Tax Provisions Under the Proposed American Jobs Act

October 26, 2011Articles The Legal Intelligencer

On Sept. 12, President Obama unveiled the "American Jobs Act of 2011." This legislation is intended to stimulate economic growth and job creation. On Oct. 5, Senate Majority Leader Harry Reid, D-Nev., introduced the act in the Senate.

The version introduced by Reid is identical to the administration's version of the act as it relates to the economic and jobs stimulus programs but differs significantly from the administration's version of the act with respect to those tax provisions intended to raise the revenue necessary to pay for the economic stimulus provisions.

The act contains significant expenditures for education, assistance to state and local municipalities for the retention and creation of jobs for law enforcement officers and other first responders, a significant public school building program and a variety of infrastructure investments. To accomplish this last result, the act calls for the establishment of an American Infrastructure Financing Authority, which will provide direct loans and loan guarantees to facilitate public and private investments in infrastructure projects of regional or national significance.

To encourage job creation, the act also contains employment tax relief provisions for both employees and employers. The act extends through 2012 the temporary Social Security tax reduction already in effect for employees (the rate was reduced under the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 from 6.2 percent to 4.2 percent for 2011) and further reduces the rate to 3.1 percent. Employers also benefit from the act by means of a corresponding rate reduction (to 3.1 percent) on their share of Social Security taxes paid during 2012. This reduction of the employer's share is limited to $5 million of wages paid by the employer. Furthermore, the employer rate reduction does not apply with respect to wages paid to household workers. An equivalent rate reduction is also provided for individuals subject to self-employment taxes.

As a further incentive for businesses to hire workers, the act proposes a temporary tax credit for certain increases in payroll during the last quarter of 2011 and for all of 2012. This credit would offset all of the employer's portion of Social Security taxes that would otherwise be due with respect to the increased payroll, but is capped at $50 million of an employer's increased wages. For example, if an employer paid $5 million in wages subject to Social Security taxes during 2011 and in 2012 paid $6 million, a credit would be available to the extent of Social Security taxes that would be due on the $1 million of increased wages. As with the reduction to the employer's share of Social Security taxes for 2012, the credit does not apply with respect to wages paid to household workers.

To stimulate capital investment, the act would allow businesses to deduct in 2012 an amount equal to 100 percent of the cost of qualified business property placed in service during the year. Under existing law, the first-year deduction for property placed in service during 2012 is limited to 50 percent.

The major difference between the administration's version of the act and Reid's version of the act is how the revenue would be generated to pay for these tax cuts and the stimulus provisions. The administration's original version of the act contains a variety of revenue enhancements, including the following:

  • The value of all itemized deductions and certain other tax expenditures for high-income taxpayers would be limited to 28 percent. This limitation would apply to taxpayers with adjusted gross income of $250,000 or greater for married couples filing jointly (or $200,000 for single taxpayers). In other words, although the taxable income for these taxpayers would be taxed at the 36 or 39.6 percent tax rates, most deductions would only be deductible or excluded at a 28 percent rate.
  • The act would eliminate the ability of managers of hedge funds, private equity funds and other investment partnerships to receive capital gains treatment on the income they receive from these activities. The act would tax as ordinary income, and make subject to self-employment tax, a service partner's share of the income from such a partnership. Any income derived from a partnership and attributable to invested capital (as opposed to the performance of services), would not be recharacterized and will continue to be taxed as capital gains. These changes would be effective for taxable years beginning after Dec. 31, 2012.
  • The ability to currently deduct or otherwise accelerate the depreciation of corporate jets would be eliminated and such aircraft would be treated as seven-year depreciable property so that corporate jets would be depreciated over the same number of years as aircraft used by airlines.
  • A number of tax incentives to the oil and gas industry would be repealed including the ability to currently deduct intangible drilling and development costs (which would be required to be capitalized). Similarly, the percentage depletion method available under existing law for the recovery of the capital cost of oil and gas wells would be repealed. Finally, the act would repeal the exception to the passive loss rules for oil and gas working interests. This repeal would limit the ability to claim deductions and credits arising from many oil and gas interests.

Under Reid's version of the act, all of these revenue enhancements would be replaced by a singular 5.6 percent surtax on modified adjusted gross income in excess of $1 million for both single filers and married couples filing jointly. This surtax would be effective for taxable years beginning after Dec. 31, 2012. However, on Oct. 10, the act failed to muster enough support in the Senate to bring the act to a final vote.

It is uncertain whether any of the provisions of the act will move forward in the highly partisan atmosphere of Washington. Although there appears to be consensus on many of the stimulus provisions of the act, the revenue enhancement provisions are mired in partisan politics with the majority of Republicans in both the House and Senate opposed to any provision that could result in increased tax revenue. As of this date, the president is attempting to get Congress to pass the entire act, with some package of revenue enhancements, while Republicans are urging a separate vote on only the stimulus provisions.

Reprinted with permission from the October 26 issue of The Legal Intelligencer. (c) 2011 ALM Media Properties, LLC. Further duplication without permission is prohibited. All rights reserved.