Obama proposes grand bargain redux in FY 2014 budget package

Transcription

1 Obama proposes grand bargain redux in FY 2014 budget package In what some have characterized as an effort to revive the elusive grand bargain on fiscal policy, President Obama on April 10 unveiled a fiscal year 2014 budget blueprint that calls for spending cuts including reductions in Social Security and Medicare payments and largely familiar tax increases primarily targeting multinational corporations and upper-income individuals. Like most administration budgets, this one has come under criticism from both the right and the left. But this year s budget is particularly noteworthy, in that it is being submitted to Congress more than two months after the statutory deadline for its release and nearly a month after the House and Senate adopted their respective fiscal year 2014 budget blueprints. Highlights of individual & corporate provisions Although the tax section of the president s budget renews a number of provisions from his previous annual submissions, it does include some notable new revenue raisers, such as proposals to: Prohibit individuals from accumulating over $3 million in individual retirement accounts and other tax-preferred retirement savings vehicles; Require that derivative contracts be marked to market with resulting gain or loss treated as ordinary income; Require that the cost basis of shares of stock held by individual investors be determined using an average cost basis method; and Prohibit most C corporations from claiming a deduction for dividends paid with respect to stock held by an ESOP. Among the key revenue raisers carried over from previous budget packages (in some cases with slight modifications) are proposals to: Implement the so-called Buffet Rule, which would require households with incomes over $1 million to pay at least 30 percent of their income (after charitable giving) in taxes; Cap the value of itemized deductions and certain income exclusions for high-income taxpayers at 28 percent; Tighten the international tax rules, including provisions to defer deductions of interest expense related to deferred income of foreign subsidiaries, determine foreign tax credits on a pooling basis, tax currently excess returns associated with transfers of intangibles offshore, curtail the use of leveraged distributions to avoid dividend treatment, and limit shifting of income through intangible property transfers; Tax income from carried interests at ordinary rates; Repeal the nonqualified preferred stock designation, and eliminate the boot-within-gain limitation under section 356(a)(2); Repeal certain longstanding deductions and credits for oil and gas companies; and Slow the depreciation schedule for corporate jets. Incentives On the incentive side, the budget includes a new proposal to create America Fast Forward (AFF) Bonds, with a goal of providing new sources of capital for infrastructure investment. The budget proposal also includes familiar incentives that would expand the research credit and make it permanent, promote renewable energy projects and encourage energy efficiency, and expand the child tax credit and the earned income tax credit. Extenders not included Other than the expansion and permanent extension of the research credit, the budget proposal does not address the extension of other routinely expiring business and individual tax provisions the so-called extenders such as the subpart F exemption for active financing income, lookthrough rules for payments between related controlled foreign corporations, and the deduction for state and local general sales taxes, to name just a few. The big picture In broad terms, the administration has cast the budget as resembling the last offer President Obama made to House Speaker John Boehner, R-Ohio, during negotiations over the fiscal cliff in December Similar to the December offer, the budget includes proposed changes to mandatory spending such as slowing the growth of Social Security and other benefits, also known as chained CPI, and health care savings of approximately $400 billion. Tax News & Views (Special Edition) Page 1 of 18 Copyright 2013 Deloitte Development LLC

2 On net, the budget envisions total revenues as a share of gross domestic product (GDP) rising from 16.7 percent in fiscal 2013 to 20.0 percent in fiscal 2023, with outlays falling from 22.7 percent to 21.7 percent of GDP over the same period. The budget anticipates a fiscal year 2014 deficit of $744 billion, or 4.4 percent of GDP. By 2018, the deficit would be reduced to 2.3 percent of GDP and fall to 1.7 percent by the close of the 10-year budget window. The debt held by the public a frequently cited metric of the level of government indebtedness would stabilize at between 75 and 76 percent of GDP by 2019 and drop to 73 percent by the close of the budget window. (In fiscal 2012, it stood at a similar 73 percent of GDP.) In contrast, the House-passed budget resolution, which was approved last month, projects that the budget would come into balance by 2023 without additional tax revenue. Revenue levels would be allowed to rise from 18 percent of GDP in 2014 to 19.1 percent in 2023 (driven not by changes in the House-passed budget but by previously enacted policies, including the fiscal cliff agreement that became law in early January). Spending under that outline would decrease from 21.2 percent of GDP in 2014 to 19.1 percent in The Senate-approved budget blueprint looks more like the president s than the one approved by the House, albeit with important differences. Under the Senate-passed plan, between 2014 and 2023, revenues would increase from 18.2 percent of GDP to 19.8 percent and spending would decrease from 22.3 percent of GDP to 21.9 percent. The plan would not balance over the 10-year budget window, but the deficit would fall to 2.2 percent of GDP in Reserve for revenue-neutral business tax reform The administration includes in this year s budget a specific call for business tax reform, noting that the country cannot remain competitive with a tax code littered with special interest tax breaks and needs one that ensures the United States is the most attractive place for entrepreneurship and business growth. While the administration does not lay out a path for individual income tax reform (other than by calling on Congress to immediately begin work on individual and business tax reform ), the budget does reiterate five guiding principles for business tax reform that were outlined in the corporate tax reform framework that the White House released last year. (For prior coverage, see Tax News & Views, Vol. 13, No. 8, Feb. 22, 2012.) According to the administration s explanation, reform must: URL: Eliminate loopholes and subsidies, broaden the tax base, and cut the corporate rate; Strengthen American manufacturing and innovation; Strengthen the international tax system; Simplify and cut taxes for small businesses; and Not add to the deficit. The budget proposal then sets forth numerous proposals many of which first appeared in prior budgets but also some important new ones that the administration says form the basis of a reserve fund that would be used to offset rate cuts and other changes necessary to enact revenue neutral business tax reform. While the reserve fund includes substantial revenue raisers, it also includes provisions that would increase the deficit by creating new tax benefits or by expanding or extending existing benefits. As a result of those pluses and minuses, the additional revenue the budget calls for to be set aside in the reserve fund approximately $104.6 billion (which falls to $94.5 billion when the outlay effects of some of those proposals are included) is generally not seen as large enough to finance, on a revenue-neutral basis, substantial business tax relief. The budget does include other proposals that raise revenue, but the administration wants those proposals used for deficit reduction and not to finance rate-reducing tax reform. Throughout this report, the specific provisions that the administration proposes to include in the tax reform reserve fund are marked with an asterisk. Tax News & Views (Special Edition) Page 2 of 18 Copyright 2013 Deloitte Development LLC

3 Inconsistent signals on tax reform? With taxwriters on Capitol Hill focused on seeing fundamental tax reform enacted in the 113th Congress, many were looking to the president s budget for clues about his level of interest in such a difficult undertaking. In some ways, the budget can be seen as sending mixed signals. On one hand, the establishment of a revenue neutral reserve fund for business tax reform and the call for a more competitive environment for investment in the U.S. suggest that the administration is giving serious consideration to tax reform, as does the identification of tens of billions of dollars in base broadeners which are necessary for the passage of a reduction in marginal tax rates that does not increase the deficit. On the other hand, the budget proposes to extend or expand some base-narrowing tax expenditures and to create others a source of concern to those who believe the tax code is doing too much to pick winners and losers. Moreover, even as the debate in Washington is gravitating, in the eyes of many, toward tax reform that shifts the U.S. toward the sorts of territorial tax regimes that have been adopted by most of our major trading partners, several key provisions of this budget attempt to further buttress our current worldwide regime of taxing the foreign income of U.S. businesses. International tax reform proposals As in prior years, President Obama s budget calls for significant changes to the international tax rules, though this year the revenue raised from those changes is earmarked for a reserve fund for revenue neutral business tax reform (see discussion above). Most of the proposals would be effective after December 31, 2013, and would raise a combined total of more than $157 billion in new revenue over 10 years. FIRPTA The budget includes a new proposal to exempt foreign pension funds from the application of the Foreign Investment in Real Property Tax Act (FIRPTA). This proposal is described below along with other economic development and infrastructure incentives. Minimum tax on foreign earnings The budget also makes explicit reference to the minimum tax on foreign earnings proposal that was included in the business tax reform framework the president released in February In the framework, the Obama administration proposed that income earned by subsidiaries of U.S. corporations operating abroad must be subject to a minimum rate of tax. More specifically, foreign income deferred in a low tax jurisdiction would be subject to immediate U.S. taxation up to the minimum tax rate with a foreign tax credit allowed for income taxes on that income paid to the host country. The framework does not specify what the Obama administration believes the minimum tax rate should be or whether there would be additional U.S. taxation on these foreign earnings upon repatriation. Deferral of certain interest deductions Similar to previous budgets, the administration proposes restricting the ability of companies to take current interest expense deductions allocated to foreign-source income that is not currently subject to U.S. tax. According to the Treasury Department s explanation, the proposal would defer the deduction of interest expense that is properly allocated and apportioned to stock of a foreign corporation that exceeds an amount proportionate to the taxpayer s pro rata share of income from such subsidiaries that is currently subject to U.S. tax. Foreign-source income earned by a taxpayer through a branch would be considered currently subject to U.S. tax, and this proposal would therefore not reach interest allocated to that income. Deferred interest expenses would be deductible in later tax years to the extent that the amount of interest expense allocated and apportioned to stock of foreign subsidiaries in the later tax year is less than the annual limitation for that year.* Foreign tax credits The administration again proposes to require that taxpayers determine their deemed-paid foreign tax credits on a pooled basis. The taxpayer would have to calculate the aggregate foreign taxes and earnings and profits of all foreign subsidiaries for which the taxpayer can claim a deemed foreign tax credit. The deemed foreign tax credit would then be limited to an amount proportionate to the taxpayer s pro rata share of the consolidated earnings and profits of the foreign subsidiaries repatriated to the U.S. taxpayer in that taxable year that are currently subject to U.S. tax. Deferred foreign taxes would be creditable in subsequent taxable years to the extent the current-year deemed paid foreign taxes are less than the annual limitation for that year.* Intangible property transfers The administration has again proposed two changes to rules affecting intangible property transfers. Under the first, if a U.S. person transfers an intangible asset from the United States to a related controlled foreign Tax News & Views (Special Edition) Page 3 of 18 Copyright 2013 Deloitte Development LLC

4 corporation that is subject to a low foreign effective tax rate, then certain excess income from transactions connected with or benefitting from the intangible would be treated as subpart F income in a separate foreign tax credit limitation basket. The second proposal would clarify the definition of intangible property for purposes of sections 367(d) and 482 to include workforce in place, goodwill, and going concern value. For transfers of multiple intangibles, the proposal would clarify that the commissioner may value the intangible properties on an aggregate basis where that achieves a more reliable result. It also clarifies that the commissioner may value intangible property taking into consideration the prices or profits that the controlled taxpayer could have realized by choosing a realistic alternative to the controlled transaction undertaken. * Reinsurance The administration repeats a prior proposal that would deny an insurance company a deduction for reinsurance premiums paid to affiliated foreign reinsurers with respect to property and casualty risks to the extent that the foreign reinsurer or its parent is not subject to U.S. tax on those premiums. The proposal would further exclude from an insurance company s income any ceding commissions received or reinsurance recovered on policies for which a premium deduction is wholly or partially denied. A foreign company that receives premiums that would be denied a deduction could elect to treat the premiums and associated investment income as effectively connected to the conduct of a U.S. trade or business (ECI) and attributable to a permanent establishment for tax treaty purposes, and this income would be placed in a separate foreign tax credit limitation basket.* Earnings stripping by expatriated entities The administration proposes to tighten section 163(j) and limit the deductibility of interest paid by expatriated entities to related entities. Expatriated entities would be defined by applying section 7874 and its regulations as if they were in effect beginning July 10, 1989, but the definition would not include surrogate foreign corporations that are treated as domestic under section For expatriated entities, the current debtto-equity safe harbor would be eliminated, and the 50 percent adjusted taxable income threshold for the limitation would be reduced to 25 percent of adjusted taxable income for disqualified interest. The carryforward for disallowed interest would be limited to 10 years, and the carryforward of excess limitation would be eliminated.* Dual-capacity taxpayers The administration proposes allowing dual-capacity taxpayers (taxpayers that are subject to a foreign levy and also receive a specific economic benefit from the levying country) to treat as a creditable tax that portion of a foreign levy that does not exceed the foreign levy the taxpayer would pay if it were not a dual-capacity taxpayer. The administration also proposes replacing the current regulatory provisions, including the safe harbor, with respect to the determination of what amount of a foreign levy paid by a dual-capacity taxpayer qualifies as a creditable tax. Further, the proposal would also convert the special foreign tax credit limitation rules of section 907 into a separate category within section 904 for foreign oil and gas income. The proposal would yield to U.S. treaty obligations that allow a credit for taxes paid or accrued on certain oil and gas income.* Lookthrough on sale of partnership interests The administration believes nonresident aliens and foreign corporations are taking positions contrary to Rev. Rul and again proposes codifying the revenue ruling s holding, which provides that gain or loss on such a sale or exchange is effectively connected with the conduct of a trade or business in the United States to the extent of the partner s distributive share of unrealized gain or loss that is attributable to property used or held for use in the partnership s U.S. trade or business.* Leveraged distributions The administration believes that a foreign corporation may inappropriately repatriate its earnings and profits (E&P) as a return of stock basis, rather than a dividend, by funding a distribution through a related corporation that has no E&P. To the extent a foreign corporation funds a related foreign corporation with the principal purpose of avoiding dividend treatment on distributions to a U.S. shareholder, this proposal would disallow the U.S. shareholder s basis in the stock of the distributing related corporation from being taken into account for determining treatment under section 301(c)(2) and (c)(3). The proposal would apply to distributions after 2013 and would raise approximately $3.3 billion over 10 years.* Section 338(h)(16) extension Section 338(h)(16) currently prevents a corporation from using a section 338 election to increase allowable foreign tax credits in a qualified stock purchase of a target corporation. The administration proposes extending the application of section 338(h)(16) to any covered asset acquisition under section 901(m). The proposal would raise slightly less than $1 billion over 10 years.* Tax News & Views (Special Edition) Page 4 of 18 Copyright 2013 Deloitte Development LLC

5 Section 902 corporations The administration believes that domestic companies should not be able to claim an indirect credit under section 902 for foreign taxes paid by a foreign corporation when certain transactions have reduced or eliminated the foreign corporation s E&P. The proposal would reduce the amount of foreign taxes paid by the foreign corporation in the event the foreign corporation s E&P is reduced by a transaction other than a dividend, deemed dividend, or section 381 transaction. The proposal would raise approximately $390 million over 10 years.* Corporate tax provisions In addition to the last three international tax reform proposals highlighted above, the budget includes the following corporate tax proposals. Repeal gain limitation for dividends received in reorganization exchanges The administration once again proposes to repeal the boot-within-gain limitation in the case of any reorganization transaction if the exchange has the effect of the distribution of a dividend under section 356(a)(2), effective for taxable years beginning after December 31, The proposal is estimated to raise $2.7 billion over 10 years.* Repeal nonqualified preferred stock (NQPS) designation Section 351(g) designates certain debt-like preferred stock as boot for purposes of section 351 and the reorganization provisions, but it is otherwise treated as stock for other purposes. Well-advised taxpayers often use NQPS in affirmative tax planning, while it can present a trap for the unwary that adds complexity to the tax law. The administration once again proposes to repeal the NQPS designation effective for stock issued after December 31, This proposal would raise an estimated $361 million over 10 years. Impose liability on shareholders participating in intermediary transaction tax shelters to collect unpaid corporate income taxes The IRS and Treasury Department identified intermediary transaction tax shelters as listed transactions in Due to the government s inability to effectively collect unpaid taxes and penalties from corporations that have engaged in these transactions and that have insufficient assets, the proposal would add a new provision that would impose liability on shareholders who enter into an intermediary transaction tax shelter. The proposal would be effective upon enactment, and would raise approximately $4.9 billion over 10 years. See also Repeal anti-churning rules under section 197, discussed below in Other proposed revenue offsets and simplification measures. Energy provisions The budget package includes a number of tax incentives designed to help meet the administration s energy goals of: (1) reducing greenhouse gas emissions by roughly 17 percent below 2005 levels by 2020; (2) reducing net oil imports 50 percent by 2020; (3) doubling U.S. energy production by 2030, relative to 2010 levels; and (4) accelerating investment in industrial energy efficiency by achieving 40 gigawatts of new combined heat and power by Credits for advanced energy investment, renewable electricity production On the incentive side, the budget proposal renews two significant provisions from prior budgets that would: Add $2.5 billion (down from $5 billion proposed in the FY13 budget) to the original $2.3 billion that was allocated to the Advanced Energy Investment Credit under section 48C. The additional allocation would be effective as of the date of enactment, at which point the two-year application period would begin. The proposal is estimated to cost $1.8 billion over 10 years.* Permanently extend, and make refundable, the section 45 renewable electricity production tax credit. The refundable tax credit would be available for property on which construction begins after December 31, (The president s FY 2013 budget proposed temporarily extending the production tax credit.) The proposal is estimated to cost $17.4 billion over 10 years.* Deduction for energy-efficient commercial buildings To support the president s call for a 20 percent reduction in energy usage in commercial buildings over the next 10 years, the budget would raise the current maximum deduction of expenditures for energy-efficient commercial building property to $3.00 per square foot (up from current-law $1.80 per square foot). Tax News & Views (Special Edition) Page 5 of 18 Copyright 2013 Deloitte Development LLC

6 The budget would also provide a new deduction applicable to existing buildings with at least 10 years of occupancy. The deduction capped at 50 percent of the total cost of implementing the plan would be calculated based on the combined projected and realized energy savings performance achieved by a plan to retrofit existing commercial buildings. A taxpayer would be limited to only one deduction for each commercial building property. The deductions would be available for property placed in service after December 31, Together, the two proposals are estimated to cost $5.2 billion over 10 years.* Revenue offsets The budget retains many of the targeted tax increases on fossil fuel production that were included in prior budgets. These changes, which would be effective beginning in 2014 and are expected to generate nearly $44 billion over 10 years, include proposals to: Repeal the section 199 deduction for oil and gas companies, coal mining, and the production of lignite and oil shale;* Repeal current incentives for domestic exploration and drilling, including: (1) the passive loss exception for working interests in oil and gas companies; (2) 24-month amortization for geological and geophysical costs for independent oil and gas producers; (3) the enhanced oil recovery credit; (4) the marginal well tax credit; (5) the deduction for tertiary injectant expenses; (6) expensing of intangible drilling costs (IDCs) and 60-month amortization of capitalized IDCs; and (7) percentage depletion for oil and gas wells;* and Repeal incentives for energy production from coal mining activities, including: (1) expensing and 60-month amortization of mining exploration and development costs relating to coal and other hard mineral fossil fuels; (2) capital gain treatment of coal and lignite royalties; and (3) percentage depletion with respect to coal and other hard mineral fossil fuels.* Environmental hazard taxes The budget includes proposals to: Reinstate, beginning after December 31, 2013 and through January 1, 2024, Superfund excise and environmental income taxes that were originally enacted to finance the cost of cleaning up toxic waste sites and allowed to expire in The proposal would raise an estimated $20.2 billion over 10 years. Increase the Oil Spill Liability Trust Fund to 9 cents per barrel beginning after December 31, 2013 (10 cents per barrel beginning after December 31, 2017) and expand the tax to include other crudes such as those produced from bituminous deposits as well as kerogen-rich rock. The proposal would raise an estimated $1.1 billion over 10 years. Levy a fee on the production from hardrock mines that would be charged per volume of material displaced after December 31, Restore fees to their pre-2006 levels of 35 cents per ton for surface-mined coal and 15 cents per ton for underground-mined coal. The fees would be effective for coal mined after September 30, Tax accounting methods As it has in previous years, the administration proposes three changes to tax accounting rules: Repeal LIFO The proposal would disallow the use of the last-in, first-out (LIFO) inventory accounting method for federal income tax purposes. Taxpayers that currently use the LIFO method would be required to change their method of inventory accounting, resulting in the inclusion in income of prior-years LIFO inventory reserves (the amount of income deferred under the LIFO method). However, this one-time increase in gross income, the resulting section 481(a) adjustment, would be taken into account ratably over 10 years, beginning with the year of change. The provision would raise nearly $80.8 billion over 10 years.* Repeal lower-of-cost-or-market accounting The proposal would mirror last year s budget proposal by prohibiting the use of the lower-of-cost-or-market and subnormal goods methods and require a change in method of accounting for inventories for taxpayers currently using such methods. Any resulting 481(a) adjustment generally would be included in income ratably over the four-year period beginning in the year of the change. The provision would raise $7.2 billion over 10 years and would be effective for taxable years beginning after December 31, 2013.* Tax News & Views (Special Edition) Page 6 of 18 Copyright 2013 Deloitte Development LLC

7 No deduction for punitive damages The proposal would disallow all deductions for punitive damages paid or incurred by a taxpayer upon a judgment or in settlement of a claim. Any damages paid or incurred by an insurer would be included in the insured s gross income, and the insurer would be required to report the payment to the insured to the IRS. The repeated proposal from last year is estimated to raise $372 million over 10 years and would apply to punitive damages paid or incurred after December 31, 2014.* Incentives for domestic manufacturing The budget package includes several manufacturing provisions the president proposed last year, as well as some new ones. Notably, a proposal in last year s plan that called for expanding the section 199 domestic production deduction for some activities (such as advanced manufacturing ) was dropped in this year s budget, but other proposals to limit the availability of the deduction, namely repealing it for oil and gas producers (discussed above), were advanced again in this year s submission. Many other provisions in the budget could be of interest (or concern) to manufacturers (including several outlined in the energy section of this report), but among the other new and expanded tax incentives, those most directly impacting manufacturing include: Tax credit for insourcing, no deduction for outsourcing This proposal would create a new general business credit equal to 20 percent of eligible expenses paid or incurred to insource business activity. It would also disallow deductions for expenses paid to outsource business activity. The proposal is estimated to cost $112 million over 10 years and would be effective for expenses paid or incurred after the date of enactment.* Permanent research credit This proposal would permanently extend the research and experimentation credit and increase the rate of the alternative simplified research credit from 14 to 17 percent, effective after December 31, 2013, when the credit is set to expire, at a cost of about $99 billion over 10 years.* Manufacturing Communities tax credit This proposal would create a new Manufacturing Communities tax credit to support investments in communities that have suffered a major job loss event resulting in a long-term mass lay-off. It would provide about $2 billion in credits annually for the years , and would cost about $4.4 billion over 10 years.* Tax credit for advanced technology vehicles This proposal would replace the plug-in electric drive motor vehicle credit with a new credit for advanced technology vehicles that meet certain criteria. The credit would be allowed for vehicles placed in service after December 31, 2013 and before January 1, The proposal is estimated to cost roughly $4.2 billion over 10 years.* Tax credit for medium- and heavy-duty alternative fuel commercial vehicles This proposal would create a new credit for alternative fuel vehicles weighing more than 14,000 pounds that is equal to 50 percent of the incremental cost of such vehicles compared to the cost of a comparable diesel or gasoline vehicle. The credit would be allowed for vehicles placed in service after December 31, 2013 and before January 1, 2020, and is estimated to cost about $2.1 billion over 10 years.* Permanent section 179 expensing & other small business tax relief The budget proposal would permanently extend the 2013 section 179 expensing and investment levels and limitations. The deduction limit of $500,000 and the $2 million level for beginning the phase-out would be indexed for inflation for all taxable years beginning after 2013, as would the dollar limitation on the expensing of sport utility vehicles. The definition of qualifying property would be permanently amended to include off-the-shelf computer software but would not include real property. An election under section 179 would be revocable by the taxpayer with respect to any property, but such revocation, once made, would be irrevocable.* Other incentives to promote job growth and encourage the development of small businesses include: Hiring credit for new jobs and wage increases The administration largely repeats a proposal from last year s budget to include an income tax credit, considered a general business credit, for employers to stimulate job creation and wage increases. The credit would be equal to 10 percent of the increase in the employer s eligible wages paid during the credit period over the employer s eligible wages paid during the base period, up to $5 million per employer, for a maximum credit of $500,000. The proposal would be effective for qualified wages paid during the twelve-month period beginning on the date of enactment. It is estimated to cost approximately $25.8 billion over 10 years. Tax News & Views (Special Edition) Page 7 of 18 Copyright 2013 Deloitte Development LLC

8 Extend certain employment tax credits for new hires The proposal would permanently extend, with modifications, the Work Opportunity Tax Credit and the Indian employment credit as it applies to wages paid to qualified individuals who begin work for the employer after December 31, The proposal is expected to cost approximately $9.1 billion over 10 years. Permanent small-business capital gains exclusion The proposal largely repeats last year s budget provision by permanently permitting taxpayers (other than corporations) to exclude 100 percent of the gain from the sale of qualifying small-business stock acquired at original issue and to eliminate the AMT preference item for gain excluded under this provision. A five-year holding period and other provisions relating to the section 1202 exclusion would also apply, and the proposal would impose additional documentation requirements to assure compliance. The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 had previously allowed this 100 percent exclusion for eligible stock acquired before January 1, 2012 and the American Taxpayer Relief Act of 2012 further extended the 100-percent exclusion to eligible stock acquired before January 1, The proposal would be effective for qualified small-business stock acquired after December 31, It is estimated to cost approximately $5.8 billion over 10 years.* Double the amount of expensed start-up expenditures The administration again proposes to permanently double, from $5,000 to $10,000, the maximum amount of start-up expenditures that a taxpayer may elect to deduct, effective for tax years ending on or after the date of enactment. That amount would be reduced (but not below zero) by the amount by which the cumulative cost of start-up expenditures exceeds $60,000. It is estimated to cost approximately $3 billion over 10 years.* Expand and simplify the tax credit provided to qualify small employers for non-elective contributions to employee health insurance The Patient Protection and Affordable Care Act of 2010 includes a tax credit to help certain small employers provide health insurance for their employees and their families. Building on a proposal from last year s budget, the administration would further expand the credit to make it available to a greater number of small employers. The provision is estimated to cost $10.5 billion over 10 years and is effective beginning after December 31, Worker classification Renewing proposals from last year, the budget again seeks to clarify whether individuals are employees or individual contractors. The budget seeks to give the Treasury Department and the IRS authority to issue generally applicable guidance on the proper classification of workers under common law standards. The proposal also would permit the IRS to require prospective reclassification of workers who are currently misclassified and whose reclassification by the IRS has been prohibited under current law. IRS authority would be effective upon enactment, but prospective reclassification would not be effective until the first calendar year beginning at least one year after date of enactment. The transition period could be up to two years for independent contractors with existing written contracts establishing their status. These provisions are estimated to raise $9.1 billion over 10 years. Unemployment insurance provisions The administration would raise nearly $15.2 billion over 10 years through several proposed modifications, for the most part carried over from last year s budget, to the unemployment insurance (UI) tax rules: Permanent unemployment insurance surtax The net Federal UI tax on employers dropped from 0.8 percent to 0.6 percent with respect to wages paid after June 30, 2011 with the lapse of the temporary 0.2 percent FUTA surtax. This proposal, carried over from last year s budget, would reinstate and make permanent the 0.2 percent surtax, bringing the FUTA tax rate back to 0.8 percent, effective for wages paid on or after January 1, Expanded FUTA wage base This proposal, which was also in the president s FY13 budget submission, would raise the FUTA wage base to $15,000 per worker paid annually, index the wage base to wage growth for subsequent years, and reduce the net federal UI tax from 0.8 percent (after the proposed permanent extension of the FUTA surtax) to 0.37 percent. States with wage bases below $15,000 would need to conform to the new FUTA base. States would maintain the ability to set their own tax rates, as under current law. This proposal would be effective upon date of enactment. Tax News & Views (Special Edition) Page 8 of 18 Copyright 2013 Deloitte Development LLC

9 Short-term relief to employers, states Each state imposes an unemployment insurance tax on employers to fund its state UI trust fund. When states funds are exhausted, states borrow from the federal UI trust fund to pay for unemployment benefits. Due to low levels of reserves in state UI trust funds and an ever-increasing amount of debt and interest owed to the federal UI trust fund, this proposal would provide short-term relief to employers by suspending interest payments on state UI debt and suspending the FUTA credit reduction for employers in borrowing states in 2013 and This proposal would be effective upon date of enactment. Financial services & products This year s budget proposal includes three new provisions that are similar to those included in a tax reform discussion draft on financial products released in January by House Ways and Means Committee Chairman Dave Camp, R-Mich. (For prior coverage, see Tax News & Views, Vol. 14, No. 5, Jan. 24, 2013.) URL: Mark-to-market for derivatives The president s budget proposal would require gain or loss from a derivative contract to be reported on an annual basis as if it were sold for fair market value on the last day of the taxpayer s taxable year, and the resulting gain or loss would be treated as ordinary. Derivative contracts would be defined broadly to include (1) any contract the value of which is determined (directly, indirectly, in whole, or in part) by the value of actively traded property and (2) any contract with respect to a contract in part 1 of the definition. Further, a derivative contract embedded in another financial instrument or contract would be subject to mark-to-market treatment if the derivative itself would be marked to market. The Treasury explanation notes that this means mark-to-market would apply to contingent debt and structured notes linked to actively traded property. In addition, a financial instrument that is part of or becomes part of a straddle, which includes a derivative contract that would be marked to market with preexisting gain recognized at that time and loss recognized when the financial instrument would have been recognized in absence of the straddle. The proposal would exempt from mark-to-market those transactions that qualify as a business hedging transaction. The explanation says a such a transaction would be defined as one that is entered into in the ordinary course of a taxpayer s trade or business primarily to manage the risk of price changes (including changes related to interest rates, currency fluctuations, or creditworthiness) with respect to ordinary property or ordinary obligations, and that is identified as a hedging transaction before the close of the day on which it was acquired, originated, or entered into. Further, the explanation says a transaction would meet the identification requirement if it is identified as a business hedge for financial accounting purposes and it hedges price changes on ordinary property or obligations. This proposal would be effective for derivative contracts entered into after December 31, The administration estimates that it would raise almost $19 billion dollars by 2023.* Market discount In its explanation of the president s proposals, the administration argues that market discount generated by a change in interest rates or a decrease in an issuer s creditworthiness is economically similar to original issue discount (OID), and, given the similarities, the tax treatment should be aligned. The proposal would require a taxpayer to take accrued market discount into income currently, in the same manner as OID. To prevent over-accrual on distressed debt, the proposal would limit accrual to the greater of (1) an amount equal to the bond s yield to maturity at issuance plus 5 percentage points, or (2) an amount equal to the applicable federal rate plus 10 percentage points. The proposal would apply to debt securities acquired after December 31, 2013, and would raise a little more than $1 billion over 10 years. Cost basis In the final proposal similar to Camp s, the administration would require the use of the average cost basis method for determining the basis of identical shares of stock that have different cost basis. Currently, taxpayers who sell identical shares of stock with differing cost basis are allowed to use the specific identification method that is, identify the specific shares of stock that were sold. The administration believes that this identification method allows taxpayers to manipulate the recognition of gain or loss on fungible shares of portfolio stock. Accordingly, the administration would require taxpayers to use the average basis method which is currently permitted for regulated investment company stock for all identical shares of portfolio stock with a long-term holding period. The provision would apply to all identical shares of stock held by the taxpayer whether in separate accounts of the same broker or with different Tax News & Views (Special Edition) Page 9 of 18 Copyright 2013 Deloitte Development LLC

10 brokers. However, the requirement would not apply to shares held in a nontaxable account, such as an individual retirement account. The proposal would be effective for portfolio stock acquired on or after January 1, 2014, and would raise about $2 billion by Financial crisis responsibility fee In addition to these new provisions, the administration has re-proposed a fee of 17 basis points (0.17 percent) on the covered liabilities of financial firms with assets in excess of $50 billion, which the administration says is necessary to recoup amounts paid to banks under the Troubled Asset Relief Program and discourage excessive risk taking. The proposal would be effective beginning January 1, 2015, and would raise more than $59 billion by Insurance companies and products The budget also re-proposes a handful of items that would affect insurance companies. These proposals would be effective after 2013 and would raise more than $11 billion by Sales of life insurance contracts The administration is concerned about compliance issues with respect to insurance settlement transactions, in which the insured sells a previously issued policy to investors. The budget proposes new information reporting on these transactions and would limit the exception to the transfer-for-value rule.* DRD for separate accounts The administration believes that current proration methods used by some life insurers to determine the company s and policyholders shares of net investment income may inappropriately reflect a company s share that is greater than its economic interest in the net investment income earned by its separate asset acconts. The administration proposes repealing the existing proration regime and subjecting the life insurer s general account DRD, tax exempt interest, and increases in certain policy cash values to a fixed 15 percent proration in a manner similar to what currently applies to nonlife insurance companies. Further, the DRD limitations that apply to other corporations would be expanded to apply to life insurance company separate account dividends in the same proportion as the mean of reserves bears to the mean of total assets of the account.* COLI Current law disallows deductions for portions of a business taxpayer s interest that is allocable to unborrowed policy cash values of corporate owned life insurance (COLI), but there is an exception for policies covering the lives of certain employees, officers, directors, and owners. The administration believes the exception allows companies to engage in tax arbitrage and proposes to repeal the exception for employees, officers, and directors, other than 20 percent owners of a business that is the owner or beneficiary of the policies.* Insurance company information reporting The administration again proposes requiring information reporting on insurance contracts whose cash value is partially or wholly invested in a private separate account and represents at least 10 percent of the account value. This proposal would be effective for taxable years after 2013 and would raise $7 million over 10 years. Insurance company special loss discount accounts This proposal, which is revenue neutral, would repeal section 847, and the entire balance of any existing special loss discount account would be included in gross income for the first taxable year beginning after December 31, 2013; the entire amount of existing special estimated tax payments (SETPs) would be applied against additional tax that is due as a result of that inclusion. Any SETPs in excess of the additional tax due would be treated as an estimated tax payment under section FATCA reporting Although it does not discuss this issue in the Green Book, the administration has expressed concern that in many cases, foreign law prevents foreign financial institutions from complying with the Foreign Account Tax Compliance Act (FATCA) requirements that were enacted as part of the Hiring Incentives to Restore Employment Act of The administration seeks to address these impediments through intergovernmental agreements, under which the foreign government agrees to provide to the IRS the information required by FATCA. To facilitate these agreements, the administration believes the IRS needs to reciprocate in appropriate circumstances by exchanging similar information with cooperative foreign governments to support their efforts to address tax evasion by their residents. The budget therefore proposes granting Treasury the authority to require U.S. financial institutions to report to the IRS information with respect to nonresident alien individuals, entities that are not U.S. persons, and certain U.S. entities held in substantial part by non-u.s. owners, including information regarding account balances and payments made with respect to accounts held by such persons and entities. Tax News & Views (Special Edition) Page 10 of 18 Copyright 2013 Deloitte Development LLC

11 The proposal does not have an effective date or a revenue score. Provisions affecting high-income individuals As it has in the past, the president s budget includes a range of provisions intended to increase taxes on certain highincome taxpayers. The budget includes several proposals that have been in prior offerings, discussed below, but also new ones. Most notably, the budget seeks to prevent accumulation of assets in tax-favored arrangements in excess of amounts needed to fund reasonable levels of consumption in retirement and are well beyond the level of accumulation that justifies tax-advantaged treatment of retirement savings accounts. Under that proposal, any individual who has accumulated assets within a tax-favored retirement arrangement such as IRAs, section 401(a) plans, section 403(b) plans, or funded section 457(b) arrangements in excess of the amount needed to purchase an annuity providing the maximum annual benefit permitted to be paid under a qualified defined benefit plan, generally $205,000 per year for 2013, would be prohibited from making additional contributions or receiving additional accruals under the arrangements. (If the proposal were enacted, the current maximum permitted accumulation for an individual age 62 or older would be about $3.4 million.) Any accounts with balances exceeding the threshold nevertheless could continue to accrue earnings and gains on a tax-deferred or tax-free basis. Further, under some circumstances, for example, when the maximum benefit level increases as a result of a cost-of-living adjustment, contributions could resume until the maximum balance amount was reached. The proposal provides that the sponsor of a retirement plan or an IRA would be required to report the value of an individual s accumulated benefit at the end of each year. If the overall value exceeded the limitation, contributions and benefit accruals would be limited in the following year. The limitation would be determined annually at the end of the calendar year, and would apply to any contributions or accruals for the following calendar year. If a taxpayer made a contribution or received an allocation or accrual that would result in an accumulation in excess of the maximum permitted amount, the excess would be treated in a manner similar to the treatment of an excess deferral under current law. Thus, amounts could be withdrawn and, if not withdrawn within the grace period, would be nondeductible, subject to an excise tax until withdrawn and taxable when withdrawn (even from a Roth account). The proposal, which raises $9.3 billion over 10 years, would be effective for taxable years beginning after December 31, Base broadeners The budget also renews several proposals to raise taxes on upper-income individuals by: Reducing the tax benefit of certain tax expenditures The administration s single largest revenue raiser amounting to $529 billion over 10 years would limit the tax savings provided by itemized deductions and exclusions for high-income taxpayers, by capping the savings as if those deductions and exclusions were used in a top 28 percent tax bracket, versus up to 39.6 percent. Notably, this proposal would apply not only to itemized deductions, but also to items currently excluded from income. Among the items identified in the proposal as subject to limitation are deductions and exclusions for health benefits, employee contributions to employersponsored defined contribution plans and IRAs, moving expenses, and certain education expenses. Instituting the Buffett rule This proposal would function similar to a minimum tax on millionaires, requiring households with more than $1 million of income pay at least 30 percent of their adjusted gross income in taxes (subject to a phase-in for married couples with incomes between $1 million and $2 million or single filers with income levels at half those amounts). A tax benefit at 28 percent would be available for charitable contributions. The proposal would raise an estimated $54 billion over 10 years. Both provisions would be effective for taxable years beginning after Tax income from carried interests as ordinary income Continuing an effort from prior years, the budget includes a proposal to tax as ordinary income a partner s share of income from an investment services partnership interest (ISPI) in an investment partnership, regardless of the character of the income at the partnership level. Accordingly, such income would not be eligible for the reduced rates of tax that apply to Tax News & Views (Special Edition) Page 11 of 18 Copyright 2013 Deloitte Development LLC