Rebounding From the Fiscal Cliff … For Now
Apparently, there is an adrenaline rush that comes from jumping off a high place with an elastic cord tied to your leg and hurtling toward the ground at high speed, only to be jerked back to safety when the cord catches you. That’s what the entire country must feel like after the events of the past month. Of course, if you keep doing that sort of thing, the elastic cord eventually stretches or breaks or the knot comes undone.
President Obama and Congress actually managed to take the country over the so-called “Fiscal Cliff” on Dec. 31 by failing to reach agreement on tax increases and spending cuts that expired at midnight that day. They then narrowly averted disaster with a “compromise” that jerked us back up on Jan. 1.
While the “compromise” did extend the expiring tax rates put in place by President George W. Bush in 2001 and 2003 for a large majority of individuals, it failed to address the looming spending cuts (other than to postpone them for two months). By the way, while everybody was mesmerized by the death-defying leap off the cliff and the subsequent rebound, the U.S. also neared its statutory borrowing limit again, which means the debt ceiling will need to be raised pretty soon or we’ll face yet another financial crisis. Oh, and the continuing resolution funding the federal government expires on March 27.
So, the adrenaline rush of being jerked back up the cliff may lead to severe headaches in the near future as pending automatic spending cuts, the debt ceiling and a potential government shutdown once again create the possibility of economic turmoil. For the moment, here’s a rundown of key provisions in the fiscal-cliff compromise that might impact forging operations:
- The income-tax brackets of 10%, 25%, 28% and 33% were permanently extended. The 35% bracket was increased to 39.6% for individuals earning more than $400,000 ($450,000 for couples filing jointly). The President urged that the 39.6% bracket start at incomes of $200,000 ($250,000 for couples filing jointly). This affects forging companies that are organized as “pass-through” entities (S Corps, LLCs or Partnerships) since the owners of those types of businesses pay taxes at the applicable individual rates.
- The capital gains and dividend tax rates of 15% were permanently extended for individuals earning less than $400,000 ($450,000 for couples filing jointly). Above those levels, the rates will be 20% on both capital gains and dividends.
- The Research and Development Tax Credit was extended for two years.
- The increased expensing of certain investments (Section 179) was extended for one year.
- The 50% bonus depreciation was extended for one year.
- The production tax credit for wind projects was extended for one year and now includes any project in which construction has started by Jan. 1, 2014.
Even though the first three months of the year will be largely dominated by the series of looming economic crises, we also expect to see work begin on comprehensive tax reform in the House Ways & Means Committee. FIA has been communicating with members of Congress for the past year to ensure that they understand the makeup of the forging industry and the key elements of comprehensive tax reform that will determine whether it is positive or negative for manufacturing in general and forging in particular.
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