Tax Law TBD Part 2
Tax law is once again making news in Washington. Congress is trying to finalize a few bills before the election season heats up, but what’s at stake and what should you know as a taxpayer? I’ve alluded to a few of these issues in other articles, but let me try and give you an up to date summary. I use the word “try” because by the time I put pen to paper (or fingers to keyboard, as is the case), much of the information could be out of date as it changes on a daily basis!
The biggest tax news right now is the potential expiration of the Bush tax cuts. What are they, and why should you care? Good question. In 2001 and 2003, under then-President George W. Bush, tax brackets were lowered to a range from 10% to 35%, and capital gains (including sales of stock, land, rental properties, etc) and dividends were taxed at a maximum of 15%. Among many other provisions, the child tax credit was increased to $1,000 per child. These provisions were all set to expire in 2010, and politicians at the time were certain that Congress would act during those 9 years to find more permanent solutions.
Let’s fast forward to 2010. We are quickly approaching 2011, and these provisions are still set to expire on December 31st, 2010. If this happens, tax brackets will jump back to the Clinton-era tax rates ranging from 15% to 39.6%, capital gains taxed at 20% and higher, and dividends taxed up to 39.6%. This means a family with income less than $40,000 may pay about $400 in extra taxes, but someone making $80,000 might pay four times that in additional income taxes. When you consider that the child tax credit will decrease to $500 per child, families could be hit the hardest.
Before we all panic, it’s important to remember that tax brackets are quite different from tax rates. Many of us fall in the 25% tax bracket, but only pay an effective tax rate of 10 – 15%. And, naturally, no one in Congress is campaigning on a ticket of raising taxes on lower income working families. There is every expectation that Congress will intervene and not allow these rates to revert to the fullest increases possible. However, as I’ve mentioned in the past, we all thought that Congress would fix the Alternative Minimum Tax and Estate Tax by now, so without a crystal ball, none of us know for sure. (I published an article about these 2 changes back in April, and have reposted it at www.cpamichele.com if you are interested).
Two other issues being debated are the S Corporation requirement to pay payroll taxes on owner’s distributions in addition to their salary, therefore an extra 15.3% tax, and the new 1099 law that was passed as part of the healthcare reform. As it is currently written, beginning in 2012 business owners will have to issue 1099 forms to all vendors they pay more than $600 for goods and services, rather than only unincorporated vendors that are paid for services. Both of these new laws represent a significant burden to business owners and there is a good chance that new legislation will be passed to get rid of the requirements before they ever take hold. Then again, there is a chance that disagreements in Washington will continue to overshadow any progress made on tax law, so all we can do for now is watch the news, keep our fingers crossed, and vote!
Immediate and Future Changes for Small Businesses
There are some huge changes in the works. I just wrote this article for the Summit Daily News and thought I’d repost it here for all to see.
If you own a small business, there are a number of drastic changes to your business operations included in the recently approved HIRE Act, and many more on the way as a result of the healthcare bill and a tax extenders package currently working its way out of committee.
The HIRE Act is a positive step for businesses. While you should consult your own CPA, HR or payroll expert regarding the details, the Hiring Incentives to Restore Employment Act was passed on March 18th, 2010 and provides tax breaks to companies who hire the unemployed. Simply put, if you hire an employee between February 3rd, 2010 and January 1, 2011 and that employee has not been employed for more than 40 hours during the previous 60 days, the employer does not have to pay the usual 6.2% of Social Security tax on that employee’s wages through the end of the year. The employer can also receive a credit up to $1,000 if the individual remains employed for a full year.
If you believe you have employees that meet this criteria (family members don’t count, nor can you terminate an existing employee without cause just to replace them with a formerly unemployed employee!), you should work with your payroll provider immediately. Employees will need to sign an affidavit certifying their previous work status, and the credit can be claimed on the 2nd Quarter Form 941 which is due July 31st.
The healthcare bill also offers a few benefits for small businesses, but many of these are phased in over the next eight years. The only change we’ve seen so far in 2010 is a credit available on the 2010 tax return for small businesses with fewer than 25 employees who offer health benefits to their works. If your company fits this scenario, you and your tax advisor should work through the formulas available at www.irs.gov.
Other small business changes lurking on the horizon are not nearly as favorable to businesses, and will cost businesses thousands of dollars in additional taxes and administrative work. Two changes on the horizon for 2011 are limits to FSA and HSA contributions, and a new employer requirement to report the aggregate value of benefits they provide for health coverage on their employees’ W-2’s. The latter has sparked rumors across the internet that health benefits will become taxable and that’s not the case, they will just be reported as additional information. Unfortunately, details aren’t available yet, so we’ll all have to stay tuned towards year end.
The most dramatic change to small businesses is buried deep in the healthcare bill. Beginning in 2012, businesses will have to issue 1099-MISC forms to all vendors they pay more than $600 to for goods or services. Under current law, you don’t have to issue 1099’s to corporations and you don’t have to issue 1099’s for the purchase of goods, only services. Beginning 2012, if your business buys a $600 computer from Office Max, they will need to collect Office Max’s address and tax ID# at the time of purchase and send them a 1099 at year end. I predict that even the smallest businesses will need to send dozens more 1099 forms a year, while larger businesses will be sending hundreds or thousands of additional forms. This will increase costs for small businesses both on the front end to collect and track the information, and at year-end to issue the 1099’s. In my opinion, this is the costliest nightmare to face small businesses in decades!
The last notable change applies only to S Corporations. Currently, S Corp owners are allowed to pay themselves a reasonable salary and take the rest of the company profit as distributions, which are not subject to the 15.3% Social Security and Medicare tax paid on the owner’s salary. This saves many S Corporations tens of thousands each year. If the tax extenders package is passed, this benefit will no longer exists for those S Corporations in service fields such as accounting, law, health, engineering, architecture, consulting, and investment management.
As always, I will do my best to keep small businesses in the loop on these upcoming changes through my blog at www.cpamichele.com. In my 10 years as a CPA, I’ve never seen so many changes in such a short amount of time, and who knows what surprises lie ahead!
