CONSISTENTLY DELIVERS

Mar 27, 2014

Tax Policy Update: Extenders Package Markup Expected Next Week

Wyden and Hatch have said in the past that they would prefer a package providing for a two-year extension of the already-expired provisions, which, if enacted, would be applied retroactively to cover the 2014 tax year as well as 2015.

As we discussed in this week's tax policy update, it is likely that not all of the tax extenders will be included in the base package, which we expect will not be offset by new revenue measures. However, Wyden may require offsets for any extenders added to his base package by amendment in order to keep the cost from escalating well above the $100 billion that a two-year extension will cost. Committee members will be encouraged to offer amendments, with priority given to those with bipartisan support.

This structure is likely to trigger a large number of amendments (we expect well over 100), as Senators will file four types of amendments:

  • Amendments that would restore dropped amendments (Democrats will file more of these than Republicans);
  • Amendments to delete provisions contained in the Chairman's Mark (Republicans will file more of these than Democrats);
  • Amendments to modify the policy in the extenders provisions; and
  • Unrelated amendments for which Senators are looking for a vehicle.

The alternative is for Wyden and Hatch to try to cut deals with Senators in advance, which they have not indicated thus far they are inclined to do.

Here are several issues to watch for:

Offsets. Will Chairman Wyden require offsets for amendments that expand the cost of extending the expired provisions? How might he justify a rule requiring offsets when the Chairman's Mark is not paid for? Without a budget resolution, reconciliation instructions, or a zero-cost Chairman's Mark, the effort to keep some Senators from making provisions permanent could be more difficult. What if a bipartisan group of Senators offers an unpaid-for amendment to make the R&D credit permanent? Will Wyden and Hatch be able to keep a vote from occurring, or defeat it? Of course they can, but it will require some negotiation and perhaps commitments on the committee leaders' part for future action on these items.

Energy Extenders. Will Wyden resolve the energy tax package behind the scenes or through public votes? If he wants to end up with a bipartisan vote to report the overall package, he should resolve some of these issues -- especially the wind production tax credit -- before he gets to the markup. Some Republicans want to end the PTC, and may vote against the overall package if it does not pare back or eliminate the provision. Many Democrats want it extended as is. That leaves the leverage with Republican Senators such as Sens. Grassley and Thune, who want the provision extended in some form, but perhaps not a straight extension.

Eeny, Meeny, Miny... No? How many of the small cost extenders will make the cut? In order to report out a bill with broad bipartisan support, the committee probably needs to pare the list either in terms of number of provisions or the overall cost of the provisions. The largest cost items are the PTC, the R&D credit, the active financing exception under Subpart F, and bonus depreciation. Some of the less costly extenders include the exclusion of discharge-of-indebtedness income on principal residences and the Work Opportunity Tax Credit.

The most likely scenario is a robust modification to the Chairman's Mark that narrows the number of amendments that must be litigated in open markup. However, this is Wyden's first markup as chairman of the Finance Committee, and he may not follow the strategy of previous chairmen.

A list of the tax provisions that expired at the end of 2013 and brief descriptions of each follows:

GENERAL BUSINESS

  • Special treatment of dividends from regulated investment companies: Exempts interest-related dividends and short-term capital gain dividends from a regulated investment company from tax (Secs. 871(k)(1) and (k)(2)).
  • Research and development credit: A credit of 20 percent of research expenses over a base amount. This credit has expired and been renewed many times in the past (Sec. 41).
  • Work opportunity tax credit: A credit equal to 40 percent of the qualified first-year wages of employees who are members of a targeted group (Sec. 51).
  • New markets tax credit: A credit for investments in businesses or real estate in low-income communities. (Sec. 45D(f)(1)).
  • Indian employment tax credit: A credit for employers of enrolled members of Indian tribes (or their spouses) who work on and live on or near an Indian reservation (Sec. 45A).

COST RECOVERY

  • Bonus 50 percent first-year depreciation: Provides a depreciation deduction equal to 50 percent of the adjusted basis of qualifying property in the first year the property is placed in service (Sec. 168(k)).
  • The $500,000 expensing limit and $2,000,000 phaseout threshold and expanded definition of Sec. 179 property: Expensing limit will be reduced to $25,000; phaseout threshold will drop to $200,000; and qualified real property will no longer be eligible for the Sec. 170 deduction (Sec. 179).
  • Fifteen-year straight-line cost recovery for certain improvements: Allows taxpayers to use 15-year straight-line recovery for qualified leasehold improvements, qualified restaurant buildings and improvements, and qualified retail improvements (Secs. 168(e)(3)(E) and 168(e)(7)(A)).
  • Election to accelerate certain credits in lieu of bonus first-year depreciation: Allows corporations to elect not to claim bonus depreciation but instead increase their AMT credit limit under Sec. 53(c) (Sec. 168(k)(4)).
  • Railroad track maintenance credit: A credit equal to 50 percent of the qualified railroad track maintenance expenditures paid or incurred by an eligible taxpayer (Sec. 45G(f)).
  • Three-year depreciation for racehorses 2 years old or younger (Sec. 168(e)(3)(A)).
  • Seven-year recovery period for motorsports entertainment complexes (Secs. 168(i)(15) and 168(e)(3)(C)(ii)).
  • Accelerated depreciation for business property on an Indian reservation: Provides owners of qualifying property used predominantly in the active conduct of a trade or business within an Indian reservation with accelerated recovery periods (Sec. 168(j)).

INTERNATIONAL

  • Regulated investment company treatment under Foreign Investment in Real Property Tax Act (FIRPTA): Provides that qualified investment entity includes any regulated investment company that is a U.S. real property holding corporation (Sec. 897(h)(4)).
  • Subpart F active financing income exceptions: Exempts certain insurance income and net gains from sale of property that produces qualified banking or financing income from income that is treated as subpart F income (Secs. 953(e)(10) and 954(h)(9)).
  • The foreign personal holding company lookthrough rules for payments between related controlled foreign corporations: Treats dividends, interest, rents, and royalties received or accrued from a controlled foreign corporation that is a related person as not foreign personal holding company income to the extent they are attributable or properly allocable to income of the related person that is neither subpart F income nor income treated as effectively connected with the conduct of a trade or business in the United States (Sec. 954(c)(6)).

ENERGY TAX PROVISIONS

  • Alternative fuel (non-hydrogen) vehicle refueling property credit: A credit of 30 percent of the cost of any qualified alternative fuel vehicle refueling property placed in service by the taxpayer during the tax year (Sec. 30C).
  • Credit for two- or three-wheeled plug-in electric vehicles: A credit of up to $7,500, based on battery capacity, for each new qualified plug-in electric drive motor vehicle placed in service by the taxpayer during the tax year (Sec. 30D).
  • Second-generation biofuel producer credit (cellulosic biofuel producer credit): A credit for each gallon of qualified second generation biofuel production (Sec. 40(b)(6)).
  • Biodiesel and renewable diesel fuel credits: Includes the biodiesel mixture credit, the biodiesel credit, and the small agri-biodiesel producer credit (Sec. 40A).
  • Biodiesel and renewable diesel fuel excise tax credits and outlay payments: A credit based on the number of gallons of biodiesel used by the taxpayer in producing any biodiesel mixture for sale or use in the taxpayer's trade or business. As an alternative, a taxpayer may receive a payment in the amount of the credit (Secs. 6426(c) and 6427(e)(6)(B)).
  • Beginning-of-construction date for renewable power facilities eligible to claim the electricity production credit or investment credit in lieu of the production credit: A credit is allowed for the production of electricity by a renewable power facility, or in the alternative, an energy credit for the cost of the construction of the facility, if construction of the facility began before 2014. These credits apply to wind, closed-loop biomass, open-loop biomass, geothermal or solar, small irrigation power, trash, refined coal production, qualified hydropower, Indian coal production, and marine and hydrokinetic renewable energy facilities (Secs. 45(d) and 48(a)(5)).
  • Indian coal production credit : Provides an increased credit for each ton of Indian coal produced by the taxpayer (Sec. 45(e)(10)(A)(i)).
  • New energy-efficient homes credit: A credit for each qualified new energy-efficient home constructed by an eligible contractor and acquired by a person from the eligible contractor for use as a residence during the tax year (Sec. 45L(g)).
  • Energy-efficient appliances credit: A credit for qualified energy-efficient appliances produced by the taxpayer (Sec. 45M).
  • Excise tax credits for alternative fuel mixtures: A credit of 50 cents per gallon of alternative fuel used in producing an alternative fuel mixture for sale or use in a trade or business (Sec. 6426(e)).
  • Special depreciation allowance for second-generation biofuel plant property: Provides a depreciation allowance equal to 50 percent of the adjusted basis of qualified second-generation biofuel plant property (Sec. 168(l)).
  • Placed-in-service date for partial expensing of certain refinery property: Allows taxpayers to treat 50 percent of the cost of any qualified refinery property as an expense that is not chargeable to capital account but instead as a deduction in the year the property is placed in service (Sec. 179C).
  • Energy-efficient commercial buildings deduction: Permits businesses to deduct the cost of energy-efficient commercial building property placed in service during the year, up to a limit of $1.80 per square foot and limited by prior Sec. 179D deductions on the building (Sec. 179D).
  • Special rule for sales or dispositions to implement Federal Energy Regulatory Commission (FERC) or state electric restructuring policy : Allows taxpayers to elect to defer the recognition of qualified gain from a qualifying electric transmission transaction (Sec. 451(i)).
  • Nonbusiness energy property credit: A credit of 10 percent of qualified improvements and expenditures, subject to a lifetime maximum (Sec. 25C).
  • Parity between the exclusion from income for employer-provided mass transit and parking benefits: Equalizes the limit for the monthly tax exclusion for employer-provided transit pass and vanpool with the limit for employer-provided parking benefits. For 2013, this amount is $245 (Sec. 132(f)).

HOUSING / REAL ESTATE

  • Exclusion for discharge-of-indebtedness income on principal residence: Excludes from gross income discharge-of-indebtedness income from the discharge of qualified principal residence indebtedness (Sec. 108(a)(1)(E)).
  • Premiums for mortgage insurance deductible as qualified residence interest: Permits taxpayers whose income is below certain thresholds to deduct the cost of premiums on mortgage insurance purchased in connection with acquisition indebtedness on the taxpayer's principal residence (Sec. 163(h)(3)).
  • Determination of low-income housing credit rate for credit allocations with respect to nonfederally subsidized buildings: This provision allows a 9 percent minimum low-income housing credit rate for nonfederally subsidized new buildings (Sec. 42(b)(2)).
  • Treatment of military basic housing allowances under the low-income housing credit: Treats buildings located in counties with qualified military installations as qualified buildings for purposes of the low-income housing credit (Sec. 142(d)).
  • Special rules for contributions of capital gain real property made for conservation purposes: Permits qualified conservation contributions to be deducted up to 50 percent of a taxpayer's contribution base (100 percent for qualified farmers and ranchers) (Sec. 170(b)).

SMALL BUSINESS PROVISIONS

  • The 100-percent exclusion for gains from qualified small business stock: Exclusion amount reverts to 50 percent (Sec. 1202(a)(4)).
  • Reduced S corporation recognition period for built-in gains tax: The reduced five-year recognition period reverts to 10 years (Sec. 1374(d)(7)).
  • Activated military reservists employer wage credit: A credit for small business employers for up to 20 percent of the eligible differential wage payments paid while an eligible employee is serving on active duty in the uniformed services (Sec. 45P).

CHARITABLE

  • Basis adjustments for S corporation charitable contributions of property: Decreases each S corporation shareholder's stock basis for charitable contributions of property by the shareholder's pro rata adjusted basis in the property (Sec. 1367(a)(2)).
  • Increased charitable deduction for contributions of food inventory: Allows businesses to make contributions of “apparently wholesome food” to charities that will use it for the care of the ill, the needy, or infants and to take an above-basis deduction (Sec. 170(e)(3)(C)).
  • Modification of tax treatment of certain payments to controlling exempt organizations: Provides that certain specified payments paid to a controlling tax-exempt organization by a controlled entity are not included in unrelated business taxable income (Sec. 512(b)(13)(E)).
  • Tax-free distributions from IRAs for charitable purposes: Allows taxpayers to distribute up to $100,000 in qualified charitable distributions from an individual retirement plan without including the distribution in income (Sec. 408(d)(8)).

SPECIALIZED BUSINESS PROVISIONS

  • Mine rescue team training credit: A credit for a portion of training costs for qualified mine rescue team employees (Sec. 45N).
  • American Samoa economic development credit: (P.L. 109-432 as amended by P.L. 111-312).
  • Election to expense advanced mine safety equipment: Permits taxpayers to elect to treat 50 percent of the cost of any qualified advanced mine safety equipment as an expense that is not chargeable to capital account but instead as a deduction in the year the property is placed in service (Sec. 179E).
  • Special film and television production expensing rules: Allows taxpayers to treat costs of any qualified film or television production as an expense that is not chargeable to capital account but instead as a deduction (Sec. 181).
  • Deduction for domestic production activities in Puerto Rico: Treats Puerto Rico as part of the United States for purposes of the domestic production activities deduction (Sec. 199(d)(8)).
  • Various empowerment zone tax incentives: Includes the designation of empowerment zones, tax-exempt enterprise zone facility bonds, the empowerment zone employment credit, increased expensing under Sec. 179 for enterprise zone businesses, nonrecognition of gain on rollover of empowerment zone investments, and increased exclusion of gain for small business stock of empowerment zone businesses (Secs. 1202, 1391, 1394, 1396, 1397A, and 1397B).
  • The temporary increase in limit on cover over of rum excise tax revenues: Increases the limit on cover over of rum excise taxes from $10.50 to $13.25 per proof gallon to Puerto Rico and the Virgin Islands (Sec. 7652(f)).

EDUCATION

  • Qualified zone academy bonds: Allows qualified schools to issue bonds for renovations (but not new construction), equipment purchases, teacher training, or developing course materials when they partner with private businesses (Sec. 54E).
  • Deduction for certain elementary and secondary school teacher expenses: Allows teachers to deduct up to $250 they spend to buy books, supplies, computer equipment, and other materials for use in their classrooms (Sec. 62(a)(2)(D)).
  • Deduction for qualified tuition and related expenses: Provides an above-the-line deduction for qualified expenses, up to a limit of $4,000, for taxpayers with adjusted gross income (AGI) of no more than $65,000 (single) or $130,000 (married filing jointly). Deduction is limited to $2,000 for taxpayers with AGI above those amounts and up to $80,000 (single) or $160,000 (married filing jointly) (Sec. 222).

GENERAL INDIVIDUAL

  • Deduction for state and local general sales taxes: Allows individuals to deduct state and local general sales taxes paid instead of state and local income taxes (Sec. 164(b)(5)).
  • Credit for health insurance costs of eligible individuals: A credit equal to 72.5 percent of the amount paid by the taxpayer for qualified health insurance coverage of the taxpayer and qualifying family members for eligible coverage months (Sec. 35).

For more information, please contact

Russell W. Sullivan

Danielle R. Dellerson