Corporate Tax Reform Proposals

Various corporation income tax reform proposals have surfaced over the past six months.  At 35%, the U.S. has one of the highest top corporate income tax rates in the world.  However, a tangle of tax deductions, credits, and incentives enable many corporations to pay a much lower effective tax rate.  The impact of the corporate tax varies greatly by industry.  For example, large incentives currently exist for technology, manufacturing, and energy industries and also for multi-national companies.  In addition, income of C corporations is taxed twice:  once at the corporate level and again by shareholders when dividends are paid.

The proposals seek to lower the top rate to somewhere around 25%.  The proposals seek "revenue neutrality" by eliminating many deductions, credits, and incentives.  Thus industries and corporations benefiting the most under current tax law may have the most to lose in corporate tax reform.  Those industries and corporations that pay a higher effective tax rate could see their tax burden drop.  Corporate reform cannot be done in a vacuum.  If individual tax rates remain at 35% or higher, and the corporate rate drops to 25%, there could be a rush to reorganize business tax structures to benefit from the rate reduction.  Therefore, the drive for corporate tax reform could lead to overall fundamental tax reform.

Businesses operated as "pass-through" entities generally only have one-level of income tax which is paid by the owners of the entity.  As a result, there has been a large increase in the number of businesses operated as limited liability companies and S corporations.  The trend toward pass-through entities has caused a sharp drop-off in the amount of corporate income tax collected as a percentage of the gross domestic product (GDP).  According to a Congressional Research Service report, the percentage in the 1950's was around 5% of GDP.  In 2007 it was 2.7% of GDP.  And in 2010 the percentage was 1.3%, also reflecting the impact of the current financial recession.  As a result of this trend, one startling proposal is to tax pass-through entities with gross receipts of $50 million or more as C corporations.  If enacted, this change would have dramatic, adverse impact on many businesses and family organizations that have arranged their affairs to reduce their tax burdens in accordance with current tax law.

Tax Benefits for Heavy SUVs in 2011

Sports utility vehicles having gross vehicle weight (GVW) of over 6,000 pounds are exempt from the so-called "luxury" automobile tax deduction limitations which generally restrict depreciation and Section 179 expensing to very modest amounts.  If the luxury auto is used 100% for business in 2011, then the maximum write-off would be either $3,060 or $11,060; depending upon whether the auto qualified for bonus depreciation.  To qualify for bonus depreciation, the vehicle must be new, meaning its original use begins with the taxpayer.  Under the 2010 Tax Relief Act, the first-year bonus depreciation amount was raised from 50% to 100% for new property acquired and placed in service after 9/8/2010 and before 1/1/2012.  Luxury auto rules limit the amount of bonus depreciation to $8,000.  Since heavy SUVs are exempt from the luxury auto rules, the full cost of the purchase is deductible in 2011 because of 100% bonus depreciation.

Bonus depreciation is different than Section 179 expensing.  Section 179 expensing is available for new or used vehicles, but is limited in amount and is limited to taxable income.  Section 179 expensing limits were greatly enhanced to $500,000 for 2010 and 2011.  However, a special rule limits the Section 179 expensing amount to $25,000 for heavy SUVs rated at 14,000 pounds of GVW or less.  Therefore, bonus depreciation is generally preferable to Section 179 expensing.

The tax deductions must be reduced if the vehicle is not used 100% for business.  In addition, if the vehicle is not used more than 50% for business, it will fail to qualify for both bonus depreciation and Section 179 expensing.