Tax Provisions Summary of the American Jobs Act of 2011

President Obama revealed an overview of the American Jobs Act of 2011 (AJA) in a speech to both chambers of Congress last week. This week, the legislative proposal was released.

This proposal is roughly 155 pages, with a 41-page section-by-section analysis at the end.

The tax provisions and/or changes in the proposal are numerous, but the tax overview or analysis below should give you a better understanding of what’s inside the proposal from a tax perspective.

• • Payroll Tax Cut – There is currently for 2011 a payroll tax cut of 2% for employees that was passed as part of the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (Tax Relief Act of 2010). The current proposal would extend and expand this payroll tax cut through 2012 by lowering the employee’s portion to 3.1% from 4.2%. Moreover, the employer’s portion would be cut in half from 6.2% currently to 3.1%. However, the employer payroll reduction only applies to the first $5 million of wages paid by the employer. Government and household employers do not get this benefit.

• • Tax Credit for Increased Wages or Payroll – Basically, companies and non-profits that increase their payroll or wages from 2011 would not be responsible for the employer’s portion of social security taxes on that increase in 2012. However, the credit is applicable only to the first $50 million in increased wages.

• • 100% Bonus Depreciation Extension – The Tax Relief Act of 2010 allowed businesses to a 100% depreciation bonus for capital investments placed into before the end of 2011 and 50% depreciation if placed into service in 2012. The AJA will double the depreciation bonus to 100% through the end of 2012 and make it 50% in 2013.

• • Delay in 3% Withholding on Government Contractors – Basically, without this proposal, government entities would need to withhold 3% from payments to government contractors starting in 2012. With the AJA, it would delay this withholding until the start of 2014.

• • Tax Credits for Veterans – The AJA modifies an existing tax credit for veterans and adds two new tax credits which non-profits and public universities can claim.
    • • Wounded Warriors Tax Credit Change – This tax credit is in existence already for veterans who suffered a disability in service and have been unemployed for 6 months or more. The AJA of 2011 would double the existing tax credit amount for employers who hire a wounded warrior to $9,600.
      • Veterans Unemployed for 4 Weeks Tax Credit – This is a new tax credit that would apply to veterans who have been unemployed for at least 4 weeks. The employer would receive a tax credit of $2,400 if the veteran is hired.
      • Veterans Unemployed for 6 Months Tax Credit – This tax credit is for employers who hire a veteran who has been unemployed for at least 6 months. As long as the veteran is hired, the employer will receive a tax credit of $5,600.
  • Tax Credit for the Long-Term Unemployed – This proposal would provide employers with a tax credit of $4k to employers who hire workers that have been unemployed for at least 6 months. Non-profits and public universities are applicable employers as well.

• Tax-Exempt Bonds Exclusion Extension from AMT – Tax-exempt private activity bonds that are currently excluded from the Alternative Minimum Tax would continue to be excluded for bonds issued in 2011 or 2012. Tax exempt activity bonds are generally issued by state and local government to help facilitate development and certain types of private sector financing (e.g. low-income housing, industrial development, etc.).

Tax Provisions to Raise Revenue

• • 28% Limitation on Itemized Deductions and Exclusions – The proposal to provide revenue for the bill would limit itemized deductions and some income exclusions for single taxpayers making $200,000 and married couples making $250,000 or more to 28%. For example, if a taxpayer is in the 35% bracket today, then $10k in itemized deductions would save that taxpayer $3,500. Therefore, starting in 2013, that $10k would only save a taxpayer in the 36% or 39.6% bracket $2,800.

• • Treat Carried Interest in Investment Partnerships as Ordinary Income – Currently, a service partner in an investment partnership receiving carried interest can be taxed on that income at 15% (if it is a long term gain) because it is treated as capital gains income. The AJA would treat this income as ordinary income subject to self-employment tax instead starting in 2013 and close this loophole that is often used by private equity firms and hedge funds.

• • Increase the Depreciation Schedule for Corporate Jets – This proposal would shorten the depreciation period for corporate jets from 5 years to 7 years beginning in 2013. This would align the corporate jet depreciation schedule with that of the major airlines.

• • Changes to Foreign Tax Credit Rules for Dual Capacity Taxpayers – Currently, the foreign tax credit stops taxpayers from having to pay taxes twice on the same income (US and foreign taxes). However, if a taxpayer is levied for a specific economic benefit from a foreign country then they are a dual capacity taxpayer (which is typically a US-based oil and gas multinational company). Therefore, they cannot claim a tax credit for the portion of the tax levy unless they can show that the “that the amount paid under a distinct element of the foreign levy is a tax, rather than a compulsory payment for a direct or indirect specific economic benefit.” The current proposal would make sure that an appropriate split is identified when a single payment is made to a foreign government, making the portion of the foreign levy that is attributed to an economic benefit a deductible expense instead of a credit.

• Repealing Oil Subsidies – The AJA contains many tax provisions regarding oil and gas subsidies. If you prefer, you can read more about the proposal’s tax provisions related to oil companies here.