Here's a question that as of today does 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 a history lesson: 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 followed significant tax cuts during the Reagan administration and Kennedy's short term in office.
There's a clear pattern here: proven three times by the facts as opposed to political posturing. Hey Congress, do you get the message? Lower income tax rates produce larger tax revenues. It's that simple!
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. This is a good start. But look out! Most Democrats would end the tax cuts for families earning more than $250,000. What group of taxpayers do you think earns more than $250,000? These taxpayers are successful owners of closely held businesses. Sorry, but as of now the answer to the question in the first paragraph of this column is "yes" for families earning $250,000 or less and a sad political "no" for families earning more than $250,000.
This is bad news for successful closely held businesses (these businesses typically earn more than $250,000) that we know provide more than 50% of the jobs in our country.
Maybe economic logic can sway enough Congressional votes to keep all of the Bush tax cuts in place. Let's take a look at some of the benefits of keeping income taxes down for all Americans: improve the economy, increase tax revenues, help closely held businesses grow, more jobs and with a little amendment keeping the tax cuts, help alleviate the tragedy of banks not making enough loans to businesses.
One of the advantages of writing a tax column is that I get to talk to business owners all over the country … answering tax questions, solving tax problems, but mostly doing estate planning. No question about it, 2010 for almost every business owner I talk to is a better year than 2008 and 2009. Many are enjoying record sales and profits. But often taxes, even at the Bush tax cut rates, stunt the growth of the business. Growing businesses provide jobs (new employees put almost all of their earnings back into the economy), buy more inventory and 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 is needed. Here's the idea (it’s easier to explain by example). Suppose Success Co., 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% of the $300,000, or $270,000 (the DTC). Now assume that the company’s 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. Now don't be a nitpicker. 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. Do you agree? If so, join me in the fight to keep the income tax law and in addition, help closely held businesses grow. Pass this article on to your friends.
What you can do
How can you help? In two ways: send a copy of this article to your representative in the House and to your two senators; and vote for those members of Congress who support tax cuts.
Let me end on a positive note. I can't tell you exactly when (maybe before the November elections, but certainly shortly after the 112th Congress begins business after the election), 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!
Finally, no matter how the final estate tax law comes out of Congress (whether your net worth is $8 million or $80 million), we have figured out how to legally eliminate the estate tax. To learn how it's done, browse my website: www.taxsecretsofthewealthy.com. If you have any questions or comments, call me Irv at 847-674-5295.
Irv Blackman, CPA and lawyer, is a retired founding partner of Blackman Kallick Bartelstein LLP and chairman emeritus of the New Century Bank, both in Chicago. He can be reached at 847-674-5295, e-mail [email protected], or on the Web at WWW.TAXSECRETSOFTHEWEALTHY.COM.