guest commentary by David Potts
Editor’s note: David Potts is a certified public accountant with more than 33 years experience. Although every effort is made to provide you accurate and timely tax information, it is general in nature and not specific to your facts and circumstances. Consult a qualified tax professional to discuss your particular case. Feel free to e-mail topic suggestions or questions to email@example.com
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CPAs regularly field questions on why the United States income tax laws are so screwed up and unfair. Everybody has their own opinion, but I tend to accept the opinion of most tax historians. Many tax historians mark Oct. 7, 1975, as the beginning of the end of a rational Internal Revenue Code.
In 1975 Wilbur Mills was chairman of the U.S. House Ways and Means Committee. Mills held this position from 1957 to 1975, a tenure longer than any other chairman of the Ways and Means Committee in U.S. history. If you are not familiar with the function of the Ways and Means Committee, it is one of the most influential committees of the U.S. House of Representatives and one of its primary functions is write the tax laws for the United States. It is the starting point for all the U.S. tax laws that have ever been enacted.
Mills was considered one of the most powerful men in Washington during his tenure. Many older CPAs and tax attorneys will tell you that Wilbur Mills was the last chairman of the Ways and Means Committee who really had a grasp of the income tax laws and regulations. He understood the importance of sound tax policy and he paid attention to details.
Unfortunately, around 2 a.m. in the morning of Oct. 7, 1975, police stopped a swerving car near the Tidal Basin and when the car stopped a lady jumped out of the car and into the water. The driver of the car was intoxicated and arrested. The driver of the car was Wilbur Mills. Mills had become addicted to alcohol and the drug Librium. After his arrest he immediately sought treatment and later, as a recovered alcoholic, promoted the need for additional treatment programs. Although he recovered from his addiction, the tax code has descended into a deep abyss.
So why are our tax laws screwed up? Forty years ago when Wilbur Mills was the chairman of the Ways and Means Committee, the Chairman had an in-depth knowledge of the Internal Revenue Code and understood how tax policy and administration should work to benefit the country. Mills prevented trash tax laws from getting through his committee. Today tax laws are primarily political currency for our elected officials to repay their political debt. They are written and passed to achieve election results, not for the functional administration of our government. National and much of state governance has developed into a culture of power acquisition driven by party loyalty. This is why our tax laws are unfair, difficult to understand, and discourage taxpayer compliance.
Where does this new political culture leave the taxpayer? For the business owner who tries to make a good business decisions, it makes life difficult. Tax laws impact business decisions. The current state of our tax laws is one of uncertainty. Uncertainty paralyzes decision makers. Uncertain as to what Congress and the President will do to the tax law, business owners tend to delay new investment in their business thereby delaying business growth which drives job growth.
One particular tax law that has been the hostage of political uncertainty is commonly known as the “Section 179 deduction” or more accurately, “Sec. 179. Election to Expense Certain Depreciable Business Assets.” Section 179 of the Internal Revenue Code allows businesses to deduct the total cost of qualifying assets (equipment, etc.) acquired in the year they are purchased rather than to allocate the deduction over many years. Many times deducting the total cost of equipment in one year can decreases a business’s income taxes enough to allow the business to buy new equipment now rather than postpone the purchase until additional cash can be generated.
Over the past several decades, business owners, primarily small business owners, have used Section 179 as a way to help their business afford the cost of new equipment. Back in the 1980’s the Section 179 deduction was limited to $10,000. By 2010 the amount of the cost of qualifying assets that could be expensed had increased to $500,000 for businesses whose investment in qualified assets didn’t exceed $2 million. The $500,000 limit was set to expire at the end of 2011, but throughout 2012 politicians kept promising to extend the “Bush” tax breaks. The obstacle for decision makers who wanted to invest in new equipment during 2012 was the constant political chatter absent any real action. It was on Jan. 2, 2013, that President Obama signed the American Tax Relief Act of 2012 extending the $500,000 Section 179 limit from Dec. 31, 2011 to Dec. 31, 2013. Any incentive to purchase qualifying assets in 2012 was void since the extension of the limit, although retroactive, was after 2012 ended.
Today, uncertainty rears its ugly head again. The $500,000 Section 179 expensing limit expired on Dec. 31, 2013, with the new 2014 limit reduced to $25,000. This is a huge change. But don’t worry, our elected officials are talking about increasing the limit again. And they are good at it ... talking I mean. But because of our elected official’s political aspirations, we the people are left to make important decisions in uncertainty.
Good government costs money and money has to be raised by people paying taxes. It just doesn’t need to cost more than needed. The problem is that tax laws are passed for the benefit of government leaders, not the electorate. Tax laws have become political tools for political parties to acquire power and buy votes. We all believe we are paying excessively for the cost of governance. This is why many if not most taxpayers feel cheated by our tax system. This is why our tax system is broken.
With the current tax code and current political culture that holds our tax laws hostage for political gain, it is more important than ever to be informed about the tax options available to you when making business and investment decisions. If you want to survive the current tax law and regulations, tax planning should be ongoing and a priority. Otherwise your hard earned money may go to pay more than your share of both party’s political debts.
We’ve talked about our complicated, confusing, and unfair tax system for most of my adult life. However, we keep allowing our government officials to pass complicated, confusing, and unfair tax laws. Nothing changes because deep down we don’t expect anything to change. Whether or not you expect our current political culture to change, let’s rebel anyway. Let’s write letters to our congressman and exercise the power of our vote. Let’s at least ask for a simple, logical, purposeful, and transparent Internal Revenue Code. Didn’t somebody once say “You have not because you ask not”?
One more thing. When you think of Wilbur Mills, whether you liked his political beliefs or not, realize there was a lot more to the man besides alcohol and drug use.