Tax Reform Proposals
This
paper lays out a series of proposals which have been made at the Federal level
for tax reforms to the current federal taxation system. The sources of these
reforms are pre-existing proposals. The proposals were chosen to be used for
this proposal to promote a tax environment that is friendlier to business needs
while still fulfilling the goals of the regulatory and taxation system.
Reform Options for
Business Investment and Innovation:[i]
1.
The elimination of the requirement of
depreciation and amortization of investments by small businesses.
A.
Under §179 the qualifying property that can be
expended by small businesses should be increased permanently and with that
amount adjusted for inflation.
B.
Under §179 qualified property should be allowed
to be expensed in an unlimited amount by small businesses.
C.
The definition of real qualified property under
§179 should include “off-the-shelf” software.
2.
Small business tax accounting simplification.
A.
The cash method of accounting should be
expanded. Some options include the following:
i.
A “business cash flow tax” model, which is a
system where the cash receipts of the business are included in income
immediately and all cash disbursements of the business are deductible expenses
immediately, should be allowed for small businesses. This system would allow
for the immediate deduction of land, buildings, equipment and inventory
therefore eliminating the need to depreciated business property and account for
inventories.
ii.
Another option would be the same as the previous
example, but without the immediate expense of buildings and land.
iii.
Allow small businesses that do not have
inventory to use the cash method of accounting for revenues and expenses.
B.
Inventory cost rules could be simplified by one
of the following methods:
i.
Direct and indirect costs of inventory should be
allowed to be expensed by small businesses.
ii.
Continue to require the capitalization of direct
costs of inventory, but allow for the exemption of small businesses from uniform
capitalization rules which require indirect costs involved in the production of
goods to be capitalized.
3.
Research and Development.
A.
Allow research and development credits to be
used against the payroll tax liability. This would result in the credit being
partially refundable.
4.
Expenditures for starting and organizing a
business.
A.
The deduction of expenditures for starting up a
business and the deduction of expenditures for organizing a business should be
merged into one rule. The proposal suggested would increase the threshold from
$5,000 to $10,000 with a phase-out starting at $60,000.
5.
“Qualified small business” stock sale exclusion.
A.
The temporary exclusion for 100% of the sale
qualified small business stock should be made permanent. The AMT preference
item associated with the sale of qualified small business stock should be
eliminated.
B.
§1202 (partial exclusion of gain from certain
small business stock) should increase the eligibility requirements from the $50
million size restriction. The proposals uses as an example up to $75 million.[ii]
C.
§1202 should also include S corporations and
limited liability corporations.
6.
Start-up Business which concentrate in research
and Development should be exempt from passive activity loss rules which require
passive losses greater than passive income to be carried forward to the next
year.
A.
Pass through entities or only ones in certain
industries should be allowed to deduct a percentage of the income from their
business.
II. Depreciation and Amortization
1.
Depreciation rules should be more accurately
matched with the economic life of intangible assets.
A.
Alternative depreciation System (ADS) allows for
a longer depreciation period using straight line depreciation instead of MACRS.
ADS could be required to be used for businesses.
B.
Revise the modifications and lives of new
technologies for the Alternative Depreciation System and require their use by
businesses.
C.
Under MACRS equipment recovery time should be
extended because inflation has decreased.
D.
Publicly traded and large audited companies
should depreciated using “book depreciation” in accordance with GAAP.
2.
The lives of intangible assets should be more
accurately matched with the amortization rules.
A.
The useful life of intangible assets could be
extended. An example of 20 years was suggested.
B.
Certain expenses should be amortized. An example
of “advertising expenses” was suggested.
3.
Expensing should be allowed at 100%
A.
Businesses should be allowed to have their
alternative minimum tax (AMT) credits accelerated instead of expensing at 100%.
III. Manufacturing
§199 Income attributable to domestic production activities
allows for the deduction of 9% of the income of businesses involved in
manufacturing and production (Oil and Gas is allowed 6%). §199 reduces the
marginal and average tax rates for the business for which it applies to.
1.
Allow for larger deductions for certain
activities.
A.
When the research and development is performed
in the United States allow for a greater deduction or R&D credit.
B.
Advanced forms of manufacturing activities
should be allowed a larger deduction for income. All forms of domestic
production activity should have the same deduction percentage. This includes
oil and gas.[iii]
IV. Innovation
Businesses currently have the option of expensing research
and development costs or to amortize research and development costs over five
or more years. Businesses involved in research and development are also allowed
a credit for incremental spending on supplier and labor used in research and
development activities. This credit can be used by businesses in one of two
ways. The first is the “traditional” credit. Under this form of the credit the
research and development expenses are compared with the research and
development expenses from 1984 to 1988. The second is the “alternative
simplified credit” which determined from looking at the last three years of
research and development expenses.
Possible reforms with regards to research and development
expensing and credits.
1.
The research and development credit should be
allowed to expire.
2.
Instead of having businesses expense research
and development immediately the businesses should be allowed to amortize the
expenses. An example given suggested a three years period.
3.
Create a permanent, simplified research and
development credit that is more focused. The following options have been
suggested:
A.
The permanent credit should completely replace
the “traditional” credit with the “alternative simplified” credit. The
“alternative simplified” credit should be increased. A suggested example was
17-20%.
B.
The allowed credit amount should be increased
with regards to specific activities. A suggested example was innovative or life
science research.
C.
The credit should apply to all qualified
research by terminating the incremental clause of the credit.
4.
Allow for a patent box
A.
A “patent box” is a method of taxing revenue
derived from products produced through research and development. Under this
method of taxing the revenue streams would be taxed a lower rates if the
research and development for patented product was performed in the United
States.[iv]
V. Other Tax Accounting
Inventory: Inventory accounting has improved dramatically
due to changes in technology which should allow for changes in inventory
accounting methods. The following are suggestion changes for taxation
accounting as it relates to inventory.
1.
Last-in, First-out (LIFO) inventory accounting
should be repealed and replaced with one of the following suggested methods:
A.
Businesses should be required to change their
method of accounting for inventories to one of the other method. The Businesses
recognize gains from the recapture of LIFO reserves. Businesses should be given
enough advanced warning as to the date of change that they can minimize their
tax liability from the change in methods.
B.
Businesses may continue to use LIFO with their
previously acquired inventory, but future inventory should be recorded using a
method of inventory of accounting other than LIFO.
Reform Options for
International Competitiveness:[v]
1.
The treatment of Non-Subpart F earnings should
be reformed and anti-base erosion rules should be stricter. The following
suggestion has been made:
A.
Sub-part F earnings subject to immediate
taxation should include the following:
i.
Low-taxed “controlled-foreign-corporations”
(CFCs) should have all their income taxed with the exception of income that is
derived from substantial activities in foreign markets.
B.
Controlled Foreign Corporation earnings should
be subject to a minimum tax rate. The following Suggestions have been made:
i.
A minimum U.S. tax should be applied to the
income of controlled-foreign-corporations that is taxed at a rate lower than
the minimum foreign effective tax rate.
1.
An exception should be allowed for income
derived in the controlled-foreign-corporations country of incorporation.
ii.
Income from intangibles of
controlled-foreign-corporations sales from the U.S. parent in foreign markets
should be taxed immediately, with no U.S. tax on the income when it is
repatriated into the U.S. A rate of 15% was used as an example.
iii.
Except for tangible capital assets in the home
country of the controlled foreign corporation all income from the controlled
foreign corporation should be taxed. A tax rate of 15% was suggested.
C.
Exemptions should be allowed together with the
above examples. Suggested examples include:
i.
A suggested example would be a 95% dividend
received exemption by U.S. corporations for dividends from
controlled-foreign-corporations. An exemption for 95% of the gains from the
sale of stock of a controlled-foreign-corporation. Allow deductions for
expenses due to the exempt dividends and gains.
1.
The suggested example also states that the 5%
remaining could be tax immediately, but the tax would be reduced by the taxes
from (A) and (B) above.
ii.
A suggested example was a 100% dividends
received exemptions for U.S. corporations receiving dividends from a
controlled-foreign-corporation, but not allow U.S. corporations to take
deductions for expenses due to exempt dividends.
iii.
Combined with (i) or (ii) above, the following
could be applied to the operations of foreign branches:
A.
Foreign branch profits could be covered by a 95%
or 100% exemption.
B.
Foreign branches could be classified as
controlled-foreign-corporations to which the exemptions would apply.
2. The Subpart F
rules could be reinforced by using one or more of the following methods:
A.
Income from services in the U.S. or the sale of
property in the U.S. by controlled-foreign-corporations taxed at a relatively
low rate should be should be taxed immediately.
B.
Income from Intangible property transferred from
a related U.S. party to a controlled-foreign-corporation should be taxed to the
extent the income exceeds a reasonable return.
3. Inclusion of
controlled-foreign-corporation income
A. The U.S. parent business should include all
the earnings of controlled-foreign-corporation with foreign tax credits.
4. Reinforce
thin-capitalization rules to prevent excessive debt financing which. This would
limit based erosion.
A. A U.S. business should not be allowed
interest expense deduction if the interest expense is greater than a percentage
of adjusted taxable income. An example percentage of 25% was suggested.
B. An exception should be allowed for a U.S.
business that is leveraged at an amount not greater than the foreign entities
with which it is involved.
C. A carry forward should be allowed to take
deductions in future years for interest that is not deductible in the current
year.
5. Reinforce
rules that prevent base erosion in the U.S. by foreign businesses.
A.
Reinsurance premiums paid to
offshore affiliates which were not taxed should have deductions for such
premiums limited.
B. Royalties paid to offshore affiliates
which were not taxed should have deductions for such royalties limited.
II. Foreign
Tax Credit and Sourcing Rules
1.
Increase the limitation on cross-crediting,
which is when an entity exploits the rules of the U.S. and foreign tax systems
to generate credits that have no correlation to any real economic activity.
A.
There are two forms of foreign tax credit
limitation groupings (referred to as “baskets”): Passive and general income.
Limitation groupings could be expanded for the purpose of creating greater
limitations. Suggested examples are Subpart F income groupings and dividends
groupings from foreign corporations which are not CFCs.[vi]
i.
Limitation groupings (“baskets”) could also be
based on country of origin.
B.
The foreign tax credit limitation grouping could
include rents and royalties from related parties.
C.
All foreign subsidiaries should be treated as
one entity when determining the foreign tax credit from U.S. subsidiaries in
foreign countries.
2.
The rules for determining the source of income
should be modified.
A.
The global “allocation of interest expense”
adoption should be accelerated.
i.
A suggested example is that the
fair-market-value method could be repealed for the apportionment of interest
expense.
B.
Sales of inventory rule should be replaced with
a place-of-business rule, which is used to determine how much foreign tax
credit is available, the title passage.
C.
The rules for the limitation of U.S. taxpayer
elections for the creation of foreign source income should be expanded in
scope.
III. Non-Resident
U.S. Citizens
1.
Long term non-resident U.S. citizens should be
allowed an election to be taxed as non-resident aliens under the following
conditions:
A.
The individual must live abroad for a specified
period of time.
B.
At the time of the election the taxpayer will be
taxed as if he or she sold all his or her assets.
References
26 U.S. Code §199 – Income
Attributable to Domestic Production Activities. Cornell University Law
School Legal Information Institute. Retrieved Dec 1, 2014 from http://www.law.cornell.edu/uscode/text/26/199
26 U.S. Code §1202 –
Partial Exclusion for Gain from Certain Small Business Stock. Cornell
University Law School Legal Information Institute. Retrieved Dec 1, 2014 from http://www.law.cornell.edu/uscode/text/26/1202
26 U.S. Code §863 –
Special Rules for Determining Source. Cornell University Law School Legal
Information Institute. Retrieved Dec 1, 2014 From http://www.law.cornell.edu/uscode/text/26/863
26 U.S. Code §865 –
Source Rules for Personal Property Sales. Cornell University School Legal
Information Institute. Retrieved Dec 1, 2014 from http://www.law.cornell.edu/uscode/text/26/865
Business Investment
and Innovation. (April 2013). The United States Senate Committee on
Finance. Retrieved Dec 1, 2014 from http://www.finance.senate.gov/issue/?id=72355fe8-b834-467e-bae8-79a77f7517f8
International
Competitiveness. (May 2013). The United States Senate Committee on Finance.
Retrieved Dec 1, 2014 from http://www.finance.senate.gov/issue/?id=72355fe8-b834-467e-bae8-79a77f7517f8
Wood, Robert W. Patent
Boxes Come to Ireland & U.K., Why Not U.S. (Oct 2014). Forbes.
Retrieved Dec 1, 2014 from http://www.forbes.com/sites/robertwood/2014/10/16/patent-boxes-come-to-ireland-uk-why-not-u-s/
[i] Business Investment and Innovation.
(April 2013). The United States Senate Committee on Finance. Retrieved Dec 1,
2014 from http://www.finance.senate.gov/issue/?id=72355fe8-b834-467e-bae8-79a77f7517f8
[ii] 26 U.S. Code §1202 – Partial Exclusion for
Gain from Certain Small Business Stock. Cornell University Law School Legal
Information Institute. Retrieved Dec 1, 2014 from http://www.law.cornell.edu/uscode/text/26/1202
[iii] 26 U.S. Code §199 – Income Attributable to
Domestic Production Activities. Cornell University Law School Legal
Information Institute. Retrieved Dec 1, 2014 from http://www.law.cornell.edu/uscode/text/26/199
[iv]
Wood, Robert W. Patent Boxes Come to Ireland
& U.K., Why Not U.S. (Oct 2014). Forbes. Retrieved Dec 1, 2014 from http://www.forbes.com/sites/robertwood/2014/10/16/patent-boxes-come-to-ireland-uk-why-not-u-s/
[v] International Competitiveness. (May
2013). The United States Senate Committee on Finance. Retrieved Dec 1, 2014
from http://www.finance.senate.gov/issue/?id=72355fe8-b834-467e-bae8-79a77f7517f8
[vi] 26 U.S. Code §863 – Special Rules for
Determining Source. Cornell University Law School Legal Information
Institute. Retrieved Dec 1, 2014 From http://www.law.cornell.edu/uscode/text/26/863
and
26 U.S. Code §865 –
Source Rules for Personal Property Sales. Cornell University School Legal
Information Institute. Retrieved Dec 1, 2014 from http://www.law.cornell.edu/uscode/text/26/865
No comments:
Post a Comment