New Congress Looks into Tax Reform
The White House and the new Congress continue to look for common ground on tax legislation and tax reform in 2015. Both sides say tax reform is possible in 2015 and behind the usual rhetoric there seems to be a real drive to move tax reform in the 114th Congress. Reform could be similar to the comprehensive package moved nearly 30 years ago in the Tax Reform Act of 1986, or, as many observers predict, will take a new track to reflect a vastly different economy and Tax Code compared to 1986.
The two tax writing committees-House Ways and Means and Senate Finance-have so far approved a number of tax bills impacting individuals and businesses. Among the bills that House Ways and Means has marked up is legislation to:
- Make permanent Code Sec. 179 small business expensing ($500,000 dollar limit/$2 million investment limit, indexed for inflation)
- Enhance Code Sec. 529 college savings plans
- Extend and expand the charitable deduction for contributions of food inventory
- Enhance and make permanent the research tax credit
- Make permanent the reduced recognition period for built-in gains of S corporations
- Extend permanently the special rules for tax-free distributions from IRAs for charitable purposes by qualified individuals
The Senate Finance Committee (SFC) also has been busy with tax legislation. The SFC has approved, among other bills, legislation to:
- Modify the alternative minimum tax for small insurance companies
- Provide special rules for charitable contributions to agricultural organizations
- Create a Waste-Heat-to-Power investment tax credit
- Exclude from income certain compensation received by public safety officers and their dependents
- Require the IRS to notify exempt organizations before revoking exempt status for failing to file returns
- Exclude from Gross Income Certain Clean Coal Power Grants
- Create a Military Spouse Job Continuity Credit
House Speaker John Boehner, R-Ohio, has signaled his support for some of the bills. Boehner controls the House's schedule and his support is necessary to bring bills before the full House for a vote. In the Senate, the new Majority Leader, Mitch McConnell of Kentucky, has said he wants to move tax legislation this year but has not provided any timetable for legislation. Because of Senate rules, bills generally come more slowly to the floor for a vote and often are subject to a lengthy amendment process. The Senate also generally requires a supermajority of 60 votes to approve tax legislation. Our office will keep you posted of developments as tax legislation moves forward.
All of the key players have voiced support for tax reform-President Obama, Speaker Boehner, Majority Leader McConnell-along with the chairs of the House and Senate tax writing committees. They differ on the scope of tax reform, how to pay for tax reform, and more details.
President Obama's fiscal year 2016 budget recommendations, released in early February, could be a catalyst for tax reform, especially the President's proposals for small businesses. Many of the small business proposals, such as enhanced Code Sec. 179 expensing, enjoy bipartisan support. As in past years, the hurdle of how to pay for these and other tax reforms is problematic. President Obama has proposed to eliminate fossil fuel tax breaks, repeal LIFO, and other revenue raisers, to pay for business tax reform, including a reduction in the corporate tax rate.
Affordable Care Act
The Affordable Care Act (ACA) is another potential hurdle to tax reform this year. The House has approved legislation to repeal the ACA and Senate Republicans have offered replacement bills. The real test of how the ACA could impact tax reform will come after June, when the U.S. Supreme Court will decide the fate of the Code Sec. 36B premium assistance tax credit. If the Supreme Court strikes down IRS regulations extending the credit to individuals in both federally-facilitated Marketplaces and state-run Marketplaces, President Obama is expected to call on Congress to come up with a legislative solution. If the White House and Congress can reach an agreement, it would be a good harbinger for tax reform.