Friday, June 8, 2012

A Pre-Mortem on Obama’s Budget

  • Enhanced R&E Credits. The current credit for research and experimentation expires (again) after December 31, 2011. The proposal would make the credit permanent and increase the alternative simplified credit amount from 14% to 17%.

  • Extensions. Certain favorable tax provisions that are scheduled to expire at the end of 2011 would be extended a year, including 15-year straight-line depreciation for qualified leasehold improvements, the exception for subpart F active financing income, and the subpart F lookthrough rules.

International Provisions

Tax Cuts

  • Defer Interest Deduction. The deduction for interest allocated to foreign-source income would be deferred until income is repatriated.

  • FTC Pooling. Section 902 deemed paid credit would be determined based on aggregate foreign taxes and e&p of all foreign subsidiaries.

  • Excess Intangibles Income. Gross income less costs plus markup from intangibles transferred to a related CFC would be treated as subpart F income.

  • Transfers of Intangibles. Clarifies that intangible property for purposes of sections 367(d) and 482 includes workforce in place, goodwill, and going concern value. Also would allow IRS to value intangibles on an aggregate basis and take alternative structures into account.

This document was not intended or written to be used, and it cannot be used, for the purpose of avoiding U.S. federal, state, or local tax penalties.

I was in Phoenix last week when the Administration released its fiscal year 2012 budget proposal. My location seemed appropriate since the revenue provisions of the budget consisted mainly of resurrected proposals that had gone down in flames last year. The likelihood of any of them being enacted this year—with a Republican House—seems remote. Nevertheless, it is worth highlighting some of the provisions that could affect businesses:

Tax activity on Capitol Hill is now focused on fundamental tax reform—the base-broadening coach outlet, rate reduction proposals contained in the report that the Deficit Commission released last December. The Senate Finance Committee has scheduled hearings on that topic for next week, and a cabal of six Senators is secretly crafting legislation to implement the Commission’s proposals. So major tax legislation seems possible this year, even though it likely won’t resemble the tax provisions of the budget.

  • LIFO. The LIFO method of inventory accounting would be repealed, with a 10-year phase-in.

  • Carried Interests. Carried interests of investment services partnership interests would be taxable as ordinary income.

  • Superfund Taxes. Superfund excise and income taxes would be reinstated.

  • Reinsurance Premiums. Premiums paid by a U.S. insurance company to a foreign reinsurer not subject to U.S. income tax would be nondeductible unless the reinsurer elects to treat the income as effectively connected to a U.S. trade or business.

  • Earnings Stripping. Tightens section 162(j) by eliminating debt-equity safe harbor, reducing 50% adjusted taxable income threshold to 25%, and reducing carryforward of disallowed interest expense to 10 years.

  • Punitive Damages. No deduction would be allowed for punitive damages.

  • Oil and Gas Preferences. All tax preferences for the oil and gas industry would be eliminated.

  • Repeal Nonqualified Preferred Stock. Certain types of preferred stock issued in exchange for a contribution to the capital of a corporation would no longer be treated as currently taxable.

  • Section 1099 Reporting Requirements. The requirement to report payments greater than $600 per year to corporations would be eliminated.


Revenue Raisers


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