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Welcome to Tax Policy Memo
On behalf of IMA I want to welcome you to the debut of IMA's Tax Policy Memo, and thank our publication underwriter and IMA member company, RSM McGladrey.
It's our goal to provide you with the latest news affecting tax policy from both Washington and Springfield. Our two-page newsletter will be published electronically and in PDF formats. We urge you to share this publication with others in your company.
For now, Tax Policy Memo will be published on a quarterly basis. However, we are considering publishing more frequently, and will provide those details in future issues.
Meanwhile, we want your opinion about our publications. Are we providing you with the information you need? What other information would you like to receive from the IMA? Email IMA's Director of Communications and Marketing, Jim Nelson at jnelson@ima-net.org with your comments.
Thank you for taking the time to read Tax Policy Memo.
Sincerely,
Gregory W. Baise
IMA President and CEO
What is TaxNet?
TaxNet is a program offered jointly by the Illinois Department of Employment Security (IDES) and the Illinois Department of Revenue. It allows businesses to file their Unemployment Insurance Tax and Wage Reports (UI-3/40) and State Withholding Forms (IL-941 and IL-W-3). Businesses may also make their IL-501 payments by direct debit through TaxNet.
Illinois TaxNet benefits your business by reducing data entry. When you file a Quarterly Wage Report, the system automatically generates a list of employees from your previous report. All you do is make updates. TaxNet also calculates the taxable wages of each employee automatically. This program is secure and confidential. Only your company's registered personnel who are authorized with a State of Illinois Digital ID can access your account. TaxNet is also convenient, it is available 24 hours any day of the week. You may also make inquiries in the system and perform certain maintenance to your account (i.e. request a name change for your account).
New report highlights SMM role in economy
A new report, released by the National Association of Manufacturers (NAM), its research and education arm, The Manufacturing Institute, and RSM McGladrey, underscores how small and mid-sized manufacturers (SMMs) are playing an increasingly important role in the nation's industrial economy — despite unprecedented challenges.
"Even though we've experienced some attrition of small manufacturers in the last five years, small and mid-sized companies still represent more than 99 percent of America's manufacturers, account for 40 percent of the value of U.S. production and are increasingly critical to our country's economic success," said NAM President John Engler. "But small manufacturers are facing unprecedented challenges such as exorbitant energy and health care costs," Engler continued.
A copy of the full SMM report is available at www.nam.org/SMMReport and the NAM policy agenda is available at www.nam.org/2006agenda.
Illinois ranks in the middle on biz tax climate
23rd for second consecutive year
The Washington, DC-based Tax Foundation has released its annual State Business Tax Climate Index for 2005. It says Illinois ranks 23rd among all 50 states in its business tax climate, remaining unchanged from 2004. In comparison, Illinois' neighboring states offered mixed results, from Indiana's 11th place ranking to Kentucky's showing of 44th place.
The study, authored by Curtis Dubay and Scott Hodge, says American companies function at a competitive disadvantage in the global economy because they pay one of the highest corporate tax rates of any of the industrialized nations. Companies, they argue, tend to locate where they have the greatest competitive advantage, and state policy makers need to be more concerned with companies moving from Peoria, Illinois to Cheyenne, Wyoming rather than from Peoria to Paraguay.
Federal Labor Department figures say most mass job relocations are from one U.S. state to another rather than to an overseas location. This supports widely held economic theory that taxes matter to businesses, and those places with the most competitive tax systems will reap the benefits of friendly tax climates.
The ideal tax system is one that is neutral to business activity, whether at the state, federal or international level. The system is one where individuals and businesses base their economic decisions solely on the merits of the transaction without regard to tax considerations. Moreover, the most competitive tax systems are those that create the fewest distortions by enforcing the most simple tax system based on broad bases and low rates.
The full 56-page study is available at http://www.taxfoundation.org/.
Procedural rules, scheduling conflicts holding up tax reconciliation talks
Senate Finance Committee Chair Chuck Grassley, R-IA, told reporters that the conclusion of conference negotiations before the next congressional recess, scheduled to begin March 20, will be "impossible."
Grassley said that an inability to come to a solution on a parliamentary issue regarding the capital gains and dividends provision included in the House reconciliation bill, combined with the timing of a pension conference, means that a final conference report will not be ready before April.
According to Taxwire, both chambers of Congress passed pension reform legislation at the end of 2005, and congressional leaders have been adamant that a conference on that legislation be wrapped up by April 15 – the date by which employers will be required to make their first pension payments of the year. A tax reconciliation bill, however, will retain its reconciliation protections as long as it's completed before Congress approves its fiscal 2007 budget resolution. Legislation that is moved through the reconciliation process avoids Senate procedural hurdles such as a filibuster and can be passed with a simple majority vote.
Grassley and Ranking Minority Member Max Baucus, D-Montana, met late in the evening March 7 to try to come to a bipartisan agreement on the $70 billion tax reconciliation bill that would allow lawmakers to avoid the procedural hurdles that have so far held up the tax conference. After the meeting, Grassley said his conversation with Baucus was "positive," but more meetings will be necessary.
Ways and Means Chair Thomas announces decision to retire
After almost 28 years of service in the House of Representatives, House Ways and Means Committee Chair William M. Thomas, R-CA., has announced that he will not seek reelection this year.
Thomas, who has been a member of Congress since 1979, began his tenure as chair of the powerful Ways and Means Committee in January 2001. In that capacity, he played a pivotal role in creating and steering through Congress the legislation that has defined tax policy under President Bush. The Economic Growth and Tax Relief Reconciliation Act of 2001 (P.L. 107-16), the Jobs and Growth Tax Relief Reconciliation Act of 2003 (P.L. 108-27), and the American Jobs Creation Act of 2004 (P.L. 108-357) were all successfully passed under Thomas' watch.
According to Taxwire, the biggest item remaining on Thomas' plate this year is passage of a pending tax reconciliation bill (H.R. 4297) that would extend many of the tax cuts enacted during his term as Ways and Means chair. Thomas has also said that his committee over the remainder of the year will continue to examine the issue of fundamental tax reform.
It is widely expected that Ways and Means Committee member Jim McCrery, R-La., will take over as committee chair in 2007, assuming Republicans maintain majority control of the House. Although three Republicans on the committee, Reps. Clay Shaw, Jr. R-FL, Nancy Johnson R-CT and Wally Herger R-CA, have seniority over McCrery, the lawmaker has a close working relationship with Thomas and took the lead on significant committee legislation in 2005. Illinois Rep. Jerry Weller is currently 10th in seniority on the tax-writing panel.
What the updated Section 199 could cost your midsized business
Most domestic manufacturers and producers are now well aware of the new Section 199 "Domestic Manufacturers' Deduction" created by the American Jobs Creation Act of 2004, which benefits a large majority of U.S. construction and manufacturing operations.
However, many taxpayers are unaware of certain requirements in Section 199 that may place an undue compliance burden on taxpayers attempting to claim the deduction. By far the most contentious issue is the stipulation that taxpayers determine their deduction on an "item-by-item" basis. There's no safe harbor for this prerequisite and the proposed regulations state that the "item" requirement cannot be satisfied by analyzing a product line or division.
By definition, mass production of products requires a standardized process; therefore at the recent Treasury hearings the following safe harbor was proposed:
A taxpayer must clearly establish (based on all facts and circumstances) that the production process of a product line represents qualified production property (QPP) manufactured, produced, grown or extracted in whole or significant part within the United States. The taxpayer must then clearly establish that 95 percent of gross receipts of the product line generate domestic production gross receipts (DPGR) from the sale, lease, license or exchange of QPP. If a taxpayer meets these requirements, all receipts within the product line represent DPGR of a single item. Further, if a taxpayer meets this safe harbor for multiple product lines, all receipts from all product lines meeting the safe harbor represent a single item of DPGR. After determining DPGR, the general rules for cost of goods sold and other expense allocations would apply, and if a taxpayer isn't able to meet this safe harbor, the general item-by-item rules apply.
This proposed safe harbor would address the Treasury's concern that taxpayers capture all DPGR for all products whether or not the income generated by a single product is positive or negative after expense allocations. It would also remove the undue burden of calculating profit or loss on every item produced by a taxpayer without affecting the amount of the taxpayer's Section 199 deduction.
Without such a safe harbor, midsized businesses could very well incur compliance costs in excess of the benefit of the deduction, decide not to attempt to claim a benefit or determine a benefit without complying with the regulations.
Author Jay Wadkins is a tax managing director with RSM McGladrey. For more information, contact him at jay.wadkins@rsmi.com.
Important Tax Filing Deadlines
April 15, 2006
Estimated Income Taxes due
April 30, 2006
First Quarter Unemployment Insurance Contribution due
Tax Policy Memo is published quarterly for IMA members by the Illinois Manufacturers' Association,1211 W. 22nd St., Ste. 620, Oak Brook, IL 60523, (630) 368-5300.
Editor: Stefany Henson, Director of Publications (shenson@ima-net.org).
Reproduction of all or any part is prohibited except by permission of authorized IMA personnel.
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