American Taxpayer Relief Act of 2012

Patient Protection and Affordable Care Act

Practice Update

Legislative Outlook

Agenda

Sheryl EighnerPartnerPricewaterhouseCoopers, LLP

Joseph WisniewskiPartnerDeloitte Tax LLP

Introductions

American Taxpayer Relief Act of 2012

• Enacted January 2, 2013• Renews dozens of temporary business tax “extenders”

Overview

• Extended retroactively through 2013• Modifications include

Changes to rules for calculating credit when there is a change of ownership for a portion of the trade or business

Changes to rules for aggregation of research expenses within a controlled group

Research credit

• Extended through 2013 Applies to qualified property placed in service before January 1, 2014

(before January 1, 2015 for certain longer-lived and transportation assets)

• Qualified property generally includes Property with MACRS recovery period of 20 years or less Certain computer software Water utility property Qualified leasehold improvement property

• Modifications Decouples bonus depreciation from allocation of contract costs under

percentage of completion accounting method rules for assets with depreciable life of seven years or less that are placed in service in 2013

For regulated utilities, clarifies that it is a violation of normalization rules to assume a bonus depreciation benefit for ratemaking purposes when a utility has elected not to take bonus depreciation

50 percent bonus depreciation

• Election to accelerate some AMT credits in lieu of bonus depreciation extended for property placed in service in 2013

• Allows corporations to “monetize” a portion of their AMT credits in lieu of claiming bonus depreciation

AMT credit in lieu of bonus

• 15-year straight-line cost recovery retroactively extended for• Certain leasehold, restaurant, and retail improvements• New restaurant buildings

• Applies to property placed in service before January 1, 2014

Depreciation of leasehold improvements

• Subpart F exception allowing deferral of active financing income of CFCs predominantly engaged in banking, financing, or similar business activity extended retroactively through 2013

• Lookthrough treatment under section 954(c)(6) for payments between related CFCs also extended retroactively through 2013.

Active financing income, CFC lookthrough

• For 2012 and 2013, maximum amount and phase-out threshold for small business expensing increased to levels in effect in 2010 and 2011

• For tax years beginning in 2013, limitation is raised to $500,000 (reduced if cost of section 179 property placed in service exceeds $2 million)

Within those thresholds, taxpayer may expense up to $250,000 of the cost of qualified leasehold improvement property, qualified restaurant property, and qualified retail improvement property

• Limitation amounts return to $25,000 and $200,000 after 2013

Section 179 expensing limitation

• Notable provisions extended through 2013 include Credit for construction of energy-efficient new homes Credit for energy-efficiency improvements to existing homes Credit for manufacture of energy-efficient appliances Incentives for biodiesel, renewable diesel, alternative fuel, alternative fuel

mixtures

• Production tax credit (section 45) Extends the credit for wind facilities through 2013 Modifies the rules to allow renewable energy facilities that begin

construction before the end of 2013 to claim 10 years of credits Disallows commonly recycled paper from qualifying

Energy extenders

• New Markets Tax Credit• Work Opportunity Tax Credit• Special exclusion rules for certain small business stock

Other notable business extenders

Individual Provisions

• 2001 and 2003 tax rates for incomes below $400,000 single / $450,000 joint

• “Permanent AMT” Relief - Individual AMT exemption amounts indexed for inflation

• PEASE - itemized deduction limitation for incomes above $250,000 single / $300,000 joint

• Personal Exemption Phaseout for incomes above $250,000 single / $300,000 joint

• State and Local Sales tax deduction extended• Extends permanently the child tax credit• Adoption credit, earned income credit enhancements,

child and dependent care credit, American tax opportunity credit, deduction for qualified tuition expenses, student loan interest deduction all extended.

• Other notable items: teacher deduction and IRA gifts to charity extended

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Estate Tax Provisions

Permanent extension of select tax provisions Estate tax with top rate of 40% and $5.12 million

exemption indexed for inflation Portability of unified credit Extended state death credit/deduction

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2013 top individual tax ratesfor incomes above $400,000 single / $450,000 joint

Wage income

Interest income

DividendsCapital gains

2013 top rate 39.6% 39.6% 20.0% 20.0%

Base HI payroll tax (employee share)

+1.45%a -- -- --

2013 phase-out of itemized deductions (“Pease”)

+1.2% +1.2% +1.2%b +1.2%b

2013 HI surtax +0.9% +3.8% +3.8% +3.8%

2013 combined top rate 43.15% 44.6% 25.0% 25.0%

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a Additional 1.45% applies for self-employed.b Assumes taxpayer has ordinary income that exceeds itemized deductions.

Note: Rates shown represent the equivalent top marginal tax rate on each additional dollar of income earned in the top income tax bracket.

Patient Protection and Affordable Care Act

•A 2.3% excise tax will be levied on manufacturers, producers, or importers on the sale of most medical devices that are not directly marketed to consumers

•Primary Guidance issued in under section 9009 of the Patient Protection and Affordable Care Act

New Medical Device Tax

Common misconceptions of worker classification:

Project workers are not employeesTemporary workers are not employees

Former executives returning as “consultants” are independent contractors

Worker Classification

“Red flags”:Former employeesForm 1099 & Form W-2Form 1099 – Multiple years Industry focusLeads

IRS internal databaseContractor originatedState info sharing

Worker Classification

Medicare Tax: Effective January 1, 2013, the Medicare tax rate will increase from 1.45% to 2.35% on wages paid in excess of $200,000 ($250,000 MFJ) per year:

Applies only to the employee portion; the employer portion will remain at 1.45% for all wages paid in the year

Employers may not withhold the higher rate on amounts of wages that do not exceed $200,000

Form W-2 requirements will not change: any additional Medicare tax will be reflected in box 6

A special line will be added to Form 941 beginning with Q1 2013 to reflect and reconcile the additional 0.9% tax

Primary Guidance issued in under section 9015 of the Patient Protection and Affordable Care Act

2013 Employment Tax Withholding

2013 Employment Tax Withholding (cont.)

Single Filer Joint Filer

Earnings Additional HI Tax Earnings Additional HI

Tax

$250,000 $450 $250,000 –

$500,000 $2,700 $500,000 $2,250

$1,000,000 $7,200 $1,000,000 $6,750

$5,000,000 $43,200 $5,000,000 $42,750

Health care taxes New Medicare taxes in effect

In 2013, certain taxpayers face new Medicare taxes on both earned and unearned income under IRC Section 1411(a)(1):• A new 3.8% tax on net investment income — Applicable

if adjusted gross income (AGI) exceeds $200,000 (single) or $250,000 (joint).• Applies to lesser of investment income or AGI above

threshold.• Includes interest, dividends, rents, royalties , capital gains,

and income from passive activities (partnerships, S corps).• Does not apply to distributions from IRAs or qualified

plans.• Does not apply to active business income distributions.

• Increase from 1.45% to 2.35% in the employee share of tax on earned income above $200,000 (single) or $250,000 (joint):• Employee and employer combined tax rate of 3.8%.• Applies also to self-employment income.

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Affected taxpayers

Additional 2% Social Security tax

Loss of Itemized Deductions

4.6% additional income tax

5% additional tax on LTCG and Div.

Medicare tax on investment income

All with

wages More than

200/250K in

AGI

More than

250/300K in

AGI

More than 400/450K in

AGI

Practice Update

•More technology – requires more critical thinking, data analytics and consulting skills

•“Basic” skills – such as tax prep is being outsourced/automated

•Communication methods and styles•Less supervisors/managers – creates challenges for entry level professionals

Practice Trends

Legislative Outlook

Consensus that rates need to come down, paid with for largely yet-to-be determined base broadening (less deductions)

Need for substantial international reforms to promote the competitiveness of U.S.-based companies

Carried interest changes are part of reform discussions If capital gain/ordinary rate differential reduced enough, the

benefit of taxing carried interest higher is less enticing to the government

Real estate industry is arguing to carve out of these discussions because change to tax treatment of carried interest would adversely affect investment

Passthrough tax regimes may get adjusted

Or, reform may be a long way off….

Tax Reform Prospects Generally

Largest corporate tax expenditures

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* Does not include revenue impact of changing tax treatment for pass-through entities

Source: Joint Committee on Taxation “Estimated Revenue Effects of Corporate Tax Reform Revenue Raising Provisions that Repeal or Modify Tax Expenditures,” Ways and Means Committee, October 2011.

Largest corporate* tax expenditures JCT Revenue Estimatesover 10 yrs. ($ billions)

MACRS $506.8

Expensing of R&E expenditures $152.2

Deduction for income attributable to domestic production activities

$127.0

Inventory methods and valuation: LIFO & LCM $65.6

Credit for low income housing $33.0

Deferral of gain on like-kind exchanges $16.0

Completed contract rules method $13.9

Energy related expenditures $12.3

$926.8

Total of all business revenue raisers estimated $964.3

Revenue-neutral corporate income tax rate 28%

Potential impact of individual tax reform

Ten largest individual tax expenditures, 2014

2014 Expenditure Value (in $B)

Exclusion of employer health contributions $143.0

Exclusion of pension plan contributions and earnings

$108.5

Reduced rates of tax on dividends and capital gains

$91.3

Mortgage interest deduction $71.7

Earned income tax credit $67.0

Exclusion of Medicare benefits $66.0

Child tax credit $57.9

Deduction for state and local taxes $51.8

Exclusion of capital gains at death $48.4

Deduction for charitable contributions $46.4Source: “Estimates of Federal Tax Expenditures For Fiscal Years 2012-2017,” Joint Committee on Taxation, JCS-1-13, Feb. 1, 2013.

Key tax reform drivers Conventional wisdom says President must lead

Bipartisan Congressional support

Need for US international business competitiveness

Stable source of revenue to fund government

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Laying the groundwork for tax reformPresident Barack Obama• PERAB Report on Tax Reform Options (August 2010)• National Commission on Fiscal Responsibility and Reform (December 2010)• President’s Council on Jobs and Competiveness (January 2012)• Released President’s Framework for Business Tax Reform (February 2012)• Released President’s FY 2014 budget (April 2013)• Calls for corporate tax reform to fund jobs / infrastructure initiatives (July 2013)

House Ways and Means Committee Chairman Dave Camp (R-MI)• Held 50+ tax reform hearings (January 2011 – Present)• Released international tax reform discussion draft (October 2011)• Released financial products tax reform discussion draft (January 2013)• Released “small business” tax reform discussion draft (March 2013)• Established bipartisan tax reform working groups (April-May 2013)• Expected to mark up comprehensive tax reform bill (Fall 2013)

Senate Finance Committee Chairman Max Baucus (D-MT)• Held 30+ tax reform hearings (March 2011 – Present)• Series of bipartisan Member meetings (March – June 2013)• Announced “blank slate” approach and requested Senator input (July 2013)• “Max and Dave” road show with Chairman Camp to build public support for tax reform• Expected to mark up comprehensive tax reform bill (Fall 2013)

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President Obama’s framework for

business tax reform Reduce corporate rate from 35% to 28% Fully offset with base-broadening options

Address depreciation schedules

Reduce bias toward debt financing

Establish greater parity between large corporations and large non-corporate businesses

Reduce gap between book income and tax income

Provide 25% rate for certain domestic manufacturing income

Increase research credit and make permanent

Limit deferral of US tax on foreign earnings • Minimum tax on foreign earnings

Use “transition” tax reform revenue to fund jobs / infrastructure initiatives

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Limits on individual itemized deductions

Itemized Deductions by AGI Levels

Total Number of Returns,

2010

Share with Itemized

Deductions

Average Deductions for

Itemizers

Under $10,000 24,795,637 4.1% 15,931

$10,000 to $20,000 24,529,229 8.3% 15,184

$20,000 to $30,000 19,135,357 14.7% 15,307

$30,000 to $50,000 25,605,319 29.4% 15,997

$50,000 to $100,000 30,532,551 56.5% 19,540

$100,000 to $200,000 13,997,651 84.8% 27,729

$200,000 to $500,000 3,471,723 95.6% 49,471

$500,000 to $1,000,000 544,224 97.0% 101,502

$1,000,000 and over 280,360 98.0% 443,680

Total 142,892,051 32.6% 26,084

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Source: IRS Statistics of Income, August 2012.

Obama Administration proposal

Cap value of deductions at 28% bracket• Estimated by Joint Committee on Taxation to raise

$480 billion over ten years

“Buffett Rule”

Obama Administration proposal Would establish a new 30% minimum tax on incomes in

excess of $2 million, to be phased-in beginning at incomes above $1 million. $500,000 for married individuals filing a separate return. Tentative “fair share” tax equals 30% of adjusted gross income

less a credit for charitable contributions AGI thresholds indexed for inflation after 2014 Estimated by the Joint Committee on Taxation to raise $70

billion over ten years, assuming interaction with carried interest proposal

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Focus on comprehensive tax reformHouse Ways and Means Committee Chairman Dave Camp (R-MI)

Goal to reduce top corporate and individual tax rates to 25%

Base broadening provisions to be determined

International reform discussion draft (October 2011)

Shift from a worldwide system to a territorial-based system

•Financial products tax reform discussion draft (January 2013)•Pass-through tax reform discussion draft (March 2013)•Bipartisan tax reform working groups

Plans to mark up comprehensive tax reform bill (Fall 2013) Senate Finance Committee

Chairman Max Baucus (D-MT)

Bipartisan member discussions

Request for Senators to submit “blank slate” reform proposals

Plans to mark up comprehensive tax reform bill (Fall 2013)

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Difficulty of getting a Bipartisan compromise

Source: National Journal’s 2012 Vote Ratings (February 2013)

1982 1994 2002 20120%

30%

60%

90%79.1%

57.9%

31.5%

3.0%

58%

34%

7%0%

Percentage of lawmakers rated as "moderate"

House Senate

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