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Blake Christian
Blake Christian

Corporate tax overhaul proposals: Obama vs. Romney

Tax reform and policy take center stage as the presidential race heats up.

April 26, 2012
by Blake E. Christian, CPA

As the presidential election heats up and the two main candidates emerge, tax, job creation, and deficit reduction issues take center stage. Amid anemic job growth and record deficits, it is a good time to compare the corporate tax proposals of President Barack Obama, the Democratic incumbent, and former Massachusetts Gov. Mitt Romney, the presumptive Republican nominee.

Both candidates agree that the current federal tax system is flawed and that an overhaul is necessary. Both of their proposals focus on creating a more holistic worldwide competitive environment, but--not surprisingly--they take different paths.

The discussion that follows reflects the major corporate tax policy issues that each candidate advanced earlier this year.

Corporate Tax Rates

Currently, corporations are taxed on a graduated basis, starting at 15% for taxable incomes up to $50,000 and increasing to 38%, but flattening out at 35% for income over $18,333,333.

Obama proposes reducing the 35% rate to 28% and providing additional deductions for domestic manufacturers that would lower their effective rate to 25%. Romney proposes lowering the top corporate tax rate to 25% for all industries.

Various Corporate Deductions

Obama’s plan includes the elimination of the LIFO (last in, first out) inventory method. Taxpayers currently reporting on the LIFO method would be required to include in income their deferred earnings (LIFO reserves) over a number of years--possibly four or more years. His plan also includes eliminating certain expenses related to the oil and gas industry, such as the expensing of intangible drilling costs and the use of percentage depletion and two-year amortization for certain oil and gas expenditures. Obama’s plan also includes increasing the depreciable life of noncommercial passenger planes from five years to seven years.

Romney has not proposed any changes to the oil and gas sector, but he plans on extending for a full year the 100% first-year bonus depreciation provisions for capital expenditures to accelerate capital investment by businesses. He has also discussed broadening the tax base by reducing tax preferences, but he has not provided details on this plan. See also “Small Business Incentives” below.

Tax Credits

Both candidates propose making the 20% research and development (R&D) tax credit permanent so that taxpayers can properly plan their research strategies. For many years, Congress has enacted the credit for only a year at a time. The R&D credit has often been extended retroactively--and is currently not in effect--even though it is popular with both parties.

Obama has also proposed increasing the rate for the simplified credit to 17%.

He also proposes making the renewable electricity production credit permanent, and also making it refundable. This credit currently provides a credit of 1.5 cents per kilowatt-hour of electricity produced through renewable sources such as wind, solar, geothermal, and others.

Romney’s current plan does not address energy credits.

Taxation of Foreign Operations of U.S. Companies

Currently the United States generally taxes worldwide income of U.S. corporations, but has provisions to defer foreign-earned income not repatriated to the United States in a given tax year.

Obama’s plan calls for a minimum tax (currently unspecified) on foreign subsidiaries of U.S. corporations, even if those earnings are kept offshore. Corporations would be allowed a foreign tax credit for taxes paid to the host country. The president’s plan also provides a 20% tax credit for the cost of qualified companies to move operations back to the United States and denies companies a deduction for the cost of moving operations overseas. Additionally, his plan would tax “excess” profits from shifting intangible assets to low-tax jurisdictions currently and defer the deduction of interest expense attributable to overseas investment until the income from the investment is taxed in the United States.

The Obama administration is opposed to a repatriation “tax holiday” to temporarily reduce or eliminate taxes on accumulated foreign earnings repatriated to the United States, although it may be a possible compromise as part of an overall legislative give and take.

In general, the president believes a worldwide tax system is favorable, since it reduces the incentive for U.S. companies to locate operations overseas or shift profits out of the United States through accounting schemes.

Romney has included a repatriation tax holiday in his tax platform; however, he has not specified if taxpayers would pay no tax or just a reduced rate on any repatriated foreign earnings. He has also stated that he would shift the corporate tax to a “territorial system,” where U.S.-source profits would be subject to U.S. tax, but profits earned overseas would be exempt and only subject to taxes in the foreign jurisdiction.

Small Business Incentives

Obama has included “small business” provisions, including permanently increasing the amount of qualified property investments that can be expensed annually (the Sec. 179 deduction) to $1 million. For 2012, the maximum amount that can be deducted is $125,000.

Obama would also expand the ability to use the cash basis of accounting to businesses with up to $10 million in gross receipts. Cash-basis accounting is currently limited to businesses with up to $5 million in gross receipts. This has limited utility since most small businesses operate as S corporations or limited liability companies and, provided they do not hold inventory for resale, can use the cash basis regardless of revenue levels. He proposes increasing the deductible amount of startup costs from $5,000 to $10,000 for companies incurring $60,000 or less of startup costs.

Romney has not provided any specific provisions aimed at small business.

Corporate Alternative Minimum Tax (AMT)

Romney has proposed eliminating the corporate AMT, which imposes a tax of 20% on a broader tax base than the regular income tax system. Obama has not specifically addressed the corporate AMT.

Individual Tax Rate Proposals

While this article focuses primarily on the corporate tax provisions of the two candidates, it is worth noting that both have also addressed the individual tax rate structures. Not surprisingly, they have different approaches in addressing the personal side of taxation.

Obama has proposed allowing the 2001 Bush tax cuts to expire. This would increase the maximum personal tax rates on ordinary income from the current 35% to 39.6% for both single taxpayers and married couples with net taxable income in excess of $390,050. His proposal also would increase other current lower tax brackets.

Capital gains rates would increase from 15% to 20%, and qualified dividends would be taxed at rates as high as 39.6%--up from the current 15%. The president has also proposed taxing carried interest amounts (associated with private equity firm deal structures) as ordinary income versus their current capital gain classification.

Current health care law provisions also contain tax increases that will be effective in 2013 of 0.9% on wage income above a certain level, as well as a 3.8% tax on net investment income.

Romney proposes leaving the current tax rates unchanged for the foreseeable future; however, this will require congressional action since the higher pre-2001 rates will automatically be reinstated on Jan. 1, 2013. He has also promised repealing the health care act, which would also repeal the 2013 wage and passive income tax increases, and to repeal the AMT for individuals.

Obama is also lobbying Congress to pass a tax increase on the wealthy under a so-called Buffett Rule, which would require taxpayers with more than $1 million of adjusted gross income in a given year to pay a rate of 30% on such excess earnings, with certain adjustments. Legislation has been introduced that would phase in these provisions for taxpayers making between $1 million and $2 million of income. On April 16, the Senate voted to reject the current Buffett Rule proposal.

Be assured that tax policy will be front and center in the 2012 presidential election. More details will be forthcoming from both candidates in the coming months--then the real analysis can begin.

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Blake E. Christian, CPA, MBT, is a tax partner in the Long Beach, Calif., office of HCVT LLP. He can be reached at 562-216-1800 or blakec@hcvt.com.