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Obama budget, Rep. Camp proposal contain several similar provisions

March 11, 2014

On March 4, President Obama released his federal budget proposals for fiscal year 2015. Days earlier, House Ways and Means Committee Chairman Dave Camp (R-MI) released his proposed tax plan, “The Tax Reform Act of 2014.” While the two documents are generally quite different, there are significant areas where they are quite similar.

Here’s a list of significant proposed law changes for which the President’s and Rep. Camp’s proposals are similar: (For more detail on the President’s budget, see Weekly Alert ¶  17  03/06/2014. For more detail on Rep. Camp’s proposals, see Weekly Alert ¶  1  03/06/2014 (individual tax provisions), Weekly Alert ¶  20  03/06/2014, (business tax provisions) and Weekly Alert ¶  32  03/06/2014 (foreign tax provisions).)

 

  • Reduce corporate tax rates. Obama would reduce the top rate to 28%, with a top rate of 25% for manufacturing. Camp would have one top rate, 25%.
  • Permanently extend expensing for small businesses. Obama provides for permanent extension of expensing under Code Sec. 179, with a $500,000 deduction limit and phase-out beginning at $2 million (both of which are indexed for inflation for tax years beginning after 2013). Camp’s plan also contains a permanent extension; it contains a $250,000 deduction limit, a phase-out beginning at $800,000, and inflation indexing for tax years beginning after 2014.
  • Enhance and permanently extend the research tax credit. Obama would make the credit permanent and would increase the rate of the alternative simplified research credit from 14% to 17%. Camp would make the credit permanent but would make some significant changes to its calculation.
  • Repeal LIFO accounting. Obama would repeal last-in, first-out (LIFO) inventory accounting and have the income that was deferred under LIFO, that could no longer be deferred, taken into income ratably over ten years. Camp would repeal LIFO and have that same measure of income taken into income over a four-year period.
  • Create a new tax on large financial institutions. Both plans would create a new tax on large financial institutions. Obama’s proposal would apply to firms with worldwide consolidated assets of over $50 billion; Camp’s would apply to firms with worldwide consolidated assets of over $500 billion. The two proposals have different tax bases for their taxes.
  • Make significant changes to the like-kind exchange rules. Obama would limit the amount of capital gain deferred under Code Sec. 1031 on a like-kind exchange of real property to $1 million (indexed for inflation) per taxpayer per tax year. Camp would totally eliminate the like-kind exchange rules for real property and for other property.
  • Apply the Self-Employment Contributions Act (SECA) tax more uniformly to passthrough entities. Obama would make changes that would treat individual owners of professional service businesses organized as S corporations, limited partnerships, general partnerships, and LLCs taxed as partnerships as subject to SECA taxes in the same manner and to the same degree. Camp would achieve much the same objectives; he specifies that partners and S corporation shareholders who materially participate in the trade or business of the partnership or S corporation would treat 70% of their combined compensation and distributive share of the entity’s income as net earnings from self-employment.
  • Severely cut back on preferential treatments for oil and gas production. Obama would, for example, repeal the enhanced oil recovery credit, the credit for oil and gas produced from marginal wells, expensing of intangible drilling costs, the deduction for tertiary injectants, the exception to passive loss limitation for working interests in oil and natural gas properties, percentage depletion for oil and natural gas wells, and the domestic manufacturing deduction for oil and natural gas production. Camp would make many, but not all, of these changes.
  • Tax carried interest as ordinary income. Obama would tax certain “carried interest” (i.e., interest in future profits of a partnership) income as ordinary income instead of capital gains. Camp’s plan has a similar proposal. In both plans, the change would convert certain income earned by partners who perform investment services for investment partnerships from capital gain into ordinary income.
  • Reduce the value of itemized deductions, etc. for high income taxpayers. Obama would reduce the value of itemized deductions and other tax preferences to 28% for families with income in the top three highest tax brackets (i.e., 33%, 35%, and 39.6%). Camp would have a similar reduction for itemized deductions (other than charitable contributions) and for other tax preferences; Camp’s reduction is a reduction to 25%.
  • Make some conservation easement incentives permanent but eliminate others. Both Obama and Camp would make permanent a series of temporary enhanced incentives for conservation easements that lapsed on Dec. 31, 2013. Both would eliminate the deduction for easements on golf courses. Obama would also eliminate an additional type of easement deduction.
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