Tax Alert: Obama Administration Releases Tax Proposals for FY 2010 Budget
6/22/2009
The Obama Administration has released numerous domestic tax proposals for the FY 2010 budget, including some impacting upper-income individuals and businesses.
Tax Changes for Upper-Income Individuals
1. For tax years beginning after 2010, the highest income tax rate would increase to 39.6% from 35%. The second highest tax rate would increase to 36% from 33%. The highest tax bracket of 39.6% would start at a taxable income of approximately $373,000. These brackets will be indexed annually for inflation by the IRS.
2. For taxable years beginning after 2010, the elimination of the limit on itemized deductions would be removed. Most itemized deductions (other than medical expenses, investment interest, theft and casualty losses, and gambling losses) would be reduced by 3% of the amount by which AGI exceeds statutory floors, but not by more than 80% of the otherwise allowable deductions. The floors would be indexed annually for inflation.
3. For taxable years beginning after 2010 the tax value of all itemized deductions would be limited to 28% if they would otherwise reduce taxable income in the 36% or 39.6% tax brackets. A similar limitation also would apply under the AMT. This would apply to itemized deductions after they have been reduced under the limitations discussed above.
4. The permanent extension of the zero and 15-percent tax rates for qualified dividends and capital gains for taxpayers with incomes up to $250,000 for joint returns and $200,000 for single taxpayers. A new 20-percent tax rate on long-term capital gains and qualified dividends would apply for married taxpayers filing jointly with income over $250,000 and for single taxpayers with income over $200,000.
5. Exemption amounts for the Alternative Minimum Tax (AMT) would be indexed annually. Most of the tax reductions enacted in 2001 and 2003 which are set to expire on Dec. 31, 2010 under current law would be continued (with the changes noted above for higher-income individuals), except for repeal of estate and generation-skipping transfer taxes. Estate and gift taxes would be extended at the levels in effect for calendar-year 2009 (a top rate of 45% and an exemption amount of $3.5 million).
Extending Certain Tax Breaks
The following provisions would be extended through Dec. 31, 2010:
The optional deduction for state and local general sales taxes, Subpart F “active financing” and “look-through” exceptions; the exclusion from unrelated business income of certain payments to controlling exempt organizations, the new markets tax credit, the modified recovery period for qualified leasehold improvements and qualified restaurant property, incentives for empowerment and community renewal zones, credits for biodiesel and renewable diesel fuels and several trade agreements, including the Generalized System of Preferences and the Caribbean Basin Initiative.
Tax Changes for Business
The research credit would be made permanent, and a lengthened NOL carryback period would be made available to more taxpayers. Effective for qualified small business stock issued after Feb. 17, 2009, the percentage exclusion for qualified small business stock sold by an individual or other non-corporate taxpayer would be increased to 100 percent and the AMT preference item for gain excluded under this provision would be eliminated. The stock would have to be held for at least five years.
The budget proposals include many revenue raising and compliance changes for businesses, including the following:
1. Repeal of Last-in, First-out (LIFO) inventory accounting method. Taxpayers that currently use the LIFO method would be required to write up their beginning LIFO inventory to its FIFO value in the first tax year beginning after Dec. 31, 2011. This one-time increase in gross income would be taken into account ratably over the first tax year and the following seven tax years.
2. Taxpayers not using a LIFO method currently may write down the carrying values of their inventories by applying the lower-of-cost-or-market (LCM) method and may write down the cost of “subnormal” goods. Taxpayers using the retail method for tax currently are not required to use that method for financial statement reporting purposes. Effective for tax years beginning after 12 months from the enactment date, taxpayers would not be able to use the LCM and subnormal goods methods. Wash-sale rules would be included to prevent taxpayers from circumventing these new rules. The retail method would be allowed only if the taxpayer uses that method for financial accounting purposes. The new rules would be treated as a change in the method of accounting for inventories, and any resulting increase generally would be included in income ratably over a four-year period beginning with the change year.
3. Effective for employment tax returns required to be filed with respect to wages paid after Dec. 31, 2009, new rules would set forth standards for holding employee leasing companies jointly and severally liable with their clients for Federal employment taxes, and would also provide standards for holding employee leasing companies solely liable for such taxes if they meet specified requirements.
4. For damages paid or incurred after 2010, no deduction would be allowed for punitive damages paid or incurred by the taxpayer, whether upon a judgment or in settlement of a claim. Where the liability for punitive damages is covered by insurance, such damages paid or incurred by the insurer would be included in the gross income of the insured person. The insurer would be required to report such payments to the insured person and to IRS.
Changes for International Taxes
We have covered this in a separate tax alert which can be accessed by clicking here.
Other Revenue-Raising Changes
1. A business would be required to file an information return for payments aggregating to $600 or more in a calendar year to a corporation (except a tax-exempt corporation). The proposal would be effective for payments made to corporations after December 31, 2009.
2. For payments made to contractors after 2009, a contractor receiving payments of $600 or more in a calendar year from a particular business would be required to furnish to the business (on Form W-9) the contractor's certified TIN. A business would be required to verify the contractor's TIN with the IRS, which would be authorized to disclose, solely for this purpose, whether the certified TIN-name combination matches IRS records. If a contractor failed to furnish an accurate certified TIN, the business would have to withhold a flat-rate percentage of gross payments.
3. Numerous changes would crack down on underreporting of income through the use of accounts and entities in offshore jurisdictions. These will be outlined in a separate tax alert.
4. For tax years beginning after 2010, carried interests would be taxed as ordinary income. A partner’s share of income on a “services partnership interest” (SPI) would be subject to tax as ordinary income, regardless of the character of the income at the partnership level. Accordingly, such income would not be eligible for the reduced rates that apply to long-term capital gains. In addition, the proposal would require the partner to pay self-employment taxes on such income. Gain recognized on the sale of an SPI would generally be taxed as ordinary income, not as capital gain.
5. Repeal Certain New York City Liberty Zone Incentives. The special depreciation allowance for qualified New York Liberty Zone property that is either nonresidential real property or residential rental property would be terminated as of the date of enactment. Property placed in service after the date of enactment would be ineligible for this incentive unless a binding written contract is in effect on the date of enactment and the property is placed in service before the original sunset dates set forth in the Act.
For more information on this or other tax matters, please contact your J.H. Cohn professional at 877-704-3500.
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