Tax Law and Business Organization Strategy

Joint Committee on Taxation Description of Business Tax Changes in President's 2010 Budget

The staff of the Joint Committee on Taxation has released a comprehensive study on the business tax changes included in the President's FY 2010 budget proposal, as submitted to Congress on May 7, 2009.  For a list of the proposed business tax changes, read on.

For tax years beginning after 2010, keeping the Code Sec. 179 expensing amount and investment-based phaseout at $125,000 and $500,000 respectively (under current law, after 2010, the amounts will fall to $25,000 and $200,000, respectively).

For qualified small business stock issued after Feb. 17, 2009, all gain from the sale or exchange of qualified small business stock would be excluded from gross income, and the alternative minimum tax (AMT) preference would be eliminated.

The research credit would be made permanent (under current law, the research credit, including the university basic research credit and the energy research credit, expires for amounts paid or incurred after Dec. 31, 2009).

The Administration proposes to work with Congress to make an extended NOL carryback period available to more taxpayers.

For transactions entered into after the date of enactment a transaction would satisfy the economic substance doctrine only if (i) it changes in a meaningful way (apart from federal tax effects) the taxpayer's economic position, and (ii) the taxpayer has a substantial purpose (other than a federal tax purpose) for entering into the transaction. A transaction would not be treated as having economic substance solely by reason of a profit potential unless the present value of the reasonably expected pre-tax profit is substantial in relation to the present value of the net federal tax benefits arising from the transaction.

For transactions entered into after the date of enactment, a 30% penalty would apply to an understatement of tax attributable to a transaction that lacks economic substance, reduced to 20% if there were adequate disclosure of the relevant facts in the taxpayer's return. The proposed penalty would be imposed with regard to an understatement due to a transaction's lack of economic substance in lieu of other accuracy-related penalties that might be levied with respect to the tax understatement. Also, there would be no deduction for interest attributable to an understatement of federal income tax arising from the application of the economic substance doctrine.

For tax years beginning after 2011, the LIFO inventory accounting method would be repealed. Taxpayers that currently use LIFO would be required to write up their beginning LIFO inventory to its FIFO value in the first tax year beginning after Dec. 31, 2011. The resulting increase in income would be taken into account ratably over eight tax years beginning with the first tax year the taxpayer is required to use FIFO.

For amounts paid or incurred after the date of enactment, the deduction for punitive damages paid or incurred as a judgment or in settlement of a claim would be repealed. If a liability for punitive damages is covered by insurance, any such damages paid by the insurer would be included in gross income of the insured person, and the insurer would be required to report such amounts to both the insured person and IRS.

For tax years beginning after 12 months from the date of enactment, the “lower of cost or market” (LCM) method and the write-down for subnormal goods would be repealed.

All of the following oil and gas tax breaks would be repealed:

  • the enhanced oil recovery credit
  • the marginal wells credit
  • the expensing of IDCs
  • the deduction for tertiary injectants
  • the exception for passive losses from working interests in oil and gas properties
  • percentage depletion for oil and gas
  • the domestic manufacturing deduction for income derived from the domestic production of oil, gas, or primary products thereof.

For forward contracts entered into on or after Dec. 31, 2010, a corporation that enters into a forward contract for the sale of its own stock would have to treat a portion of the payment received with respect to the forward contract as a payment of interest.

For tax years beginning after the date of enactment, commodities dealers, commodities derivatives dealers, dealers in securities, and options dealers would have to treat the income from their day-to-day dealer activities with respect to Code Sec. 1256 contracts as ordinary in character, not capital. This would not affect the application of the mark-to-market rules with respect to such gains and losses.

Other proposals would modify the rules that apply to sales of life insurance contracts, modify the dividends received deduction for life insurance company separate accounts, and expand the pro rata interest expense disallowance for company-owned life insurance (COLI).

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