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Posted: July 25, 2013

Which way the taxation winds are blowing: Part 1

This might be a good time to invest in the economy

Mira Finé

Investors have a bit more to ponder as the administration rolls out its proposed tax program, designed to both address the federal budget deficit and promote economic development.

When President Obama's budget was rolled out this spring, it called for more spending on non-defense research, education and things such as roads, bridges and other infrastructure items. It featured some adjustment to the CPI calculations for Social Security and Medicare as well as some higher taxes on high earners.

“We can grow our economy, and shrink our deficits,” the president said.

When one analyzes the administration’s proposals, you can see the intent behind the President’s comment. And while the House and the Senate have forwarded their own very different proposals, it’s useful to see which way the taxation wind is blowing to gain an insight on what actually could be adopted and affect the actions of investors.

Capital Investment
First, the administration wants to make accelerated depreciation permanent. This is where you can essentially write off 100 percent of a certain capital investment after the first year, and it’s not an insignificant tax rule. Corporations generally paid about the same amount in taxes that they received benefits for. A large portion of that benefit was from two items: Deferring income offshore and additional first-year depreciation subject to the limitations. Companies are encouraged by this rule to buy new equipment, which is expected to stimulate the economy.

Pro-U.S. small business and renewable energy
Another pro-business, pro-investment move is the permanent extension of the research and development tax credit while raising its rate. This credit is one of those that have annual sunsets and Congress renews them for another year, only to deal with them next year. By making the credit permanent, it gives credit for individual creativity for new products that benefit the American public.

The administration also wants to permanently extend the work opportunity tax credit, a 20 percent credit on qualifying wages for certain individuals. There’s also a one-time, temporary 10 percent tax credit for a small business that hires new employees or increases wages and a permanent exclusion for 100 percent of small business stock sales. Another thing the administration wants to do is to push savings by requiring employers with more than two years in business and more than 10 employees to enroll their employees in a direct deposit IRA in exchange for a $25 tax credit per employee.

The President has also proposed taxes or revenue raising ideas that involve businesses in the plan. For instance, Last-in/first-out inventory accounting would be repealed and the use of the lower-of-cost-or-market rule would be banned, which would have the effect of increasing taxable income. They also want to tax carried partnership interest as ordinary interest and eliminate loopholes in importing carried losses into related party partnerships, and repeal the technical partnership termination rules, which have been seen as vulnerable to fraud.
   
When it comes to manufacturing, the administration continues to support renewable energy, including $2.5 billion in tax credits for qualified property investments and making the renewable production tax credit permanent. It wants to install measures to promote investment in the U.S. with credits and disallow deductions for expenses incurred in connection with outsourcing a U.S. business. 

The President also takes aim – I think futilely – at the domestic fossil fuel business by suggesting we repeal the enhanced oil recovery credit; the credit for oil and gas produced from marginal wells; expensing of intangible drilling costs; the deduction for tertiary injectants; and the percentage depletion for oil and natural gas wells, among other things.

Mira Finé, CPA, is the national director of tax operations for Hein & Associates LLP, a full-service public accounting and advisory firm with offices in Denver, Houston, Dallas, and Southern California. She specializes in succession planning and can be reached at mfine@heincpa.com or 303.298.9600.

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