The President's FY2025 budget includes proposals that would affect tax rates, accounting methods (e.g., how certain income and deductions are calculated for federal income tax purposes) and certain fossil fuel tax credits. Subject to exceptions, the proposals are generally effective in tax years beginning after December 31, 2024.

For a discussion of international tax budget proposals, please see Tax Alert 2024-0618.

Corporate income tax rate increase

Under the proposal, the corporate income tax rate would increase from 21% to 28%, and the global intangible low-taxed income (GILTI) rate would increase to 14%. Another proposal, however, would further increase the effective GILTI rate to 21%. This proposal would be effective for tax years beginning after December 31, 2023. For tax years beginning before January 1, 2024, and ending after December 31, 2023, the corporate income tax rate would be 21% plus 7% times the portion of the tax year that occurs in 2024.

Corporate alternative minimum tax rate increase

The corporate alternative minimum tax rate would increase from 15% to 21%. The proposal would be effective for tax years beginning after December 31, 2023.

Strengthen the limitation on losses for noncorporate taxpayers            

Effective for tax years beginning after December 31, 2024, the proposal would make the excess business loss limitation under IRC Section 461(l) permanent and treat excess business losses carried forward as current-year business losses, rather than as net operating losses. IRC Section 461(l) currently disallows noncorporate taxpayers from claiming excess business losses for tax years 2021 through 2028. Excess business losses are defined as the excess of current-year net business losses over a specified amount (for 2024, $610,000 for married couples filing jointly and $305,000 for other taxpayers).

Expand limitation on deductibility of employee remuneration exceeding $1 million

The proposal would amend IRC Section 162(m) to strengthen the deduction disallowance, so that it applies to all C corporations and all compensation paid by the corporation over $1 million to any employee. The proposal also would add an aggregation rule that would treat all controlled group members as a single employer for purposes of determining the covered employees and applying the deduction disallowance. The amendments to IRC Section 162(m) would make sure "otherwise deductible compensation paid to an employee is considered 'applicable employee remuneration', subject to the deduction disallowance, whether or not paid directly by the corporation." Additionally, it would expand Treasury's authority to issue regulations and other guidance to carry out the provisions of IRC Section 162(m).

The proposal would be effective for tax years beginning after December 31, 2024.

Eliminate fossil fuel tax preferences

The proposal would repeal several fossil fuel tax preferences, including the enhanced oil recovery credit for eligible costs attributable to a qualified enhanced oil recovery project and the credit for oil and gas produced from marginal wells. It also would eliminate:

1. Expensing of intangible drilling costs
2. The deduction for costs paid or incurred for any qualified tertiary injectant used as part of a tertiary recovery method
3. The exception to passive loss limitations for working interests in oil and natural gas properties
4. The use of percentage depletion for oil and gas wells
5. Expensing of exploration and development costs
6. Percentage depletion of hard mineral fossil fuels
7. Capital gains treatment for royalties
8. Accelerated amortization for air pollution control facilities

Additionally, the proposal would repeal two-year amortization of geological and geophysical expenditures by independent producers and allow amortization over the seven-year period used by major integrated oil companies. The proposal also would eliminate the exemption from corporate tax for publicly traded partnerships with qualifying income and gains from fossil fuels, and the Oil Spill Liability Trust Fund and Superfund excise tax exemption for crude oil derived from bitumen and kerogen-rich rock.

The proposal would generally be effective for tax years beginning after December 31, 2024. For royalties, the proposal would be effective for amounts realized in tax years beginning after December 31, 2024, regardless of when a company acquired the property generating the royalties. The repeal of the exemption from corporate income tax for publicly traded partnerships with qualifying income and gains from fossil fuel activities would be effective for tax years beginning after December 31, 2029.

Repeal gain deferral for like-kind exchanges

The proposal would require a taxpayer to recognize gain from any like-kind exchanges exceeding $500,000 ($1 million for a joint return) during a tax year. No changes would be made to the gain deferral for like-kind exchanges up to an aggregate $500,000/$1 million for individual/joint filers.

Require 100% recapture of depreciation deductions as ordinary income for some depreciable real property

When real property is sold or otherwise disposed of, this provision would treat any gain on IRC Section 1250 property held for more than one year as ordinary income to the extent of any cumulative depreciation deductions taken after the effective date of the provision. However, this provision would not apply to noncorporate taxpayers with AGI below $400,000 ($200,000 for married taxpayers filing separately). Partnerships and S corporations would be required to (1) compute the character of gain/loss on business-use property at the entity level, and (2) report to entity owners the relevant amounts for ordinary income/loss, capital gain/loss, and unrecaptured IRC Section 1250 gain under both the current tax law and the proposal. Taxpayers with income at or above the threshold would use amounts calculated under the proposal in completing their returns. The proposal would be effective for (1) depreciation deductions taken on IRC Section 1250 property in tax years beginning after December 31, 2024, and (2) sales, exchanges, involuntary conversions or other dispositions of IRC Section 1250 property completed in tax years beginning after December 31, 2024.

Modify depreciation rules for general aviation passenger aircraft purchases

Under the proposal, the recovery period for depreciating general aviation passenger aircraft would increase from five years to seven years, and the recovery period for taxpayers using the alternative depreciation system would be extended to 12 years. The proposal would be effective for property placed in service after December 31, 2024.

Amend the mark-to-market rules to include digital assets

Effective for tax years beginning after December 31, 2023, a new third category of assets — actively traded digital assets and derivatives on, or hedges of, those digital assets — would be added to the categories of assets that a dealer or trader may mark to market. The Green Book notes that a "digital asset would not be treated as a security or commodity for purposes of the mark-to-market rules and would therefore be eligible for mark-to-market treatment only under the rules applicable to the new third category of assets."

Limit the deduction for the transfer of property to the value of property included in income

The proposal would amend IRC Section 83(h) to limit the service recipient's deduction for income attributable to property transferred in connection with the performance of services to the amount the service provider included in income. It also would deem the amount reported on the annual information return as included in income for purposes of IRC Section 83(h).

The proposal would be effective after December 31, 2024.

Implications

The proposals in the approximate $7.3 trillion budget would have a major economic impact on certain industries including, but not limited to, oil and gas and real estate. Corporations and high-income individuals also would be significantly affected by higher rates, if enacted. While the proposal presently is not expected to have momentum in Congress, it will serve as the cornerstone of the current Administration's economic policies. The Administration has not yet reached an agreement with Congress on the budget for the current fiscal year that began October 1, 2023.