Accountancy joy

Accountants rejoice! No more talk about the Fair Tax. Simplicity is out. You are almost guaranteed more work. It has been years since we have had an accountant friendly White House AND Congress.

I have been reading through the Green Book, a.k.a. “General Explanations of the Administration’s Fiscal Year 2010 Revenue Proposals,” released last Monday by the U.S. Treasury Department. It’s great! All you have to do is look at the table of contents – 16 pages of tax cuts and 108 pages of increased tax rates, elimination of deductions and increased enforcement. Curb your exuberance for now because these are proposals, not current tax law. But by examining these proposals, you can get a feel for the government’s new priorities and philosophies. The demand for accountants is sure to increase.

As expected, the top tax rates are to be raised from the current 33% and 35% tax rates to 36% and 39.6%. Granted, this tax rate increase is not steep and the top rates would only equal the top tax rates when President Reagan was in office, but I believe there will be more to come. Why? The United States’ projected 2009 budget deficit is now $1.84 trillion, or 12.9% of the economy, a level not seen since 1945. The government has to raise taxes to reduce the budget deficit. Spending cuts hurt the politicians too much.

Why is this good for accountants? It is good for accountants because tax deductions will be worth more and therefore we can save our clients more money. The more money we save our clients the more they love us. And get this. We can make them feel good about this tax increase by telling them it is a fair tax. The Green Book states the reason for this change is to “make the income tax more progressive and [it] would distribute the cost of government more fairly among taxpayers of various income levels”.

Several of the revenue proposals are designed to “reduce the tax gap.” The tax gap is simply the difference between taxes owed and taxes due. The IRS estimates that about 15% of taxpayers are tax cheats and rob the government of approximately $350 billion annually, mostly through underreporting their income.

To close the tax gap, the U.S. Treasury proposes that honest businesses be required to assist the IRS collect tax. Businesses are now required to send non-employee service providers information returns, Forms 1099-Misc, reporting to the IRS how much they paid to the service provider if payments during the year total more than $600. If the service provider is incorporated, 1099s are not required to be sent. The new proposal would impose several new requirements including 1) 1099s be sent to corporations as well on non-incorporated service providers, 2) service providers be required to obtain a “certified” taxpayer identification number, 3) if the service provider doesn’t have a certified taxpayer identification number the business that paid the service provider would have to withhold taxes at a flat percentage rate and remit to the IRS, and 4) even if the service provider had a certified taxpayer identification number the service provider could elect for the business to withhold tax from their gross payment. Consequently, businesses large and small would have increased compliance.

I like the stated reason for this new withholding proposal. Since the self employment tax rate is 15.3% and income tax rates begin at 10%, required tax rates on small contractors and service providers can be more than 25%, “even for a contractor with modest income.” I guess that since the tax burden is so high on small contractors and service providers that they might be tempted to pay bills before taxes. Therefore this new withholding option will reduce the burden of having to make quarterly payments. What crap!

The proposals discussed above are two out of many. Other proposals include the repeal of expensing of intangible drilling costs and percentage depletion for independent oil and gas producers; increased penalties; increased information sharing with state governments; etc. You should download the Green Book and read it for yourself.

These proposals may or may not become law, but with budget deficits being in the trillions of dollars taxes can only go up. In the future you can expect businesses to be inflicted with more rules and regulations and the associated costs. The underlying message in many of these proposals seems to be that people can’t be trusted or are too stupid to do things on their own. Are you too stupid to set aside money to pay your quarterly payments? We will make your customer or client withhold taxes for you.

Just in case you failed to notice that the statement “accountants rejoice” was meant to be tongue-in-cheek, rest assured that accountants generally don’t like change and the proposals presented in the 2010 Green Book represent a lot of change. If these proposals become law I expect small businesses will bear a great portion of the additional compliance costs. A good accountant can help you mitigate the additional costs of compliance and regulatory burden.

David Potts is a certified public accountant also accredited in business valuation. Owner of Potts & Company, Certified Public Accountants for more than 25 years, his practice focuses on small and medium size businesses and their owners in the areas of taxation, accounting and bookkeeping, business valuation and business advisory services. He is a Fort Smith native and a graduate of the University of Arkansas at Fayetteville. You can follow his blog at ThePottsReport.com.

Potts can be reached at [email protected]