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AGC Financial Issues Forum
January 2014
Brian J. Lenihan
Director, Tax, Fiscal Affairs, and Accounting
Associated General Contractors of America
202.547.4733 | [email protected]
AGC Financial Issues Forum Winter Meeting
Federal Tax Update for 2014
AGC Financial Issues Forum Winter Meeting
AGC Financial Issues Forum Winter Meeting
Summary to Date
• Unusual bipartisan and bicameral cooperation from lead tax-writers to drive the
debate, including joint hearings and a redolent tax reform road show
• Ways and Means Chairman created bipartisan working groups, released three detailed
discussion drafts, and now holding intensive Member-only meetings to prep for rollout
• Finance Chairman published policy papers in the Spring under a blank slate approach
• Finance Chairman released four “staff discussion drafts” in the late Fall
• In December, Chairman Camp announced that he would delay his long-stated goal of
marking up a tax bill in 2013
• Administration has not engaged other than to promote corporate only proposals
• White House selected Baucus as ambassador to China (confirmation in early 2014)
AGC Financial Issues Forum Winter Meeting
2013 Timeline
Source: Bloomberg
AGC Financial Issues Forum Winter Meeting
Tax Reform Momentum in 2013
Senate Finance Cmte.
shifts focus to IRS scandal
Corporate coalitions form to
advocate for tax code overhaul
House Ways and Means Cmte.
Chairman Dave Camp (R-Mich.) flirts
with but decides against Senate run
Sequester diverts
lawmakers’ attention
Congressional
momentum on tax
reform
Fiscal cliff deal meets some
Democrats’ aim of raising
taxes on wealthy; eases
widespread push for reform
Source: National Journal
Senate Finance Cmte.
Chairman Sen. Max
Baucus (D-Mont.)
announces retirement
Senators asked to
submit confidential
proposals on which tax
breaks to keep
Congress
resumes;
budget is top
priority
AGC Financial Issues Forum Winter Meeting
Key Dates in 2014
• The transition of Finance Chairman could begin as early as January
• W&M Chairman Camp could release a comprehensive draft bill in January - February
• Debt Limit February – March (CBO June)
• Primary season starts March – May – kitchen table issues will shift to forefront
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• The majority of primaries will occur in June & August
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Congressional Agenda
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Highway Reauthorization
Unemployment Insurance
Minimum Wage
Health Care Reform/Repeal
Farm Bill
Water Infrastructure (WRRDA)
NSA
Immigration Reform
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Flood Insurance Program
Higher Education
Pension Reform
Housing Finance Reform
Terrorism Risk Insurance
Repeal of Medical Device Tax
Physician Reimbursement (SGR)
Trade agenda
AGC Financial Issues Forum Winter Meeting
AGC Financial Issues Forum Winter Meeting
Key Players
Ron Wyden(D-Ore.)
Elected: 1996; 4th term
Profile: Promoted health care legislation with
Chairman Paul Ryan (R-WI)
Sponsored a tax reform bill with Sen. Dan Coats (R-IN)
Pitched transportation legislation with Sen. John
Hoeven (R-ND)
Dave Camp (R-Mich.)
Elected: 1998; 8th term
Motivation: Term limited as Chairman and sees
as legacy agenda item
Next Step: Vie for Tax Subcommittee Gavel or run
for leadership position – opted out of run to
succeed the open Senate seat occupied by Sen.
Carl Levin
AGC Financial Issues Forum Winter Meeting
Key Players – Future Chairmen
Ron Wyden(D-Ore.)
Elected: 1996; 4th term
Paul Ryan(R-Wis.)
Elected: 1998; 8th term
Both are expected to helm the tax writing committees in 2015
While ideologically on opposite sides of the political spectrum –in December 2011
they attracted attention for working together on a Medicare reform plan
Concern for comprehensive tax reform – will chairmen be as dedicated or switch
their focus to main driver of debt – entitlement reform
AGC Financial Issues Forum Winter Meeting
Key Players - Administration
Mark Mazur
Assistant Secretary for Tax Policy
Confirmed: August 2012
• Responsible for developing, analyzing, and coordinating
John Koskinen
Confirmed: December 20, 2013
• In December, the Senate confirmed him as the next IRS
Treasury's and the Administration's agenda, policies, and guidance
on tax issues.
Commissioner by a 59 to 36 vote.
• Internal Revenue Service, Director of Research & Analysis
• Joint Committee on Taxation
• National Economic Council under President Clinton
a history of turning around distressed organizations
• Koskinen, 74-year old former Freddie Mac executive, has
• Served in the Office of Management and Budget (OMB)
during the Clinton-era.
AGC Financial Issues Forum Winter Meeting
Key Players Moving
Chairmen – Camp-Baucus
Baucus announced as nominee for US Ambassador for China
Camp has backing from Speaker but not a long leash due to politics
Camp met with his leadership in December – outcome was get the votes then move bill
Future Chairmen – Ryan-Wyden
Status quo election in 2014 could allow carryover of progress
Wyden agenda will be key marker for which committee issues move (health, trade)
Committee Staff
Baucus had 3 high level staff departures – unclear if Wyden will rearrange staff
Camp beefed up his tax cadre since 2011 – unsure which committee staff will remain in 2015
Administration
No engagement until the appearance of a concrete plan from Congress (post 2014?)
AGC Financial Issues Forum Winter Meeting
AGC Financial Issues Forum Winter Meeting
AGC Tax Policy Principles
• Economic growth should be the goal of tax reform
• Tax policy should not pick winners and losers
• Higher taxes should be supported if the money collected is dedicated to public works projects
• Clarity, simplicity and certainty should be the goals of tax reform
• Dollar thresholds should be indexed to avoid stealth tax increases
• A three year phase in of tax policy would be preferable to deal with long term contracts
• Lower rates are preferable to more deductions, and limits on deductions should be looked at if
they accompany rate cuts. Of the deductions, it was determined that accelerated depreciation
was an extremely important policy for the industry
• A gross receipts tax or value added tax would be bad for the construction industry
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Economic
Growth
Unique
Importance to
industry
X
Reduces
Compliance
Costs
Good Tax
Policy
Certainty
(+inflation)
Bonus Depreciation and Capital Expenditures Write-Off Levels – Expand
and make permanent bonus depreciation and enhanced capital expenditures writeoffs to incentivize capital investments and new and used equipment purchases
Shortened Cost Recovery Period for Leasehold, Retail, and Restaurant
Improvements – Make 15-year shortened cost recovery permanent to provide
an important incentive for capital improvements to these properties
Reduces
Complexity
Repeal corporate and individual Alternative Minimum Tax – Repeal the
Alternative Minimum Tax for C-corporations and pass-throughs in order to provide
capital needed for businesses to grow and invest
Percentage-of-Completion Accounting – The threshold at which the
Percentage-of-Completion method of accounting is required should be increased to
$40m indexed for inflation since inception and should be exempt from AMT
Lookback Accounting – Eliminate the burdensome Lookback Accounting
requirement for long-term contracts
Taxation of Income While In Dispute – Stop taxation of income while in
dispute
Domestic Production Activities Deduction – Preserve the Section 199
deduction for the construction industry
Reduces Tax
Liability
(effective rate)
Tax Policy
Eliminates
Unfair policy
Construction Industry Tax Priorities
X
AGC Financial Issues Forum Winter Meeting
Employee Misclassification – Oppose Unnecessary Administrative Burdens and
Recordkeeping Requirements For Employers and Clarify the Definition to Preserve
Legitimate Independent Contractor Relationships
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Tax Rate Overhaul – Retain Permanent Marginal, Capital Gains, and Dividends
Rate Reductions
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Tax Exempt Public Works Financing –Preserve the Preferable Tax Treatment
of Debt Used to Finance Public Infrastructure
X
Commercial Building Energy Efficiency Tax Deduction – Increase Deduction
and Convert it into a Tax Credit to Provide a Significant Financial Incentive for all
Property Owners to Improve the Energy Efficiency of Commercial Buildings and
Ensure that 179D does not get Charged to the Contractor Doing the Work
Net Operating Loss Carryback – Create permanent tax policy on NOL
Carryback that allows a 5-year carryback and a 15-year carryforward for all
businesses to allow cash-strapped businesses to convert future tax benefits into cash
today
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Specific
Importanc
e to
Economic
industry
Growth
Certainty
(+inflation)
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Per Diem Allowances – Allow the Full Deductibility of Per Diem Allowances in
Construction
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Reduces
y
Complianc
e Costs
Good Tax
Policy
Tax
Liability
(effective
Reduces
rate)
Complexit
Tax Policy
Eliminates
Unfair
policy
Reduces
Construction Industry Tax Priorities
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AGC Financial Issues Forum Winter Meeting
Carried Interest – Reject efforts to increase tax that would undercut
the economic incentive to build projects and drive away investments
from the commercial real estate sector. Most efforts identified have cast
a broad net and will likely have a significant impact on equity transfer in
closely held construction companies.
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Economic Growth
Specific Importance
to Industry
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Alternative Energy—Extend Alternative Energy Tax Production Tax
Credits
Retirement Security – Reform the Social Security System; Preserve
Currently Available Tax Preferred Retirement Savings Vehicles and
Provide Alternative Savings Vehicles to Ensure Stable Retirement for All
Generations of Workers
Certainty
(+inflation)
Good Tax Policy
Reduces
Compliance Costs
Reduces
Complexity
Reduces Tax
Liability
(effective rate)
Tax Policy
Eliminates Unfair
policy
Construction Industry Tax Priorities
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AGC Financial Issues Forum Winter Meeting
Released Finance Committee Drafts
In November & December, Chairman Baucus unveiled three discussion drafts. The policy proposals
are meant to build momentum in Congress for a corporate tax overhaul.
• Tax administration: Reduce complexity, increase compliance and ensure taxpayer rights.
• Cost recovery and accounting: Businesses could face additional taxes as a result of
lengthening tax depreciation and amortization benefits, and curtailing expensing. The anticipated
new revenue — $700+ billion over 10 years — would be used to offset the cost of cutting the
corporate tax rate. Baucus reportedly wants to reduce rates to below 30 percent.
• International taxation: Companies could incur a one-time tax of $200 billion on accumulated
earnings. Future foreign earnings would be taxed under a lower corporate income tax rate of less
than 30 percent, partially offset by a minimum tax on all foreign income as it is earned.
• Energy taxation: Consolidate 42 provisions in to 2 simplified technology-neutral tax credits for
the domestic production which phase out as GHG intensity of each market has declined by 25
percent as determined by the EPA.
AGC Financial Issues Forum Winter Meeting
Cost Recovery & Accounting Draft
The staff discussion draft proposes a modernized set of rules that are “simpler, fairer, and lessen tax burdens
on small businesses.” Revenue raised used to reduce the corporate tax rate.
• Replace current MACRS and ADS with a system that approximates economic depreciation based on
estimates from the Congressional Budget Office.
• This new system would use a pooling method rather than requiring taxpayers to calculate depreciation
for separate assets. Reduce the number of major depreciation rates from more than 40 to 5.
• Treasury would have regulatory authority to reassign assets to different pools or to create new asset
classes.
• Elimination of bonus depreciation
• Permanently increase Section 179 expensing to $1 million and expand the definition of qualifying
expenses.
Chairman Baucus requested that CBO produce a letter detailing their analysis of economic depreciation rates
of tangible assets. Proposed effective date: taxable years beginning after 2014
Committee staff is looking for feedback from stakeholders by January 17, 2014
AGC Financial Issues Forum Winter Meeting
Cost Recovery & Accounting Draft
Assets would be assigned to pools based on specific asset classes (end of year pool adjusted basis is
multiplied by an assigned percentage to determine the depreciation deduction for the year).
Pool 1 (38%) – annual economic depreciation 20 percent or more
• Includes computers, computer software, business automobiles
Pool 2 (18%) – annual economic depreciation 12 to 20 percent
• Hard to generalize, but includes trucks, farming assets, Distributive Trades or Businesses
(Asset Class 57.0), some manufacturing assets
Pool 3 (12%) – annual economic depreciation 6 to 12 percent
• Includes most manufacturing asset classes, air transportation, most oil production and
refining, office furniture, section 1245 property without an assigned asset class
Pool 4 (5%)– annual economic depreciation under 6 percent
• Includes non-building land improvements, pipelines, water transportation, most non-real
property utility property, solar and wind energy
Source: KPMG 12/3/13
AGC Financial Issues Forum Winter Meeting
Senate Finance Committee “Staff Discussion” Draft
Cost Recovery Draft
Comparison with House Ways and Means
Provision
Depreciation
Cost recovery
and
LIFO accounting
accounting
Small business tax
relief
Camp
Baucus
N/A
Limits depreciation (with
pooled asset recovery system)
and amortization tax benefits
N/A
Repeals
Cash accounting, more
immediate expensing
Cash accounting, more
immediate expensing
AGC Financial Issues Forum Winter Meeting
Senate Finance Committee “Staff Discussion” Draft
Cost Recovery Draft
Cost Recovery and Accounting
Analysis
Limit depreciation tax benefit of tangible assets with According to Baucus, certain business costs such as those
pooled asset recovery system
related to oil and gas extraction will have a simpler
depreciation schedule more aligned with the economic lives of
assets. By setting depreciation schedules roughly equal to
economic lives, the policy removes implied benefits from the
current more accelerated depreciation schedule.
Increase immediate expensing for small businesses
Business expenses that qualify for the Section 179 benefit are
increased from $500,000 to $1 million and the definition of
qualifying expenses is expanded.
Cash accounting for small businesses
Expanded to include all businesses with gross receipts less
than $10 million with inflation indexing. Concern is the
accrual method is more complex and costly for construction
companies. These businesses would not be permitted to
change their method of accounting without consent more
frequently than every five years.
AGC Financial Issues Forum Winter Meeting
Senate Finance Committee “Staff Discussion” Draft
Cost Recovery Draft
Cost Recovery and Accounting
Real Property
Analysis
Buildings and other property classified as “real property”
would be depreciated over 43 years using the straight-line
method
Repeal of Section 1031 like-kind exchanges
Baucus’ rationale – The effect of reducing the pool balance by
the gross proceeds of a disposition, and adding the value of the
replacement asset, has substantially the same effect as LKEs.
Section 179 expensing
Baucus would extend the current 179 rules for an additional
year but then permanently modify them going forward. After
the change, the maximum amount that could be expensed
would be set at $1 million (phasing out for qualifying property
exceeding $2 million) with the thresholds indexed for inflation.
Currently, the $500,00 maximum deduction is scheduled to
plummet to $25,000 in 2014 (see extenders).
Repeals specialized expensing provisions
Repeals the tax deduction for energy-efficiency improvements
to commercial buildings under Section 179D.
AGC Financial Issues Forum Winter Meeting
Cost of Reform
• JCT and Finance Committee majority staff determined that every $2 trillion of individual tax
expenditures that are added back would, on average, raise each of the seven individual income tax
brackets by between 1.3 and 2.2 percentage points from what they would be under a blank slate.
• Every $200 billion of corporate tax expenditures that are added back would, on average, raise the
top corporate income tax rate by 1.5 percentage points from what they it would be under a blank
slate.
Largest business revenue raisers
Corporate
Pass-throughs
Alternative to Current Depreciation Schedule (MACRS)
$506.0
$217.0
Domestic production activities deduction
$127.0
$36.9
Deferral of gain on like-kind exchanges
$16.0
$2.0
Completed contract rules method
$13.9
–
Estimated Revenue Cost (Billions)
Source: JCT Tax Expenditure Estimates, October 2011
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AGC Financial Issues Forum Winter Meeting
Tax Extenders
• Chairman Baucus’s departure could ease action on a package of temporary
tax breaks lawmakers routinely renewed known as “extenders.” Baucus &
Camp had been holding them in abeyance to focus attention on tax reform
efforts.
• Senator Wyden stated he wanted to take up those breaks sooner rather than
later. “Even a relatively short period really can harm the kind of investment and
certainty and predictability” that’s needed for businesses that rely on the
breaks.”
• Extending all 55 provisions would increase the deficit by about $50 billion
per year.
• Will deficit hawks require offsets?
AGC Financial Issues Forum Winter Meeting
Tax Extenders
• List of the tax extenders along with their costs for 2013 and 2014, as was estimated by the Joint
Committee on Taxation after their extension on January 1, 2013.
• JCT has not released any cost estimates for renewing these provisions for 2014 and beyond.
2013
2014
Extension of new markets tax credit
Extension of work opportunity tax credit
$0.9
$0.9
$1.0
$0.8
Extension of 15-year straight-line cost recovery for qualified leasehold
improvements
$0.4
$0.4
Extension of bonus depreciation
$19.6
$30.2
Extension of increased expensing limitations and treatment of certain real
property as section 179 property
$4.4
$4.2
Election to accelerate AMT credit in lieu of bonus depreciation
Extension of energy efficient commercial buildings deduction
$0.16
$0.10
$0.14
$0.10
Provision
Estimated Revenue Cost (Billions)
Source: JCT Tax Expenditure Estimates, February 2013
AGC Financial Issues Forum Winter Meeting
Extenders to Consider
The Urban Institute released an evaluation of the New Markets Tax Credit (NMTC) based on projects
launched between 2002 and 2007.
In its early years, the NMTC program operated as intended—encouraging investments in low-income
areas for a diverse range of community- and economic-development projects associated with varying
results.
About two-thirds of projects, accounting for about three-quarters of all project costs, consisted of
construction or rehabilitation of commercial or residential real estate (including office buildings, housing,
mixed-use, and retail properties).
Based on the evidentiary review, it can reasonably be concluded that between three and 4 of every 10
early-year projects would likely not have proceeded without NMTCs; about 1 of every 10 projects would
likely have proceeded without NMTCs, but probably in a different location or on a delayed schedule.
Category
Direct Jobs
Indirect Jobs
Induced Jobs
Total Jobs
Construction
171,804
65,822
97,711
335,337
Source: NMTC Coalition Economic Impact Report 2003-2012
AGC Financial Issues Forum Winter Meeting
AGC Financial Issues Forum Winter Meeting
AGC Responses
April 2013
Submitted comments to the W&M pass-through
group highlighting 179 Expensing, Percentage-ofCompletion Accounting, Look-back Accounting
July2013
Submitted comments to SFC for blank slate deadline
January 2014
Plan to submit comments to SFC for capitol cost
recovery staff discussion draft highlighting:
• MACRS
• 179 expensing
• 179D
• Accrual method threshold
• 15-year leasehold improvements,
• Removal of “home construction contract”
classification
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AGC Financial Issues Forum Winter Meeting
Comprehensive Reform
AGC has been a leader in Washington circles
to engage coalitions and the tax committees to
promote a comprehensive message (C-corp &
pass-throughs) when reforming business rates.
Leaders of the RATE Coalition and the
Coalition for Fair Effective Tax Rates stressed
at a joint Capitol Hill event that both the
individual and corporate sides of the code
need to be revamped.
AGC Financial Issues Forum Winter Meeting
What Industries Pay
Establish effective tax rates as the best metric to make meaningful comparisons among policy
choices and how they would impact different business types and industries
AGC Financial Issues Forum Winter Meeting
What Companies Pay
Choosing a Company’s Tax Rate for Tax Overhaul
• A popular measure used by companies to understand taxes paid relative to profit.
• Lawmakers also use ETRs in comparing taxes paid by businesses and assess the impact a tax provision may have
on industry ETRs when deciding among potential base-broadeners
Three important factors that influence a company or industry’s effective tax rate:
• Variation in definitions of tax and income
• Timing and data issues
• Accounting methods
Entity
Study
Calculation methodology
Implication for tax debate
Multinationals
Business Roundtable
All taxes (federal, state, foreign except
deferral) or statutory rate
Tax rate on multinationals relatively higher
than foreign competitors
C corporations
Treasury
Combined corporate and individual rate
(with significant assumption for distribution
of profits rather than retained earnings)
Tax rate on C corporations relatively high
because of “double taxation”
Pass-throughs
GAO
Federal income taxes only
Tax rate on pass-throughs relatively high
AGC Financial Issues Forum Winter Meeting
AGC Financial Issues Forum Winter Meeting
Lingering Questions
• Can lawmakers ever settle the question as to whether tax revenues are high enough
or need to rise further?
• Will business community accept repealing or modifying long-standing tax rules, even
in exchange for lower rates?
• Will individual taxpayers have sticker shock when they see which loopholes have to
be closed in tax reform?
• Will the House move forward without acknowledgement of progress from the
Senate?
AGC Financial Issues Forum Winter Meeting
Political Realities
Democratic Leadership in Congress
• Use tax reform to raise revenue for social & health programs
• Tax the rich and oil & gas for middle-class & low-income tax preferences
House Republican Fiscal Hawks
• Waver on anything that smells like a tax increase or too large of a bill
• Incumbents fear radical primary challengers
Democrats in Senate
• Having a hand in crafting a tax measure could stall efforts
• Will want to save tax provisions for their constituencies or filibuster
House Republican Leadership
• Wary of moving a bill that jeopardizes their majority status if the Senate slow-walks
• Need House Democrats to advance bill on the House floor
AGC Financial Issues Forum Winter Meeting
Hurdles for Reform
• Unlikely at this point that Democrats would reverse course and allow the next debt
limit increase to be used to address policy issues
• Shortened congressional schedule for action; slim odds of reaching an agreement on
revenue levels for tax reform
• “Dynamic Scoring” could help: Economists agree that a tax change that trades
inefficient tax subsidies for lower business tax rates should generate more economic
activity. CBO signal on scoring the Senate’s immigration bill proved important to
passage in at least that chamber
• Tough to see reformers overcoming barriers and enacting tax reform without it
being part of a larger agreement, but tax reform does have bipartisan support in both
the House and Senate
• Broader Structural Problems: Deeply divided environment in Washington makes it
challenging to pass any legislation (inter & intra party strife)
AGC Financial Issues Forum Winter Meeting
AGC Financial Issues Forum Winter Meeting
What’s Ahead
Baucus and Camp have not laid out all of their cards
• Other important tax expenditures, such as Section 199 and interest deductibility could also
face repeal or reduction
• No legislative drafts with specific tax rates for c-corps and pass-throughs released
Camp will continue facing political conflict in 2014
• If Camp's proposals are released, the tax policy discussion could focus less on Camp's goals
and instead more on how his proposals may align or conflict with the administration's FY2015
budget, which should also be released in February 2014.
AGC Financial Issues Forum Winter Meeting
What’s Ahead
Incoming Chairmen are waiting in the wings
• Wyden and Ryan have deeper policy differences and stronger support from the bases of their
respective parties than the current chairmen, so if tax reform doesn’t happen in 2014, the
legislative landscape will look much different in 2015 and 2016. So different, in fact, that tax
reform may have to wait for a new president.
• Even if tax reform legislation were not to be enacted in this Congress, the efforts of both
congressional committees are sufficiently comprehensive that they may set the agenda for tax
reform efforts
Tax extenders extended retroactively sounds the death knell for tax reform in 2014
• $50+ billion in annual business tax extenders have a significant impact on business
investment decisions
AGC Financial Issues Forum Winter Meeting
Probability for Reform
• Most observers believe Chairman Camp will release a specific tax reform plan with rates,
base-broadeners, and revenue estimates in 2014. A good number also think the W&M
Committee will begin a tax reform markup in 2014.
• Many experts believe there is a 15-20% chance for reform in 2014 and that the
environment for comprehensive reform will be better after 2016.
House
• 75% chairman releases tax reform proposal
• Better than 50% committee begins markup of tax reform legislation
• Less than 50% committee approves tax reform legislation
• 20% chamber passes comprehensive tax reform legislation
Senate
• Slightly better than 50% chairman releases reform proposal (if he keeps gavel)
• Less than 10% chamber passes comprehensive tax reform legislation
AGC Financial Issues Forum Winter Meeting
Questions