Congress Debates Payroll Tax, Sec. 179 Expensing

December 13, 2011

A handful of tax cuts and tax extensions are set to expire Dec. 31, 2011 unless Congress acts soon. Of particular interest to small business are two key provisions: reduced payroll taxes for small-business owners and expanded section 179 expensing. Both provisions are currently being debated, however the pay-fors continue to cause heartburn for lawmakers on both sides of the aisle.

Payroll Tax

In 2010, Congress enacted legislation, the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 which reduced employee payroll taxes and self-employment taxes by two percentage points. This provision is set to expire on Dec. 31, 2011. Although this provision didn’t impact the employer-side of the payroll tax, lawmakers and the administration have been debating a host of proposals that could.

President Barack Obama has proposed reducing employee and employer payroll taxes by 50 percent on the first $5 million in payroll for 2012, and a complete payroll tax holiday for new hires. In the Senate, Democratic and Republican measures to cut payroll taxes have failed due to lack of agreement on how to pay for the payroll tax reduction.

Majority Leader Harry Reid proposed late Monday to reduce Social Security payroll taxes for individuals only (not employers) in 2012 from 6.2 percent to 3.1 percent and to raise individual income tax rates on those earning over $1 million annually by 1.9 percentage points. On Tuesday, Senate Minority Leader Mitch McConnell criticized the bill as “not a compromise” and “designed to fail.”

A recent bipartisan proposal from Sens. Claire McCaskill (D-Mo.) and Susan Collins (R-Maine) would cut employer payroll taxes by two points on payroll up to $10 million for one year. The pay-for would raise taxes by two points permanently on incomes over $1 million, but it includes some kind of small-business carve out. While a potentially promising concept, unfortunately no deatils have been released yet on what that carve-out would look like.

NSBA has called on Congress to enact an extension of payroll tax relief that addresses both employer and employee rates, which underscores the benefit a payroll tax cut can provide to struggling small-business owners. In an economy where credit continues to be tight, lower payroll tax rates provide immediate cash flow to smaller companies. This is money entrepreneurs can use to take advantage of usiness opportunities—leading to expanded business, more hiring, and investment in equipment.

Please click here to view NSBA’s complete statement.

Section 179 Expensing

For 2011, up to $500,000 of investment purchases may be deducted under section 179 expensing rules as approved under 2010’s Small Business Jobs and Credit act which increased significantly section 179 expensing. This was just a temporary increase, however and the limit is set to drop back down to $125,000 in 2012, and reduce even further in 2013 to $25,000. A failure of Congress to act to extend the expanded levels allowed under section 179 expensing will dramatically limit the number of firms that can benefit and dramatically reduces the economic effect of the provision. Retaining the current $500,000 threshold is of vital importance to the economy and to small businesses.

Bipartisan legislation has been introduced in the House by Reps. Richard Hanna (R-N.Y.) and William Keating (D-Mass.) and in the Senate by Sens. Chris Coons (D-Del.) and Marco Rubio (R-Fla.) to address this issue. The AGREE Act (S. 1866, H.R. 3476) would extend the current threshold through 2014. It also would make other positive changes including exempting small firms who are issuing their first new stock to the public from the application of section 404(b) of the Sarbanes-Oxley Act of 2002 for five years. These internal control reporting and assessment requirements are very burdensome to small public companies.

Please click here to see NSBA’s letter of support on the AGREE Act.

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