PPAI’s Washington Report – The People Have Spoken

President Obama has been re-elected, the Democrats have retained a majority in the United States Senate, and the Republicans have retained control of the House of Representatives.  

Now what?

Through our legislative contacts and lobbyists, PPAI has access to up-to-the-minute 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.

I hope you find this information beneficial to your business.

___________________________

THE PEOPLE HAVE SPOKEN

President Obama has been re-elected, the Democrats have retained a majority in the United States Senate, and the Republicans have retained control of the House of Representatives.

What can we expect?

Nothing is going to change with respect to consumer product safety laws, rules, compliance and enforcement.  The President and the minority in the Senate will have a tussle or two over appointing commissioners to the Consumer Product Safety Commission but the general course and direction will remain the same.

The pending defense cuts will be revised.  What we have to watch for is someone in Washington introducing a perceived a “good faith” initiative to make at least modest cuts elsewhere by curbing “waste, fraud, and abuse” and it includes a reduction in the use of promotional products.

While the House majority ensures that Congress will not adopt any anti-business initiatives, we will have to keep an eye on a backdoor initiative to curb the ability of promotional consultants to do business as independent contractors.  When the congressional deficit committee was contemplating a super deal, there were rumors that a change in the rules for independent contractor status was in the mix.  That is the kind of initiative we need to keep an eye out for.

The Physician Payment Sunshine Act, which was included in the health care reform law, is not going away.  Indeed, we will probably now see the rules implementing the disclosure reporting requirements.  That will probably have the effect of reminding pharmaceutical and medical device manufacturers that they have disclosure requirements for promotional products given to physicians.

Sole proprietors, partners, and S Corporation shareholders will be in the hot seat if there is any tax reform momentum.  These businesses are called pass-through entities because they pay taxes on business income on the individual rate schedule.  With the President protecting the middle class and consensus for corporate rate relief, pass-through entities such as sole proprietorships, partnerships, and S Corporations will find themselves occupying the same uncomfortable ground as high-income taxpayers.  Those businesses could loss deductions and credits without any relief.

Those businesses are probably going to get a tax increase at the beginning of the year.  It seems a sure thing that the top individual marginal rate is going back up to 39.6 percent from its current temporary 35 percent for incomes over $250,000.

On the other hand, hopefully the effort to pass a “stop us from going over the fiscal cliff” bill during the lame duck will provide a couple of relief items.

The most likely candidate for lame duck relief is the Alternative Minimum Tax (AMT) situation and the extension of the AMT income “patch.”  This is the temporary increase in the incomes levels at which the AMT kicks in.  As you recall, the last patch actually expired at the end of 2011, so if the patch is not re-applied some of us are already at risk.  The patch is expected to cover 2012 and 2013.  (The amounts would be $50,600 for individuals and $78,750 for joint returns in 2012 and $51,150 and $79,850 respectively for 2013.)

One of small business issues with the best prospects in the lame duck session is a renewal of a generous direct expensing allowance under Section 179 of the tax code.  Section 179 of the tax code allows businesses to write off the amount of equipment and asset purchases in the year of purchase up to a certain amount as long as the business does not spend more than a specific total amount on such purchases in a year.  At the beginning of 2013, the amounts revert to pre-2003 levels of $25,000 and $200,000 without inflation indexing.  This will probably be another temporary increase.

The Occupational Safety and Health Administration (OSHA) will probably get busy with new regulations.  One project that was put on the back burner was an injury reporting and reduction initiative.  It could have implications for promotional product safety recognition programs if they move it to the front burner.

HEALTH CARE REFORM

To state the obvious, health care reform is moving forward.  The key provisions kick in in 2014.  There are still some wild cards that could change the course but we would not count on them.

The election result also does mean it is unlikely the new taxes that were embedded in the health care reform law will be reversed before they take effect on January 1st.

As a revenue offset, the health care reform law increases the Medicare Hospital Insurance (HI) trust portion) of the payroll tax to 2.35 percent from 1.45 percent (i.e. a 0.9 increase) on wages or self-employment income over $200,000 for an individual return and $250,000 for a joint return effective January 1, 2013.  There is no limit on the amount of wages or self-employment income that is subject to the tax (unlike the social security portion of the FICA tax, which has a wage cap).  This is an increase in the employee’s share only.  The employer will continue to pay to its 1.45 percent rate share on the employee’s wages.  In the case of the self-employed, they will pay “only” the additional 0.9 percent on the income above the $200,000/$250,000 threshold.

Since the HI applies only to earned income, the law establishes a new “Unearned Income Medicare Contribution” (UIMC) tax.  This is calculated separately from the HI tax and would apply to “net investment income” which is interest, dividends, royalties, rents, gross income from a trade or business involving passive activities, and net gain from disposition of property (other than property held in a trade or business).  The rate is 3.8 percent.  The UIMC tax on net investment income would not apply if modified adjusted gross income is less than $250,000 in the case of a joint return, or $200,000 in the case of a single return.  The UIMC tax takes effect in 2013.

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