Capital Corner: “Public Enemies”

Jim Brandenburg, CPA, MST Tax Shareholder   email | bio
August 2009

Wisconsin makes the big screen with the recent release of “Public Enemies,” starring “JD,” Johnny Depp. Ironically, at almost the same time, the new state budget was released in Madison and signed into law by another “JD.” Unfortunately, businesses in Wisconsin might be labeled “Public Enemies” by this year’s budget. Here are a few of the tax increases directed at businesses:

Income Tax Rates.

• As many closely-held businesses operate as S Corporations and LLC/Partnerships, the business income is taxed to the individual. Increasing the maximum rate from 6.75 percent to 7.75 percent amounts to a 14.8 percent tax hike on many closely-held businesses.

"Production Deduction” Eliminated."

• Wisconsin had followed federal law and permitted the “production deduction” incentive. This deduction was available to manufacturers, construction companies, agricultural businesses, software developers and even movie-makers. It was available to S Corporations, Partnerships and C Corporations. The federal production deduction for 2009 is 6 percent of the company’s income, and increases to 9 percent in 2010. The state budget bill no longer allows this deduction. A closely-held S Corporation or Partnership could have double trouble with a combination of both of these. The combined overall tax increase is 22.1 percent for 2009, and would be 26.2 percent in 2010.

Capital Gains Tax Doubles.

• Wisconsin previously taxed 40 percent of long-term capital gains and excluded 60 percent (a net tax rate of 2.7 percent). Under the new budget bill, for 2009, 70 percent of capital gains will be taxed and 30 percent will be excluded. This is a 5.425 percent rate (using the new state maximum rate) or a 101 percent increase.

The Wisconsin budget made many changes including income taxes, sales taxes, property taxes, garbage fees, insurance, etc. but coverage of these will need to wait for the sequel.