Tax Planning on Hold

Normally, a business’ tax planning for the year begins months in advance of the start of that year. Unfortunately, because of Congress’ inaction to extend dozens of tax rules that expired at the end of 2009 or decide on the fate of tax rules for 2011, 2010 is almost half over and tax planning for 2010 continues at this time to be on hold.

The House finally passed an extender bill on May 28. Key business provisions extended, but for only one year (2010), include:

  • Research credit
  • Empowerment zone and renewal community tax incentives
  • 15-year amortization of leasehold improvements
  • 5-year depreciation for farming equipment

The Senate does not expect to take action on extenders until the week of June 7. It is likely to follow suit for most of the key provisions, but it’s not a done deal yet! And the Senate version contains a killer tax increase on S corporation shareholders. There’s a provision that would no longer limit Social Security and Medicare taxes for shareholder-employees to nominal salaries after 2010.

Because of the limited extension period — retroactive to January 1, 2010, through the end of this year --- businesses don’t know what will happen to the provisions in the legislation after 2010. They could, of course, be extended again. Is this any way for Congress to act (and leave businesses up in the air and unable to plan)?

Expiration of the Bush tax cuts
Besides the uncertain state of extenders for 2010 and beyond, major provisions of the tax law are set to expire at the end of 2010. These include reduced personal income tax rates (the rates paid by sole proprietors and owners of pass-through entities on their share of business profits) and favorable rates for long-term capital gains and qualified dividends.

There have been hints about what’s to come. The President's budget would retain low rates for taxpayers other than singles with income of $200,000 or more and joint filers with income of $250,000 or more. Congress has not yet faced these concerns. More uncertainty for some time to come!


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