Unless Congress and President Barack Obama act, the tax cuts passed in 2001 and 2003, known as the Bush tax cuts, will expire when the calendar turns to 2011.
Previous federal tax schedules will resume, which will raise income taxes for many Americans, particularly those earning more than $250,000 in personal income.
Barring any unforeseen federal action – tax rates are set to revert to 2001 levels. Couples in the highest income bracket ($375,700 and more) will pay 39.6 percent federal income tax rates, up from 35 percent this year.
Families earning between $232,950 and $375,7000 will pay a 36 percent rate, up from today’s 33 percent, while families earning between $210,400 and $232,950 will actually have their rate lowered, from 33 percent to 28 percent.
Business owners and the companies they own and operate may be particularly affected – because many business owners report their companies’ earnings as personal income.
“In February, we started telling our clients that this year’s tax planning might be backwards,” said Thomas Kammerait, tax practice section leader at the law firm von Briesen & Roper, who is also a CPA. “They should be a on a witch hunt to increase their income (this year) and defer later income.”
Michael Berzowski, partner at the law firm Weiss Berzowski Brady, agreed.
“One thing (business owners) can do now is to try to have transactions take place in 2010 to take advantage (of the current tax climate),” he said.
If rising taxes are matched with increased interest rates and inflation, owners of small to middle market companies could be negatively impacted, said Jim Friedman, an attorney with Quarles & Brady.
“If we get rising interest rates and inflation, I don’t know where we could go,” he said. “There could be a lot more individuals and businesses in dire straits. All of these things impact their earning streams.”
There is widespread speculation that Congress may try to extend the Bush tax cuts for one or two more years or adopt some new legislation that could soften the blow of rising income tax rates. The current environment of uncertainty is making it difficult for individuals and business owners to plan for their tax needs for next year, said John Sikora, another attorney with Weiss Berzowski Brady.
“The greatest problem for small businesses is the uncertainty that is created by not knowing what is going to change and how it is going to change,” he said. “My clients say, ‘How do I do anything intelligently until I know what the tax implications are?'”
Michael Burzynski, a partner in the Milwaukee CPA firm Komisar Brady & Co. LLP, said he does not believe that businesses will make layoffs if the tax cuts are allowed to expire. However, some businesses may delay or hold off hiring new employees or purchasing new equipment because of higher tax rates.
“It’s possible that we’ll see businesses that were otherwise looking to hire slowing down,” he said. “I think it’s more going to push in the direction of cost cutting. It’s not going to be a sole factor, but it’s going to be something that will impact decision making.”
Burzynski said some businesses might delay year-end bonuses into 2011, in order to declare them as an expense next year. Some business owners might also rethink about taking some losses this year, and holding them off as expenses until next year, he said.
“Capital gains are one of the other things out there as to how people might make decisions,” Burzynski said. “We may see that people who have previously harvested losses at the end of the year might not do that this year. Next year, they could offset gains at a higher (tax) rate.”
Friedman said an increase on personal income taxes could further hamper the lower end of the middle market mergers and acquisition market, because companies will appear to be earning less.
“Sales of businesses are way down. That’s really because the value of many businesses has declined and people can’t get the price that might induce them to sell their businesses,” he said. “If you raise taxes by letting the legislation (the Bush tax cuts) expire, it’s kind of a double whammy.”
