Highlights of Business Tax Changes in President’s 2010 Budget
The Obama administration is advancing a number of proposed tax changes for businesses in its upcoming budget. The U.S. Department of the Treasury released details in the General Explanation of the Administration’s Fiscal Year 2010 Revenue Proposals, also referred to as the Green Book, on May 11, 2009.
“The early budget package has a long way to go in Congress before becoming reality; if passed, most of the provisions would not be effective until 2011. However, businesses should be aware of the potential changes that may affect them,” says Andy Biebl, tax principal with LarsonAllen.
Although the Green Book contains approximately 40 proposals, including many important tax law modifications and compliance requirements, Biebl has summarized those with the broadest application:
LIFO repeal
If the last in, first out (LIFO) method of inventory valuation is repealed, businesses currently using it would be required to adjust beginning LIFO inventory to its first in, first out (FIFO) value, effective the 2012 tax year. The income increase from this change would be spread ratably over eight tax years, starting in 2012.
If passed, this would mean huge tax increases for dealerships and companies across many industries; however, it is unknown if this attempt to repeal the LIFO inventory method is any more realistic than similar proposals from past presidential administrations.
LCM repeal
Businesses using the lower of cost or market (LCM) method of inventory valuation presently can adjust inventory values below cost. The proposal would eliminate both the ability to use the LCM method and to write down sub-normal goods carried in inventory.
These changes would be effective for the first tax year beginning after 12 months from the enactment of the legislation. Taxpayers required to restore inventory values to income under this change would be allowed to spread that income ratably over four tax years.
IRAs
Effective January 1, 2010, employers who have been in business for at least two years and have 10 or more employees would be required to offer an automatic individual retirement account (IRA) option on a payroll deduction basis. This would apply to businesses that do not otherwise offer a qualified retirement plan. A small $25 per-employee tax credit would be available to assist employers with the administrative costs of these accounts.
Tax loss carryback
Businesses with losses may have an expanded loss carryback opportunity, perhaps similar to the special rule enacted last year that allows a five-year carryback of a 2008 tax loss. Normally, when a business incurs a tax loss, that loss can be applied to the prior two tax years to recover previously paid taxes.
This proposal isn’t specific. The Treasury’s release simply states that “the administration looks forward to working with the Congress to make a lengthened NOL [net operating loss] carryback available to more taxpayers.” The present 2008 five-year carryback provision only applies to smaller businesses with average annual gross receipts less than $15 million.
Elimination of oil and gas company preferences
The oil and gas industry would face repeal of a series of significant tax breaks that have been law for many years. Expensing intangible drilling costs, the percentage depletion deduction, and the passive loss exception for working interests in oil and gas activity would all be eliminated, as well as other oil and gas tax preferences, for tax years beginning after 2010.
For more information, access the Treasury’s Green Book or contact us.