NUMBER OF THE WEEK: $2 million. The amount of tax revenue the state of Colorado collected in the month of January 2014 recreational marijuana sales.
House & Senate: Lew Touts Obama's FY2015 Tax Proposals. Treasury Secretary Jack Lew appeared before both the House Ways & Means Committee and the Senate Finance Committee last week to review the revenue proposals contained in President Obama's Fiscal Year 2015 Budget Request.
Some Common Ground. Ways & Means Chairman Dave Camp (R-MI) expressed support of the administration's proposals to make permanent small-business expensing under Section 179 of the Internal Revenue Code and the research & development tax credit, but he questioned Lew about the proposal to permanently extend select tax breaks -- such as the Earned Income Tax Credit -- without an offset. Lew indicated that different characteristics warrant different treatment of certain tax credits -- a response that did not appear to satisfy Camp. Lew and Camp did, however, seem to be on the same page about consolidating several education tax credits.
Wyden's First Hearing ... to Be Followed by Many, Many More. During the Finance Committee's hearing with Lew on March 5, Sen. Ron Wyden (D-OR) agreed that the current bevy of education tax credits should be simplified. In his first hearing as chairman, Wyden also repeated his intention to "move quickly to extend a number of expired tax provisions such as the research and development credit" before focusing his efforts on a comprehensive overhaul of the tax code.
You can expect to see Wyden's methodical approach include a slew of tax reform hearings and serious consideration of the proposed reforms put forth by Camp on Feb. 26, as well as proposals from the administration and Wyden's predecessor, former senator-turned-ambassador Max Baucus.
The Camp Counselor. This week, we're taking a closer look at how key provisions in Rep. Dave Camp's tax reform discussion draft might impact the domestic food & beverage industry, with analysis from McGuireWoods LLP partner Giles Sutton.
For corporate taxpayers, the proposal's two primary features are the lowering of the federal statutory rate from a maximum 35 percent to a flat 25 percent rate, and elimination, modification or repeal of code sections dealing with various deductions, revenue recognition, credits and accounting methods.
The transition to the flat rate would be phased in by reducing the top corporate rate 2 percent a year from 2015 to 2019, when it will reach the 25 percent level. Interestingly, while the rate reduction would be phased in, many of the modifications or eliminations of deductions and other changes would, with a few exceptions, be effective for tax years beginning after 2014.
While the prospect of lowering the corporate rate and the proposed, or supposed, "simplification" of the code does sound appealing, taxpayers must look at the details to determine whether there are in fact net benefits to be had for their organizations. Some elements of the proposal, such as the repeal of the Alternative Minimum Tax, are hard to argue with. However, the proposal is likely to impact various industries differently and disproportionately.
The repeal of the AMT would simplify financial reporting for many taxpayers, including those in the food & beverage sector, and it would eliminate the duplicative tax regimes (federal and AMT) and the myriad depreciation records currently required (federal tax, AMT depreciation and the Accumulated Current Earning (ACE) Adjustment, which requires a separate depreciation calculation).
However, the elimination of the "last in, first out" inventory method (LIFO) and the "lower of cost or market" inventory method (LCM) would be problematic to many in the food & beverage industry. There is no doubt that in inflationary times, particularly times of commodity inflation, the use of LIFO inventory valuation is a tax benefit for those taxpayers dependent on inflationary components to their inventory. Further, the LCM method provides an easy and understandable convention to federal inventory accounting to sellers of tangible personal property. Do these inventory methods provide an incremental tax benefit? Yes. But isn't the federal government trying to incent domestic commercial economic activity?
Perhaps the most potentially troubling proposed provision is the unconventional treatment of advertising expenses contained in the proposal. For both taxpayers and the IRS, the general deductibility of advertising expenses has, historically, been relatively uncontroversial. The proposal's mandatory requirement of capitalization and 10-year amortization of 50 percent of advertising expenses would significantly impact food & beverage companies' bottom lines. Again, when the supposed intent of the proposal is to increase economic activity, penalizing advertising expenditures that promote the sale of new goods or services appears to be counter-productive.
Even the modification of the federal tax credits impacts corporate taxpayers differently. For many, particularly retailers, the tax impact of the repeal of the Work Opportunity Tax Credit will deny them a permanent tax benefit in an industry where permanent benefits are hard to find. Conversely, while the research credit would be made permanent in the proposal and gives some tax certainty to such activities, the economic value of this "permanency" to the food and beverage industry may not be worth much, particularly in light of the proposed modifications to the credit.
At the end of the day, lowering the rate is beneficial only to the extent that the expansion of the base and the repeal of existing benefits are less impactful. While this is still only a proposal, if companies do not keep any eye on what is being considered, they will likely be blindsided by what is passed.
Comment Periods Closing This Week:
Computation of the Research Tax Credit for Members of a Controlled Group. The proposed rules would change how members of a controlled group calculate gross receipts on internal transactions between domestic and foreign group members for the purpose of calculating the research tax credit under tax code Section 41. Comments are due by Thursday, March 13, and can be submitted here.
COURTS & LEISURE
Individual Mandate a Tax, Not a Taking. The U.S. Court of Appeals for the District of Columbia Circuit on March 7 dismissed a Fifth Amendment "takings" challenge to the Affordable Care Act's individual mandate. The plaintiffs in Ass'n of Am. Physicians & Surgeons v. Sebelius argued that the individual mandate exceeded the government's taxing power and amounted to a taking of private property without just compensation, in violation of the Takings Clause. The court rejected the argument as well as the plaintiffs' origination clause challenge, which alleged that the mandate is invalid because it did not originate in the House of Representatives. Read the full opinion here.
Relevant Hearings in the Senate
The Senate Budget Committee will hold a hearing Wednesday, March 12 on the president's FY2015 revenue and economic policy proposals. The sole witness is Treasury Secretary Jack Lew.
The Senate Finance Committee will hold a hearing Thursday, March 13 to explore ways to strengthen and expand the middle class. The witnesses include:
- Mr. George Packer, staff writer, author, The New Yorker Magazine, Brooklyn, NY.
- Dr. William C. Dunkelberg, chief economist, National Federation of Independent Business, Washington, D.C.
- Ms. Diane Swonk, chief economist and senior managing director, Mesirow Financial, Chicago, IL
- Dr. Lawrence B. Lindsey, president and CEO, The Lindsey Group, Fairfax, VA
- Leonard Burman, Ph.D., director, Tax Policy Center, The Urban Institute, Washington, D.C.
Relevant Hearings in the House
The House Judiciary Committee will hold a hearing Wednesday, March 12 on Internet sales tax issues. The hearing will focus on the proposals included in, and alternatives to, the Marketplace Fairness Act of 2013 (H.R. 684). The bipartisan bill, sponsored by Reps. Steve Womack (R-AR) and Jackie Speier (D-CA), would allow states to require online retailers based in other states to collect sales taxes. A similar version passed the Senate in 2013. Witnesses include:
- Former Rep. Christopher Cox (R-CA), a lawyer representing a coalition of companies opposed to the Marketplace Fairness Act
- Mr. Joe Crosby, principal, MultiState Associates Incorporated Mr. Stephen P. Kranz, partner, McDermott Will & Emery
- Mr. William E. Moschella, shareholder, Brownstein Hyatt Farber Schreck, LLC Mr. Andrew Moylan, outreach director and senior fellow, R Street Institute
- Mr. James H. Sutton Jr., shareholder, Moffa, Gainor & Sutton, P.A.
The House Budget Committee will hold a hearing Thursday, March 13 on the president's FY2015 revenue and economic policy proposals. The sole witness is Treasury Secretary Jack Lew.