Westchester businesses could be adversely affected by several of the proposals included in the Obama administration”™s Feb. 22 framework for corporate tax reform, financial analysts said last week.
Despite consensus between Democratic and Republican lawmakers that changes to the corporate tax structure are long overdue, there are few assurances that an overhaul would even be passed prior to the election.
U.S. businesses currently pay a top tax rate of 35 percent, which come April will rank as the highest statutory corporate income tax rate among the Organization for Economic Cooperation and Development (OECD) countries.
In his framework for reform, President Obama proposes lowering the top rate to 28 percent and to 25 percent for manufacturers, while also introducing measures to protect U.S. manufacturing jobs, eliminate tax loopholes and simplify tax requirements for small businesses.
Also included in the Obama framework are proposals to extend, simplify and make permanent the research and development tax credit, incentives to encourage investment in clean energy and a requirement for companies that do business abroad to pay a minimum tax on overseas profits.
U.S. Sen. Kirsten Gillibrand (D-NY) called the plan “a strong proposal” and Rep. Nita Lowey (D-NY) also commended Obama, but both said following a breakfast hosted by the Business Council of Westchester that they would consider other plans as well.
“It”™s very valuable to get the corporate tax rate down (and) simplify the code,” Gillibrand said. “The choices he”™s made I think are wise ”“ keeping the R&D tax credit permanent (and) keeping the renewable energy tax credit (are) very important for New York, so I think he”™s reached a very strong balance and I support it.”
However, Congressional Republicans have criticized the plan for lacking in detail.
“Unfortunately, this so-called framework is murky, ill-defined and contradictory to the goal of reducing complexity and making our tax code more efficient,” said Sen. Orrin Hatch (R-UT), ranking Republican on the Senate Finance Committee, in a statement.
Both Democrats and Republicans have also called for any discussion over changes to the tax code to include the personal income tax, which has a greater impact on most small-business owners than the corporate tax structure.
Several deductions that would be eliminated under the Obama plan currently benefit local businesses, said Charles Sockett, managing director at UHY Advisors NY Inc., a tax and business consultant with offices in White Plains.
“There are some good proposals in here and also I think there are some proposals that are going to adversely affect small businesses in the area,” Sockett said.
Among those items that could hurt Westchester businesses are proposals to eliminate the “last-in, first-out” method of accounting for retailers, to close a loophole for managers in investment services partnerships by taxing “carried interest” at ordinary income rates rather than as capital gains and to tax larger non-corporate entities at similar rates as their corporate counterparts.
The latter item could have the greatest affect, Sockett said.
Currently, many small and medium-size businesses are set up as flow-through, or non-corporate entities, he said, meaning income is taxed as part of the business owner”™s personal income rather than as the company”™s income.
That would change under the Obama framework for higher-income businesses.
“The proposal that”™s out there is that even though you may be a closely held business, they”™re proposing that if you have gross tax receipts of more than $50 million that they would eliminate the flow-through treatment and tax you as if you were a regular corporation,” he said.
There are a number of positive elements to the framework as well, Sockett said.
Allowing small businesses to expense up to $1 million in qualified investments and capital expenditures, rather than up to $500,000 as it currently stands, and allowing cash accounting for businesses with up to $10 million ”“ rather than up to $5 million ”“ in gross receipts would both be welcomed by local business owners, Sockett said.
However, when asked the likelihood of any action on the Obama proposals in 2012, Sockett responded, “not great.”
“There”™s rhetoric about whether or not this is something that has a lot of legs or whether it”™s primarily a campaign tool. Based on what we”™ve seen in the past, there is going to have to be a significant give-and-take between the two parties,” he said.
