On February 14, the President issued his FY 2012 budget proposals, accompanied by the Treasury’s release of its “General Explanations of the Administration’s Fiscal Year 2012 Revenue Proposals” (colloquially referred to as the Green Book). These documents reveal that the Administration has a robust agenda of tax proposals it will try to get Congress to enact. There are scores of changes for businesses, individuals and investors.
Observation: It could be a busy year for tax legislation, even if only a fraction of the tax changes in the budget are enacted.
Observation: A number of provisions in the President’s FY 2011 budget wound up being enacted, such as the removal of cell phones from the listed property category, enhanced writeoffs for business buying machinery and equipment, and the extension of a number of popular tax breaks for individuals.
Tax proposals for businesses and investors include:
Expanding the research credit by nearly 20% and making it permanent.
Revamping the Federal Unemployment Tax Act (FUTA) tax. Currently, the tax is 6.2% through June of 2011, and 6.0% for the remainder of calendar year 2011 and later years. It’s levied on the first $7,000 paid each employee as wages during the calendar year. Under the budget proposal, the FUTA rate would remain at 6.2% after June of 2011, and, beginning in 2014, the FUTA wage base would be raised to $14,000.
Repealing the use of the LIFO inventory accounting method. Taxpayers currently use this method would be required to write up their beginning LIFO inventory to its FIFO value in the first tax year beginning after Dec. 31, 2012, but this one-time increase in gross income would be taken into account ratably over ten years, beginning with the first tax year beginning after Dec. 31, 2012.
Repealing current law’s boot-within-gain limitation in the case of any reorganization transaction if the exchange has the effect of the distribution of a dividend, as determined under Code Sec. 356(a)(2). This would apply for tax years beginning after Dec. 31, 2011.
Taxing as ordinary income a partner’s share of income on an “investment services partnership interest” (ISPI) in an investment partnership, regardless of the character of the income at the partnership level. The partner would have to pay self-employment taxes on such income, and gain recognized on the sale of an ISPI would generally be taxed as ordinary income, not as capital gain. In general, an ISPI would be defined as a carried interest in an investment partnership that is held by a person who provides services to the partnership. These changes would apply for tax years beginning after Dec. 31, 2011.
Barring a deduction for punitive damages. Where the liability for punitive damages is covered by insurance, such damages paid or incurred by the insurer would be included in the gross income of the insured person. These changes would apply to damages paid or incurred after Dec. 31, 2012.
Repealing the lower-of-cost-or-market inventory accounting method, and the subnormal goods method, effective for tax years beginning after Dec. 31, 2012.
Repeal the additional information reporting requirements imposed by the Affordable Care Act, but requiring businesses to file an information return for payments for services or for determinable gains aggregating to $600 or more in a calendar year to a corporation (except a tax-exempt corporation). Regulatory authority would be provided to make appropriate exceptions where reporting would be especially burdensome. Information returns would not be required for payments for property. These changes would be effective for payments made after Dec. 31, 2011.
Requiring all corporations and partnerships that must file Schedule M-3 to file returns electronically, effective for tax years beginning after Dec. 31, 2011.
Permitting IRS to require prospective reclassification of workers who are currently misclassified and whose reclassification has been prohibited under current law. This would apply upon enactment, with a transition rule.
Eliminating tax preferences (e.g., expensing of intangible drilling costs, enhanced oil recovery credit, production tax credit for marginal wells, percentage depletion) for oil, gas and coal companies.
Replacing the current Code Sec. 179D deduction for energy efficient commercial building property with a more generous and effective tax credit that will encourage building owners to retrofit their properties.
Imposing a financial crisis responsibility fee on certain liabilities of the largest firms in the financial sector. The fee would apply after 2012, would be reported on the federal income tax return, and would be deductible in computing corporate tax.
Effective for forward contracts entered into after 2011, requiring a corporation that enters into a forward contract to issue its stock to treat a portion of the payment on the forward issuance as a payment of interest.
Repealing the exception from the pro rata interest expense dis-allowance rule for contracts covering employees, officers or directors, other than 20% owners of a business that is the owner or beneficiary of the contracts. This would apply to contracts issued after Dec. 31, 2011, in tax years ending after that date. Any material increase in the death benefit or other material change in the contract would be treated as a new contract except that in the case of a master contract, the addition of covered lives would be treated as a new contract only with respect to the additional covered lives.
Effective for tax years beginning after the enactment date, requiring dealers in commodities, commodities derivatives dealers, dealers in securities, and dealers in options to treat the income from their day-to-day dealer activities in Code Sec. 1256 contracts as ordinary in character, not capital.
Effective on the enactment date, amending the definition of “control” in Code Sec. 249(b)(2) to incorporate indirect control relationships of the nature described in Code Sec. 1563(a)(1).
Reinstating Superfund excise taxes for periods after 2011 and before 2022, and reinstating the corporate environmental income tax for tax years beginning after 2011 and before 2022.
Reforming the current Code Sec. 30D credit for purchasers of electric vehicles by allowing dealers to claim it, with clear transparency requirements to ensure the benefit of the credit is passed on to consumers.
Making permanent the Code Sec. 179 rule allowing up to $125,000 to be expensed. (Under current law, the maximum expensing amount is $500,000 for tax years beginning in 2010 or 2011, dropping down to $125,000 for tax years beginning in 2012, and then falling to $25,000 for tax years beginning after 2012.)
Making permanent the Code Sec. 1202 rule excluding all gain on qualified small business stock. (Under current law, the exclusion applies only for disposition of qualified stock acquired before 2012.)
Extending Build America Bonds (BABs) at a 28% subsidy rate, and expand them to cover a broader set of investment such as capital infrastructure projects and financing for nonprofit colleges and hospitals.
Replacing the current tax deduction for energy efficient commercial building property with a more generous and effective tax credit that will encourage building owners to retrofit their properties.
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