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By Neil Gnebba, Tax Manager
BDO, Detroit office

Ever hear the old joke about what’s going to happen in the future? While the joke generally varies, it usually ends with “consult the magic eight ball” or “throw a dart at the dartboard” or “if I knew that, I’d be a millionaire.”

And while everyone smiles, there’s some truth to the punch line. Each day taxpayers attempt to balance on the economic seesaw, wondering which way the scale will tilt. Will the Bush cuts be extended? If so, for who? If not, how will the economy react? And all this is taking place while we work through the grind of day-to-day life.

So, with all this unpredictability, what can are taxpayers to do?

The need for planning has become more important than ever. A few news areas to consider focusing on include:

Businesses

• Accelerate deductions: For 2010 and 2011, you are allowed to deduct $500,000 in depreciation expense for qualified capital purchases during the year. The total assets purchased for the year cannot exceed $2 million or else the deduction begins to phase out. Also, bonus deprecation is extended for 2010, which enables you to deduct 50 percent of qualified property costs in the first year in which an asset was placed in service.
• Credits: For 2011, there is an employee retention credit, in which you can receive up to $1,000 for retaining certain newly hired workers for at least one year.
• Additional hot topics: Start-up costs, higher education expenses, portfolio allocation and built in gains/losses.

Individuals

• Estate planning: While in 2010 taxpayers enjoyed no estate tax, starting in 2011 the estate tax reverts back to the $1 million exemption amount. This means that if you were to pass away, your estate would be required to pay tax on the value of your assets that exceed $1,000,000. While this exemption amount is currently being debated in Congress — in 2009, the exemption amount was $3.5 million — proper planning and consideration for the future will be important.
• Gifting: The annual gift tax exclusion for 2011 is $13,000. This exclusion entitles you to gift $13,000 — or $26,000 if married — of value without either party paying tax. The lifetime gift tax exclusion is $1 million. Perhaps it’s time to start funding your grandchildren’s college education?
• Additional hot topics: Conversion of a traditional IRA to a Roth IRA, generation skipping transfer tax, charitable contributions.

When we look into the future of the Michigan Business Tax (MBT), which took effect just two years ago, the crystal ball becomes even murkier. Most newly elected officials, including Michigan’s Governor-elect Rick Snyder, made campaign promises to significantly change and/or repeal the MBT.

Most business owners would agree with that concept, claiming that the current tax regime puts Michigan businesses at a disadvantage from a competitive standpoint. They don’t like the fact that a business pays a “modified gross receipts tax” even in years in which they incur substantial losses. Sound familiar?

The question that Michigan’s government faces is how do you make up for the revenue shortfall created by repealing the MBT?

In the past with the abolishment of the Single Business Tax, any time there are proposed radical changes to the state’s revenue streams, there are continuous debates and compromises until we reach an agreed-upon tax. Therefore, even though Michigan’s new leadership would like to change the MBT, in the short term, the tax is likely here to stay.

Overall, this has become the most interesting year in recent memory with regards to taxes. With the current lame-duck Congress, taxes, while on the forefront of most people’s minds, are still sitting on the back burner with no headway in sight.

My prediction: This is going into the 11th hour. So make sure you have your accountant and broker on speed dial because there might only be a narrow window of opportunity for planning before the year is over.

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