If Congress passes the deal struck by President Obama and Republican lawmakers, federal tax rates will remain the same next year, unemployment benefits will be available for longer, and employers will get some new tax incentives.

If the deal fails, taxes on most Americans will go up as of Jan. 1 and unemployment benefits will not be extended.   While anything could change politically, most observers believe Congress will approve the deal extending Bush-era tax rates for two years and unemployment benefits for another 13 months.

As the deal-making escalates, however, so does the proposal’s final cost—projected to add $858 billion to the federal deficit in the next several years. Beyond the tax-rate and unemployment extensions, the deal provides a one-year payroll tax reduction for employees.

And the estate tax -- currently scheduled to return in 2011 to a top rate of 55% along with a $1 million exemption -- will instead return with a lower top rate of 35% along with a $5 million exemption.

The deal also would allow businesses to expense 100% of most of their investments in 2011, which some say will encourage business owners to purchase new equipment and ultimately hire more workers.

The deal also proposes to expand the federal research and development tax credit, and  keeps three tax cuts included in the federal stimulus package-- a tuition tax credit, child tax credit and one for the Earned Income Tax Credit.

Form 1099 repeal delayed

However, a measure that would have rolled back a controversial aspect of federal health reform for businesses has been delayed but is expected to be adopted when the new Congress takes over in January. At question is a healthcare reform mandate requiring all businesses to file a miscellaneous 1099 form with the IRS for all purchases of property and services exceeding $600, starting in 2012.

If this provision isn’t repealed, businesses will have the burden and expense of tracking all purchases and then reporting the dollar amount of sales on a 1099 form whenever the $600 threshold is reached.

Unemployment extension

The tax-deal bill extends the period in which individuals may qualify for Emergency Unemployment Compensation (EUC) from ending the week before Nov. 30, 2010, to the week ending before Jan. 3, 2012. Those who qualify by that deadline may claim EUC through the week ending June 9, 2012.

There is no increase, however, in the maximum period of EUC benefits.  Also, the bill extends the 100% federal reimbursement of regular Extended Benefits (EB) payments (which are normally only 50% federally reimbursed) through the week ending after Jan. 4, 2012, with authority for states to further extend the 100% reimbursement through June 11, 2012.

The net cost of all of the unemployment provisions is estimated through 2020 to be $56.485 billion. The bill calls for the additional spending to be deemed emergency and not to require offsetting reductions in spending or offsetting increases in revenue. Congress is expected to vote on the tax deal this week.

For more information, contact CBIA’s Bonnie Stewart at 860.244.1925 or bonnie.stewart@cbia.com.