President Obama's Fiscal Year 2011 Budget Released, Includes Tax Increases

President Obama's Budget Released, Tax Increases Included

February 2, 2010

FEI Summary

President Barack Obama sent his 10-year budget plan to Congress on Feb. 1, proposing a $3.8 trillion budget for fiscal year 2011. The proposal contains more than $400 billion in business tax increases over the next 10 years, including international tax changes estimated to raise approximately $122 billion.

Below is a summary of many of the tax provisions that will affect FEI members and their companies. Additionally, some miscellaneous provisions included below could also have an effect on financial executives.

Tax Relief For Business (the first three proposals may be passed soon as a part of a planned Jobs Stimulus Bill being considered in Congress):

1. Extending Section 179 Small Business Expensing through 2010;
2. Extending 50 percent Bonus Depreciation through 2010;
3. Index the AMT for inflation;
4. Remove Cell Phones from listed property for tax purposes; and
5. Make the Research and Development Tax Credit Permanent

Taxes Increases on Business:

1. Repeal the LIFO inventory accounting method, allowing 10 years to recognize the additional income.
2. Prohibit Lower-Cost-or-Market Inventory Accounting Method.
3. Several proposed changes to the U.S. international tax rules would increase business taxation including:
1. Defer deduction of interest expense related to deferred income under the U.S. International tax rules;
2. Prevent the separation of foreign taxes from related foreign-source income; and
3. Curtail the Foreign Tax Credit by limiting “cross crediting.”
4. Reinstate the Estate Tax at 2009 rates (top rate of 45 percent with a $3.5 million exemption), and make changes to valuation discounts.
5. Allow top two tax rates to revert to pre-2001 levels (39.6 percent and 36 percent), raising taxes on pass-through corporations, and restate limitations on itemized deductions and Personal Exemption Phaseout for top two tax brackets.
6. Raise Capital Gains Taxes (20 percent rate instead of 15 percent) on top two tax brackets.
7. Codifying the economic substance doctrine. Under this doctrine, currently, courts can invalidate a tax transaction if it lacks economic substance independent of the tax considerations.

Note: This year’s budget proposal does not include a proposal included in last year’s budget to eliminate the “check-the-box” rules.

Miscellaneous Provisions:

1. Create an “Auto-IRA” program in which employees are automatically enrolled in a 3 percent retirement savings program, but are allowed to opt-out at any time.
2. Impose a financial crisis responsibility fee on top banks’ liabilities (15 basis points). This proposal will take approximately $8 billion to 9 billion in liquidity out of the markets per year and potentially decrease lending; in addition, these fees will likely be passed down to commercial customers directly or indirectly.

Prepared Feb. 3, 2010 by Cady North, manager, Government Affairs, and Matt Miller, senior director, Financial Executives International (FEI). This summary does not represent FEI opinion unless specifically noted above.