Last month, we explored some potential tax law changes that might affect your business. Let’s review a few more as well as some revenue-raising proposals.
The American Recovery and Reinvestment Act (ARRA) includes a provision to soften the effect of situations, such as insolvency or reorganizations, in which some debt is forgiven. If a business is unable to pay its debts and the creditors forgive those debts, the business has received the equivalent of income and must pay taxes on this “benefit” derived from avoiding debt repayment. This provision allows the business to defer recognition of income from the cancellation of certain business debts in 2009 or 2010 for up to five years and then prorate the income beginning in 2014, deferring the tax obligation even further.
Eliminating the capital gains on investments in “qualified small business stock” will reduce tax revenues by a projected $82 billion. Although this Internal Revenue Code 1202 exclusion only applies to noncorporate investors, it is touted as a business tax cut. The actual benefit to small businesses would be an influx of capital from stockholders taking advantage of a five-year tax-free investment.
IRS Code Section 199, The Domestic Production Activities Deduction (DPAD), should be of special interest to contractors. Officially known as Section 102 of the American Jobs Creation Act of 2004, it is a phased deduction of Qualified Production Activities Income (QPAI)—6 percent for 2009 and 9 percent for 2010—not to exceed 50 percent of W-2 wages reported. QPAI is calculated based on gross receipts from activities such as “construction, erection, or substantial renovation of real estate including infrastructure.” Renovation includes any major component that materially increases value, prolongs the life of the property, or adapts it for a different use. Infrastructure includes communications facilities, cable and wiring. If Starbucks was able to negotiate a DPAD application for grinding its coffee beans, then this is a slam-dunk for electrical contractors. Use IRS Form 8903 to calculate the deduction. Estimates of the new taxes, fees and costs to be shouldered by taxpayers at all income levels over the next decade have reached $1.5 trillion.
Specific proposals for the generation of revenue can be found in General Explanations of the Administration’s Fiscal Year 2011 Revenue Proposals. This 153-page February 2010 Department of the Treasury publication, the “Greenbook,” can be downloaded at www.treas.gov/offices/tax-policy/library/greenbk10.pdf.
Much of the revenue proposed in the Greenbook will be generated by closing loopholes in international tax laws and reducing preferences for fossil fuel exploration companies. However, there are a number of new or reinstated taxes that affect a wide range of businesses. For example, making the 0.2 percent federal unemployment insurance surtax permanent is projected to raise approximately $14 billion. Another $66 billion will come from accounting method changes, such as repealing the use of LIFO inventory accounting, as well as the lower-of-cost-or-market inventory valuation method. Another $7 billion will come from tightening worker classifications that will increase withholding tax revenues.
Congress will be considering whether to revive provisions that expired in 2009, such as the estate tax, and debating cap-and-trade as well as the renewal of the annual alternative minimum tax (AMT) “patch” that keeps about 26 million taxpayers from the AMT each year. There also are tax cuts from 2001 and 2003 that expire at the end of 2010, and Congress will have to enact legislation to keep them.
Finally, President Obama appointed former Federal Reserve Chairman Paul Volcker to lead a Tax Reform Task Force focused on three key areas: simplification, tax gap reduction (closing loopholes and reducing tax evasion) and reducing “corporate welfare.” Its recommendations could supersede Greenbook proposals in favor of more sweeping changes.
Meanwhile, you have a chance to participate in the process. In 2002, the Internal Revenue Service established an Office of Taxpayer Burden Reduction (OTBR), charged with reducing the burden of taxpayer compliance. In testimony before the House Committee on Government Reform Subcommittee on Regulatory Affairs on Paperwork Reduction in July 2006, OTBR Acting Director Beth Tucker declared that the IRS had reduced the burden by more than 200 million hours, largely by simplifying forms, notices and publications, streamlining processes, promoting “less burdensome” regulations and rulings, and partnering with stakeholders to identify areas of improvement. She also cited specific examples of burdens resulting from tax legislation, such as the 230 changes required by the Katrina Emergency Tax Relief Act of 2005.
Now, it’s your turn to help, by completing IRS Form 13285-A, Reducing Tax Burden on America’s Taxpayers, designed to “refer ideas for reducing taxpayer burden to TBR for consideration and possible implementation.” Download the two-page form at www.irs.gov/pub/irs-pdf/f13285a.pdf, and you might make a difference. It’s worth a try.
NORBERG-JOHNSON is a former subcontractor and past president of two national construction associations. She may be reached at firstname.lastname@example.org.