The administration, Congress and the media have, like a child at Christmas, gone through the whirlwind of unwrapping all the proposals in the President’s budget. Now, a reality check for which of these tax proposals will actually become law.

Proposals That Will Go Forward

Jobs/Hiring Credit

High marks to the President for perseverance. He campaigned on a hiring credit, and Congress first rejected the proposal in the stimulus bill last year. Now Congress is revisiting his idea. However, the likelihood is that you will see Congress significantly change the concept of the President’s proposed hiring credit, to the benefit of the unemployed and business owners. Look for a credit more along the lines of that outlined by Senators Schumer and Hatch that will provide immediate payroll tax relief for hiring new workers (who have been unemployed for more than 60 days). House Democrats in the Ways and Means Committee did not give the President’s proposal for a jobs credit a warm reception the other day, so the administration has some work to do. Congress needs to ensure that the hiring credit is simple and provides immediate relief (cash-in-hand to business owners) if it is going to have a real impact.

Section 179, Bonus Depreciation, COBRA, and Unemployment Benefits

Expect a continuation of these expanded policies. All will be included in a jobs bill. It would be helpful to small business if Congress increased the phase-out point for Section 179. The current $800K is too low for many small businesses. Still to be seen is whether Senator Grassley will successfully push for inclusion of his proposals for small business tax relief included in S. 1381, easily the most comprehensive tax relief for small business that is before the Senate.

Extenders/AMT

Along with continuation of the current “hold-harmless” provision on the individual alternative minimum tax (AMT), there will be a strong effort to include business and individual tax extenders in the jobs bill, with an expanded R&D tax credit as the main engine driving the effort. A key provision of the bill would allow small-medium size businesses to take the general business credits, such as the R&D tax credit, without being limited by the AMT. This assumes that the House/Senate haven’t reached a compromise yet on the separate extenders package. The main fight was on the offsets, with the House now agreeing to drop carried interest – more on that to follow.

Estate/Death Tax

Expect the Senate to add to the jobs bill a $5 million exemption ($10 million/couple) with rates somewhere in the 35%-40% range. Then the fight will be with the House to accept the Senate provision. Treasury Secretary Geithner’s comments about wanting to see the estate tax retroactive to January 1st is a helpful push for an early resolution of estate tax (if the estate tax isn’t resolved by Spring, look for problems in making the estate/death tax retroactive to January 1). There are three possible scenarios:

1.   Likely: Two-year extension of 2009 law
2.   Possible: The Senate position prevails
3.   Hard to imagine, but why not — they’ve screwed it up enough already: Congress does nothing for the year on estate/death tax

Top Rates/Capital Gains/Dividends/PEPS/Pease

Despite a trial balloon from the administration that the slated increase in top rates would be delayed for one/two years, the administration has stated clearly that it wants the rates for the top two levels to be increased from 33/35% to 36/39.6% and capital gains and dividends to go to 20%. While a month ago the chances of the top rates and capital gains/dividends going up was certain, I view that as down slightly thanks to the Massachusetts election and several Democrat members of Congress writing to the President their support for keeping the current rates in place. In addition to the rates going up, the hidden tax increases caused by limitations on personal exemptions (PEPS) and itemized deductions (Pease) will also be brought back. This is a huge tax increase that gets very little notice, hitting higher income families to the tune of more than $200 billion over ten years. Note: the significant tax benefits of the IC-DISC for small and medium business manufacturers who export will stay in place under the administration’s proposal, despite the dividend rate going up.

Expanded 1099 Reporting – for Payments to Corporations for Property or Services

Both the House and Senate included this tax gap proposal in the Health bill. Look for it to show up sometime as a “payfor” this year.

Independent Contractor v. Employee Status

Lost in much of the discussion of the budget is the administration’s sweeping changes to current practice on independent contractor/employee status. The law will allow Treasury/IRS to issue guidance on who is or isn’t an independent contractor, something they have been barred from doing by law since 1978. Space doesn’t allow me to do this justice, but if independent contractor/employer questions are an area of interest for you and your business, this is a world-changing proposal. There haven’t been the votes in the Senate to get through other union-supported policies. This proposal will likely have a rough road as well, but it’s too early to see where the votes are.

Carried Interest

Congress and the administration’s policy as to changing taxation of carried interest seems to be like heaven: everybody wants to go there, just not today. Carried interest was included for the umpteenth time in a House bill (most recently as an extenders “payfor”) and was dropped in discussions with the Senate. When there is a public mark-up, carried interest is included. Then there is a closed door meeting, and the carried interest provision is dropped. Color me skeptical that changes to carried interest happen this year.

Fees on Banks

It remains to be seen what Congress does with this proposal. The administration proposal isn’t detailed and seems primarily a political exercise. It might be something for the jobs bill (doubtful – not ready), but if not that legislation, the number of tax bills that Congress will act on will be very few in number for the rest of the year. Congress, overall, doesn’t appear completely sold on this proposal at the moment.

Proposals That Will Never See the Light of Day
FLPs and GRATs

The administration’s proposals to limit estate planning of family limited partnerships and the use of GRATs has zero interest on the hill.

Cap of 28% on Itemized Deductions – Charities and Mortgage

This didn’t go anywhere as a revenue raiser for health care, so it’s hard to see it going anywhere this year.

The Impact of the Massachusetts Senate Election

The Massachusetts Senate election had a big impact on D.C., especially in the area of tax policy. It’s not only the fact that Brown’s victory greatly strengthens the ability of Senate Republicans to prevent legislation from going forward (but watch out for reconciliation), but the loss of a Senate seat in a state with a strong Democrat voting tradition, coupled with the wide margin of Brown’s victory, has done much to provide focus to many Senators on both sides of the aisle to be more hard-eyed about possible tax increases – and views towards the administration’s tax proposals.

Bottom Line

The outlook for business owners is that no one in Washington is going to be cutting your taxes for you. Businesses will continue to have to work with their trusted financial advisors to take full advantage of federal and state tax incentives if they want to see their taxes cut.
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By Dean Zerbe, alliantgroup, LP

Example. Jane Smith operates a 10-employee business, and she currently covers her employees with health insurance at a cost to her business of $60,000.
Before the new law, Ms. Smith deducted the cost of the insurance and received a tax benefit of $24,000 in her 40 percent tax bracket ($60,000 times 40 percent).

This year, because of the new law, Ms. Smith makes not a single change in her business operations, but because of the new law, she receives a tax credit equal to 35 percent of the $60,000 she paid for health insurance and then she deducts the remainder, for a current-year tax benefit of $36,600. She’s smiling. This new law gives her a tax gift of $12,600.

Ms. Smith receives this gift each year for six taxable years (four years under phase 1 and two years under phase 2). In six years, Ms. Smith will have more than $75,600 in extra cash (note—this calculation includes the incremental increase in the tax credit from 35 to 50 percent in 2014 and 2015).

What will the small-business provisions of the new health care law give you?

The Rules You Want to Know

You qualify for the full 35 percent current-year tax credit on the dollar amount you pay for your employees’ health insurance when you

1. employ 10 or fewer full-time equivalent employees (phaseouts start with 11 equivalent employees),
2. pay each of those full-time equivalent employees an annual full-time equivalent wage of less than $25,000 (phaseouts start at $26,000),2 and
3. pay premiums of no less than 50 percent of the average employee-only small-group coverage premiums, as determined by the U.S. Department of Health and Human Services (these will be posted by the IRS on its Web site by the end of April 2010).

You calculate your full-time equivalent employees by dividing the total hours worked by all employees during the employer’s tax year by 2,080.4 For any one worker, you may not count more than 2,080 hours.

Example. You have 17 employees total, including those who work part-time. This group works 18,000 hours during the year. You have eight full-time equivalent employees (18,000 hours divided by 2,080 equals 8.65, which is then, by law,6 rounded down to the nearest whole number, which makes eight employees your number).

Your payroll is $192,000 for the year. Divide that by eight and you get an annual full-time
equivalent wage of $24,000.

The next test: Did you pay at least 50 percent of the health insurance premium for single
(employee-only) coverage? You can pay more, and you can even pay for family coverage, but you may not pay less than 50 percent of the employee-only coverage.

Phaseout of Credits

The new law contains two provisions that injure or kill your credit:

1. If you have more than 10 full-time equivalent employees, you reduce your credit by 1/15th for each excess employee. (Here, the law kills your credit in total when you have 25 or more full-time equivalent employees.)
2. If the average full-time equivalent wage exceeds $25,000, you reduce your credit by 1/25th for each $1,000 in excess of $25,000. (Here, the law kills your credit in total when you pay an average full-time equivalent wage of $50,000.)

The combination of the two provisions can kill your credit before you reach either the 25-employee limit or the $50,000 wage limit.

Phaseout Example

Example. For 2010, you have 12 full-time equivalent employees with average annual wages of $30,000. You pay $96,000 in health care premiums that cover at least 50 percent of the employee-only cost, as determined by the average premium for the small-group market in your state.
Your credit is calculated as follows:

Description Calculation Amount

Summary

To find your big smile in this new health care law, consider the following two phaseouts.

Do you have 10 or fewer full-time equivalent employees? (If “yes,” smile.)
Is the annual full-time equivalent wage less than $25,000? (If “yes,” another smile!)

Planning might assist you in this regard. Perhaps you could hire a lower-paid employee or two to help the wage averages.

If you already provide health insurance for your employees, you have to simply thank lawmakers for their generosity, because you are now receiving an extra award for what you already do.

Finally, getting the tax credit for six years is a great bonus for those with plans in place already and certainly an incentive for those small businesses thinking about putting a health insurance plan in place.

You have to like the small-business health care tax credit and the absence of a penalty for small businesses that do not participate.

The IRS has released a draft of Schedule UTP, Uncertain Tax Positions Statement, with accompanying draft instructions, that it proposes to be used by certain taxpayers required to report uncertain tax positions. FIN 48 requires that taxpayers with uncertain tax positions account for and report those positions that affect their income tax liability. The draft Schedule UTP and instructions provide that certain taxpayers will be required to file Schedule UTP beginning with the 2010 tax year.  The requirement only applies to taxpayers required to file Forms 1120, 1120 L, 1120 PC and 1120 F, if they have uncertain tax positions and assets equal to or in excess of $10 million and if they or a related party issued audited financial statements. The draft instructions provide that a taxpayer filing a Schedule UTP will be treated as filing a Form 8275 and Form 8275-R due to the fact that those two forms duplicate information reported on Schedule UTP.

The Internal Revenue Service announced it is developing a schedule requiring certain taxpayers to report uncertain tax positions on their tax returns. The Service is now releasing the draft schedule, Schedule UTP, accompanied by draft instructions that provide a further explanation of the Service’s proposal. The Service invites public comment on the draft schedule and instructions. The schedule and instructions will be finalized after the Service has received and considered all of the comments regarding the overall proposal and the draft schedule and instructions.

The draft schedule and instructions provide that, beginning with the 2010 tax year, the following taxpayers with both uncertain tax positions and assets equal to or exceeding $10 million will be required to file Schedule UTP if they or a related party issued audited financial statements:

• Corporations who are required to file a Form 1120, U.S. Corporation Income Tax Return;
• Insurance companies who are required to file a Form 1120 L, U.S. Life Insurance Company Income Tax Return or Form 1120 PC, U.S. Property and Casualty Insurance Company Income Tax Return; and
• Foreign corporations who are required to file Form 1120 F, U.S. Income Tax Return of a Foreign Corporation.

The draft schedule and instructions also provide that, for 2010 tax years, the Service will not require a Schedule UTP from Form 1120 series filers other than those identified above (such as real estate investment trusts or regulated investment companies), pass-through entities, or tax-exempt organizations. The Service will determine the timing of the requirement to file Schedule UTP for these entities after comments have been received and considered.
The Service is reviewing the extent to which the proposed Schedule UTP duplicates other reporting requirements, such as Form 8275, Disclosure Statement; Form 8275-R, Regulation Disclosure Statement; Form 8886, Reportable Transaction Disclosure Statement; and the Schedule M-3, Net Income (Loss) Reconciliation for Corporations With Total Assets of $10 Million or More. The draft instructions provide that a taxpayer will be treated as having filed a Form 8275 or Form 8275-R for tax positions that are properly reported on Schedule UTP. The Service is considering other circumstances under which a tax position reported on Schedule UTP need not be separately reported elsewhere on the tax return or another disclosure statement.

Schedule UTP asks for information about tax positions that affect the United States federal income tax liabilities of certain corporations that issue or are included in an audited financial statement and have assets equal to or exceeding $10 million.

Tax positions to be reported

Schedule UTP requires the reporting of a corporation’s federal income tax positions for which the corporation or a related party has recorded a reserve in an audited financial statement. Schedule UTP also requires the reporting of tax positions taken by the corporation in a tax return for which a reserve has not been recorded by the corporation or a related party based on an expectation to litigate or an IRS administrative practice.
A tax position is required to be reported on a Schedule UTP attached to a particular tax year’s return if:

1. at least 60 days before filing the tax return a reserve has been recorded with respect to that tax position, or at least 60 days before filing the tax return a decision was made not to record a reserve based on an expectation to litigate or an IRS administrative practice, and
2. the tax position has been taken by the corporation in a tax return for the current tax year or a prior tax year. 

A tax position must be reported regardless of whether the audited financial statement is prepared based on United States generally accepted accounting principles (GAAP), International Financial Reporting Standards (IFRS), or other country-specific accounting standards, including a modified version of any of the above (for example, modified GAAP) that requires a taxpayer to record a reserve for federal income tax positions.

A tax position is based on the unit of account in the audited financial statements in which the reserve is recorded. A tax position taken in a tax return means a tax position that would result in an adjustment to a line item on that tax return if the position is not sustained. A line item on a tax return may be affected by multiple units of account, in which case each unit of account must be reported separately on Schedule UTP.