Director, Tax, Fiscal Affairs, and Accounting
Associated General Contractors of America
202.547.4733
| lenihanb@agc.org

AGC Financial Issues Forum Winter Meeting

AGC Financial Issues Forum Winter Meeting

AGC Financial Issues Forum Winter Meeting
• Unusual bipartisan and bicameral cooperation from lead tax-writers to drive the debate, including joint hearings and a redolent tax reform road show
• Ways and Means Chairman created bipartisan working groups, released three detailed discussion drafts, and now holding intensive Member-only meetings to prep for rollout
• Finance Chairman published policy papers in the Spring under a blank slate approach
• Finance Chairman released four “staff discussion drafts” in the late Fall
• In December, Chairman Camp announced that he would delay his long-stated goal of marking up a tax bill in 2013
• Administration has not engaged other than to promote corporate only proposals
• White House selected Baucus as ambassador to China (confirmation in early 2014)

Source: Bloomberg
AGC Financial Issues Forum Winter Meeting

AGC Financial Issues Forum Winter Meeting
Corporate coalitions form to advocate for tax code overhaul
Senate Finance Cmte. shifts focus to IRS scandal
House Ways and Means Cmte.
Chairman Dave Camp (R-Mich.) flirts with but decides against Senate run
Congressional momentum on tax reform
Sequester diverts lawmakers’ attention
Fiscal cliff deal meets some
Democrats’ aim of raising taxes on wealthy; eases widespread push for reform
Senate Finance Cmte.
Chairman Sen. Max
Baucus (D-Mont.) announces retirement
Senators asked to submit confidential proposals on which tax breaks to keep
Congress resumes; budget is top priority
Source: National Journal

• The transition of Finance Chairman could begin as early as January
• W&M Chairman Camp could release a comprehensive draft bill in January - February
• Debt Limit February – March (CBO June)
• Primary season starts March – May – kitchen table issues will shift to forefront
• The majority of primaries will occur in June & August
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AGC Financial Issues Forum Winter Meeting
• Highway Reauthorization
• Unemployment Insurance
• Minimum Wage
• Health Care Reform/Repeal
• Farm Bill
• Water Infrastructure (WRRDA)
• NSA
• Immigration Reform
• Flood Insurance Program
• Higher Education
• Pension Reform
• Housing Finance Reform
• Terrorism Risk Insurance
• Repeal of Medical Device Tax
• Physician Reimbursement (SGR)
• Trade agenda

AGC Financial Issues Forum Winter Meeting

AGC Financial Issues Forum Winter Meeting
Ron Wyden(D-Ore.)
Elected: 1996; 4 th term
Profile: Promoted health care legislation with
Chairman Paul Ryan (R-WI)
Sponsored a tax reform bill with Sen. Dan Coats (R-IN)
Pitched transportation legislation with Sen. John
Hoeven (R-ND)
Dave Camp (R-Mich.)
Elected: 1998; 8 th term
Motivation: Term limited as Chairman and sees as legacy agenda item
Next Step: Vie for Tax Subcommittee Gavel or run for leadership position – opted out of run to succeed the open Senate seat occupied by Sen.
Carl Levin

AGC Financial Issues Forum Winter Meeting
Ron Wyden(D-Ore.)
Elected: 1996; 4 th term
Paul Ryan(R-Wis.)
Elected: 1998; 8 th term
Both are expected to helm the tax writing committees in 2015
While ideologically on opposite sides of the political spectrum –in December 2011 they attracted attention for working together on a Medicare reform plan
Concern for comprehensive tax reform – will chairmen be as dedicated or switch their focus to main driver of debt – entitlement reform

AGC Financial Issues Forum Winter Meeting
Mark Mazur
Assistant Secretary for Tax Policy
Confirmed: August 2012
• Responsible for developing, analyzing, and coordinating
Treasury's and the Administration's agenda, policies, and guidance on tax issues.
• Internal Revenue Service, Director of Research & Analysis
• Joint Committee on Taxation
• National Economic Council under President Clinton
John Koskinen
Confirmed: December 20, 2013
• In December, the Senate confirmed him as the next IRS
Commissioner by a 59 to 36 vote.
• Koskinen, 74-year old former Freddie Mac executive, has a history of turning around distressed organizations
• Served in the Office of Management and Budget (OMB) during the Clinton-era.

AGC Financial Issues Forum Winter Meeting
Chairmen – Camp-Baucus
Baucus announced as nominee for US Ambassador for China
Camp has backing from Speaker but not a long leash due to politics
Camp met with his leadership in December – outcome was get the votes then move bill
Future Chairmen – Ryan-Wyden
Status quo election in 2014 could allow carryover of progress
Wyden agenda will be key marker for which committee issues move (health, trade)
Committee Staff
Baucus had 3 high level staff departures – unclear if Wyden will rearrange staff
Camp beefed up his tax cadre since 2011 – unsure which committee staff will remain in 2015
Administration
No engagement until the appearance of a concrete plan from Congress (post 2014?)

AGC Financial Issues Forum Winter Meeting

AGC Financial Issues Forum Winter Meeting
• Economic growth should be the goal of tax reform
• Tax policy should not pick winners and losers
• Higher taxes should be supported if the money collected is dedicated to public works projects
• Clarity, simplicity and certainty should be the goals of tax reform
• Dollar thresholds should be indexed to avoid stealth tax increases
• A three year phase in of tax policy would be preferable to deal with long term contracts
• Lower rates are preferable to more deductions, and limits on deductions should be looked at if they accompany rate cuts. Of the deductions, it was determined that accelerated depreciation was an extremely important policy for the industry
• A gross receipts tax or value added tax would be bad for the construction industry
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AGC Financial Issues Forum Winter Meeting
Tax Policy
Repeal corporate and individual Alternative Minimum Tax – Repeal the
Alternative Minimum Tax for C-corporations and pass-throughs in order to provide capital needed for businesses to grow and invest
Percentage-of-Completion Accounting – The threshold at which the
Percentage-of-Completion method of accounting is required should be increased to
$40m indexed for inflation since inception and should be exempt from AMT
Lookback Accounting – Eliminate the burdensome Lookback Accounting requirement for long-term contracts
Taxation of Income While In Dispute – Stop taxation of income while in dispute
Domestic Production Activities Deduction – Preserve the Section 199 deduction for the construction industry
Bonus Depreciation and Capital Expenditures Write-Off Levels – Expand and make permanent bonus depreciation and enhanced capital expenditures writeoffs to incentivize capital investments and new and used equipment purchases
Shortened Cost Recovery Period for Leasehold, Retail, and Restaurant
Improvements – Make 15-year shortened cost recovery permanent to provide an important incentive for capital improvements to these properties
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AGC Financial Issues Forum Winter Meeting
Tax Policy
Employee Misclassification – Oppose Unnecessary Administrative Burdens and
Recordkeeping Requirements For Employers and Clarify the Definition to Preserve
Legitimate Independent Contractor Relationships
Per Diem Allowances – Allow the Full Deductibility of Per Diem Allowances in
Construction
Tax Rate Overhaul – Retain Permanent Marginal, Capital Gains, and Dividends
Rate Reductions
Tax Exempt Public Works Financing –Preserve the Preferable Tax Treatment of Debt Used to Finance Public Infrastructure
Commercial Building Energy Efficiency Tax Deduction – Increase Deduction and Convert it into a Tax Credit to Provide a Significant Financial Incentive for all
Property Owners to Improve the Energy Efficiency of Commercial Buildings and
Ensure that 179D does not get Charged to the Contractor Doing the Work
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Net Operating Loss Carryback – Create permanent tax policy on NOL
Carryback that allows a 5-year carryback and a 15-year carryforward for all businesses to allow cash-strapped businesses to convert future tax benefits into cash today
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AGC Financial Issues Forum Winter Meeting
Tax Policy
Carried Interest – Reject efforts to increase tax that would undercut the economic incentive to build projects and drive away investments from the commercial real estate sector. Most efforts identified have cast a broad net and will likely have a significant impact on equity transfer in closely held construction companies.
Alternative Energy—Extend Alternative Energy Tax Production Tax
Credits
Retirement Security – Reform the Social Security System; Preserve
Currently Available Tax Preferred Retirement Savings Vehicles and
Provide Alternative Savings Vehicles to Ensure Stable Retirement for All
Generations of Workers
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AGC Financial Issues Forum Winter Meeting
In November & December, Chairman Baucus unveiled three discussion drafts. The policy proposals are meant to build momentum in Congress for a corporate tax overhaul.
• Tax administration: Reduce complexity, increase compliance and ensure taxpayer rights.
• Cost recovery and accounting: Businesses could face additional taxes as a result of lengthening tax depreciation and amortization benefits, and curtailing expensing. The anticipated new revenue — $700+ billion over 10 years — would be used to offset the cost of cutting the corporate tax rate. Baucus reportedly wants to reduce rates to below 30 percent.
• International taxation: Companies could incur a one-time tax of $200 billion on accumulated earnings. Future foreign earnings would be taxed under a lower corporate income tax rate of less than 30 percent, partially offset by a minimum tax on all foreign income as it is earned.
• Energy taxation: Consolidate 42 provisions in to 2 simplified technology-neutral tax credits for the domestic production which phase out as GHG intensity of each market has declined by 25 percent as determined by the EPA.

AGC Financial Issues Forum Winter Meeting
The staff discussion draft proposes a modernized set of rules that are “simpler, fairer, and lessen tax burdens on small businesses.” Revenue raised used to reduce the corporate tax rate.
• Replace current MACRS and ADS with a system that approximates economic depreciation based on estimates from the Congressional Budget Office.
• This new system would use a pooling method rather than requiring taxpayers to calculate depreciation for separate assets. Reduce the number of major depreciation rates from more than 40 to 5.
• Treasury would have regulatory authority to reassign assets to different pools or to create new asset classes.
• Elimination of bonus depreciation
• Permanently increase Section 179 expensing to $1 million and expand the definition of qualifying expenses.
Chairman Baucus requested that CBO produce a letter detailing their analysis of economic depreciation rates of tangible assets. Proposed effective date: taxable years beginning after 2014
Committee staff is looking for feedback from stakeholders by January 17, 2014

AGC Financial Issues Forum Winter Meeting
Assets would be assigned to pools based on specific asset classes (end of year pool adjusted basis is multiplied by an assigned percentage to determine the depreciation deduction for the year).
Pool 1 (38%) – annual economic depreciation 20 percent or more
• Includes computers, computer software, business automobiles
Pool 2 (18%) – annual economic depreciation 12 to 20 percent
• Hard to generalize, but includes trucks, farming assets, Distributive Trades or Businesses
(Asset Class 57.0), some manufacturing assets
Pool 3 (12%) – annual economic depreciation 6 to 12 percent
• Includes most manufacturing asset classes, air transportation, most oil production and refining, office furniture, section 1245 property without an assigned asset class
Pool 4 (5%)– annual economic depreciation under 6 percent
• Includes non-building land improvements, pipelines, water transportation, most non-real property utility property, solar and wind energy
Source: KPMG 12/3/13

AGC Financial Issues Forum Winter Meeting
Senate Finance Committee “Staff Discussion” Draft
Cost Recovery Draft
Comparison with House Ways and Means
Provision
Depreciation
Cost recovery and accounting
LIFO accounting
Small business tax relief
Camp
N/A
N/A
Baucus
Limits depreciation (with pooled asset recovery system) and amortization tax benefits
Repeals
Cash accounting, more immediate expensing
Cash accounting, more immediate expensing

AGC Financial Issues Forum Winter Meeting
Senate Finance Committee “Staff Discussion” Draft
Cost Recovery Draft
Cost Recovery and Accounting
Limit depreciation tax benefit of tangible assets with pooled asset recovery system
Analysis
According to Baucus, certain business costs such as those related to oil and gas extraction will have a simpler depreciation schedule more aligned with the economic lives of assets. By setting depreciation schedules roughly equal to economic lives, the policy removes implied benefits from the current more accelerated depreciation schedule.
Increase immediate expensing for small businesses Business expenses that qualify for the Section 179 benefit are increased from $500,000 to $1 million and the definition of qualifying expenses is expanded.
Cash accounting for small businesses Expanded to include all businesses with gross receipts less than $10 million with inflation indexing. Concern is the accrual method is more complex and costly for construction companies. These businesses would not be permitted to change their method of accounting without consent more frequently than every five years.

AGC Financial Issues Forum Winter Meeting
Senate Finance Committee “Staff Discussion” Draft
Cost Recovery Draft
Cost Recovery and Accounting
Real Property
Repeal of Section 1031 like-kind exchanges
Section 179 expensing
Analysis
Buildings and other property classified as “real property” would be depreciated over 43 years using the straight-line method
Baucus’ rationale – The effect of reducing the pool balance by the gross proceeds of a disposition, and adding the value of the replacement asset, has substantially the same effect as LKEs.
Baucus would extend the current 179 rules for an additional year but then permanently modify them going forward. After the change, the maximum amount that could be expensed would be set at $1 million (phasing out for qualifying property exceeding $2 million) with the thresholds indexed for inflation.
Currently, the $500,00 maximum deduction is scheduled to plummet to $25,000 in 2014 (see extenders).
Repeals specialized expensing provisions Repeals the tax deduction for energy-efficiency improvements to commercial buildings under Section 179D.

AGC Financial Issues Forum Winter Meeting
• JCT and Finance Committee majority staff determined that every $2 trillion of individual tax expenditures that are added back would, on average, raise each of the seven individual income tax brackets by between 1.3 and 2.2 percentage points from what they would be under a blank slate.
• Every $200 billion of corporate tax expenditures that are added back would, on average, raise the top corporate income tax rate by 1.5 percentage points from what they it would be under a blank slate.
Largest business revenue raisers
Alternative to Current Depreciation Schedule (MACRS)
Domestic production activities deduction
Deferral of gain on like-kind exchanges
Completed contract rules method
Estimated Revenue Cost (Billions)
Source: JCT Tax Expenditure Estimates, October 2011
Corporate Pass-throughs
$506.0
$217.0
$127.0
$16.0
$13.9
$36.9
$2.0
–
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AGC Financial Issues Forum Winter Meeting
• Chairman Baucus’s departure could ease action on a package of temporary tax breaks lawmakers routinely renewed known as “extenders.” Baucus &
Camp had been holding them in abeyance to focus attention on tax reform efforts.
• Senator Wyden stated he wanted to take up those breaks sooner rather than later. “Even a relatively short period really can harm the kind of investment and certainty and predictability” that’s needed for businesses that rely on the breaks.”
• Extending all 55 provisions would increase the deficit by about $50 billion per year.
• Will deficit hawks require offsets?

AGC Financial Issues Forum Winter Meeting
• List of the tax extenders along with their costs for 2013 and 2014, as was estimated by the Joint
Committee on Taxation after their extension on January 1, 2013.
• JCT has not released any cost estimates for renewing these provisions for 2014 and beyond.
Provision
Extension of new markets tax credit
Extension of work opportunity tax credit
Extension of bonus depreciation
Election to accelerate AMT credit in lieu of bonus depreciation
Extension of energy efficient commercial buildings deduction
Estimated Revenue Cost (Billions)
Source: JCT Tax Expenditure Estimates, February 2013
2013
$0.9
$0.9
$0.4
$19.6
$4.4
$0.16
$0.10
2014
$1.0
$0.8
$0.4
$30.2
$4.2
$0.14
$0.10

AGC Financial Issues Forum Winter Meeting
The Urban Institute released an evaluation of the New Markets Tax Credit (NMTC) based on projects launched between 2002 and 2007.
In its early years, the NMTC program operated as intended—encouraging investments in low-income areas for a diverse range of community- and economic-development projects associated with varying results.
About two-thirds of projects, accounting for about three-quarters of all project costs, consisted of construction or rehabilitation of commercial or residential real estate (including office buildings, housing, mixed-use, and retail properties).
Based on the evidentiary review, it can reasonably be concluded that between three and 4 of every 10 early-year projects would likely not have proceeded without NMTCs; about 1 of every 10 projects would likely have proceeded without NMTCs, but probably in a different location or on a delayed schedule.
Category Direct Jobs
Construction 171,804
Indirect Jobs
65,822
Induced Jobs
97,711
Total Jobs
335,337
Source: NMTC Coalition Economic Impact Report 2003-2012

AGC Financial Issues Forum Winter Meeting

AGC Financial Issues Forum Winter Meeting
April 2013
Submitted comments to the W&M pass-through group highlighting 179 Expensing, Percentage-of-
Completion Accounting, Look-back Accounting
July2013
Submitted comments to SFC for blank slate deadline
January 2014
Plan to submit comments to SFC for capitol cost recovery staff discussion draft highlighting:
• MACRS
• 179 expensing
• 179D
• Accrual method threshold
• 15-year leasehold improvements,
• Removal of “home construction contract” classification
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AGC Financial Issues Forum Winter Meeting
AGC has been a leader in Washington circles to engage coalitions and the tax committees to promote a comprehensive message (C-corp & pass-throughs) when reforming business rates.
Leaders of the RATE Coalition and the
Coalition for Fair Effective Tax Rates stressed at a joint Capitol Hill event that both the individual and corporate sides of the code need to be revamped.

AGC Financial Issues Forum Winter Meeting
Establish effective tax rates as the best metric to make meaningful comparisons among policy choices and how they would impact different business types and industries

AGC Financial Issues Forum Winter Meeting
Choosing a Company’s Tax Rate for Tax Overhaul
• A popular measure used by companies to understand taxes paid relative to profit.
• Lawmakers also use ETRs in comparing taxes paid by businesses and assess the impact a tax provision may have on industry ETRs when deciding among potential base-broadeners
Three important factors that influence a company or industry’s effective tax rate:
• Variation in definitions of tax and income
• Timing and data issues
• Accounting methods
Entity Study Calculation methodology Implication for tax debate
Multinationals Business Roundtable All taxes (federal, state, foreign except deferral) or statutory rate
Tax rate on multinationals relatively higher than foreign competitors
C corporations Treasury Combined corporate and individual rate
(with significant assumption for distribution of profits rather than retained earnings)
Tax rate on C corporations relatively high because of “double taxation”
Pass-throughs GAO Federal income taxes only Tax rate on pass-throughs relatively high

AGC Financial Issues Forum Winter Meeting

AGC Financial Issues Forum Winter Meeting
• Can lawmakers ever settle the question as to whether tax revenues are high enough or need to rise further?
• Will business community accept repealing or modifying long-standing tax rules, even in exchange for lower rates?
• Will individual taxpayers have sticker shock when they see which loopholes have to be closed in tax reform?
• Will the House move forward without acknowledgement of progress from the
Senate?

AGC Financial Issues Forum Winter Meeting
Democratic Leadership in Congress
• Use tax reform to raise revenue for social & health programs
• Tax the rich and oil & gas for middle-class & low-income tax preferences
House Republican Fiscal Hawks
• Waver on anything that smells like a tax increase or too large of a bill
• Incumbents fear radical primary challengers
Democrats in Senate
• Having a hand in crafting a tax measure could stall efforts
• Will want to save tax provisions for their constituencies or filibuster
House Republican Leadership
• Wary of moving a bill that jeopardizes their majority status if the Senate slow-walks
• Need House Democrats to advance bill on the House floor

AGC Financial Issues Forum Winter Meeting
• Unlikely at this point that Democrats would reverse course and allow the next debt limit increase to be used to address policy issues
• Shortened congressional schedule for action; slim odds of reaching an agreement on revenue levels for tax reform
• “Dynamic Scoring” could help: Economists agree that a tax change that trades inefficient tax subsidies for lower business tax rates should generate more economic activity. CBO signal on scoring the Senate’s immigration bill proved important to passage in at least that chamber
• Tough to see reformers overcoming barriers and enacting tax reform without it being part of a larger agreement, but tax reform does have bipartisan support in both the House and Senate
• Broader Structural Problems: Deeply divided environment in Washington makes it challenging to pass any legislation (inter & intra party strife)

AGC Financial Issues Forum Winter Meeting

AGC Financial Issues Forum Winter Meeting
Baucus and Camp have not laid out all of their cards
• Other important tax expenditures, such as Section 199 and interest deductibility could also face repeal or reduction
• No legislative drafts with specific tax rates for c-corps and pass-throughs released
Camp will continue facing political conflict in 2014
• If Camp's proposals are released, the tax policy discussion could focus less on Camp's goals and instead more on how his proposals may align or conflict with the administration's FY2015 budget, which should also be released in February 2014.

AGC Financial Issues Forum Winter Meeting
Incoming Chairmen are waiting in the wings
• Wyden and Ryan have deeper policy differences and stronger support from the bases of their respective parties than the current chairmen, so if tax reform doesn’t happen in 2014, the legislative landscape will look much different in 2015 and 2016. So different, in fact, that tax reform may have to wait for a new president.
• Even if tax reform legislation were not to be enacted in this Congress, the efforts of both congressional committees are sufficiently comprehensive that they may set the agenda for tax reform efforts
Tax extenders extended retroactively sounds the death knell for tax reform in 2014
• $50+ billion in annual business tax extenders have a significant impact on business investment decisions

AGC Financial Issues Forum Winter Meeting
• Most observers believe Chairman Camp will release a specific tax reform plan with rates, base-broadeners, and revenue estimates in 2014. A good number also think the W&M
Committee will begin a tax reform markup in 2014.
• Many experts believe there is a 15-20% chance for reform in 2014 and that the environment for comprehensive reform will be better after 2016.
House
• 75% chairman releases tax reform proposal
• Better than 50% committee begins markup of tax reform legislation
• Less than 50% committee approves tax reform legislation
• 20% chamber passes comprehensive tax reform legislation
Senate
• Slightly better than 50% chairman releases reform proposal (if he keeps gavel)
• Less than 10% chamber passes comprehensive tax reform legislation

AGC Financial Issues Forum Winter Meeting