Posted: February 08, 2009
Business braces for Obama tax changes
2009 Tax GuideDavid Lewis
Barack Obama was lucky enough to be elected president and unlucky enough to be elected president in the midst of a nasty economic crisis. Under normal economic conditions – we forgive you if you can’t recall what those are – record deficits and a staggering economy might engender a degree of caution about hiking deficit spending. (Think of the early Clinton administration after the deficits piled up by the Reagan and first Bush administrations.) Thus, in traditional terms, such a scenario would be bad news for the conventional liberal/progressive leader, one who wishes to advance government power by increasing government spending. But these are not normal times. We hope.
So it is that pundits, experts and members of the chattering classes look forward to the Obama era with a unique-in-our-lifetimes combination of fervent hope and near-total confusion. And it must be added that President Obama’s stated policies do little to clarify the confusion. During the campaign Obama promised to deliver “broad-based tax relief to middle class families and cut taxes for small businesses and companies that create jobs in America, while restoring fairness to our tax code and returning to fiscal responsibility.” That’s a tall order, huh? How is all this going to take place? Well, when we drill deeper into the then-candidate’s campaign promises, we find his plan to: “Eliminate capital gains taxes for small businesses, cut corporate taxes for firms that invest and create jobs in the United States, and provide tax credits to reduce the cost of health care and to reward investments in innovation.”
These pledges are particularly significant for Colorado because an estimated 98 percent of all businesses here are small businesses, according to the National Federation of Independent Business, the NFIB. Of course, “If you are in startup mode you’re not generating capital gains,” notes CPA Fran Coet, of Broomfield-based Coet & Coet. As philosopher George Santayana put it, “Skepticism, like chastity, should not be relinquished too readily.” So we asked some professional skeptics for their views of the Obama plan and its possible impact on the Colorado economy. And we kept in mind another quote, this one from David T. Wolf: “Idealism is what precedes experience; cynicism is what follows.” Fiscal/financial conservatives, of course, Obama-nate the Obama-nomic approach. “The danger of his business tax policy is that he does not want to entertain lowering the corporate income tax rates, and it looks as though he wishes to move the capital gains tax return back up to 25 percent, both of which are going to be devastating for the nation and for Colorado,” says Jon Caldara, president of the Golden-based Independence Institute.
One point upon which all experts agreed is that, given the fluidity of the present mess, it’s hard to know what specific policies the new Congress and the new president will pursue. That adds up to uncertainty, doubt, anxiety. Business’ incertitude and anxiousness has two parts, according to Tony Gagliardi, NFIB Colorado state director. One is the conventional concern business owners harbor for the Democratic leadership. “For small business in general things like mandatory paid leave, paid family leave, that always makes us real nervous because somebody’s going to have to pay for that,” Gagliardi says. The second part of his worry has to do with the worry of worry, otherwise known as fearing fear itself. “When you start talking about new programs, there is still a lot of uncertainty, and uncertainty is not a very comfortable feeling for small-business owners,” he says. “The problem is everything is still unknown, but I think we can be pretty safe at this point in assuming that there are not going to be dramatic changes, at least early in the year,” adds CPA Greg Truitt of Aurora-based Holm Ryan Truitt Hall LLC.
“There are still a lot of unknowns,” echoes Washington, D.C.-based NFIB tax counsel Bill Rys. “We’ve seen the focus of tax policy change through the course of the campaign, and then we’ve seen that change even after, so at this point there are still a lot of unknowns as to what types of proposals he may be looking at and if there are changes when those changes might occur.
"The biggest issue right now is that uncertainty: People want to plan for changes in tax code, but you’re not sure yet what those changes are going to be. The driving force right now for all these tax issues is the shaky economy, so, really, until either we see some improvement in the economy or we see what the impact of the stimulus bill is, it’s really hard to get a sense of where the lines are going to be drawn.”
Another point that garners near-complete agreement among economists and other observers is that, whatever the Obama administration’s eventual plans, significant tax changes will probably have to wait for something like economic normalcy. “Nothing is going to be done about the tax issue for probably the first six months, especially anything that looks like a tax increase,” says Vectra Bank Colorado economist Jeff Thredgold. “The things that Obama campaigned on were in the context of a viable economy, which we do not have right now. Priority No. 1 will be economic and financial stabilization. He inherits a mess from Bush and Paulson and Bernanke and Wall Street, and a U.S. economy in its most serious downturn since the Great Depression; plus, a global economy that’s in recession, and confidence that is largely gone, tarnished or damaged in domestic and global financial markets.
“It may be that the first thing that they talk about at some point will be economic stabilization or a move toward a one-payer system in health care, but the idea that the new administration is going to say, ‘By the way, we’re going to take the capital gains tax from 15 percent up to 20 percent or 25 percent or 28 percent,’ in the context of a Dow that is down 34 percent, just isn’t going to happen.” Adds Truitt, “We are looking at anywhere from six months’ to a year’s delay in the implementation of a number of these provisions. There was a lot of rhetoric during the election and afterward about a lot of small-business tax cuts, a lot of pro-business, pro-small business moves, and then also a potential increase in some individual tax rates for higher income people. “The problem is, all of those are pretty expensive tax cuts and so in a bad economy they just can’t afford to implement those in the time frame that they want to,” he says. “So what we are anticipating is that there is going to be a delay in implementation of a lot of the small business tax changes and other tax changes.”
The critical ingredient in an economic recovery is a return of business and consumer confidence, Truitt says, and the D.C. regime “can’t afford to throw those big changes in on top of the already difficult economy.”
What is as certain as death and taxes is massive spending. “The day that Obama takes office he will announce formal details on an economic stimulus program somewhere between probably $700 billion and $900 billion,” Thredgold adds. “Nothing takes priority over that at this point.” The NFIB’s Rys says capital scuttlebutt hints at a package between $400 billion and $850 billion, by the way. While worried about the long-term impact of trillions more in deficit spending, the economists we spoke with were uniformly more concerned about the present chaos. Policy makers gave a choice between trickle-down economics and a bottom-up approach. Like the president, Patricia L. Silverstein, president of Littleton-based Development Research Partners, favors the latter policy. “Without consumer stimulus, there won’t be any demand anyway,” she says. “And we would still be looking at a deflationary scenario.” The NFIB’s chief suggestion for Obama’s tax policy, by the way, is a payroll tax holiday.
“We really think this is one thing the government can do that can really have a positive impact,” Rys says. “What we are seeing is a frozen small-business economy, and we need to get that unfrozen. That’s why we think a six-month payroll tax holiday can really help, because it helps on both sides of the economic equation. It puts money back into the pockets of employees so they can go out and spend; it also puts money back in employers’ pocket to help defer some of the costs of labor, so it creates an incentive to keep people on the payroll, and helps them make their monthly expenses, which are becoming more and more of a challenge.” Experts are relatively optimistic regarding the Colorado economy, largely because it never reached the bubbly heights of those in Nevada, California, Arizona or Florida. “Small businesses are extremely flexible, and if they’ve got their ducks in a row in terms of marketing, and they didn’t over-leverage, there is a lot of opportunity in the market,” Coet says. “I think Colorado is in the catbird seat.”
Last-minute tax fixes for procrastinators
As you may have noticed, Dec. 31, 2008 occurred last year. For tax planning purposes, if you failed to close the books on 2008 on that date, you probably blew it. “Up until 12/31 you have the choice of making some transactions, doing some things overtly that would potentially make some changes for your business, and pay expenses ahead of time that you might not otherwise pay,” says CPA Greg Truitt of Aurora-based Holm Ryan Truitt Hall LLC. Now, “There’s not too much to work with here because everything is after-the-fact,” he adds.
Both Truitt and CPA Fran Coet, of Broomfield-based Coet & Coet, noted that at least you have some 2008 tax changes to consider. “There are fewer choices to manipulate the tax liabilities, but there are still a few things that businesses can take into account,” she says. “They can look at expensing the equipment that they purchased during 2008, because Congress in the Economic Stimulus Act that was passed in February 2008 lifted the expensing provision up to $250,000 from $125,000.” Also, “If you don’t qualify for that then, they offered 50 percent first-year depreciation,” Coet adds. “For instance, if I went out and bought a car – and obviously I didn’t because nobody did – then I got bonus depreciation for buying a car or truck to work as an offset to the expensing provision.” One more: “Later in the year in the bailout or TARP (Troubled Assets Relief Program) package we got extenders for business for research and development credits,” which leads to an intriguing possibility.
“We have a client who’s developing a low fuel-usage helicopter engine – a pretty niche market there – and has spent a couple of hundred thousand in the research and development of that product,” Coet says. “When we go to prepare his tax returns this year we’re going to have to look at it. Does it make sense to simply expense research and development expenses or to capitalize them? Which is where you can actually get more than 100 percent, because you are capitalizing your expenses. If you can amortize them then you are also getting a credit on top of that.” — David Lewis
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