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Annette Nellen
Annette Nellen

Corporate Taxation and President Obama’s FY 2013 Budget

Proposals include stimulus provisions and closing loopholes, but passage unlikely.

February 23, 2012
by Annette Nellen, Esq., CPA

On Feb. 13, President Barack Obama released his proposed budget for fiscal year 2013 and the “Green Book” of revenue proposals. The budget continues to call for economic stimulus provisions, such as extension of 100% bonus depreciation, as well as some international tax reforms and “loophole” closers. Key new items are proposals to encourage domestic job creation and retention. This article summarizes selected proposals of Obama’s budget relevant to corporations and notes some likely hurdles to the budget’s enactment.

Budget highlights

The president’s budget message emphasizes “creating an economy that is built to last” and all doing their “fair share” to help reduce budget deficits by $4 trillion over 10 years (President’s budget message). Jeffrey Zients, acting director of the Office of Management and Budget and chief performance officer, explains that “building an economy that is built to last also requires that we transform our economy from one focused on speculating, spending, and borrowing to one constructed on the solid foundation of educating, innovating, and building” (OMBLog, 2/13/12).

The budget includes tax proposals for economic stimulus, encouraging job insourcing, closing “loopholes” and reducing the tax gap. Proposals most relevant to corporations and their budget effect in millions of dollars for fiscal years 2012 and 2013 are listed below (FY 2013 Green Book).

Economic stimulus provisions

Selected provisions: The following items would be temporary changes.

Proposal

2012

2013

Extend 100% bonus depreciation through 2013

($35,046)

($14,830)

A 10% tax credit for 2012 for increases in wage expense due to hiring or increased wages

($14,227)

($12,601)

$5 billion additional credits for investment in property used in a “qualified advanced energy manufacturing project”

($170)

($779)

Incentives to expand manufacturing in the U.S. and insource jobs

Selected provisions:

Proposal

2012

2013

20% permanent credit for eligible expenses for insourcing a U.S. trade or business

0

($8)

Enhance the research credit and make it permanent

($4,012)

($7,048)

Extend and modify certain energy incentives

($460)

($625)

Tax relief for small businesses

Selected provisions:

Proposal

2012

2013

Permanently increase the Sec. 1202 qualified small business stock exclusion to 100% and remove the AMT preference

Revenue effect starts in FY 2017

Expand and simplify the health care credit for small businesses

($512)

($1,077)

Other provisions including “loophole” closers

Selected provisions:

Proposal

2012

2013

Tax qualified dividends at ordinary rates for high-income taxpayers

0

$21,537

Tax net long-term capital gains of high-income taxpayers at 20%

0

$5,811

Tax carried interest as ordinary income

0

$1,287

Reform international tax system such as deferring deduction of interest expense related to deferred income of foreign subsidiaries and computing foreign tax credit on a pooling basis

0

$9,490

Reinstate Superfund environmental income tax for 2013 through 2022

0

$1,445

Eliminate fossil fuel preferences such as expensing of intangible drilling costs

0

$4,401

Repeal LIFO and lower-of-cost-or-market inventory rules

Takes effect for tax years beginning after 2013 with spread period for the Sec. 481(a) adjustment.

No deduction for punitive damages

Effective after 2013.

The road ahead

The road ahead for any tax or spending change is likely a rough one.

Economic stimulus: Earlier this month, the Bureau of Labor Statistics reported that nonfarm employment increased by 243,000 in January and the unemployment rate had dropped to 8.3% (BLS, News Release (2/3/12)). Campaign rhetoric seems to be falling along the divergent lines of either the economy is improving, which favors Obama, or the economy is not improving, so it is time for a new president. The president may find it difficult to pass more economic stimulus provisions (beyond extension of the employee payroll tax cut for the balance of 2012), while also saying on the campaign trail that the economy has improved. Anyone pushing for more stimulus provisions will have to find ways to pay for that stimulus, as well as fund the extension of the tax cuts that expire at the end of 2012.

Another argument against the economic stimulus provisions is whether they are effective. A January report from the Congressional Research Service (CRS), Section 179 and Bonus Depreciation Expensing Allowances: Current Law, Legislative Proposals in the 112th Congress, and Salient Economic Effects, by Gary Guenther (1/18/12), stated that studies have found accelerated depreciation to be a “relatively ineffective tool for stimulating the economy” because its use was not as great as anticipated and just 10% of taxpayers indicate that bonus depreciation was key to the decision to purchase assets.

Bipartisan differences: A sign of the differing political perspectives on the president’s budget and how to address the deficit problem could be seen at a Feb. 14 Senate Finance Committee hearing where Treasury Secretary Tim Geithner testified about the president’s budget. Chairman Max Baucus, D-Mont., remarked, “In addition to creating jobs, the president’s budget takes important steps to bring the deficit and federal debt held by the public under control.” But Ranking Member Orrin Hatch, R-Utah, said the budget plan “fails to address this nation’s glaring fiscal crisis, and it will probably never be brought to a vote. ... His plan would only make our fiscal problems worse and harm our economy by imposing around $1.9 trillion of stifling tax hikes.”

Budget problems: There are several important tax and budget topics in need of attention in 2012. As Baucus noted in his Feb. 14 opening remarks:

A perfect fiscal storm is waiting at the end of the year. First, the 2001, 2003 and 2010 tax cuts expire. Two days later, an automatic sequester of many federal programs will take place, and the debt limit will need to be raised at about the same time. This is what we’ll face if we do nothing to reduce deficits and control federal debt in the coming year.

In addition to the tax cuts that expire at the end of 2012, 60 provisions expired in 2011 and more expire at the end of 2012. Provisions that expired at the end of 2011 include many that are typically renewed, such as the research tax credit, above-the-line deduction for teacher expenses and the “AMT patch.” (See Joint Committee on Taxation, List of Expiring Federal Tax Provisions 2011-2022 (JCX-1-12) (Jan. 13, 2012).)

Challenges of extending any of the expired or expiring provisions include determining which ones to extend, how to pay for extended provisions, and how to make this happen without either political party using the process more for the purpose of campaigning rather than doing what is best for the tax system. These challenges will likely result in any legislation not passing until the last minute, and probably not until after the November election.

Tax reform: In 2011, the congressional tax committees held over 20 hearings on tax reform (see Nellen, Tax Reform Hearings of the 112th Congress). In October 2011, House Ways and Means Committee Chairman Dave Camp, R-Mich., introduced legislative language and sought comments for his proposal to use a territorial system rather than a worldwide one.

Obama has stated that he will be offering a corporate tax reform plan this year. It is likely that hearings on the proposal and other aspects of tax reform will continue in 2012. Consideration of Obama’s tax gap and “loophole” closing provisions may become part of continued tax reform discussions.

In introducing the president’s tax reform proposals in testimony before the Repate Finance Committee on Feb. 14, Geithner stated:

Soon, the administration will release a framework for reforming the corporate tax system. This proposal will lower the maximum statutory rate, limit the ability of firms to shift profits to low-tax jurisdictions, eliminate tax expenditures that have no positive spillovers to society as a whole, and bring a sense of permanence to various provisions in the corporate income tax code.

No doubt, 2012 will be an interesting year, but one where there is likely to be more talk about the issues and less action in enacting tax changes.

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Annette Nellen, Esq., CPA, is a tax professor and director of the MST Program at San José State University. She is an active member of the tax sections of the AICPA, ABA and California State Bar. She chairs the AICPA’s Individual Income Taxation Technical Resource Panel. She has several reports on tax policy and reform and a blog.