New Tax Bill Raising Eyebrows

Sometimes I enjoy getting another professional’s perspective on what is happening in Washington.  Here is a great blog post from the Tax Girl.

 

Apparently, Congress is on a roll. Just a couple of months after they pushed through the massive health care bill (referred to as the Patient Protection and Affordable Care Act, signed into law in March 2010) and debated the similarly hefty Tax Extenders Bill (referred to as the American Workers, State, and Business Relief Act of 2010, passed by the Senate in March 2010), they’re trying again. Pitched as “amendments to the Senate Amendment to H.R. 4213? (H.R. 4213 is the Tax Extenders Bill), the Senate and the House have apparently reached a consensus on a new bill and it’s causing quite a commotion.

 

First, the title: American Jobs and Closing Tax Loopholes Act of 2010. Let your mind wander for a minute.

 

Next, the length. When I plowed through it earlier today, the version was a remarkable 433 pages (the officially summary alone is 27 pages). Yeah, for an amendment.

 

And finally, the content. Brace yourself. There are nine chapters:

 

1. Promoting American Jobs

 

2. Relief for Working Families

 

3. Disaster Response

 

4. Domestic Energy

 

5. Extension of Other Expiring Tax Provisions

 

6. Closing Foreign Tax Loopholes

 

7. Closing Other Tax Loopholes

 

8. Maintaining Access to Affordable Health Care

 

9. Other Provisions

 

There’s a lot to take in. I’m going to hit some of the most talked about highlights now and blog a longer summary later. Here are the bits raising eyebrows across the internet today:

 

· Included in the bill are proposals to increase the Oil Spill Liability Trust Fund liability cap and to increase the Oil Spill Liability Trust Fund solvency. The latter would increase the per-barrel-tax on the oil industry by 24 cents. This is because “a major spill, particularly one in a sensitive environment, could threaten the viability of the fund.” Hmm, reactionary, much?

 

· Also included in the bill is election to expense advanced mine safety equipment. While tax-neutral, the plan is to encourage mine operations to invest in more mine safety equipment. This makes sense because what’s really needed to push safety in mines is advanced expensing. Losing a miner or two (or 29) apparently isn’t enough.

 

· The bill includes about $15 billion in foreign tax-related provisions. The plan is to try to curb “abuses of the U.S. foreign tax credit system and other targeted abuses.” Specifically targeted are multi-national companies. While the idea is a good one, there is a lot of chatter about whether continuing to hammer at multi-national companies will actually serve as a deterrent to doing business in the US which is really the opposite intention (it’s really supposed to discourage potentially tax-evasive offshore operations of US companies).

 

· The bill slowly poisons many s corporations. Okay, that’s a bit dramatic. But the bill purports to raise nearly $10 billion by tacking on payroll taxes to certain service professionals who currently split income as wages and draws. And by certain service professionals, Congress specifically means those in “health, law, lobbying, engineering, architecture, accounting, actuarial science, performing arts, consulting, athletics,, investment advice or management, or brokerage services.” So, um, everyone who uses an s corporation. And likely those who are high wage earners. Make no mistake: this is Congress’ way of hiking taxes on the upper middle class and letting Obama keep his promise of not raising taxes on the middle class. If you aren’t familiar with the way s corporations work, let me just advise that most small business are s corporations specifically because of this payroll tax issue – and if the bill passes, they just got socked with an additional 15% tax. If Congress was looking for a way to encourage under-reporting, mark my words, this is it.

 

· The bill also contains nearly $5 billion to pay for settlement of what are known as the Cobell and Pigford class action lawsuits. These are, respectively, lawsuits brought over management of trust accounts for Native Americans and discrimination lawsuits brought by black farmers against the USDA (opens as a pdf). Notwithstanding any other issues, there has been grumbling about whether this bill is the appropriate place to tack on these settlement funds.

 

· Finally, the bill orders the Commerce Department to study job losses over the past 20 years. My guess (and I won’t charge them for it): they’re going to find some.

 

I’m not alone in my concern over the scope of this bill and what it means for our economy. We keep pushing a little bit at the edges of some pretty sweeping changes at an alarming speed – so fast, in fact, that many taxpayers haven’t had time to digest them, much less, react to them. Bits and pieces are just now coming out about laws passed months ago. Maybe it’s time for Congress take a breath and slow down – or, I don’t know, actually read what they’re making into law. Just saying.

Comments

[Eric Killian]

Write your representatives, even if you don't agree with my opinions:

I won't waste time with formalities.

While many provisions are concerning over Amendments to the Senate Amendment to H.R. 4213 (H.R. 4213 is the Tax Extenders Bill), in particular I have many concerns over how the bill purports to raise nearly $10 billion by tacking on payroll taxes to certain service professionals who currently split income as wages and draws. And by certain service professionals, Congress specifically means those in “health, law, lobbying, engineering, architecture, accounting, actuarial science, performing arts, consulting, athletics,, investment advice or management, or brokerage services.

As a CPA I can say this will cause a fervor among our middle class. As a small business focused CPA most my clients who live a middle class lifestyle (at best) are taking salaries and draws out of their businesses. This split and saving on income tax is the margin that allows most of these businesses to function (or pay health care costs, or pay decent wages to employees, or provide quality services....)

To look deeper one must understand the tax code and how earnings/wages are earned/taxed. All of my clients take a reasonable salary from their corporations. While there are many other individuals that do not - THESE ARE THE PEOPLE YOU SHOULD BE CLOSING THE GAP ON. These 'people' are those that claim less than <35k in salaries and take a disproportionate 50k, 60k, 150+k in dividends/rents/draws. One must look at the involvement in the business and if a reasonable salary is being taken out of the corporation before one can determine whether draws are investment or earned income.

You must see that a significant potion of my clients (and the middle class business owners of our United States) earnings are NOT due to full time work at the place of business but rather due to their investment of money, start up risk and innovation (although many continue to work 60-70+ hour work weeks just to stay afloat). These items, just like stocks and other investments, should NOT be taxed at the higher income tax rate. Earning a wage from a business has no inherent risk, while a starting/running a business effectively puts at risk your lifestyle, family, home and all that our clients strive for. Its the foundation of American entrepreneurial spirit.

Perhaps my next letter will be to my clients, encouraging them to work for our government where you can retire on full pension (with health care) after 30 years of service, have extravagant expense accounts, spend many weeks on vacation, spend many months campaigning and have their own system of social security and health care.

I encourage you and all of our representatives to look at the SUBSTANCE of earnings and focus on the MANY other gaps in our system.

-Eric Killian, CPA

[Eric Killian]

-I applaud efforts to reel in extravagant oil company gains and encourage any and all efforts for environmental cleanup. I pick up after my dog... surely oil companies should be expected to do the same.