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Annette Nellen
Annette Nellen
Proposed Tax Changes for Businesses

The tax proposals recently released by the Administration include numerous tax changes that would affect businesses.

February 25, 2010
by Annette Nellen, CPA, Esq

In early February 2010, President Obama released his budget for FY 2011. It included approximately 100 tax law changes. Among these are several changes applicable to businesses that will generate revenue for the fiscal year. There are also a few that will lower business taxes, but the net impact for business is a tax increase. However, businesses do not bear the major brunt of the deficit reduction efforts. That payment burden falls upon higher income individuals who would face almost $1 trillion of tax increases in the 2011-to-2020 time frame, about 87 percent of the total proposed to be raised. This article reviews some of the proposed tax changes that would affect businesses. The revenue estimates provided are from General Explanations of the Administration's Fiscal Year 2011 Revenue Proposals, issued by the Department of the Treasury in February 2010, commonly referred to as the "Greenbook" (PDF).

Tax Increases
In terms of dollars, most notable among the proposals that would increase revenues are those affecting international tax provisions and those that cut back preferences for the oil and gas industry. Details:

Proposal
Revenue estimate for 2011 to 2020 (millions)
International tax reform
Defer deduction of interest expense related to deferred income
$25,642
Determine the foreign tax credit on a pooling basis
31,961
Prevent splitting of foreign income and foreign taxes
27,403
Current taxation of excess returns associated with transfers of intangibles offshore
15,474
Limit shifting of income via intangible property transfers
1,233
Repeal the 80/20 company rules
1,149
Prevent avoidance of dividend withholding taxes
1,237
Modify rules for dual capacity taxpayers
8,549
Reduce underreporting of income due to use of offshore accounts and entities
5,433
   Total
$118,081

Elimination of oil, gas and coal preferences

Repeal enhanced oil recovery credit
$0
Repeal credit for oil and gas produced from marginal wells
0
Repeal expensing of intangible drilling costs (IDC)
7,839
Repeal tertiary injectants deduction
67
Repeal passive activity loss exception for working interests in oil and gas properties
180
Repeal percentage depletion for oil and natural gas wells
10,026
Repeal domestic manufacturing deduction (§199) for oil and gas production as well as for coal and other hard mineral fossil fuels
17,371
Increase to 7 years, the geological and geophysical amortization period for independent producers
1,110
Repeal expensing of exploration and development costs (coal)
413
Repeal percentage depletion for hard mineral fossil fuels
1,062
Repeal capital gains treatment for royalties (coal)
751
   Total
$38,819

The revenue proposals also include ones for new or reinstated taxes, as follows:

Proposal

Revenue estimate for 2011 to 2020 (millions)

New and reinstated taxes

Financial crisis responsibility fee
$90,000
Reinstate Superfund excise taxes
7,155
Reinstate Superfund environmental income tax
11,770
Make the unemployment insurance surtax permanent
14,196
   Total
$123,121

There are also several accounting method, tax shelter, compliance and tax gap proposals pertinent to businesses including the following.

Proposal

Revenue estimate for 2011 to 2020 (millions)

Accounting method changes

Repeal use of the LIFO method for inventories
$59,085
Repeal the lower-of-cost-or-market inventory valuation method
7,494
  Total
$66,579

Tax shelter related

Codify the economic substance doctrine
$4,242

Tax gap and compliance proposals relevant to businesses

Require information reporting on payments to corporations
$9,154
Require a certified Taxpayer Identification Number from contractors and allow certain withholding
704
Increase information return penalties
376
Require greater use of electronic filing of returns
0
Increase certainty with respect to worker classification
7,343
   Total
$17,577

While not listed as a tax increase for businesses, a portion of the almost $1 trillion of revenue (FY2011 to 2020) to be generated from the higher tax rates and reduction in itemized deductions and personal exemptions for high income individuals would arise from businesses that operate as a sole proprietorship, partnership, Limited Liability Company (LLC) or S corporation.

Tax Breaks
While fewer in number relative to tax increases proposed for businesses, there are a few significant tax reductions for businesses included in the President's FY 2011 budget.

Proposal
Revenue estimate for 2011 to 2020 (millions)
Tax reductions
Make the research tax credit permanent
-$82,608
Eliminate the capital gains on investments in "qualified small business stock" (§1202)
-8,055
Remove cell phones from "listed property" (§280F)
-2,826
   Total
-$93,489

The revenue estimate for the capital gains exclusion for "qualified small business stock" (QSBS) listed above represents the effect on non-corporate investors as they are the only ones who can avail themselves of the IRC §1202 exclusion. The Administration lists the proposal as a cut for businesses though. While not accurate, this placement is likely because the tax-free possibility of investing in QSBS for over five years will benefit businesses by incentivizing non-corporate taxpayers to invest.

In addition, several provisions are proposed to be extended through 2011. The Greenbook does not list all of these items, although it notes these business provisions: the shorter recovery period for qualified leasehold improvements and qualified restaurant property, and incentives for empowerment and community renewal zones. The budget effect projected for renewal of several temporary rules through 2011 is $46,677 billion revenue reduction for 2011 through 2020. The extended provisions pertain to both individuals and business taxpayers.

The Administration also proposes to extend bonus depreciation at IRC §168(k) and the higher expensing amounts of IRC §179, which expired at the end of 2009, through 2010. In the FY2011 to 2020 budget, these changes represent tax cuts for 2010, but not for later years because the larger depreciation deduction that could be claimed in 2010 results in reduced depreciation deductions for subsequent years.

Looking Forward
Congress has many items on its plate, such as healthcare reform, whether or not to reinstate the estate tax for 2010, deciding if any items that expired at the end of 2009 should be renewed, the alternative minimum tax (AMT) "patch" for 2010 and cap-and-trade. In addition, if it wants to retain any of the tax cuts of 2001 and 2003 that expire at the end of 2010, it will have to enact legislation to keep them. Thus, Congress has a busy schedule. Certainly some of the proposals from the Administration might end up in various tax bills, particularly ones that are revenue raisers that can help Congress meet its PAYGO (pay as you go) budget requirements.

We also await the report of President Obama's Tax Reform Task Force this year. This could overshadow the "Greenbook" proposals if there is a desire by Congress and the Administration to address broader, strategic tax reform rather than piecemeal changes. It should be an interesting year.

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Annette Nellen, CPA, Esq, is a tax professor and director of the MST Program at San José State University. Nellen is an active member of the tax sections of the AICPA, ABA and California State Bar. She serves on the AICPA’s Individual Income Taxation Technical Resource Panel and chairs the California Bar's Tax Policy Committee. She has a 21st Century Taxation Web site and blog.