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Congress Tees Up Tax Agenda For Remainder Of 2010
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Congress Tees Up Tax Agenda For Remainder Of 2010
Jul 08, 2010
Congressional Tax Agenda for Remainder of 2010
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1. Tax Legislative Update Breaking news from Capitol Hill from Grant Thornton’s Washington National Tax Office 2010-10 July 7, 2010 Congress tees up remaining 2010 tax agenda Contact information Congress adjourned for its July 4 recess without completing several major tax priorities. Mel Schwarz Lawmakers plan to address the remaining tax legislation when they return, but may delay Partner, Washington action on major tax legislation until after Labor Day. National Tax Office T 202.521.1564 E Mel.Schwarz@gt.com The unfinished legislative efforts on tax policy include the following: Dustin Stamper • Tax “extenders” Manager, Washington • Small business and economic stimulus tax incentives National Tax Office T 202.861.4144 • The expiration of the 2001 and 2003 tax cuts E Dustin.Stamper@gt.com • Estate and gift taxes www.GrantThornton.com/tax • Revenue offsets to pay for many of these priorities The congressional schedule is very tight for the rest of the year. Congress returns from recess the week of Monday, July 12, but is scheduled to recess again in August after just three weeks in session (the Senate currently plans to stay for four weeks). Lawmakers will return from the August recess on Sept. 12, but will then have less than two months in session before they need to adjourn for the November elections. It is likely that a “lame duck” session will be needed after the elections. Tax extenders The popular temporary tax provisions known as “extenders” include over 30 tax provisions that expired at the end of 2009: • Research credit • Itemized deduction for state and local sales taxes • 15-year cost recovery for qualified leasehold improvements, qualified restaurant buildings and improvements, and qualified retail improvements • Look-through treatment of payments between related controlled foreign corporations under foreign personal holding company income rules The House and Senate have sent competing versions of extender legislation (H.R. 4213) back and forth to try and settle on a final product. The House and Senate agree on the tax incentives and extensions in the legislation (a full list is available in Tax Legislative Update 2010-09), but have differed on the offset and spending provisions. The process stalled in late June when the Senate tried and failed three times to advance a final version. © 2010 Grant Thornton LLP All rights reserved U.S. member firm of Grant Thornton International Ltd 1
The extender provisions are very popular, and the Senate is expected to try again to complete the bill in July or after returning in September from the August recess. Because of the difficulty of finding the 60 Senate votes necessary to move the bill, the House will likely be forced to pass the Senate’s final package without changes. Lawmakers also may combine these tax provisions with other tax legislation. The obstacles to Senate passage include the bill’s revenue offsets and the overall cost. To lower the price tag, Democrats are hoping to remove the extension of enhanced unemployment benefits and pass it separately. Democratic leaders may also be forced to amend some of the more controversial revenue raisers. Revenue raisers included in the most recent failed Senate extenders agreement PROVISION STATUS Carried interest • Beginning in 2011, partnership income from an • Provision remains controversial and extensive interest granted to provide investment, lobbying against it will continue management or financial services would be taxed • Additional changes are possible, but some version at a ratio of 75/25 ordinary income to capital gains of the provision appears likely to be included in • A 50/50 split would be available for assets held at final legislation least 5 years • Capital gains rate would apply only to the extent income represents a reasonable return on capital actually invested in the partnership S corporations • S corporation income from certain service S • Swing voter Sen. Olympia Snowe, R-Maine, has corporations would be treated as self-employment identified this provision as one of the last obstacles income beginning in 2011: in the way of her support o Would apply to any S corporation that is a • She will likely continue to push to remove or member of professional services partnership narrow the provision o Would apply to S corporations with 80% of gross income from the professional services of 3 or fewer owner-employees International proposals • Includes 9 new revenue-raising international reform • Provisions do not appear to be in the way of proposals, most geared to the foreign tax credit enactment but there has been an effort to push back effective dates Boot within the gain • “Boot-within-gain” limitation under Section 356 • Resistance to this provision has not been would be repealed for reorganizations in which the significant and has focused primarily on attempts to shareholder’s exchange has the effect of the grandfather pending transactions distribution of a dividend Reverse Morris Trust • Distributions of debt securities in a tax-free spinoff • Resistance to this provision has not been would be treated in the same manner as significant and has focused primarily on attempts to distributions of cash or property grandfather pending transactions Oil spill liability excise tax • Oil spill liability excise tax would be increased to 49 • Opponents gained some traction by portraying this cents per barrel (from 9 cents) offset as shifting the costs of cleanup to consumers • Consensus seems to be emerging that the trust fund needs to be expanded; proposed tax increase has gotten larger in each new version of the bill Both the House and Senate extenders bills would allow a corporation to claim a refundable credit in its first taxable year beginning in 2010 equal to the lesser of one-half of unused AMT credits or 10 percent of the amount of qualified property placed in service © 2010 Grant Thornton LLP All rights reserved U.S. member firm of Grant Thornton International Ltd 2
in the United States that year. Qualified property generally would be defined in the same manner as property that was eligible for bonus depreciation in 2008 and 2009. Pension relief provisions (H.R. 3962) and an extension of the closing date for the homebuyer credit (H.R. 5623) were removed from the extenders bill and enacted separately. H.R. 5623 also expands the IRS bad check penalty to electronic payments. Small business and economic stimulus incentives The House originally passed a small business tax incentives bill (H.R. 4849) in March and approved a slimmed down version (H.R. 5486) in June. The Senate has taken up the new version (H.R. 5486) and begun floor consideration on its own substitute amendment. The bill cleared an important Senate procedural hurdle in a 66 to 33 vote on June 29. This likely clears the way for eventual Senate passage when Congress returns from recess, but amendments will be considered. The House and Senate will also need to reconcile the differences in their bills before a bill can be sent to the president for enactment. The House bill would treat nonrecourse small Provisions in both House and Senate business investment company loans from the • 100% capital gain exemption on qualified small business stock acquired before Small Business Administration as amounts at risk. Dec. 31, 2011 (from date of enactment in The House would also pay for its bill with a Senate or March 17 in House) revenue raiser aimed at grantor retained annuity • Limit the 6707A penalty for failure to trusts (GRATs). The provision would require a report a listed transaction to 75% of the tax benefit: 10-year minimum annuity term for GRATs, − Corporate maximum of $200,000 and prohibit a reduction in annuity payments during minimum of $10,000 the first 10 years, and require the annuity interest − Individual maximum of $100,000 and to have a value greater than zero at the time of the minimum of $5,000 transfer. The 10-year minimum term would make • Increase 2010 and 2011 start-up business expensing limit and phaseout a GRAT a riskier planning technique because the from $5,000 and $50,000 to: tax benefits of GRATs are typically achieved when − Senate: $10,000 and $60,000 the grantor outlives the term. The Senate did not − House: $20,000 and $75,000 include the GRAT provision in its bill. The Senate also added tax incentives that would do the following: • Extend bonus depreciation for property placed in service in 2010 • Allow five-year carrybacks and exempt from the alternative minimum tax (AMT) the 2010 general business credits of sole proprietorships, partnerships and non-publicly traded corporations with $50 million or less in average annual gross receipts • Shorten the built-in gains tax holding period for an S corporation conversion to five years if the fifth taxable year precedes the taxable year beginning in 2011 • Increase Section 179 expensing limit to $500,000 and increase the phaseout threshold to $2 million in 2010 and 2011 • Allow Section 179 expensing of up to $250,000 in 2010 and 2011 for qualified leasehold improvement property, qualified restaurant property and qualified retail improvement property © 2010 Grant Thornton LLP All rights reserved U.S. member firm of Grant Thornton International Ltd 3
• Allow a self-employment income deduction for 2010 healthcare expenses • Allow 401(k), 403(b) and governmental 457(b) rollovers into Roth accounts • Allow Roth contributions to governmental 457(b) plans The Senate is also expected to adopt a popular amendment to remove the tax consequences and substantiation requirements for employer-provided cell phones. Currently, employers are denied a deduction for Section 280F “listed property” such as cell phones unless business purpose and use are documented, and employees must include the value of any personal usage of their cell phone in income. The Senate uses revenue offsets generally considered non-controversial that would do the following: • Expand 1099 reporting to include rental expenses of over $600 • Increase information return failure-to-file penalties • Expand IRS federal contractor levy authority to include payments made for property and to allow the IRS to bypass collection due process requirements • Expand the IRS bad check penalty to include electronic payments (already enacted in H.R. 5623) • Bar crude tall oil from the cellulosic biofuel credit (also in House bill) In addition, the provisions allowing rollovers into Roth accounts are scored as revenue raisers. Estate and transfer taxes The estate and generation skipping transfer tax have expired for 2010 and the gift tax rate is only 35 percent. In 2011, the estate tax is scheduled to return with an exemption level of only $1 million and a top rate of 55 percent. Many lawmakers and the White House supported extending the 2009 top rate of 45 percent and exemption of $3.5 million through 2010 and beyond, but to date Congress has been unable to make any progress toward a bill. The retroactive reinstatement of the estate tax for 2010 appears increasingly unlikely, and the chances are dimming for an agreement that would increase the exemption and lower the rate for 2011 and future years. However, Congress has enacted a pay-as-you-go budget exemption that would ease the passage of an extension of 2009 estate tax law through 2011. Progress is still possible and an agreement could be reached this year. If so, lawmakers have discussed allowing taxpayers the choice of using the 2009 or 2010 estate tax law. In 2010, taxpayers no longer receive a “step up” in the basis of inherited assets (an estate can allocate an additional $1.3 million in basis). For taxpayers with estates over $1.3 million but not significantly greater than $3.5 million, the step up in basis and estate tax exemption of 2009 may provide a better tax result. © 2010 Grant Thornton LLP All rights reserved U.S. member firm of Grant Thornton International Ltd 4
Expiration of 2001 and 2003 tax cuts The Bush tax cuts enacted in 2001 and 2003 are scheduled to expire at the end of 2010. Tax rates would go up across the ordinary income brackets and for capital gains and dividends. This would also mean the elimination of the $1,000 child credit and marriage penalty relief and a reinstatement of the personal exemption phaseout and “Pease” phaseout of itemized deductions. Individual tax brackets if tax cuts expire as scheduled Single Joint 2010 2011 Ordinary $0 – $8,375 $0 – $16,750 10% 15% income tax brackets $8,376 – $34,000 $16,751 – $68,000 15% 15% (2010)* $34,001 – $82,400 $68,001 – $137,300 25% 28% $82,401 – $171,850 $137,301 – $209,250 28% 31% $171,851 – $373,650 $209,251 – $373,650 33% 36% Over $373,650 Over $373,650 35% 39.6% Capital gains 15%** 20% Dividends 15%** 39.6%*** * Brackets are adjusted for inflation every year ** Capital gains and dividends in bottom two brackets have zero rate in 2010 *** Dividends would be taxed as ordinary income in 2011 up to the top rate of 39.6% The president has proposed permanently extending the 2001 and 2003 tax cuts for taxpayers with income under $200,000 if single and $250,000 if married filing jointly. Congress has made no progress yet on legislation, but has enacted pay-as-you-go budget rules that would make it easier procedurally to extend the tax cuts under that income threshold. Omnibus tax bill Congress may seek to combine all the tax items excluded from pay-go budget requirements in one omnibus tax bill for consideration before the expected October adjournment. Revenue offsets would not be required under the budget rules for a two- year extension through 2011 of the 2009 estate tax rules; the permanent extension of existing tax rates for taxpayers with income below $200,000 (single) and $250,000 (joint); the permanent extension of a number of other provisions from the 2001 and 2003 tax cuts; and a two-year patch to the individual AMT (covering 2010 and 2011). If the extenders package is not enacted separately, Democratic lawmakers could add it to an omnibus package to be offered on a take-it-or-leave-it basis shortly before the election. Tax items exempted from pay-go rules Estate tax • Extension of 2009 exemption and rate through 2011, adjusted for inflation AMT • AMT patch for 2010 and 2011 to hold the number of taxpayers affected by the AMT to 2008 levels Rate cuts • Permanent extension of the 10%, 25% and 28% brackets • Permanent extension of the 33% bracket only for taxpayers with income under $200,000 (single) or $250,000 (joint) • NO PROTECTION to prevent reversion of 33% bracket to 36% and 35% bracket to 39.6% for taxpayers with income over 200,000 (single) or $250,000 (joint) © 2010 Grant Thornton LLP All rights reserved U.S. member firm of Grant Thornton International Ltd 5
Family incentives • Permanent extension of current child tax credit (including recent enhancements) • Permanent extension of current marriage penalty relief (including recent amendments) • Permanent extension of adoption tax credit • Permanent extension of dependent care credit • Permanent extension of employer-provided child care credit Education • Permanent extension of student loan interest deduction incentives • Permanent extension of exclusion for certain scholarships and assistance programs Capital gains and • Permanent extension of the 15% capital gains and dividend rates (and zero dividends bracket) for taxpayers with income under $200,000 (single) or $250,000 (joint) • NO PROTECTION to prevent reversion to 20% capital gains rate and ordinary income rates for dividends for taxpayers with income over 200,000 (single) or $250,000 (joint) PEP and Pease • Permanent elimination of the personal exemption phase-out (PEP) and limits on itemized deductions (Pease) for taxpayers with income under $200,000 (single) or $250,000 (joint) Small business • Permanent extension of current Section 179 limits and phase-out threshold expensing (including recent increases) The information contained herein is general in nature and based on authorities that are subject to change. It is not intended and should not be construed as legal, accounting or tax advice or opinion provided by Grant Thornton LLP to the reader. This material may not be applicable to or suitable for specific circumstances or needs and may require consideration of nontax and other tax factors. Contact Grant Thornton LLP or other tax professionals prior to taking any action based upon this information. Grant Thornton LLP assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein. No part of this document may be reproduced, retransmitted or otherwise redistributed in any form or by any means, electronic or mechanical, including by photocopying, facsimile transmission, recording, re-keying or using any information storage and retrieval system without written permission from Grant Thornton LLP. Tax professional standards statement This document supports the marketing of professional services by Grant Thornton LLP. It is not written tax advice directed at the particular facts and circumstances of any person. Persons interested in the subject of this document should contact Grant Thornton or their tax advisor to discuss the potential application of this subject matter to their particular facts and circumstances. Nothing herein shall be construed as imposing a limitation on any person from disclosing the tax treatment or tax structure of any matter addressed. To the extent this document may be considered written tax advice, in accordance with applicable professional regulations, unless expressly stated otherwise, any written advice contained in, forwarded with, or attached to this document is not intended or written by Grant Thornton LLP to be used, and cannot be used, by any person for the purpose of avoiding any penalties that may be imposed under the Internal Revenue Code. © 2010 Grant Thornton LLP All rights reserved U.S. member firm of Grant Thornton International Ltd 6