PROPOSED 2015 BUSINESS TAX REFORM
Last month we looked at House Ways and Means Committee Chairman, Dave Camp’s, sponsored Tax Reform Act of 2014 as it relates to tax provisions relating to individuals. This article will explore some of the provisions relating to businesses.
Tax Rates. This provision would lower the C corporation tax rate from a graduated scheduled to a flat 25% rate beginning in 2019. The rate would be reducing from a flat 33% in 2015 down to the eventual 25% in 2019.
Reform of Accelerated Cost Recovery System. Under the provision, the MACRS recovery periods and methods would be repealed and rules substantially similar to the alternative depreciation system (ADS) would apply to depreciable property, which requires longer recovery periods and the use of the straight line depreciation method. In general, class lives would match more closely the true economic useful life of assets, and depreciation deductions would be determined under the straight line method. In addition, a taxpayer could take an additional depreciation deduction to account for the effects of inflation on depreciable personal property, calculated by multiplying the year end adjusted basis in the property (determined without regard to inflation deductions) by the chained CPI rate for the year. The provision would repeal bonus depreciation.
Expensing Certain Depreciable Business Assets for Small Businesses. Under the provision, Code section 179 expensing would be made permanent at the 2008-2009 levels. Taxpayers would be able to expense up to $250,000 of investments in new equipment and property in the year, with the deduction phased out for investments exceeding $800,000 indexed for inflation. In addition, the provision would allow investments in air conditioning and heating units to qualify for section 179 expensing.
Net Operating Losses. Under the provision, C corporations could deduct an NOL carryover or carryback only to the extent of 90% of the corporation’s taxable income (determined without regard to the NOL deduction), conforming to the current law AMT rules.
Repeal of Deduction for Expenditures by Farmers for Fertilizer, Etc. Under the provision, the special rule for immediately deducting expenditures for fertilizer and other farming related materials would be repealed.
Phase-out and Repeal of Deduction for Income Attributable to Domestic Production Activities. Under the provision, the deduction for domestic production activities would be phased out, with the deduction reduced to 6% in 2015 and reduced to zero for tax years after 2016.
Entertainment Expenses. Under the provision, no deduction would be allowed for entertainment, amusement or recreation activities, facilities or membership dues relating to such activities or other social purposes. In addition, no deduction would be allowed for transportation fringe benefits or for amenities provided to an employee that are primarily personal in nature and that involve property or services not directly related to the employer’s trade or business, except to the extent that such benefits are treated as taxable compensation to an employee. The 50% limitation under current law also would apply only to expenses for food or beverages and to qualifying business meals under the provision, with no deduction allowed for other entertainment purposes.
Repeal of Like Kind Exchanges. Under the provision, the special rule allowing deferral of gain on like kind exchanges would be repealed.
Limitation on Use of Cash Method Accounting. Under the provision, businesses with average annual gross receipts of $10 million or less may use the cash method of accounting; whereas businesses with more than $10 million would be required to use accrual accounting. The provision would not apply to farming businesses, which would continue to be able to use the cash method regardless of the level of gross receipts.
Certain Special Rules for Taxable Year of Inclusion. Under the provision, a taxpayer on the accrual method of accounting for tax purposes would be required to include an item of income no later than the tax year in which such item is included for financial statement purposes. The provision would provide that cash and accrual method taxpayers may defer the inclusion of advance payments for certain goods and services in income for tax purposes up to one year (but not longer than any deferral for financial statement purposes).
Installment Sales. Under the provision, the interest charge rules would apply to any installment sale in excess of $150,000, provided the obligation remains outstanding at the end of the tax year, eliminating the $5 million limitation. The provision also would repeal the exceptions and special rules for sales of farm property, timeshares, and residential lots.
Repeal of Last In, First Out Method of Inventory. Under the provision, the LIFO inventory accounting method would no longer be permitted. Thus, taxpayers could use FIFO or any other method that conforms to the best accounting practices in a particular trade or business and clearly reflects income.
Repeal of Lower of Cost or Market Method of Inventory. Under the provision, the lower of cost or market method would be repealed.
Repeal of Averaging for Farm Income. Under the provision, the farm income averaging method would be repealed.
Of course there are many other provisions that may affect a wide range of taxpayers. All the various provisions can be reviewed on the webpage for the House Ways and Means Committee. It is clear an attempt is being made to make the tax code easier, but what is also clear is that the reform provisions are seeking to raise additional revenue (i.e., increase your taxes). Keep an eye out to see if this legislation gains any traction and be ready to voice your opinion.
– Jason W. Harrel is a Partner at Calone & Harrel Law Group, LLP who concentrates his practice in all manners of Taxation, Real Estate Transactions, Corporate, Partnership and Limited Liability Company law matters. He is a certified specialist in Taxation. Mr. Harrel may be reached at 209-952-4545 or email@example.com