President Bush's budget for fiscal year 2004, released just before Valentine's Day, is stuffed with tax treats, including many that would taste sweet to trucking businesses. But Congress may consider them too rich and pick a slimmer menu instead.
The President has proposed cuts almost as large over 10 years as the massive package Congress enacted in 2001. The biggest single item is elimination, at the individual shareholder level, of double taxation of corporate income, retroactive to January 1, 2003. Companies would tell shareholders how much corporate income tax had been paid, both on dividends and retained earnings. Shareholders would exclude the dividend portion from current income taxes and the retained earnings portion from capital gains when they sell the company's stock.
This provision would immediately benefit shareholders of profitable “C” corporations and would encourage owners of “S” corporations, partnerships and some sole proprietorships to convert to corporate status. These business forms are popular in trucking.
A second goodie is the broadening of expensing (immediate deduction) of equipment. Currently, businesses that buy no more than $200,000 of equipment can expense the first $25,000. The budget would boost those amounts to $325,000 and $75,000 in 2003, and index them for inflation thereafter.
Not all companies would be winners, however. The plan would trim to one year the time over which a net operating loss (NOL) could be carried back to claim a refund of taxes on past profits. Under current law, NOLs can be carried back two years (five years for NOLs in 2001 and 2002). Carriers that incur losses in both 2002 and 2003 thus would get no relief until they return to profitability.
Another provision of the President's plan would accelerate to the beginning of 2003 the reduction in individual tax rates already scheduled for 2004 and 2006. This would help employees, owner-operators and owners of all types of companies.
So far, key members of Congress have been cool to the corporate tax proposals. The expensing and rate cut ideas appear more likely to be enacted.
The budget would dramatically expand and simplify some savings incentives. Individuals would be able to contribute much higher amounts to savings plans. Of greater interest to companies, the tricky nondiscrimination rules for employee savings plans would be loosened and contribution limits raised.
It is unclear whether these changes would encourage more carriers, especially small ones, to contribute to employees' retirement plans, or to drop plans on the grounds that employees now could more easily contribute on their own.
A minor but beneficial part of the budget would scale back the federal unemployment tax rate that all employers pay from 0.8% to 0.2% by 2009. Finally, the budget proposes making permanent the income-tax cuts and estate-tax repeal now scheduled to occur in 2010 and to disappear in 2011. Given the huge long-run revenue cost of those changes, it seems unlikely that Congress will enact them this year.
The bottom line: The President has sent Congress a big box of candy. But Congress may say, “No can do.” Because the tax ideas are so sweeping and come at a time of huge deficits and widespread concerns about war and a sluggish economy, many of them are sure to be ignored, watered down or replaced. That makes this a time to stay in touch with both your financial planner — so you can move quickly on changes that do become law — and your Washington representatives, to tell them how each change would affect you.