Tax Benefits From Congress Impact Hospitality Industry
“We may not imagine how our lives could be more frustrating and complex--but Congress can.” - Cullen Hightower
Congress has been in session for a little more than 100 days. Changes can be expected with the Democrats taking control. They had a number of pet projects they wanted to address during this period. It is expected that a flurry of bills, the low-hanging fruit, will be enacted to show that the Congress can be effective. Most of the bills garnered Republican support although, ironically, the Republicans complained about being kept out of the negotiations on a number of them.
It is the 109th Congress that has been busy passing tax legislation at the last minute that will impact the hospitality industry. A session of Congress lasts only two years; however, the 109th outdid itself in the number of tax bills passed during its tenure. The final bill, the Tax Relief and Health Care Act of 2006, was just one of seven significant tax bills passed during the last two years. In addition, the Pension Protection Act (PPA) was passed during the summer.
Getting Employees To Save
The Pension Protection Act is a large and significant piece of legislation that is meant to strengthen traditional pension plans and increase participation and savings. It also clarifies tax implications for charitable contributions, Section 529 college savings and prepaid tuition plans. It is probably a safe bet to assume most Americans did not sit down with their morning coffee and read this 907-page bill, the bulk of which focuses on solidifying traditional defined benefit plans. However, this new legislation is cause for cheer for employers, employees and taxpayers in many areas, especially the sections relating to defined contribution savings plans.
Employers, including many hotel companies, have gradually shifted away from offering its workers defined benefit or pension plans as a vehicle for retirement saving. The onus has moved to the employee to plan and save responsibly for his or her own retirement. As pension plans fade away, there is growing concern for how many Americans will fund their retirement since we typically are not a nation of savers. This fear was the driving force behind the introduction of defined contribution (401K, 403b and IRA) plans.
Once defined contribution plans were available, the next challenge was getting employees to participate. The Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) included a number of temporary provisions that benefited plan sponsors and plan participants. Under this Act, many of its provisions were scheduled to expire in 2010, with the saver’s credit set to expire at the end of last year. The Pension Protection Act has changed all that and taken some significant steps to increase plan participation and save defined contribution plan sponsors money.
PPA gives guidance on automatic enrollment, making it easier for employers to put this option into place. Essentially, the act forces a negative election whereby employees must opt out of the defined contribution plan in writing. Otherwise, three percent of their pay will be automatically contributed to the plan. PPA gets workers past the inertia and encourages them to start saving.
In addition to automatic enrollment and its safe harbor benefits, a number of other tax benefits for retirement savings were enacted or made permanent under PPA. Limits on IRA contributions and catch-up contributions that were increased under EGTRRA have been made permanent under this new law. PPA made the retirement tax savers credit, which would have expired on December 31st, permanent. PPA removed the sunset provision on Roth-type 401k and 403b plans.
The Tax Relief and Health Care Act was overwhelmingly approved by Congress in December. The law retroactively restores some popular expired tax breaks back to the beginning of 2006. The law contains 45.1 billion in tax benefits. A number of extenders impact individuals but several apply to businesses as well. The one which may be of the most value to the hospitality industry is the work opportunity and welfare –to – work tax credits. The credits give employers incentives to hire economically disadvantaged individuals. The Act retroactively renews the two credits back to 2006 and combines them for 2007. The consolidation should simplify the computation and make the credit more beneficial.
The research tax credit and the tax advantages related to leasehold and restaurant improvements also have been extended through 2007. The law extends the 15-year recovery period for certain leasehold and restaurant improvements. This would be any improvement to an interior portion of a nonresidential building with certain exceptions. Special rules apply to restaurants where more than 50 percent of the building’s square footage is used in preparing or serving the food and the building is at least three years old.
The New Markets Tax Credit provides benefits for qualified equity investments in economically distressed communities through 2008. The placed in service date requirement for taking advantage of Gulf Opportunity Zone property tax relief was extended to property placed in service before 2011.
The bill contains a host of other enhancements and extensions, including some related to health savings accounts and energy incentives. The problem with the bill is that retroactive application means that the law was not in existence during the year in question. As such, the benefits that the tax provisions were supposed to provide are limited because taxpayers frequently are unwilling to take a chance on Congress not passing the legislation. Generally, the provisions were not controversial but every time they were brought up during the year they were attached to something that was. The Democrats have said that things will be different this year.
Issues In 2007
What can we expect this year? Well, the minimum wage debate is a perfect example of how compromise still is needed. There were a number of tax breaks attached to the bill to offset some of the costs to small businesses related to the increase in wages. Expect the Democrats to focus on “middle class issues” particularly child and education related incentives. Also, expect them to address the alternative minimum tax issue. However, don’t be surprised if the ultimate cost of any change makes it impossible to fix except on a short term basis. While the players may be different, expect the continued tinkering of the tax code to accomplish political objectives. The constant change makes it more difficult, but also more imperative, to do quality tax planning.
Kevin F. Reilly, an attorney and CPA, is a member of the firm, PKF Witt Mares, with 6 office locations. Mr. Reilly serves as the leader of the hospitality niche and sits in the Fairfax, Virginia office. He may be reached at firstname.lastname@example.org. This article was first published in the April 2007 issue of Lodging Magazine.