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Last week, Congress approved legislation (H.R. 8) which extends permanently a host of tax provisions, including most of the so-called Bush tax cuts, and delays mandatory spending cuts, known as sequestration, for two months. Passage of the bill by the Senate (89-8) early on Tuesday, Jan.1 led to great consternation among Republicans in the House with Speaker John Boehner (R-Ohio) ultimately calling the bill up for a vote despite the fact that he did not have the majority of Republicans behind the bill. The House vote was 257-167 with 172 Democrats and 85 Republicans voting for the measure, and House Majority Leader Eric Cantor (R-Va.) voting with the majority of his party against the bill.
This debate was the result of an agreement included in the 2011 passage of legislation to raise the debt ceiling, which established that, in the absence of a broader recommendation from the so-called “Super Committee,” there would be across-the-board spending cuts and various tax cuts and deductions would be allowed to expire. Although this deal does provide permanency for some important tax cuts and credits that impact millions of small businesses, it is only a temporary reprieve from the impending discussion over raising the debt ceiling, which is expected as early as February.
“Economic uncertainty is the number one challenge facing America’s small-business owners,” stated NSBA President Todd McCracken. “While the tax provisions provide a level of stability, we are left with the likelihood of ongoing brinksmanship and have no meaningful framework for addressing our long-term fiscal challenges.”
While the fiscal cliff agreement resolves several of the most pressing tax and budget issues, it leaves a few items on the table that will need to be addressed in the near term. First, H.R. 8 does not address the automatic spending cuts under the Budget Control Act’s sequester; it only postpones the first round of cuts — which were scheduled to begin in early January — until March. Second, the U.S. reached its statutory debt ceiling at the end of 2012, and Treasury is taking what it calls “extraordinary measures” to keep from breaching the limit; but those measures are unlikely to carry the U.S. beyond the end of February. Finally, federal government operations are only funded at FY2012 levels through March 27, requiring congressional action to prevent a government shutdown beginning March 28. Failure to resolve these pressure points — and others that may surface as well — could have wide-reaching economic effects, and, in what is likely to be a replay of the fiscal cliff drama, the White House and Congress will have to come together again to work out a deal.
Among the tax provisions included in the bill:
Bush Tax Cuts
The measure permanently extends the 2001 and 2003 income tax cuts for individuals earning less than $400,000 and families earning less than $450,000: the current 10 percent, 25 percent, 28 percent, and 33 percent brackets will remain, as well as the current 35 percent bracket but only for taxable income that does not exceed the $400,000 (single) or $450,000 (joint) threshold. Taxable income above those levels will now be taxed at the top rate of 39.6 percent, effectively a tax increase of 4.6 percentage points for top earners’ income exceeding the new threshold. The itemized deduction phase-out now begins at $300,000 (joint) and $250,000 (single). While the permanent extension for the lower tax rates is a positive, NSBA believes that tax increases—at any level—should only have been done within the context of broad tax reform.
The compromise includes a permanent fix for the estate tax by extending the current exemption amount, now $5.12 million based on the $5 million level which is indexed for inflation for years after 2011. However, the maximum rate will jump to 40 percent from the current 35 percent rate. NSBA supports a more predictable and permanent fix to the estate tax, but would have preferred a lower rate and higher exemption level.
Alternative Minimum Tax
The language includes a permanent fix to the alternative minimum which will increase the exemption amounts (income not subject to the AMT) $50,600 for individuals and $78,750 for couples filing jointly, and will adjust those amounts for inflation annually. The AMT has been a thorn in the sides for small businesses for years, and NSBA supports permanency of this provision.
Section 179 Expensing
The increased allowable expensing of $500,000 under Section 179 expensing is extended for 2012 and 2013, with the phase-out starting with investments exceeding $2 million. NSBA supports this extension as a positive way to help small businesses while stimulating the economy.
Research and Experimentation Tax Credit
The bill extends the R&E credit (also known as the R&D credit) for 2012 and 2013. NSBA supports the extension, but would prefer permanency in the absence of broader tax reform.
The increased, 50 percent bonus depreciation rules remain in place for property placed in service before the end of 2013, an extension NSBA supports.
Capital Gains & Dividends Taxes
For individuals and families earning below the $400,000 and $450,000 thresholds, respectively, the tax on capital gains and dividends will remain at 15 percent permanently. For those above the threshold, the capital gains and dividends tax rate will increase to 20 percent. NSBA supports making this tax rate permanent, but continues to push for broad tax reform.
Payroll Tax Reduction
The bill does not extend the two percent reduction in worker’s Social Security payroll tax that was enacted two years ago on employees’ portion of the payroll tax.
Other Small Business Credits
There are a handful of other targeted tax credits that were extended for 2012 and 2013, including: the new markets tax credit for businesses that invest in certain community development entities and other qualified investments; the 100 percent exclusion of gain on small business stock; a reduction in the recognition period for S-corporation built-in gains tax; the work opportunity tax credit for qualified wages paid to members of targeted groups; a reduction in the time from 39 years to 15 over which a business can recover the cost of certain leasehold improvements and restaurant and retail property; among other targeted provisions. NSBA supports these extensions to help stimulate the economy, but will continue pushing for broad tax reform that eases complexity as a long-term solution.
Energy Tax Incentives
The bill also would extend through 2013 a handful of energy tax incentives, including: the credit for alternative fuel vehicle refueling property; the credit for two-wheeled or three-wheeled plug-in electric vehicles; the credits for biofuel production and outlay payments; certain renewable energy credits including the renewable electricity production for wind facilities; the credit for construction of energy-efficient new homes and well as for energy-efficient appliances; among other provisions. NSBA supports these extensions to help stimulate the economy, but will continue pushing for broad tax reform that eases complexity as a long-term solution.
The cost of extending all of these tax provisions, according to the Joint Committee on Taxation, is estimated at $3.92 trillion over 10 years, the majority of which comes from the income tax rates and AMT patch.
Although supportive of several tax provisions included in the overall package, NSBA is disappointed that lawmakers walked away from a major opportunity to show the ability to work together reasonably and move toward meaningful solutions to the very serious financial issues facing the country.
Economic uncertainty has been one of the most significant challenges facing America’s small-business owners for the last four years, and Congress has done little to fix that problem. NSBA will continue to push policymakers to address the national debt, restrain federal spending and work toward real, meaningful tax reform.