Double Taxation: A Take On All Things Taxes

After a week when dreams of $640 million in instant riches took over the national consciousness — with desperate yet misinformed Americans even checking out every available copy of the Shirley Jackson tale from local libraries in search of winning tips – we can all finally get back to accepting that we’ll live out our days as corporate drones. The triumphant numbers have been announced, and they ain’t ours.

There were three winners, to be exact; one in Maryland, Illinois, and Kansas. Each ticket was expected to be worth $213 million, before taxes. 

But where the story ends for those with Mega Millions fever, it begins for CPAs and the like. What are the tax consequences of hitting the jackpot?

The first step towards an answer is understanding the payout options. From the lottery website:

If you are a Mega Millions jackpot winner, you will have the choice of a Cash Option or an Annual Payout.

Annuity option: Provides annual payments over a 26-year period. For every $1,000,000 in the jackpot, you will receive approximately $38,500 per year before taxes.

Cash option: A one-time, lump-sum payment that is equal to all the cash in the Mega Millions jackpot prize pool.

In general, the taxation of lottery winnings is extremely straight forward:

Cash option:

A one-time cash payment is taxed as ordinary income under I.R.C. § 61 and I.R.C. § 74. Lottery winnings are not tax-free gifts under I.R.C. § 102, as the lottery commission did not make them with a “detached and disinterested generosity.”

Given the current tax rate structure, the winners will be sending 45% of their hard-earned money to the IRS.

Annuity option:

Individuals are overwhelmingly cash-basis taxpayers. As such, they recognize income when it is “actively or constructively received.” Typically, if a taxpayer is granted an option between taking cash now or receiving it in installments, they have “constructively received” the income and must recognize it all immediately, even if the annuity option is selected.

Section 451(h) offers a reprieve to this harsh treatment. Provided the annuity payment is received over a period longer than 10 years, a taxpayer will not be treated as having constructively received the value of the winnings. Instead, each annuity payment will be taxed as ordinary income when received.

 In general, the winner has 60 days from the date his numbers are announced to make the election to receive the annuity and qualify for tax deferral.

Sale of a lottery ticket:

This is where things get interesting. Say you win the lottery, and decide you want to do the conservative, fiscally responsible thing and collect your winnings annually as an annuity. Your restraint is limited, however, and after you collect one annuity payment, you decide that your newfound wealth and status isn’t complete without a jumpsuit made from solid gold.

To finance your purchase, you decide to sell the remaining stream of annuity payments for a one-time lump sum payment. Someone offers you a purchase price equal to the present value of the payments, and you happily accept.

This begs the question: does the sale of your annuity stream for a lump sum payment generate capital gain? Is your winning lottery ticket a “capital asset” in which you have a basis equal to its purchase price?

The answers, unfortunately, are no and no. As numerous courts[i] have decided — with perhaps the most commonly cited decision being Davis v. Commissioner, 119 T.C. 1 (July 3, 2002) — lottery tickets are not capital assets, and the sale of future annuity payments generates ordinary income under the “assignment of ordinary income doctrine.”

In short, this doctrine provides that a taxpayer cannot convert future income that would be ordinary income when received into capital gain by selling the right to receive the future income for one-time payment.

Under an alternate argument, the courts have also held that the sale generates ordinary income because unlike the sale of a typical capital asset, the amounts received from the seller upon the sale of future annuity payments are not received due to the appreciation in value of the underlying asset.

Deductions:

To soften the tax burden, the IRS does allow a tax deduction for any gambling “losses” you had. These are taken as miscellaneous itemized deductions that cannot exceed your winnings under I.R.C. § 165(d). If your lottery winnings are payable in annual installments, the installments you receive in future years are still gambling winnings, making losses in those future years deductible to the extent of the installments, even if you have no other gambling winnings in those years. Gambling losses aren’t subject to the 2%-of-adjusted-gross-income floor on miscellaneous itemized deductions.

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The Supreme Court held a little get-together. On Monday, the penalty for failing to acquire health insurance wasn’t a tax. Then on Tuesday it was, but the mandate appeared doomed anyway. Whether the rest of Obamacare goes with it remains to be seen.

Remember kids, working tirelessly to protect your musical legacy — while admirable — is no excuse for failing to pay your taxes.

House Republicans proposed a “small business” bill, that would benefit corporations earning over $1,000,000 more than sole proprietorships. Senate Democrats countered with yet another bonus depreciation/payroll tax credit temporary patch. A frustrated nation shrugged its collective shoulders and went back to watching “Hoarders.”

Just because you’re free to chase ambulances during company time doesn’t mean you’re not an employee.

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Ah…”Rappers Delight.” When those first base notes give way to the familiar “I said a hip hop…” it hearkens back to a bygone era, when rap was simple and pure. Back then, shock value wasn’t important; you didn’t have to rap about slaughtering cops and slinging dope to sell records. As long as it was done over a solid base line, you could write ridiculously harmless lyrics like these, and people would still dig it.

So after school I take a dip in the pool,
Which is really on the wall,
I got a color TV, so I can see
The Knicks play basketball.

Things have evolved, obviously. The turning point came in 1988, when NWA released “Straight Outta’ Compton” and changed the game forever. Rap got angry. And violent. And yes; really, really good.

But as aggressive as the genre became, at least it was — for the most part — false bravado. Those guys bragging about pimpin’ and drive-bys weren’t actually criminals (well, except for Slick Rick).

Now today’s rappers…these guys are terrifying. If you’re not an ex-con, shoot-out survivor, or  a little white guy from Detroit, you’ve got virtually no chance of being taken seriously.

But I digress. The point is, while rap has undergone a staggering metamorphosis in the past three decades, one element of the industry has remained constant from old school through today: rappers hate paying taxes.

That hatred can  now be traced all the way back to rap’s genesis, as the three brothers who started Sugar Hill Records —  the trailblazing rap label that gave birth to the aforementioned “Rapper’s Delight,” the genre’s first Top 40 hit — are currently in a heap of hot water with the IRS. From Bloomberg:

Leland, Rhondo and Joseph Robinson Jr. admitted today in federal court in Newark, New Jersey, that they didn’t file returns from 2005 to 2008 that would have declared royalties from their ownership of Sugar Hill Music. The brothers failed to pay $1.28 million in taxes and also owe interest and penalties. Each pleaded to two misdemeanor counts covering a different tax year and also admitted to related conduct for failing to file in two other years. They face a year in prison on each count.

That’s right. If things go wrong, it’s not a ho-tel, mo-tel, or Holiday Inn the Robinson brothers will be residing in, but prison. But don’t fret for the Sugar Hill Gang too much, as their attorney, Henry Klingeman,  has an air-tight alibi for his clients’ noncompliance:

“They’ve been concentrating on protecting their current musical legacy instead of fulfilling their tax obligations,” he said.

Whew…glad we’ve cleared that up. Carry on, gentlemen.

To the Robinson brothers’ credit, they’ve remained optimistic throughout their recent fiscal ordeal, as evidenced by this statement released through their attorney:

A Skiddleebebop, we rock, Scooby Doo,
And guess what, America, we love you
‘Cause you rocked and a rolled with so much soul,
You could rock ’til a hundred and one years old.
I don’t mean to brag, I don’t mean to boast,
But we like hot butter on our breakfast toast!

I have no idea what that means, but I’ll be damned if it’s not provocative.

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If you’re a business owner, there’s few easier ways to save a couple of bucks than to treat your workers as independent contractors. By doing so, you shift the burden of one-half of the employment taxes on any compensation you pay them away from you, as the employer, and on to them. Let them deal with the tax bill, while you kick back and light a Cuban purchased with your extra change.  

Of course, aside from issues of morality and fairness, there is that little matter of the IRS to deal with. Employee classification issues have long been a hot topic for the Service, who want to make sure the proper taxpayer is bearing the burden of payroll taxes.

Consider the case of Donald Cave. Cave operated a small law firm complete with three associate attorneys,  law clerk, and an office manager. The firm was established as an S corporation.

Cave performed substantial services for the firm; in addition to maintaining an active trial practice, he also did all the hiring and made other key management decisions.

Cave preferred to hire his associate attorneys right out of school. Key terms of their service to Cave included the following:

• They were not required to work from the office or work set hours, nor were they required to account for their time.
• They were not required to sign employment contracts or noncompetition agreements. They were free to provide services elsewhere if they chose, though there was no evidence they any of the associate attorneys ever did so.
• They were referred cases by Cave and were encouraged to find their own cases. As incentive, they received 1/2 of the fees they collected on cases they generated, but only 1/3 on cases referred to them by Cave.
• Cave recommended that the attorneys attend seminars, read certain articles, and attend one or two of Cave’s trials.
• Cave would often advance an attorney the expenses of litigation. If the case resulted in victory, Case would be reimbursed from the proceeds. If he case did not result in victory, Case bore the risk of loss for the advanced funds.
• On cases where Case advanced funds to an attorney, he required oral status updates.
• Cave provided to each attorney an office, furniture, janitorial services, and all the other accouterments of standard cubicle life.

On the S corporation’s tax returns for 2003 and 2004, neither Cave nor the associate attorneys were treated as employees. Cave took no salary from the S corporation, but did take substantial distributions. The associate attorneys were treated as independent contractors and paid on a Form 1099-Misc.

The IRS took issue with this treatment; arguing that Cave and the associate attorneys were all employees of the S corporation, and thus the corporation was liable for employment taxes on the distributions paid to Cave and the non-employee compensation paid to the attorneys.

The Tax Court upheld the Service’s determination[i], and earlier this week, the Fifth Circuit affirmed the court’s decision.[ii]

Both courts had a simple task in concluding that Cave should have received a salary from the S corporation. Under I.R.C. § 3121 and scores of S corporation cases, any shareholder-employee who renders significant services must receive a salary. Since Cave was an active participant in the law firm, a portion of Cave’s distributions were reclassified as salary, on which the corporation was liable for employment taxes.[iii]

With regards to the associate attorneys, the courts examined six factors routinely considered in deciding whether a worker is a common law employee:

Degree of control: If the principal controls the work of the underlings, it is evidence of an employer-employee relationship.

Good news: Cave provided minimal training and supervision, and the associate attorneys were not required to work from a particular location, to work particular hours, or to account for their time.

Bad news: Cave controlled the assignment of cases and decided which cases would be eligible for advanced funding.  Cave also required oral status reports, reviewed the work of the associate attorneys, and required their help on his personal cases.

Verdict: Indicative of employer-employee relationship.  

Investment in Facilities: the fact that a worker provides his own tools indicates the worker is an independent contractor.

Good news: none

Bad news: Cave provided the attorneys with everything they needed to do their work: an office, furniture, access to a legal library, etc…

Verdict: Indicative of employer-employee relationship.

Profit or Loss: If an individual controls their ability to make additional profit and also bears the risk of loss associated with their work, it is evidence they are an independent contractor.

Good news: The associate attorneys could increase their earnings by bringing in their own clients.

Bad news: The associate attorneys bore no risk of loss, since if Cave advanced funds to them and they lost the case, they did not have to reimburse him.

Verdict: Neutral 

Permanence of relationship: Permanence is indicative of an employer-employee relationship:

Good news: The attorneys did not have to sign employment contracts or covenants not to complete.  

Bad news: Each attorney had worked for Cave for over three years, and had never provided services for any other law firms.  

Verdict: Indicative of an employer-employee relationship.

Skill required in operation: The more skill required, the more likely there is no employer-employee relationship:

Good news: The attorneys were highly educated professionals.

Bad news: The attorneys had no experience, and were not specialists called in to solve a particular problem.

Verdict: neutral

Other factors: Legal services were the S corporation’s only source of income, and the associate attorneys were an integral part of the law firm’s business.

Taken together, these factors convinced both the Tax Court and upon appeal, the Fifth Circuit, that the associate attorneys were, in fact, employees. The S corporation was thus liable for its share of the employment taxes on all compensation paid to th associate attorneys.

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Day 3 of the Supreme Court’s Obamacare hearings, while lacking the luster of the constitutionality debate of Day 2, remained of utmost interest to CPAs and their wealthy clients. The topic for the day was “severability;” with the justices addressing the following hypothetical question: Assuming the Supreme Court strikes down as unconstitutional the requirement that all individuals acquire health insurance, does the rest of the Patient Protection and Affordable Care Act have to go with it?

As a reminder, there were some other rather important provisions in the Act, particularly:

• Higher Medicare taxes will be imposed upon wealthy taxpayers beginning in 2013. Section 3101(b)(2)will be amended to include an additional tax of 0.9 percent on all wage income in excess of $200,000, or $250,000 for joint filers.
• Starting in 2013, Code I.R.C. § 1411 creates a 3.8 percent Medicare tax on investment income in excess of $250,000 for joint filers, $125,000 for married filing separately, and $200,000 ―in any other case.

Considering the Bush tax cuts already hang in the balance of the November elections, if these provisions remain part of the Code, the current top rate on dividend and interest income could climb as high as 43.4% in 2013. (the return to the 39.6% pre-Bush tax cut top rate + the 3.8% additional Medicare taxes). Needless to say, the nation’s rich had a vested interest in yesterday’s hearings, rooting for the court to conclude that the Act cannot be severed, and it all must go.  

What makes severability a complicated concept with regards to the Patient Protection Act is the interrelationship between many of the key provisions. For example, in addition to requiring all individuals to acquire health insurance or pay a tax penalty, the Act also mandates that insurance companies must guarantee coverage to an applicant. These two provisions were to work in tandem to provide health care to all while simultaneously reducing costs.

If the individual insurance mandate is declared unconstitutional, however, while the “guaranteed coverage” clause remains, both goals of Congress in enacting the statute will not be met. If individuals are not required to obtain insurance but can rest assured that whenever they’ll need it, they’re guaranteed to be covered, they’ll refrain from purchasing insurance for as long as possible. This will dilute the number of active participants in the insurance market, resulting in skyrocketing costs for those who are insured. Thus, the opponents to the Act argue, if the insurance mandate goes, everything else should go with it.

The government, on the other hand, maintains that even in the event the insurance mandate is ruled unconstitutional, the remainder of the Act should remain valid law, including the Medicare surcharges discussed above.

While today’s debate was spirited, unlike Days 1 and 2 there seemed to be no consensus on which direction the Court will head. CNN interpreted the justices as leaning towards severing the insurance mandate, while MSNBC took the contrary view, reacting to today’s testimony with a strong feeling that the entire Patient Protection Act is doomed.

Our view? After reading today’s transcript, we could easily see this issue going either way. While its dangerous to read too heavily into oral testimony, the justices seemed split on whether removing the insurance mandate cuts the heart out of the Act, rendering the rest of it toothless, or whether salvaging the remaining provisions is possible.

Justice Scalia, questioning who would bear the burden of picking apart the Act piece by piece to determine which provisions are constitutional and which have to go:

Mr. Kneedler, what happened  to the Eighth Amendment? You really want us to go through these 2,700 pages? And do you really expect the Court to do that? Or do you expect us to — to give this function to our law clerks?  Is this not totally unrealistic? That we are going to go through this enormous bill item by item and decide each one?

Justice Ginsburg, pointing out the silliness in removing completely unrelated provisions of the Act:

Mr. Clement, there are so many things in this Act that are unquestionably okay. think you would concede that reauthorizing what is the Indian Healthcare Improvement Act changes to long benefits, why make Congress redo those? I mean it’s a question of whether we say everything you do is no good, now start from scratch, or to say, yes, there are many things in here that have nothing to do frankly with the affordable healthcare and there are some that we think it’s better to let Congress to decide whether it wants them in or out. So why should we say it’s a choice between a wrecking operation, which is what you are requesting, or a salvage job. And the more conservative approach would be salvage rather than throwing out everything.

Justice Kagan, leaning towards severability, presumably as lunch time drew near:  

And the question is always, does Congress want half a loaf. Is half a loaf better than no loaf? And on something like the exchanges it seems to me a perfect example where half a loaf is better than no loaf.

Justice Sotomayor, stating that the Court would be overstepping its bounds by striking the entire Act:

So what is wrong with the presumption that our law says, which is we presume that Congress would want to sever? Wouldn’t that be the simplest, most objective test? Going past what Justice Scalia says we have done, okay, get rid of legislative intent altogether, which some of our colleagues in other contexts have promoted, and just say: Unless Congress tells us directly, it’s not severable, we shouldn’t sever. We should let them fix their problems. You still haven’t asked — answered me why in a democracy structured like ours, where each branch does different things, why we should involve the Court in making the legislative judgment?

So what happens next?

We play the waiting game.

OK, the waiting game sucks. Let’s play Hungry-Hungry-Hippos instead.

While we’re busy doing that, the justices will meet over the next few days, voice their opinions and vote. Afterwards, Chief Justice Roberts will stick a few unfortunate justices with the task of crafting a series of  legal opinions that will become part of this country’s history. Final opinions will then be published this summer, when most of America will  be too wrapped up in Alica Sacramone’s quest to bring home Olympic gold in gymnastics to notice.

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Two items for the afternoon:

First, the proposal by House Republicans to offer small businesses a tax deduction equal to 20% of profits in 2012 was approved by the U.S. House and Ways Committee today along party lines. The bill now moves to the full House for the next vote, which is expected to take place prior to the April 17th filing deadline.

One interesting note about the version of the bill that passed today: Though advertised as a boon to small businesses, the 20% deduction is limited to 50% of the wages paid to employees who aren’t owners. This means that closely held businesses that pay all of its wages to owners — and sole proprietorships that don’t pay any wages — will not benefit at all from the rule. Perhaps that’s why a recent study by the Tax Policy Center revealed that 49% of the benefit from the Republican plan would go to taxpayers earning more than $1,000,000.

Second, as April 17th draws closer, we focus so heavily on simply getting 2011 tax returns filed, we run the risk of losing sight of post year-end opportunities to reduce the tax liability reflected on those returns. Such opportunities do exist, and if employed correctly, can provide two benefits, allowing taxpayers to not only reduce their 2011 tax liability, but to also sock away money they can later use to fund their retirement or — much more likely — pay off their kid’s gambling debts.

Stuart Robertson at Forbes tells you how to do it:  

If you have a 401(k) plan for your business, consider making a profit sharing contribution: There’s still time to make a 401(k) profit sharing contribution before April 17th and deduct it from your 2011 business taxes. It can make for a nice bonus for your employees as well as allow you (the owner) to receive the profit share in your own 401(k) account. When combined with personal tax-deferred contributions of up to $16,500 during 2011, this move can help lower your personal tax liability by up to $49,000. One significant barrier to profit sharing is if your business entity is a corporation (e.g. C-corp or S-corp). Unless you filed for an extension, tax filing deadlines for corporations expired on March 15.

If you don’t have a 401(k), tax-defer up to $5,000 in an IRA: A quick and easy way to reduce your personal taxes for 2011 is to put up to $5,000 (the current maximum, $6,000 if you’re age 50 or older) into an Individual Retirement Account (IRA). Funding an IRA is easy and can be set up quickly with almost any online brokerage. This assumes that neither you nor your spouse is an active participant in a qualified retirement plan for 2011. If either of you are participants, there are some phase-out rules that can limit the amount you can deduct from your taxes.

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On second thought, maybe the government wouldn’t mind tabling the discussion on the constitutionality of Obamacare until 2015 after all.

Coming into today’s eagerly anticipated Supreme Court hearings, hopes were high within the Obama administration that the Court would bless the “individual insurance mandate” — requiring all Americans to procure health insurance starting in 2014 or risk being assessed a tax penalty — as constitutional, with some optimistically predicting that eight of the nine justices would support the law.

And while it’s never wise to predict the outcome of a case based on oral arguments, it’s safe to say that much of that optimism died today. After the justices took turns expressing skepticism — in some cases severe — regarding the law, even the biggest proponents of Obamacare must face the reality that, at best, the fate of the insurance mandate is going to come down to a 5-4 decision, and it doesn’t appear likely that it will go the president’s way.

While the goal of the day was to discuss whether the individual insurance mandate is constitutional or whether Congress overstepped its taxing authority by adding I.R.C. § 5000A to the Code, the first step towards making that determination was to answer the question: By requiring taxpayers to acquire health insurance or pay a penalty, is Congress regulating commerce, or creating it?

The distinction is critical, and it was a point belabored for much of the two-hour debate. The attorney for the government, Solicitor General Donald Verrilli, argued that Congress was merely regulating the existing health care marketplace within its rights under the Commerce Clause.

The health care market, Verilli posited, is a unique one, in the sense that even if a consumer isn’t in it, he’s in it, for two reasons:

First, every American, at some point or another, will need health care. He may not know when, he may not know to what extent, but he will get sick, and when he does, he’ll go to the doctor. So to Verilli’s point, by requiring everyone to have health insurance, the government is not forcing people to join a market they would otherwise avoid. Rather, they are merely regulating the already existing market, which happens to include all Americans, whether they know it or not.  

Second, when we do show up at the doctor seeking care, we’ll get it, whether we’re insured or not. This affects the insurance market, because when setting the cost of policy premiums, insurance providers must take into consideration the cost of this uncompensated medical care for uninsured patients. They do so by raising the rates on those individuals who do have insurance.

So in summary, the young, healthy guy, who buoyed by a naïve sense of invincibility opts to spend his hard-earned money on fast cars and faster women rather than health insurance, is effectively punishing the insured by raising their health insurance costs.

As Verilli explained, Congress could remedy these problems by requiring all Americans to have health insurance or be denied treatment,  but would prefer not to resort to such Draconian measures. As an alternative, Congress used its authority granted under the Commerce Clause to require that everyone procure insurance in advance, rather than at the moment they arrive at the doctor, sick and uninsured.  

Compelling as this argument may be, the justices didn’t appear to be buying it.

They repeatedly attacked the individual insurance mandate as too broad, too invasive, and a potential Pandora’s box.

Chief Justice Roberts, challenging Verilli’s contention that the insurance market is unique:

Well, the same, it seems to me, would be true say for the market in emergency services: police, fire, ambulance, roadside assistance, whatever. You don’t know when you’re going to need it; you’re not sure that you will. But the same is true for health care. You don’t know if you’re going to need a heart transplant or if you ever will. So there is a market there. To — in some extent, we all participate in it.  So can the government require you to buy a cell phone because that would facilitate responding when you need emergency services? You can just dial 911 no matter where you are?

 Justice Scalia, questioning the reach of Congress, and where it heads next:

The argument here is that this also is — may be necessary, but it’s not proper because it violates an equally evident principle in the Constitution, which is that the Federal Government is not supposed to be a government that has all powers; that it’s supposed to be a government of limited powers. And that’s what all this questioning has been about. What — what is left? If the government can do this, what, what else can it not do?

Justice Kennedy, explaining that this country was built on the principle that its citizens can stand idly by while someone gets hit by a bus:

But the reason, the reason this is concerning, is because it requires the individual to do an affirmative act. In the law of torts our tradition, our law, has been that you don’t have the duty to rescue someone if that person is in danger. The blind man is walking in front of a car and you do not have a duty to stop him absent some relation between you. And there is some severe moral criticisms of that rule, but that’s generally the rule. And here the government is saying that the Federal Government has a duty to tell the individual citizen that it must act, and that is different from what we have in previous cases and that changes the relationship of the Federal Government to the individual in the very fundamental way.

Chief Justice Roberts, echoing Scalia’s concerns:

And you’re worried — that’s the area that Congress has chosen to regulate. There’s this health care market. Everybody’s in it. So we can regulate it, and we’re going to look at a particular serious problem, which is how people pay  for it. But next year, they can decide everybody’s in this market, we’re going to look at a different problem now, and this is how we’re going to regulate it. And we can compel people to do things — purchase insurance, in this case. Something else in the next case, because you’ve — we’ve accepted the argument that this is a market in which everybody participates.

Justice Alito, asking why the government doesn’t regulate burial services while it’s at it:

All right, suppose that you and I walked around downtown Washington at lunch hour and we found a couple of healthy young people and we stopped them and we said, “You know what you’re doing? You are financing your burial services right now because eventually you’re going to die, and somebody is going to have to pay for it, and if you don’t have burial insurance and you haven’t saved money for it, you’re going to shift the cost to somebody else.”

Trust me, this was but a taste of the overall tone of the day. Even Justice Sotomayor, an Obama appointee, got in on the act, questioning Congress’s ability to force people into commerce.

Unlike the Day 1 debate, it appears the constitutionality debate will ultimately be settled on partisan lines, with Justice’s Roberts, Scalia, Thomas and Alito – all conservative, Republican appointees — voting the individual insurance mandate unconstitutional. Assuming Justice’s Sotomayor, Ginsburg, Kager and Breyer — liberal Democrat appointees — vote to preserve the law, the fate of the individual insurance mandate may well rest in the hands of Justice Kenney. And judging by what we saw today, that’s not good news for President Obama.

Day 2 Supreme Court transcript

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As we’ve discussed previously, there are but a few things the entire tax community can agree on as being essential to tax reform, but included among them are the following:

1. The Internal Revenue Code is in desperate need of simplification.

2. The endless cycle of “enact temporary provision-allow provision to expire-retroactively re-enact said provision” has to stop.

3. In order to rejuvenate the economy and promote job growth, any reform needs to target small businesses.

So what do the nation’s leaders offer in the form of their most recent tax proposals? More complexity, more uncertainty, and more provisions benefiting huge corporations.

Two weeks ago, we covered a proposal made by House Republicans that would provide a deduction equal to 20% of profits to businesses with fewer than 500 employees, a plan billed as targeting “small businesses” that in reality would benefit 99.7% of the companies in the United States. This bill has been panned by Democrats as catering to the wealthy, but is still set to be pushed through the Ways and Means Committee today.

In response to the House bill, Senate Democrats have unveiled their own small business solution: a proposal that would resuscitate 100% bonus depreciation for 2012 while also providing a 10% tax credit for the first $5 million that a company adds to its payroll this year, either through wage increases or hiring.

First things first, it’s hard to see where the Senate proposal shifts a greater portion of the resulting tax benefits to small businesses, as large corporations would also be eligible for 100% depreciation and the payroll tax credit. In addition, small, profitable corporations already have Section 179 at their disposal, reducing the benefit of the 100% bonus provisions.

The details of the bill, however, are not what is troubling. What is frustrating is that the Senate bill represents yet another short-term band-aid rather than a concerted effort to institute permanent code reform and simplification. One quarter of 2012 is already in the books, meaning in a mere nine months, small businesses will again be left playing the “will they or won’t they?” game with regards to possible extensions of these provisions into future years. This constant uncertainly will handcuff business owners, just as it did at the end of 2011, when certain provisions expired that are still rumored to be retroactively extended.  

Needless to say, we’re not alone in feeling this way. Todd McCracken, president of the National Small Business Association in Washington, had this to say about the Senate proposal to Bloomberg:

“All the temporary tax provisions that we’ve seen enacted and talked about the last few years really has crystallized in small business owners’ minds the need for a total overhaul of the tax code,” he said. “You realize more and more this is no way to run a railroad.”

Having been presented with these maddeningly oblivious House and Senate bills, we’re left to conclude that both Democrats and Republicans have chosen to ignore the foundations for reform valued by many. Lucky for us, to quote Douglas Holtz-Eakin, who previously advised presidential candidate John McCain on economic policy, “Neither has a snowball’s chance in hell of being passed.”

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