Welcome to The Washington Report
I can say without hesitation that PPAI leads the way in advocating for its members, the promotional products industry and for the issues that are important to small businesses.
Through our legislative contacts and lobbyists, we have access to information, insight and analysis that you won’t see published anywhere else. Information that will help you better understand how what happens in D.C. can affect your business and employees at home. Information that will help you become more aware and better prepared to advocate for your business, profession and industry.
The Washington Report is a new monthly feature for readers of this blog. I hope you enjoy it.
NO PAYROLL TAX INCREASE
Congress decided to skip the high drama and renewed the temporary two-percentage point reduction in payroll taxes. You may recall that when it was expiring at the end of last year, Congress ended up renewing it for just two months. Congress passed and the President has signed the Middle Class Tax Relief and Job Creation Act of 2012 (MCTRJCA) into law. Employees will continue to receive the two percent reduction and so will the many self-employed in our industry for the rest of year. Employers continue to pay their full share for employees.
If you like technical details, we have them. Under existing law, the Federal Insurance Contributions Act (FICA), employers pay a tax based on the amount of wages paid to an employee during the year. The tax imposed is composed of two parts: the old age, survivors, and disability insurance ((OASDI) and sometimes referred to as the “Social Security tax”) tax equal to 6.2 percent of covered wages up to the taxable wage base ($110,100 for 2012); and the Medicare hospital insurance (HI) tax amount equal to 1.45 percent of covered wages. In addition to the tax on employers, each employee is subject to FICA taxes equal to the amount of tax imposed on the employer (the “employee portion”). The employee portion of FICA taxes is withheld and remitted to the Federal government by the employer.
The Self-Employment Contributions Act (SECA) tax applies to the self-employment income of self-employed individuals. The rate of the OASDI portion of SECA taxes is 12.4 percent, which is equal to the combined employee and employer OASDI FICA tax rates, and applies to self-employment income up to the FICA taxable wage base (thus $110,000 in 2012). Similarly, the rate of the HI portion of SECA tax is 2.9 percent, the same as the combined employer and employee HI rates under the FICA tax, and there is no cap on the amount of self-employment income to which the rate applies.
The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 gave us the first temporary reduction (for 2011) in the OASDI rate for the employee portion of the FICA tax. It was reduced by two percentage points to 4.2 percent. Similarly, for taxable years beginning in 2011, the OASDI rate for a self-employed individual was reduced by two percentage points to 10.4 percent. The Temporary Payroll Tax Cut Continuation Act of 2011 extended that two-percentage point reduction through the end of February 2012. The new law extends the reduction through December 31, 2012.
IT IS GOING TO GET MESSY
As we previously reported, unless Congress does something before the end of the year, many of us are going to get hit with the Alternative Minimum Tax (AMT). The temporary increases in the income levels at which the AMT kicks in expired at the end of 2011. The income levels for the 1960’s tax were never indexed and Congress has been artificially propping them up (thank goodness!) to avoid having literally millions more taxpayers paying the AMT. If Congress does not do something, when we fill out the tax forms at the beginning of 2013 for our 2012 income the AMT may be a bigger part of our tax bills. In addition, at the end of 2012, the temporary reduction in the top individual margin rate and the estate tax relief expire. To add to Congress’ tough choices, the aforementioned payroll tax relief will expire again. Many folks are wondering whether Congress and the President have the will in a congressional and presidential election year, to avert the looming tax increases. Stay tuned.
ANOTHER TAX REFORM PLAN
The President has shared his thoughts on business tax reform. It is only a general outline (25 pages) so it is difficult to draw any clear conclusion as to who are the winners and losers. (The unstated goal of any tax reform plan is make us all feel like we are winners, but the hard numbers usually tell another story.)
“The President’s Framework For Business Tax Reform” (Framework) proposes the adoption of a lower C Corporation top rate. At the same time, however, it proposes the elimination of some business “tax expenditures” (some would call them “loopholes”) in exchange for the lower rate. It does not specify what those “tax expenditures” might be but the repeal of the Last In/First Out (LIFO) method of inventory accounting is used as an example. There are so many credits and deductions that are considered tax expenditures we will just have to see which are chosen before you can determine what it means to your business, if you are doing business as a C Corporation.
One the other hand, the future does not look as bright under the proposal for sole proprietorships, partnerships, and S Corporations. There is no rate relief for those pass-through entities. Most tax expenditures are not limited to use by businesses using certain tax structures, which adds up to the pass-through entities potentially ending up with a net increase in tax liability.
The Framework does offer two provisions specifically for small businesses. The President’s proposal would allow small businesses to expense up to $1 million in investments and allow cash accounting on businesses with up to $10 million in gross receipts.
Whether the cash accounting proposal does anything for you depends on a lot of facts. Currently there is one tax code section that allows businesses with $5 million or less in gross receipts to use cash accounting. However, there also other sections that “override” that section that require you to use accrual accounting. The biggest one is a section of the tax code that says if you are required to use inventory accounting in your business for tax purposes, you have to use accrual accounting. At the same time, there are sections of the tax code and Internal Revenue Service administrative rules that allow you to cash accounting even though you have more than $5 million in gross receipts. Confusing. That’s why we have to have lawyers and accountants.
As we have previously reported, the President mentioned some help for manufacturers in his State of the Union. The Framework expands on the nature of the help. One item would be to increase the existing Domestic Production Activity Deduction (Internal Revenue Code Section 199). Basically, Section 199 currently allows businesses to reduce their taxable income by nine percent for U.S. based activities. Unfortunately, the President’s framework also calls for the definition of manufacturing to be tightened up and, as a result, some businesses would lose the ability to use DPAD. We do not know what “tightened up” means, but, at least by definition, some suppliers in our industry currently qualify for relief under Section 199.