Recently, we reviewed Senator Obama’s tax policies and how they might impact S corporations should he become President. What about Senator Clinton? If she becomes President, how would her tax policies impact small and closely-held businesses?

In general, Senator Clinton has opposed the rate relief and other tax reductions enacted over the past eight years. As she told one audience:

I want to restore the tax rates we had in the ’90s. That means raising taxes on corporations and wealthy individuals. I want to keep the middle-class tax cuts, and I want to start making changes that will save us money, save money in our Medicare budget, save money for the average American.

On the individual side, she advocates repealing the Bush tax cuts for those taxpayers making $250,000 or more. In practical terms, that would mean the two top income tax rates would rise from 33 and 35 percent to 36 and 39.6 percent.

While her position on reforming the Alternative Minimum Tax is unclear, she has advocated cutting the AMT and raising taxes on “billionaires”:

I’ll tell you something that we are going to have to deal with, the alternative minimum tax, which falls heavily on a lot of you and your families. You know, for six years I’ve been saying, with all due respect, do the billionaires in America need more tax cuts? Don’t you think we ought to cut the taxes of middle income people, in particular those who are going to be hit by the alternative minimum tax?

For investment income, dividends and capital gains, there’s no ambiguity. She supports raising the top tax rate on dividends from 15 to 39.6 percent, while raising the tax on capital gains above the old rate of 20 percent.

Regarding payroll taxes, she has expressed opposition to Senator Obama’s plan to eliminate the Social Security wage cap, but she has questioned why middle-income taxpayers are subject to Social Security taxes while wealthier taxpayers are not. As she stated in a debate last year:

Middle-class and working families are paying a much higher percentage of their income. [Billionaires like] Warren Buffett pay about 17%, because don’t forget, it’s the payroll tax plus the income tax. And when you cut off the contribution at $95,000, that’s a lot of money between $95,000 and the $46 million that Warren Buffett made last year. We’ve got to get back to having those with the most contribute to this country.

Finally, on the estate tax, Senator Clinton has advocated freezing the law as of 2009, when the top rate is 45 percent and the exemption is $3.5 million per spouse.

So what does all this mean for S corporations? On its face, it’s a mixed bag. Senator Clinton’s support for freezing the estate tax rules at 2009 levels is an improvement over current law, which would have the estate return to its old robust self in 2011. But all of her other positions represent a retrenchment back to pre-2001 tax policies or worse.

One challenge for Senator Clinton is how to pay for any AMT reform, middle class tax relief, or the numerous spending programs she has put forward. Keep in mind, the congressional baseline assumes all the Bush tax relief goes away in 2011, including family tax relief such as the refundable $1000 child credit and estate tax reform and repeal.

Extending any of those provisions, even freezing the estate tax at 2009 levels, will be considered revenue losers by the Congressional Budget Office and will have to be offset so as not to add to the deficit. Going beyond the Bush family tax relief by increasing the child credit for the child’s first year, as Senator Clinton advocates, would reduce revenues even more. Where will a Clinton presidency turn for those additional revenues?

Details aside, it is obvious that Senator Clinton’s priorities do not include keeping a lid on tax rates or the overall tax burden. She has other goals in mind. Given the budget pressures we will face over the next decade, a Clinton Presidency will likely mean significantly higher taxes on S corporations and taxpayers in general.

LIFO Under Attack, Again

Last-In, First Out accounting has been under fire for the past two years.

Part of the rationale for eliminating LIFO is budgetary-repealing LIFO would raise lots of money for the Federal government; by some estimates, more than $100 billion over 10 years. As you can imagine, numbers like that have caught the attention of policymakers desperate for new revenues.

Another reason is the on-going effort to conform U.S. accounting rules to those in Europe. These talks are part of a broad-based initiative to create a single, uniform set of world-wide accounting rules, something the accounting industry has sought for years.

The problem is the Europeans don’t use LIFO, so any effort to conform U.S. and E.U. accounting rules would require somebody to make a change. In some circles, the presumption is that the U.S. would repeal LIFO and conform to the Europeans.

Where does FASB (Financial Accounting Standard’s Board), the U.S. accounting standard maker, stand? In the past, they have been reluctant to weigh in on an issue as politically charged as LIFO.

So imagine our surprise when we saw their submission to the Securities Exchange Commission from last Fall on the topic of allowing U.S. issuers to prepare their financial statements under E.U. rules. In it, the chairmen of FASB and its Foundation advocate the U.S. adopting European rules:

Board members and Trustees strongly support the proposal described below that U.S. public companies transition to an improved version of international accounting standards; however, individual Board members and Trustees may have differing views on some of the other recommendations outlined in this letter.

Let us hope individual board members have lots of differing views, since part of the FASB recommendation is to eliminate LIFO.

It is unclear why the FASB would recommend for the United States to adopt the accounting rules of France, and not the other way around. Moreover, all the talks appear to be with Europe. The U.S. is talking with Europe. Japan is talking with Europe. The Chinese are talking with Europe. Perhaps the U.S. should talk to Japan instead, and reinforce our respective support for this important inventory accounting method. Unfortunately, Japan appears to be moving in the opposite direction.

LIFO is needed now more than ever. With inflation rearing its ugly head again after 25 years of disinflation, policymakers on Capitol Hill should be reluctant to repeal the one accounting method that protects businesses from paying taxes on the phony, inflated value of their inventory. Income taxes should apply to real income only, not phantom profits.

For companies using LIFO, there are two policy responses. First, we can and will defend LIFO before Congress.  There is no policy rational for repealing LIFO other than for its use as a revenue offset. Second, we should look into eliminating the conformity requirement for companies that use LIFO for tax purposes to also use LIFO for their book accounting as well. If FASB wants to abandon U.S. companies currently using LIFO, there is little reason the U.S. Congress and the tax code need to follow suit.

These issues will be debated and fought over the next year. If your company is on LIFO and wants to keep it that way, please let us know and we will help connect you with your congressional representatives.