Tax reform: Change is on the horizon
After years of complaining about the complexity of the Code, we may finally see real reform.
April 25, 2013
For years, taxpayers and tax practitioners alike have sought reform to the complexities of the Internal Revenue Code. In response to this common desire, both the Senate and the House of Representatives issued papers, or other documents, this year, suggesting alternatives to simplify and streamline the Code.
Why the need for change?
On Feb. 26, 2013, Rep. Dave Camp, R-Mich., chairman of the House Ways and Means Committee, issued a news release, suggesting revisions to the complex set of rules contained in the American tax system. Camp “reiterated his goal to at least move a revenue-neutral corporate and individual tax code overhaul through [the Ways and Means Committee] this year.” Additionally, the Senate Finance Committee on March 21, 2013, issued a paper discussing tax reform options, followed by a second paper on April 11 and a third on April 18. It held a hearing on tax reform and identity theft issues last week.
While the Senate and the House may have different proposals to reform the Code, simplification is a common theme. Both parties believe that adherence to the complex set of rules set forth within the Code can be “anti-business,” as the costs for compliance to these technical measures can be burdensome, thus nullifying any potential incentives taxpayers would gain through strict observance of the law.
A reform of the Code will not be accomplished overnight. As the broad reform looks to cover topics such as individual, corporate, partnership, and international taxation, among other areas, the process to do so will likely be long and arduous as lawmakers seek to manage governmental revenue while also simplifying the modern complexities today’s taxpayers and practitioners face.
The proposed areas of change are broad and sweeping; however, there are certain overriding themes throughout both the House’s and Senate’s proposals for tax reform. While covering each proposed reform topic is beyond the scope of this article, corporate taxpayers would be affected by the following:
Statutory filing due dates. In an effort to ease the compliance burden on taxpayers and allow access to third-party information on a timely basis, the filing deadlines for corporate (and partnership) federal income tax returns would be shifted. Legislation has been introduced that includes the following deadlines (H.R. 901; S. 420):
|Form||Current Deadline||Proposed Deadline|
|Form 1065||April 15||March 15|
|Form 1120S||March 15||March 31|
|Form 1120||March 15||April 15|
For more, see the AICPA webpage on the topic.
Sec. 179. Increased expensing of qualifying assets would be made permanent. For 2013, the maximum amount that can be expensed under Sec. 179 is $500,000 for property purchases, with the deduction phasing out for asset purchases over $2 million. However, absent congressional action, these increased amounts expire at the end of 2013 and will revert to $25,000 and $200,000, respectively.
Accounting methods. The limitation on the use of the cash method of accounting would be increased from the current amount of $5 million or less of average gross receipts for the preceding three tax years. Additionally, the requirement to account for inventories under Sec. 263A would be revised, potentially altering the exclusion for small producers to be similar to the $10 million exclusion under current law for small retailers.
Startup expenditures.The proposed change would consolidate the startup and organizational cost provisions in the Code (i.e., Secs. 195, 248, and 709) into a single provision. Additionally, the deduction limitation would increase from $5,000 to $10,000. Lastly, the phaseout threshold for the new unified deduction would be set at $60,000.
There are a number of other tax reform proposals, focusing on areas such as research and development credits, the alternative minimum tax, and international tax reform, as well as provisions focusing on information comparability and transparency. Above all else, lawmakers in the House and Senate are seeking ways to streamline the Code in an effort to remove some of the complexities that force taxpayers and tax preparers to expend energy and resources to abide by the letter of the law.
On April 10, 2013, President Barack Obama released his fiscal 2014 budget road map, including proposals to reform the present tax code. The president’s budget road map does include certain reform areas that are also referred to by the House and Senate, such as increasing the startup expenditure deduction and Sec. 179 deduction limits. However, many of the other reform proposals put forth by the House and Senate, such as alteration of the compliance due date schedule, as well as an overall focus on simplification, appear to be absent from the president’s initial proposal.
The road ahead
As the president continues on his second term, it appears that changes to the tax code as we know it are on the horizon. While the exact changes are yet to be determined, it does appear that there will be changes as Congress and the president focus on making it easier to comply (including information reporting), as well as “smoothing the playing field” so that all taxpayers carry their share of the tax burden.
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Stephen J. Ehrenberg, CPA, MBT, is a tax principal in the Los Angeles office of Holthouse Carlin & Van Trigt LLP.