President Bush!  Seems like we’ve heard that one before.  However, the current  Bush is acting more like former President Reagan than his father.  As one of his first moves in office, he is pushing a $1,600,000,000,000 ($1.6 trillion – although it seems much more impressive with all the zeros) tax bill.  During the campaign, it was $1.2 trillion, but increased by 25 percent before it was even introduced. 

Pork a la mode

The bill contains very little in business tax breaks, and even before the proposal was sent to the Hill, the lobbyists were at full force visiting key players in Congress.  Too much pent-up demand is present for the bill to emerge as it was originally introduced.  Although President Bush has asked that the bill not be loaded up with extraneous provisions, experience tells us that one person’s pork is another’s key need.  You can expect that $1.6 trillion number to increase as Congress adds its pet projects.

However, all bets are off in trying to predict what finally comes out.  Alan Greenspan’s endorsement of tax cuts and the slowing economy have provided an impetus for passing some form of legislation.  The move to make the tax cut retroactive to the beginning of the year also means that you are operating in a game in which you do not know the rules (always great for business planning.) 

Even the Democrats are on board for some type of tax relief.  But it’s unlikely they will sign off on the plan currently being submitted, since most of the tax relief goes to higher income individuals, and the Democrats are concerned that any downturn in the economy will impact the size of the surplus being predicted.  With the narrow margins in both the House and the Senate, President Bush will need to compromise, while at the same time keeping his message intact.  But it will be some time before we can talk about what finally passes next year.  Right now, we need to look at what happened in 2000 that will impact the hospitality industry.

Lame Duck Soup

Due to the presidential election and the partisan bickering throughout the year, very little tax legislation was enacted.  In fact, the more important bills were not passed until a lame-duck session of Congress.  The omnibus funding bill contained $31.5 billion in tax cuts.  Most of the tax incentives are designed to encourage investment in economically distressed areas.  More than 20 administrative and corrective measures were tacked on to the Community Renewal Tax Relief Act.  Although not the Act’s focal point, the changes will impact a far greater number of taxpayers than the community renewal provisions.

Probably the most important change for the hospitality industry is the repeal of last year’s legislation that eliminated the use of the installment method for accrual basis taxpayers.  In effect, things go back to where they were, as if the repeal were never enacted.  The retroactive repeal allows a business sold in 2000 to ignore the repealed law entirely when filing its 2000 tax returns.  The reason for the repeal in the first place was to plug a loophole that allowed a business to defer tax on gain for a long period of time.  That perceived loophole was not addressed in the repeal.

The legislation comes shortly after the IRS announced a relaxation of the rules allowing more small businesses to circumvent the legislation.  In Rev. Proc. 2001-10, the IRS allowed more businesses with less than $1 million in gross receipts to use the cash method of accounting.  The legislation reinstates the use of the installment method for all taxpayers, not just those under $1 million.  You can expect a more careful review of the issue in the future, since the cost of the repeal is estimated to be $2 billion over the next ten years.

Tips Ragout

The Internal Revenue Service has issued model agreements for employers in specified industries to determine, report, and pay tax on employee tips.  Since 1993, it has solicited Tip Reporting Alternative Commitment (TRAC) agreements from the food service industry.  The purpose is to increase compliance among tipped employees through education and agreements rather than audits.  When employers in the food service industry wanted to design their own TRAC agreement, the IRS incorporated its provisions into the present arrangement.  The agreement provides that the IRS will not examine an employer while the agreement is in effect.  It will also adhere to certain guidelines for auditing employees and refrain from demanding payment of FICA tax from the employer.  The IRS may terminate the agreements at any time.  However, it may not terminate without cause, unless there is a significant change in the FICA taxation of tips.  After December 31, 2005, the IRS reserves the right to terminate the program.  Any covered entity allowing tips should consider entering the program.

Just (?) Desserts

A number of administrative rules were issued during the year which, in some cases, increased the burden on taxpayers, and in others, reduced it.  Increasingly, the trend is for the IRS to continue requiring taxpayers and professional preparers to take on more of an audit function by requiring more information reporting.  True, the IRS audits only about one percent of returns filed, but this is slight consolation if yours is one of the returns selected.  Expect this trend toward more administrative burdens being placed on taxpayers to continue into the future!

Kevin F. Reilly, JD, CPA, is the U.S. national director of taxation and managing director for the Washington, D.C. office of PKF.