Active corporate and business tax agenda expected.

Although it is easier to make promises on the campaign trail than to actually pass legislation once elected, recent history indicates that new presidents have been surprisingly successful in getting at least a significant part of their tax proposals enacted early in their first year in office.

Indeed, Presidents Ronald Reagan, Bill Clinton and George W. Bush all pushed significant tax legislation through Congress in their first year in office that contained much of what they had promised.

In fact, it's probably easier to get tax proposals through Congress during a new president's so-called honeymoon period, when memory of the election and the desires of the voters are fresh in legislators' minds.

Given this history, it would not be surprising to see President Barack Obama act quickly on his tax agenda as well.

The following will focus on some key elements of Obama's corporate and business tax proposals, how they might fare in the 111th Congress and what organizations and their advisers should keep in mind. Typically, the new president sets forth proposals in his State of the Union address and the legislative language follows soon thereafter. Given the current economic crisis, this traditional legislative timeline could be accelerated.

Business Tax Breaks

Obama's proposals for business tax breaks have tended to be less specific than his individual tax proposals. The tax breaks have mostly focused on small business or firms that are adding domestic jobs.

He has proposed eliminating all capital gains on investments in small businesses and start-up firms. This would be an expansion of the existing 50 percent capital-gains exclusion for small-business investments. Obama has also proposed extending the current Internal Revenue Code Sec. 179 small business expensing limit of $250,000, at least through 2009. Small business would also be in line for a new health-care credit, though the specifics have not been laid out.

Of benefit to large and small businesses would be lower corporate tax rates. Lowering these rates would be possible in exchange for closing corporate tax loopholes. Since one of Obama's focuses has been on protecting and growing U.S. jobs, tax rates might also be structured such that the lower rates are available only for companies that start or expand operations, and, therefore, add domestic jobs. No specific rate has been suggested.

He has also proposed a $3,000 refundable credit for 2009 and 2010 for new, full-time employees and proposed to make the research and development credit permanent. The R&D credit has generally been extended for only a year or two at a time in recent years, creating complaints in the business community of the difficulty of doing long-term planning. Obama has also proposed to promote rural economic development through loans and tax incentives to promote community broadband systems.

Energy Tax Breaks

The focus of Obama's plan to achieve energy independence in a decade is through federal research support for alternative energy and energy conservation. Tax proposals have included an emergency energy rebate of $500 ($1,000 for joint filers) for home heating costs, paid for with a windfall profits tax on oil and gas companies--although the impetus for this proposal may have been reduced somewhat by the recent decline in oil and gas prices.

Continuing a trend of tax credits for alternative-energy vehicles, Obama has a proposal for a $7,000 tax credit for the purchase of advanced-technology vehicles.

The economic stimulus package that was discussed by Congrees in the lame-duck session at the end of last year included--as part of a package to help the automobile industry--an above-the-line tax deduction for interest payments on car loans and state sales taxes for new cars purchased by Dec. 31.

Prior to the recent Congressional focus on a bailout to the domestic auto industry to keep it on its feet until better economic conditions return, Obama had proposed $4 billion in loan guarantees and tax credits to help auto manufacturers and parts suppliers retool for a new generation of more energy-efficient and alternative-energy vehicles.

Candidate Obama, in very general terms, proposed tax breaks for producers of wind, solar, biomass and other alternative-energy resources. This would include a five-year extension of Sec. 45 of the Internal Revenue Code credit for electricity produced from renewable resources.

Business Revenue Raisers

If Obama's business tax breaks have lacked some specificity, his proposed revenue raisers have been stated in even more general terms. Although he's generally spoken of closing corporate tax loopholes as the quid-pro-quo for lower corporate tax rates, he has not identified many of the loopholes we would close. One possibility appears to be imposing limits on the deductibility of executive performance-based pay in addition to the current limits on executive pay not tied to performance.

The Emergency Economic Stabilization Act of 2008 included overall limits on executive compensation for financial institutions receiving government bailout money. There has been some suggestion of a $1 million limit on the deduction for performance-based pay in addition to the existing $1 million limit on compensation not tied to performance.

Obama may also seek to penalize businesses that have exported jobs overseas through limits on the use of foreign tax credits or limits on the deduction of expenses until the related earnings are repatriated to the U.S.

Among other areas that have been mentioned are operations in tax-haven jurisdictions and transfer pricing involving intellectual property and other intangibles. These suggestions could get tied into an overall reform of the way that the U.S. taxes multinational companies. Many companies have been pushing for a move to a territorial tax system similar to many of our trading partners. This could be accompanies by the addition of a national consumption tax, or some other variant of the value-added tax also used by many of our trading partners.

Larger businesses that don't offer their employees health insurance would be required to contribute a percentage of their payroll to a national fund that would help fund health insurance for those without private coverage. The details of this proposal may be tied to Obama's effort to enact his overall health-care initiative--encouraging private health insurance and making it more attractive by putting limits on what insurers could exclude, such as pre-existing conditions, while providing alternative affordable insurance options.

Other Obama proposals include a codification of the economic substance doctrine, which is a judicially developed doctrine that doesn't recognize transactions that are tax motivated and lack a business purpose. He also proposes to tax carried interests, under which certain profit interests in partnerships would be taxed at ordinary income tax rates rather than capital gains rates, as under current law. Both of these proposals were before Congress in various legislative proposals last year, attracted significant opposition and were not enacted. A new president and Congress may have better luck.

Obama has also proposed a payroll tax surtax of two-to-four percent on incomes over $250,000. With the Social Security portion of the payroll tax ending at incomes of $106,800 for 2009, this would leave a range of income that would not be subject to Social Security tax with the surtax kicking in at $250,000.

Some have suggested that a payroll tax surtax of this sort could make S Corporations relatively more attractive than limited liability companies and partnerships.

S Corps have an easier time distinguishing what is compensation compared with partnerships and LLCs, where compensation--particularly for service entities--can be viewed as all income net of expenses. Obama has not proposed an immediate implementation of this proposal. Instead it might be tied to Social Security reform with perhaps a delayed implementation of the surtax for 10 years.

Crystal Ball Watching

Neither party in Congress has had an easy time passing its legislative agenda in recent years--which some would argue has been a good thing. The main stumbling block has been the closely divided Senate, with neither party able to reliably muster the 60 votes necessary to end a filibuster.

But not all senators always follow party lines, and the Democrats have enlisted some relatively conservative candidates to help capture seats in areas that have in recent years gone Republican. Obama cannot, therefore, be sure of the support he needs to swiftly move his agenda through Congress.

Still, the 44th president is taking office with more of a mandate than many of his predecessors, and the need to respond to the economic crisis in a meaningful way is likely to encourage even more bipartisanship than might otherwise be the case during the honeymoon period for a new president. The odds of Obama being able to enact a significant portion of his agenda appear fairly good.

As corporations go hat in hand to the government for assistance in getting through the current economic crisis, it will be harder for them to fight off business tax increases to help pay for them.

Obama seems determined to tackle some of the big issues that have been plaguing the nation for some time--including health insurance, energy independence and the U.S. system of international taxation. To the extent that some of these tax proposals are included as part of a larger package to reform particular areas of the economy, they may stand a better chance of passing.

While major reforms usually take more time to formulate and put into legislative proposals, the current economic environment may well help to accelerate the process.

MARK LUSCOMBE ([e-mail]), J.D., LL.M, CPA, is a principal analyst with CCH, a Wolters Kluwer business in Chicago.

Following his inauguration on Jan. 20-and given history and the current economic climate--President Barack Obama is expected to swiftly engage in pushing to enact many of the proposals he made on the campaign trail.