CEO Update - January
Friday, January 11, 2013
Posted by: Rick Murray, CEO
Last week, Congress approved legislation, which permanently extends a host of tax provisions, including most of the so-called Bush tax cuts. It also delays mandatory spending cuts, known as sequestration, for two months. Passage of the bill by the Senate led to great consternation among Republicans in the House.
This debate was the result of an agreement included in the 2011 passage of legislation to raise the debt ceiling. This agreement established that in the absence of a broader recommendation from the "Super Committee,” the current tax cuts and deductions would be allowed to expire. Although this deal does provide permanency for some important tax cuts and credits that impact millions of small businesses, it is only a temporary reprieve from the impending discussion over raising the debt ceiling, which is expected as early as February.
Economic uncertainty is the number one challenge facing America’s small-business owners. While the tax provisions provide a level of stability, we are left with the likelihood of ongoing brinksmanship and have no meaningful framework for addressing our long-term fiscal challenges.
While the fiscal cliff agreement resolves several of the most pressing tax and budget issues, it leaves a few items on the table that will need to be addressed in the near term. First, it does not address the automatic spending cuts; it only postpones the first round of cuts until March, which were originally scheduled to begin in early January. Second, the U.S. reached its statutory debt ceiling at the end of 2012, and Treasury is taking what it calls "extraordinary measures” to keep from breaching the limit; but those measures are unlikely to carry the U.S. beyond the end of February. Failure to resolve these pressure points could have wide-reaching economic effects, and, in what is likely to be a replay of the fiscal cliff drama, the White House and Congress will have to come together again to work out a deal.
Among the tax provisions included in the bill:
Bush Tax Cuts
The measure permanently extends the 2001 and 2003 income tax cuts for individuals earning less than $400,000 and families earning less than $450,000: the current 10 percent, 25 percent, 28 percent, and 33 percent brackets will remain, as well as the current 35 percent bracket, but only for taxable income that does not exceed the $400,000 (single) or $450,000 (joint) threshold. Taxable income above those levels will now be taxed at the top rate of 39.6 percent, effectively a tax increase of 4.6 percentage points for top earners’ income exceeding the new threshold. The itemized deduction phase-out now begins at $300,000 (joint) and $250,000 (single).
The compromise includes a permanent fix for the estate tax by extending the current exemption amount, now $5.12 million based on the $5 million level, which is indexed for inflation for years after 2011. However, the maximum rate will jump to 40 percent from the current 35 percent rate.
Alternative Minimum Tax
The language includes a permanent fix to the alternative minimum which will increase the exemption amounts (income not subject to the AMT) $50,600 for individuals and $78,750 for couples filing jointly, and will adjust those amounts for inflation annually.
Section 179 Expensing
The increased allowable expensing of $500,000 under Section 179 expensing is extended for 2012 and 2013, with the phase-out starting with investments exceeding $2 million.
Research and Experimentation Tax Credit
The bill extends the R&E credit (also known as the R&D credit) for 2012 and 2013.
The increased, 50 percent bonus depreciation rules remain in place for property placed in service before the end of 2013.
Capital Gains & Dividends Taxes
For individuals and families earning below the $400,000 and $450,000 thresholds, respectively, the tax on capital gains and dividends will remain at 15 percent permanently. For those above the threshold, the capital gains and dividends tax rate will increase to 20 percent.
Payroll Tax Reduction
The bill does not extend the two percent reduction in worker’s Social Security payroll tax that was enacted two years ago on employees’ portion of the payroll tax.
Energy Tax Incentives
The bill also would extend through 2013 a handful of energy tax incentives, including:
- The credit for alternative fuel vehicle refueling property
- The credit for two-wheeled or three-wheeled plug-in electric vehicles
- The credits for biofuel production and outlay payments
- Certain renewable energy credits, including the renewable electricity production for wind facilities
- The credit for construction of energy-efficient new homes as well as for energy-efficient appliances among other provisions
The cost of extending all of these tax provisions, according to the Joint Committee on Taxation, is estimated at $3.92 trillion over 10 years, the majority of which comes from the income tax rates and AMT patch. Although supportive of several tax provisions included in the overall package, it is disappointing that lawmakers walked away from a major opportunity to show the ability to work together reasonably and move toward meaningful solutions to the very serious financial issues facing the country.
2013 Legislative Agenda and Small Business Outlook 2013
Speaking of legislation, ASBA just released its 2013 Legislative Agenda, which focuses on the top five issues that small businesses contend with:
- Economic Development
Visit asba.com/LegislativeAgenda to download ASBA’s 2013 Legislative Agenda. For a more in-depth overview of what small businesses can expect in 2013, attend the 2013 Small Business Outlook on January 17, 2013. Visit www.asba.com/outlook for registration and details. With all this talk about legislation, I'm curious to know what you think. How do you feel this will impact your business?