AIM Business Insider

Governor Offers Spirited Defense of Tax, Reform Proposal

  

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Governor Deval Patrick invoked the community response to the Boston Marathon tragedy today to urge business leaders to support his vision of creating economic opportunity through a $1.9 billion tax and reform package for transportation and education

“I think you know that my vision for Massachusetts is of a unified community, where we work together to build a better future for everyone,” the governor told 550 people at the 2013 AIM Annual Meeting in Waltham.

“In some ways, I think we got a glimpse of that in the past couple of weeks.  So many lives were suddenly, viciously and profoundly affected by the bombings on Marathon Monday.  And yet out of the dust of that tragedy emerged a strong sense of community, the notion of common stake and common cause.  The bravery of first responders, the supreme professionalism of the medical teams, the acts of kindness and generosity by ordinary citizens – in these ways and others the strength of our community was on display for the world and, most of all, for each other. “

Patrick said he hears daily from people concerned about finding or keeping jobs, paying for college, the quality of their children’s education and the reliability of the MBTA – and suggested that business people hear the same concerns. He said the commonwealth must simultaneously grow jobs and be prepared to make the investments needed for that growth.

“I am not running for anything else.  I have no agenda other than to make our commonwealth stronger, to leave it better than I found it.  We have a rare chance right now to do some lasting good in transportation and education, in growth and opportunity, for our time and the generation to come.  If that’s what you’re interested in, I look forward to working with you,” he said.

The governor also emphasized that his administration has made hard choices about making state government more efficient.

“We have eliminated over 6,000 positions in state government, consolidated agencies, shut down the Turnpike Authority, reformed the pension system, asked employees to pay a greater share of their health care benefits, and much more.  We have, with your help, undertaken a comprehensive review of regulations and cut the time for state approvals to a fraction of what it once was.

“Of course we are not done.  But it’s a fact that this administration has not only saved taxpayers billions of dollars and made state government vastly more efficient, but we have accomplished more of AIM’s agenda than any administration in 20 years.”

The Massachusetts House and Senate both passed much smaller tax packages focused exclusively on transportation. Patrick said today he will monitor the final bill that emerges from a conference committee to ensure that it provides revenue that is both reliable and timely.

“I am here to ask you to join us in that work.  Because the work of building the platform for growth is vital to the business community.  Some of that will involve taxes.  Some will involve reforms.  They are not mutually exclusive, but two sides of the same coin,” he said.

The governor’s speech was part of an Annual Meeting that also saw AIM honor several  companies and organizations for outstanding achievements.

• Massachusetts Business Alliance for Education (MBAE) received the 2013 Legacy of Leadership Award 
• The Manufacturing Advancement Center Workforce Innovation Collaborative (MACWIC) won  the 16th Annual Gould Education & Workforce Development Award
• EMD Milipore, Billerica; Kinefac Corporation, Worcester; and Lenox, East Longmeadow all received Global Trade Awards   

Senate Passes Transportation Bill; Tax Debate Nears Resolution

  

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The Massachusetts Senate approved a transportation funding bill Saturday that would dedicate approximately $800 million per year in new taxes and other revenue to roads, bridges and public transit by 2018.

The Senate measure is larger than the $500 million package approved on April 8 by the House of Representatives, but still well below Governor Deval Patrick’s original proposal to raise $1.9 billion annually for transportation and education by raising the income tax and corporate taxes.  The governor praised the Senate bill on Saturday as a significant step toward a “safe, functional, modern transportation system to keep pace with a growing economy.”

Senators voted 30 to 5 to approve the same basic group of tax changes passed by the House - $110 million from increasing the gasoline tax 3 cents per gallon and then indexing the levy to inflation; $161 million from a tax on computer services; $110 million from tobacco taxes; and $83 million from changes to utility classification and sales sourcing.

The Senate bill adds revenue from several sources, including $40 million by requiring utility companies to pay for light poles and other structures on public rights of way, and $80 million by redirecting 2.5 cents per gallon from the gasoline tax currently earmarked for cleanup of underground storage tanks.

A conference committee will now hammer out differences between the two versions, but analysts expect the final measure to be closer to the Senate’s $800 million number. Governor Patrick had threatened to veto the House blueprint, but has not said directly whether he would sign a final bill with the Senate numbers.

Associated Industries of Massachusetts has maintained throughout the debate that lawmakers should fund transportation improvements with transportation-specific sources of revenue rather than business taxes such as the one on computer software. The association nevertheless believes that the legislation passed by the House and Senate takes positive steps toward fixing the transportation system without crippling increases to the income tax or other broad-based levies.

AIM also remains encouraged that both the House and Senate bills would require the MBTA and Department of Transportation to accelerate reasonable benchmarks for revenues, savings, and reforms. A menu of reforms approved in 2009 was supposed to generate $6.5 billion in savings over 20 years, but has so far reduced costs by just $500 million.

“Employers understand the need for Massachusetts to maintain a transportation infrastructure that supports economic growth. The Senate and House measures solve the immediate and long-term structural deficit of the state transportation system,” said John Regan, Executive Vice President of Government Affairs at AIM.

The increase in the gasoline tax would cause an average driver to pay an additional $12 to $30 per year to fill the tank. The Legislature said it did not want to rely solely on increasing the gas tax because gas consumption has declined in recent years and is expected to continue to fall.

The plan would provide “forward funding” for regional transit authorities in 2014 and allow the Department of Transportation to move all employees onto the operating budget by 2016, ending the current practice of  paying for personnel with borrowed funds.

Information provided by the Legislature indicates that their proposal to apply the sales tax to software modifications and systems design does not impose taxes on cloud-based services such as remote data storage. Downloads of computer games, music and books would also remain outside the new sales tax.

Other elements of the Senate bill include:

• A provision directing the Department of Transportation (DOT) to move towards open road tolling on major routes other than the Turnpike.
• A commitment to transfer up to approximately $160 million per year from the general fund to the transportation fund in years beyond Fiscal 2018. 
• A directive to the MBTA to pursue naming rights sales on its stations and other assets.

PriceWaterhouse Coopers Analysis of Business Taxes in Murray/DeLeo Plan

Ernst & Young Analysis of Tax on Computer Services

AIM Urges House to Pass Murray/DeLeo Transportation Plan

  

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Senate President Therese Murray and House Speaker Robert  DeLeo last week announced  a  proposal  that would increase gasoline, tobacco and certain business taxes to close an operational deficit in the Massachusetts transportation system that is set to reach $548 million by Fiscal Year 2018.

The legislative plan would generate $110 million by increasing the gasoline tax 3 cents per gallon and then indexing the levy to inflation.  It also raises $161 million from a tax on computer services, $110 million from tobacco taxes and $83 million from changes to utility classification and sales sourcing.

The measure is more focused than Governor Deval Patrick’s earlier plan to spend more than $1.9 billion a year on transportation and education. The governor sought to increase the income tax from 5.25 to 6.25 percent, eliminate 44 personal exemptions and deductions, reduce the sales tax from 6.25 to 4.5 percent and raise corporate taxes by $500 million annually.

John Regan, Executive Vice President of Government Affairs at Associated Industries of Massachusetts, said employers are encouraged that the Murray/DeLeo proposal requires both the MBTA and Department of Transportation to meet reasonable benchmarks for revenues, savings, and reforms.

“Although we would have preferred that the plan rely more heavily on transportation-specific sources of revenue, we nevertheless believe that the proposal announced by Senate President Murray and Speaker DeLeo takes a meaningful step in the right direction by solving the immediate and long-term structural deficit of the state transportation system.” Regan said.

The increase in the gasoline tax would cause an average driver to pay an additional $12 to $30 per year to fill the tank. The Legislature said it did not want to rely solely on increasing the gas tax because gas consumption has declined in recent years and is expected to continue to fall.

The plan would provide “forward funding” for regional transit authorities in 2014 and allow the Department of Transportation to move all employees onto the operating budget by 2016, ending the current practice of  paying for personnel with borrowed funds.

Information provided by the Legislature indicates that their proposal to apply the sales tax to software modifications and systems design does not impose taxes on cloud-based services such as remote data storage. Downloads of computer games, music and books would also remain outside the new sales tax.

PriceWaterhouse Coopers Analysis of Business Taxes in Murray/DeLeo Plan

Ernst & Young Analysis of Tax on Computer Services

Richard C. Lord, President and Chief Executive Officer of AIM, commended the Legislature for its proposal and Governor Patrick for initiating a serious and thorough discussion of state spending priorities.

The full House is scheduled to debate the plan later today.  Although AIM would have liked to see more reliance on transportation-related revenues and less on increased business taxes, we believe this plan represents a reasonable approach in the midst of a less than robust economic recovery and we encourage the members of the House to support it.  

Proposed Business-Tax Hikes Threaten Economic Growth

  

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The debate surrounding Governor Deval Patrick’s proposal to increase the state income tax has nearly obscured the fact that the plan also includes more than $500 million in new business taxes. The corporate levies not only threaten job growth in a persistently fragile recovery, but also take aim at key technologies that Massachusetts companies use to improve efficiency.

“At a time when so many other states are moving to reduce corporate taxes, these proposals do the exact opposite by making significant tax law changes that exacerbate the climate of uncertainty around the state's tax structure.  This uncertainty will reduce Massachusetts' ability to compete for business investment and jobs," said Paul O'Connor, head of taxation for EMD Millipore Corporation and Chair of AIM's Taxation Committee.

“This and other pending tax proposals are troubling and counter to the legislatures past efforts to create a more positive and consistent business climate."

Here are the proposed tax increases and what they mean:

Eliminate the FAS 109 deduction ($76 million)

The proposal to eliminate of the FAS 109 deduction signals the commonwealth’s intent to reverse an agreement reached as part of the 2008 “combined reporting" tax policy change.

Combined reporting brought income from companies' operations in other states into a unitary or "combined" Massachusetts tax return. The FAS 109 deduction was adopted to avoid penalizing companies after the fact for making capital investments.  (FAS 109 is an accounting standard that requires that financial statements reflect the tax consequences of all book/tax differences.)

The deduction has been delayed twice and now the administration's budget proposes to eliminate it without allowing companies to realize the deduction as enacted by the Legislature and signed by the governor. 

Impose sales taxes on data processing, cloud-based computer services and custom software ($265 million)

The proposal to tax cloud computing - which uses a network of remote servers hosted on the Internet to store, manage, and process data – would affect computer services, data processing and custom software. The tax flies in the face of efforts by Massachusetts companies, individuals and government to leverage technology as a way to reduce costs and achieve economies of scale in a high cost state.

Most states recognize these data-processing and cloud-computing services as “business or economic inputs” that are key to economic development, business expansion and associated job growth.  Adding a tax to such inputs creates economic distortions by “pyramiding” - that is the tax is levied at multiple levels and as a result the “effective tax rate” exceeds the actual sales/retail tax rate.

It is also important to note that the expected revenues from this provision are based on the 4.5 percent sales tax rate proposed by the administration. If the sales tax remains at its current level of 6.25 percent, the estimated impact to the business community from taxing computer services would grow from $265 million to $370 million annually.

Increase taxes on security corporations and utilities ($83 million)

The proposal would eliminate the classification for security corporations and utilities.  Those levies would represent a major tax increase on companies that engage in buying, selling, dealing in, or holding securities; as well as on those that deliver electricity, gas, water and telephone services.  Both industries are key elements of the Massachusetts economy and the utility tax has implications for employers and consumers who already pay the highest electricity rates in the nation.

The administration tax plan also seeks to move toward market sourcing ($35 million), under which Massachusetts would source sales, other than sales of tangible personal property, to the Bay State for sales factor purposes if a corporation’s “market” for the sale is in Massachusetts.

Finally, the proposal would limit the film tax credit ($40 million).

AIM strongly urges the Legislature to reject the business-tax increases in the proposed budget. We note that none of these proposals has received a hearing before the Joint Committee on Revenue.  Targeting taxes on the tools of efficiency will throw sand in the gears of an economy already struggling to build up steam.

Please contact me at 617.262.1180 or bmacdougall@aimnet.org to learn more about the administration's tax proposal.

Employers Encouraged as DeLeo Narrows Revenue Debate

  

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House Speaker Robert A. DeLeo today proposed an encouraging and well-considered framework for modernizing the state’s transportation system without massive increases to income and business taxes.

In a speech to the Greater Boston Chamber of Commerce, DeLeo said he is committed to finding new revenue to support transportation needs, but will call for a revenue package “of a significantly smaller size” than the proposal offered by Gov. Deval Patrick. He said that the House will develop a new source of transportation revenue “that is commensurate with job creation, job retention and economic growth.”

“I'm worried that the administration’s proposal places too heavy a burden on working families and businesses struggling to survive. We want to minimize the pressure on Massachusetts citizens as we find ways to meet our goals. If we are to pass a new revenue package, I believe it should be far more narrow in scope and of a significantly smaller size,” DeLeo said.

The speaker stressed that the transportation system must continue to cut costs and improve efficiency. He praised the reforms that have taken place as the result of merging several agencies into the current Department of Transportation in 2009, but noted that the department still borrows money to pay salaries and other operational expenses.

Associated Industries of Massachusetts views DeLeo’s approach as a formula for success. AIM will of course wait to review the House’s actual transportation proposal before making a final judgment, but the association believes the speaker has framed the issue in a manner that can generate widespread support.

DeLeo’s comments came two months after Governor Patrick proposed a complex $1.9 billion-per-year tax plan that would increase individual income tax rates from 5.25 to 6.25 percent, double the personal exemption, lower the sales tax rate from 6.25 to 4.5 percent, eliminate 44 personal income tax deductions and boost corporate taxes by $500 million. The governor’s plan, intended to increase funding for both transportation and education, has met with a lukewarm response among legislators.

AIM and its 5,000 members understand that the commonwealth must improve the condition of its roads, bridges and public transportation system to pave the way for future job growth.  The best way to accomplish the goal is for the state to “finish the job” on uncompleted efficiency reforms and identify the revenue it needs to meet its current operational needs.

 “Employers look forward to working with lawmakers to understand the current operational issues facing the transportation system, to institute meaningful reform and to identify appropriate sources of revenue to fund the system we have in place now,” said John Regan, Executive Vice President of Government Affairs at AIM.

“Only after we return the system to financial stability can we reasonably review some of the longer-term capital spending plans proposed by the administration.”

DeLeo also used his speech this morning to unveil a proposal to enhance the ability of community colleges to provide the science, technology, engineering and math skills increasingly demanded by employers. AIM commends the speaker for proposing the STEM STARTER ACADEMY and again looks forward to reviewing the details.

What is in the Governor's Tax Plan?

  

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Governor Deval Patrick last month proposed historic changes to the Massachusetts tax system in an effort to raise some $1.9 billion per year for transportation and education.

The complex proposal would redefine the tax landscape for everyone from parents with children in day care, to workers accustomed to a deduction for health savings accounts, to employers who purchase computer software. The plan also calls for automatic increases in the gasoline tax, highway tolls and MBTA fares.

Here is a summary of the administration tax plan. Most of the summary was prepared by the Massachusetts Taxpayers Foundation, with additions from the AIM Government Affairs team.

What is your opinion of the proposal and how might it affect your business? The AIM Board of Directors is currently developing a position on the plan and would like to hear from as many employers as possible.

Please leave your opinions in the comments section below, or email Brad MacDougall, Vice President of Government Affairs, bmacdougall@aimnet.org.

Here are some of the 44 personal exemptions and deductions the plan would eliminate:

Here are proposed increases in taxes and user fees pertaining to transportation:

Fiscal Cliff Bill Includes Potential Benefits for Manufacturers

  

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The American Taxpayer Relief Act of 2012, which pulled the nation back from the “fiscal cliff” on January 1, contained two provisions of interest to manufacturers—extension of the Research and Development (R&D) Tax Credit that expired in 2011, and enhanced Section 179 capital expenditure deduction limits for 2013.

The National Institute of Standards and Technology’s Hollings Manufacturing Extension Partnership (MEP) reports that the bill extended the R&D tax credit retroactively to January 1, 2012 through December 31, 2013. While the measure has never been a permanent part of the U.S. Tax code, it has always gathered strong bi-partisan support to be extended on a temporary basis.

Since the IRS eliminated some of its restrictive language in 2004, the R&D credit has been increasingly valuable for manufacturers that employ engineers or engage in product and process testing. The R&D credit benefits manufacturers of all types, including those that design and develop their own products as well as those that make parts for their OEM customers.

The MEP reports that about 70 percent of the credit dollars are derived from the salaries of employees devoted to qualified research activities, making it a wage-based credit available to a variety of manufacturing enterprises.

A second provision of the tax act extended the U.S. tax code’s Section 179 tax deduction. The 179 deduction allows companies to deduct the entire purchase price of qualifying office equipment, software, and other business needs in one year, rather than over the typical five-to seven-year depreciation schedule.

Manufacturers should check out how these two provisions may impact their operations.   

State Revenue Commissioner Names 16 to Tax Advisory Council

  

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The Massachusetts Department of Revenue (DOR) yesterday named 16 people, including three members of the AIM Taxation Committee, to a newly formed council to advise Revenue Commissioner Amy Pitter on a variety of tax issues.

The DOR Advisory Council will take up topics that include audit practices, federal tax developments impacting Massachusetts, responses to court decisions or legislation, new and proposed business practices, guidance on recent or upcoming tax matters and the status of on-going DOR projects.

The AIM Taxation Committee Members on the panel include Scott G. Roberti, Director, State Tax Policy for General Electric Company; David Nagle;  partner in the Tax Department of the Boston office of Sullivan & Worcester; and Jason Zorfas is Executive Director, Ernst & Young.

“Our goal in forming the Advisory Council was to bring different perspectives to DOR in changing tax policies and practices to improve the customer experience,” Pitter said.

“It was really important to us that council membership reflect different groups of taxpayers, especially those DOR doesn’t normally hear from. We are fortunate to have attracted a diverse roster of leaders from different industries.”

The Advisory Council is part of the DOR360 initiative to improve efficiencies at the agency and open new avenues of communication with the communities it serves.  Members of the Council will meet quarterly and also serve on working groups throughout the year.  The first meeting is scheduled for Wednesday, January 30 from 9:30am to 1:30pm.

AIM expects to provide DOR and the newly appointed members of the Advisory Council with suggestions, including those contained within an AIM bill to improve the DOR’s administration and reforms to the state’s electronic filing system for corporate taxes. The association believes that state and local governments must continue to reform and that the DOR360 initiative and Advisory Council provide other state agencies with a model pathway towards substantive changes.

“Taxes and taxation remain a matter of great concern for Massachusetts employers. The Advisory Council gives employers a conduit for policy suggestions on state tax administration,” said John Regan, Executive Vice President of Government Affairs at AIM.

Have any suggestions for the DOR Advisory Council? Want to track council activity? Please contact me 617-262-1180 or bmacdougall@aimnet.org.

What Will the Fiscal Cliff Agreement Mean to Employers?

  

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The American Taxpayer Relief Act of 2012 signed yesterday by President Barack Obama contains broad business tax provisions that will affect virtually every employer in Massachusetts. The so-called “fiscal cliff deal” extends 31 business tax breaks and 12 energy tax breaks while partially extending current tax brackets.

The bill does not, however, extend the temporary payroll-tax rate reduction, a policy sure to engender significant conversation between employees and their HR departments when the first paychecks of 2013 are issued.

Here is a summary of provisions of interest to business owners and managers:

Tax credit for research and experimentation expenses.  The bill extends for two years, through 2013, the research tax credit equal to 20 percent of the amount by which a taxpayer’s qualified research expenses for a taxable year exceed its base amount for that year and provides an alternative simplified credit of 14 percent.  The bill also modifies rules for taxpayers under common control and rules for computing the credit when a portion of a trade or business changes hands.

Work opportunity tax credit.  This bill extends for two years, through 2013, the provision that allows businesses to claim a work opportunity tax credit equal to 40 percent of the first $6,000 of wages paid to new hires of one of eight targeted groups.   These groups include members of families receiving benefits under the Temporary Assistance to Needy Families (TANF) program, qualified ex-felons, designated community residents, vocational rehabilitation referrals, qualified summer youth employees, qualified food and nutrition recipients, qualified SSI recipients, and long-term family assistance recipients.

15-year straight-line cost recovery for qualified leasehold improvements, qualified restaurant buildings and improvements, and qualified retail improvements.  The bill extends for two years, through 2013, the temporary 15-year cost recovery period for certain leasehold, restaurant, and retail improvements, and new restaurant buildings, which are placed in service before January 1, 2014. The extension is effective for qualified property placed in service after December 31, 2011.

Bonus depreciation.  Under current law, businesses are allowed to recover the cost of capital expenditures over time according to a depreciation schedule.  For 2008 through 2010, Congress allowed businesses to take an additional depreciation deduction allowance equal to 50 percent of the cost of the depreciable property.  Federal law expanded this provision to allow 100 percent bonus depreciation for investments placed in service after September 8, 2010 and before 2012 and 50 percent bonus depreciation for investments placed in service during 2012.  This provision would extend the current 50 percent expensing provision for qualifying property purchased and placed in service before January 1, 2014 (before January 1, 2015 for certain longer-lived and transportation assets) and also allow taxpayers to elect to accelerate some AMT credits in lieu of bonus depreciation.  This provision also decouples bonus deprecation from allocation of contract costs under the percentage of completion accounting method rules for assets with a depreciable life of seven years or less that are placed in service in 2013. For regulated utilities, the provision clarifies that it is a violation of the normalization rules to assume a bonus depreciation benefit for ratemaking purposes when a utility has elected not to take bonus depreciation.

9% Credit Rate Freeze for the Low-Income Housing Tax Credit Program.  The low-income housing tax credit program provides a tax credit over a period of ten years after the housing facility is placed-in-service.  The credit provided each year is determined by present-value formula based on the federal cost of borrowing.  Over the past few years, as the federal cost of borrowing has declined, so has the amount of tax credits that can be used to build a LIHTC project.  To deal with this, in 2008, Congress adjusted the formula and set a minimum credit amount of 9%, which is based on the original credit rate when the program was created.  The provision is effective for facilities placed-in-service before December 31, 2013.  This proposal would extend the expiration date by changing the deadline to projects that have received an allocation before January 1, 2014.

New Markets Tax Credit.  Through the New Markets Tax Credit (NMTC) program, the federal government is able to leverage federal tax credits to encourage significant private investment in businesses in low-income communities. The program provides a 39 percent tax credit spread over seven years.  The bill extends for two years the new markets tax credit, permitting a maximum annual amount of qualified equity investments of $3.5 billion each year.

Employer wage credit for activated military reservists.  The bill extends for two years, through 2013, the provision that provides eligible small business employers with a credit against the employer’s income tax liability for a taxable year in an amount equal to 20 percent of the sum of differential wage payments to activated military reservists.

Returning Heroes and Wounded Warriors Work Opportunity Tax Credits. Currently businesses are allowed to claim a work opportunity tax credit (WOTC) for hiring qualified veterans in the following targeted groups and up to the following credit amounts:

• Veterans in a family receiving supplemental nutrition assistance:  $2,400
• Short-term unemployed veterans:  $2,400
• Service-related disabled veterans discharged from active duty within a year:  $4,800
• Long-term unemployed veterans:  $5,600
• Long-term unemployed service-related disabled veterans: $9,600

A credit against Social Security taxes is also available to tax-exempt employers. Transfers are made from general revenues to make the Social Security trust fund whole.  The provision expires on December 31, 2012.  The proposal would extend these credits for an additional year, though 2013. 

Temporarily extend increase in the maximum amount and phase-out threshold under section 179. Under current law, a taxpayer with a sufficiently small amount of annual investment may elect to deduct the cost of certain property placed in service for the year rather than depreciate those costs over time.  The 2003 tax cuts temporarily increased the maximum dollar amount that may be deducted from $25,000 to $100,000.  The tax cuts also increased the phase-out amount from $200,000 to $400,000.  These amounts have been further modified and extended several times on a temporary basis, increasing up to a high of $500,000 and $2 million respectively for taxable years beginning in 2010 and 2011, and then to $125,000 and $500,000 respectively for taxable years beginning in 2012, before reverting to the permanent amounts of $25,000 and $200,000 respectively for taxable years beginning in 2013 and thereafter. The modified proposal would increase the maximum amount and phase-out threshold in 2012 and 2013 to the levels in effect in 2010 and 2011 ($500,000 and $2 million respectively). Within those thresholds, the proposal would also allow a taxpayer to expense up to $250,000 of the cost of qualified leasehold improvement property, qualified restaurant property, and qualified retail improvement property. This proposal expires at the end of 2013 and the amounts revert to $25,000 and $200,000, respectively.

Treatment of certain dividends of regulated investment companies (RIC’s).  The bill extends a provision allowing a RIC, under certain circumstances, to designate all or a portion of a dividend as an “interest-related dividend,” by written notice mailed to its shareholders not later than 60 days after the close of its taxable year. In addition, an interest-related dividend received by a foreign person generally is exempt from U.S. gross-basis tax under sections 871(a), 881, 1441 and 1442 of the Code. The proposal extends the treatment of interest-related dividends and short-term capital gain dividends received from a RIC to taxable years of the RIC beginning before January 1, 2014.

Look-through treatment of payments between related controlled foreign corporations under the foreign personal holding company rules.  The bill allows deferral for certain payments (interest, dividends, rents and royalties) between commonly controlled foreign corporations (CFC).  This provision allows U.S. taxpayers to deploy capital from one CFC to another without triggering U.S. tax. The proposal extends present law to the end of 2013.  The proposal is effective for tax years beginning after December 31, 2011.

Special rules for qualified small business stock.  Generally, non-corporate taxpayers may exclude 50 percent of the gain from the sale of certain small business stock acquired at original issue and held for more than five years. For stock acquired after February 17, 2009 and on or before September 27, 2010, the exclusion is increased to 75 percent. For stock acquired after September 27, 2010 and before January 1, 2012, the exclusion is 100 percent and the AMT preference item attributable for the sale is eliminated. Qualifying small business stock is from a C corporation whose gross assets do not exceed $50 million (including the proceeds received from the issuance of the stock) and who meets a specific active business requirement. The amount of gain eligible for the exclusion is limited to the greater of ten times the taxpayer’s basis in the stock or $10 million of gain from stock in that corporation. The provision extends the 100 percent exclusion of the gain from the sale of qualifying small business stock that is acquired before January 1, 2014 and held for more than five years. The bill also clarifies that in the case of stock acquired after February 17, 2009, and before January 1, 2014, the date of acquisition for purposes of determining the percentage exclusion is the date the holding period for the stock begins.

Reduction in S corporation recognition period for built-in gains tax.  If a taxable corporation converts into an S corporation, the conversion is not a taxable event. However, following such a conversion, an S corporation must hold its assets for a certain period in order to avoid a tax on any built-in gains that existed at the time of the conversion. The American Recovery and Reinvestment Act reduced that period from 10 years to seven years for sales of assets in 2009 and 2010.  The Small Business Jobs Act reduced that period to five years for sales of assets in 2011.  The bill extends the reduced five-year holding period for sales occurring in 2012 and 2013.  In addition, this bill clarifies rules for carryforwards and installment sales.

Empowerment zone tax incentives.  The bill extends for two years the designation of certain economically depressed census tracts as Empowerment Zones. Businesses and individual residents within Empowerment Zones are eligible for special tax incentives.

Payroll Tax Increase

The end of the payroll tax reduction creates employee-relations challenges for companies.

Effective January 1, employers should withhold 6.2 percent for employee Federal Insurance Contribution Act (FICA) contributions.  The payroll tax has increased to its previous rate of 6.2%.  In recent years, employees experienced a lower rate of 4.2% and therefore greater take home pay as a result of the temporary 2% decrease in employee contributions to FICA.  The Congressional Budget Office reports that the payroll tax increase will raise $95 billion.

Important for employers & employees:

• Your next payroll and paycheck - Employers may want to consider communicating to employees that their next paycheck will be lower as a result of the payroll tax increase. The Tax Policy Center in Washington, D.C., reports that 80 percent of households with incomes between $50,000 and $200,000 will pay higher taxes.   Among the households facing higher taxes, the average increase would be $1,635.  Individuals can estimate how much more in FICA taxes they will pay in the new year by using this calculator.
• Payroll accuracy and treble damages - For Massachusetts employers especially, accurate payroll accounting is vital given that state law mandates treble damages for any violation of wage and hour violations, event for honest mistakes.

Top 10 Massachusetts Business Stories of 2012

  

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The year 2012 was one of questions, not answers.

An unspeakable tragedy that convulsed the nation ended a year that did little to resolve fundamental issues that keep both citizens and employers awake at night. Eleven months of political debate and a fourth year of halting economic recovery left the Americans at year-end still face-to-face with a fiscal cliff, a governmental impasse and, last week, a haunting societal abyss made manifest at a tiny elementary school in Newtown, Connecticut.   

The nation thus began and ended 2012 with questions. Will lawmakers resolve a $16 trillion debt problem without throwing the country back into recession? Will the newly re-elected president and Speaker of the House come to agreement? Will employers regain the level of confidence they need to resume investing in expansion and jobs? Will the economies of China and Europe recover?

The top 10 stories to affect Massachusetts employers in 2012:

1. Fiscal cliff, European debt and slowing Chinese economy imperil Massachusetts.
   
   The same Massachusetts innovation economy that helped the Bay State ride out the Great Recession found itself uniquely vulnerable to debt and deficit crises unfolding on both sides of the Atlantic. Failure by U.S. lawmakers to avoid automatic budget reductions and tax increases threatened to trigger deep cuts to bedrock Massachusetts industries such as defense and health care. An austerity-driven European recession continued to impede a key export market for Massachusetts companies, while growth in China declined 1.4 percentage points to its lowest rate since 1999. The result – Massachusetts unemployment rose from 6 percent in the spring to 6.6 percent in November.
   
   
2. Massachusetts passes a first-in-the-nation law to limit increases in health-care costs.
   
   Governor Deval Patrick signed a bill in August limiting the increase in medical spending in Massachusetts to a level equal to overall economic growth from 2013 until 2017. The spending growth target will drop to 0.5 percentage points below gross state product from 2018-2022 before returning to the economic growth benchmark in 2023 and beyond. Associated Industries of Massachusetts President Richard C. Lord was named in November to represent employers on the board of a new commission that will implement the cost-control law.
   
   
3. United States Supreme Court rules federal health care reform constitutional.
   
   The high court ruled in a 5-4 decision on June 28 that the portion of federal reform that requires everyone to purchase health insurance – the so-called individual mandate – is constitutional. The court ruled that the mandate violates the commerce clause of the Constitution, but is permissible under the taxing power of Congress. The landmark decision, coupled with the re-election of President Barack Obama in November, ensured that Massachusetts will be the only state in the nation to face the challenge of reconciling federal reform with an existing state health care reform.
   
   
4. Manufacturing continues to make a comeback as companies create trend of re-shoring.
   
   A funny thing happened to the conventional wisdom that manufacturing moves inexorably overseas – companies like General Electric, which resumed making appliances at its sprawling Appliance Park campus in Louisville, Kentucky, started bringing it back. Research by the MIT Forum for Supply Chain Innovation found that manufacturers are reconsidering their supply chain strategies due to higher labor costs in developing countries, energy costs and political stability issues. It was good news for Massachusetts, where manufacturing employment stabilized after a sharp decline during the recession.
   
   
5. President Barack Obama wins a second term, defeating former Massachusetts Governor Mitt Romney, while Elizabeth Warren defeats Scott Brown on a platform of making business accountable.
   
   An electorate made restive by four years of economic turmoil nevertheless turned away from a former financial executive promising economic change and returned to the status-quo of divided government. The re-election of President Obama affirmed the inevitability of federal health reform and set up a redux of the fiscal battle between the president and Congressional Republicans over whether to address the federal deficit through tax increase of spending cuts. Massachusetts voters elected Warren, a Harvard University professor and the creator of the Consumer Financial Protection Bureau, to the Senate seat held by Republican Scott Brown.
   
   
6. Courts postpone National Labor Relations Board rules on accelerated union elections and employee rights posters.
   
   A United States District Court issued a judgment in May invalidating a far-reaching National Labor Relations Board (NLRB) regulation promoting accelerated union representation elections.  Ruling in favor of the United States Chamber of Commerce and the Coalition for a Democratic Workplace (of which AIM is a member), the court found that the NLRB did not have the required quorum to pass the rule. Separately, a federal appeals court blocked another NLRB rule requiring more than 6 million U.S. employers to post a workplace notice informing employees of their right to join a union.
   
   
7. Massachusetts lawmakers pass a balanced budget with no tax increases, but hint as the year comes to a close that they are likely to seek additional revenue in 2013.
   
   Governor Patrick signed a $32.5 billion budget for Fiscal Year 2013 that included no new broad-based taxes and the final installment of a three-year drop in corporate income taxes from 9.5 to 8 percent. The budget represented a 3.2 percent increase in spending over Fiscal Year 2012. Lagging tax revenues during the fall created a $540 million budget shortfall that prompted the governor to announce cuts in local aid and state government. Beacon Hill lawmakers have sent strong signals that they may seek to raise taxes for transportation, higher education and other purposes next year.
   
   
8. Governor Deval Patrick and the Massachusetts Legislature freeze unemployment insurance rates for a third consecutive year.
   
   Lawmakers froze unemployment insurance rates at Schedule E, averting an automatic 31 percent increase from $715 per employee to $935 per employee. AIM argued that the fund used to pay jobless benefits in Massachusetts would grow to between $300 million and $400 million, even if rates were frozen. Beacon Hill did not move forward with changes to the unemployment benefits structure that would assure the solvency of the jobless fund for the long term.
   
   
9. Massachusetts employers benefit as Congress grants Permanent Normal Trade Relations (PNTR) with Russia and re-authorizes the Export-Import Bank.
   
   Congress and President Obama followed up the signing of three free-trade agreements in late 2011 with the granting in 2012 of Permanent Normal Trade Relations (PNTR) with Russia, a move experts believe will create new market opportunities for companies in Massachusetts that have already boosted exports to Russia by 30 percent this year. Re-authorization of the Export-Import Bank was also important to the export-driven Bay State economy – the bank has provided loans to 74 exporting Bay State companies in the past two years in amounts from $5,500 to $27 million.
   
   
10. Nomination of Massachusetts Senator John F. Kerry to be secretary of state sets off a political donnybrook one month after the election.
    
    President Obama on Friday nominated Kerry, Chairman of the Senate Foreign Relations Committee, to replace Hilary Clinton as Secretary of State.  The news set off speculation that everyone from Scott Brown to Edward Kennedy Jr. to Congressman Edward Markey to the actor Ben Affleck would compete for Kerry’s senate seat during a special election next year. Affleck’s name prompted wags to suggest campaign slogans for the actor, including The People magazine’s seat; Vote baby vote; and Armagettinoutthevote.