Amidst the scandal and meltdown in the financial sector, many have been waiting for a taxing regulatory response.  One was not forthcoming until last month, as the House approved the most significant expansion of Federal regulations since the Great Depression.  In an effort to avoid a repeat of the liquidity crisis, the bill includes leverage limits and the ability for regulators to break up large banks.

But the more ominous government action will take place in 2010, as the Obama administration is positioning for significant tax increases which will dramatically impact small businesses.  The Treasury’s recommendations to enhance “revenue” include:

* Tax cuts for families and individual in the form of more aggressive MWP (Making Work Pay) credits,  Earned Income Tax Credits (EITC) and Child Tax Credits.

* Reinstatement of the 39.6 tax rate, 36% for couples over $250,000 in income, and elimination of deductions for certain taxpayers in this tax bracket.

* Imposition of  a 20% rate on dividends and capital gains (at incomes above $250k)

* Changes in 401K rules that will encourage retirement savings for lower wage earners

* Elimination of Capital Gains taxation on investments in small business stock (primarily in manufacturing).

* Making the Research and Experimentation (R&E) credit permanent.

*Expansion of the Net Operating Loss Carryback.

The most dramatic of these changes is the 13% tax increase in the marginal tax rate for the wealthy.  In a remarkable irony, the 35% rate (due to sunset in 2010) was part of the Jobs and Growth Tax Relief Reconciliation Act of 2003. Now that some in Congress believe that jobs and growth are seemingly not as important, the proposed rate will escalate to 36.6% for high income earners should the legislation pass.

The news is not all bad for the manufacturing sector as new tax laws may include the elimination of capital gains taxes for non-service businesses. To qualify, stock must be issued in 2009 or later and be held for 5 years. Tax savvy manufacturing entrepreneurs should seek counsel from their tax professional (that would not be us) and watch as these tax rules unfold in the months to come.