There are both tax incentives and take hikes in the proposals, which tend to offset each other and result in zero sum for small businesses. The proposals are outlined in the Treasury Green Book.
Here are some of the proposals that would impact small businesses and their owners.
A number of provisions that had applied in 2009 or are set to expire in 2010 would be extended or made permanent, including:
- • First-year expensing up to $250,000 (for 2010, with the ceiling dropped in 2011).
- • 50% bonus depreciation (for 2010).
- • Research credit (make this permanent).
- • Empowerment zone incentives (through 2010).
- • 15-year amortization for certain leasehold improvements (through 2011).
- • New markets credit (for 2010 and 2011).
The proposals would also extend COBRA assistance by the federal government to employees terminated before January 1, 2011, which means more administrative work for employers subject to COBRA and that lay off workers.
The proposals contain a number of new incentives:
- • Doubling of the current $500 per year credit for small employers that start qualified retirement plans. Employers in business for more than two years and with more than 10 employees that do not have qualified plans would be required to adopt an automated payroll contribution system for employee IRA contributions. These breaks wouldn’t start until 2012.
- • Eliminate any capital gain tax on small business stock made after February 17, 2009, that is held for more than five years.
- • Remove cell phones from listed property, simplifying substantiation.
The tax rates on individuals with income over $200,000 and joint filers with income over $250,000 would be increased, with a reinstatement of pre-Bush tax cut rates of 36% and 39.6%. Who would be subject to these rates, besides top sports figures, movie stars, and financial executives? The answer is many, many small business owners.
- The FUTA surtax of 0.2% of taxable wages, which first was imposed in 1976, would be made permanent.
- A LIFO inventory election would be repealed after 2011, eliminating the opportunity to effectively defer income when inventory costs increase over time.
- Various tax incentives for fossil fuels would be repealed after 2011, including expensing of intangible drilling costs and percentage depletion for coal and other hard mineral fossil fuels.
- The Superfund environmental income tax of 0.12% imposed on corporate alternative minimum taxable income over $2 million would be reinstated; this tax had expired at the end of 1995. This would apply after 2010 and through 2020.
- Information reporting would be required for payments of services to corporations of $600 or more; currently only payments to independent contractors and certain other parties are required to be reported after 2010.
- Information reporting would be required for rental income recipients making payments of $600 or more to a service provider, such as a plumber, painter, or accountant, in the course of earning rental income after 2010.
- A contractor receiving payments of $600 or more in a calendar year from a particular business would be required to furnish to the business on Form W-9 the contractor’s certified taxpayer identification number (TIN). The business would be required to verify the contractor’s TIN with the IRS.
- The IRS would be allowed to require prospective reclassification of workers who are currently misclassified as independent contractors.
What it all means
These are only proposals. It is unlikely that Congress will enact all, or even most, of these suggestions given that 2010 is an election year.
What is troubling about the proposals, however, is the fact that it includes tax hikes, temporary tax extensions, and other measures that impede small businesses and do not support job growth. The minor tax incentives for small businesses are more than offset by tax hikes.
The proposals do not include specific tax incentives for job creation, although there are already a number of bills before Congress in this regard.
Certainly, some of the proposals are welcomed and would be helpful to small businesses. Bottom line: We have to wait to see what Congress will do about taxes for 2010 and for the coming years.