With concerns about sales, unemployment, access to credit, and health care reform paramount on the economic scene, accounting and taxes may not be on your radar screen. Still, these factors have a direct impact on your bottom line-the more of your earnings that you keep after tax, the better.
Looking ahead, taxes will continue to be used for social engineering-to encourage job creation, help the unemployed, provide incentives for going green, assist U.S. companies going global, and ensure that most Americans have health coverage. Taxes will also be used to serve its traditional function as a revenue raiser to pay for the war in Afghanistan. Within this context, here are the top 10 trends in accounting and taxes for 2010.
1. More guidance to move from GAAP to IFRS
Generally accepted accounting standards (GAAP) in the U.S. are likely to be replaced over time by international financial reporting standards (IFRS). IFRS, used in Europe and elsewhere, provides improvements over GAAP in financial reporting to investors. Companies with a global presence could benefit from changing their standards to the format in greater use worldwide.
The SEC has proposed a roadmap that public companies can use to make the transition. If milestones in the roadmap can be achieved, it could mean required use of IFRS by U.S. public companies by 2014; some public companies will be able to use IFRS as early as 2010.
It will take years for the transition to be made by privately-held corporations and other small businesses, but eventually they will follow public corporations to IFRS. Expect to hear more chatter about IFRS in 2010.
2. More IRS tax audits of businesses
The ever-present audit threat is always lurking in the minds of business owners. In 2010, there’s good reason for concern. As part of a budget measure, the House has approved a $5.504 billion increase in the IRS budget for fiscal year 2010; these funds will largely be used for enforcement activities.
Starting in February 2010, the IRS will launch employment tax audits of 5,000 random returns.
The IRS is also gearing up for more income tax audits. As part of the federal government’s 2010 budget (it’s fiscal year started October 1, 2009), the IRS has hired or is hiring 5,000 to 7,000 new revenue agents (auditors), revenue officers (collectors), and special agents (criminal investigators) in 2009 and another 5,000 in 2010 in an effort to combat the “tax gap.” The tax gap is the $345 billion spread between what the government collects and what it thinks it should collect. Schedule C filers (independent contractors, sole proprietors, and one-member limited liability companies) are in the government’s crosshairs because of the belief that many don’t report all their income or overstate their deductions, so these business owners could be most vulnerable to audit selection in 2010.
3. Higher taxes to pay for health care reform
With House passage of a massive health care bill and the Senate poised to follow suit, look for new taxes levied on small businesses and their owners to help pay for reform. While final tax provisions will need to be worked out in a House-Senate conference bill, these are the likely results that will impact small business owners:
- Tax penalties on individuals, such as independent contractors, who opt not to obtain health coverage.
- A payroll tax on businesses that fail to provide health coverage for their staff. There may be some limited relief for small businesses, in the form of a tax credit, to encourage them to provide coverage for their staff.
- A surtax on high income individuals (about a third of whom are small business owners).
4. New taxes to support cap and trade legislation
Cap and trade is a government run program to limit (cap) the amount of emissions resulting from energy usage. In June the House approved a bill that would aim to cut emissions 17% by 2020 from 2005 levels. The Senate has several bills currently in committee on cap and trade and President Obama promised the world conference in Copenhagen in December that the U.S. would achieve significant emissions reductions by key dates. If a cap and trade program is enacted, payments by businesses that exceed their allocated energy usage will amount to a tax on doing business.
Short of cap and trade, Congress could enact an emissions tax. The Congressional Budget Office reports that a good alternative to cap and trade would be a tax on emissions because it would be less costly for the government to implement. Either way, it will mean higher costs for doing business.
5. No AMT reform
The alternative minimum tax (AMT) is a stealth tax system that applies when certain taxpayers lower their regular tax bill through various deductions that are not allowed for AMT purposes. However, it has become a significant revenue raiser (it could cost $2 trillion over 10 years if AMT were eliminated); Congress can’t easily eliminate it without raising other taxes as a substitute.
Rep. Rangel, head of the House Ways and Means Committee, has been promising for several years to “handle” the AMT problem, but has yet to do anything other than maintain the status quo. Unless there is a “patch” for 2010, millions of individuals, many of whom are small business owners, will owe this tax. Even a patch, however, isn’t reform.
6. Stimulus 2
The $787 billion American Recovery and Reinvestment Act of 2009 that was supposed to create jobs and jump-start the economy may not have provided the desired results. What to do? Congress is thinking about a second stimulus package aimed primarily at jobs creation. If there is a Stimulus 2, look for tax incentives, such as a tax credit for small businesses that add to their payroll or a payroll tax holiday; the bill being discussed in December 2009, which could become law in early 2010, could cost $300 billion.
7. An ever-increasing array of state and local taxes and fees
Some states are teetering on the brink of bankruptcy and need to find new sources of revenue wherever possible. This will lead to new (and often disguised) taxes.
States that raised taxes in 2009 may discover that revenues will decline as individuals and businesses more to more tax-friendly locations. New York, for example, has changed the income tax rules for millionaires-this is likely to induce many wealthy people to relocate, and if they are business owners, to take their companies with them.
Some states are looking closely at their tax structures and could move forward with sweeping changes. For example, a bi-partisan commission in California, a state with one of the worst fiscal crises around, recommended this past fall a tax overhaul that included slashing individual, business, and sales taxes.
8. More e-filing
Last income tax filing season, the number of returns filed electronically reached an all-time high. According to the IRS, 67.18% of individuals filed (or had their returns filed through paid preparers) electronically. About 34% of these filed returns from home computers.
For businesses, electronic filing is required for large corporations (those with $10 million or more in total assets and that file 250 or more returns a year) and encouraged for small businesses. Guidance on e-filing for the coming tax season (for 2009 income tax returns) should be available in January 2010.
E-filing isn’t limited to income tax returns. Businesses are encouraged to e-file; look for new and improved e-filing options to the following programs for 2010:
- Information returns about retirement plans (Form 5500) with the Department of Labor via EFAST
- Excise tax returns (typically businesses that use special fuels), called ETEC with the IRS
- W-2 forms for employees with the Social Security Administration through Business Services Online.
9. New tax breaks to build retirement savings
The “lost decade” (the previous 10 years) of poor stock market performance has left many individuals with less than they expected in their retirement accounts. New tax incentives have been introduced to encourage more retirement savings-by workers and their employers (especially small businesses).
New for 2010 is the DBk, a hybrid retirement plan that can be used only by small businesses (between 2 and 500 employees) to offer a small pension plan combined with a 401(k)-type savings plan within a single trust. Proposed guidance on the DBk was issued in 2009, but many employers are sitting on the sidelines while regulations are finalized and financial institutions start marketing DBk products. This likely will happen in 2010.
10. A VAT?
A valued added tax (VAT) is imposed on each link in the supply chain-from manufacturer, to wholesaler, to retailer, and ultimately to the consumer. With the ever-pressing need for revenue by the federal government, renewed attention will be given to the possibility of a VAT in the U.S. (It has been considered and rejected several times over the past 30 days.) A VAT has long been used in Europe, with a standard VAT rate of 15% in most EU countries (25% in Sweden). The Tax Policy Center estimates that a 5% VAT would produce revenues of $3.3 trillion from 2010 to 2019.
Bloggers have pointed out that a VAT in the U.S. would be on top of state and local sales taxes. Thus, a 15% VAT would look more like the 25% rate in Sweden in states such as California and Tennessee where state and local sales tax rates top 9%.
Bottom line: Accounting rules and taxes will undoubtedly change in 2010 and in years to come. Stay alert to opportunities that could help you.
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About the Author: Barbara Weltman, an attorney, is a leading authority on tax, law, and finance for small business. She hosts a weekly radio show, Build Your Business, and publishes “Idea of the Day®” and monthly e-newsletter, “Big Ideas for Small Business®” at Barbara Weltman. She has written over 25 books, including perennial top sellers “J.K. Lasser’s Small Business Taxes” and “The Complete Idiot’s Guide to Starting a Home-Based Business” and is a blogger for Business.gov, Startup Nation, and SCORE’s Women Entrepreneurs.
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You have an incredible talent;
You can make what’s usually a mundane topic really shine!
Ok, now I must dim those shiny lights a bit.
Section #3 is really not very good news for small business owners.
We don’t need penalties and higher taxes. I don’t think those two items will stimulate things. Do you?
The Franchise King
Thanks for sharing. I will be looking ahead to these trends in 2010.
Barabara, Good article — and welcome! Nice to see you here.
Signs of #7 raise their ugly little heads from time to time. New York and some of the Northeast states seem particularly bad. I’ve heard New York business owners complain bitterly about the tax load.
But here’s a radical solution for state lawmakers who feel their states are on the brink of bankruptcy. They should do what the rest of us have to do when expenses exceed income: tighten their belts. Curtail expenses instead of spending like drunken sailors with wanton abandonment. That would be the fiscally responsible thing — instead of getting creative about new things to tax — like VATs.
Belt tightening is obvious to us (small business owners), who routinely do this when our revenues fall. High-tax states can also learn from states that have low taxes on business; businesses prosper in low-tax states. For a list of favorable and unfavorable states, view the SBE Council’s 2009 Small Business Survival Index (http://www.sbecouncil.org/survivalindex2009/).
When will the government realize that taxes discourage desirable behavior? Seems so simple.
It seemed to me that calls for AMT reform were loudest during the dot.com era. I can remember more than a few coworkers who bought and held their options being subject to AMT. These were people earning, say, 40K-60K a year in salary but just got lucky with a dot.com and then got unlucky during the crash. If I remember the “paradox”, they got 10,000 options at 50 cents. They bought 10,000 shares at 50 cents (paying $5,000). But the stock was now trading at $100 a share when they bought their options. Even though they didn’t sell (under the belief that $100 a share would go up to $200 a share in 6 months time) AMT rules said “oh you made $995,000 this year” and then hit you with a tax bill of $200,000.
However, when the tax bill came, the bust was in full swing and their shares were now worth $1. Even if they sold they couldn’t pay off the tax bill. They had to pay the tax bill up front and then write a % of their loss off their income over a few years. I guess technically they’d get the $200K back over a few years as a tax refund.
Or that’s they way I remember it.
Karl, you are right in saying that one of the AMT problems was exposed during the dot.com era. But AMT hits many, many middle income people with no incentive stock options. To be an AMT victim, all you need today is sufficient income, live in a high-tax state, have a lot of dependents, and/or claim large miscellaneous itemized deductions. When AMT first appeared in 1969, it was intended to make sure that millionaires paid some income tax; now it’s a penalty on middle income people; those in high tax brackets don’t wind up paying AMT. Repeal or serious reform is what’s needed now, but I don’t expect we’ll see this.
For item 2, over half a trillion dollars for audits? Must be a typo. I clicked through the to the source and couldn’t find anything about a $543 billion increase. More like $5.5 billion earmarked for enforcement. Bad enough that nearly half of the IRS budget is intended for whacking on taxpayers. That speaks volumes about the IRS’ priorities.
Thank you so much for the Shout-Out!
I hope we can meet next year, in person.