Draft Tax Reform Act Of 2014 - Part 2

Tuesday, I looked at the costs and implications of the tax changes coming out of the draft Tax Reform Act of 2014 for individual taxpayers. Today, while Hurricane Arthur lashes my house, I’ll look at some of the “big money” items in part of the business tax reforms. Just to remind you the costs and savings by each item are scored by the Joint Committee on Taxation (JCT).

TITLE III BUSINESS

Subtitle A – Tax Rates

Section 3001: Corporate tax rates are phased down to 25% by 2019. Tax savings $680.3B

Subtitle B – Exclusions and Deductions

Section 3101: The removal of the federal subsidy for state and local governments offering incentives or concessions to corporations to relocate. Tax increase $8.8B

Section 3104: Reform of depreciation methods. The Modified Accelerated Cost Recovery System (MACRS) periods and methods are repealed for property place in service after 2016 and the applicable methods revert to straight line depreciation. The Treasury is required to review and recommend new schedules for “economic depreciation” by the end of 2017. Tax increase $269.5B.

Section 3105: The special election for amortizing pollution control facilities is repealed. Tax increase $7.9B.

Section 3106: Changes to net operating loss deductions increase taxes $70.5B.

Section 3108: All research and experimental expenses are to be amortized over a five year period beginning with the midpoint of the tax year the expense is incurred/paid. The change is phased in over several years. Tax increase $192.6B.

Section 3110: Advertising expenses will now be 50% expensed and 50% amortized over 10 years. Phased in over several years. The first $1M can be expensed but would be reduced to the extent a taxpayer’s advertising costs exceed $1.5M and completely phased out once advertising costs exceed $2M. All of these thresholds are to be adjusted for inflation. Tax increase $169B.

Section 3111: Section 179 expensing is made permanent at 2008-2009 levels with $250,000 maximum but the deduction is phased out for investments over $800,000. Both figures will be indexed for inflation.

Computer software and certain real property improvements are included (qualifying leasehold, restaurant and retail).

 Air conditioning and heating units are included in the section. Tax saving $54.9B.

Section 3115: Farming deduction for cost of fertilizers etc. is repealed. Tax increase $3.4B.

Section 3119: Amortization of intangibles/goodwill is increased from 15 to 20 years. Tax increase $13B.

Section 3122: Deductions for income attributable to domestic production is phased out from 9% to 6% in 2015, 3% 2016 and zero thereafter. Tax increase $115.8B.

Section 3126: No deduction for entertainment, amusement or recreation activities, facilities or membership dues. No deduction for transportation fringe benefits or amenities.

50-percent limitation applies only to food/beverages and qualifying business meals with no deduction for entertainment. Tax increase $14.7B.

Section 3129: Limitations imposed on the full deductibility of FDIC premiums. Tax increase $12.2B.

Section 3130: Repeal of the percentage depletion method. Tax increase $5.3B.

Section 3133: Repeal of deferral of tax on like-kind exchanges. Exchanges entered into this year are permitted provided there is a binding contract and the exchange is completed on or before December 31, 2017. Tax increase $40.9B.

Section 3136: The exclusion of gain from the sale of certain small business stock is repealed. Tax increase $4.8B.

Section 3139: The recapture rules for depreciable real property are revised to limit the amount treated as ordinary income to the lesser of: the difference between accelerated depreciation and straight line to periods before 2015 or the excess of the amount realized over adjusted basis. Tax increase was incorporated under Section 1001-1003.

 Subtitle C – Reform of Business Credits

Section 3203: Research credit is modified and made permanent after 2013. Tax saving of $34.1B.

Section 3204: Revisions to the low-income tax credit (allocation of basis, credit period and credit amount). Tax increase $ 10.7B

Section 3206: The phase out and repeal of credits for electricity from certain renewable resources. Tax increase $9.6B.

Section 3208: Repeal of the credit for portion of employer social security taxes paid with respect to employee cash tips. Tax increase $10.1B.

Section 3209: Repeal of the credit for testing orphan drugs. Tax increase $9.1B. Hopefully, none in Congress rue this!

Section 3222: Repeal of the credit for employee health insurance expense of small employers. Tax increase $11.1B.

Section 3223: Repeal of the rehab credit. Tax increase $10.5B

Subtitle D – Accounting Methods

Section 3301: The cash method is limited to businesses with annual gross receipts under $10M. Does not include sole proprietors. Tax increase $ 23.6B

Section 3303: Special rules for accrual taxpayers for taxable year of inclusion. Tax increase $10.4B.

Section 3304: Installment sales. Interest charge rules apply for sales greater than $150,000. The exceptions/special rules for the sales of farms, timeshares and residential lots are repealed. Tax increase $1.1B.

Section 3308: Modification of rules for long-term contracts. The completed-contract method would be limited to contracts to be completed within two years for taxpayers with average gross receipts of $10M or less over a three year period. The PCM rules for multi-family units and ship building are repealed. Tax increase $6.5B.

Section 3310: LIFO is repealed. Tax increase $79.1B.

Section 3311: Lower-of-cost-or-market method is repealed. Tax increase $3.8B.

Section 3312: Uniform capitalization (UNICAP) rules are expanded. Tax savings $4.5B

Subtitle E – Financial Instruments

Part 1 Derivatives and Hedges

Section 3401: Derivatives marked to market at year end and gains/losses treated as ordinary income or loss unless they are genuine hedges or commercial/non-speculative transactions. Tax increase $15.7B.

Part 2 Debt Instruments

Section 3413: Accrual taxpayers holding debt instruments cannot defer fees and certain original issue discount (OID) income. Tax increase $9.5B

Part 3 Determining Gain or Loss

Section 3421: Taxpayers selling a portion of substantially identical stock must determine gain/loss using FIFO. Tax increase $3.8B.

Part 4 Tax Favored Bonds

Sections 3431-3432: Interest on new private activity bonds (PABs) is taxable as income. No federal tax credits will be allowed for mortgage credit certificates after 2014. Tax increase $23.9B.

Section 3433: Interest on advanced refunding bonds issued after 2014 are taxable. Tax increase $8.3B.

This takes us to page 104. 78 pages to go.