Talking Shop Blog

Congress adjourns this week to hit the campaign trail before the November 2 election.

The Hill reports that Democrats plan to “stuff” 20 bills during the post election lame duck session ( http://thehill.com/homenews/senate/121223-dems-stuff-lame-duck ).

That includes the so-called “Bush tax cuts”, which expire at the end of the year. Unless Congress acts on an extension, the tax rates go up for everyone on January 1.

The top rate jumps from 35% to 39.6% and the capital gains rate goes from 15% to 20%. The estate tax comes back with a top rate of 55% and a $1 million exemption.

Most pundits expect Congress to extend at least some of the current tax rates. The big question is what the rates will be for those with incomes over $250,000.

Congress will also likely “reinstate” the estate tax laws from 2009. That means a top rate of 45% and a $3.5 million exemption.

Congress will also take up the “tax extenders” bill after the election. But if the tax “extenders” aren’t extended, some popular tax breaks are no longer available this year.

These include the research tax credit and tax-free distributions from IRAs made to charitable organizations.

Congress is scheduled to return the week of November 15.

Stay tuned.

Yesterday President Obama signed into law the Small Business Jobs Bill of 2010.

We covered the key business tax incentives on Friday. Here are some other tax provisions included in the bill:

The bill allows participants in a section 401(k) plan, section 403(b) plan or governmental section 457(b) plan to make a rollover of elective deferrals to a Roth-designated account. The amount of the roll-over is taxable, except for any after-tax contributions.

The plan must allow for Roth roll-overs, which means that some plans may need to be amended this year to allow for 2010 rollovers. Amounts rolled over this year will be included ratably in income in equal amounts over 2011 and 2012, unless the taxpayer elects otherwise.

The bill extends Form 1099 reporting to recipients of rental income from real estate. Under the new law, rental income recipients making payments of $600 or more to a service provider in the course of earning rental income are required to provide a Form 1099 information return to the IRS and to the service provider. This provision applies to payments made after Dec. 31, 2010.

The new law also increases the penalties for failure to file timely information returns. Per-form penalties are doubled from their current amounts, and the calendar year maximums increase from $250,000 to $1,500,000, depending on the penalty category.

Lower maximum penalties apply to qualified small business filers with average gross revenues not more than $5 million.

Yesterday the House passed the Small Business Jobs Bill of 2010 (HR-5297). The bill, which was approved by the Senate last week, will be signed into law by President Obama on Monday. 

Here are some of the highlights:

The first-year 50% bonus depreciation provision is extended for one year to apply to property acquired and placed in service in 2010.

For 2010 and 2011, the Section 179 expense deduction is increased  to $500,000, combined with an increase in the phase out threshold to $2 million.

The bill allows self-employed individuals who deduct the cost of health insurance for themselves and their immediate family, to also take the deduction into account in calculating net earnings for the self employment tax. This provision applies to tax years beginning after 2009.

The carry-back period for eligible small business credits is extended from one to five years. The eligible credits will now also offset both regular and alternative minimum tax liability. The changes apply to credits determined in tax years beginning after 2009.

The bill increases the tax exclusion for gain on the sale of qualified small business stock from 50% to 100%. This provision applies to eligible stock acquired after the date of enactment and before Jan. 1, 2011.

We’ll cover the major revenue raisers contained in the bill on Monday.

Yesterday the Senate passed the Small Business Jobs Bill of 2010 (HR-5297). The House is set to vote on the bill next week.

The Senate passed bill includes a $30 billion lending pool for small business and $12 billion in tax incentives.

Two highlights of the bill include:

     A one-year extension of the 50-percent bonus depreciation provision for qualified property placed in service during 2010.

      An increase to $500,000 in the Section 179 expense deduction for 2010 and 2011, combined with an increase in the phase out threshold to $2 million.

We’ll keep you posted on this important legislation as it develops.

The Joint Committee on Taxation has issued a complete technical explanation of the bill, JCX-47-10, which you can find at http://www.jct.gov/publications.html?func=startdown&id=3707

WARNING: As we’ve noted before, Exposure to Technical Explanations of Federal Tax Legislation has been found to cause headaches and drowsiness in laboratory tests (TPS Report # 1954-01).

The President’s Economic Recovery Advisory Board has recently released its tax reform report. 

The report offers some interesting options on ways to simplify the tax laws and improve tax compliance.

One option offered is to simplify the so-called “kiddie tax” rules. The kiddie tax applies to certain dependents with unearned income over $1,900.

The report notes that “navigating these rules requires a 28-page IRS booklet that includes worksheets to calculate the dependent’s taxable income and tax liability”.

There are also some options to “harmonize rules” on capital gains tax rates.

“Harmonize” is a derivative of the word “harmony”. Harmony is good. I like harmony.

But then there is a section on Page 40 titled “Limit or Repeal Section 1031 Like-Kind Exchanges”.

I don’t like that idea. Section 1031 is good. I really like Section 1031 a lot.

Section 1031 provides for a deferral of tax when someone trades investment or business property for other “like-kind“ property.   

This law exists as a tax fairness provision. If you trade property for other property, you don’t have the cash to pay the tax on the profit you made. That’s because the cash is tied up in the property you just bought.  

So it’s only fair to defer the tax until the time you ‘cash out” of the property.

We’re not sure how much traction this proposal will have. But we’ll be watching closely.

You can find the full tax reform report at http://www.whitehouse.gov/blog/2010/08/27/perab-tax-task-force-report