The Difficulties of Tax Planning with an Inept Congress

How does the lack of clear tax provisions hurt tax planning? Here’s an example from one of my clients.

The client is a small business owner. His business is growing and he hired his first employee this year. In prior years, this hire would have qualified the business owner for the “Work Opportunity Credit” (abbreviated as “WOC”).

But the WOC expired 12/31/11 and is no longer available for most categories of new hires, except for hires of veterans. The employee is not a veteran but belongs to one of the other categories of new hires that used to qualify for the credit.

So my client is out of luck.

Or is he?

It’s possible that Congress will extend the WOC, retroactively for all of 2012, for all classifications of new hires. Because of that, we submitted the necessary paperwork to Iowa Workforce Development to get the pre-approval certification, even though we don’t know if the credit will even be available.

(Side note: the way the WOC works is, you send a stack of paperwork to your state workforce agency [in Iowa, it’s Iowa Workforce Development], which reviews the paperwork and hopefully sends you a certificate saying you qualify. With the certificate in hand, you can then claim the credit on your tax return.)

Because of the rapid expansion of his business, the business owner’s net income has spiked this year. The WOC would be a huge, huge help on his tax return.

But we can’t assume the credit will be extended. So we’re at an impasse. Does the client make estimated payments to the tune of several-thousand dollars? It’s been a banner year, but the company is still in start-up mode. Several-thousand dollars is a big deal.

Or does the client hold out in hopes that the credit is extended for 2012? If the credit is extended, he would qualify for a large enough WOC to wipe out his entire tax liability.

The last time a batch of tax provisions expired, Congress waited until shortly before Christmas to extend the provisions retroactively to the beginning of the year. Not exactly convenient for planning purposes.

The real shame is, small businesses that are growing, hiring employees and trying to do the right thing are caught in the middle of the political wrangling.

Further Reading

Over the summer, I posted an article about tax planning for alternative minimum tax when we don’t know what the AMT exemption is for 2012.