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Congress and the President have put forward their competing visions of fundamental tax reform. Representative Dave Camp     (R-MI), the current Ways and Means Committee Chairman, introduced on February 26 his "Tax Reform Act of 2014." President Obama unveiled his $3.9 trillion budget for the 2015 Fiscal Year (October 1, 2014 - September 30, 2015) on March 4. In his Budget, the President called on Congress to immediately begin work on corporate tax reform that will close loopholes, lower the corporate tax rate, strengthen investment and not add to the deficit. The President's Budget contains a large number of tax proposals. These two tax bills, as well as another item of legislative interest, are discussed in detail below:

1. Representative Camp Releases His Tax Reform Plan Aimed at Strengthening the Economy and Making the Tax Code Simpler, Fairer and Flatter - On February 26, Representative Camp released the "Tax Reform Act of 2014" (the Act). Based on an analysis by the independent, non-partisan Joint Committee of Taxation, the Act would (i) create up to 1.8 million new private sector jobs, (ii) allow roughly 95% of taxpayers to get the lowest possible tax rate by simply claiming an increased standard deduction, (iii) strengthen the economy and increase Gross Domestic Product by up to $3.4 trillion, and (iv) reduce the annual federal income tax liability of the average middle-class family of four by $1,300.

The Act will accomplish the above by, among other things, providing the following:

  • New Individual and Corporate Tax Rates - Flattening the tax brackets of the Code by reducing rates and collapsing today's 5 rate brackets into just brackets of 10% and 25% for "virtually all" taxable income. This would ensure that over 99% of all taxpayers face a maximum tax rate of 25% or less. The Act also reduces the corporate top rate to 25%.
  • Larger Standard Deduction - Providing for a significantly more generous, inflation-adjusted standard deduction of $11,000 for single taxpayers and $22,000 for married taxpayers filing jointly.
  • Larger Child Tax Credit - Increasing the Child Tax Credit to $1,500 per child and expanding the number of families that can claim the Credit.
  • Simpler Taxation of Investment Income - Taxing long-term capital gains and qualified dividends as ordinary income, but exempting 40% of such income from income tax.
  • No Alternative Minimum Tax (AMT) - Repealing the AMT.
  • Permanent Research & Development (R&D) Tax Credit - Making the R & D Credit permanent, and enhancing the credit.
  • IRS Accountability - Cracking down on IRS abuses and reducing IRS waste. In addition, the Act prohibits the Department of the Treasury from implementing the recently proposed regulations which would adversely affect IRC Section 501(c)(4) organizations (i.e., social welfare organizations). It also provides applicants for tax-exempt status under IRC section 501(c)(4) information regarding the status of investigations regarding possible IRS violations of their rights under the Internal Revenue Code.
  • Charitable Giving - Expanding the ability of taxpayers to make tax-deductible contributions to charities beyond the end of the tax year.
  • Shrinks and Simplifies the Internal Revenue Code - Repealing over 220 sections of the Code.

Reaction to the Act was varied. The reaction among Representative Camp's own Republican Party has been lukewarm. Leading business tax professionals polled in a recent survey conducted by the Tax Policy Center felt there is very little chance of the Act becoming law this year, with slightly over 50% of the survey respondents assigning a zero probability for passage in 2014.

2. President Obama's Budget Contains Numerous Individual and Business Income Tax Provisions - On March 4, President Obama released his federal budget proposal for the Fiscal Year 2015. The President's Budget contains over 160 tax proposals, although only about 30 of these were not already included in the President's Fiscal Year 2014 Budget Proposal (which was not acted on by Congress). The Budget's tax proposals are far-reaching and impact businesses, international transactions, energy incentives, individuals, estate and gift taxation and tax administration.

Some of the more significant tax proposals contained in the Budget include the following:

  • Business Tax Proposals - The Budget (1) permanently extends the 2013 expensing limits for qualified property under Section 179 of the Code; (2) permanently extends and enhances the R&D tax credit; (3) requires, after December 31, 2015, that certain employers offer an automatic IRA option to their employees (i.e., employers that have been in business for at least 2 years, have over 10 employees, and do not currently offer a retirement plan); (4) repeals the LIFO accounting method; (5) modifies the like-kind exchange rules to limit the amount of deferred capital gain; and (6) taxes certain "carried interest" income as ordinary income rather than capital gain income.
  • International Tax Proposals - Creates a new income tax credit for certain expenses incurred in bringing a foreign-based business to the U.S., and denies tax deductions for expenses incurred in foreign outsourcing of a U.S. business.
  • Energy-Related Tax Proposals - Eliminates tax preferences (i.e., deductions and tax credits) presently granted to producers of fossil fuels.
  • Individual Tax Proposals - The Budget (1) reduces the value of itemized deductions and other tax preferences to 28% for families with income in the top three highest tax brackets (i.e., 33%, 35%, and 39.6%); (2) imposes the "Buffett Rule" by requiring millionaires to pay no less than 30% of adjusted income (after taking into account charitable contributions) in federal income taxes; and (3) limits the amount individuals who participate in a tax-qualified retirement plan(s) can accumulate in retirement benefits.
  • Estate and Gift Tax Proposals - Beginning in 2018, returns the federal estate, gift and generation skipping transfer tax rates and exemptions to their levels as in effect in 2009.
  • Tax Administration Proposals - Conforms self-employment (i.e., FICA) taxes for professional service businesses, no matter in what form they are organized. Accordingly, individual owners of such businesses organized as S corporations, limited or general partnerships and LLCs taxed as partnerships will be subject to self-employment taxes in the same manner and to the same degree as employees of Subchapter C corporations are subject to FICA taxes.

3. House of Representatives Passes Legislation That Restricts the Power of the IRS in Auditing Taxpayers -
On February 25, the House of Representatives passed by voice vote the "Taxpayer Transparency and Efficient Audit Bill." Under this legislation, the IRS would be required to conclude any tax audit of an individual within one year after the commencement of the audit. At the same time, the House of Representatives also passed by voice vote the "Protecting Taxpayers From Intrusive IRS Requests Bill" which would prohibit the IRS from requesting that taxpayers provide to the IRS information regarding their religious, political or social beliefs.

For additional information regarding this topic, please contact your local UHY LLP professional.