July 26, 2010
Tax Agenda Pushed Aside as Congress Adjourns
It is likely that a “lame duck” session will be in store for Congress this year as they attempt to wrap up several outstanding pieces of tax legislation. Lawmakers are scheduled to return from the July 4th holiday on Monday July 12th for a three week session. Following, an August recess is scheduled with a return date of September 12th, leaving just a few weeks to wrap up before November elections. With the following pertinent tax issues on the agenda, Congress will likely reconvene after the elections to complete their unfinished business, with the major tax issues outlined below.
Over thirty temporary tax provisions, which expired in 2009, remain at issue. Also known as “extenders,” these tax provisions include the research and development credit, itemized deductions for state and local sales taxes, as well as cost recovery of qualified improvements. In an effort to reduce the cost of the bill, the House and the Senate have yet to achieve the necessary votes to move forward. It is likely that these and many other issues might be passed due to the limited time frame without any of the proposed changes, or that they might be combined with other legislation.
Some of the provisions which have been disagreed upon between the House and the Senate include:
- Treatments of some S Corporation income as self-employment income
- Carried interest would be taxed at a ratio of 75/25 ordinary income to capital gains
- Treatment of distributions of debt securities in a tax-free spinoff
- 9 new revenue-raising international reform proposals geared toward foreign tax credits
Economic Stimulus Incentives related to Small Business
The House and the Senate will need to give consideration to the small business tax incentives bills passed this spring, in addition to any proposed changes or amendments before it is sent for Presidential approval and enactment. H.R. 4849 and H.R. 5486 were passed in March and June of this year, and currently sit with the Senate for consideration.
This bill targets the following issues, most of which are considered revenue raisers:
- Expansion of 1099 reporting
- Increases in failure to file information return penalties
- Increased 2010 and 2011 start-up expenses for businesses from the current phase-out amounts of $5,000 to $50,000
- Limitation of the current penalty for non or inadequate disclosure of listed transactions
- Capital gain exemption on qualified small business stock acquired before 12/31/2011
- Changes in grantor retained annuity trusts – such as a proposed 10 year minimum annuity term and a reduction in annuity payments during the first ten years. In addition, annuity interest having to be greater than zero at the time of a transfer- thus making GRATs a risky tax planning technique
- Increases in the Section 179 limit from $250,000 to $500,000 with a threshold of $2 million in 2010 and 2011, in addition to potentially allowing up to $250,000 in 2010 and 2011 for qualified retail improvement property, restaurant property and leasehold improvement property
- Extension of bonus depreciation for property placed in service in 2010
- Shorten the built-in gains tax holding period for S Corporations
- Allow five year carry backs and exemption from AMT for the 2010 general business credits of sole proprietorships, partnerships and private corporations with less than $50 million average annual gross receipts
- Self-employment income deductions for 2010 healthcare expenses
- Changes to Roth plans affecting 401(k), 403(b), 457(b) rollovers and contributions to governmental 457(b) plans
- Removal of tax consequences for employer provided cell phones
2010 currently has no estate and generating skipping transfer tax – they expired last year. The gift tax rate is only 35% - but is expected to potentially increase up to 55% with an exemption of $1 to $3.5 million. Talk within Congress leads away from the idea of a reinstatement of the expired rates, but the House and the Senate have yet to agree on the provisions. Additionally, there is hope of the passage of an agreement concerning an extension of 2009 estate tax law through 2011 – giving taxpayers a choice of the 2009 or 2010 estate tax law application on their returns. Note that in 2009, taxpayers could step-up their basis in inherited assets, so depending upon the value of the estate, application of either year’s laws could be beneficial until passage of a new law.
Significant tax rate increases are expected as the tax cuts of the Bush administration are set to expire this year. Ordinary income rates will increase dependent upon income. Capital gains rates will rise from 15% to 20% and dividend rates from 15% to 39.6% - essentially dividends will now be taxed at ordinary rates. These rates can be alarming to investors. President Obama’s proposal to extend the Bush rates for taxpayers earning under $200,000 ($250,000 if filing joint) have not progressed through Congress as of yet.
Other issues which have been passed separately in the meantime include:
- Pension relief provisions (H.R. 3962)
- Extended closing date for the homebuyer credit (H.R. 5623)
It is evident that there are an array of tax issues that need to be reconciled before the end of 2010. Likely, a lame duck session might result in addition to an omnibus bill which will lump many of the unsettled issues, extensions, and expansions in order to be dealt with in 2011 and beyond.
The Tax Professionals at MarcumRachlin will monitor the changes and how they might affect you. Please contact a representative with any questions you may have.