Which Rangel Tax Provision Affects You?

New York congressman's controversial bill frames the upcoming debate over corporate tax issues.

Whether Rangel’s bill has a chance of passing in its current form remains unclear. But the proposal has framed the debate. Here’s a list of the key corporate provisions contained in Rangel’s Tax Reduction and Reform Act of 2007 that executives — and their lobbyists — will likely face in the months to come:

Reduction of the corporate tax rate. The bill cuts the top corporate marginal tax rate from 35 percent to 30.5 percent (Estimated cost over 10 years: $364 billion.)

Repeal of the deduction for domestic production activities. The tax break, according to Rangel, benefits only a few corporations, providing a 3.15 percent rate cut on domestic manufacturing income. (Estimated to raise over 10 years: $115 billion.)

Allocations of expenses and taxes for repatriated income. The provision would require U.S.-based companies that defer income through controlled foreign corporations to also defer the associated deductions. Currently, corporations are allowed to take deferred deductions and account for them on a current basis. (Estimated to raise over 10 years: $106 billion.)

Repeal of worldwide allocation of interest. Current law, which has yet to take affect, allows U.S. corporations to elect special interest allocation rules that reduce the amount of interest expense allocated to foreign assets. (Estimated to raise over 10 years: $26 billion.)

Limitations on treaty benefit for deductible payments. The bill would prevent foreign multinationals that are incorporated in tax haven countries from avoiding tax on income earned in the United States. The provision addresses multinationals that route income through structures that allow a U.S. subsidiary to make a deductible payment to a country that has a tax treaty with the Unites States. Usually, the company repatriates the earnings in the tax-haven country after the deduction is taken. (Estimated to raise over 10 years: $6 billion.)

Repeal of the LIFO inventory accounting method. Any income recorded as a result of the proposed repeal of the last-in, first-out accounting method for booking inventory would be taxed over eight years. (Estimated to raise over 10 years: $107 billion.)

Repeal of the inventory valuation choice method. The bill would require corporations to value inventories at cost, eliminating the opportunity to choose between the lower of cost and market value. (Estimated to raise over 10 years: $7 billion.)

Elimination of the special service provider rule. The provision would prevent larger corporations (defined as C corporations in the tax rules) that use the accrual method of accounting from taking advantage of the special rule pertaining to service providers. The current rule allows C corporations not to account for amounts that will go uncollected based on the history of the service provider. (Estimated to raise over 10 years: $225 million.)

Permanent extension of enhanced small business expensing. The bill would extend the current threshold amounts that small businesses can count as a tax-deductible expense. The rule is scheduled to expire in 2010, but the proposal would allow businesses to continue at current levels — that is, $125,000 (indexed for inflation) with a phase-out threshold of $500,000 (also indexed for inflation). After 2010, if the law is not changed, small businesses would only be able to expense $125,000, with a $500,000 phase-out threshold, and neither expense mark would be indexed for inflation. (Estimated cost over 10 years: $21 billion.)

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