Wake up, Congress!
Use the tax laws to help our economy recover
Irv Blackman is a certified public accountant and lawyer
Here’s a question that as of July 31, 2010 did not have a clear answer: Will Congress extend the Bush tax cuts that became law in 2001 and 2003 and are scheduled to expire after 2010?
First, a bit of history. When the income tax rates were cut by Congress at the turn of the century (known as the “Bush tax cuts”), the amount of income tax revenue actually went up in the years that followed. The same result – increased tax revenues - followed significant tax cuts during the Reagan administration and Kennedy’s short term in office.
WHOA!!! There’s a clear pattern here: proven by the facts, as opposed to political posturing. Lower income tax rates produce larger tax revenues.
Yet here’s the current Congressional position: A majority of Democrat and Republican lawmakers want to keep the Bush tax cuts for families that earn $250,000 or less. A good start.
But others would end the tax cuts for families earning more than $250,000. These families are most often successful owners of closely held businesses.
Sorry, but as of now the answer to the question in the first paragraph of this article is “yes” for families earning $250,000 or less and a sad political “no” for families earning over $250,000.
It’s bad news for successful closely held businesses, which typically earn over $250,000 and provide over 50 percent of the jobs in our country.
Let’s take a look at some of the problems that would be helped by keeping income taxes down for all Americans: (1) improve the economy; (2) increase tax revenues; (3) help closely held businesses grow; (4) more jobs and (5) with a little amendment to keeping the tax cuts, help alleviate the tragedy of banks not making enough loans to businesses.
I get to talk to business owners all over the country. No question about it, for almost every business owner I talk to 2010 has been a better year than 2008 or 2009. But often taxes - even at the Bush tax cut rates - stunt the growth of the business. Growing businesses provide jobs, buy more inventory, equipment and make other necessary business expenditures. The ripple effect is positive for other businesses, their employees and, of course, the economy.
But growth requires capital to fund increased inventory, receivables and equipment. Bank loans - the traditional way of funding business growth - is usually not available in these crazy economic times.
What to do? An amendment to the Bush tax cuts. Here’s the idea (it’s easier to explain by example). Suppose Success Company (Success), a closely held business, has a total of $1 million in inventory, receivables and fixed assets (basically equipment, computers and vehicles used in the business) on December 31, 2010. Suppose at the end of the 2011 the same group of assets total $1.3 million, an increase of $300,000. Success would get a deferred tax credit (DTC) of say 90 percent of the $300,000, or $270,000 (the DTC). Now assume that Success’ income tax bill is $370,000. The DTC would reduce the amount due to the IRS to $100,000 ($370,000-$270,000).
Each year the computations of the DTC would be done again, resulting in an increase of the DTC or payment of the prior year(s) tax because of a DTC decrease. Of course, there would be rules to help qualified small businesses grow, yet prevent cheats from cutting their taxes by misuse of the DTC rules.
Now, take a moment and go back to read the five positive impacts that lowering taxes will have. If you agree, join me in the fight to keep the income tax law, and in addition help closely held businesses grow. Contact your Congressional representatives. Vote for those that support tax cuts.
Let me end on a positive note. I can’t tell you exactly when, but the estate tax will be changed to ease your potential estate tax liability. Between $3.5 million (the House version) and $5 million (the Senate version) of your wealth will be estate tax free. That’s between $7 million and $10 million for you married folks. Nice!
Irv Blackman is a certified public accountant and lawyer who specializes in estate planning, business succession and asset protection. www.TaxSecretsofTheWealthy.com. 847-674-5295.