Double Taxation: A Take On All Things Taxes

If You’re the Type of Guy Who Enjoys Kicking Back On His Private Jet While Visiting His Many Oil Fields, You’re Probably Not Digging the President’s “Jobs Act”

Last week, we discussed the tax incentives in President Obama’s proposed “American Jobs Act.”  For the most part, it all sounded familiar: incentives for hiring and extended bonus depreciaiton opportunities.

Yesterday, however, the White House issued detail regarding the legistlative language and section-by-section analysis of the Act, which included a number of revenue raisers. Now, these particular revenue raisers are nothing new, as the Obama administration has been pushing for them since his election, but they may be enough to insure that the Jobs Act never gets passed in its current form.

Among the more important revenue raisers include:

28 Percent Limitation on Certain Deductions And Exclusions. This section would limit the value of all itemized deductions and certain other tax expenditures for high-income taxpayers by limiting the tax value of otherwise allowable deductions and exclusions to 28 percent. No taxpayer with adjusted gross income under $250,000 for married couples filing jointly (or $200,000 for single taxpayers) would be subject to this limitation. The limitation would affect itemized deductions and certain other tax expenditures that would otherwise reduce taxable income in the 36 or 39.6 percent tax brackets. A similar limitation also would apply under the alternative minimum tax. This section would be effective for taxable years beginning on or after January 1, 2013.

Tax Carried Interest in Investment Partnerships as Ordinary Income. This has been bandied about for years, and it appears Obama is dead-set on making it happen. Current law allows service partners to receive capital gains treatment on labor income without limit, which creates an unfair and inefficient tax preference. This section would tax as ordinary income, and make subject to self-employment tax, a service partner’s share of the income of an investment partnership attributable to a carried interest because such income is derived from the performance of services.

Close Loophole for Corporate Jet Depreciation, General Aviation Aircraft Treated As 7-Year Property. Current law contains a loophole that allows corporate jets to be depreciated faster than jets used by airlines to carry passengers courtesy of bonus depreciation. This section closes this loophole, requiring corporate jets to be depreciated over the same number of years as other aircraft. This section would be effective for taxable years beginning after December 31, 2012.

Repeal of Deduction for Intangible Drilling and Development Costs in the Case of Oil and Gas Wells. This section would not allow expensing of IDCs or 60-month amortization of capitalized IDCs. Instead, IDCs would be capitalized as depreciable or depletable property, depending on the nature of the cost incurred, in accordance with generally applicable rules. This section would repeal current law expensing of IDCs and 60-month amortization of capitalized IDCs effective for costs paid or incurred after December 31, 2012.

Repeal of Percentage Depletion for Oil and Gas Wells. This section would repeal the percentage depletion method available under existing law for recovery of the capital costs of oil and gas wells. Under the percentage depletion method, the amount of the deduction is a statutory percentage of the gross income from the property. Instead of the percentage depletion method, taxpayers would be permitted to claim cost depletion on their adjusted basis, if any, in oil and gas wells. Under the cost depletion method, the basis recovery for a taxable year is proportional to the exhaustion of the property during the year. This method does not permit cost recovery deductions that exceed basis or that are allowable on an accelerated basis. This section would be effective for taxable years beginning after December 31, 2012.

 Section 199 Deduction Not Allowed With Respect to Oil, Natural Gas, or Primary Products Thereof. This section would deny the deduction available under existing law with respect to income attributable to domestic production activities (the manufacturing deduction) for oil and gas production. The manufacturing deduction generally is available to all taxpayers that generate qualified production activities income, which under current law includes income from the sale, exchange or disposition of oil, natural gas or primary products thereof produced in the United States. The proposal would retain the overall manufacturing deduction, but exclude from the definition of domestic production gross receipts all gross receipts derived from the sale, exchange or other disposition of oil, natural gas or a primary product thereof. This section would be effective for taxable years beginning after December 31, 2012.