On February 9, 2016 the president released his federal budget proposals for the 2017 fiscal year ending September 30, 2017. This article summarizes many of the tax changes contained in the budget proposal.
Business Tax Proposals
• Increase the maximum Sec. 179 expense limitation from $500,000 to $1 million
• Expand use of the cash method of accounting by small businesses to those entities with average annual gross receipts below $25 million over the preceding three tax years
• Repeal the last-in, first-out (LIFO) accounting method for inventories
• End the “carried interest” loophole by taxing this income as ordinary income
• Implement a new $5,000 per student “Community College Partnership Tax Credit” for businesses that hire graduates from community and technical colleges
• Impose a new “financial fee” – 7% fee on liabilities of large, highly-leveraged financial institutions
• Provide additional tax credits ($2.5 billion) for investment in qualified property used in a qualified advanced energy manufacturing project
• Disallow deductions for expenses of outsourcing a U.S. trade or business – reducing or eliminating a trade or business or line of business currently conducted within the U.S. and starting up, expanding, or otherwise moving the same trade or business outside the U.S. to the extent it results in a loss of U.S. jobs
• Create a new “manufacturing communities tax credit” to support investment in communities that have suffered a major job loss event, such as the closing of a military base or long-term mass layoff by a major employer
• Impose liability on shareholders to collect unpaid income taxes of applicable corporations
• Deny deductions for punitive damages
• Increase the depreciation period for corporate jets from five to seven years to be consistent with commercial aircraft
• Modify like-kind exchange rules for real property by limiting the amount of capital gain that can be deferred from the exchange of real property to $1 million per taxpayer per tax year
Individual Tax Proposals
• Increase the top tax rate on capital gains and dividends to 24.2% (plus the 3.8% Net Investment Income tax, for a total top rate of 28%)
• Eliminate tax on student loan debt forgiveness
• Create a “Second Earner Tax Credit” for married couples where both spouses work
• Increase and expand the Earned Income Tax Credit for workers without qualifying children and non-custodial parents
• Limit the value of certain deductions or exclusions from income and all itemized deductions to 28% for taxpayers in higher tax brackets
• Observe the “Buffett rule” by imposing a new “fair share tax”, which would generally require that higher income taxpayers pay no less than a 30% tax rate on income after charitable contributions
• Repeal dependent care flexible spending accounts and increase the child and dependent care tax credit, with a larger credit for families with children under age five
• Expand the definition of self-employment income to S corporation profits
• Simplify required minimum distribution (RMD) rules by exempting individuals if the aggregate value of IRA and other retirement plan balances do not exceed $100,000
• Allow all inherited retirement plan and IRA balances to be rolled over within 60 days
The budget proposal also contains numerous international tax, energy related provisions, estate and gift tax proposals and changes to various IRS practices and procedures. While it is not anticipated that many of these proposals will become law, the budget nonetheless is a strong policy statement that may well influence the tone and direction of the coming tax debate in the presidential election, both in respect to politicians who generally align themselves with the President’s objectives, and those who vehemently disagree with them.
Neil Becourtney, CPA
CohnReznick LLP
