Today, the Obama Administration (the Administration) released its Budget of the United States Government, Fiscal Year 2016 and Greenbook. The budget proposal states: “A simpler, fairer, and more efficient tax system is critical to achieving many of the President’s fiscal and economic goals…. While commerce around the world is increasingly interconnected, an out-of-date, loophole-ridden business tax system puts U.S. companies at a disadvantage relative to their competitors, while also failing to encourage investment in the United States.” The proposal continues, explaining that the budget “raises revenue for deficit reduction by curbing high-income tax benefits and closing loopholes and reforms the business tax system to make it fairer and more pro-growth. It also reinvests in the Internal Revenue Service (IRS), reversing the sharp funding reductions of recent years and improving customer service and tax enforcement.”
The budget calls for $12.9 billion for the IRS, $400 million more than it requested last year.
The Administration’s proposal includes business tax reform generally consistent with what it has proposed since 2012.
Corporate Rates: It would lower the corporate tax rate to 28%, with a 25% effective rate for domestic manufacturing.
International Activities: A new proposal would impose a 19% minimum tax on foreign earnings that would require US companies to pay tax on all of their foreign earnings when earned, after which earnings could be reinvested in the United States without additional tax. The proposal also includes items addressing inversions and interest stripping.
Research and Clean Energy Incentives: It would make permanent research and clean energy incentives.
Small Business Taxes: It would simplify and cut taxes for small businesses.
The Greenbook includes details on specific proposals.
The area of international taxation includes proposals to (as described by the Greenbook):
- Restrict deductions for excessive interest of members of financial reporting groups
- Provide tax incentives for locating jobs and business activity in the United States and remove tax deductions for shipping jobs overseas
- Repeal delay in the implementation of worldwide interest allocation
- Extend the exception under Subpart F for active financing income
- Extend the look-through treatment of payments between related controlled foreign corporations (CFCs)
- Impose a 19% minimum tax on foreign income
- Impose a 14% one-time tax on previously untaxed foreign income
- Limit shifting of income through intangible property transfers
- Disallow the deduction for excess non-taxed reinsurance premiums paid to affiliates
- Modify tax rules for dual capacity taxpayers
- Tax gain from the sale of a partnership interest on a look-through basis
- Modify Sections 338(h)(16) and 902 to limit credits when non-double taxation exists
- Close loopholes under Subpart F
- Restrict the use of hybrid arrangements that create stateless income
- Limit the ability of domestic entities to expatriate
For financial and insurance industry products the budget proposes to (as described by the Greenbook):
- Require that derivative contracts be marked to market with resulting gain or loss treated as ordinary
- Modify rules that apply to sales of life insurance contracts
- Modify proration rules for life insurance company general and separate accounts
- Expand pro rata interest expense disallowance for corporate-owned life insurance
- Conform net operating loss rules of life insurance companies to those of other corporations
The area of capital gains taxation includes proposals to (as described by the Greenbook):
- Increase the total top capital gains and dividend rate to 28% (including the 3.8% net investment income tax)
- Create deemed recognition events for assets acquired by bequest or gift, with certain exceptions
For small businesses the budget proposes to (as described by the Greenbook):
- Expand and permanently extend increased expensing for small business
- Expand simplified accounting for small business and establish a uniform definition of small business for accounting methods
- Eliminate capital gains taxation on investments in small business stock
- Increase the limitations for deductible new business expenditures and consolidate provisions for start-up and organizational expenditures
- Expand and simplify the tax credit provided to qualified small employers for non- elective contributions to employee health insurance
The budget also proposes to (as described by the Greenbook):
- Repeal last-in, first-out (LIFO) method of accounting for inventories
- Repeal lower-of-cost-or-market (LCM) inventory accounting method
- Modify like-kind exchange rules for real property and collectibles
- Modify depreciation rules for purchases of general aviation passenger aircraft
- Expand the definition of substantial built-in loss for purposes of partnership loss transfers
- Extend partnership basis limitation rules to nondeductible expenditures
- Limit the importation of losses under related party loss limitation rules
- Deny deduction for punitive damages
- Conform corporate ownership standards
- Tax corporate distributions as dividends
- Require current inclusion in income of accrued market discount and limit the accrual amount for distressed debt
- Require that the cost basis of stock that is a covered security must be determined using an average cost basis method
- Tax carried (profits) interests as ordinary income
- Require non-spouse beneficiaries of deceased IRA owners and retirement plan participants to take inherited distributions over no more than five years
- Limit the total accrual of tax-favored retirement benefits
- Conform Self-Employment Contributions Act (SECA) taxes for professional service businesses
- Limit Roth conversions to pre-tax dollars
- Eliminate deduction for dividends on stock of publicly-traded corporations held in employee stock ownership plans
- Repeal exclusion of net unrealized appreciation in employer securities
- Disallow the deduction for charitable contributions that are a prerequisite for purchasing tickets to college sporting events
The White House made the budget proposal available in blog format as well.