Many vital tax provisions remain in ‘legislative limbo’
I recently had one of those “teaching” moments with my young children. They like to watch the reruns of the game show “Deal or No Deal” and saw an episode where the contestant won the $1 million prize. They asked whether the contestant gets to keep the $1 million. I answered that the contestant does not actually keep all of it, as income taxes need to be paid.
The fact that a significant amount of the $1 million prize may end up being paid in taxes came as a shock to them. It provided an opportunity to discuss what taxes are and what government services need taxes to operate.
I did not let them know about the concepts of deficit spending that have been a common practice in Washington, D.C., for a good number of years, but I did reflect on where we are in 2010 with many tax provisions in what I would term a “legislative limbo.”
It is now May and many tax provisions that expired during 2009 are awaiting their fate of whether they will or will not be extended by Congress. Many of the expiring provisions are included in proposed tax legislation in some form in the U.S. House of Representatives and the U.S. Senate.
The process of waiting until a period of time after a provision has expired to enact its actual renewal has become a more frequent activity in recent years. Just look at the history of the alternative minimum tax patch for individuals. We have seen the AMT patch enacted nearly 12 months after it had expired, and as a result, the IRS has had to revise at the last minute any forms and instructions, in addition to its computer systems, to accommodate the 11th hour change.
The actual legislative activity in 2010 has brought about some tax law changes. In March, legislation on the job creation and retention tax incentives as well as the health care reform legislation (with its tax provisions) were enacted. Other legislative initiatives in 2010 may also include items that impact the tax code. To date, none of the legislation has contained much addressing the expired provisions.
The expired legislation includes some notable, longstanding items in the tax code. These include the credit for increasing expenditures related to research and experimentation or, as it is commonly known, the research tax credit. This incentive allows a tax credit for qualifying wages and certain other costs related to qualifying research.
In past years, it often has been enacted during the year after its expiration with an effective date back to the date of the expiration. The difficulty for taxpayers that qualify for the credit is that there is an element of uncertainty about whether it will actually be renewed. This uncertainty causes issues with the financial reporting during the period when it is technically expired, as well as with the investment decisions of taxpayers that may make decisions on certain investment activities that may qualify for the research credit, if the credit is, in fact, available.
Other expired tax provisions that are included in the pending tax legislation include provisions to extend certain tax credits, including certain employment related tax credits as well as provisions dealing with the taxation of certain foreign income earned by foreign subsidiaries.
Other provisions dealing with investment and the method and rate of tax depreciation on certain new capital expenditures are also included for extension. These include provisions providing for accelerated depreciation on qualified leasehold improvements and other depreciation provisions dealing with farm business machinery and equipment.
The fate of these provisions may impact investment decisions by business, which then impacts employment staffing decisions. The continued uncertainty of these provisions in terms of their ultimate enactment impacts the affected business as well as other businesses that may manufacture (including components of the end product) or install the affected equipment, machinery or leasehold improvements.
It is likely, as we have seen with most tax legislation, that some new provisions will be included in any ultimate extenders legislative package. This may include additional credits and deductions and some revenue raisers (i.e., tax increases) to offset the impact of the extension of certain credits and deductions.
The difficulty in the entire process is that there appear to be certain provisions that seem to have nearly universal support, such as the research tax credit, but only are extended for one-, two- or three-year periods of time in any legislation rather than making them permanent in the tax code. Permanency may help with some of the uncertainty with taxpayers, though most realize that even permanent tax code provisions often are amended or even removed at times.
Some may look at the current status of the estate tax as an even more serious tax concern. The estate tax was reduced in 2001 during the first term of the Bush administration. Included was a provision that actually had the estate tax disappearing for a one-year period in 2010 and then springing back to life in 2011 at the levels in place for pre-2001 periods. Most tax and legal professionals thought that, prior to 2010, the provisions (expiration in 2010) and the sunset to pre-2001 levels would be addressed in the legislative process and we wouldn’t actually see the estate tax disappear in 2010.
Well, it is 2010, and as of early May, no legislation has been enacted to reinstate the estate tax for 2010 or to address its springing back to life Jan. 1, 2010, at pre-2001 levels (in terms of tax rates, exemptions, credits, etc). So, if one dies or has a family member die in 2010, it is not entirely clear to the family and their advisers in terms of some of the courses of action that may be necessary with respect to estate and inheritance taxes, administration of the estate and the estate’s assets and the distribution of the estate’s assets per the terms of wills, trusts and other estate related documents and agreements.
For many of those who have estate planning documents, the premise of those documents is that an estate tax will be present at death and the terms or any documents are based on that premise. When we are at the place we are in 2010 with no tax in effect, with the possibility a tax may be enacted for 2010, it does provide for uncertainty among advisers, individuals and their families and heirs.
As summer comes and we enter in the fall election cycle, it will be interesting to watch what tax legislative proposals actually make it to the president’s desk for signature to be enacted into law. It is difficult at times to handicap whether an election cycle helps or hurts the prospects to move specific legislation.
Picking the right briefcase for tax legislation is more difficult than picking the right case on “Deal or No Deal.”
William E. Roth II is a tax partner with BDO Seidman LLP. The views expressed above are those of the author and not necessarily those of BDO Seidman. The comments expressed are general in nature and not to be considered as specific tax or accounting advice and cannot be relied upon for the purpose of avoiding penalties. Readers are urged to consult with their professional advisers before acting on any items discussed herein.