The financial rescue plan approved by Congress last week included many extensions of expiring tax credits and deductions that helped it win passage in the House, but it also left out some tax issues that will surely be bones of contention for the next Congress.
"It's safe to predict that not much will happen in a lame duck session," said Tom Ochsenschlager, vice president of taxation at the American Institute of CPAs.
He was pleased that the final bill contained a provision equalizing the penalty provisions for tax preparers and taxpayers, which the AICPA had lobbied for heavily in Congress. The provision had been included in a number of bills passed by both houses of Congress in the past year, but the bills never made it all the way to the Oval Office for signature, mainly because of disagreements about how to pay for some of the tax provisions, such as the alternative minimum tax patch. "We finally got across the finish line," said Ochsenschlager.
"Dozens of these tax proposals had been languishing in Congress for months," noted CCH principal federal tax analyst Mark Luscombe in a statement. "For some reason, when combined with a financial 'bailout' that had failed passage in the House, the total package became irresistible."
Ochsenschlager pointed out that the tax extenders and AMT patch were passed early enough for the Internal Revenue Service to include the changes in next season's tax forms, avoiding the problems last season when the AMT patch was passed at the last minute.
"They maintained a lot of the popular tax policies, including cutting out 20 million people from the AMT," said David Lifson, managing partner of Hays & Co. and former president of the New York State Society of CPAs. "They did a lot of what could be characterized as biting around the edges of tax fairness programs. For the most part they didn't address the budgetary headaches. They left that to the next administration. One would expect, depending on who is elected president, there will be a cry for several levels of tax reform."
Technology companies will also benefit from the extension of the expired research and development credit. “The most immediate benefit is that companies will now generate a significant cash benefit,” said Ernst & Young’s national director of research credit and technology Tony Mondoro. “The fact that it’s retroactive will be a good source of cash for the companies. With the credit crunch, a number of companies feel that they should plow the money from the credit back into their research.”
The legislation also includes an alternative simplified credit, which Congress ratcheted up from 12 to 14 percent. One proposal had set the rate at 16 percent. David Hudson, a member of Ernst & Young’s national tax research credit group, speculated that the next extension of the credit might include the higher 16 percent rate.
Next year's tax legislation will naturally depend on the outcome of the November election, but the faltering economy will also have an effect. "If this were any kind of normal situation, it will depend on who the next president is," said Ochsenschlager. "For sure there will be some major tax changes no matter which candidate is elected president. Hang onto your hat next year."
Among the provisions set to expire after 2010 is the estate tax cut. "If it's not extended, it goes back to the pre-Bush reductions," said Ochsenschlager. The capital gains and income tax rates will also be coming up for discussion. "The economy being what it is, if it continues in a tailspin, the Democrats are talking more about a stimulus package than the Republicans. It depends a lot on who is elected."
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