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Now is the time to prepare for coming tax increases

There’s a blizzard of tax increases headed our way. If you’re a small business owner or practicing professional, it’s time to start thinking about how you’re going to survive this onslaught.

In the next few years, you can expect four significant tax increases. The first two are already legislated. The third is under debate in the Senate, and the fourth is at the heart of the dustup in Wisconsin. All four are inevitable.

Health care reform brings a slew of tax increases and new fees and regulations all by itself, particularly if you’re a health care professional. I keep reading reports that half the physicians plan on retiring. The days of wine and roses could be over for medical professionals if they’re not busy devising ways to deal with it. Our tricky Congress delayed the most unpleasant parts of health care reform until everything else was implemented so it would be harder to unravel. The bill is more than 4,000 pages long and I don’t think they’ve delved all the way to the bottom yet. In addition to all the bad things, it’s chock full of tax preferences targeted at individual contributors (oops) companies. Congress can’t de-fund the bill unless they change House rules. So the bill is funded. The IRS has added 1,500 agents just to police the tanning tax.

The Bush tax cuts are legislated to expire in 2012. That’s a done deal. All lawmakers have to do is nothing. Considering the economy, the difficulty selling treasuries and our relationship with our biggest creditor, I think they’ll be forced to let the tax cuts expire.

But that won’t be enough to begin repaying the national debt. It’s a subject that’s starting to get action in the Senate. A coalition of senators from both sides of the aisle recently plotted to force Congress to accept a tax increase. That one apparently didn’t get anywhere, but the size of the national debt makes it absolutely certain something has to happen. The federal budget deficit will be $1.55 trillion this year, bringing the national debt to $15 trillion. As you’re fully aware, that can’t go on.

There are two ways to deal with it. One is to cut spending and the other is to increase taxes. Congress has shown no inclination to cut spending. Lawmakers barely approved a $100 billion spending cut, which is only one-fifteenth of the deficit. That means lawmakers have opted for a tax increase. Congress has never cut spending and won’t cut spending now. That means a tax increase.

Look out the window. Believe it or not, you don’t see much recession locally thanks to our energy sector. But tax revenues are down all over the country, which puts state pensions upside down — teachers, police, firefighters, city, county, state. This is the fight they’re having (or they’ve already had) in Wisconsin. That will give you the idea how popular it is to cut pensions. I don’t think our State Legislature has any intention of dealing with that. A state tax increase is inevitable.

At 15 percent each, that’s a cumulative tax increase of 60 percent. That will drive the top rate up from 35 percent to 56 percent.

And to add to your woes, there are a couple flies in the ointment.

First, 99 percent of practicing professionals and small business owners pay more tax than the law requires. In my entire career, I haven’t encountered a single small business that hasn’t. If that’s you, and it probably is, you’d better get on top of that before those goodies start dropping down your smokestack.

Second, the IRS has identified 10,000 entire firms of incompetent tax professionals. The IRS is writing, calling, visiting their offices, visiting their homes and generally putting the fear of God in them. That’s the reason the IRS will soon begin testing tax preparers.

This is a good time to start getting everything in order. It’s a dangerous world out there and it’s going to get more dangerous.

 

Robert Ellis is principal at Ellis CPA, a Grand Junction-based firm that serves closely held businesses throughout the United States. For more information, call 241-5040 or visit www.elliscpa.com.
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