As an Iowan, I’m still recovering from the hangover we call the Iowa Caucuses. Because of the presidential campaign, one of the injustices we were frequently assaulted with in television ads and phone calls was the “empty promise.” Political ads for presidential candidates made bold promises that were beyond the Constitutional authority of the position of president. I noticed the most frequently mouthed empty promise revolved around taxes. The typical candidate stated that when he was in charge, “taxes would be lowered.” No specifics, no indication of how to pay for it, no mention that perhaps Congress might have a differing opinion.
These amorphous tax claims make for great entertainment and plenty of copy for journalists, but they don’t provide any guidance for the entities that have to pay these taxes. Businesses in particular are being left in the dark as to what will happen with their taxes, especially since many key tax breaks expired when the clock hit midnight at the beginning of this year. Prognostication with taxes is always dangerous, but I’d like to suggest four items businesses should consider in planning for taxes this year—particularly as they apply to benefit planning.
1. Overall taxes are more likely to go up than down. Three factors drive this opinion from the tax community. First, the federal debt is approaching $15 trillion. It’s difficult to imagine a way to grow or save ourselves out of this large debt. Second, the political mood is not to extend tax cuts for businesses. Especially since a number of breaks expired this year, inaction by Congress translates to automatic increases in taxes for businesses. Finally, businesses need more and more to factor in state and local taxes. In many jurisdictions, their treasuries are empty, and they need to fill their coffers quickly.
2. Tax planning should include more than seeking out tax deductions. In the world of benefits, the rules are well established as to what currently is deductible and what isn’t. There is only so much a business can afford to put in currently deductible plans such as a qualified retirement plan or a health insurance offering. The business seeking to save additional taxes should also be considering techniques involving tax deferral and tax timing. For example, if the company is informally funding a promised benefit, it might consider using a tax deferred vehicle like cash value life insurance. Or, in anticipation of increasing tax rates, it might look at deferred tax deductions that can be generated by deferred compensation arrangements. The CFO with a good calculator may find that the net present value of a future deduction is worth more than a current deduction.
3. Tax avoidance is OK; tax fraud is not. With the prospective increase in tax rates, particularly for businesses and the affluent, we are also seeing an increase in tax schemes. Since Congress has been in stall mode for the last several years, there have been few substantive changes in the actual tax code. It is unrealistic to expect the suddenly arrival of tax strategies that weren’t available in the past. A handy acid test for looking at new benefit offerings is to question benefits that are titled with tax code numbers. Sure, we know about 401(k)s and 403(b)s. But when we see new benefit programs referencing 419, 412, and Section 79, it is advisable to talk with your tax professional first.
4. It’s not just about taxes. Over the years, I’ve encountered businesses seemingly willing to spend $1.10 to save $1 in taxes. Especially when it involves employee benefits, what value is there to a tax-favored benefit that no one likes? The CFO and the HR director need to work together to determine benefits that provide bottom-line value, both in terms of taxes and productivity. Particularly since we won’t know the outcome of the presidential election until the year is almost over, it’ll be a long time before we know where taxes will ultimately land. Taxes are important, but businesses are well advised to keep employee satisfaction and expense management at the forefront.