Tax Bill Passes with Immediate Effects on Businesses

Update – December 17, 2010
Just after midnight on December 17, the House passed the tax compromise bill negotiated by the President. The only proposed change to the Senate version of the bill was a provision to adopt the 2009 estate tax rates and limits, and it was defeated. The final vote was 277-148 with plenty of grumbling on both sides of the aisle even from those that voted for the bill. The President is expected to sign the Act into law.

The bill extends provisions of the 2001 and 2003 tax bills generally through 2012. The individual tax rates remain at current levels. The 15% tax rate on long-term capital gains and dividends is also extended. Another AMT “patch” to the exemption amount was also adopted. A one-year, 2 percentage point reduction in employee contributions of Social Security taxes will be in effect in 2011. It is hoped that tax cut as well as the extension of unemployment benefits will boost spending in the short term and bolster the slow economic recovery.

The estate tax, which was fully repealed in 2010, will have a maximum rate of 35% and sets the exemption from the tax at $5 million per person ($10 million per couple). This change is retroactive to estates arising on or after January 1, 2010. However, the law provides that an estate arising in 2010 may elect to choose the zero tax rate currently in effect. You may wonder why an estate would not choose the zero tax rate rules. The answer lies in the carryover of the basis of assets under the current law compared to stepping up the basis of inherited assets under the new bill.

Several provisions directly and immediately affect businesses. Businesses may claim a 100% immediate write off of assets placed in service after September 8, 2010 through December 31, 2011. This provision differs from the Section 179 expense in that there is no limit on the amount of assets allowed for the deduction. The bill also extends the 15-year cost recovery period for leasehold and other real property improvements placed in service in 2010 and 2011.

Update – December 14th, 2010

The Senate voted on December 13 to close debate (cloture) on the tax compromise bill. A final vote may occur this week. Various economic analyses have predicted a worsening recession without a tax compromise. Several Senate Democrats cite these reports as key to their vote to close debate. However, some House Democrats are expressing displeasure and insist that changes need to be made to the compromise before a House bill will be considered on the floor.

Update – December 10th, 2010year-end tax planning can help you identify strategies that will allow you to minimize your tax liabilities. However, this year is a little different than others. Several tax breaks are scheduled to expire at the end of 2010. Also, Congress is negotiating over several tax bills so we don’t know yet the tax rates that will be in effect for 2011.

The Senate Finance Committee drafted a bill late on December 9 that basically follows the framework agreed to by the White House and the Republican leadership. The Joint Committee on Taxation issued a “very preliminary” cost estimate of the Senate bill at $801 billion for the fiscal years of 2011 through 2020. A vote on the Senate floor could take place on December 13 at which time amendments may be introduced. However, the House Democratic caucas expressed their displeasure with the framework by voting not to bring a bill to the floor.

Update – December 9th, 2010

The President and Republican leaders reached a “framework” on which to draft a tax bill. The framework includes a continuation of the current individual ordinary tax rates and capital gains tax rates for a period of two years. The agreement also excludes $5 million of the value of estates from taxation and caps the tax rate at 35%. A one-year reduction in in employee payroll tax withholding is also included. Another AMT “patch” is included. Businesses will benefit from a provision that will allow them to expense investments in equipment.

It is assumed that the additional money available to individuals from the reduction in payroll taxes next year and the extension of unemployment benefits will result in greater spending and, thereby, stimulate the economy.

There are Democrats who object to the estate tax limitations and there are Republicans who object to the projected increase in the deficit due to the continuing tax cuts and extension of the unemployment benefits. This “framework” has not yet been written into a bill and is far from a done deal.

The Senate Finance Committee drafted a bill late on December 9th that basically follows the framework agreed to by the White House and the Republican leadership. The Joint Committee on Taxation issued a “very preliminary” cost estimate of the Senate bill at $801 billion for the fiscal years of 2011 through 2020. A vote on the Senate floor could take place on December 13th at which time amendments may be introduced. However, the House Democratic caucas expressed their displeasure with the framework by voting not to bring a bill to the floor.