Document Lists Potential Revenue-Raising Options for Tax Reform

POTENTIAL CORPORATE OFFSETS

Insurance Company Offsets

Note these options relate to the taxation of insurance companies, not the taxation of insurance products.

1. Life Insurance Reserves

Reserves are the liabilities insurance companies are required to establish by state insurance regulators. They represent the regulators' estimate of the amount needed to cover expected future claims. Under current law, insurance companies deduct on an annual basis additions to these reserves. The insurance reserve deduction is based on reserves required by state regulatory accounting rules, but the tax code then prescribes complicated adjustments to those reserves to establish the deductible amount.

The proposed change would allow life insurers to use the reserve reported under state law as the basis for their reserve deduction, without the current law adjustment to the statutory reserve amounts. The proposal would reduce the amount of reserves that may be deducted. (Camp Section 3504, $24.5 billion) (current proposal is approx. $9 billion).

2. Proration (Life)

Life insurance companies are allowed to deduct a portion of their reserves from taxable income. However, they are required to allocate their tax exempt income between the company and their policyholders for purposes of calculation additions or reductions to reserves. The proposal would simplify the calculation by applying a fixed percentage to determine the company's share of the tax-exempt income, thereby and increasing taxable income of the life insurance industry on net. (Camp Section 3506, $4.5 billion).

3. Proration (P&C)

For property and casualty insurers, the proration provision reduces an insurer's deduction for additions to loss reserves by 15 percent of the insurer's tax-exempt interest, the deductible portion of dividends received, and the annual increase in the cash value of contracts written. The proposal would increase the percentage in an amount proportional to the reduction in the corporate tax rate. (Camp Section 3508, $2.9 billion).

4. NOL Carryovers

For life insurance companies, present law allows a deduction for the operations loss carryovers and carrybacks to the taxable year, in lieu of the deduction for net operation losses allowed to other corporations. They are permitted a loss carryback to each of the three taxable years preceding the loss year and an operations loss carryover to each of the 15 taxable years following the loss year. The proposal would repeal the special loss rule and conform the loss treatment to that of regular corporations. (Camp. Section 3502, $0.3 billion).

5. Reserve Accounting Method Changes

When insurers change their accounting treatment for insurance reserves, they are permitted to account for the change in the basis of reserves ratably over a ten year period. The proposal would repeal this special rule, and make insurers conform to the general rule where changes in basis due to an accounting method change are made over a 4-year period. (Camp Section 3505, $2.5 billion).

6. Small Life Insurance Company Deduction

Life insurance companies with gross assets less than $500 million may take a special deduction from income, up to 60 percent of income, capped at $3 million per year. The amount phases out for companies reporting higher gross income. The proposal would repeal this special rule. (Camp Section 3503, $0.3 billion).

7. Policy Acquisition Costs

Policy acquisition expenses, such as commissions, are expenses incurred in the sale of insurance company products. These costs are comparable to the cost of goods sold for regular companies. Insurers are required to capitalize and amortize these expenses over a 10-year period. The proposal would extend the amortization period to a longer period (ex. 15 years), but would retain the current law for the calculations of expenses required to be amortized. (Camp Section 3512, $11.7 billion).

8. Special Treatment of certain pre-1984 distributions to shareholders

The 1984 Act changed the shareholder distribution rules for insurance companies, but permitted special deferral rules for pre-enactment accounts. The proposal would repeal the special rules for the tax treatment of pre-1984 accounts. (Camp Section 3507, $50 million).

9. Treatment of Special Estimated Tax Payments.

The special estimated tax payment rules are repealed. (Camp Section 3511, $50 million).

10. Special Reporting Requirements for Certain Insurance Transactions

The purchase and sale of existing life insurance policies would entail reporting requirements that would enable the IRS to determine the taxpayer's loss or gain on such transactions. (Camp Secs. 3513-3514, $0.2 billion).

Tax-exempt Organizations

1. 2% excise tax on investment income of certain private colleges and universities.

Colleges, universities and endowments do not pay tax on investment earnings. Private foundations pay a 2% excise tax on investment income (which can be reduced to 1% if certain distribution requirements are met). The proposal would extend the 2% excise tax to private colleges and universities with assets (other than those used directly in carrying out the institution's educational purposes) valued at the close of the preceding tax year of at least $100,000 per full-time student. State colleges and universities would not be subject to the provision. ($4.2 billion) (Similar to Camp section 5206, which applied a 1% excise tax).

2. Name and logo royalties treated as unrelated business taxable income (UBIT).

Current law designates certain activities as per se unrelated trades or businesses for UBIT purposes, including advertising activities and debt management plan services. Under the proposal, the sale or licensing by a tax-exempt organization of its name or logo (including any related trademark or copyright) would be treated as a per se unrelated trade or business, and royalties paid with respect to such licenses would be subject to UBIT. (Camp section 5002, $1.8 billion).

3. Compute UBIT separately for each business activity.

Under current law, where a tax-exempt organization operates more than one unrelated trade or business activity, losses generated by one business may be used to offset income derived from another. Under the proposal, losses generated by one unrelated trade or business could not be used to offset income derived from another unrelated trade or business. In addition, the NOL carry-forward rules for tax-exempt organizations would be conformed to the new NOL rules generally applicable to for-profit businesses. (Modified Camp section 5003, $3.2 billion).

4. Modification of intermediate sanctions.

Under current law, certain officials and managers of public charities are subject to an excise tax up to 25% on salary and benefits in excess of their reasonable value. No tax applies to the exempt organization itself. The proposal would expand the excise tax to apply to labor unions and trade associations and impose a 10% excise tax on the organization if the tax is applied to the officer. The exempt organization could avoid the excise tax through minimum due diligence standards. Treasury regulations currently provide a rebuttable presumption with respect to the reasonableness of compensation arrangements and property transfers for purposes of determining if the excise tax applies, which shifts the burden of proof to the IRS. The proposal would eliminate the rebuttable presumption, and the organization would be required to demonstrate the reasonableness of the compensation and benefits. (Camp section 5201, negligible)

5. Repeal of tax-exempt status for professional sports leagues

Under current law, a professional football league is specifically granted tax-exempt status, and the IRS has interpreted the exemption for “professional football leagues” to include all professional sports leagues. The proposal would preclude professional sports leagues from being eligible for tax-exempt status, but it would not apply to amateur sports leagues, including the U.S. Olympic Committee. (Camp section 5301, $0.1 billion)

6. University seat licenses

Under current law, a charitable deduction is disallowed to the extent a taxpayer contributes to a charitable organization and receives a benefit in return. A special rule, however, permits taxpayers to deduct as a charitable contribution 80 percent of the value of a contribution made to an educational institution to secure the right to purchase tickets for seating at an athletic event in a stadium at that institution. The proposal would repeal this special rule. (Camp section 1403)

7. Contributions of intellectual property to tax-exempt organizations

Under current law, contributions intellectual property to a tax-exempt organization may be deducted in an amount equal the property's adjusted basis. The donor, however, is allowed an additional deduction equal to a percentage of the income generated by the intellectual property over the following 12 years, even though that income is earned by a tax-exempt entity. The proposal would repeal the additional deduction, but retain the deduction for the original contribution of the intellectual property. (Camp section 1403)

Deduction of business meals, entertainment and transportation expenses

Under current law, businesses may not deduct expenses relating to entertainment, amusement or recreation activities, or facilities, unless they are directly related to the active conduct of the taxpayer's trade or business, in which case the business may deduct up to 50% of the expenses. Businesses that provide meals to employees on their premises are currently permitted to deduct such expenses in full. The proposal would:

• Bar deductions for entertainment expenses, and eliminate the subjective determination of whether such expenses are sufficiently business related.

• Expand the current 50% limit on the deductibility of business meals to meals provided through an in-house cafeteria or otherwise on the premises of the employer.

• Deny deductions for employee transportation fringe benefits (e.g., parking and mass transit) but retain the exclusion from income for such benefits received by an employee.

• Repeal the current $20 per month bicycle commuting benefit; and

• Preclude deductions for transportation expenses that are the equivalent of commuting for employees (e.g., between the employee's home and the workplace), except as provided for the safety of the employee.

(Camp sections 1420, 3126).

Employer-provided Housing

Under current law, housing provided to an employee for the convenience of the employer is excluded from income if the employee is required to accept lodging on the premises of the employer as a condition of employment. In the case of educational institutions, the value of housing provided to their employees also is excluded to the extent the rent paid by the employee is at least 5 percent of the lodging's appraised value or the average of the rent paid by individuals for comparable housing, whichever is less. The proposal would cap the exclusion for housing provided for the convenience of the employer and for employees of educational institutions at $50,000. The exclusion also would be limited to one residence. (Camp 1419, $50 million).

Moving and Tuition

The proposal would:

• Repeal the employee exclusion for employer provided moving expenses.

• Limit the employer moving expense deduction to the amount the employee recognizes in income.

• Repeal the exclusion for qualified tuition reduction provided by employers to employees, and family members of employees, for employees who are highly compensated employees (compensation in excess of $120,000 for the preceding year).

(Camp sections 1208, 1412)

Nonqualified Deferred Compensation

Under current law, deferred compensation in a qualified plan (e.g., a 401(k) plan) is taxed at a later time. Nonqualified deferred compensation for highly compensated employees, which is funded, is included in income when there is no longer a substantial risk of forfeiture (i.e., when it is vested) — unless specific complex requirements are met. The provision would remove the ability to defer nonqualified compensation after it vests by meeting specific requirements, and simply make compensation taxable when it vests. It also would accelerate the taxation on existing nonqualified deferred compensation arrangements to a year or two before the end of the budget window. (Camp section 3801, $9.2 billion).

Excise Tax on charity executive compensation

Under current law, publicly traded corporations can only deduct compensation paid to CEO's and certain high-paid officers up to $1 million. The new provision would be a parallel limitation for tax-exempt organizations so that a tax-exempt organization would be subject to a 25% excise tax on compensation in excess of $1 million paid to any of its five highest paid employees. (New provision).

Coordination of plan contribution limits and early withdrawal rules for 403(b) and 457(b) plans

Currently, taxpayers that participate in both 403(b) plans (for schools and tax-exempt organizations) and 457(b) plans (for governmental entities) get separate $18,000 deferral limits in a single year, allowing them to contribute up to $36,000 ($48,000 if they are age 50 or older). The $18,000 limit is the same limit that applies to 401(k) plans. The proposal would coordinate these two limits and no longer allow them to operate independently, thus reducing the annual limit to $18,000 ($24,000 if age 50 or older). The proposal also would impose the 10% additional tax for early withdrawal (before age 59½) on 457 plan participants. These proposals would have the effect of treating employees the same regardless of whether they work for private, non-profit, or public employers. (Camp Sections 1618 and 1619, $1.5 billion).

On-Demand Economy Reforms and Reporting

For decades, the designation of a worker as an employee or independent contractor has been determined on a case-by-case analysis of a broad range of criteria, which has led to uncertainty and controversy between taxpayers and the IRS. Reforms to existing reporting and withholding rules are needed to accommodate the new realities of the on-demand economy.

The provision would create a safe harbor based on objective tests, and would include reporting and limited withholding on payments to service providers. The provision also would align the reporting rules for payments made to service providers by increasing the current $600 threshold for Form 1099-MISC to $1,000, and by creating a general threshold of $1,000 for Form 1099-K issued by third-party settlement organizations, which would be expanded to include marketplace platforms engaged in the on-demand economy. An exception would be provided for 1099-Ks issued with respect to sales of goods under which reporting would be required once the number of transactions exceeds 50 or the dollar amount exceeds $5,000. Under current law, third-party settlement organizations are only required to issue 1099-Ks when the number of transactions exceeds 200 and the dollar amount exceeds $20,000. (New Provision).