Postscript: Jan. 13, 2014 TaxAnalysts “Piecemeal Reform of Financial Products Tax Unlikely, JCT Economist Says.” “Congress is unlikely to pass a stand-alone financial products tax reform bill without enacting broader tax reform legislation, Joint Committee on Taxation economist Karl Russo said January 9 at the Practising Law Institute’s taxation of financial products and transactions seminar in New York.”
Tax-writing Congressional leaders — Rep. Dave Camp (R-MI), chairman of Ways and Means and Sen. Max Baucus (D-MT), chairman of the Senate Committee on Finance — worked on a tax reform bill last year that included closing many tax loopholes and tax expenditures. Due to gridlock over ObamaCare and the government shutdown, they weren’t able to present the bill, so they punted tax reform to 2014.
Budget-writing Congressional leaders – Rep. Paul Ryan (R-WI), chairman of the House Budget Committee and Sen. Patty Murray (D-WA), chair of Senate Budget Committee — forged a last-minute budget deal enacted into law. While it was a small deal — leaving out the extension of expiring unemployment benefits and “tax extenders” — it did break the paralyzing gridlock.
On Jan. 8, TaxAnalysts published “Camp Remains Focused on Comprehensive Tax Reform, Not Extenders.” Camp is pushing forward in 2014 on completing his tax reform bill, and he doesn’t want to undermine it and get side tracked with budget-busting tax extenders in a separate clean bill. If you want tax policy like tax extenders, then include it, and pass the entire tax reform bill. Kudos to Camp. It will be hard to attach tax extenders to a deficit-ceiling vote coming up soon, since tax extenders cost $50 billion per year. Same reason Ryan left it out of his budget vote.
There is another path to retroactive renewal of “tax extenders”
After Ryan and Murray omitted tax extenders from their year-end budget bill — probably because they would have broken their bank — Senate Majority Leader Harry Reid (D-NV) sponsored a “clean bill” to continue all tax extenders for another year. Perhaps Reid will push it soon on the Senate floor.
While it’s hard to imagine Republican leaders balking at a clean bill for tax breaks, in my view, it would interrupt all tax and budget leaders work toward budget and tax reform. Republicans voted against extending expiring payroll tax cuts a few years back to make a bigger political point. In my opinion, extending tax loopholes and corporate welfare like R&D tax credits undermines concrete efforts underway toward meaningful tax reform. Are separate “clean bills” for extending unemployment insurance benefits and tax extenders meant to embarrass the other party or are they for realistic enactment?
One tax extender that may affect traders and investment managers the most is a significant reduction in Section 179 expensing. For 2014 the maximum Section 179 expense deduction for equipment purchases decreases to $25,000 of the first $200,000 of business property placed in service during 2014. The bonus depreciation of 50 percent is gone, as is the accelerated deduction, where businesses can expense the entire cost of qualified real property in the year of purchase.
Tax reform is unlikely in 2014
Tax reform as contemplated by Camp and Baucus will continue to be highly contested by many lobbyists in Washington campaigning to retain valuable tax breaks for their clients and industries. That’s just the half of it. Even more controversial is the partisan divide over the underlying goals of tax reform. Democrats want to raise revenue and Republicans want it to be revenue neutral.
Will Congress pass tax reform in pieces in 2014? President Obama has continued to campaign on closing the carried interest tax break for investment managers of hedge funds. It’s hard to envision hedge fund managers being sacrificed alone, with Wall Street’s Sen. Charles Schumer (D-NY) representing their interests and Chicago exchange’s Sen. Dick Durbin (D-IL) also in leadership — second and third behind Reid.
While Baucus is expected to leave his chair soon – President Obama nominated him for the next U.S. ambassador to China – Camp has expressed interest to finish his year as chairmain, and run for another one year term. Camp remains dedicated to completing his hard work on tax reform pushing for passage in 2014, no matter the political headwinds.
Camp’s proposals on investments
It is interesting to consider some of the tax reform changes promoted by Camp in connection with investments. He proposed using mark-to-market accounting more than it’s used now — in Section 1256 contracts and with business traders who elect 475 MTM and dealers. This would do away with complex provisions and opportunities for income deferral and tax rate arbitrage.
Camp also proposed connecting entities with their owners for wash-sale loss calculations, and he confirmed that is not the case under existing tax law. IRS Pub. 550 mentions individuals and their controlled entities are connected for wash-sale purposes. We agree with Camp that separate tax filing entities are not connected with individuals under current tax law for purposes of wash sale calculations. It’s important to note that IRS publications are not authoritative tax law.
Bowles-Simpson goes further than Camp
The Bowles-Simpson 2010 Plan (National Commission on Fiscal Responsibility and Reform) suggested one tax rate to do away with a material difference between ordinary income and long-term capital gains tax rates. While that change would surely simplify the tax code in a huge way, Republicans won’t agree to it unless Democrats agree to lower that individual tax rate to around 23% to 25%, which is highly unlikely.
Business traders seem on safe ground
There are no current indications that business traders should fear losing their current trader tax breaks. Of course, business traders are regular individual taxpayers, too, and Congress may further limit their itemized deductions. Trader tax status is more valuable than ever, turning investment expenses into business expenses, which are unlimited.
We have not heard of proposals to repeal Section 475 MTM ordinary gain or loss treatment for business traders, and again we feel it’s positive that Camp favors MTM.
Some progressive Democrats want to repeal lower 60/40 tax rates on futures and other Section 1256 contracts. In a July 11, 2011 New York Times article (An Addition to the List of Tax Loopholes), I defended 60/40 while Warren Buffett argued for its repeal. Will Durbin stand by to watch 60/40 be repealed by Congress? Infamous Rep. Dan Rostenkowski (D-IL) won 60/40 treatment for Chicago futures exchanges. President Obama was a Senator from Illinois, too.
Tax reform goals will certainly be political campaign fodder and platforms for the 2014 midterm election in November and perhaps for the 2016 Presidential election. With continued political infighting over ObamaCare, it’s hard for me to envision Congress enacting a meaningful tax reform in 2014. The November election doesn’t have consequence until the new Congress takes office in January 2015.
ObamaCare tax on investment income
Not all tax change has been favorable to traders and investment managers. The Affordable Care Act’s 3.8% Medicare tax on unearned income — otherwise called the net investment tax (NIT) on net investment income (NII) — takes its first bite out of your apple on 2013 tax returns. New IRS Form 8960 for the NIT will be a nasty surprise for taxpayers with AGIs over $250,000 joint and $200,000 single, providing they have NII. The IRS published instructions for Form 8960 in early January. We are satisfied that the IRS repaired some glaring problems in their proposed NII regulations, making it much more favorable for business traders and investment managers that it otherwise would have been in the proposed regulations. See our Dec. 4, 2013 blog “IRS final regulations for Net Investment Tax help traders.”
Tax breaks for business traders and investment managers are still alive and well.