5 Tax Issues You Can’t Ignore
Along-awaited deal was passed by Congress Jan. 1 that prevented the immediate impact of going over the “fiscal cliff” of tax hikes and mandatory spending cuts.
Despite the failure to agree on a “grand bargain,” there is plenty in this legislation to make businesses happy. For example, the research credit, which had expired at the end of 2011, was retroactively reinstated for 2012 and extended through 2013. The Section 179 Small Business Expense election, which had decreased from $500,000 in 2011 to $139,000 in 2012 — and was scheduled to decrease to $25,000 in 2013 — was retroactively increased to $500,000 for 2012 and extended through 2013. And the 50 percent first-year bonus depreciation, scheduled to expire at the end of 2012, was extended through 2013.
But upcoming debt ceiling negotiations and continuing tax discussions leave a number of business tax issues unresolved in 2013. Here are five key issues businesses should continue to watch for this year:
• The corporate tax rate. The U.S. rate is among the world's highest, and there's a consensus among Democrats and Republicans that revenue-neutral reform is needed. We can expect much discussion about a potential rate reduction, which might be done by broadening the tax base. This would have a negative impact on pass-through entities, since it would amount to the loss of tax deductions with no decrease in tax rates.
• Treatment of pass-through entities. Not only must pass-through entity owners be aware of the individual rates, but there has been discussion over whether large pass-through entities should be taxed as corporations. This, along with an increase in individual rates, could require rethinking whether pass-through status makes the most tax sense.
• Focus on manufacturing. Both parties talk about the need to boost the manufacturing sector, yet there is considerable concern that many beneficial tax expenditures are in danger of being eliminated, such as accelerated depreciation and the domestic production deduction.
• Taxing foreign earnings. Businesses that operate globally should consider whether Congress will look to move toward a territorial tax system that would allow taxing the foreign earnings of U.S. businesses. Most foreign-taxing jurisdictions follow the territorial approach, as compared to the U.S. approach of taxing businesses on a worldwide basis.
• Everything is on the table. A number of business tax deductions were not put to rest in the recent fiscal deal, and are likely to come up again. For example, there has been much discussion with regard to eliminating the LIFO (last in, first out) method of accounting for inventory, and there is concern that Congress could look to reduce or eliminate a company's ability to deduct interest expense.
Despite its helpful tax breaks and extensions, the fiscal deal passed on New Year's Day leaves several business tax issues open to be addressed, and plenty to watch for as the 113th Congress gets to work.
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Patrick L. Connolly is a partner with BlumShapiro, an accounting, tax and business consulting firm which has offices throughout New England.
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