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Sunday, March 23, 2014

Income Taxation: What Changes Will 2014 Bring?


Two little words can be used to describe what I predict will happen to the tax law in 2014: not much.

There are currently proposals and ideas circulating in both houses of Congress that include wholesale changes that go right to the core of our tax system. There are also rumors that tax changes would be on a much smaller scale and focus only on tax benefits that expired at the end of 2013.

In any case, there doesn’t seem to be much interest in Congress or from the president to spend significant time and effort in this area. But, this isn’t for lack of effort in 2013.

Last year, the House and the Senate crafted several bills and plans that have already altered the tax code, a few of which are explained herein.

Tax Law Overhaul
The House and the Senate have been working independently on tax overhaul bills that would have a significant impact on the majority of taxpayers. The Senate’s “discussion draft” created under Senator Baucus got a lot of press for the contentious changes he included such as limiting the “cash-method” of accounting to smaller businesses, and a complete overhaul of how foreign earnings are taxed. But there are several hurdles that Congress will face:

  • Senator Baucus has just been nominated for U.S. Ambassador to China, and it’s unclear how tied his successor is to this “discussion draft.”
  • Revenue Neutral or Revenue Raiser: Democrats and Republicans differ on if this wholesale change would result in a tax increase or not.
  • 2014 is an election year. While most Americans are for tax reform, when it comes to taking away a tax benefit that a Congressmen’s constituents enjoy, that’s a very politically sensitive thing to have to do.
  • Finally, the last tax overhaul happened in 1983. Given how dysfunctional our current Congress is, pulling something like this off would be extremely difficult.

Extending Expired Tax Incentives
Some of the tax incentives that expired in 2013 were very popular (including credits for R&D activities and “bonus” depreciation). The Senate crafted a bill to retroactively extend nearly sixty of the expired incentives through the end of 2014. So far, many are holding out for that wholesale change in the tax code.

The “Buffet Rule” Tax
This tax is named for Warren Buffet’s idea that the wealthy should be subject to a minimum tax rate of 30 percent. While the name of this law is interesting, Republicans in the House have no interest in it.

International Overseas Profits
This bill, which has support in both houses, would end the income tax deferral on corporate profits earned by US companies overseas. However, this bill was written about a year ago and doesn’t seem to be gaining traction.

Here are a few things I believe Congress should be focused on.

Internet Sales/Use Tax
States are becoming more and more aggressive in collecting sales taxes on internet purchases. The Supreme Court decided not to hear a case in this area where some guidance could have been given. This means that the ball is now back in Congress’ court to figure out what to do next.

Mobile Work Force Income Tax
Many state laws impose tax on a person or business working in that state even for one day. Yes, pro-sports players’ state tax filings are incredibly voluminous.

Congress has attempted to reduce this burden by drafting legislation that would increase the number of days for which an individual would have to be present in that state to more than a month out of the year to allow the state to tax that person. Sadly, this effort essentially went nowhere.

These state tax provisions are outdated for today’s business climate where even a small scale business can easily have customers and business interests in several states. Given that there are nearly 7,000 different state, county and city jurisdictions that assess tax, the high amount of compliance involved puts a severe burden onto these businesses.

Tax Reform Update
Representative David Camp, Chairman of the House Ways and Means Committee, has proposed sweeping tax reform that would literally impact all forms of taxpayers (and non-tax payers). Unlike acts of the past, the “Camp Act” would be true tax reform simplifying a complex and distortional tax code from top to bottom. The reality is that it is dead on arrival. This is clear from the immediate outcry of criticism from all quarters of industry, small business consortiums, think-tanks and politicians. With a highly divided-Congress lacking the ability to accomplish the most simple matters, tax reform propositions of this magnitude are impossible. However, it certainly gives us all a glimpse of proposals we may see in the future presented on a piecemeal basis.

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