Business Income Tax Provisions of Pres. Obama’s Fiscal Year 2014 Budget Proposal

On April 10, 2013, Pres. Obama released his budget proposal for the Federal government’s fiscal year running from October 1, 2013 through September 30, 2014.  The budget proposal includes many individual and business income tax provisions, projected to increase taxes by $1.1 trillion over 10 years according to the Tax Policy Center.  This post concerns business tax proposals.  The previous post dealt with individual income tax and the next post will deal with estate and gift tax proposals. 

1.     Permanently extend the currently high Section 179 business property expensing amount of $500,000 and the currently high phase-out level of $2 million.  These amounts are scheduled to drop to $25,000 and $200,000 in tax years beginning after 2013.  Off-the-shelf computer software would continue to be eligible, but qualifying real property would no longer be eligible for Section 179 expensing.

2.     Increase the alternative simplified research credit rate from 14% to 17% after 2012 and permanently extend the research tax credit which is scheduled to expire in tax years beginning after 2013.

3.     Provide a one-time 10% tax credit for increased wages paid during the 12-month period after the date of enactment, over the amount of wages paid in 2012, whether the increase is driven by new hires, raises, or both.  Eligible businesses are those with less than $20 million of total 2012 wages.  The maximum credit is $500,000.

4.     Require employers who have been in business for at least two years and have over 10 employees, but do not currently offer a retirement plan, to enroll their employees in a 3% payroll-deduction, individual retirement account (IRA), effective for tax years beginning after 2014.  Employees would be able to opt out of the mandatory enrollment or elect to modify the 3% default rate.

5.     Repeal the last-in, first-out (LIFO) inventory costing method for the first tax year beginning after 2013.  When inventory prices rise over time, LIFO reduces income tax by treating the most recently purchased inventory item as having been sold.  The proposal would cause the one-time increase in taxable income to be recognized ratably over 10 years.

6.     Repeal the lower-of-cost or market and subnormal goods methods of inventory tax accounting (applicable to those not using the LIFO method) for tax years beginning after 2013.  The proposal would cause the one-time increase in taxable income to be recognized ratably over four years.

7.     Tax so-called “carried interest” income as ordinary income instead of as long-term capital gains in tax years beginning after 2013.  In addition, such income would be subject to self-employment tax.

8.     Repeal the partnership “technical termination” rules under Section 708(b)(1)(B) for transfers on or after December 31, 2013.  Under current rules, a partnership is considered terminated for income tax purposes if 50% or more of the capital and profits interests are sold or exchanged within any 12-month time period.

9.     Enact a new 20% tax credit for expenses paid or incurred after the date of enactment for costs related to insourcing a line of business into the U.S.  On the other hand, a deduction would be denied for costs of outsourcing a line of business.

10.  Repeal many of the tax benefits for oil and gas and coal exploration and production.  Repealed benefits would include the current expensing of exploration and development costs, percentage depletion, and the domestic manufacturing deduction.  The proposal would be effective for tax years beginning after 2013.