2012: A Year of Total Uncertainty In Tax Law

A “perfect storm” of election year politics and partisan posturing in the current Congress promises to make 2012 the most difficult year in memory for business taxpayers and their advisors. While we have a right to plan our affairs to pay the least amount of tax legally due, that’s a hard right to exercise when the law governing transactions in 2012 could change anytime before December 31. 2012.

Critical tax provisions, usually having “broad, bipartisan support” were allowed to expire on December 31, 2011. Among them,loss of the research credit is likely to be  responsible for increasing the effective tax rate of thousands of large and small enterprises. The dizzying “now you see it, now you don’t” whirl of special, limited time, rules for various asset depreciation classifications and schemes have all expired . . . for the moment.

The problem, as I see it, is that a bunch of elected Representatives and Senators with little or no historic memory of why the tax code is this way or that way, are going to make campaign promises regarding the tax law. Then, in late November or early December, another hodge-podge of special interest tax breaks and economic pacifiers  to quiet this group or that group will pass both houses of Congress.  The  current President’s background as a social activist hardly prepares him to make a meaningful contribution to the process.

Is there an answer ? Yes, but you may not like it.

Make no tax motivated changes. Initiate no transaction for which the tax benefit or cost is a significant element in analyzing return on investment. Will that help the economy ?  Hell no ! It simply assures that portion of the gross national product dependent on private ownership will be “on hold” while the politicians ponder, posture and pontificate about the need to stimulate the economy.

It’s going to be difficult year for tax advisors !

2011: What Got Done, What Didn’t, Now What ?

2011 is history, but reverberations will continue until after Congressional elections in November 2012. Let’s start with what got done in 2011.  Obviously the payroll tax cut and it’s heavily debated extension would be fresh in our memory. The most significant failure, of course, was the descent into partisan bickering of the so-called “super committee.” That was the last hope for meaningful action on over 100 various tax provisions; some now expired, some really creative new proposals, but all doomed to perish in the quagmire of political posturing.

What did get done was several significant enforcement initiatives: one against U.S. citizens using foreign bank accounts to hide assets and income from the IRS; another requiring registration, education, and testing of tax return preparers; and finally, robust enforcement of Treasury Circular 230 ethical standards against CPAs, EAs, and Attorneys who failed to exercise “due diligence” in preparing returns or giving tax advice. Congress may be paralyzed, but Doug Shulman is fully mobilized.

How about those expired tax provisions I mentioned earlier ? Here are just a few:  enhanced AMT exemptions and available personal credits; State and local sales tax deduction option; teacher’s $250 deduction for classroom supplies; 100% bonus depreciation; enhanced Sec. 179 deduction (the 2012 limit will be $139,000); research credit; and 15 year cost recovery for “Qualified” leasehold improvements, restaurant property, and retail property.

That’s not a complete list.  Depending on how you count, there are over 60 provisions that were allowed to expire . . .at least for now.  No doubt, some will be the subject of late restoration efforts . . . and Congress can do that . . . change the law for 2012 anytime before December 31, 2012, it would not be “retroactive.” Confusing . . . chaotic . . . but not retroactive.

Shouldn’t the legislative process produce whatever tax changes are going to be made in time for taxpayers and their advisors to comply without special efforts and to plan with some certainty ?