Amid expiring tax credits, the daunting prospect of corporate tax reform, and a Congress in perpetual gridlock, companies are nonetheless unlikely to see significant shifts in tax policy in 2012. That may make this an ideal year for businesses to give Congress input on impending changes, experts say.
Despite the tax agenda President Obama set out in his State of the Union address, “this is probably kind of a stand-pat year,” says Dean Zerbe, national managing director at alliantgroup and former tax counsel to the U.S. Senate Committee on Finance. “I think the real fight is going to be in the next year and after the elections,” Zerbe says.
Ultimately, Congress will probably extend the payroll tax cut and wait until next year to retroactively extend incentives such as the research and experimentation (R&E) credit, he says. But there is little chance that Congress will enact comprehensive corporate tax reform this year, giving companies plenty of time to consider current proposals, like a draft released last fall by chairman Dave Camp of the House Committee on Ways and Means, Zerbe says.
Camp’s proposal would lower the corporate tax rate to 25%. It would also implement a territorial tax system that would exempt companies from paying taxes on most profits they earn abroad, and it would impose a low tax rate on existing overseas profits, whether or not companies bring those earnings back to the United States.
The proposal could be a blueprint for corporate tax reform. “I think once [Congress] gets into a discussion about reform, that’ll be the starting point,” Zerbe says. “In general, companies that do have an international presence need to be mindful of that, consider whether the proposal works for them, and make their concerns known.”
Corporate tax reform could go another way. The president and lawmakers in both parties have floated the idea of lower tax rates, a broader tax base, and fewer incentives for companies. Companies that are organized as “pass-through entities” – often small- and medium-sized businesses such as LLCs or S-corporations – could lose out under that proposal, because their owners pay the individual rate rather than the corporate rate, Zerbe says. The policy would effectively raise taxes on those companies by removing their incentives without lowering their tax rate.
“Those incentives are being taken away to lower the corporate rate for the Fortune 500 companies, which will see their rates go down,” Zerbe says. “But pass-throughs are going to see their rates go up. And for small and medium businesses that are looking to attract capital and investors, that could be a sea change,” he says.
With all of those proposals in mind, business leaders should share their input with lawmakers, says John Harrington, a partner at SNR Denton. “I don’t think companies can sit on the sidelines,” Harrington says. “When [Congress is] doing this groundwork, companies that see themselves being potentially impacted by corporate tax reform do need to keep an eye on the process. Reform may not be getting enacted now, but that doesn’t mean a lot of serious work isn’t being done and that companies shouldn’t monitor and weigh in as appropriate.”
The Treasury Department will reveal more details on its tax priorities in its annual “Green Book” this February.