Wednesday, August 25, 2010

Estate tax debate makes planning for death even more difficult

By Sara Wyant

“My wife and I are trying to do estate planning, but we don’t know how Congress is going to change the law,” lamented an elderly Kansas farmer during a recent meeting. “Do you have any idea of what they are going to do?”

Unfortunately, the estate tax picture, as well as the general tax picture in Congress, is about as clear as mud right now. As you may know, the federal estate tax expired December 31, 2009 after Congress was unable to reach an agreement on either a permanent or short-term extension. There is no federal tax on estates if you die this year, but then the death tax comes back with a vengeance.
The tax will be re-instated on January 1, 2011, with only a $1 million exemption and a 55% tax on amounts over that level--- unless Congress takes action to change the law. As a result, even smaller farms and businesses could end up paying a bucketful of taxes when the owner dies next year.

Several lawmakers have introduced bills to raise the exemption and change the tax rates. But changing the law won’t be easy. The Statuatory Pay-As-You-Go Act of 2010, enacted in February 2010, requires that any changes to the estate tax beyond a two-year extension of 2009 law must be fully offset by cuts in programs or revenue raisers. In 2009, there was a $3.5 million exemption on estate taxes with a 45% top tax rate. An estate tax bill was passed by the House last year that would basically reinstate the 2009 exemption and rates.

In addition to the estate tax, there are a multitude of tax issues that need to be tackled before year’s end. The biodiesel tax incentive lapsed at the end of 2009 and has yet to be renewed. As a result, dozens of biodiesel plants are idling and investors are losing their confidence in renewable energy. Later this year, the Volumetric Ethanol Excise Tax Credit (VEETC), widely known as the "Blenders' Credit" is set to expire. Last, but certainly not least, are the “Bush” tax cuts that you hear about so often about in political debates. If these tax cuts are not renewed, you could see tax increases in individual rates, capital gains, and dividends.

Fiscal war?

Tax issues could brew into a fiscal war of sorts for the country. President Obama wants to allow the Bush tax cuts to expire for individuals making more than $200,000 a year and for couples making more than $250,000. Regarding the estate tax, Administration sources say the president’s position is to restore the estate tax and extend it at the 2009 rates.

Several GOP lawmakers are fighting to reduce the estate tax and continue the previous tax cuts. They argue that, with the economy sagging and millions unemployed, it’s exactly the wrong time to force small business owners to pay more taxes. Doing so will place an additional damper on economic recovery.
Yet, others say that continuing the current tax cuts will be fiscally irresponsible and add to an already alarming federal deficit. The Congressional Budget Office recently forecast that the federal deficit will reach $1.34 trillion for this fiscal year.

Even former Federal Reserve Chairman Alan Greenspan, an influential voice in favor of the first Bush tax cut in 2001, weighed in recently. On NBC's Meet the Press Aug. 1 he said that extending the cuts without making offsetting spending reductions could prove "disastrous."

"I'm very much in favor of tax cuts, but not with borrowed money," said Greenspan.
Tax package ahead?

When the Senate returns in mid-September, lawmakers are likely to consider a small business bill which could include a “fix” for the estate tax problem. The American Farm Bureau Federation is supporting an amendment to the small business bill that was introduced by Sens. Blanche Lincoln (D-AR) and John Kyl (R-AZ.). Their measure would set the estate tax exemption at $5 millionwith a 35 percent maximum rate.

Another bill, introduced by Sen. Diane Feinstein (D-CA), would defer estate taxes on farms and ranches if a number of conditions are met. Her “Family Farm Estate Tax Referral Act of 2010, includes provisions that the farm must be passed on to an individual or family member who has been materially engaged in its management and operation for at least five years, and the heirs must continue to use the land for farming purposes.

A “recapture tax” would be owed if the farm or ranch was subsequently sold outside the family or was no longer used for farming or ranching. The tax due would be based on the value of the estate at the time the property is sold or ceases to be used for farming or ranching.

Yet another measure has been introduced by Sen. Bernie Sanders (I-VT.). His bill is cosponsored by Sens. Tom Harkin (D-IA), Sheldon Whitehouse (D-R.I.), and Sherrod Brown (D-OH). The bill would exempt the first $3.5 million of an estate from federal taxation ($7 million for couples), the same exemption that existed in 2009, and create a progressive rate so the so called “super wealthy” pay more. The tax rate for estates valued between $3.5 million and $10 million would be 45 percent, the rate on estates worth more than $10 million and below $50 million would be 50 percent; and the rate on estates worth more than $50 million would be 55 percent.

The AFBF supports the Lincoln/Kyl amendment because it seeks a permanent forgiveness of estate taxes while the Feinstein bill is a deferral with taxes owed if property were ever sold outside the family or ceased to be used for agriculture.
The National Farmers Union sent a letter of support for the Lincoln/Kyl bill, but their policy actually calls for a $4 million individual exemption. Chandler Goule, NFU’s VP for Government Relations says the Lincoln/Kyl measure is preferable to current law and says a conference between the two chambers could come close to what NFU has been supporting.

Failure to include estate tax reform in the Small Business bill increases the likelihood that estate tax reform will be included in a major tax package that is expected to be considered in a “lame duck” session after the mid-term election, says Patricia Wolff, Director, Public Policy for AFBF.

Where the offsets would come from to pay for estate tax reform or other changes in the tax code is still anyone’s guess.

Sen. Maria Cantwell (D-WA) has circulated an idea that would allow individuals to prepay their estate tax, based on current value. Conceivably, the federal government would receive more money up-front, but could lose money if an individual’s assets appreciate considerably between the time they pay and the time they die.

One relatively piece of good news for those of you trying to plan: There is little opposition to a stepped-up basis on asset values, says Wolff, so any of the proposed “fixes” will likely allow any appreciation of the affected property that occurred during a person’s lifetime to never be taxed.

Tuesday, August 10, 2010

More red tape for your farm?

Congress created new record-keeping requirements that could burden farms, small businesses

By Sara Wyant

A little-known provision tucked into the health care reform bill that President Obama signed into law this spring could have costly and confusing impacts on farmers and small business owners.

The new regulations, which kick in at the start of 2012, require any taxpayer with business income to issue 1099 forms to all vendors from whom they purchased more than $600 of goods and services that year and report on forms filed in 2013. That means supplies, parts, or any of the goods that you might purchase to run your farming operation or business.

“A laundromat that buys soap each week would now have to issue a 1099 to their supplier and the IRS at the end of the year. A landscaper who buys lawn fertilizer a couple of times a month will now be forced to issue 1099s to the companies they do business with, and no one is excluded,” lamented Sen. Mike Johanns (R-NE) in a recent speech on the Senate floor where he argued for full repeal of the new regulations.

The Patient Protection and Affordable Care Act (PPACA) provision would apply to businesses of all sizes, charities and other tax-exempt organizations, and government entities. These would include two million farming businesses, 26 million non-farm sole proprietorships, four million S corporations, two million C corporations, three million partnerships, one million charities and other tax-exempt organizations, and probably more than 100,000 federal, state, and local government entities, according to a report released by National Taxpayer Advocate Nina Olson.
The provision has nothing to do with health care, other than to help generate more tax revenue to pay for the mammoth reform package by reducing the “tax gap.” The federal government misses out on over $300 billion each year from tax underpayment, according to a report issued by the General Accountability Office in 2007. Requiring the additional 1099 paper trails are an attempt to help the Internal Revenue Service (IRS) find businesses that may not be paying their fair share of taxes.

But along with additional tax revenues, the new regulations will likely create a paperwork nightmare for farmers and small business owners and yes, even the IRS. Although the rules have not yet been finalized, Olson highlighted a number of the challenges in her report: “National Taxpayer Advocate's FY 2011 Objectives Report to Congress”.

“First, vendors will have to furnish, and businesses will have to collect, TINs (Tax Identification Numbers). If the vendor is a sole proprietor who uses his or her Social Security number (SSN) as the TIN, there could be identity theft concerns, especially if TINs essentially become public through routine printing on receipts. Alternatively, such a vendor could obtain an Employer Identification Number (EIN). If a vendor fails to furnish a correct TIN, the business is required by law to impose back-up withholding at the rate of 28 percent of the purchase price.”
“Second, businesses will now have to keep records of all purchases sorted by TIN. Under prior law, a business may have retained sufficient records to substantiate lump-sum ex-pense deductions. Under the new law, the business will have to segregate its records by vendor TIN to determine whether the $600 annual threshold is met for each vendor.

“Third, businesses will have to produce and transmit information reports, including many not previously required. For this purpose, small businesses may have to acquire new software or pay for additional accounting services, incurring additional costs. Moreover, if a business makes qualifying purchases from at least 250 vendors during the calendar year, it will be required to file Forms 1099 electronically, which may require the business to pay a per-report fee charged by an e-file service provider.
“Fourth, the IRS will face challenges making productive use of this new volume of information reports. In general, the IRS’s document-matching system (known as the Automated Underreporter (AUR) program) compares amounts shown on a taxpayer’s tax return with amounts shown on third-party information reports like Forms W-2, Wage and Tax Statement, and Forms 1099.

For example, it matches wages shown on a Form W-2 with wages reported on a tax return and interest shown on a Form 1099-INT, Interest Income, with interest reported on a tax return.Under the expanded reporting regime, however, the amounts on the information reports and the tax returns will not match under the rules for at least two reasons. First, total annual payments under $600 will not be reported by the purchaser on Form 1099 but must be reported by the vendor. While the $600 threshold existed under prior law, if a significant proportion of a vendor’s proceeds comes from small purchases, PPACA reporting would be underinclusive. Second, the goods market is subject to a high rate of returned items that result in refunds to the purchaser. If a business purchases and then returns goods, the vendor does not have any income. Yet depending on how the purchaser’s record-keeping system is set up, a Form 1099 may be filed showing the purchase (particularly if the purchase occurs in one tax year and the return occurs in the following tax year).”

At any rate,”it will be challenging for the IRS to sort these payments out,” reports Olson in her report to Congress. “In our view, it is highly likely that the IRS will improperly assess penalties that it must abate later, after great expenditure of taxpayer and IRS time and effort.”

Under a proposed regulation to streamline data collection, many business purchases made with credit or debit cards would be exempt from the new reporting requirement because they are already reported by banks and other payment processors. But even this proposed rule has come under attack from small business groups that want to pay with cash or check to avoid costly credit card fees. The IRS is accepting public comments on the new rule until Sept. 29, 2010.

Will Congress repeal?

Even before the new rules take effect, several lawmakers are trying to repeal this proposal altogether and a key Senate vote is scheduled for mid-Sept. Both Republicans and Democrats want to change the rule, but they differ in their approaches and methods of paying for them.

For example, Sen. Mike Johanns (R-NE) introduced S.3578, the Small Business Paperwork Mandate Elimination Act, which would totally repeal this provision and prevent what he describes as “a massive new paperwork requirement from being imposed on businesses.” This is a companion legislation to H.R. 5141 introduced in May be Rep. Dan Lungren (R-CA).

"This mandate forces businesses to waste staff time and resources on paperwork that even the IRS says will likely be of little value," Johanns said. "One more mandate that stifles small businesses at the same time that Washington urges them to hire workers. For businesses already struggling to emerge from a recession this would be particularly burdensome, requiring government paperwork for common, everyday purchases. It is nothing more than a government-imposed obstacle to economic growth and job creation.”

Co-sponsors include: Sen. Pat Roberts (R-KS), Sen. John Thune (R-SD), Sen. Christopher Bond (R-MO), Sen. Tom Coburn (R-OK), Sen James Inhofe (R-OK), Sen. Kay Bailey Hutchinson (R-TX), Sen. John Cornyn (R-TX), Sen. Mike Enzi (R-WY), Sen. John Barrasso (R-WY), Sen. Mike Crapo (R-ID),Sen. James Risch (R-ID), Saxby Chambliss (R-GA), Sen. Johny Isakson (R-GA), Sen. Richard Burr (R-NC), Sen. Lamar Alexander (R-TN), Sen. John McCain (R-AZ),Sen. Lindsey Graham (R-SC), Sen. Richard Lugar (R-IN), Sen. Lisa Murkowski (R-AR), Sen. John Ensign (R-NV), Sen. David Vitter (R-LA), Sen. George Voinovich (R-OH), and Sen. Scott Brown (R-MA). The lone Democrat to sign on this far is the chairman of the Senate Agriculture Committee: Sen. Blanche Lincoln (D-AR).

To pay for the change, Johanns lowers the affordability exemption for the new individual mandate from 8 percent to 5 percent, making fewer people subject to the individual health insurance mandate. The amendment also proposes that a $15 billion fund for wellness programs not be funded until 2018.

Sen. Bill Nelson (D-FL) plans to offer another amendment that would not repeal the record-keeping measure but would change the reporting threshold to from $600 to $5,000. His alternative is paid for by changing Section 199 of the tax code, which allows the nation’s largest oil companies to deduct six percent of their income from oil and gas production from their tax liability, effective Dec. 31, 2010.
Some of the nation’s largest small business groups and the American Farm Bureau Federation are lobbying for full repeal.

“The only option to address this widely-agreed upon onerous 1099 provision on small businesses is full repeal,” emphasized Susan Eckerly, senior vice president at the National Federation of Independent Business in a statement. “Congress needs to stop speaking out of both sides of their mouth. If they are truly interested in helping small businesses – whatever their size – they will pass legislation that fully repeals this burdensome new requirement.”