By Brad Eriksen
Oregon businesses can look forward to an interesting 2012 in the areas of tax policy, tax law changes, and tax enforcement actions. With governments at the local, state, and federal levels running deficits and trying to balance budgets, all means of revenue enhancement and tax collection are in play for the coming year.
State Income Taxes
In 2010, Oregon voters approved Measure 66, which included a combination of permanent and temporary income tax increases to address budgetary shortfalls during the recession. The new top marginal rate of 11 percent is scheduled, under the terms of the measure passed by the voters, to drop back to 9.9 percent for 2012. Pro-tax advocates are now claiming this amounts to a "tax cut for the wealthy." But since the highest marginal rate was "only" 9 percent prior to the implementation of the measure, 2012 tax rates are still 10 percent higher than historical tax rates before implementation of Measure 66.
During the campaign for Measure 66, the temporary nature of some of the tax increases was a major part of the campaign to pass the measure, and it was described as necessary only to address the budgetary shortfall caused by the recession. As 2012 unfolds, and the legislature once again finds itself with a budget deficit, expect a significant push to make permanent the "temporary" higher tax rates of Measure 66.
Tax Audits Increasing
Tax audits of businesses have increased recently, and with the expanded staffing at the IRS, they can be expected to continue increasing. One study reported a 61 percent increase in federal tax audits and a 37 percent increase in state tax audits. A popular audit topic is worker classification. Here, the IRS gets to take an after-the-fact look to determine whether workers are properly classified as independent contractors or treated as employees. The IRS is not alone in this effort: The U.S. Department of Labor and various states with information-sharing agreements provide assistance and information.
Employers found to have improperly classified workers are at risk for back payroll taxes, withholding, and the usual assortment of fines and penalties. Employers can be proactive in this area by undertaking their own classified audits. Similarly, proper, up-to-date documentation of all independent contract arrangements can reduce the risk of misclassification.
Federal Payroll Taxes
The popular press has been awash with news reports of the Congressional debate to extend the 2 percent payroll tax cut into 2012. Most are aware of the compromise for a two-month extension through February 2012 with the debate for the full-year extension to come this year. While this short extension may provide a modest tax break for individual taxpayers, the cost to the businesses that employ these taxpayers has been largely ignored.
The employee's Medicare tax rate, currently 4.2 percent, is scheduled to return to 6.2 percent after February 29, 2012. Employers may or may not need to retool their payroll programs to account for this change. If Congress authorizes the full-year extension of the payroll tax cuts after February 29, employers may in fact need to retool their payroll programs several times during the year. The cost, in terms of staff time, outside IT consultants, and the like could be significant, and have a disproportionate impact on smaller employers. The frequent changes also require time to address employee inquiries and complaints as to why their paychecks keep changing. Outsourcing employee payroll can minimize the expense, risk of mistake, and inconvenience.
A creative business owner may see an opportunity here to front-load compensation and to pay all or a majority of 2012 compensation in January and February to take advantage of the temporary lower tax rates. If Congress does not extend the lower tax rates for the entire year, the IRS is already a step ahead of you. The Tax Act includes a recapture provision — if an employee's first two months of wages exceed 2/12 of the annual taxable wage base ($110,000), payroll tax on excess wages ultimately will be recaptured on the employee's 2012 federal income tax return.
Alternative Minimum Tax ("AMT")
Alternative minimum taxes were originally designed to prevent a small number of wealthy taxpayers from excessive use of tax breaks in the regular tax code. Over the years, the number of taxpayers subject to AMT has increased to include an estimated 5 million taxpayers. Congress has tried to minimize the expanding scope of AMT by enacting a series of "patches." In 2011, that patch excluded single taxpayers earning up to $48,450 and married taxpayers earning up to $75,450 from the higher taxes imposed by AMT. Unfortunately, the exemption levels for 2012 have dropped to $33,750 for single taxpayers and $45,000 for married taxpayers. Unless Congress takes action, this will expose an additional 31 million taxpayers to the higher AMT taxes this year.
Research and Development ("R&D") Credits
Like the AMT patch, the R&D credit, which allows companies to subsidize research in areas that might otherwise go unexplored, is a popular tax incentive with broad support. Unfortunately, Congress allowed this credit to expire in 2011, and it is uncertain whether the political atmosphere in Washington D.C. will permit Congress to reinstate this credit for 2012. Companies that routinely take advantage of the R&D credit will need to reevaluate whether certain work remains cost-effective without the R&D credit.
Corporate Tax Rates
Corporate tax rates have played a central role in this year's Presidential politics. Each candidate seems to have a different plan to address the current 35 percent corporate tax rate. The outcome of the Presidential election will be so late in the year that the likelihood of any of these ideas moving through Congress is very remote, but the election may well set the stage for further changes to taxes and tax policy into 2013.
The 2012 tax picture is uncertain at best. Business owners and executives are cautioned to stay vigilant and well-informed about the changing tax landscape and its impact on their business. Consult your attorney or tax advisor for advice about your specific circumstance.