White House Releases Tax Proposals as Part of Fiscal Year 2014 Budget Plan.
(Parker's Federal Tax Bulletin: April 27, 2013)

President Obama's budget for fiscal year 2014, released earlier this month, includes numerous tax proposals affecting, among others, individuals, small businesses, and partnerships. The proposals are described in the General Explanations of the Administration's Revenue Proposals for FY14, also known as the Greenbook.

Not surprisingly, some Republicans have declared the budget dead on arrival. However, if a comprise should be reached, some of these proposals may actually become law before the end of the year. The following is a summary of some of the more important budget proposals.

Proposals Affecting Individuals

(1) The proposal would permanently extend increased refundability of the child tax credit by reducing the earned income threshold that makes additional credits available.

(2) The proposal would make permanent the temporary expansion of the earned income tax credit that increased the EITC for families with three or more children and increased the phase-out range for all married couples filing a joint return.

(3) The proposal would make the American Opportunity Tax Credit a permanent replacement for the Hope Scholarship credit.

(4) The proposal would permanently increase from $15,000 to $75,000 the AGI level at which the child and dependent care credit begins to phase down.

(5) The proposal would permanently extend the exclusion for income from the discharge of qualified principal residence indebtedness to amounts that are discharged before January 1, 2016, and to amounts that are discharged pursuant to an arrangement entered before that date.

(6) The proposal would limit the tax value of specified deductions or exclusions from AGI and all itemized deductions. This limitation would reduce the value to 28 percent of the specified exclusions and deductions that would otherwise reduce taxable income in the 33-percent, 35-percent, or 39.6-percent tax brackets. A similar limitation also would apply under the alternative minimum tax.

(7) The proposal would impose a new minimum tax, called the Fair Share Tax (FST) (i.e., the Buffet Rule), on high-income taxpayers. The tentative FST would equal 30 percent of AGI less a credit for charitable contributions. The charitable credit would equal 28 percent of itemized charitable contributions allowed after the overall limitation on itemized deductions (i.e., the so called Pease limitation). The final FST would be the excess, if any, of the tentative FST over regular income tax (after certain credits, the alternative minimum tax and the 3.8 percent surtax on investment income) and the employee portion of payroll taxes. The set of certain credits subtracted from regular income tax would exclude the foreign tax credit, the credit for tax withheld on wages, and the credit for certain uses of gasoline and special fuels.

Business-Related Provisions

(1) The proposal would permanently extend the 2013 Code Sec. 179 expensing and investment limitations. Further, the deduction limit of $500,000 and the $2 million level for beginning the phaseout would be indexed for inflation for all tax years beginning after 2013, as would the dollar limitation on the expensing of sport utility vehicles. Qualifying property would permanently include off-the-shelf computer software, but would not include real property.

(2) The proposal would permanently extend the 100-percent exclusion for qualified small business stock.

(3) The proposal would permanently double, from $5,000 to $10,000, the maximum amount of start-up expenditures a taxpayer may deduct (in addition to amortized amounts) in the tax year in which a trade or business begins. This maximum amount of expensed startup expenditures would be reduced (but not below zero) by the amount by which start-up expenditures with respect to the active trade or business exceed $60,000.

(4) The proposal would permanently extend the work opportunity tax credit to apply to wages paid to qualified individuals who begin work for the employer after December 31, 2013.

(5) The proposal would provide qualified employers a tax credit for increases in wage expense, whether driven by new hires, increased wages, or both. The credit would be equal to 10 percent of the increase in the employer's eligible wages paid during the credit period over the employer's eligible wages paid during the base period.

(6) The proposal would provide a new allocated tax credit to support investments in communities that have suffered a major job loss event.

(7) The proposal would provide a new general business credit against income tax equal to 20 percent of the eligible expenses paid or incurred in connection with insourcing a U.S. trade or business.

(8) The proposal would expand eligibility for the health insurance tax credit for small employers and simplify its operation in an effort to increase the utilization of the tax credit, and encourage more small employers to provide health benefits to employees and their families.

(9) The proposal would repeal the deduction for dividends paid with respect to stock held by an ESOP that is sponsored by a C corporation (subject to an exception for C corporations with annual receipts of $5 million or less).

Provisions Relating to International Taxes

(1) The proposal would defer the deduction of interest expense that is properly allocated and apportioned to stock of a foreign corporation that exceeds an amount proportionate to the taxpayer's pro rata share of income from such subsidiaries that is currently subject to U.S. tax. Under the proposal, foreign-source income earned by a taxpayer through a branch would be considered currently subject to U.S. tax; thus, the proposal would not apply to interest expense properly allocated and apportioned to such income. Other directly earned foreign source income (for example, royalty income) would be similarly treated.

(2) The proposal would require a U.S. taxpayer to determine its deemed paid foreign tax credit on a consolidated basis taking into account the aggregate foreign taxes and earnings and profits of all of the foreign subsidiaries with respect to which the U.S. taxpayer can claim a deemed paid foreign tax credit (including lower-tier subsidiaries described in Code Sec. 902(b)). The deemed paid foreign tax credit for a tax year would be limited to an amount proportionate to the taxpayer's pro rata share of the consolidated earnings and profits of the foreign subsidiaries repatriated to the U.S. taxpayer in that tax year that are currently subject to U.S. tax.

Accounting and Depreciation Proposals

(1) The proposal would repeal the use of the LIFO inventory accounting method for federal income tax purposes. Taxpayers that currently use the LIFO method would be required to change their method of inventory accounting, resulting in the inclusion in income of prior-years' LIFO inventory reserves (the amount of income deferred under the LIFO method). The resulting Code Sec. 481(a) adjustment, which is a one-time increase in gross income, would be taken into account ratably over 10 years, beginning with the year of change.

(2) The proposal would statutorily prohibit the use of the lower of cost or market (LCM) and subnormal goods methods for valuing inventory. Appropriate wash-sale rules also would be included to prevent taxpayers from circumventing the prohibition. The proposal would result in a change in the method of accounting for inventories for taxpayers currently using the LCM and subnormal goods methods, and any resulting Code Sec. 481(a) adjustment generally would be included in income ratably over a four-year period beginning with the year of change.

(3) The proposal would increase the recovery period for depreciating general aviation passenger aircraft from five years to seven years. Correspondingly, for taxpayers using the alternative depreciation system, the recovery period for general aviation passenger aircraft would be extended to 12 years.

Partnership Proposals

(1) The proposal would amend Code Sec. 743(d) to also measure a substantial built-in loss by reference to whether the transferee would be allocated a net loss in excess of $250,000 upon a hypothetical disposition by the partnership of all of the partnership's assets, immediately after the transfer of the partnership interest, in a full taxable transaction for cash equal to the fair market value of the assets.

(2) The proposal would amend Code Sec. 704(d) to allow a partner's distributive share of expenditures not deductible in computing the partnership's taxable income and not properly chargeable to capital account only to the extent of the partner's adjusted basis in its partnership interest at the end of the partnership year in which the expenditures occurred.

(3) The proposal would amend Code Sec. 267(d) to provide that the principles of Code Sec. 267(d) do not apply to the extent gain or loss with respect to the property is not subject to federal income tax in the hands of the transferor immediately before the transfer but any gain or loss with respect to the property is subject to federal income tax in the hands of the transferee immediately after the transfer.

Proposals Relating to the Elimination of Fossil Fuel Preferences

(1) The proposal would repeal the investment tax credit for enhanced oil recovery projects.

(2) The proposal would repeal the production tax credit for oil and gas from marginal wells.

(3) The proposal would repeal expensing of intangible drilling costs (IDCs) and 60-month amortization of capitalized IDCs. IDCs would be capitalized as depreciable or depletable property, depending on the nature of the cost incurred, in accordance with the generally applicable rules.

(4) The proposal would repeal the exception from the passive loss rules for working interests in oil and gas properties.

(5) The proposal would repeal percentage depletion with respect to oil and gas wells. Taxpayers would be permitted to claim cost depletion on their adjusted basis, if any, in oil and gas wells.

(6) The proposal would retain the overall manufacturing deduction, but exclude from the definition of domestic production gross receipts all gross receipts derived from the sale, exchange, or other disposition of oil, natural gas, or a primary product thereof. There is a parallel proposal to repeal the domestic manufacturing deduction for coal and other hard mineral fossil fuels.

(7) The proposal would increase the amortization period from two years to seven years for geological and geophysical expenditures incurred by independent producers in connection with all oil and gas exploration in the United States. Seven-year amortization would apply even if the property is abandoned and any remaining basis of the abandoned property would be recovered over the remainder of the seven-year period.

(8) The proposal would repeal expensing, 60-month amortization, and 10-year amortization of exploration and development costs with respect to coal and other hard-mineral fossil fuels. The costs would be capitalized as depreciable or depletable property, depending on the nature of the cost incurred, in accordance with the generally applicable rules. The other hard-mineral fossil fuels for which expensing, 60-month amortization, and 10-year amortization would not be allowed include lignite and oil shale to which a 15-percent depletion rate applies.

(9) The proposal would repeal percentage depletion with respect to coal and other hard-mineral fossil fuels. The other hard-mineral fossil fuels for which no percentage depletion would be allowed include lignite and oil shale to which a 15-percent depletion rate applies. Taxpayers would be permitted to claim cost depletion on their adjusted basis, if any, in coal and other hard mineral fossil-fuel properties.

(10) The proposal would repeal capital gains treatment of coal and lignite royalties and would tax those royalties as ordinary income. (Staff Editor Parker Tax Publishing)

Don't miss our Complimentary Federal Tax Bulletin: April 24, 2013.

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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