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Legislators move to extend expired tax provisions as Camp announces he won’t seek re-election

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Congress has finally begun the process of extending the 50-plus tax provisions that expired at the end of 2013. The Senate Finance Committee approved a bill on April 3 that would extend 51 of these tax provisions for two years. Meanwhile, the House Ways and Means Committee is expected to address on April 8 those business tax provisions extended as part of the tax reform discussion draft released by Chair Dave Camp, R-Mich., in February.

 

Camp, who has served as chair of the Ways and Means committee since 2011 and has been a member of Congress since 1991, announced on March 31 that he would not seek re-election. Camp cited party rules as being responsible for his inability to remain as chair in the next Congress and one reason for his decision to retire. Speculation about Camp’s decision to step down has been widespread over the past year, especially after he declined to run for the Senate in Michigan after Sen. Carl Levin, D-Mich., decided he would not seek reelection. Camp has said he still intends to pursue tax reform over the rest of his term. He has repeatedly emphasized a preference for comprehensive reform over a short-term renewal of tax extenders, but his approach has softened in recent weeks.

 

The Senate Finance Committee’s Expiring Provisions Improvement Reform and Efficiency (EXPIRE) Act would retroactively extend the majority of tax provisions that expired at the end of 2013, making them effective for 2014 and 2015. Included are popular individual tax benefits like the itemized deduction for state and local sales taxes and the ability of taxpayers age 70 ½ or older to make tax-free distributions from an individual retirement accounts charity. More important, the bill would extend nearly all of the expired business provisions, including:

  • The research credit
  • The work opportunity tax credit
  • The 15-year straight-line cost recovery for qualified leasehold improvements, qualified restaurant buildings and improvements, and qualified retail improvements
  • Alternative fuel incentives
  • The look-through rule for payments from related controlled foreign corporations (CFCs)
  • The subpart F exemption for active-financing income

 

Tax writers also included extensions of several business provisions that were originally enacted during the economic downturn to boost the economy:

  • 50% bonus depreciation
  • Reduced five-year holding period for S corporation built-in gains for dispositions
  • 100% exclusion for gain from qualified small business stock

 

The only provisions that expired at the end of 2013 and were not included in the final version of the bill approved by committee action were the Section 45M energy-efficient appliance credit, a partial expensing allowance for certain refinery equipment and New York Liberty Zone tax-exempt bond financing (a full table listing all the extended provisions is included at the end of this update). However, several significant provisions were not included in the first version of the bill introduced by Senate Finance Committee Chair Ron Wyden, D-Ore. Several of these provisions were added back as part of the revised chairman’s mark or through amendment, including:

  • The look-through rule for payments from related controlled foreign corporations
  • The Section 45 credit for production of renewable electricity
  • The expensing allowance for film and television productions
  • The Section 179D deduction for energy-efficient commercial building property

 

The provisions that had to be added separately could be most precarious if any extensions are eventually dropped in order to reach a final agreement with the House.

 

Modifications

The legislation would also modify several tax incentives, including the research credit. The committee approved an amendment that would allow individuals to offset research credits against the alternative minimum tax and would allow businesses less than five years old with less than $5 million in annual gross receipts to take a refundable research credit of up to $250,000 against payroll taxes. These types of enhancements have been considered in the past and have significant support. However, they are susceptible to being dropped as the process continues.

 

The legislation would also extend for one year the credit for fuel cell vehicles and several pension plan provisions that are not scheduled to expire until the end of 2014. In addition, the committee approved a separate package of technical corrections that could be added to the extenders bill later in the process.

 

Wyden would not allow votes on amendments to delay the medical device excise tax for two years or add the Marketplace Fairness Act, which would authorize states to require out-of-state sellers to collect sales tax. Wyden ruled that the amendments were not germane to the markup, but both items have some bipartisan support and could be offered again when the bill reaches the Senate floor. Both provisions still face an uphill battle to enactment.

 

The legislation includes only $865 million in revenue offsets – the vast majority of which come from provisions that would expand IRS levy authority to 100%, up from 15%, of Medicare provider payments — a provision also included in Camp’s tax reform discussion draft, exclude clean coal power initiative grants from gross income, and extend preparer due diligence requirements to the child tax credit. The offsets are meant to cover some of the cost of modifications to the extender provisions and not pay for the extensions themselves. Democrats remain committed to extending the expired provision without using revenue offsets. This position may run into more trouble in the House. Many Republicans have pledged not to vote for any provisions that increase the deficit, including targeted tax cuts.

 

Next steps

Senate Majority Leader Harry Reid, D-Nev., is committed to moving the extenders legislation, but the process could continue to drag. The Senate must carve out time for the bill and wait for the House to act, after which the two chambers must reconcile their differences. Wyden, who recently took over the committee for former Sen. Max Baucus, D-Mont., repeatedly stressed during the markup that he was committed to tax reform and would never again move a bill with temporary provisions.

 

Camp still appears more focused on tax reform than extenders and has indicated that he views the extenders primarily as a means to advance tax reform. In a letter to committee members, he said the permanent extension of some temporary tax provisions would give him a better revenue baseline and could “pave the way for tax reform.” He has scheduled a hearing the week of April 7 to examine “the benefits of permanent tax policy” and discuss which extenders should be made permanent. How he intends to integrate the extenders into permanent tax reform has not yet been revealed.

 

Final agreement between the House and the Senate is likely to follow the Senate approach, unless tax reform develops additional momentum in the coming months. Ways and Means chair Camp’s recent announcement that he will not run for re-election is generally believed to further limit the outlook for fundamental tax reform. Republican leaders have reacted coolly to his tax reform discussion draft (for a description of Camp’s draft, see Tax Legislative Update 2014-01). The Republican budget approved by the Budget Committee on April 3 calls for progrowth tax reform but does not endorse Camp’s bill. The budget calls for deeper tax rate cuts for passthrough businesses than those in Camp’s discussion draft, noting that passthroughs are responsible for roughly half of all active business income and private sector employment.

 

Details

The following table describes how the bill treats all the provisions that expired at the end of 2013. The table notes if the provision was added as part of the modification to the chairman’s mark or by an amendment during the markup.

Provision

Extension under Senate Finance Committee bill

Individual tax provisions

Itemized deduction for state and local sales taxes

  • Extends through 2015

Above-the-line deduction for qualified tuition and expenses

  • Extends through 2015

Above-the-line deduction of $250 for teacher classroom expenses

  • Extends through 2015

Tax-free IRA contributions to charity after age 70½

  • Extends through 2015

Deduction for mortgage insurance premiums

  • Extends through 2015

Transit and parking fringe benefit equalization

  • Extends through 2015, and an amendment was approved that adds cost of bike share to definition of qualified transit benefit

Exclusion for principal residence debt forgiveness income

  • Extends through 2015

Health care tax credit for displaced workers

  • An amendment was approved extending through 2015

General business tax provisions

Research credit

  • Extends through 2015, and an amendment was approved that would allow individual research credits to offset alternative minimum tax and make up to $250,000 of credit refundable against payroll taxes for businesses less than five years old with less than $5 million in annual gross receipts

Qualified small business stock

  • Extends to apply to stock acquired before Jan. 1, 2016

New markets tax credit

  • Extends through 2015

Reduced five-year holding period for S corporation built-in gains for dispositions

  • Extends through 2015

Work opportunity tax credit

  • Extends through 2015 and the chairman’s mark adds those who have exhausted unemployment benefits as a new category of eligible workers

CFC-related payment look-through rule

  • Chairman’s mark extends through 2015

Subpart F exemption for active-financing income

  • Extends through 2015

Minimum low-income tax credit rate for low-income housing credit

  • Extends through 2015 and the chairman’s mark adds a 4% minimum credit rate for acquiring existing housing

Exclusion of military housing allowance for income test for low-income housing credit

  • Extends through 2015

Indian employment tax credit

  • Extends through 2015

Employer wage credit for active-duty employees

  • Extends through 2015, and the chairman’s mark expands the credit to all employers and increases rate to 100%

RIC-qualified investment entity treatment under FIRPTA

  • Extends through 2015

Interest and short-term capital gains-related RIC dividends

  • Extends through 2015

Conservation contributions of capital gain real estate

  • Chairman’s mark extends through 2015

Enhanced charitable deduction for gifts of food inventory

  • Extends through 2015

Treatment of payments to controlling exempt organizations

  • Extends through 2015

Basis adjustment to S corporation stock for charitable contributions of property

  • Extends through 2015

Railroad track maintenance tax credit

  • Extends through 2015

Mine rescue team training credit

  • Extends through 2015

Depreciation provisions

Bonus depreciation

  • Extends 50% bonus depreciation for property placed in service in 2014 and 2015 (2016 for certain long-lived and transportation property) and extends ability to claim unused AMT credits in lieu of bonus depreciation

Section 179 expensing

  • Extends the $500,000 expensing allowance and $2 million phaseout threshold to property placed in service before Jan. 1, 2016, and an amendment was accepted to index these figures it to inflation

15-year straight-line cost recovery for qualified leasehold improvements, qualified restaurant buildings and improvements, and qualified retail improvements

  • Extends through 2015

Three-year depreciation for racehorses

  • Extends through 2015

Seven-year cost recovery for motor-sports entertainment complexes

  • Chairman’s mark extends through 2015

Expensing for advanced mine safety equipment

  • Extends through 2015

Special expensing for film and television productions

  • Chairman’s mark extends through 2015

Energy tax provisions

Section 30D plug-in electrical vehicle credit

  • General credit, which will begin to phase out once 200,000 vehicles are sold, is not extended
  • Credit for three-wheeled vehicles allowed to expire, but the credit for motorcycles is extended through 2015

Credit for production of Indian coal

  • Extends through 2015

Cellulosic (second-generation) biofuel credit

  • Extends through 2015

Special depreciation for cellulosic biofuel plant property

  • Extends through 2015

Incentives for biodiesel and renewable diesel

  • Extends through 2015

Alternative fuel and alternative fuel mixture credit

 

  • Extends through 2015 for all fuels, including propane used in forklifts

Alternative fuel vehicle refueling property credit

  • Extends through 2015

Special rule for qualified electric utility dispositions to implement FERC or state restructuring policy

  • An amendment was approved that extends through 2015

Partial expensing of refinery equipment

  • Not extended

Section 45 renewable electricity production credit

  • Chairman’s mark extends credit to property with construction beginning before Jan. 1, 2016, and extends ability to claim 30% Section 48 credit in lieu of Section 45

Section 45M energy-efficient appliance credit

  • Not extended

Section 45L energy-efficient new home credit

  • Extends through 2015

Section 25C energy-efficient home improvement tax credit

  • Chairman’s mark extends through 2013 and expands the credit to include energy star roofing

Section 179D deduction for energy-efficient commercial building property

  • Chairman’s mark extends through 2015 and updates the energy efficiency standards.

Incentives for specific locations

Accelerated depreciation for Indian reservation business property

  • Extends through 2015

Empowerment zone tax incentives

  • An amendment was approved extending through 2015

Section 199 deduction for Puerto Rican production activities

  • Extends through 2015

Increased limit on rum excise tax cover for Puerto Rico and the Virgin Islands

  • Extends through 2015

American Samoa economic development credit

  • Extends through 2015

New York Liberty Zone tax-exempt bond financing

  • Not extended

Qualified Zone Academy Bonds

  • Extends through 2015, and the chairman’s mark reduces the private contribution requirement from 10% to 5%

 

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Contact
Mel Schwarz
202.521.1564
mel.schwarz@us.gt.com

 

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