Rangel proposes business tax changes, LIFO repeal

Business tax changes in the legislation introduced on October 24th by House Ways Committee Chairman Charles Rangel (D-NY) are designed to be revenue neutral as required by House rules, and the provision to reduce the top corporate income tax rate from 35 to 30.5 percent is offset in the bill by the repeal of the last-in, first-out (LIFO) method of accounting for inventory and changes in or the elimination of other tax breaks.

Although the Senate attempted unsuccessfully to repeal the use of LIFO by oil companies in 2005 in an effort to respond to critics of the government's treatment of the petroleum industry, according to The Wall Street Journal, Rangel's proposed LIFO repeal would extend to all businesses using this method of accounting and is expected to account for $106 billion of the $360 billion required to offset the lower corporate income tax rate. Income recognized as a result of LIFO repeal would be taxed over a period of eight years.

LIFO repeal would affect an estimated 8.7 percent of the 5,000 publicly traded companies in the U.S., according to University of Connecticut accounting professor George Plesko, however many smaller, privately-held companies use the LIFO method of inventory valuation as well. Analysts predict that many smaller companies would either have to raise prices or face going out of business in order to deal with the change.

Another provision in Rangel's tax bill would change the rules for foreign income for U.S. companies and require companies to defer deductions on certain overseas business expenses until the money is repatriated. This change is also expected to provide about $106 billion toward paying for the reduction in corporate income tax rates.

Yet a third provision of the bill, the elimination of the domestic manufacturers' tax credit that was created in 2004, would offset an anticipated $115 billion over 10 years.

Rangel's bill also takes aim at enforcement of tax law, giving the IRS more leeway to impose penalties on corporations that engage in sham transactions, according a statement made by Clint Stretch, managing principal of tax policy at Deloitte Tax LLP and reported at cnnmoney.com.

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