Update on the Budgeted Taxes, Part II
 
Written by: Steven D. Beaucaire, MST
Director - Tax | Bedford Cost Segregation, LLC

Last month the individual sections of the FY 2010 budget were discussed. As promised, this month focuses on the sections affecting businesses. The proposed tax changes for next year’s budget are elaborated in the “General Explanations of the Administration's Fiscal Year 2010 Revenue Proposals,” also known as the Green Book for the color of its cover. The Green Book's revenue- raising tax proposals will pose significant tax planning challenges for businesses including higher taxes and higher compliance costs for business of all sizes.


Tax Changes for Business
The research credit would be made permanent, and a lengthened NOL carryback period would be made available to more taxpayers. The budget proposals include many revenue-raising and compliance changes for businesses, including the following:

• Disallowance of the LIFO inventory accounting method. Taxpayers that currently use the LIFO method would be required to write up their beginning LIFO inventory to its FIFO value in the first tax year beginning after December 31, 2011. This one-time increase in gross income would be taken into account ratably over the eight years. This will have a major impact on the retail industry, where LIFO is used extensively.

• Effective for tax years beginning after 12 months from the enactment date, taxpayers would not be able to use the lower-of-cost-or-market (LCM) and subnormal goods methods. Appropriate wash-sale rules also would be included to prevent taxpayers from circumventing the prohibition. The retail method would be allowed only if the taxpayer uses that method for financial accounting purposes as well. The new rules would be treated as a change in the method of accounting for inventories, and any resulting Code Sec. 481(a) adjustment generally would be included in income ratably over a four-year period beginning with the change year.

• For tax years ending after Dec. 31, 2009, all corporations and partnerships required to file Schedule M-3 (differences between book and tax income), would be required to file their tax returns electronically. In the case of certain other large taxpayers not required to file Schedule M-3 (such as exempt organizations), the regulatory authority to require electronic filing would be expanded to allow reduction of the current threshold of filing 250 or more returns during a calendar year. Any new regulations would balance the benefits of electronic filing against any burden that might be imposed on taxpayers, and implementation would take place incrementally to afford adequate time for transition to electronic filing. Taxpayers would be able to request waivers of this requirement if they cannot meet the requirement due to technological constraints, if compliance with the requirement would result in undue financial burden, or if other criteria specified in regulations are met. The main burden on taxpayers here is you have to purchase software that is compliant with IRS requirements in order to file electronically.

• Effective for employment tax returns required to be filed with respect to wages paid after Dec. 31, 2009, new rules would set forth standards for holding employee leasing companies jointly and severally liable with their clients for Federal employment taxes, and would also provide standards for holding employee leasing companies solely liable for such taxes if they meet specified requirements.

• For damages paid or incurred after 2010, no deduction would be allowed for punitive damages paid or incurred by the taxpayer, whether upon a judgment or in settlement of a claim. Where the liability for punitive damages is covered by insurance, such damages paid or incurred by the insurer would be included in the gross income of the insured person. The insurer would be required to report such payments to the insured person and to IRS.

• The three Superfund excise taxes would be reinstated for periods after Dec. 31, 2010, and the corporate environmental income tax would be reinstated for tax years beginning after Dec. 31, 2010.

• Oil and gas companies would face repeal of all of the following tax breaks: the credit for enhanced oil recovery projects, the credit for marginal well production, expensing for intangible drilling costs, the deduction for tertiary injectants, the passive loss exception for working interests in oil and gas properties, the percentage depletion deduction, and the domestic manufacturing deduction. The amortization period for geological and geophysical costs would be increased to seven years, and there would be a tax on certain offshore oil and gas production.


It is likely that businesses would face a dramatic increase in taxes and regulatory expenses if all of the above are enacted into law. In that neither the Administration nor Congress has yet proposed any changes to depreciation or how you calculate it, it makes a cost segregation study an even more valuable tool in your tax planning arsenal. Business will need to recoup the lost deductions and credits somewhere. Because a CSS accelerates depreciation, it can offer a business substantial benefit.

* The Green Book can be viewed at http://www.treas.gov/offices/tax-policy/library/grnbk09.pdf.
Source:  Federal Tax Updates on Checkpoint Newsstand tab 5/12/09