-year depreciation deduction and 50 percent bonus depreciation will surely benefit companies and, if passed, will last throughout 2009. Companies will benefit because most depreciable assets a business buys could be deducted in the same year acquired. An extension of the 2008 law through 2009 that allows a deduction equal to 50 percent of the cost of new assets purchased is likely to occur.
Additionally, a reduction in the maximum corporate tax rate from 35 percent to a yetto-be-determined rate would be beneficial. And, if companies with net operating losses incurred in 2008 and 2009 are able to apply those losses to their prior five years for refund of previous taxes, rather than two, it could be beneficial to go back to those third, fourth or fifth years when, perhaps, the company was in a higher tax bracket.
STEVE AWALT is a shareholder with Briggs & Veselka Co. Reach him at (713) 667-9147 or email@example.com.