The President’s hand picked “Economic Recovery Advisory Board (PERAB)” has issued their findings. Wait until you read what they think will help the economy. Guess who gets the target squarely on their back….again. Small business.
There were some real shockers in the report, at least for me.
I’ve outlined a few of the items I’m most concerned about. You can go to this Government siteto read the entire report.
Normally I try to be objective in reporting tax news. Sorry, can’t do that this time. These changes could be the final straw for many struggling small businesses and some of the plans might sound good on paper, but I can’t see how they could possibly be implemented, at least not without a lot of chaos.
Small-business bank reporting. If you’ve ever had the bank make an error on your account, this proposal should make you shudder.
Small businesses would be required to keep a separate bank account for their business (separate from personal). So far, so good. But then, banks will report the receipts and expenditures from those accounts to the IRS. Can you imagine the mess that will create?
Withholding for independent contractors. If you make a payment to an independent contractor or, for that matter, pay almost any other business for products or services, you’ll have to do a tax withholding on the payment. Sounds an awful lot like what you have to do with employees. A lot more paperwork plus the government keeps your money. And, what if the receiving entity doesn’t have the much of a margin. They may have to wait for their refund for months, while meanwhile their company is hit once again with a cash flow shortage.
Multiple-year audits for small businesses and individuals. The idea here is to make more returns available for audit. The IRS would be able to extend audits beyond the current three-year statute of limitations if a state audit reveals changes and could re-open earlier years if they find noncompliance.
New self-employment tax rules. All partners, S corporation shareholders and LLC members would be responsible for paying self-employment tax. Congress tried this already once, but couldn’t get it past the Senate. Hopefully it gets stopped again.
Eliminate like-kind exchanges. What? This one caught me by surprise. The program calls for eliminating the ability to roll-over gain from real estate into another investment. You’ll have to pay the tax right now (if this passes).
Reduce itemized deductions. Ostensibly to make tax filings easier, the report suggests that itemized deductions be cut way back and the standard deduction is increased. That means the W-2 wage earner can say good-by to pretty much all of their deductions, including the home mortgage interest deduction. Looks like another blow to the real estate market may be coming.
Capital gains rates – The report notes that the zero-percent rate on capital gains for taxpayers in the lower brackets raises questions about whether middle-income taxpayers should pay some tax on capital gains income. The report provides two options in this area: (1) convert the separate rates on capital gains into a 50 percent exclusion and (2) replace the zero rate with a 5 percent rate for taxpayers in the 10 and 15 percent tax brackets.
Corporate tax changes. There are a number of programs suggested for reforming corporate tax. I’m hoping they go for the option that calls for reducing the current corporate rate by a few percent.
PERAB (who brought us this new proposal) is headed by former Federal Reserve Board Chairman Paul Volcker. Members of the tax reform task force include Laura Tyson, currently one of President Obama’s economic advisors and formerly chairman of the Council of Economic Advisors and director of the National Economic Council during the Clinton administration; William Donaldson, a former chairman of the Securities and Exchange Commission; Martin Feldstein, a professor of economics at Harvard University; and Roger Ferguson, the CEO of TIAA-CREF.