[Editor’s Note: This is the first installment of a three-part series by members of CBIZ Tofias and Mayer Hoffman McCann P.C. on potential changes in tax law.]
No one ever said running a business was easy. Part of what makes it difficult is complying with the ever-changing federal tax code. Brace yourself. The Obama White House has proposed a tidal wave of changes.
The administration recently released General Explanations of the Administration’s Fiscal Year 2010 Revenue Proposals (a.k.a. the Green Book), describing its tax agenda for congressional action this year. Democrats, who control Congress, are likely to pass many, if not all, of the president’s recommendations.
Here is a look at some of the proposals affecting businesses. In two subsequent columns, we will discuss proposed changes that will affect individual income taxes, and retirement and estate planning.
The business-tax incentives proposed by the administration are targeted tax cuts. Small businesses and businesses engaged in research activities would be the primary beneficiaries.
• NOL carryback. The American Recovery and Reinvestment Act of 2009 (ARRA) extended the two-year NOL carryback period for certain small businesses for applicable 2008 net operating losses. Taxpayers may elect to carryback an applicable 2008 NOL three, four or five years. To qualify for the NOL carryback, a small business must have an average of $15 million or less in gross receipts over a three-year period ending with the year giving rise to the loss. The administration has signaled its support for “working with Congress to make a lengthened NOL carryback period available to more taxpayers.” However, it has not specified the extent of the proposed expansion.
In previous years, Congress has extended the NOL carryback period without limiting the incentive to small businesses. It is unlikely that the current Congress will approve an extended NOL carryback for all taxpayers regardless of their size. It is more likely that lawmakers will increase the current $15 million gross receipts ceiling, and do so for 2009 and then wait to see if it is also needed in 2010. The Green Book’s revenue allocations anticipate NOL tax relief of $27.8 billion in 2009 and $35.7 billion in 2010, far above the $4.7 billion in NOL relief provided under ARRA.
• Qualified small-business stock. ARRA expanded a special tax break to help small C corporations raise capital by allowing noncorporate investors who purchase original issue stock to cut the tax on their profit. If a five-year holding period is met, qualifying individuals can exclude 75 percent of their gains on qualified small-business stock from taxable income. The 75 percent exclusion is available for stock acquired after Feb. 17, 2009, and before Jan. 1, 2011, which would result in an effective regular tax rate of 7 percent and 12.88 percent under the Alternative Minimum Tax (AMT).
The administration would raise the exclusion to 100 percent for qualified stock issued after Feb. 17, 2009. This treatment would cost $5.8 billion over 10 years and would result in an effective tax rate of zero. This tax break becomes more valuable to higher-income taxpayers who should expect to have their capital gains tax rate increase to 20 percent after 2010.
As in the past, the exclusion would apply only to the extent that the gain does not exceed the greater of either 10 times the taxpayer’s adjusted basis in the stock disposed of during the tax year, or $10 million, reduced by gain excluded in earlier years from sales of stock in the corporation.
A permanent research tax credit would cost $74.4 billion over 10 years. That significant price tag has been the reason for prior temporary extensions. The two compelling reasons for making the credit permanent are the need for the United States to stay competitive in the global race for market share and the reality that research often requires long-term funding for which the credit is a make-or-break offset.
EESA also eliminated the election to use the alternative incremental method of calculating the research credit (effective for tax years beginning after Dec. 31, 2008). It is unclear if the administration would revive the alternative incremental method or make permanent the credit as it is in 2009.
In addition to the increase in individual tax rates for higher-income individuals, international tax measures and LIFO accounting method reform, the administration is proposing a host of other ways to raise revenue. These proposals are generally aimed at stopping tax abuses and increasing transparency. But they also target oil and gas preferences in a bid to indirectly encourage green energy. •
Michael Corrente (mcorrente@cbiztofias.com) is a managing director at CBIZ Tofias, which operates in association with Mayer Hoffman McCann P.C. Local offices are located in New Bedford, Newport and Providence.
