Business tax legislation uncertain: though little is expected from Washington this election year, will Congress act at all on significant tax reform or simply wait for 2013? Regardless of timing, financial executives should pay careful attention to the details of ongoing tax discussions.

• Author: Paull, Lindy L.
• Position: Cover Story

Business tax issues will be a key part of the congressional agenda, with attention focused on small business tax relief, renewal of expired business tax provisions and extension of the individual tax cuts first enacted in 2001 and 2003. Lawmakers are closely monitoring economic conditions and unemployment, and these concerns will be an important consideration in formulating tax legislation.

Another consideration is the federal government's budget picture, with significant deficits and growing debt still on the horizon. This, too, will influence tax legislation, particularly from an affordability standpoint.

While some lawmakers are pushing for quick action on small business tax relief, renewal of expired tax provisions such as the research credit and extension of the 2001 and 2003 individual tax cuts, legislation appears unlikely to be completed on these items until after the November elections, possibly during a post-election "lame duck" session of Congress.

Since the post-election session will be relatively short and faced with unfinished business on many fronts, Congress will be laying the foundation for these tax issues during the summer months. It is important that businesses pay careful attention to the details of the tax discussions, particularly regarding possible tax increases to offset the cost of legislation. Indeed, tax increases recently surfaced as a possible way to fund changes to federal transportation and student loan programs.

In addition, the congressional committees responsible for tax legislation have spent considerable time preparing for comprehensive tax reform, and legislation could emerge as early as next year. President Barack Obama joined this effort earlier this year by releasing a set of principles for tax reform and a "framework" for business tax reform. The general concepts being discussed by tax reform supporters include lowering tax rates, broadening the tax base by reducing or eliminating tax deductions and credits and revising the taxation of global business income to enhance competitiveness.

Based on discussions to date, reform legislation would be "revenue neutral" overall, meaning that aggregate tax cuts would be offset by aggregate tax increases. As a result, tax reform can be expected to produce winners and losers when compared to the present tax code.

Small Business Tax Relief

An effort is underway to give temporary tax relief to small businesses for 2012. So far, the House of Representatives and the Senate are pursuing different approaches. The House has passed H.R. 9, the Small Business Tax Cut bill to provide a temporary 20 percent deduction for domestic business income of small businesses with fewer than 500 employees. Assuming the 35 percent rate under present law, the effect of the House bill would be to lower the top tax rate on small businesses to 28 percent for 2012.

In contrast, Senators are seeking to extend 100 percent bonus depreciation and provide a temporary tax credit for increasing payroll (up to a maximum of $5 million) through new hires or increased wages (S. 2237, the Small Business Jobs and Tax Relief Act). The Senate approach applies to all businesses regardless of size.

While there appears to be ample support to provide tax relief to small businesses, it is uncertain whether the House and Senate will be able to reconcile these different approaches before the November elections.

Expired Tax Provisions

Congressional lawmakers have expressed bipartisan support for renewing numerous business, energy and individual tax provisions that expired at the end of 2011. Although these provisions are expected to be renewed retroactively back to the beginning of 2012, their expiration creates uncertainty for financial and planning purposes.

Expired provisions of importance to many businesses include the research credit, deferral of tax on global active financing income, look-through treatment of related-party payments of controlled foreign companies, increased expensing of tangible personal property and a 15-year cost-recovery period for leasehold, restaurant and retail improvements.

The cost of a one-year renewal of the expired tax provisions is $35-40 billion (exclusive of extending AMT relief). It is unclear at this time whether Congress would decide to offset this cost and, if so, whether through tax increases or spending cuts. There is an effort underway to review the merits of specific expired provisions to analyze whether they should be continued. The cost of "tax extender" legislation would be reduced if some expired provisions are not reinstated.

The president's budget proposes making the research credit permanent and extending other expired tax provisions for two years. His business tax re-form framework, discussed below, recommends that expired and expiring business tax provisions either should be eliminated or made permanent on a revenue-neutral basis as part of any tax re-form effort. The administration...