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Welcome ...
 It's my pleasure to welcome you to our
newsletter.
This edition focuses of how changes in our individual income tax are taking shape. No clear picture yet, but an opaque view is possible.
I
hope you'll find the information useful.
Michael Jellison, CPA
President - BankSems, LLC
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It's no surprise, really.....
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Tax hikes are likely for many
Many of my CPA clients are bracing for an increase in their personal income taxes. Reading the political 'tea leaves' suggests this will be the case in the fairly short term.
If Congress does nothing (something they seem to do all too well)
The current tax policy expires in the main on December 31, 2010. That means January 1, 2011, it's back to the law previously in place. - The maximum personal income tax rate increases from 35% to a stated rate of 39.6%, but the effect rate is closer to 42% for many.
- The maximum long term capital gains tax rate increases from 15% to 20%.
- The Section 179 deduction falls dramatically from $250,000 to about $134,000.
If Congress acts
It's possible Congress will do more than just let the current tax law lapse. Here's their 'wish list'. - High income earners will pay more. The progressive tax rate structure is alive and well with this Congress. And, I suspect we'll hear it's only fair that the wealthy should carry the burden. One of my clients puts it this way, 'when you rob Peter to pay Paul, you can always count on the support of Paul'.
- With the increase in the tax rates as the 'stick', the 'carrot' will be an explosion of targeted tax credits. These credits are likely to be directed to 'long term' job creation, health care for employees, etc.
- The 'C' corporation may enjoy tax rates that are lower than they are now. There's talk of lowering the maximum corporate tax rate from 35% to 25%. Just talk at this stage, but if 2010 sees little job creation, it's definitely a possibility.
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From: Business Tax Return Analysis: A Banker's Perspective
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"Maybe time to rethink the S Corporation election; dropping it and reverting back to a 'C' might be wise."
As an S corporation, the corporation's taxable income (loss) is passed through and reported as taxable income (loss) on the owner's personal tax return. That's been fine recently because the maximum federal corporate and personal tax rates have been the same (35%). And, as an S corporation, the 'double tax' feature of a 'C' corporation is moot. But, if the relative tax rates change, a new dimension
- If the 'C' corporation rate does down, and the personal tax rate increases:
- The growing business will have more after tax dollars to further its growth by opting out of S tax status and reverting back to 'C' status.
- True, this comes with a price - the 'double tax' concept applies, but it's a non-issue because the after tax profits are not paid out as a taxable dividend.
- The profitable S corporation may find it advantageous to have the profits taxed at the lower 'C' corporate rates than the increased personal tax rates. This comes with some 'strings' attached, but may still be a good idea.
- If the business is passing through a loss to its shareholder, the S status still offers an advantage over the 'C' status. The loss is worth more as an offset to the shareholder's other income on their personal tax return.
- I suspect we'll all know a great deal more come late summer, early fall of 2010. There will be political pressure on the members of Congress seeking re-election to offer tax breaks to encourage job creation (hence the possible reduction in the 'C' tax rate), and to raise taxes 'on the rich' to reduce the deficit. We've heard this story before.
- I'll be watching and ready to advise my clients on their proactive moves. I suspect the late fall of 2010 will be particularly active.
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Refresh your skills in using business tax returns in the new year!
Available for delivery January 16, 2010
Want to PREVIEW the on-line course Business Tax Return
Analysis: A Banker's Perspective?
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