* No major tax overhaul seen now, more likely 2012-2013
* Top tax breaks include foreign deferral, depreciation
* Cantor willing to discuss loopholes, wants offset
* McCain calls for eliminating domestic production break (Adds new Cantor comments, McCain comments)
WASHINGTON, July 6 (Reuters) - Corporate tax breaks -- from offshore shelters to private jets -- are a key stumbling block in the U.S. debt ceiling debate, with talks set for Thursday between President Barack Obama and congressional leaders.
The tax code is riddled with deductions, exemptions and other provisions to support corporations. Not since 1986 under President Ronald Reagan has the code been fully overhauled.
Obama and the Democrats want to end some of these tax breaks, while Republicans generally are opposed, with much horse-trading and compromise sure to come in months ahead.
Though specific tax breaks -- for ethanol fuel and hedge fund manager's pay, for instance -- are being debated right now as tax moves up the debt ceiling agenda, most analysts do not expect a thorough tax code reform until 2012-2013.
"It's unlikely that we're going to get a deal in the short term that has any significant tax/revenue changes," said Anne Mathias, director of research at financial group MF Global.
"But I do think this is setting the stage to make it more likely that we will have a pretty big tax reform at the end of another extension of the debt ceiling."
House of Representatives Republican Leader Eric Cantor said on Wednesday that he is willing to discuss tax loopholes with Obama. "We'll be glad to talk loopholes ... Preferences in the code aren't something that helps economic growth overall," he said, adding that offsetting tax cuts must accompany any such discussions.
Corporations want the 35-percent corporate income tax rate reduced as a trade-off for ending some of their tax breaks.
Corporate tax breaks will cost the government about $102 billion in lost revenues in 2011. Curbs on them would trim the $1.5-trillion annual deficit, but they would be hard to achieve, and much more would be needed to balance the budget.
The total cost of corporate tax breaks is dwarfed by the cost of tax breaks for individuals. The mortgage interest tax deduction alone will cost $104 billion this year, for example.
Each corporate tax break is protected by lobbyists for companies that aggressively exploit these provisions, usually in perfectly legal ways, to boost their profits.
Here are the four biggest corporate tax breaks, based on U.S. Office of Management and Budget estimates of 2011-2015 revenue losses facing the government on each one.
DEFERRAL OF FOREIGN INCOME
Profits earned by U.S. corporations at home are taxed right away, but not necessarily profits earned overseas, as long as the parent company wriggles through certain legal loopholes.
This difference is at the core of many multinational businesses' profit-maximizing tax strategies. It is high on most analysts' lists of corporate tax reform targets.
It works this way. Corporate tax must be paid as profits are earned from U.S. operations, or from directly owned branch operations abroad. But profits earned by a legally separate foreign subsidiary, or by a pass-through entity such as a partnership, are different. These indirect profits are not taxed until they come back to the United States and they can sit overseas, untouched by Uncle Sam, for many years.
As a result, U.S. businesses today have $1 trillion in profits parked overseas, avoiding the 35-percent U.S. corporate income tax. Corporations want to bring the money home -- and so does the government -- because it would boost revenue. But companies are holding out for a deal, like they got in 2004.
Back then, a similar mountain of overseas profits had built up and the Bush administration allowed it to come home at a low tax rate of 5.25 percent, saying it would boost job creation. Studies later showed most of the roughly $299 billion that was repatriated went to share buybacks, not creating jobs. Any new deal would have to get around this.
What is the political outlook? The largest corporate tax break of all is squarely in the sights of the Obama administration and congressional Democrats. Many Republicans, too, want a change in this area. But complexity and divergence in views among companies make agreement difficult. Pharmaceutical and technology companies have much to lose, while firms with few overseas operations have little at stake.
Estimated cost, 2011-2015: $172.1 billion.
STATE AND LOCAL TAX-FREE BONDS
Buying bonds from state and local governments to finance public projects -- from schools to hospitals to airports -- is good business. This is because the interest that corporations get back from such lending is tax-free income.
Political outlook? Businesses across the economy use this tax break, also available to individuals. It is a vital support for state and local governments. Despite its size, it generally is not on any analysts' short list of targets for reform.
Estimated cost, 2011-2015: $59.8 billion.
DOMESTIC MANUFACTURING DEDUCTION
Making things in the United States, instead of abroad, gets companies a tax deduction under Section 199 of the Internal Revenue Code, enacted during the Bush administration in 2004.
It lets companies cut their taxable income if they can show a sizable portion of their profits came from U.S. operations.
Businesses that can use this provision include manufacturers; computer software makers; music and film producers; electricity, oil, natural gas and water utilities; and construction, engineering and architectural firms.
Political outlook? Oil and gas companies this year have fought off proposals in Congress to kill this tax break for their sector. Manufacturers, miners, farmers, Hollywood and power producers also stand to lose if Section 199 is killed.
The financial services industry and retailers have little at stake. So on this issue, businesses are not united, making it hard to find agreement on changes, though some want it.
Republican Senator John McCain on Wednesday said the government "should eliminate the Section 199 tax subsidies for all industries."
Estimated cost, 2011-2015: $58 billion
Companies own assets -- from forklifts to private jets -- that wear out. As they age, their value is reduced on the books -- a standard accounting practice called depreciation.
The value lost each year is a cost for companies, but it is a tax-deductible one. Accelerated depreciation lets companies deduct depreciation costs faster than they normally would.
This tax break was expanded recently. Under a December 2010 tax and economic stimulus deal, companies can deduct the entire cost of new, long-term investments in 2011 only, with some "bonus" depreciation provisions extended through 2012.
Corporate jets were covered under this deal, accepted by both Obama and Congress.
Political outlook? Manufacturers, transport companies, farmers and high-tech firms gain most from this tax break, while banks, Wall Street, insurers and retailers gain little.
Businesses are divided on this as are lawmakers beholden to different industries. So agreeing on changes to this tax break will be tough.
Estimated cost, 2011-2015: $51.7 billion. (Reporting by Kevin Drawbaugh, editing by Howard Goller)