The Senate version of Small Business Bill is apparently going to be voted upon by the House of Representatives this afternoon or evening. President Obama will get to sign the bill either tomorrow or next week.
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Planning for the End of the Year
As we move forward this year, it appears that there are three issues that will need our focus. (1) Planning for Capital Gains and Losses and Dividends. (2) Estate Planning, and (3) Alternative Minimum Tax Planning. Today, I’m going to focus on dividends. Unless Congress acts, the dividend rates will go up from 15% Federal tax to your marginal tax bracket (as high as 40%). This means that if Congress fails to act, that stocks which are income sensitive, like utilities for example will go down in value as we approach the end of the year because the tax hit on their dividends will be higher. Thus, it might make sense to consider getting away from taxable dividend paying stocks and mutual funds as we get closer to the end of the year. This also applies to “blue chip” industrial stocks to some degree as well. High dividend stocks may very well be less favorable after the first of the year. Tomorrow we’ll talk about planning capital gains and losses.
Small Business Tax Bill
The 1099 requirement on Landlords is going to have an impact even on the guy renting out one house. Assume that he has one plumber who he paid $600 to install a new dishwasher. First, he has to go to the IRS and get a form 1099MISC (or to an office supply store). He now has to fill out a 1099MISC for the plumber, get his social security (or EIN number), fill out a 1096 to forward the 1099 to the IRS (which probably was not part of the package he originally got), and then put a stamp on it to mail it to the IRS. That will take him 2 hours of time plus the gas to go to the IRS to get the forms, plus postage stamp. All told compliance will cost him $300. Tax generated to IRS by the 1099 = $250. Or he’ll choose not to deduct the $600 on his taxes and avoid the hassle. Aside from the fact, he just broke the law, his tax savings cost would only be $170. In other words, he saves $130 in taxes. If Congress had thought of making the reporting level $5000 (as recommended by Senator Nelson), it would have been reasonable. This is going to fuel the fire for independents who don’t mind paying their taxes, but hate the paperwork, if passed by the House and signed by the President.
Small Business Bill Continued
Over the weekend, I noted that there is one very difficult piece of the Small Business Tax Bill. That is the provision that requires landlords to get EIN’s from Service providers for payments over $600. So, Sam owns a condo at the Beach that he rents out. He contracts a HVAC guy to fix the Air Conditioner Unit. The bill comes to $800 including parts and labor. He then needs to ask the HVAC guy for his EIN or Social Security Number. The guy who comes to fix the heater says, “I ain’t gonna give you my social security number, I don’t give that out.” Then Sam hires a char service owned by Juanita. He asks Juanita for the company’s EIN, and she says she doesn’t have one because, we’ll she pays her workers in cash and they don’t all have no social security numbers. Now, Sam has a problem. If he deducts these services on his tax return, the IRS is going to ask him where the 1099’s are. He goes, I asked and they wouldn’t tell me. So, Sam gets smart, he asks for the EIN before he hires the worker or service provider. Now he files all these 1099’s and discovers that half of the numbers are incorrect and worse, they are someone else’s EIN and they are getting tax notices for income they never received. I heartily recommend small businesses to just put their EIN numbers on their invoices to reduce panicked January phone calls to them. Thank you Congress for giving Small Business a $120 Billion compliance bill. Keep up the good work on fixing that economy.
It appears also that in the final version of the bill, the 10 year GRAT requirement was deleted.
Another provision that was added was that if a C Corporation converts to an S Corporation, it will only have to wait from 5 to 7 years before the built in gain is ignored. That is significant because it avoids the corporate level of tax sooner. Thus if a real estate owner converted his C corporation holding real estate to an S Corporation in 2005, he can now sell his real estate in 2011 and avoid the corporate level of tax on the sale of the land owned by the Corporation. This avoids a potential 40% tax. It is only applicable through 2012 and only if it passes the House and only if the President signs the Bill.
The Small Business Bill
One tax increase that is in the proposed Jobs bill going through Congress right now is that it will limit the availability of the use of Grantor Retained Annuity and Unitrusts to periods of ten years or more. These are also known as “Walton GRATS”. The bill version that I saw indicates that the effective date is the date the Act is signed into law. So, if you’re considering short term GRATs, this is the time to do it or possibly lose it. Update as of 4:00 p.m. The Senate passed the bill. It now goes back to the House for ratification. On the good side if you sell your small business before 2012, you get to exclude up to $10 Million of gain.