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Taxes, Deficits and Policy; Summarizing Recent
Federal Legislation Impacting Hotels

 
By Kevin F Reilly, May 2010
It’s the economy, stupid
- sign in Bill Clinton election headquarters, 1992 election

It’s the economy, stupid
- title of op-ed piece by Karl Rove in Wall Street Journal, 06/04/2009

The more things change, the more they stay the same.  Both political parties know a winning strategy when they see it.  After a year where the principle focus was on health care, the whole focus seems to have shifted to jobs.  Little if any time or importance was spent on taxes.  However, it just puts more pressure on 2010 because of the expiration of a number of provisions during 2009 and even more at the end of 2010.

With the recession in full swing at the beginning of 2009, Congress enacted the American Recovery and Reinvestment Act of 2009 (Act).  While the size of the Act was unprecedented, the business tax breaks were not large in the grand scheme of things and few benefited hospitality directly.  In fact, the lodging industry as a whole was disproportionately impacted by some of the moves made during the enactment of the bill.  Part of the Act restricted corporate travel for companies accepting bailout money.  One hope with the size of the Act was that it would increase consumer confidence.  Unfortunately this did not happen and with the increase in unemployment, any recovery will take longer than hoped.

Tax bills during 2009 extended the ability of business to write off 50 percent of the cost of qualifying depreciable property purchased and placed into service during 2009.  It also extended the ability of small businesses to expense completely the purchase of certain assets.  For 2009 and 2010, small business may write off qualifying equipment purchases up to $250,000 and the phase out remains at $800,000 for the year.  The largest tax break was an increase of the carry back period for a net operating loss (NOL).  A net operating loss is the excess of gross income over income in a particular tax year.  Generally, the loss may be carried back 2 years and forward 20.  With so many businesses experiencing losses in 2008 and 2009, Congress wanted to get the money into the hands of the businesses quicker.  As such, it increased the carry back period to five years.  Unfortunately, the benefit is now available only to businesses with gross receipts of $15 million or less and losses from 2008 and 2009.  Additional provisions include:

• Incentives to hire unemployed veterans and disconnected youth;
• Extensions of certain credits;
• Delayed recognition of certain cancellation of debt income;
• Changes to qualified small business stock rules; 
• Shortening the holding period of assets for built-in-gain purposes for S corporations; and
• Increasing the penalty for late filing of partnership and S corporation returns.
Since there were so few changes impacting 2009 and 2010, it is interesting to see what will occur this year.  It is important to remember that it is an election year and with the success the Republicans had in special elections, it will be difficult to get anything through.  However, something has to be done.

One of the more interesting issues is what to do with the estate tax.  Right now the estate tax has sunset.  However, if no action is taken, the tax will return in 2011 with a 55 percent tax rate and a $1 million exemption level.  Congress must make some choices.  It can extend the 2009 tax rates, have a retroactive tax increase when something is past, or come up with a completely new third alternative.  It will be interesting to see if retroactivity will be upheld since the event (death) making someone subject to the tax will already have occurred.

Other issues to be considered will be to extend many expired provisions and address the impact of the expiration of the Bush tax cuts in 2011.  In order to make the budget numbers look better, President Bush had the tax cuts end after 2010 and the rate return to what it was before the change.  However, the deficit will impact every discussion.  The Congressional Budget Office has issued some scary numbers:

- 2010 budget deficit - $1.6 trillion
- Projected 10 year deficit - $8.5 trillion
- Federal debt projection over next 10 years rises from $12 trillion to $24.5 trillion
Table 1 shows the percentage of gross domestic product that relates to the deficit on a historical basis.  The percentage for 2010 is the highest it has been in more than 40 years.  The improvement relates to some expectations of controlled spending and increased revenue which may not be feasible in an election year.  Table 2 and Table 3 look forward and compare the baseline budget to the President’s and how that will be impacted by many of the proposals.

Total Deficit or Surplus as a Percentage of Gross Domestic Product (CBO)

Congress needs to deal with these issues while providing some incentives with the jobs bill.  A number of the provisions under consideration could benefit the hospitality industry.  These include a further extension of the expensing provisions for purchases of equipment and a credit available to employers for expanding the portion of the wage base subject to FICA tax.  Congress does not have the luxury of doing nothing.  Failure to act will result in an increase in taxes for 95 percent of taxpayers, suicide in any year but particularly in an election year.

The President’s budget proposal contains a number of provisions which give some insights into what can be expected.  Upper income taxpayers will take a hit in almost any proposal.  The President wants to raise the top tax rate to 39.6 percent and the dividends and capital gains rate will probably increase to 20 percent from the current 15 percent.  Unfortunately, tax planning will be very difficult as discussions will be partisan and even a number of Democrats in swing states do not want the tax bills addressed until after the election.

What the President cannot get done through Congress, it can try and regulate.  The IRS enforcement budget has been increased and it is increasing its rulemaking.  Issues of specific concern to the hospitality industry include a proposal to disclose an uncertain tax position on a tax return, as well as addressing the independent contractor/employee issue (again).  While it will be another difficult year, the emphasis on jobs by Congress may help improve consumer confidence which is the best thing that can happen to the hospitality industry.

Comparison of CBO’s 2009 Baseline and President’s Budget (Billions of Dollars)


Comparison of Budget Deficit Projections (Billions of Dollars)

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Kevin Reilly, an attorney and CPA, is a member of the firm of Witt Mares.  Witt Mares is a member of PKF International Ltd, an association of legally independent member firms.  He heads up the hospitality practice for the Fairfax, Va.-based firm.  This article was published in the April 2010 edition of Lodging.

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Contact: 

Robert Mandelbaum
Director of Research Information Services
PKF Hospitality Research
3475 Lenox Road, Suite 720
Atlanta, GA  30326
Phone: (404) 842-1150, ext 223
Fax: (404) 842-1165
robert.mandelbaum@pkfc.com
www.pkfc.com
 

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Also See: Analyzing the Tax Implications of the Stimulus Legislation; Tax Breaks Not Large, Few Will Benefit Hospitality Industry / Kevin F Reilly / May 2009
The Checks in the Mail; Congressional Action Impacting the Lodging Industry / Kevin F. Reilly / May 2008
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