Services
News
Obama Administration: Fiscal Year 2010 Revenue Proposals
– July 7, 2009
On May 11, 2009, the Obama Administration released their revenue proposals in the Treasury Department's General Explanations of the Administration's Fiscal Year 2010 Revenue Proposals, also known as the Green Book. Although the Green Book does not include proposed statutory language, it contains details about what they intend to propose to Congress. The following paragraphs briefly summarize some of the more significant proposals that can impact you and businesses in North Louisiana.
Ordinary Income. The top two rate brackets applicable to ordinary income (33 percent and 35 percent) would be increased to 36 percent and 39.6 percent, respectively, in taxable years beginning after December 31, 2010. For married individuals filing a joint return, the 35 percent bracket would begin at taxable incomes greater than $250,000 less the standard deduction and two personal exemptions (estimated to be approximately $235,000). The starting points for the 39.6 percent bracket would be $372,950 in 2009 for joint return filers.
Capital Gains and Qualified Dividends. The maximum tax rate on long-term capital gains and qualified dividends would be increased to 20 percent for married individuals filing a joint return having taxable incomes greater than $250,000 less the standard deduction and two personal exemptions which would be approximately $230,000
Limitations on Deductions of Higher Income Taxpayers. For taxable years beginning after December 31, 2010, the tax value of all itemized deductions would be limited to 28 percent of the amount by which they would otherwise reduce taxable income in the 36 percent or 39.6 percent brackets. A similar limitation also would apply under the AMT.
The proposal would phase out deductions for personal exemptions of taxpayers having AGI in excess of certain levels. The AGI levels at which the phase-out begins would be adjusted for inflation starting with a value of $250,000 in 2009 for joint return filers.
Estate and Gift Tax Reforms. The proposal would impose several new rules that would limit the ability to minimize estate and gift taxes through valuation discounts and "freezes." The proposal would require consistency between the decedent or donor of property and the recipient of property in determining the basis of the property. The proposal would apply special valuation rules for interests in family controlled entities that would make valuation discounts more difficult to sustain. The proposal would also prohibit the use of "grantor retained annuity trusts" as valuation "freeze" vehicles if the retained interest period is less than 10 years. These proposals would generally become effective upon enactment.
Taxation of Partnership Profits Interests (including Carried Interest) as Ordinary Income. Under the proposal, partnership income allocated to a partner who has received a partnership interest in exchange for services would be taxed as ordinary income, regardless of the underlying character of the income, and would be subject to self-employment taxes. Also, gain on the sale of a partnership interest received in exchange for services would be taxed as ordinary income rather than capital gain. Income or gain attributable to a service partner's capital contributions of money or other property to the partnership would not be subject to the ordinary income rule, provided that the capital contribution was not funded by a loan made or guaranteed by the partnership or any partner. The proposal would apply to taxable years beginning after December 31, 2010.
MISCELLANEOUS PROVISIONS AFFECTING BUSINESSES
Work with Congress to Lengthen the NOL Carryback Period for More Taxpayers. The Administration signaled its desire to include more taxpayers in the expanded five year NOL carryback period that was enacted for businesses whose gross receipts do not exceed $15M.
Repeal of Last-In, First-Out Inventory Accounting Method (LIFO). The proposal would repeal the LIFO method of valuing inventories, which is beneficial in a time of cost inflation. In their first taxable years beginning after December 31, 2011, taxpayers would need to adjust their beginning LIFO inventories to their FIFO values. The resulting, one-time increase in gross income would be taken into account ratably over that taxable year and the following seven taxable years.
PROVISIONS AFFECTING ENERGY MATTERS
Elimination of Oil and Gas Company Preferences. All of the following proposals would be effective for years beginning in 2011.
Repeal of the Current Expensing and Amortization rules for Intangible Drilling Costs (IDC). The proposal would repeal the present IDC expensing and amortization rules. Currently operators of oil and gas property may elect to deduct the cost of IDCs, in the year paid or incurred.
Repeal of the Passive Loss Rules Exception for Working Interests in Oil and Gas Properties. Under the proposal, the current exemption from the passive activity loss rules for working interests in oil or gas property would be repealed. The current exemption applies to a working interest in oil or gas property that the taxpayer holds directly or through an entity that does not limit the liability of the taxpayer with respect to the interest. The proposal's repeal of this exemption would subject such interests to the passive activity loss rules. Net losses on wells in which the taxpayer does not materially participate will be limited in a given year to income and taxes allocable to passive activities.
Repeal of Percentage Depletion for Oil and Gas Wells. The proposal would eliminate use of the percentage depletion method for oil and gas wells, in favor of the cost depletion method, for taxable years beginning after December 31, 2010. Under the cost depletion method, the deduction is equal to the amount of basis in the property that is proportionate to the amount of the oil reserve removed. Under the cost depletion method no deduction is permitted in excess of the basis of the property and no deduction is allowable on an accelerated basis. Percentage depletion permits a deduction in excess of basis.
Increase in the Amortization Period for Geological and Geophysical Costs to Seven Years. The proposal would increase the amortization period for geological and geophysical expenditures incurred by independent producers in connection with oil and gas exploration in the United States from two years to seven years. This seven-year amortization period, which currently applies to integrated oil and gas producers, would apply even if the property were abandoned.
Gerry Hedgcock, CPA
Tax Partner
318.429.2028
ghedg@hmvcpa.com
Gerry has more than 30 years experience in the accounting industry with a concentration in auto dealerships, real estate, cost segregation, profitability issues and the timber industry. In addition to his responsibilities as partner, Gerry plays a very proactive role in growing the firm as the partner-in-charge of Business Development.