These will be considered as Congress attempts to resolve its own budget for spending and revenues.
The administration’s FY 2014 budget proposes:
- Spending cuts and revenue increases of $1.2 trillion over 10 years, to replace the spending cuts mandated by the Budget Control Act of 2011, also known as the “sequester”
- Deficit reduction of $1.8 trillion over 10 years
- A framework for revenue-neutral tax reform
Provisions concerning exempt organizations
Among the proposals that would affect exempt organizations are the following:
- Require that all Form 990 series tax and information returns be filed electronically and require the IRS to make the electronically filed Form 990 series returns publicly available in a machine readable format in a timely manner
- Change the excise tax rate imposed on the net investment income of private foundations from the current 1% or 2% to a single rate of 1.35%
- Limit the tax rate for charitable contributions to 28% in computing a new tax that implements the “Buffett rule”
- Allow more flexible research arrangements for purposes of the private business use limits
Framework for revenue-neutral tax reform
The administration’s FY 2014 budget offers a detailed analysis of business proposals that “close loopholes and provide incentives for growth in a fiscally responsible manner.” The administration proposes that these measures be enacted as part of revenue-neutral tax reform. These proposals are not reflected in the budget receipts and are not counted towards deficit reduction.
The framework that the administration proposes contains the following five elements:
- Eliminate loopholes and subsidies, broaden the base, and cut the corporate tax rate (though no specific rate cut is proposed)
- Strengthen domestic manufacturing and innovation
- Strengthen the international tax system
- Simplify and cut taxes for small business
- Restore fiscal responsibility and not “add a dime to the deficit”
The president’s business tax reform proposal includes many of the proposals from previous budgets such as changes to the taxation of foreign income, energy provisions, and making the research credit permanent. The proposals include a few new incentives, such as a temporary 10% small business credit for new jobs and wage increases. Reform proposals also include changes to the taxation of financial derivatives, much as proposed by the Ways and Means Committee, such as a mark-to-market rule.
The reform proposals include a number of familiar revenue-raising provisions from previous budgets, such as a financial crisis responsibility fee imposed on financial institutions and changes to the taxation of carried interests in partnerships.
It is important to note that, unlike the administration’s previously published “Framework for Business Tax Reform” (February 2012), the budget does not contain a specific rate reduction proposal nor does it reiterate a number of its previously suggested revenue offsets to finance the rate reduction. In particular, the budget makes no mention of previous proposals to eliminate accelerated depreciation, impose a minimum tax on income earned outside the United States, limit the deductibility of corporate interest, and expand the scope of the corporate tax to “large passthrough” entities.
The administration’s FY 2014 budget proposes an additional $1.8 trillion in deficit reduction over 10 years, of which just over $1 trillion would come from revenue (tax) increases.
New revenues of $580 billion would come from two individual income tax changes affecting high-income taxpayers:
- A new proposal would require households with incomes over $1 million to pay at least 30% of their income (after charitable giving) in taxes (the so-called “Buffett rule”).
- A proposal from previous budgets would limit the value of tax deductions and other tax benefits for high-income taxpayers to 28%.
The administration’s FY 2014 budget includes a new proposal that would reduce the deficit by $230 billion over 10 years by replacing the consumer price index (CPI) currently used for inflation with “chained CPI”—generally a lower measure of inflation. As a result, social security and other benefits would be reduced by $130 billion over 10 years; in addition, revenues would be increased by $100 billion from lower adjustments to tax brackets and other indexed provisions.
Another new proposal for deficit reduction is a limit on the amount that can be accumulated in tax-preferred retirement accounts. The proposal would limit the deduction or exclusion for contributions to tax -favored retirement plans, including IRAs, 401(k)s, and defined benefit plans when the amounts in those plans exceed a maximum allowable benefit, raising $9 billion over 10 years.
As in previous budgets, the administration’s FY 2014 budget includes many loophole closers, base broadeners, and simplification measures.
Read KPMG's analysis (April 2013) [PDF 1.5 MB] of the administration’s FY 2014 budget proposals, prepared by Washington National Tax professionals of KPMG LLP.
For more information, contact:
Rick Speizman, National Partner-In-Charge, KPMG’s Exempt Organizations Tax Practice (ExoTax)
+1 (202) 533-3084