There is no question in anyone’s mind that America’s complicated system of business taxation is in need of reform. In light of the fact that the U.S. corporate tax rate will soon be the highest among advanced countries and is riddled with loopholes and deductions, our system is uncompetitive and inefficient. It does little to encourage job creation and investment at home. To address these issues, the White House and Treasury released the President’s Framework for Business Tax Reform. The plan could spotlight President Obama as a business-friendly tax cutter for the upcoming election because it calls for lowering the top corporate rate to 28% from 35%. The proposed tax overhaul also included proposals to eliminate oil and gas company deductions, to slap new taxes on U.S. firms that operate overseas, and to offer new incentives for domestic manufacturing, research and clean-energy companies.
The proposal fails to ensure parity between small and large business. Any plans for reform should not create more uncertainty and take away deductions that many small businesses count on each year. Small businesses could soon be facing tax rates of up to 40 percent or more, the proposal would not lower the tax rates of small businesses that pay taxes on the owner’s personal income tax level, and eliminating “last in first out” accounting and changing depreciation schedules would scale back capital cost recovery.
On a more positive note, the proposed tax reform framework does include provisions that would help small business: expanding and making permanent the R&E tax credit; increasing Section 179 expensing to $1 million; doubling the deduction for start-up costs from $5,000 to $10,000; and allowing cash accounting on businesses with up to $10 million in gross receipts. The proposal also mentions expanding and simplifying the health insurance tax credit.
Key Point: The five elements emphasized in the Administration’s tax reform Framework, as summarized in Treasury’s press release, are:
- Eliminate dozens of tax loopholes and subsidies, broaden the base and cut the corporate tax rate to spur growth in America: The framework eliminates dozens of different tax expenditures and fundamentally reforms the business tax base to reduce distortions that hurt productivity and growth. It reinvests these savings to lower the corporate tax rate to 28 percent, putting the United States in line with major competitor countries and encouraging greater investment.
- Strengthen American manufacturing and innovation: The framework would refocus the manufacturing deduction and use the savings to reduce the effective rate on manufacturing to no more than 25 percent, while encouraging greater research and development and the production of clean energy.
- Strengthen the international tax system, including establishing a new minimum tax on foreign earnings, to encourage domestic investment: Our tax system should not give companies an incentive to locate production overseas or engage in accounting games to shift profits abroad, eroding the U.S. tax base. Introducing the principle of a minimum tax on foreign earnings would help address these problems and discourage a global race to the bottom in tax rates.
- Simplify and cut taxes for America’s small businesses: Tax reform should make tax filing simpler for small businesses and entrepreneurs so that they can focus on growing their businesses rather than filling out tax returns.
- Restore fiscal responsibility and not add a dime to the deficit: Business tax reform should be fully paid for and lead to greater fiscal responsibility than our current business tax system by either eliminating or making permanent and fully paying for temporary tax provisions now in the tax code.
Daszkal Bolton would like to make domestic and international clients aware that within the “Framework” the following items are mentioned, and if passed, the proposal would have an impact that we would wish to address in advance with financial executives:
- Eliminate “last in first out” (LIFO) method of accounting
- Eliminate oil and gas preferences, including repealing the expensing of intangible drilling costs and percentage depletion for oil and natural gas wells
- Reform treatment of insurance industry and products by denying certain interest deductions allocable to life insurance policies and improving information reporting
- Tax carried interest as ordinary income
- Eliminate special depreciation rules for corporate purchases of aircraft
- Address depreciation schedules
- Reduce bias toward debt financing
- Require greater disclosure of annual corporate income tax payments
- Lower top effective rate on manufacturing income to 25 percent by reforming the domestic production activities deduction
- Expand, simplify, and make permanent the R&D tax credit
- Remove tax deductions for moving production overseas and provide new incentives for bringing production back to the United States, including a 20 percent income tax credit for insourcing
- Strengthen international tax rules by taxing excess profits associated with shifting intangibles to low tax jurisdictions
- Require that the deduction for interest expense attributable to overseas investment be delayed until the related income is taxed in the United States
- Allow small businesses to expense up to $1 million in investments
Contact us: Please contact Michael Daszkal, CPA, Managing Partner, or Mark Chaves, CPA, Partner-in-Charge of International Tax for tax planning or compliance solutionsat 561-367-1040. Or you may email your questions to [email protected], or [email protected].