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The President’s American Jobs Act of 2011 and Plan for Economic Growth and Deficit Reduction – Proposed Tax Changes

On Monday, September 12, 2011, President Obama submitted his “American Jobs Act of 2011” (the “Jobs Act”) to Congress.

As discussed below, among this bill’s provisions are a number of tax items, including a temporary payroll tax cut, a new limitation on itemized deductions for certain high-income taxpayers, and a proposal to tax carried interests from partnerships as ordinary income rather than capital gains.

Following his submission of the Jobs Act, the President, on September 19, presented his “Plan for Economic Growth and Deficit Reduction” (the “Plan”) to Congress and the Joint Select Committee on Deficit Reduction (the “JSC”). This 80-page “blueprint” calls on Congress and the JSC to undertake comprehensive tax reform and sets forth the following five principles to be met in doing so:

  1. Lower tax rates;
  2. Cut wasteful loopholes and tax breaks;
  3. Cut the deficit;
  4. Increase job creation and growth in the U.S.; and
  5. Observe the so-called Buffett Rule.

As discussed below, the tax provisions proposed in the Jobs Act represent just a portion of the total tax changes that were included in the President’s blueprint for comprehensive tax reform under the Plan.

Proposed Tax Breaks in the Jobs Act

In the Jobs Act, the sole tax relief proposal for individuals consists of cutting the employee’s portion of Social Security taxes in half for 2012, from 6.2% to 3.1%. Employers would also benefit from a 50% tax cut on the employer’s portion of Social Security taxes for the first $5 million of wages for 2012. This equates to a maximum reduction of $155,000 per employer. Self-employment tax rates would see corresponding decreases for 2012 as well.

To encourage growth in workforce and higher wages, the Jobs Act would also provide a full payroll tax credit to offset the employer’s portion of Social Security taxes for the fourth quarter of 2011 and for all of 2012, which are attributable to any net payroll growth of up to $50 million (limited to $12.5 million for fourth quarter of 2011) over the corresponding period from the prior year. This payroll growth may come from new hires, net increases in wages for existing employees, or both.

Also proposed are the “Returning Heroes and Wounded Warriors Work Opportunity Tax Credits,” which would double the $4,800 section 51(b) credit currently available for hiring certain unemployed, disabled veterans. Two new tax credits would be created: One for hiring veterans who have been unemployed for at least four weeks ($2,400) and another for hiring veterans who have been unemployed for at least six months ($5,600). These credits would be available to tax-exempt entities and public universities as well as to for-profit employers.

A $4,000 credit would be available for employers who hire individuals who have been unemployed for at least six months, but who do not otherwise qualify for the above tax credits. The Jobs Act would also delay the effective date of the 3% withholding requirement on payments to government contractors until after 2013.

To encourage additional capital investment by businesses, the Jobs Act would extend 100% bonus depreciation to the costs of qualified assets placed into service through the end of 2012. Under current law, bonus depreciation is set to decrease from 100% for 2011 to 50% for 2012 with respect to most qualifying assets.

Proposed Revenue Raisers in the Jobs Act

The following revenue-raising proposals would offset the costs of the above tax cuts and other proposed expenditures under the Jobs Act:

  • Impose a new 28% limitation on certain deductions and exclusions for married taxpayers earning more than $250,000 in adjusted gross income ($200,000 for single taxpayers). This provision would limit the value of deductions and exclusions to 28% of the taxpayer’s taxable income.
  • Change the rules regarding partnership interests transferred in connection with performance of services (commonly known as “carried interests”) by providing special rules which would classify a carried interest in an investment partnership as an “investment services partnership interest” (“ISPI”). These special rules would result in a partner’s share of income from an ISPI that is not attributable to invested capital to be taxed at higher ordinary income rates, regardless of the character of such income at the partnership level.
  • Repeal certain tax benefits for oil and gas companies, including the use of the percentage depletion method for oil and gas wells currently available for certain taxpayers.
  • Defer corporate jet depreciation by treating general aviation aircraft as seven-year property, rather than five-year property.
  • Modify the foreign tax credit rules applicable to dual-capacity taxpayers.
  • Increase taxes on foreign oil and gas income.

Additional Plan Proposals for Comprehensive Tax Reform

As indicated above, the President’s Plan sets forth recommended changes to the tax code beyond those contained in the Jobs Act. The President’s Plan implores Congress to enact comprehensive tax reform, indicating that “[t]he time has come for tax reform to modernize our tax code, make it fairer, and to reduce its complexity.” This comprehensive tax reform, as envisioned by the President, would meet the following five principles: (1) Lower tax rates; (2) Cut wasteful loopholes and tax breaks; (3) Cut the deficit; (4) Increase job creation and growth in the U.S.; and (5) Observe the Buffett Rule. Under the so-called Buffett Rule, no household making over $1 million annually would pay a smaller share of its income in taxes than middle-class families pay.

In general, the Plan calls for tax changes for both individuals and businesses, along with reforming the U.S. international tax system. For individuals, the plan calls for the 2001 and 2003 tax cuts for high-income taxpayers (those with household income of over $250,000 per year) to be allowed to expire after 2012. Also, the Plan proposes to return the estate tax exemption and rates to their 2009 levels.

As for businesses, the significant changes proposed under the Plan are as follows:

  • Repeal the use of the last-in, first-out (LIFO) accounting method, for tax years beginning after 2012. Businesses required to change from the LIFO method would experience a one-time increase in taxable income that would be recognized ratably over 10 years.
  • Prohibit the use of the lower-of-cost-or-market and subnormal goods methods of inventory accounting, which currently allow certain businesses to take cost-of-goods-sold deductions on certain merchandise before the merchandise is sold.
  • Increase the net federal unemployment insurance tax on employers, which was reduced from 0.8% to 0.6% for wages paid after June 30, 2011, by returning the rate back to 0.8%, retroactively effective as of June 30, 2011.
  • Permit the IRS to issue generally applicable guidance about the proper classification of workers and to require prospective reclassification of workers who are currently misclassified and whose reclassification is prohibited under section 530 of the Revenue Act of 1978. Penalties would be waived for service recipients with only a small number of workers, if the service recipient had consistently filed all required information returns reporting all payments to all misclassified workers and agreed to prospective reclassification of misclassified workers.
  • Eliminate the following tax preferences for coal activities beginning in 2013: 1) expensing of exploration and development costs; 2) percentage depletion for hard mineral fossil fuels; 3) capital gains treatment for royalties; and 4) the ability to claim the domestic manufacturing deduction under Code Section 199 against income derived from the production of coal and other hard mineral fossil fuels.
  • Expand information reporting on the sale of life insurance contracts and the payment of death benefits on contracts that were sold, and modify the “transfer-for-value” exceptions to prevent purchasers of policies from avoiding tax on the receipt of death benefits.
  • Modify the dividends-received deduction (“DRD”) for life insurance companies. The DRD with regard to general account dividends would be subject to the same flat proration percentage (15%) that currently applies to non-life insurance companies. The DRD with regard to separate account dividends would be based on the proportion of reserves to total assets of the account.
  • Expand the pro rata interest expense disallowance for corporate-owned life insurance (“COLI”) by repealing the exception for officers, directors and employees unless these individuals are also 20% owners of the business that is the owner or beneficiary of the contracts. Thus, purchases of life insurance by small businesses and other taxpayers that depend heavily on the services of a 20% owner would be unaffected, but the funding of deductible interest expenses with tax-exempt or tax-deferred inside buildup would be curtailed.

In the international tax realm, the President’s Plan proposes the following changes:

  • Defer the deduction of interest expense properly allocable and apportioned to a taxpayer’s foreign-source income that is not currently subject to U.S. tax until such income is subject to U.S. tax.
  • Require a taxpayer to determine its foreign tax credits from the receipt of a dividend from a foreign subsidiary on a consolidated basis for all of its foreign subsidiaries. Foreign tax credits from the receipt of a dividend from a foreign subsidiary would be based on the consolidated earnings and profits and foreign taxes of all of the taxpayer’s foreign subsidiaries.
  • Provide that if a U.S parent transfers an intangible to its controlled foreign corporation in circumstances that demonstrate excessive income shifting from the U.S., then an amount equal to the excessive return would be treated as subpart F income.
  • Clarify the definition of intangible property for purposes of the special rules applicable to transfers of intangibles by a U.S. person to a foreign corporation (section 367(d) of the Code) and the allocation of income and deductions among taxpayers (section 482 of the Code) to prevent inappropriate shifting of income outside the U.S.
  • Amend the rules that limit the deductibility of interest paid to related persons subject to low or no U.S. tax on that interest to prevent inverted companies from using foreign-related parties and certain guaranteed debt to inappropriately reduce the U.S. tax on income earned from their U.S. operations.

The President’s Plan also calls for increases in funding for the IRS’s tax enforcement and compliance activities to enable the IRS to more effectively crack down on “tax cheats and delinquents” to bring in additional revenue. The Plan also proposes specific changes to step up collection efforts for debts owed to the Federal government, including increasing the IRS’s levy authority from 15% to 100% for Federal contractor payments and Medicare payments. To assist state governments, the Plan includes a proposal to allow offsetting Federal tax refunds to collect state income taxes from debtor taxpayers who currently reside outside the state seeking collection.

Several of the revenue raisers proposed by the President in the Jobs Act have been previously proposed by the President and rejected by Congress, so it is not anticipated that the Jobs Act will be well-received by Congress, at least not in its current form. If anything does pass, a number of compromises would be expected. Regardless of the provisions contained in the Plan, the Jobs Act or any other proposed tax legislation this year, businesses should not assume that the tax benefits set to expire at the end of this year (such as 100% bonus depreciation) will ultimately be extended to 2012.

If you have any questions regarding the proposals described in this Alert, please contact Ross Cohen.

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About Greenebaum Doll & McDonald PLLC
Greenebaum Doll & McDonald PLLC is a widely-respected business law firm with approximately 150 professionals in five offices, serving local, national and international clients in virtually every industry.

Copyright 2011 Greenebaum Doll & McDonald PLLC.  All Rights Reserved.

  • Partner

    Ross D. Cohen serves as Co-Leader of the Federal Tax Team and concentrates his practice on federal tax transactional and planning issues of partnerships, joint ventures, limited liability companies and S and C corporations.

    With ...



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