Despite its significant tax increases, President Obama's 2011 $3.8 trillion budget plan contains a number of revenue provisions calculated to encourage business expansion and move the economy upward.
"The extension of the liberal depreciation rules that expired at the end of last year will help the economy," said Lewis Taub, tax director at RSM McGladrey's New York office. "Specifically, the budget proposes to extend both bonus depreciation and the increase in expensing for small business. This is intended to encourage investment by business in property to expand plants and add equipment. The more you expand, the more you need to hire someone to run the equipment."
Obama touched on many of the budget items pertaining to job creation and similar incentives in his State of the Union address, but Tom Ochsenschlager, vice president of taxation at the American Institute of CPAs, said that as a result of the acrimony between the Republicans and the Democrats, it would be difficult to predict which items will reach across the aisle.
However, the president's proposal to eliminate long-term capital gains tax on small businesses, as well as employers' Social Security tax on new employees, would, according to Ochsenschlager, be ones that would be likely to pass, as both parties have pledged to stimulate job growth. But he pointed out that, as a result, less money would be going into Social Security, which currently is cash-flow negative.
For tax years 2008 and 2009, the maximum Section 179 deduction was increased from $125,000 to $250,000. Without the extension, qualifying property placed in service after 2010 would be limited to the pre-2003 limit of $25,000 for the maximum deduction. The additional first-year 50 percent bonus depreciation also expired at the end of last year, but would be extended for a year.
"This is all designed as an incentive for businesses to grow and invest in themselves, which will lead to more hiring," said Taub.
Likewise, the proposed extension of the more favorable depreciation treatment for leasehold improvements should encourage businesses to expand, Taub added. "The depreciation period used to be 39 years, but it was shortened to 15 years for 2008 and 2009," he said. "The proposal keeps the 15-year provision through 2011. This is a way to encourage expanding businesses by reducing their tax."
Two other provisions are particularly helpful to a recovering economy, Taub observed: "The elimination of capital gains tax on investments in small-business stock is an incentive for people to invest in small business. It's a way of getting more capital into the company."
Under the proposal, the percentage exclusion for qualified small-business stock sold by an individual or other non-corporate taxpayer would be increased permanently to 100 percent and the Alternative Minimum Tax preference would be eliminated.
"And making the research credit permanent would remove some of the uncertainty in long-range planning for research activities," he said. "Whenever the credit expires, everyone thinks it will be extended, but no one knows until Congress actually gets it done. If it's made permanent, people not only get to keep their jobs, but additional people will be hired."
TAKING WITH THE OTHER HAND
Even with the number of tax cuts for business, the budget proposals don't impress George Pieler, a Washington-based tax attorney and former tax counsel to the Senate Finance Committee.
"It shouldn't get any credit for tiny tax cuts in the face of such massive tax increases," he said. "When you net it out, it doesn't get a passing grade."
The budget allows the 2001 and 2003 Bush administration's tax cuts to expire for families making over $250,000 a year, and raises their top two marginal tax rates from 33 and 35 percent to 36 and 39.6 percent, respectively. The president also proposed raising the tax rates on dividends and capital gains from 15 percent to 20 percent for taxpayers with incomes over $250,000 a year. Meanwhile, higher taxes on businesses include the bank tax proposal, designed to recoup some of the money lent to banks as part of the Troubled Asset Relief Program.
"Just before the budget was proposed, President Obama asked for, and the Senate passed, a revival of the PayGo law. It requires that any policy change that might lose revenue has to be offset dollar for dollar, so that already rules out the possibility that there would be net tax cuts," Pieler said. (This is in contrast to the congressional PayGo rule, which is frequently waived.)
But the budget is nothing more than a compendium of proposals the administration hopes to bring up during the year, Pieler noted. "The House and Senate are supposed to propose their own budget and agree on one, but for the most part it's not a binding document," he said. "It's a blueprint, and they may or may not pass legislation reflecting it. It gives some constraint on either side to work within, and Congress generally at least gives lip service to the budget it adopts."
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