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
income credit - 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
production deduction - 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 protected].
