Congress must reach an agreement on expiring tax provisions as soon as possible because small businesses are being impeded from long-term tax and cash flow planning and prevented from making informed decisions. That is the message Jeffrey Porter, vice chair of the AICPA Tax Executive Committee, delivered to the House Subcommittee on Economic Growth, Tax and Capital Access in a hearing on Thursday in Washington.
The hearing was titled, "Adding to Uncertainty: Small Businesses' Perspectives on the Tax Cliff," and the subcommittee, part of the U.S. House of Representatives Committee on Small Business, heard from witnesses representing Women Construction Owners and Executives, USA, the North American Die Casting Association, and the Tax Foundation, as well as the AICPA.
One goal of the hearing was to examine how the scheduled expiration of the lower tax rates enacted in 2001 and 2003 is affecting small businesses' decision-making. Another goal was to hear small businesses' views on the Obama administration's proposal to let the current top two tax rates expire (and increase) for taxpayers with income over $200,000 a year ($250,000 for married taxpayers filing jointly).
In written and oral testimony, Porter addressed the impact of tax uncertainty in several areas and made recommendations on behalf of the AICPA for alleviating some of that uncertainty. He emphasized the difficulties businesses are having in planning for the future when income tax rates, capital gains tax rates, and the tax rate for qualified dividends, and the availability of various deductions, credits, and exemptions are all uncertain. "Multi-year planning and the ability to predict (or at least estimate) business profits and taxes are critical in operating a business," he noted. He also pointed out that structuring business transactions, such as the sale of a business, depends on knowing future income tax rates.
Estate, gift, and GST tax
Porter's written testimony also urged Congress "to take prompt action to enact permanent estate, gift, and GST [generation-skipping transfer] tax provisions and thus provide needed certainty to taxpayers planning their affairs." He cited a retailer who is planning to gift $5 million of his company's stock to take advantage of the current unified estate and gift tax exemption amount, even though the transfer does not fit into his overall succession plan. Porter noted that in the current climate, "some small business owners feel pressure to accelerate or modify" their business succession plans.
The AICPA has seven recommendations for Congress to consider when enacting permanent estate, gift, and GST provisions:
1. Make permanent technical modifications to the GST tax rules that provide relief from several GST tax traps that previously existed;
2. Maintain the current gift and estate tax exemption amount and index it for inflation;
3. Maintain a uniform gift, estate, and GST tax exemption;
4. Maintain the portability of the estate tax exemption between spouses;
5. Reinstate the full state estate or death tax credit;
6. Provide broad-based liquidity relief, rather than targeted relief provisions; and
7. Provide many estate tax brackets.
Porter also addressed the difficulties presented by the large number of temporary tax provisions that have expired or are scheduled to expire. He told the subcommittee that these "in the last several years have repeatedly created uncertainty and confusion. The on-again-off-again nature of extenders, coupled with retroactive tax law changes, make long-term planning difficult, result in the filing of amended returns, and significantly increase the overall complexity."
In his written testimony, he presented the AICPA's recommendation that "[f]uture tax changes should be enacted with a presumption of permanency, except in rare situations in which there is an overriding and explicit policy reason for making provisions temporary."
Porter urged Congress to address the alternative minimum tax (AMT) rules, noting that, "the AMT exemption has become an annual problem" and that the most recent AMT patch has expired. "As a result," he told the subcommittee, "estimated tax planning for small businesses has to take into account the lower AMT exemption amount. This means many small businesses will essentially provide the government with an interest-free loan or risk paying an underpayment penalty if the AMT patch is not passed retroactively. It is a no-win situation for these taxpayers."
Porter's written testimony reiterated the AICPA's support for repeal of the AMT, and, in the alternative, strongly urged Congress to permanently index the AMT for inflation.
Finally, Porter strongly urged Congress, "to not underestimate the effect that the tax cliff has on tax administration itself."
He told the subcommittee, "If Congress waits until late in the year—or even into next year—to enact tax law changes, the IRS and commercial software vendors must scramble to revise tax forms and update software." And he reminded them that just two years ago, the late passage of tax legislation delayed the initial date when many taxpayers could file their returns.
—Alistair M. Nevius (firstname.lastname@example.org) is the JofA's editor-in-chief, tax.