Posts Tagged ‘congress’

Now that we’re more than halfway through 2012, Congress has decided it’s an appropriate time to make some serious inroads towards extending the 55 tax provisions that expired as of December 31, 2011.  From Bloomberg:

The U.S. Senate Finance Committee has reached a bipartisan agreement to revive lapsed tax breaks, including the credit for corporate research. The committee will vote on the proposal in Washington tomorrow, according to a statement by Chairman Max Baucus, a Montana Democrat, and by Orrin Hatch of Utah, the top Republican on the panel. [Ed note: No work on whether the committee took Donald Marron’s sage advice, discussed here.]

Chief among the expired provisions are the R&D credit, the optional deduction for state sales taxes, accelerated depreciation for certain restaurants and the ability for financial-services companies to defer U.S. taxation on overseas income. (for a complete list, see here) Details of the bill — including the list of provisions being extended and the length of the extensions — have not been released, but Bloomberg is reporting that 25% of the “extenders package” will not be given new life.

Importantly, the bill is also expected to include an AMT patch that would increase the exemption for 2012, sparing millions of Americans from being forced to pay an additional minimum tax on their 2012 tax returns.

Exhausted from a summer of mud-slinging, bickering, and running in place, Congress is slated to take a well-deserved recess for the next month,  so no further action will take place on the bill until September at the earliest, though in all likelihood, no new legislation of any kind will be passed until after the November election.

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Earlier today, President Obama fired what promises to be the opening salvo in a six-month battle to determine the fate of the Bush tax cuts. As a reminder of what’s at stake, the 2001 and 2003 reductions of the individual income tax rates are set to expire at year-end, and in the absence of further legislation, the current tax brackets of 10/15/25/28/33 and 35% percent would be replaced by rates of 15/28/31/36 and 39.6%.

In his address to Congress, President Obama remained true to prior promises, urging an extension of the Bush tax cuts for those taxpayers with adjusted gross income of less than $250,000. For those earning in excess of the threshold, the top rates of 33% and 35% would return to the 36% and 39.6% rates seen prior to 2001.

While Obama’s push to extend reduced rates only for lower and middle class taxpayers should come as no surprise, the President did acquiesce on one portion of his previous stance: he is now arguing for only a one year extension of the Bush tax cuts; previously, the President promised to make the cuts permanent for those earning below the $250,000 threshold.

In his remarks, the President correctly pointed out retaining the current rates for the lower and middle classes is one of the rare pieces of tax policy to find bipartisan agreement. As a result, there is no need to continue to hold up an extension of those rates for qualifying taxpayers while the parties continue to hash out what to do with those earning more than $250,000.  That debate, Obama reasoned, can take place after the lower and middle-class extension is signed into law.

It’s a cheeky bit of strategy by the President.  By backing off his requirement that any lower and middle class extensions be permanent, Obama is attempting to show the voting public that he’s willing to work with his Republican adversaries to come to an agreement. Should the Republican party not be willing to make its own concessions — either real or largely illusory, as the President’s may well be — in order to reach an agreement to extend the cuts, they risk alienating the very lower and middle class voters who may well decide the upcoming election.

Further exacerbating the Republican’s potential public perception problem, if the party’s leaders fail to heed the President’s plea to extend the middle-class cuts now and debate the fate of the nation’s wealthy later, Republicans will appear willing to let the entire nation suffer to ensure they protect the wealthiest two percent.  

Republican lawmakers, of course, have other ideas for any extension. They would like to see the Bush tax cuts continued for all taxpayers, and are unwilling, at least at this point, to give up what leverage they have by agreeing to a scaled-back extension of the cuts. To that end, House Republicans are expected to unveil their own bill proposing a one-year extension of the current rates for all taxpayers later this month.

It should be interesting to see the response to today’s remarks engender from Mitt Romney as well as current members of the House. This much we know, we’re in for a heated half-year on Capitol Hill.

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President Obama issued his “to do” list to Congress on Tuesday. Hopefully, America’s Senators and Representatives can pull themselves away from their busy summers of tweeting pictures of their genitalia and (allegedly) soliciting gay sex in airport bathrooms long enough to address the President’s concerns.  

So what’s on the agenda? Nothing we haven’t seen before. More international reform that will never get passed, the extension of 100% bonus depreciation, which should be a foregone conclusion depending on what bill it’s attached to, and additional clean energy incentives. Here is the complete list, with links added to previous Double Taxation coverage on each recommendation:

 1. Reward American Jobs, Eliminate Tax Incentives To Ship Jobs Overseas: Congress needs to attract and keep good jobs in the United States by passing legislation that gives companies a new 20 percent tax credit for the cost of moving their operations back to the U.S. and pay for it by eliminating tax incentives that allow companies to deduct the costs of moving their business abroad.

Currently, if a firm shutters a production facility, moves it to another country, and incurs $15 million in expenses for breaking down assembly lines and production equipment, moving expenses to transport equipment abroad, and mothballing the Iowa facility, then under current law, the company could reduce its tax burden by $5.25 million dollars, assuming a 35 percent corporate tax rate. Under the President’s plan, this company can no longer deduct the $15 million in moving expenses, eliminating the $5.25 million tax break for shipping the facility overseas.

Consider the same firm as above, except they are moving the facility from overseas back to the U.S. If this company were to move a manufacturing plant with 800 employees back to the United States from another country, and incurred $15 million in costs from packaging and transporting equipment, and cleaning up the old facility abroad, then under the President’s plan, the company would still be able to deduct the $15 million, saving $5.25 million in taxes and on top of that would receive a 20% credit on its $15 million in expenses – or a $3 million additional income tax benefit. [Ed note: it’s hard to imagine Congress would truly permit the same costs to be both deductible and creditable, as that sort of double benefit is rarely seen in the Code.]

2. Cut Red Tape So Responsible Homeowners Can Refinance: Congress needs to pass legislation to cut red tape in the mortgage market so that responsible families who have been paying their mortgages on time can feel secure in their home by refinancing at today’s lower rates.

3. Invest in a New Hire Tax Credit For Small Businesses: Congress needs to invest in small businesses and jumpstart new hiring by passing legislation that gives a 10 percent income tax credit for firms that create new jobs or increase wages in 2012 and that extends 100 percent expensing in 2012 for all businesses.

4. Create Jobs By Investing In Affordable Clean Energy: Congress needs to help put America in control of its energy future by passing legislation that will extend the Production Tax Credit to support American jobs and manufacturing alongside an expansion of the 30 percent tax credit to investments in clean energy manufacturing (48C Advanced Energy Manufacturing Tax Credit)

5. Put Returning Veterans to Work Using Skills Developed in the Military: Congress needs to honor our commitment to returning veterans by passing legislation that creates a Veterans Job Corps to help Afghanistan and Iraq veterans get jobs as cops, firefighters, and serving their communities.

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Covering President Obama’s recent tax proposals has given me a firm appreciation for what it must have been like to be a sports reporter during the latter stages of Brett Favre’s career, when journalists breathlessly covered whether he would retire or continue playing, despite the fact that everyone knew damn well Favre would show up to camp a week late and start another 16 games. And what I’ve learned is this: it’s a rather empty feeling to spend day after day analyzing a story the ending to which was preordained before it even began.

But that’s where we are with tax reform in this country. Everything is happening, but nothing’s happening. Last week the president unveiled his plans for individual tax reform, and today it’s corporate tax reform, but regardless of what’s said or written, we all know nothing will be passed unless the president wins re-election, and even then these proposals — as currently constructed — are a long-shot to ever become law.

Anyhoo, what follows is a summary of President Obama’s appeal for corporate tax reform, released today. And while the headlining proposal — the promise to reduce the maximum corporate tax rate to 28% —  is likely to win some appreciation from the Republican party, there are enough high-profile revenue raisers in the plan, such as the elimination of tax preferences for the oil and gas industry and the imposition of a “minimum tax” on a U.S. corporation’s worldwide profits, to guarantee that the president’s corporate proposals will be shelved right along with his plan for individual tax reform until after the election.

The president’s plan can be separated into three distinct categories: general corporate reform, manufacturing industry reform, and international reform.  

General Corporate Reform

While the president’s pitch to lower the maximum corporate tax rate from 35% to 28% is sure to get the most publicity, understand that the intention is for this lost revenue to be paid for by broadening the tax base, i.e.., eliminating deductions. The president (correctly) points out that our current tax system — replete with innumerable deductions, exclusions and preferences — benefits certain industries over others. Take a gander at the following table, which illustrates the effective tax rate paid by different industries in 2007 and 2008, even though they were all subject to the same 35% marginal rate:


The president believes that while eliminating deductions and preferences, care should be taken to equalize the benefits of the code across all industries.  To that end, he has placed a number of provisions on the chopping block, calling for the following changes:

  •  Elimination of “Last in first out” accounting. Under the “last-in, first-out” (LIFO) method of accounting for inventories, it is assumed that the cost of the items of inventory that are sold is equal to the cost of the items of inventory that were most recently purchased or produced. This allows some businesses to artificially lower their tax liability.
  • Elimination of oil and gas tax preferences. The president’s framework would repeal the expensing of intangible drilling costs, and percentage depletion for oil and natural gas wells. .
  • Reform treatment of insurance industry and products The president’s framework would close this loophole and not allow interest deductions allocable to life insurance policies unless the contract is on an officer, director, or employee who is at least a 20 percent owner of the business.  
  • Taxing carried (profits) interests as ordinary income. The framework would eliminate the loophole for managers in investment services partnerships and tax carried interest at ordinary income rates.
  • Eliminate special depreciation rules for corporate purchases of aircraft. This would eliminate the special depreciation rules that allow owners of non-commercial aircraft to depreciate their aircraft more quickly (over five years) than commercial aircraft (seven years).
  • Addressing depreciation schedules. Current depreciation schedules generally overstate the true economic depreciation of assets.
  • Reducing the bias toward debt financing. Reducing the deductibility of interest for corporations should be considered as part of a reform plan. This is because a tax system that is more neutral towards debt and equity will reduce incentives to overleverage and produce more stable business finances, especially in times of economic stress.

 Manufacturing Industry Reform

 While the president asserts that all industries should be treated equally, the plan then goes on to bestow certain preferences specifically on the manufacturers by proposing the following:

  •  Effectively cutting the top corporate tax rate on manufacturing income to 25 percent and to an even lower rate for income from advanced manufacturing activities by reforming the domestic production activities deduction. The president’s framework would focus the current I.R.C. § 199  deduction more on manufacturing activity, expand the deduction to 10.7 percent, and increase it even more for advanced manufacturing. This would effectively cut the top corporate tax rate for manufacturing income to 25 percent and even lower for advanced manufacturing.
  •   Expand, simplify and make permanent the R&D Tax Credit. The president’s framework would increase the rate of the alternative simplified  credit to 17 percent.  
  •  Extend, consolidate, and enhance key tax incentives to encourage investment in clean energy.

International Reform

It is in the international arena that the president’s proposals most deviate from those of his Republican counterparts. While Mitt Romney and Newt Gingrich have loudly called for a move to a “territorial” tax system, whereby U.S. corporations would only pay tax on U.S. income, leaving other nations to trust foreign profits, President Obama wants to expand the current corporate tax regime to tax profits earned by foreign affiliates of U.S. corporations before they are repatriated to the U.S. This is sure to be a sticking point in any future negotiations, as some powerful lobbies will not take kindly to the idea of a minimum international tax rate.

 The president’s proposals include the following:

  •  Require companies to pay a minimum tax on overseas profits. Specifically, under the President’s proposal, income earned by subsidiaries of U.S. corporations operating abroad must be subject to a minimum rate of tax. This would stop our tax system from generously rewarding companies for moving profits offshore. Thus, foreign income deferred in a low-tax jurisdiction would be subject to immediate U.S. taxation up to the minimum tax rate with a foreign tax credit allowed for income taxes on that income paid to the host country. This minimum tax would be designed to balance the need to stop rewarding tax havens and to prevent a race to the bottom with the goal of keeping U.S. companies on a level playing field with competitors when engaged in activities which, by necessity, must occur in a foreign country.
  • Remove tax deductions for moving productions overseas and provide new incentives for bringing production back to the United States. The President is proposing that companies will no longer be allowed to claim tax deductions for moving their operations abroad. At the same time, to help bring jobs home, the President is proposing to give a 20 percent income tax credit for the expenses of moving operations back into the United States.
  •  Other reforms to reduce incentives to shift income and assets overseas. The Framework would strengthen the international tax rules by taxing currently the excess profits associated with shifting intangibles to low tax jurisdictions. In addition, under current law, U.S. businesses that borrow money and invest overseas can claim the interest they pay as a business expense and take an immediate deduction to reduce their U.S. taxes, even if they pay little or no U.S. taxes on their overseas investment. The Framework would eliminate this tax advantage by requiring that the deduction for the interest expense attributable to overseas investment be delayed until the related income is taxed in the United States.

Of course, the chess match continues. In response to the president’s plan for corporate reform, the rise of Rick Santorum, and his recent slip in the polls, Mitt Romney changed his stance on the maximum individual tax rate today, proposing to reduce it to 28% (as part of a 20% cut of all rates across the board) as opposed to simply extending the Bush tax cuts (which contain a 35% maximum tax rate), as he’d proposed earlier in his campaign. Romney also went on to promise a free Chalupa to anyone who votes for him.* Desperation, as they say, is a stinky cologne.

*this may not have happened

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The presidential election is a mere nine months away, and while the man to represent the Republican party in its quest to unseat President Obama is still anyone’s guess, most pundits agree it will come down to either former House Speaker Newt Gingirch or Mitt Romney, the former Governor of Massachusetts. 

While the months to come will surely flush out each candidate’s stance on hot-button issues like foreign policy, homeland security, and public breastfeeding, we here at Double Taxation concern ourselves with tax law, and only tax law. And though both Gingrich and Romney have found their personal tax returns at the center of controversy in the past few weeks, we’re of the view that not enough attention has been paid to the tax proposals each candidate would seek to implement should they be elected president. 

As a result, we’ve culled through each candidate’s published proposals and campaign rhetoric in an attempt to create a comprehensive comparison of their respective plans for tax reform, culminating in this “Tale of the Tax Tape,” if you will. We’ll spare you the commentary, however, as the determination of the “best” plan requires an independent analysis based on each individual voters” political, social, and religious values.  

Newt Gingrich

Comparison of Key Tax Considerations

Mitt Romney

Remain at 35%; 15% if optional “flat tax” is elected (see fn iv)

Top Ordinary Rate[i]

Remain at 35%
Remain at 15%; 0% if optional “flat tax” is elected (see fn ii)

Long Term Capital Gains Rate [i]

0% for taxpayers with AGI < $200,000; 15% for everyone else
Remain at 15%; 0% if optional “flat tax” is elected (see fv ii)

Qualified Dividends Rate [i]

0% for taxpayers with AGI < $200,000; 15% for everyone else.
Taxed at ordinary rates; 0% if optional “flat tax” is elected (see fn ii)

Rate on Interest

0% for taxpayers with AGI < $200,000; ordinary rates for everyone else.
Offer individual taxpayers an optional 15% flat tax[ii] Please see footnote ii, as this is a critical part of the Gingrich tax platform.

Tax Code Reform

Start with the Bowles-Simpson Commission[iii] approach; lower rates and broaden the tax base

Estate Tax[iv]

Maximum 12.5% rate

Corporate Income Tax[v]

Maximum 25% rate
Switch to a “territorial system[vi]

International Tax Reform

Switch to a “territorial system”
Full expensing of capital expenditures permitted

Capital Expenditures

100% bonus deprecation extended  1 year
No tax on corporate capital gains; eventually replace payroll tax with personal accounts


Would end the American Opportunity tax credit for college education; lower payroll taxes

[i] Neither Gingrich nor Romney propose to allow the Bush tax cuts to expire. Were they to expire, the top ordinary income rate is slated to return to 39.6% on January 1, 2013. In addition, qualified dividends will again be taxed at ordinary rates — as opposed to the current 15% — and long-term capital gains will be taxed at a 20% rate as opposed to the current 15% rate.

[ii] In what may be the most important aspect of Gingrich’s plan, taxpayers could elect to forego the complexities of the Code in favor of a flat 15 percent tax rate regardless of income. Under this alternative calculation, all capital gains, interest income, and dividends would be tax-free, while nearly all deductions and credits would be abolished, except for the deductions for mortgage interest and charitable contributions and the earned income, child and foreign tax credits. The AMT would be eliminated, and all taxpayers would have the option of a $12,000 standard deduction. The idea is to create simplicity; taxpayers would be able to pay their taxes by mailing a postcard to the IRS with the necessary calculation, thereby saving considerable time and professional fees.

[iii] Bowles-Simpson was a presidential commission created by President Obama in 2010 to propose ways to cut the federal deficit. From a tax perspective, the commission attempted to simplify the Code while simultaneously raising tax revenue by eliminating many tax deductions.

[iv] The estate tax is currently at 35% for 2011 and 2012, but is slated to return to a 55% rate in 2013.

[v] The maximum corporate income tax rate is currently 35%.

[vi] A territorial systems is one in which income is taxed only in the country in which it is earned. Under its current “worldwide” system, foreign affiliates of American companies are generally taxed on income in their host country. When the earnings are repatriated from the foreign affiliate to a U.S. corporation, tax is paid a second time to the U.S., with a credit given for the tax paid abroad.

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Last week we drew your attention to Newt Gingrich’s use of a well-documented nuance in the S corporation law to forego a portion of salary in favor of distributions from his two corporations/employers and avoid $70,000 in payroll taxes.

Over the years, several solutions have been suggested to curb what is seen as abuses of this S corporation payroll advantage, including:

  • Imposing self-employment tax on the flow-through income of all shareholders owning 50% or more of an S corporation’s stock;
  • Imposing self-employment tax on the flow-through income of all shareholders, which would equalize the payroll tax treatment of S corporations and many partnerships.
  • Impose self-employment tax on the flow-through income of all “professional service corporations,” i.e., those S corporations engaged in law, accounting, consulting, etc…

Most recently, in response to the news that Gingrich took only $450,000 of salary from his S corporations while allowing net-profits of $2.4 million to flow through payroll-tax free, U.S. congressman Pete Stark proposed the not-so-subtly-named Narrowing Exceptions for Withholding Tax, or NEWT, Act.

Under Stark’s bill, the flow-through income of an S corporation with three or fewer shareholders would be taxed as compensation, thus requiring both the corporation and the shareholders to pay the necessary payroll taxes, effectively closing this lucrative loophole for closely-held S corporations.

From my perspective, Congress has had 50 years to close this loophole, and if they didn’t feel compelled to do so when former vice president candidate John Edwards took advantage of the same rules in a far more egregious manner, then there’s no reason to believe they will now.

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Every guy has a friend like my buddy Todd, who despite being an otherwise normally functioning adult, thinks it’s an indictment on his manhood to admit that he’s really into a girl.  

The thing is, he’s not fooling anyone. He’s been dating this same girl exclusively for the last nine months. He’s met her family. She’s met his. They go camping together, skiing together, make fondue together, all the adorable crap that defines the traditional boyfriend-girlfriend relationship.   

Only Todd refuses to refer to this girl as his “girlfriend.” Won’t do it. Even though everyone they come into contact with walks away certain that she is just that, he won’t concede it to his friends, lest a level of permanency attach to their relationship and jeopardize his self-aggrandizing “ladies man” persona.

Ridiculous, right? We’ll that’s exactly the same silly posturing Congress has engaged in for the last fifty years by refusing to make certain tax provisions permanent, instead enacting them with arbitrary deadlines and routinely allowing them to expire before retroactively extending them again and again and again.

Take, for example, the R&D credit. According to Congress, the credit is a “temporary” provision, but it’s been in the Code for 30 years! Every few years, the credit expires — as it did most recently on December 31, 2011 — and taxpayers and practitioners alike are left to put their faith in their pattern recognition skills and trust that Congress will again retroactively reinstate Section 41. Based on the history of these extenders, we can be confident it will get done, but we can never really be certain, and it makes tax planning needlessly complicated.

So why does Congress go through this song and dance every few years? It’s simple really: when the national budget is determined, any tax provisions that are set to “expire” at the beginning of the year are left out, typically yielding a much smaller budget deficit than what would otherwise appear. I wish I were making that up.  

Luckily, Montana Senator Max Baucus is taking up our cause, calling for a long-term solution that would end the uncertainty caused by the frequent renewal required for more than 50 tax provisions.

Until that day comes however, we’re left doing the annual year-end will-they-or-won’t-they bit. As for this year, according to MSNBC, our best chance at seeing expired provisions — including the R&D creidt — extended in the near future is if Congress is willing to tack the extenders package onto the proposed extension of the payroll tax cut, which is set to expire at the end of February.

Whether it happens remains to be seen, but in the interim, it can be awfully awkward extolling the virtues of an R&D study to a client when the statute permitting the credit technically no longer exists.

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