IMGCAP(1)]Is it too early to start thinking about tax extenders? Not according to Kathleen King, managing director of Alvarez & Marshall Taxand’s Washington, D.C., office.
“It will be August next week,” she observed. “Washington will clear out, and there will really be only a month until those who are running have to go back home and campaign until after the elections, so we’re looking at mid-November for something to get through.”
There has been some action in the form of committee markups, she observed. “There are a couple of different versions out there. Some want a permanent R&D credit, but that’s very expensive so it has its detractors. They’re also trying to find ways to expand the research credit to smaller businesses. Right now it’s not been sent to any sort of joint analysis or discussion. My expectation is that the Senate will take a closer look at it after Labor Day.”
“At that point we’ll get another version of proposed extenders, and then they’ll go to the respective committees, and there will be some sort of reconciliation,” she said.
As far as waiting for comprehensive tax reform to take care of the issues relating to the extenders, King doesn’t believe it will happen.
“There’s general acknowledgement that tax reform is off the table, at least any sort of wholesale tax reform,” she said. “So they’ll approve what’s already expired. Although it could be before they leave for the election break, there’s not much time for that. I don’t expect anything will get through until a lame-duck session again.”
“It will be a fairly vanilla extension, following the course of extenders the last several times they’ve come up,” she said.
“When it gets to crunch time, they’re not going to get any new things into the legislation,” she predicted. “The pressure will be to extend what’s already on the books.”
So, what should a tax adviser tell business clients about purchasing equipment before the end of the year?
“You have to look at the business needs first. If they need equipment, then they should go forward and buy it,” King said. “Some companies are getting used to these extenders, and by and large they are counting on them to pass.”
However, the process makes it that much harder to do real tax planning, according to Grafton “Cap” Willey, managing director of CBIZ Tofias’s New England office.
“How do we engage in mid-year planning when we don’t know what the rules will be?” he asked. “Last year we waited until December 21 to pass the extenders retroactively. Then they extended the provisions until the end of the year and expected everyone to say, Thank you.’”
“Businesses need to be able to plan, and that takes time,” Willey noted. “If you purchase a large piece of equipment, that’s a major decision. I have people postponing their decisions because of questions as to whether the enhanced Section 179 deduction will still be there. And usually an R&D project is a multi-year endeavor.”
“It’s tough,” he said. “You can tell a client that more likely than not, there may be a chance that a provision will extend, but there may be a chance that it will not. They have to know the risks involved and have to plan on the downside.”
The delay in addressing the issue is negatively affecting the economy, he noted.
“It’s slowing the purchase of equipment and slowing the manufacturing of equipment,” he said. “We would have a more robust economy if there were more certainty to the tax code. And when you talk to Congressmen, they all nod their heads and point their fingers to someone else. Washington is 40 square miles surrounded by reality.”
“Planning at year-end is going to be very basic,” Willey predicted. “You almost have to put aside a lot of planning because you don’t know what will happen.”
