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Post Election Special Edition Whitepaper: Eye on Washington

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*Key Issues in the Tax Reform debate …

*Key Issues in the Tax Reform debate
*Important Dates
*What Happened in Congress?
*The Fiscal Cliff
*The PAYGO Rules
*The Tax Writing Committees
*The President’s Tax Reform Plan
*Other Tax Issue

For more information, visit www.cbiz.com or contact the author.

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  • 1. Post Election Special Edition: Eye on Washington Presented by Stephen C. Henley, CPA National Tax Practice Leader, CBIZ MHM, LLC William M. Smith, Esq.Managing Director, CBIZ MHM, LLC National Tax Office
  • 2. Tax Reform – Key Issues• Key issues in reform: – Fate of Bush tax cuts, extenders – Corporate tax rate – Structure of international tax system – Reduce complexity and increase permanency• Unlikely that tax reform will begin in lame duck Congress – any discussion of tax reform would likely begin after January 2013• More agreement among members of Congress on reform of the corporate system – may take up corporate reform first, and separate from individual tax reform.
  • 3. Important DatesNovember 6, 2012 Election of President and members of CongressDecember 31, 2012  the “Fiscal Cliff” – expiration of tax extender provisions and mandatory budget cuts known as “sequestration”January 3, 2013  113th Congress is sworn inJanuary 20, 2013  President Obama is sworn inFebruary 2013  US will reach its debt limit
  • 4. Lame Duck Session of Congress – CurrentComposition House Senate Democrats 192 53 Republicans 242 47 Vacancies 1 0
  • 5. Composition of New Congress House Senate Democrats 191 52 Republicans 232 45 Independents 0 2 Vacancies 0 0 TBD 12 1
  • 6. Notable Winners and Losers• NOTE: Balance of power in Washington is virtually unchanged even though Democrats defended 23 Senate seats versus Republicans’ 10• North Dakota Senate race is TBD• New Congress includes at least 19 women• Democratic Senate wins by Warren (MA) and Donnelly (IN) were gains for Democrats (seats were previously held by Republicans)• CT Senate race: Retiring Sen. Lieberman (CT-I) is replaced by a Democrat (Murphy)• Republicans picked up Senate seat in Nebraska (Fisher)• Maine Senator-elect Angus King is independent but is expected to caucus with Democrats
  • 7. What is the Fiscal Cliff?• Combination of tax increases due to the expiration of tax provisions, new taxes under the Affordable Care Act, and the $1.2T of mandatory spending cuts put in place by the Budget Control Act of 2011 (known as “sequestration”). All will be effective as of January 2, 2013.Expiring Taxes New Taxes • 2001 and 2003 tax cuts • Health care taxes • Payroll tax cut • Extenders • Estate tax relief Spending • AMT patch • Automatic spending cuts • Equipment expensing (“Sequestration”)
  • 8. What is the Fiscal Cliff?• If Congress enacts PAYGO bills cutting taxes or increasing mandatory expenditures without fully offsetting the costs, the Act specifies a penalty, called "sequestration." If Congress adjourns at the end of a session with net costs – that is, more costs than savings - on the scorecard, the Office of Management and Budget (OMB) is required to calculate, and the President is required to issue a sequestration order implementing, across-the-board cuts to a select group of mandatory programs in an amount sufficient to offset the net costs on the PAYGO scorecard.
  • 9. Fiscal Cliff – Tax Increases Billion 2001 and 2003 tax cuts $166 Payroll tax cut $125 AMT patch $119 Health care taxes $23 Stimulus tax cuts $21 Extenders $20 Estate tax $13 Capital asset expensing $8 Total Tax Increase $495
  • 10. Fiscal Cliff – Sequestration Cuts in 2013• 50-50 split in cuts between defense and domestic spending• 9.4% cut in non-exempt defense discretionary funding• 8.2% cut in non-defense, non-exempt discretionary funding• 2% cut in Medicare funding• 7.6% cut to other non-exempt non-defense mandatory programs• 10% cut to non-exempt, mandatory defense programs
  • 11. Fiscal Cliff – Impact• CBO projects the automatic spending cuts plus expiration of tax cuts and extenders will send the US into a recession in 2013• Nearly 90% of US taxpayers will pay more tax• Average amount of increase: $3500• Middle income household average increase: $2000• Estate and Gift taxes return to 2001 levels
  • 12. Fiscal Cliff – Leaders in Congress• House Speaker John Boehner (R – OH): Spending cuts, no tax increases; any increase in debt limit must be offset by spending cuts and not tax increases.• Sen. Majority Leader Harry Reid (D – NV): Must include tax increases in discussion of deficit reduction; will oppose efforts to roll back the sequestration and increase defense spending.
  • 13. Fiscal Cliff• In the third presidential debate on October 21, 2012, President Obama said the fiscal cliff “will not happen.”• Senior Advisor David Plouffe said the President was expressing a desire that the fiscal cliff should not happen.• In an October 20 webinar, BNA reporters said that the consensus in Congress is that Congress and the Administration will find a way to avoid the fiscal cliff.
  • 14. Fiscal Cliff – Key Issues• BNA congressional reporters: – Major disagreement between Republicans and Democrats: The extension of the 2001 and 2003 tax cuts for families making $250,000 or more and individuals making $200,000 or more. – Most staffers in the House believe the Senate will come up with proposed legislation and the House will amend it. – November may be a dead zone for activity in Congress – they return on Nov. 13th and are gone soon after for Thanksgiving. So negotiations may not begin until December. – Many have suggested 6 month extension of everything except the payroll tax reduction. – It is likely all fiscal cliff issues will be dealt with in a single package – little appetite for dealing with individual issues piecemeal.• Difficult to assess statements from Congress because everyone was posturing for the election.
  • 15. Fiscal Cliff – Key Issues – cont.• Bipartisan “Gang of 8” Senators – Coburn (R– OK), Chambliss (R – GA), Crapo (R – ID), Johanns (R – NB), Warner (D – VA), Durbin (D – IL), Conrad (D – ND), Bennet (D – CO).• Goal – compromise on deficit reduction deal – held retreat in VA in October 2012.• As of Oct. 11, Gang of 8 had not agreed on any key issues including taxes, social programs, and legislative procedure.• Any agreement put forward by the Gang of 8 would still need to win support – for example Senate Majority Leader Reid has said he considers maintaining Bush tax cuts for top 2 income tax brackets to be unacceptable.
  • 16. Pay-As-You-Go Rules• The Pay-As-You-Go or PAYGO rules generally require revenue neutrality -- any tax reduction provided by Congress must be paid for with an offset (i.e., a source of tax revenues).• Statutory PAYGO laws, initially passed in 1990, have come and gone, and come again – most recently in 2010. They provide for determining revenues over 10 years, and sequestration if tax cuts violate PAYGO.• Budgetary process PAYGO rules are rules that govern procedurally what each law is required to contain regarding budget neutrality.
  • 17. Pay-As-You-Go Rules• Violations of the procedural PAYGO rule are subject to points of order in the House and Senate. In the Senate, points of order against PAYGO violations can be overcome by 60 votes, and when considering particular bills, the House can adopt a rule prohibiting such points of order with a simple majority.• PAYGO rules provide an exception to the offset requirement with respect to an extension of the 2001 and 2003 tax cuts (“Bush tax cuts”), but only for cuts that benefit individuals who earn $200,000 or less per year or couples who earn $250,000 or less per year. Extension of the Bush tax cuts for those in the top 2 income brackets is subject to the PAYGO requirements.
  • 18. Pay-As-You-Go Rules – cont.• Congressional Budget Office and Joint Committee on Taxation will “score” tax proposals to determine their cost.• Bills are scored for effects over 10 years• The possibility that a tax cut will expand the economy which will therefore make up any shortfall in revenue is NOT considered in the CBO’s and JCT’s scoring of tax proposals – it is too difficult to present reliable data that economic expansion is due to tax rate reduction• If a tax plan is scored as causing a deficit increase, that increase must be offset in order to overcome the PAYGO rules, and revenue from economic expansion cannot provide the offset.• Joint Committee on Taxation estimated cost of extending Bush tax cuts for top 2 brackets for 2013 would cost $50 billion.
  • 19. Pay-As-You-Go Rules – cont.• Republicans in Congress have proposed extending Bush tax cuts for top brackets – will need to address PAYGO rules or waive them.• Will need 60 votes to waive PAYGO rules in Senate• Lame duck Senate – not enough votes in Senate to waive• Democrats maintain majority in Senate, so Republicans do not have enough votes after January 1 to waive PAYGO for extension of Bush tax cuts for top brackets• President Obama has stated he will veto any bill that extends the Bush tax cuts for the top 2 brackets.
  • 20. Reconciliation and Points of Order• Two processes used predominantly in the Senate to avoid constraints of the Budget Act of 1974• Most points of order in the Budget Act apply to measures as a whole, as well as to motions, amendments, or conference reports to those measures. When a point of order is sustained against consideration of some matter, the effect is that the matter in question falls.• In the Senate, most points of order under the Budget Act may be waived by a vote of at least three-fifths of all Senators duly chosen and sworn (60 votes if there are no vacancies)
  • 21. Reconciliation and Points of Order• Reconciliation is a legislative process of the United States Senate intended to allow consideration of a budget bill with debate limited to twenty hours under Senate rules.• The Byrd Rule was adopted in 1985 and amended in 1990. Its main effect has been to prohibit the use of reconciliation for provisions that would increase the deficit beyond 10 years after the reconciliation measure.• The Health Care and Education Reconciliation Act of 2010 (H.R. 4872) is a reconciliation bill passed by the 111th United States Congress to make changes to the Patient Protection and Affordable Care Act. It was signed into law by President Barack Obama on March 30, 2010.
  • 22. Composition of Senate Finance (Lame Duck) Democrats 13 Republicans 11Composition of House Ways and Means(Lame Duck) Democrats 15 Republicans 22
  • 23. Seats on Finance Committee at Stake Result Bingaman (D-NM) - (Retired this year) Heinrich (D) Cantwell (D-WA) Won Cardin (D-MD) Won Carper (D-DE) Won Conrad (D-ND) - (Retired this year) Heitcamp (D) Menendez (D-NJ) Won Nelson (D-FL) Won Stabenow (D-MI) Won Hatch (R-UT) Won Kyl (R-AZ) - (Retired this year) Flake (R) Snowe (R-ME) - (Retired this year) King (I)
  • 24. Seats on Ways and Means at Stake Republicans Result Democrats ResultWally Herger (R-CA) Retired this year Sander Levin (D-MI) WonSam Johnson (R-TX) Won Charles B. Rangel (D-NY) WonKevin Brady (R-TX) Won Fortney Pete Stark (D-CA) LostPaul Ryan (R-WI) Won Jim McDermott (D-WA) WonDevin Nunes (R-CA) Won John Lewis (D-GA) WonPat Tiberi (R-OH) Won Richard Neal (D-MA) WonGeoff Davis (R-KY) Resigned this year Xavier Becerra (D-CA) WonDave G. Reichert (R-WA) Won Lloyd Doggett (D-TX) WonCharles W. Boustany Jr. (R-LA) TBD Mike Thompson (D-CA) WonPeter J. Roskam (R-IL) Won John B. Larson (D-CT) WonJim Gerlach (R-PA) Won Earl Blumenauer (D-OR) WonTom Price (R-GA) Won Ron Kind (D-WI) WonVern Buchanan (R-FL) Won Bill Pascrell Jr. (D-NJ) Won
  • 25. Seats on Ways and Means at Stake cont. Republicans Result Democrats ResultAdrian Smith (R-NE) Won Shelly Berkley (D-NV) Retired this yearAaron Schock (R-IL) Won Joseph Crowley (D-NY) WonLynn Jenkins (R-KS) WonErik Paulsen (R-MN) WonKenny Marchant (R-TX) WonRick Berg (R-ND) Resigned last yearDiane Black (R-TN) WonTom Reed (R-NY) WonDave Camp (R-MI) Chairman Won
  • 26. President’s Tax Reform Plan
  • 27. Obama Tax Plan – Tax Reform Generally• January 2012 State of the Union Speech – Expand relief to startups and small businesses that are creating jobs and increasing wages; close loopholes and simplify the code.• February 2012 – Eliminate all expenditures for specific industries other than those that are critical to growth or fairness; establish greater parity between large corporations and large non- corporate entities (e.g., partnerships).
  • 28. Obama Tax Plan - Individuals• Extend all Bush tax cuts permanently except for individuals making $200,000 or more, and married filers making $250,000 or more. For these taxpayers, the 2 highest income tax brackets would rise (33% up to 36%, and 35% up to 39.6%). – July 2012: Obama senior advisor David Plouffe confirmed that Obama would veto any legislation that extends the Bush tax cuts to families making more than $250,000 per year.• Long term capital gains rate on most assets would rise to 20%.• February 2012: End the qualified dividend tax rate for those in the top two tax brackets.• Reduce each personal exemption (but not below zero) by 2% of the exemption amount for the year for each $2500 ($1250 if married filing separate) or fraction thereof by which AGI exceeds certain thresholds.
  • 29. Obama Tax Plan – Individuals cont.• Cap certain deductions or exclusions at 28% for taxpayers in the 36% and 39.6% brackets.• Add flexibility to Earned Income Tax Credit for taxpayers whose children are claimed as dependents on another person’s tax return.• Make the American Opportunity Tax Credit permanent, and use it to replace the Hope Scholarship Credit.
  • 30. Obama Tax Plan – Individuals cont.• Estate tax: Set exemption at $3.5 million; maximum rate of 45%• Gift tax: Decoupled from estate tax; maximum rate of 45%.• Extend AMT patch through 2013, but then replace with the “Buffett Rule” – taxpayers with income over $1 million must pay an effective federal income tax rate of at least 30%.• Exempt individuals from the minimum required distribution requirements if the aggregate value of the individual’s IRA and tax favored retirement plan accumulations does not exceed $75,000 (indexed for inflation).
  • 31. Obama Proposals – Corporate• Reduce top corporate rate from 35% to 28%• Increase Domestic Production Activities Deduction, allowing 25% rate on manufacturing income and lower rate (approximately 18%) for “advanced manufacturing”• Extend 100% bonus depreciation for one year• Provide certain employers with a one year 10% credit for new jobs and wage increases.• New Manufacturing Communities Tax Credit for communities that have suffered a “major job loss event.”
  • 32. Obama Proposals – Corporate cont.• Make the Research and Experimentation Credit permanent• Increase the alternative simplified research credit from 14% to 17% of the excess of current-year qualified research expenses ("QREs") over 50 percent of the taxpayers average QREs for the prior three years.• Additional restrictions on Low Income Housing Tax Credits• Require all corporations and partnerships that file a Schedule M-3 to file returns electronically.• Assess a financial crisis responsibility fee on firms with $50 billion or more in consolidated assets that received funds under the Troubled Assets Relief Program (“TARP”) until the firms pay back funds.• Require corporations that enter a forward contract for issuance of their own stock to treat a portion of the payment on the forward issuance as interest.
  • 33. Obama Proposals – Corporate cont.• Additional funding for New Markets Tax Credits• Replace the section 179D deduction for energy efficient commercial building property with a credit equal to the cost of property certified as reducing interior energy costs by 20% or more.• Replace the credit for plug in electric drive vehicles with a credit for advanced technology vehicles under 14,000 lbs.• Extend production tax credit and investment tax credit for wind facilities and property and for other qualifying energy property.
  • 34. Obama Proposals – Corporate cont.• Expand the 30% section 48C Advanced Energy Manufacturing Tax Credit• Require employers in business for at least 2 years that have more than 10 employees to offer an automatic IRA option that allows contribution by payroll deduction• Expand maximum “start up costs” credit for small employers that adopt new qualified plans.• Repeal the “boot within gain” limitation in a reorganization where the exchange has the effect of the distribution of a dividend.• Repeal the section 351 provision that treats non-qualified preferred stock as boot.
  • 35. Obama Proposals – Corporate cont.• Expand the definition of “substantial built in loss” in transfers of partnership interests under section 743(d), measuring the loss based on the transferee rather than the partnership itself.• Allow a partner’s distributive share of expenditures that are not deductible in computing the partnership’s taxable income only to the extent of the partner’s adjusted basis in the partner’s partnership interest.• Mandate the streamlined “electing large partnership” (ELP) audit and adjustment procedures, but not simplified reporting, for any partnership with 1,000 or more partners at any time during the year.• Allow companies with up to $10 million in gross receipts (up from $5 million) to use cash accounting.• Address miscalculation of workers as independent contractors (e.g., reduced penalties for misclassification of workers where businesses voluntarily reclassify workers).
  • 36. Obama Proposals – Corporate cont.• Repeal provisions allowing: – LIFO inventory accounting – Oil and gas tax preferences – Interest deductions on corporate life insurance policies – Special depreciation on corporate aircraft – Taxation of carried interest income at capital gains rates• Consider reforming provisions that “distort” tax base: – Accelerated depreciation – Reduce bias toward debt financing by limiting interest expense deductions – Establish greater parity between corporations and passthrough entities by taxing large passthrough entities as corporations.
  • 37. Obama Proposals – International• Retain the worldwide taxation system• Impose a minimum tax on foreign profits of US companies to discourage taxpayers from keeping funds outside the US• Protect US jobs by: – Eliminating deductions for moving operations abroad – Creating a 20% credit for expenses of moving jobs back to the US – Imposing current tax on “excess profits” associated with moving intangibles to low tax jurisdictions; and defining “intangible property” to include workforce in place, goodwill, and going concern value – Delay deduction of interest expense associated with offshore investments until related income is subject to US tax – Requiring that deemed paid foreign tax credit must be calculated on a consolidated basis
  • 38. Obama Proposals – Capital Gains• January 2012: Make permanent the 100% exclusion from tax for capital gains realized on the sale of certain small business stock held for more than 5 years (exclusion expired at the end of 2011). – 50% exclusion was of little benefit, because the gain was taxed at 28% rate, making the effective rate 14%.• February 2012: The 100% exclusion would not be available for income taxable in the top two brackets.
  • 39. Obama – Tax Issues Not Addressed• Enhanced section 179 expensing election (dropped from $500,000 in 2011 to $139,000 in 2012, and will revert to $25,000 in 2013.)• 15 year recovery period for qualified leasehold, restaurant, and retail improvement property (expired in 2011).• Repatriation holiday – Reduced rate of income tax provided for repatriation of cash held overseas (used in 2005).• 2.3% medical device excise tax – some Democrats support repeal because it affects their constituents.• Extension of forgiveness of indebtedness income exclusion for writedown of principal in mortgages – has bipartisan support.
  • 40. SPECIFIC TAX ISSUES
  • 41. Wind Tax Credit, Energy Incentives• On October 17th, a Democratic staffer said that he believes a tax credit measure (S. 3521) will be incorporated into efforts to avoid the fiscal cliff.• S. 3521 extends more than $18 billion in energy-related incentives, the majority of which would be a one year extension of the wind energy industry’s 2.2 cent per kilowatt hour production tax credit, in addition for a change in the law that allows wind projects already under construction by the end of 2013 to be eligible.• Other credits include a production tax credit for other renewable energy projects, credits for energy-efficient homes and appliances, and incentives for cellulosic biofuel and other alternative fuels.
  • 42. Payroll Tax Cut• President Obama and Congress appear to agree that the 2% payroll tax cut should not be renewed.• On January 1 2013, employees’ share of FICA will increase from 4.2% to 6.2%, unless the payroll tax cut is extended.• Prospects for the payroll tax cut to be added to any package of extenders are dim.
  • 43. Delay• With likelihood that tax rules will not be finalized before December 2012, taxpayers may be prohibited from filing their returns until later in 2013.• IRS system will have to be changed to agree with any changes in the law; right now everything is set to comply with law as it would exist if the fiscal cliff were to occur at the end of 2012.• Withholding rates may change, especially considering the uncertainty of the top 2 income tax brackets.• Forms will also need to be changed. – In 2011, e-filing was delayed until mid-February• Guidance will be required in the event any changes are made – will also likely be delayed.
  • 44. Summary/Key Takeaways• Death is the only thing that remains certain• Lame Duck Congress faces the Fiscal Cliff – $495 Billion of Tax Increases – 2013 Sequestration Cuts split 50-50 between defense and domestic• The President’s Ideas on Tax Reform are Dependent on Congress – No material change in balance of power in House and Senate – Neither party has 60 vote majority in the Senate – Most members of Senate Finance and House Ways and Means won their races – should be essentially the same makeup in committees in the new Congress (total party numbers will remain unchanged)
  • 45. Summary/Key Takeaways• Highlights of President’s Plan – Increase individual tax brackets and cap certain deductions – Extend Bush Tax Cuts except for wealthy – LTCG rate increases to 20%; eliminate qualified dividends for wealthy – Extend AMT patch through 2013; then Buffet Rule – Estate tax: exemption $3.4 million; max. rate 45% – Reduce corporate max. rate to 28% – Extend bonus depreciation one year – New jobs and other credits; increase R&E credit – Repeal LIFO Inventory – Retain worldwide tax system while providing incentives to keep jobs in US
  • 46. Summary/Key Takeaways• Payroll tax cut disappearing• Delay in tax legislation effect on IRS
  • 47. QUESTIONS?
  • 48. Upcoming Webinars• Healthcare Legislative Update: What’s Next? – Tuesday, November 13th from 11:30 – 1:00 ET• Individual Year-End Tax Planning Tips for 2012 and Beyond – Wednesday, November 14th from 2:00 – 3:00 ET• Eye on Washington: Quarterly Business Tax Update – Tuesday, January 22nd from 2:00 – 3:00 ET (Registration coming soon!)**Links are provided in handouts to register by clicking on webinar title. 53
  • 49. CBIZ MHM, LLC Contact Information Stephen C. Henley National Tax Practice Leader  770.858.4443  shenley@cbiz.com William M. Smith Managing Director  301.951.3636  billsmith@cbiz.com
  • 50. Thank You