Expiring Tax Provisions Affecting Your Bottom Line

By William J. Killory, CPA (Feb, 2010)

As the New Year gets underway, having completed our year end planning and seeing our results on financial statements and tax returns, we can look ahead and implement our plans for 2010 and beyond. Investment and hiring decisions are primarily dictated by current business needs and future expectations. Tax considerations are a secondary but important factor.

Federal tax law is the intersection of politics and the need to raise revenue. The current environment is such that there is a desire to increase employment levels and raise revenue to offset budget deficits. We will monitor the situation in Washington and update you as proposals gain traction and move toward passage. In the meantime, by doing nothing, federal tax law has already changed and will continue to change.

The tax cuts proposed by President Bush and implemented by Congress in 2002 and beyond mostly came with expirations dates. The Joint Committee on Taxation prepared a list of expiring federal tax provision for 2009 – 2020. For 2009 and 2010 there are over 140 changes that have or will occur, some having broad ranging significant impact on taxpayers, many having limited impact that affect specialized industries or targeted groups.

One change that we reported on in December is the estate tax. January came without any Congressional action and currently we have no estate tax. We also do not have a step-up in basis for estate assets meaning beneficiaries must use a carry-over basis along with a carry-over holding period. Disposals of these inherited assets will be subject to capital gain treatment. Legislation may be enacted to revive the estate tax this year but it remains to be seen whether it will be retroactive and if so, would that prompt a judicial review?

There are significant business changes this year that affect capital purchases. One of these changes that expired in December is bonus depreciation that allowed you to write off half of new assets with a tax life of twenty years or less. Along with that benefit, the expanded expensing election allowed you to write off up to $250,000 of tangible personal property also expired. The limit for 2010 is currently $134,000 and that will be further reduced to $25,000 next year. There are dollar limits as to total purchases allowed in a year and still qualify for this expensing election. The limit for 2009 was $800,00, for 2010 it is $530,000 and in 2011 it will be $200,000.

The fifteen year life for leasehold improvement, restaurant and retail improvements expired in December but this provision has expired in previous years and may be revived before year-end. The credit for increasing research and development also expired in December but this twenty year old credit has expired just about every year since inception and will likely be revived by year-end as well.

The alternative minimum exemption for married filing jointly is currently $45,000 down from $70,950 in 2009. To make matters worse, many personal credits, such as child credits or energy credits, cannot offset AMT in 2010. The change in the exemption means an increase in the tax bill of up to $6,747 for most married taxpayers residing in New York. Other filing statuses will see a similar increase in taxes if the exemption amount is not increased by year end. It is very likely that this too will be corrected before year-end.

The real treat comes next year when many, if not most, of the Bush administration tax cuts are automatically reversed. The tax brackets that currently range from 10% to 35% will start at 15% and go to 39.6%. The 15% rate on dividends disappears in 2011 and they will be taxed at ordinary rates next year. This is a planning opportunity for some closely held businesses to consider dividend distributions this year. Capital gain rates will go up next year, again presenting a planning opportunity for investors. The estate tax will resurface bringing it back to its 2001 rates and exemptions. The talk in Washington is to allow these rates to come back but modify them for lower income taxpayers.

There are many other changes. The Joint Committee on Taxation report on the expiring provisions by year and by the different tax code sections can be obtained at the following URL:http://www.jct.gov/publications.html?func=startdown&id=3646.

The year is early yet, and the changes in tax law affecting all of us over the next few years will be voluminous. We will keep our eyes open and inform you as the legislative picture becomes clearer. In the meantime, while taxes should not be a prime motivating factor for a particular transaction or decision, the timing of your action can have significantly different consequences depending on when it occurs. Keep us in mind and contact us when thinking about any significant transaction contemplated in the next few years.

 

The information reflected in this article was current at the time of publication. This information will not be modified or updated for any subsequent tax law changes, if any.

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