Taxes and the Deficit

It was quite a year for health care reform, tax legislation, change in control of the House and the rise of the tea party in 2010. Oh yes, it was a very political and partisan year. While it may have gone down to the wire for the extension of the Bush tax cuts, taxes were addressed all throughout the year. Early in the year, Democrats were still trying to reduce unemployment and the HIRE Act of 2010 was enacted in March. It provided new incentives to encourage the hiring of new workers. With the economy beginning to recover last year (although very slowly), many hotels were able to take advantage of some of these incentives. However, many businesses felt that any advantage received from that act was more than offset by the Patient Protection and Affordable Care Act. The act was much more than a tax bill, but several tax provisions were included. With the decisions of several courts and the Republicans in control of the House, it is unclear what will become of the legislation, but businesses must begin to address the provisions of the bill now as many aspects are already effective.

One provision that received immediate attention was the requirement that businesses issue 1099s to all vendors with which they deal, for goods as well as services. This provision was derided as soon as people focused on it. Legislation was introduced several times during 2010 to repeal the bill and, while no one liked it, the legislation never passed. In February, the bill finally passed the Senate and, unfortunately, was added to a larger bill. While the House did not object to the larger bill, it wanted the stand-alone repeal bill so it could trumpet its success. It is expected that by the time this article appears, the legislation will have been passed and the requirement repealed. Failure to pass the repeal would have placed an enormous burden on business, particularly small businesses and provided little additional help to the Internal Revenue Service in collecting additional revenue.

Even with the elections coming up, or maybe because of it, Congress passed additional legislation in September, the Small Business Jobs Act of 2010, which retroactively extended many provisions that had expired at the end of 2009. One of the key provisions for businesses is the renewal of the increased expensing limitations ($500,000 limit with $2 million phase-out threshold) and the qualified real property expensing ($250,000 limit). These items are critical if business is going to lead the recovery.

But the best was kept to last. And the politics surrounding it were fierce. As a matter of fact, it was not until the lame duck session after the Democrat's losses in November, that Congress even was able to address the critical issues surrounding the expiration of the Bush tax cuts. Since Congress often states that it needs to pay for any tax cuts, one method used is to have the provisions expire at some certain date in the future even though the expectation is something will be done at that point. It clearly is smoke and mirrors but has religiously been a ploy used by Democrats and Republicans over the years. However, seldom have the stakes been as high.

It was not until late December that a bipartisan agreement was reached on a tax bill. President Obama allowed the tax cuts to continue for all taxpayers, including the wealthy, and the Republicans agreed to an extension of the unemployment insurance as well as additional economic stimulus measures. However, in a clear indication that the battle is not over, the provisions were extended for another two years, which will put the debate square in the middle of another Presidential election cycle. At least for now, we have some answers.

Among the items passed that will impact business are:

  • the favorable tax structure for individuals remains in place (this impacts business in that many are operated under some type of flow through entity)
  • the higher standard deduction remains and the reduction in the value of itemized deductions for higher income individuals is postponed
  • long term capital gains and dividends continue to be taxed at 15%
  • the AMT "patch" is extended for two years
  • providing significant estate tax relief ( a surprising development)
  • a 100 percent bonus first year depreciation allowance for property placed in service after September 8, 2010 and before January 1, 2012
  • a 50 percent bonus depreciation allowance for property placed in service during 2012, and
  • increasing the maximum expense deduction to $125,000 and setting the phase out amount at $500,000 for years beginning after December 31, 2011.

One major problem with all of the above is that the changes significantly add to the deficit. With tea party candidates being elected to reduce spending, it will be interesting to see how far the bipartisanship will go. President Obama has introduced his budget for next year and already the proposed cuts are being called insufficient. It is ironic that we are talking about next year's budget and still have not passed spending bills for last year.

It would be interesting if we ran our business that way.

Too much of our budget is in entitlements, defense spending and interest on the debt. Without an increase in revenue, or the political courage to address entitlements, the problem will grow exponentially. Chart Two shows the national debt. If not already done, the debt will need to be raised shortly. Already, this has people lining up to require substantial cuts (in the current fiscal year) before they will vote for the increase.

While we have just finished the 2010 elections, the election cycle is continuous. Both political parties already are gearing up for the 2012 elections. As a result it is likely that, while some reductions will be made, many of the hard decisions will not and the buck will be passed to the next Congress or even the next generation.

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Kevin Reilly, an attorney and CPA, is a member of the firm of Witt Mares. Witt Mares is a member of PKF International Ltd, an association of legally independent member firms. He heads up the hospitality practice for the Fairfax, Va.-based firm. This article was published in the April 2011 edition of Lodging.

photo of Robert Mandelbaum