Small Business Taxes & Management^TM--Copyright 2013, A/N Group, Inc.

The Treasury has released the General Explanations of the Administration's Fiscal Year 2015 Revenue Proposals. Even where one party controls the House, Senate and the Presidency the actual proposals only rarely emerge as law. But neither can they be ignored, particularly ones that have been mentioned on more than one occasion. In the discussion below we'll mention only those items that are most likely to impact small business owners and individuals. We'll concentrate our discussion on those items that have a chance of passage and those that could have a significant impact. For example, the proposal that would require S corporation income to be subject to the self-employment tax would have a substantial impact on shareholders. Putting a limitation on like-kind exchanges has also been mentioned before. These are issues that should be watched carefully. The short descriptions below will give you an idea of the proposals. You can download the complete text at www.treasury.gov/resource-center/tax-policy/Documents/General-Explanations-FY2015.pdf.

Permanently extend earned income tax credit for larger families and married couples.

Permanently extend the American Opportunity Tax Credit. This would make permanent this education credit.

Incentives for manufacturing and creating jobs in the U.S. This would create a new general business tax credit.

Research and experimentation credit. This would enhance and make permanent the research tax credit.

Extend and modify certain employment tax credits. This would permanent extend the Work Opportunity Tax Credit (WOTC) and would provide incentives for hiring veterans.

Extend expensing of acquired assets for small business. Would provide a deduction limit under Sec. 179 of $500,000 with a phase at $2 million. Off-the-shelf computer software would permanently qualify.

Eliminate capital gains taxation on small business stock. The provision would make the 100% exclusion for qualified small business stock permanent. This applies to C corporations.

Increase limit on start-up and organization expenditures. New businesses could deduct $20,000 of start-up and organization expenditures.

Employer provided health insurance credit. This would expand and simplify the tax credit for qualified small employers for non-elective contributions to employee health insurance.

Modify and permanently extend the New Markets Tax Credit.

Repeal enhanced oil recovery credit. This would eliminate the 15-percent credit for eligible costs attributable to enhanced oil recovery (EOR) projects.

Repeal credit for oil and natural gas produced from marginal wells. Eliminate the $3.00 per barrel of oil and 50 cents per 1,000 cubic feet of natural gas associated with marginal wells for years beginning after December 31, 2014.

Repeal expensing of intangible drilling costs. Costs that benefit future periods must generally be capitalized, but intangible drilling costs (IDCs) may be expensed as paid or incurred. The proposal would repeal expensing of IDCs and 60-month amortization of capitalized IDCs effective for costs incurred after December 31, 2014.

Repeal deduction for tertiary injectants.

Repeal exception to passive loss limitation for working interests in oil and natural gas properties. The passive loss rules limit deductions and credits from passive business activities. An exception is provided for any interest in an oil or natural gas property that the taxpayer holds directly or through an entity that does not limit the liability of the taxpayer with respect to the interest. The proposal would repeal the exception for taxable years beginning after December 41, 2014.

Repeal percentage depletion for oil and natural gas wells. This would be effective for tax years beginning after December 31, 2014.

Repeal domestic manufacturing deduction for oil and natural gas production. This would be effective for tax years beginning after December 31, 2014.

Increase Geological and Geophysical amortization period for independent producers to seven years. This would be effective for tax years beginning after December 31, 2014.

Repeal expensing of exploration and development costs. This proposal would apply to coal mines, effective for costs incurred after December 31, 2014.

Repeal percentage depletion for hard mineral fossil fuels. This applies to the 10% rate for coal and lignite and 15% for oil shale. Effective for taxable years beginning after December 31, 2014.

Repeal capital gains treatment for royalties. The proposal applies to royalties received on the disposition of coal or lignite.

Repeal domestic manufacturing deduction for the production of coal and other hard mineral fossil fuels.

Repeal Last-In, First-Out (LIFO) method of accounting for inventories. The proposal would be effective for the first taxable year beginning after December 31, 2014.

Repeal Lower-of-Cost-or-Market inventory accounting method. The proposal would prohibit the use of the LCM and subnormal goods methods, effective for taxable years beginning after December 31, 2014.

Modify depreciation rules for general aviation passenger aircraft. The proposal would increase the depreciation period for general aviation aircraft used for passenger transport from five to seven years, for property placed in service after December 31, 2014.

Repeal gain limitation for dividends received in reorganization exchanges.

Expand definition of substantial built-in loss for purposes of partnership loss transfers.

Expand partnership basis limitation rules to nondeductible expenditures. The proposal would amend Sec. 704(d) to allow a partner's distributive share of expenditures not deductible in computing the partnership's taxable income and not properly chargeable to capital account only to the extent of the partner's adjusted basis in its partnership interest at the end of the partnership year in which the expenditure occurred, effective for partnership years beginning on or after the date of enactment.

Limit the importation of losses under related party loss limitation rules.

Deny deduction for punitive damages. The proposal would disallow a deduction for punitive damages paid or incurred by the taxpayer, whether upon a judgment or in settlement of a claim. If the liability is covered by insurance, the amount paid by the insurer would be included in the income of the insured.

Modify like-kind exchange rules for real property. The proposal would limit the amount of capital gain deferred under Sec. 1031 from the exchange of real property to $1,000,000 (indexed for inflation) per taxpayer per taxable year. The proposal would be effective for like-kind exchanges after December 31, 2014.

Prevent elimination of earnings and profits through distributions of certain stock. the proposal would amend the application of the general earnings and profits adjustment rules to distributions of stock of another corporation.

Provide additional tax credits for investment in qualified property used in a qualifying advanced energy manufacturing project.

Modify and extend tax credit for construction of energy-efficient new homes.

Expand earned income tax credit (EITC) for workers without qualifying children.

Automatic enrollment in IRA accounts or annuities. This proposal would require employers in business for at least two years that have more than ten employees to offer an automatic IRA option to employees under a payroll-deduction basis if the employer does not sponsor a qualified plan, SEP, or SIMPLE.

Expand the child and dependent care tax credit.

Extend exclusion from income for cancellation of certain home mortgage debt. The proposal would extend the exclusion for qualified principal residence indebtedness to amounts that are discharged before January 1, 2017.

Exclusion from income for student loan forgiveness. The proposal would exclude from gross income amounts forgiven at the end of the repayment period for certain borrowers using the income-contingent repayment option or the income-based repayment option.

Make Pell grants excludable from income and from tax credit calculations.

Reduce the value of certain tax expenditures. The proposal would limit the tax value of specified deductions from AGI and all itemized deductions. This limitation would reduce the value to 28 percent of the specified exclusions and deductions that would otherwise reduce taxable income in the 33%, 35%, or 39.6% brackets. A similar limitation also would apply under the alternative minimum tax. The proposal would be effective for taxable years beginning after December 31, 2014.

Implement the Buffett rule by imposing a new "Fair Share Tax". The proposal would impose a new minimum tax on high-income taxpayers equal to 30% of AGI less a credit for charitable contributions. The tax would be phased in starting at $1 million AGI and fully phased in at $2 million AGI. Effective for tax years beginning after December 31, 2014.

Restore the estate, gift, and generation-skipping transfer tax parameters in effect in 2009. This would make the top tax rate 45% and the exclusion amount for estate and GST taxes to $3.5 million and the gift tax to $1 million.

Require consistency in value for transfer and income tax purposes.

Require a minimum term for grantor retained annuity trusts (GRATs).

Limit duration of generation-skipping transfer (GST) tax exemption.

Extend the lien on estate tax deferrals where estate consists largely of interest in closely held business.

Simplify gift tax exclusion for annual gifts.

Require current inclusion in income of accrued market discount on bonds.

Require cost basis of stock that is covered security must be determined using an average basis method. Under current law if you have stock with different cost basis (because of different purchase dates) you can decide which shares to sell, allowing you to create a smaller or greater gain or loss. For portfolio stock acquired on or after January 1, 2015 only an average basis method could be used.

Tax carried (profits) interests as ordinary income. Require faster income exclusion for non-spouse beneficiaries. Under the proposal, non-spouse beneficiaries of retirement plans and IRAs would generally be required to take distributions over no more than five years. Certain exceptions would apply allowing distributions over an individual's life expectancy.

Limit the total accrual of tax-favored retirement benefits.

Conform self-employment contributions act (SECA) taxes for professional service businesses. Individual owners of professional se vice businesses (those in the field of health, law, engineering, accounting, etc.) organized as S corporations, partnerships, and LLCs would all be treated as subject to SECA taxes in the same manner and to the same degree.

Provide short-term tax relief to employers and expand Federal Unemployment Tax Act (FUTA) base.

Enhance and make permanent incentives for the donation of conservation easements.

Restrict deductions and modify rules for contributions of conservation easements for historic preservation.

Require a taxpayer identification number (TIN) from contractors and allow certain withholding.

Require greater electronic filing of returns.

Increase certainty with respect to worker classification.

Increase levy authority for payments to medicare providers with delinquent tax debt. The provision would increase to 100% (from 15%) the amount the Treasury could levy on a payment to a Medicare provider to collect unpaid taxes.

Streamline audit and adjustment procedures for large partnerships.

Revise offer-in-compromise application rules. This would eliminate the requirement that an offer-in-compromise include a nonrefundable payment of any portion of the taxpayer's offer.

Make repeated willful failure to file a tax return a felony. New penalties could be assessed for willfully failing to file (subject to certain requirements) if the tax liability is at least $50,000. This could result in a felony conviction with a fine of not more than $250,000 or imprisonment for not more than five years.

Extend statute of limitations where state adjustment affects federal tax liability.

Allow the IRS to absorb credit and debit care processing fees for certain tax payments.

Make e-filing mandatory for exempt organizations.

Impose a penalty on failure to comply with electronic filing requirements.

Provide whistleblowers with protection from retaliation.

Extend paid preparer earned income tax credit due diligence requirements to the child tax credit.

Add tax crimes to the aggravated identity theft statute.

Regulation of tax return preparers. The proposal would explicitly provide the IRS has the authority to regulate all paid tax return preparers.

Rationalize tax return filing due dates so they are staggered.

Increase penalty applicable to paid tax preparers who engage in willful or reckless conduct.

Enhance administrability of the appraiser penalty.

Simplify minimum required distribution rules.

Among other modifications, the proposal would eliminate MRD requirements for balances of $100,000 or less.

Exclude self-constructed assets of small taxpayers from the uniform capitalization (UNICAP) rules.

Repeal technical terminations of partnerships. The proposal would eliminate the rule that if, within a 12-month period, there is a sale or exchange of 50% or more of the total interest in partnership capital and profits, the partnership is treated as having terminated for tax purposes.

Increase standard mileage rate for auto use by volunteers.

Allow offset of federal income tax refunds to collect delinquent state income taxes for out-of-state residents.

--Last Update 03/31/14