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Moving Ahead for Progress in the 21st Century Act
The last part of February 2012 and March 2012 was a busy time for both Congress and the Obama Administration. On the tax reform front, President Obama led off with his plan for business tax reform. The House Republicans, on March 20, 2012, countered with their own Fiscal Year 2013 budget blueprint ("The Path to Prosperity") which, among other things, proposed a dramatically simpler income tax code including the repeal of the often-patched alternative minimum tax. The next day, Representative Eric Cantor (R-VA) dropped his own tax reform bombshell by introducing legislation that would allow businesses with fewer than 500 employees to deduct 20% of their active business income (subject to certain limitations) in computing their "taxable income".
But what might also turn out to be significant legislation was the Senate's passage, on March 14, 2012, of S. 1813, the
"Moving Ahead for Progress in the 21st Century Act" ("MAP-21")
. Although MAP-21 is primarily meant to address the need to reauthorize the nation's surface transportation programs presently set to expire on March 31, the Senate version (S. 1813) of the bill has been chosen as a legislative vehicle to also address a host of federal tax and non-tax changes (one of which is intended to prevent travel outside the U.S. by certain delinquent taxpayers).
As yet, it is unclear whether the House of Representatives intends to put S. 1813 to an up or down vote in the House or whether the House will vote on its own version (H.R. 7) of such legislation. On March 21, 2012 the House Republican leadership stated that they intended to delay consideration of S. 1813 until at least April 14, 2012. We are following this bill closely and will report on it in more detail once the House and the Senate have agreed to the bill's content.
For the present,
President Obama's corporate tax reform plan
and other noteworthy tax developments are discussed below:
President Releases His Plan For Overhauling Corporate Tax Code and Simplifying Small Business Taxes
– On February 22, 2012, the Treasury Department released a document called "The President's Framework for Business Tax Reform." The document sets forth a broad outline (i.e., a plan short of specifics) of President Obama's proposal ("Proposal") to (1) cut corporate tax rates, (2) simplify corporate tax rules, (3) revise the rules governing the taxation of international transactions, and (4) retain the present "worldwide" system of taxation rather than the "territorial" system of taxation being advocated by some Republicans. The Proposal principally recommends the following:
Allowing small businesses (not clearly defined in the President's Proposal) to (i) expense up to $1 million annually under IRC Section 179, (ii) use the cash method of accounting for annual gross receipts of up to $10 million (up from $5 million under current law), (iii) double the amount of currently deductible start-up costs from $5,000 to $10,000, and (iv) expand the health insurance credit under the Health Care Reform Act of 2010
Reducing the top corporate tax rate from 35% to 28% for most corporations
Cutting the top corporate tax rate on manufacturing income to 25% and to an even lower rate for income from "advanced" (also not clearly defined in the President's Proposal) manufacturing activities
Lengthening current depreciation recovery periods and thereby reducing annual depreciation deductions for certain assets
Reducing the deductibility of interest by corporations
Taxing "large" (as yet undefined) pass-through business entities the same as Subchapter C corporations
Subjecting income earned by subsidiaries of U.S. corporations operating overseas to an as yet unspecified minimum U.S. tax rate
Creating a 20% income tax credit for the expenses of moving business operations back to the U.S. and disallowing deductions for moving expenses for moving business operations abroad
Eliminating the following tax breaks:
- LIFO accounting for inventories
- Certain tax breaks for the oil and gas industry
- Interest deductions allocable for corporate-owned
non-key life insurance policies
- Current rules allowing "carried interests" in hedge fund
partnerships to be taxed as capital gains rather
than as ordinary income
- Current tax rules allowing corporate-owned jets to be
depreciated over 5 years rather than 7 years
Treasury Department Balks At A Move Towards A Pure Territorial Tax System
– Speaking at the USA Branch of the International Fiscal Association on March 1, 2012, Manal Corwin, Treasury Deputy Assistant Secretary for International Tax Affairs, rejected the efforts of some Republicans to push for a "Territorial" system of taxation. According to Mrs. Corwin, the Obama Administration believes that any move to a pure "Territorial" system of taxation would aggravate the problem of U.S. taxpayers shifting income to foreign jurisdictions. This strong statement in opposition to a pure "Territorial" system of taxation comes as many in the business community, backed by Republicans, have called for abandoning the "Worldwide" system of taxation in favor of a "Territorial" system of taxation. Mrs. Corwin stated that the Administration's rejection of a "Territorial" system of taxation is a key component of the corporate tax reform framework unveiled by the Treasury Department on February 22, 2012.
Small Businesses Balk At the Obama Administration's Plan to Tax Certain Pass-Through Business Entities The Same As Subchapter C Corporations
– On March 7, 2012, several members of the small business community appeared before a House Ways and Means Committee hearing to speak against the tax treatment of certain pass-through entities being proposed by the President in his just released plan for corporate tax reform. In their remarks, they strenuously objected to President Obama's plan to tax "large" pass-through business entities (such as partnerships, LLCs, and Subchapter S corporations) the same as Subchapter C corporations. According to the Administration, the proposed change in the tax treatment of large pass-through entities would establish greater parity between large corporations and large non-corporate counterparts. The President's plan does not, however, contain many specifics, such as how "large" must the business counterparts be to invoke this special treatment. The net effect of the change would be that the income of certain pass-through entities would no longer be subject to tax at the top individual marginal tax rate of its owners, but instead would be subject to the top marginal corporate tax rate that applies to Subchapter C corporations, and any dividend distributions by the entity to its owners would be taxed again as "dividend income".
IRS Liberalizes The Rules of Tax Penalties and Availability of Installment Agreements
– On March 7, 2012, the IRS issued News Release 2012-31 in which it announced a major expansion of its "Fresh Start" initiative "to help struggling taxpayers by taking steps to provide new penalty relief to the unemployed and making Installment Agreements [IRS Form 943] available to more people". Under the new guidelines, certain taxpayers who have been unemployed for 30 days of longer will be able to avoid failure-to-pay tax penalties with regard to the payment of their 2011 tax obligations as long as the tax, interest and any other tax penalties otherwise due on account of the taxpayer's 2011 tax year are fully paid by October 15, 2012. In addition, the Release also provides that the threshold for using an Installment Agreement without having to supply the IRS with a financial statement has been raised from $25,000 to $50,000.
Congressional Democrats to IRS – "Regulate IRC Section 501(c)(4) Organizations More Closely Or We Will!"
– On March 12, 2012, the House and Senate Democrats each sent a letter to Douglas Shulman, IRS Commissioner, imploring him to draft new Treasury Regulations that would more strictly interpret the requirements applicable to organizations seeking tax-exemption under IRC Section 501(c)(4). Section 501(c)(4) presently requires organizations seeking tax exemption under that Section to be "operated exclusively for the promotion of social welfare." At present, the Treasury Regulations dealing with 501(c)(4) organizations only require that such organizations' social welfare activities be their "primary purpose." According to the letters, the Democrats believe that 501(c)(4) organizations are using the ambiguity inherent in a "primary purpose" test to engage in substantial political activities. Republicans believe that most of these "offending" organizations are promoting Republican issues and candidates. The Senate letter states that "If the IRS does not adopt a bright line test [as to what constitutes a "primary purpose"], or if it adopts one that is inconsistent with the Code's exclusivity language, then we plan to pursue legislation codifying such a test."
Congressional Republicans to the IRS – "Keep Politics Out of Your Review of IRC Section 501(c)(4) Organizations"
– On March 14, 2012, twelve Republican Senators urged the IRS to keep politics from playing a role in any action taken by it in reviewing the tax-exempt status of nonprofit 501(c)(4) organizations. The letter, signed by Senator Orrin Hatch (R-UT) and Senator Rob Portman (R-OH) and 10 other Republican Senators, came just 2 days after a letter from seven Democratic Senators to the IRS which had urged that the IRS more stringently examine the 501(c)(4) applications by certain organizations. In their letter, the Republicans questioned recent allegations of selective denial of 501(c)(4) status to some organizations and requested a detailed analysis of the IRS's process for recognizing the tax-exemption of purported 501(c)(4) organizations. Specifically, "Tea Party" groups had complained to many Republicans that they had been told by their attorneys that the number and extent of questions the groups had been asked by IRS agents reviewing their 501(c)(4) applications had been excessive, leading them to believe that they were being targeted for their political views.
IRS to House Republicans
"Politics NOT Involved in IRS Scrutiny of 501(c)(4) Organizations"
– In response to questions posed to him at a House subcommittee meeting on March 21, 2012, Commissioner of Internal Revenue Douglas Schulman stated that the IRS's recent scrutiny of conservative groups seeking tax exemption under IRC Section 501(c)(4) have not been politically motivated. His remarks came after a number of "tea party" groups have complained that the IRS has been politically targeting them through what they view as overly intensive and intrusive questions in response to their requests for tax exemption. Commissioner Schulman pointed out that any questions posed of such groups represent a "facts and circumstances" approach in which the IRS reviewer decides what he or she needs to know and that "We [the IRS] pride ourselves on being a nonpartisan, nonpolitical agency."
House Republicans' 2013 Fiscal Year Budget Plan Aims to Simplify Tax Rate Structure
– On March 20, 2012, Representative Paul Ryan (R-WI), chairman of the House Budget Committee, introduced his proposed new budget for the 2013 Fiscal Year (October 1, 2012-September 30, 2013). Among other things, Rep. Ryan's budget proposal would:
- Consolidate the current 6 individual tax brackets into
2 brackets (10% and 25%);
- Reduce the corporate tax rate to 25%;
- Repeal the Alternative Minimum Tax;
- Shift our taxing system from a worldwide system to a
territorial system; and
- Repeal the 2010 health care reform bill.
As expected, the Democrats ranking member on the House Ways and Means Committee, Sander Levin (D-MI), dismissed the budget as one which "would end up showering benefits on the very wealthy and soaking the middle class."
Representative Eric Cantor (R-VA) Throws A Big Bone to Small Businesses
– In legislation introduced on March 21, 2012 by Rep. Cantor and Representative Dave Camp (R-MI), every "small business" would be eligible to deduct 20% of their active business income from their gross income in determining their "taxable income". Specifically, the bill would allow businesses with fewer than 500 employees to deduct 20% of their income, up to 50% of the W-2 wages paid by them, regardless if they file as a pass-through entity or as a regular corporation. According to U.S. Census figures, the tax deduction would benefit 99.7% of the 27.3 million businesses in the U.S.