TAXES - WHERE DO WE STAND?

Oct, 2010

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With the US tax code comprising so many thousands of pages and only getting larger, it's getting more and more difficult to keep up on what's happening. This article is intended to be a short overview of some of the latest actions and inactions by our lawmakers. It is also intended to be strictly a recitation of the facts; no political spin or opinion included.

Most recently, the 2010 Small Business Jobs Act ("SBJA") passed the Senate (9/16/10), the House (9/23/10),Iowa Equity Exchange and was signed into law by President Obama (9/27/10). While its name might indicate otherwise, the law impacts large businesses and individuals in addition to small businesses. It extends some provisions and creates some new ones.

Some of the extensions:

  • One of the extensions relates to the well-known Section 179 deduction. Formerly, the annual limit for this deduction was $250,000 and the deduction phased out when purchases exceeded $800,000. The SBJA extends the limit to $500,000, and phase out does not begin until purchases are greater than $2 million. This applies only to tax years 2010 and 2011. Logically, the extension should make it more attractive for businesses to invest in needed equipment in the remainder of 2010 and calendar year 2011. (The Section 179 deduction allows businesses to expense, or write off, the entire cost of eligible equipment up to the limit instead of having to depreciate it over its useful life.)
  • Further, for the first time ever, certain types of real property can be included in the Section 179 deduction. There is a separate limit of $250,000 of the total $500,000 limit applied to real estate, and it is still subject to the phase-out over $2 million. Qualified expenditures include such things as qualified leasehold improvements, qualified restaurant property and qualified retail improvement property. (An interesting sidebar - this could have an impact on negotiations as to whether the landlord or the tenant completes property improvements.)
  • General business credits may now be carried back five years; the carryback was previously only one year.
  • Fifty percent bonus first-year depreciation has been extended for property placed in service during calendar year 2010 (with certain limited exceptions extending to 2011). This applies to property with a recovery period of seven years or less. It only applies to property being placed in service for the first time. 
  • The infamous expansion of reporting requirements for payments of $600 or more to service providers is part of this act. For rental property owners, this includes such providers as plumbers, snow and mow companies, management, etc., and generally will require issuance of a Form 1099-MISC to all providers of $600 or more in such services during the calendar year. Increased penalties for non-compliance with this requirement are also a part of this act.

Next, we'll take a look at some of the impacts of Congress taking no action on particular aspects of tax law. Sometimes inaction creates consequences every bit as much as action does. This is one of those instances. There is still time for Congress to take action on some or all of these matters, but if nothing is done, the following things will revert to pre-Bush era law as of January 1, 2011:

  • The tax rate on capital gains will go from its current 15% back to 20%.
  • The tax rate on dividends will rise from 15% to one's ordinary income tax rate.
  • The current marginal tax brackets of 28%, 33%, and 35% will rise to the pre-Bush-tax-cut rates of 31%, 36%, and 39.6% for ordinary income.
  • The so-called "marriage penalty" will return for lower income couples.
  • The child tax credit, the Hope education credit, and the earned income credit will all be reduced.
  • After the 2010 Act described above expires, the Section 179 limit will drop back to $25,000. 
  • The estate tax, after its one year hiatus during 2010, will come back at its old levels.

The health care legislation that was passed earlier this year contained a number of things that pertain to taxes:

  • The legislation created several tax credits to help companies and individuals pay for health care legislation.
  • There were also several penalties imposed to help government pay for the health care legislation.
  • In addition, other revenue raisers were added to offset costs:
    • Higher Medicare payroll tax on wages (an extra 0.9% for higher earners)
    • The Medicare payroll tax was extended to include investments:
      • There is a new 3.8% tax on investment income. (This would have the effect of creating a 23.8% capital gain rate for taxpayers to whom it applied.)
      • The 3.8% tax applies to adjusted gross income and investment income over $200,000 for single filers and income over $250,000 for married filing jointly.
      • It applies to net investment income after reductions due to related expenses.
    • It should be noted that most of these provisions do not take effect until 2013 or later.

There you have it--a summary of some of what I believe to be the most significant actions and inactions of the past year in relation to tax policy. I do want to give thanks to David E. Watson, CPA and Senior Partner of LWBJ Capital Advisors in West Des Moines, IA, for his excellent presentation at the Iowa Commercial Real Estate Expo on September 28, 2010, from which much of this material was gathered. Dave was kind enough to forward his presentation to me after the event for reference. If you have questions about any of this material, please let me know. Some of this stuff is very difficult to weed through and I don't claim to have any particular skill at it, but I'll do my best.