Tax developmentsBy Brian R. Jenney

President Obama’s 2015 Federal Budget Proposal (FBP) and Rep. Dave Camp (R-MI) Tax Reform Act of 2014 (TRA) contain numerous similar provisions. This article highlights ten similar provisions that may actually go into effect since there is some agreement between Democrats and Republicans. Dave Camp plans to retire after his current term. The second section of this article reviews important and interesting provisions contained in the proposed Tax Reform Act of 2014.

1. Reduce Corporate Tax Rates. The FBP would reduce the top corporate tax rate to 28% and the manufacturing top rate would be 25%. TRA proposes a top tax rate of 25%.

2. Permanently Extend Expensing for Small Businesses. FBP provides for a permanent extension of expensing under IRS Code §179, with a $500,000 deduction limit and phase-out starting at $2 million. TRA also has a permanent extension and contains a $250,000 deduction limit and a phase-out starting at $800,000. Inflation indexing applies to both proposals.

3. Changes to the Like-Kind Exchange Rules. FBP proposes to limit the amount of capital gain deferred under Code §1031 on a like-kind exchange of real property to $1 million dollars per taxpayer per tax year. This number would be indexed for inflation. TRA would totally eliminate the like-kind exchange rules for real property.

4. Reduce Value of Itemized Deductions for High Income Taxpayers. FBP would reduce the value of itemized deductions to 28% for families with income in the top three highest tax brackets, 33%, 35% and 39.6%. TRA proposal reduces the value of itemized deductions to 25%.

5. Conservation Easement Incentives Permanent. Both the FBP and TRA would make permanent a series of temporary enhanced incentives for conservation easements which lapsed on December 31, 2013. Both proposals eliminate the deduction for easements on golf courses.

6. Repeal LIFO Accounting. FBP would repeal last in, first out inventory accounting and make the income that was deferred under LIFO taken into income ratably over ten years. TRA would repeal LIFO and have the income taken into income over a four year period.

7. Tax Carried Interest as Ordinary Income. FBP and TRA have similar proposals to tax carried interest income as ordinary income instead of capital gains. This change would convert certain income earned by partners who perform investment services for investment partnerships from capital gain into ordinary income.

8. Apply Self-Employment Contributions Act (SECA) Tax Uniformly to Pass-through Entities. FBP would treat individual owners of professional service businesses organized as S corporations, limited partnerships, general partnerships and LLCs taxed as partnerships as subject to SECA taxes. TRA specifies that partners and S corporation shareholders who materially participate in the trade or business of the partnership or S corporation would treat 70% of their combined compensation and distributive share of the entity’s income as net earnings from self-employment.

9. Reduce Preferential Treatments for Oil and Gas Production. Both proposals reduce the credits and deductions available for oil and gas companies.

10. New Tax on Large Financial Institutions. Both the FBP and the TRA proposals create a new tax on large financial institutions. The FBP proposal would apply to firms with worldwide assets of over $50 billion and the TRA proposal would apply to firms with worldwide assets of over $500 billion.

The Tax Reform Act of 2014 of Rep. Dave Camp attempts to reduce the tax code by approximately 25% by eliminating lobbyist loopholes and special interest carve outs to lower rates and make the code simpler and fairer for everyone. The Act does not at this time have broad support from Republicans. Rep. Camp is proposing to repeal a number of popular individual tax breaks, including the following:

  • Deduction for personal exemptions;
  • Deduction for state and local income taxes and property taxes;
  • Deduction for itemized deductions for expenses attributable to the trade or business of performing services as an employee;
  • Deduction for personal casualty losses;
  • Deduction for tax preparation expenses;
  • Itemized deduction for medical expenses;
  • Deduction for alimony payments;
  • Deduction for moving expenses;
  • Deduction and exclusions for contributions to medical savings accounts;
  • 2% floor on miscellaneous itemized deductions;
  • Deduction for interest on education loans;
  • Exclusion for discharge of student loan indebtedness;
  • Exclusion for employer provided education assistance;
  • Special rule permitting recharacterization of Roth IRA contributions as traditional IRA contributions;
  • Exception to the 10% penalty on early distribution from IRAs for up to $10,000 to pay for first time homebuyer expenses;
  • Credit for adoption expenses;
  • Credit for residential energy efficient property; and
  • Exclusion of income from U.S. savings bonds used to pay higher education tuition and fees.

Other noteworthy provisions:

  • Accrual Method. Businesses with more than $10 million gross income would be required to use the accrual accounting method. Farmers are exempt regardless of their income. Doctors, lawyers, CPAs, consultants, architects, engineers and other professionals would have a significant tax increase because they would have to make the switch from the cash method of accounting to the accrual accounting method.
  • Capital Gains and Dividends. The top rate under current law: 23.8 percent. The top rate under the proposal: 24.8 percent.
  • Professional sports. Repeals the tax-exempt status for professional sports leagues.
  • Municipal bonds. High-income taxpayers must pay a surtax of 10 percent on their otherwise tax-exempt municipal bond interest. This would increase borrowing costs for state and local governments.

For further information regarding these matters, please contact Mr. Jenney at 248.740.5688 or click here to send an email.

Some of the information contained in this article was obtained from 2014 Thomas Reuters/Tax & Accounting, RIA Checkpoint Federal Taxes Weekly Alert.