The Road Ahead For Entrepreneurs And Tax Reform

October 22, 2013 |Entrepreneur | alliantgroup National Managing Director Dean Zerbe

There is much talk in Washington about tax reform. But what does it mean for entrepreneurs?

The possibilities of sweeping tax reforms happening in the next year are remote, with the only real glimmer being a possible deal as part of addressing the shutdown/debt ceiling. That’s further down the line—call me after the elections, but I would still say it is highly unlikely for the next three years.

Why is that? It is not for lack of effort or commitment by Rep. Dave Camp (R-MI), Chairman of the House Ways and Means Committee, and Sen. Max  Baucus (D-MT), Chairman of the Senate Finance Committee. They have certainly been pulling on the oars of tax reform.

In this case, the fault does lie in the stars – i.e., the Congressional leadership and the administration. The two parties leadership roles are poles apart on what they want to accomplish in tax reform, with the Democrats looking to emphasize corporate tax reform and raising significant revenues (tax increases) and the Republicans wanting broader business tax reform (more on that below) and that reform be revenue neutral (no net tax increases).

Another dividing line between the parties has been whether there should be a discussion of only corporate tax reform, which, as readers know, is a primarily bigger entity, or business tax reform, that would encompass all types of businesses (including pass-thru’s such as LLC’s, S Corp’s, and partnerships). Most start-ups are organized as a pass-thru. Chairman Camp has had some success in moving the discussion towards business tax reform, but it is taking a good deal of educating congressmen and senators to understand that most start-ups and the 93 percent of businesses organized as pass-thru’s don’t benefit from corporate tax reform.

Overlaying these divisions is the simple reality that tax reform is not a priority for the administration. (Note: I don’t say that as a criticism. The administration has other items on its “to do” list. That’s fine, but tax reform isn’t one of them.) That makes it all the harder for Chairmen Camp and Baucus to push the rock.

So, all that said – if you were going to have tax reform, what are the possibilities that might matter to entrepreneurs?

Capital Gains Tax. Always of interest to investors – the general betting is that capital gains (currently 20 percent plus 3.8 percent ACA add-on) would go up in a deal on tax reform. The Democrats have been keen on increasing the rate and bringing it closer in line with taxes for ordinary income (top rate 39.6 percent plus 0.9 percent Medicare tax). What has surprised me is what used to be a “never retreat” position of the Republicans gave way in the deal this past January that saw the capital gains rates go from 15 percent to 20 percent. In discussions with Republican staff, the comment was that they just were not hearing of this as a priority from constituents. I could see capital gains going up to 25 percent (plus the 3.8 percent add-on).

Dividends. Will stay linked with capital gains. When they go up, so do dividends..

Ordinary Income. While some Democrats will want to see the top rates go up further, this is where the Republicans dig in. The real fight will be on deductions and credits (think mortgage and charity), which both sides have indicated some openness to scaling back. The rough difference is that Democrats would use the savings from limiting deductions (it can be hundreds of billions of dollars over ten years, depending on how you limit the deductions) for more spending, while the Republicans would use the money to offset lowering the ordinary income rates. Same bed dreaming different dreams. At a minimum, ordinary income rates stay the same, and it’s hard to see a deal Republicans are willing to take that doesn’t have a reduction in the rates.

Estate and Gift Tax. Nothing happens. This dog sleeps. Some view the estate tax as too generous, some want to eliminate the estate tax. Most members view that this was a good deal ($5 million per person indexed for inflation and 40 percent rates) and don’t want to kick the slumbering hound.

International Tax and Repatriation. No repatriation without international tax reform – no dessert without spinach. Move to a territorial system. Chairman Camp’s proposal is the early-bird blueprint for what reform in this area would look like.

Corporate Tax. The corporations are banging for a rate of 25 percent. My read is that the lowest the rates could go (keeping revenue neutral and getting rid of various deductions and credits) is around 28 percent. This will not make the corporate folks happy, and they will be even more unhappy when the tax-writing committees get to 28 percent by goring ox and slaying sacred cows. Many of the corporate folks are happy for reform if it gets the rate to 25 percent and does so by getting rid of the other fellow’s tax benefits. Awakening will be rude.

Entrepreneurs and Startups. Credit the Senate Finance Committee for putting together a useful compilation of proposals on innovation and startups. In addition to some standards – increased expensing for startups and small businesses, there are also suggested proposals on Section 1202 stock (expanding dollar caps $75 million and also allow S Corp’s and LLC’s to be eligible). Also included is expanding the availability of credits (especially the R&D tax credit) to startups and allowing its deduction against the AMT – all good ideas.

As a general note, both sides of the aisle are open to proposals to help startups and entrepreneurs ,and I am interested to hear from readers what they think would be useful for Congress to consider.

The bottom line: While tax reform is being talked about, it will be a long and winding road before any big changes in law occur. Entrepreneurs need to not wait for Washington, but they do need to sharpen their pencils to make certain that they are taking full advantage of what is already available at the state and federal level to lower their taxes.

Take Control Of Your Company’s Future: The R&D Tax Credit

The manufacturing industry remains in a constant race to improve their products, as well as the process of making their products — all while dealing with tight budgets and low profit margins. These twin efforts push innovation to the forefront, in particular, applying innovation to the task at hand via research and development (R&D). Happily, the tax code rewards manufacturers who are engaged in these efforts to stay competitive with the R&D tax credit. Unhappily, far too many manufacturing companies, especially the small- and medium-sized, are failing to take advantage of the R&D tax credit.

The benefits of the R&D tax credit can be significant for the bottom line. For example, alliantgroup recently helped a specialty sheet metal company with annual revenue of $4 million receive over $70,000 in federal R&D tax credits and $91,000 in state credits for the testing and implementation of a new metal stamping process. Another manufacturer of precision tools with annual sales of $12.7 million acquired $281,000 in combined state and federal R&D credits for their efforts toward the testing and improvement of new modeling procedures.

The R&D tax credit is a lucrative government-endorsed incentive that many manufacturers are failing to utilize, either from lack of information or self-censorship (assuming their activities wouldn’t qualify). If your firm is in any way developing new or improved features or functionality through a development process, you should be taking advantage of the major tax benefits offered through this credit.

Isn’t R&D reserved for people in white lab coats?

No! You don’t have to be creating groundbreaking inventions and processes to be conducting qualified activities as defined by the Internal Revenue Code.

Throughout the years, Congress has reduced documentation and qualification requirements to make this credit more accessible to companies outside of the Fortune 1000. Eligibility has been boosted and much needed clarification of credit qualifications has been provided. Small- to medium-sized firms now have a clear, consistent and affirmative message toward estimation and costs that can be claimed.

Examples of qualifying activities for this credit include developing improved products or unique computer numerical control programs, designing innovative manufacturing equipment and developing or designing tooling and fixture equipment. A key benefit of the federal R&D credit is that a business can claim the benefit for all open tax years — generally the last three years plus the current year — and the credit may be carried forward up to 20 years, often resulting in hundreds of thousands of dollars added to a business’ bottom line. In addition, many states now have a state R&D tax credit — increasing the tax savings for manufacturers.

The key is to throw out the old definition of R&D, which many believe is limited to developing products that are new to the industry as a whole. A new host of activities that many businesses might view as operating expenses are potentially eligible for qualification under the R&D credit. The research and design doesn’t have to be new to the world, just new to the company.

Self-censoring slows American innovation and job growth

While this incentive is rewarding and attainable, many manufacturers fail to take advantage of it. The Wall Street Journal reported that 19 out of 20 small and medium businesses that are eligible for tax incentives, such as the R&D tax credit, are not claiming the benefits to which, upon examination, they would find that they are fully entitled to.

This is overwhelmingly due to self-censorship. Small- and medium-sized business owners frequently think that only Nobel Prize winners and rocket scientists should bother applying. At $10 billion credits awarded a year, even if you did not think you qualified in the past, it is certainly worth a second look.

“The R&D tax credit is arguably one of the most important incentives our government has created to help support American businesses. Small- and medium-sized businesses account for 70 percent of jobs within the United States, and it’s imperative that they take advantage of the support being offered by our government,” said Mark W. Everson, former IRS commissioner and current alliantgroup vice chairman.

In the last 60 years, innovation in new products or new processes has been a central driving force to the nation’s economic growth, thus qualifying countless American businesses for these beneficial incentives. This effort needs to continue in order to keep up with a constantly changing market and stay relevant within the manufacturing industry.

Claim this credit now!

Congress and many state governments realize how critical innovation is to the future of America’s competitiveness in the world, and the R&D tax credit is an important incentive to nurture that innovation. They also know that the companies engaging in these activities are supporting millions of high-skilled, well-paying jobs.

For these and other reasons, the R&D credit doesn’t look as if it will be going anywhere anytime soon. Any manufacturer with relevant products or services would be smart to realize the benefits of this credit and take a strategic approach to allocate that to which they are fully entitled.

While this incentive can be of extreme benefit to manufacturers, it is also complex, and fully identifying the proper substantiation for capturing the credit requires a deep understanding of the tax code. For this reason, companies interested in pursuing this tax credit would be well served by securing the services of a third-party specialty tax firm with practical experience in the disciplines of manufacturing engineering, industrial engineering, mechanical contracting, tool and die, and metallurgy, to work alongside and offer support to their CPAs, ensuring optimal results. By leveraging this expertize companies may be able to realize R&D tax credits that benefit their bottom line while also helping promote its overall strength and viability in the marketplace.


alliantgroup is the nation’s premier provider of specialty tax services. As such, they have one mission: to help CPA firms and the businesses they advise take full advantage of the many available federal and state tax credits, incentives, exemptions, and deductions — infusing cash to help their businesses compete successfully and grow. Learn more at www.alliantgroup.com.


Reprinted from: http://www.manufacturing.net

How to survive a tax audit

NEW YORK (CNNMoney)

Tax season has finally wrapped up, but audit season is just about to begin.

The chances of being dealt an audit are low — about one in 100. But if you happen to be selected, you can take certain steps to make the process a little less painful.

1. Know what to expect.

Envisioning a visit from a suit-clad IRS agent with a briefcase? That’s not usually how an audit plays out. The vast majority, or 76%, are correspondence audits, meaning the IRS requests information by mail instead of questioning a taxpayer in person.

These tend to focus on specific items on a return — like itemized deductions for medical expenses — and simply ask for documentation, said John Lieberman, CPA at Perelson Weiner LLP. In-person field audits are broader inquiries about a tax return and often involve verifying income, he said.

In either case, you’ll likely receive a notification by mail explaining which parts of your return the IRS has questions about.

2. Don’t ignore the letter.

Shoving the letter you get from the IRS in a drawer and pretending it’s not there won’t make it go away. You’re usually given 30 days to respond, so make sure to write back promptly or certain items may be disallowed or automatically corrected. The IRS will then begin collecting on any extra tax it believes you owe, said Lieberman.

3. Get documentation together.

Once you find out what parts of your tax return are in question, you should start collecting any relevant paperwork.

The rule of thumb is to keep tax-related documents for three years from the date a return was filed. If you can’t find the documentation you need in your files, you can usually get another copy elsewhere. If you’re missing the bill for a medical expense you claimed, for example, you can contact your doctor’s office. If you donated money to a charity but lost your receipt, the charity will probably be able to send you a duplicate.

If you’re unable to get the proof the IRS is asking for, any unsubstantiated claim or deduction on your return will be disallowed, said Lieberman.

4. Stay calm.

Spending time with the IRS may not be your idea of a fun time, but it won’t help to be rude or difficult.

“Make sure you show respect for the individual on the other side,” said Mark Everson, vice president of tax service firm alliantgroup and former head of the IRS. “It’s not something you look forward to, but it’s going to go better if you’re respectful and friendly, recognizing that he or she is just trying to do their job.”

Hiding information is another obvious no-no.

“If you think you’ve made an error on your return, don’t try to cover that up — figure out why that happened and what needs to be done to correct it,” Everson said.

Lieberman recommends pointing out any mistakes — and explaining why they occurred — in a cover letter replying to your audit notification.

Continue reading the entire article here.

IRS Update: Challenging Times To Be Sure

A former IRS commissioner looks at current state of the service — and its future

Originally posted in Accounting today on March 19, 2013
By Mark W. Everson

Now that we have reached the middle of the filing season and sequestration is a reality, let’s take stock of where it is all going at the Internal Revenue Service. My sense is that the service is getting by so far, but that it will be hard pressed to maintain taxpayer service and enforcement levels in the months ahead. This year’s filing season was already, by just about any measure, the most challenging faced by the IRS in two decades. Late congressional action; identity theft; healthcare demands; reorganizations; and a change in leadership are all in the mix, making for a bad cocktail. Add in the sequestration and it looks to be a bumpy road at 1111 Constitution for some months to come.
Let’s start with the impact of the American Taxpayer Relief Act, passed into law at the start of the year. Because of the time required to update and test systems, the late passage of ATRA forced the IRS to delay the start of the filing season. While the service estimated that over 120 million filers would be good to go at the end of January, others have had to wait additional weeks to file. Such a delay sends a shudder through the IRS, disrupting work flows and increasing taxpayer anxiety.

The problem of stolen identity refund fraud further complicates the filing season. This criminal activity has exploded in the last several years. In 2012 the service stopped several million fraudulent returns. False positives may run well below 10 percent, but this is another area where the IRS just can’t win. If computer programs are tightened in order to minimize fraud — including all too often by incarcerated felons — legitimate refunds are delayed and taxpayers howl. On the other hand, if standards are too loose, billions more go out the door at a time when we need the money. Of course, cleaning up stolen identities is a further drag on service resources, taking months, and adding to the frustration of honest taxpayers.

All this is unfolding when the service is striving to meet its looming responsibilities under the Affordable Care Act. Many of the act’s provisions require extensive systems work with unforgiving delivery deadlines. The new law demands the continuing attention of senior IRS managers at a time when the service is struggling to do its day job.

Continue reading the full article here.

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Tax Pro: IRS Dodges Filing Season Bullet But Tough Times Are Ahead

Spring 2013  | Mark W. Everson
Re-Published from NATP TAXPRO Journal

We just wrapped up another hectic tax filing season, so now is a good time to examine the state of affairs at the Internal Revenue Service. After a difficult start, the IRS has delivered a successful filing season, but the months to come will most certainly see declines in taxpayer service and enforcement levels. Congressional dysfunction, identity theft, healthcare demands, reorganizations, sequestration, and leadership questions are all cause for concern.

The process of updating forms and testing systems required for the American Taxpayer Relief Act, passed into law at the start of the year, forced the IRS to delay the start of the filing season. The service estimated that over 120 million filers would be good to go at the end of January, but others had to wait additional weeks to file.

While such delays send a shudder through the service and agitate both taxpayers and tax professionals, it was a significant victory for the IRS to get everything in place by early March as it did. Let’s hope the Congress does better next time around. I am not holding my breath.

Identity theft and criminal refund fraud—which have exploded in recent years—constitute a real strain on the IRS and our nation’s tax and financial systems taken together. This is an area in which the IRS seeks to strike a difficult balance. Many fraudulent attempts are stopped by the service each year. However, for identities that are stolen, it can take months and significant resources for the IRS to unravel what happened, and clean up and restore proper account balances. As anyone who has been a victim of identity theft knows, this is no fun.

 

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