[Senate Report 113-154]
[From the U.S. Government Publishing Office]
Calendar No. 366
113th Congress } { Report
SENATE
2d Session } { 113-154
_______________________________________________________________________
EXPIRING PROVISIONS IMPROVEMENT REFORM AND EFFICIENCY (EXPIRE) ACT OF
2014
__________
R E P O R T
[To accompany S. 2260]
TO AMEND THE INTERNAL REVENUE CODE OF 1986 TO EXTEND CERTAIN EXPIRING
PROVISIONS, AND FOR OTHER PURPOSES
__________
COMMITTEE ON FINANCE
UNITED STATES SENATE
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
April 28, 2014.--Ordered to be printed
_____
U.S. GOVERNMENT PRINTING OFFICE
39-010 WASHINGTON : 2014
C O N T E N T S
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Page
I. LEGISLATIVE BACKGROUND........................................ 1
II. EXPLANATION OF THE BILL...................................... 5
A. Sense of the Senate (sec. 2 of the bill).................. 5
TITLE I--PROVISIONS EXPIRING IN 2013............................. 5
A. Subtitle A--Individual Tax Extenders...................... 5
1. Health coverage tax credit (sec. 101 of the bill and
sec. 35 of the Code)................................... 5
2. Extension of deduction for certain expenses of
elementary and secondary school teachers (sec. 102 of
the bill and sec. 62(a)(2)(D) of the Code)............. 7
3. Extension of exclusion from gross income of discharges
of acquisition indebtedness on principal residences
(sec. 103 of the bill and sec. 108 of the Code)........ 8
4. Parity for exclusion from income for employer-provided
mass transit and parking benefits (sec. 104 of the bill
and 132(f) of the Code)................................ 9
5. Extension of mortgage insurance premiums treated as
qualified residence interest (sec. 105 of the bill and
sec. 163 of the Code).................................. 12
6. Extension of deduction of State and local general
sales taxes (sec. 106 of the bill and sec. 164 of the
Code).................................................. 13
7. Extension of special rule for contributions of capital
gain real property made for conservation purposes (sec.
107 of the bill and sec. 170(b) of the Code)........... 15
8. Deduction for qualified tuition and related expenses
(sec. 108 of the bill and sec. 222 of the Code)........ 18
9. Extension of tax-free distributions from individual
retirement plans for charitable purposes (sec. 109 of
the bill and sec. 408(d)(8) of the Code)............... 19
B. Subtitle B--Business Tax Extenders........................ 23
1. Extension and modification of research credit (sec.
111 of the bill and secs. 38 and 41 and new sec.
3111(f) of the Code)................................... 23
2. Extension and modification of temporary minimum low-
income housing tax credit rate for non-Federally
subsidized buildings (sec. 112 of the bill and sec. 42
of the Code)........................................... 29
3. Extension of military housing allowance exclusion for
determining area median gross income (sec. 113 of the
bill and secs. 42 and 142 of the Code)................. 31
4. Extension of Indian employment tax credit (sec. 114 of
the bill and sec. 45A of the Code)..................... 32
5. Extension and modification of new markets tax credit
(sec. 115 of the bill and sec. 45D of the Code)........ 33
6. Extension of railroad track maintenance credit (sec.
116 of the bill and sec. 45G of the Code).............. 36
7. Extension of mine rescue team training credit (sec.
117 of the bill and sec. 45N of the Code).............. 37
8. Employer wage credit for employees who are active duty
members of the uniformed services (sec. 118 of the bill
and sec. 45P of the Code).............................. 38
9. Extension and modification of work opportunity tax
credit (sec. 119 of the bill and secs. 51 and 52 of the
Code).................................................. 40
10. Extension of qualified zone academy bonds (sec. 120
of the bill and secs. 54E and 6431 of the Code)........ 46
11. Extension of classification of certain race horses as
three-year property (sec. 121 of the bill and sec. 168
of the Code)........................................... 48
12. Extension of 15-year straight-line cost recovery for
qualified leasehold improvements, qualified restaurant
buildings and improvements, and qualified retail
improvements (sec. 122 of the bill and sec. 168 of the
Code).................................................. 49
13. Extension of seven-year recovery period for
motorsports entertainment complexes (sec. 123 of the
bill and sec. 168 of the Code)......................... 52
14. Extension of accelerated depreciation for business
property on an Indian reservation (sec. 124 of the bill
and sec. 168(j) of the Code)........................... 54
15. Extension of bonus depreciation (sec. 125 of the bill
and sec. 168(k) of the Code)........................... 55
16. Extension of enhanced charitable deduction for
contributions of food inventory (sec. 126 of the bill
and sec. 170 of the Code).............................. 60
17. Extension and modification of increased expensing
limitations and treatment of certain real property as
section 179 property (sec. 127 of the bill and sec. 179
of the Code)........................................... 62
18. Extension of election to expense mine safety
equipment (sec. 128 of the bill and sec. 179E of the
Code).................................................. 65
19. Extension of special expensing rules for certain film
and television productions; Special expensing for live
theatrical productions (sec. 129 of the bill and sec.
181 of the Code)....................................... 65
20. Extension of deduction allowable with respect to
income attributable to domestic production activities
in Puerto Rico (sec. 130 of the bill and sec. 199 of
the Code).............................................. 67
21. Extension of modification of tax treatment of certain
payments to controlling exempt organizations (sec. 131
of the bill and sec. 512 of the Code).................. 69
22. Extension of treatment of certain dividends of
regulated investment companies (sec. 132 of the bill
and sec. 871(k) of the Code)........................... 70
23. Extension of RIC qualified investment entity
treatment under FIRPTA (sec. 133 of the bill and secs.
897 and 1445 of the Code).............................. 71
24. Extension of subpart F exception for active financing
income (sec. 134 of the bill and secs. 953 and 954 of
the Code).............................................. 72
25. Extension of look-thru treatment of payments between
related controlled foreign corporations under foreign
personal holding company rules (sec. 135 of the bill
and sec. 954(c)(6) of the Code)........................ 75
26. Extension of exclusion of 100 percent of gain on
certain small business stock (sec. 136 of the bill and
sec. 1202 of the Code)................................. 76
27. Extension of basis adjustment to stock of S
corporations making charitable contributions of
property (sec. 137 of the bill and sec. 1367 of the
Code).................................................. 77
28. Extension of reduction in S corporation recognition
period for built-in gains tax (sec. 138 of the bill and
sec. 1374 of the Code)................................. 78
29. Extension of empowerment zone tax incentives (sec.
139 of the bill and secs. 1391 and 1397B of the Code).. 80
30. Extension of temporary increase in limit on cover
over of rum excise taxes to Puerto Rico and the Virgin
Islands (sec. 140 of the bill and sec. 7652(f) of the
Code).................................................. 86
31. Extension of American Samoa economic development
credit (sec. 141 of the bill and sec. 119 of Pub. L.
No. 109-432)........................................... 87
C. Subtitle C--Energy Tax Extenders.......................... 89
1. Extension and modification of credit for nonbusiness
energy property (sec.151 of the bill and sec. 25C of
the Code).............................................. 89
2. Extension of credit for 2-wheeled plug-in electric
vehicles (sec. 152 of the bill and sec. 30D of the
Code).................................................. 91
3. Extension of second generation biofuel producer credit
(sec. 153 of the bill and sec. 40(b)(6) of the Code)... 92
4. Extension of incentives for biodiesel and renewable
diesel (secs. 154 and 311(a) and (e) of the bill and
secs. 40A, 6426 and 6427(e) of the Code)............... 93
5. Extension and modification of credit for the
production of Indian coal (sec. 155 of the bill and
sec. 45(e)(10) of the Code)............................ 96
6. Extension of credits with respect to facilities
producing energy from certain renewable resources (sec.
156 of the bill and secs. 45 and 48 of the Code)....... 97
7. Extension of credit for energy-efficient new homes
(sec. 157 of the bill and sec. 45L of the Code)........ 98
8. Extension of special allowance for second generation
biofuel plant property (sec. 158 of the bill and sec.
168(l) of the Code).................................... 99
9. Extension and modification of energy efficient
commercial buildings deduction (sec. 159 of the bill
and sec. 179D of the Code)............................. 101
10. Extension of special rule for sales or dispositions
to implement FERC or State electric restructuring
policy for qualified electric utilities (sec. 160 of
the bill and sec. 451(i) of the Code).................. 103
11. Extension of excise tax credits relating to certain
fuels (alternative fuel and alternative fuel mixtures
(including hydrogen)) (sec. 161 of the bill and sec.
6426 and 6427(e) of the Code).......................... 105
TITLE II--PROVISIONS EXPIRING IN 2014............................ 107
A. Subtitle A--Energy Tax Extenders.......................... 107
1. Extension of credit for new qualified fuel cell motor
vehicles (sec. 201 of the bill and sec. 30B of the
Code).................................................. 107
2. Extension of alternative fuel vehicle refueling
property (sec. 202 of the bill and sec. 30C of the
Code).................................................. 108
B. Subtitle B--Extenders Relating to Multiemployer Defined
Benefit Pension Plans...................................... 109
1. Multiemployer defined benefit plans (secs. 251-252 of
the bill and sec. 221(c) of the Pension Protection Act
of 2006, secs. 431-432 of the Code, and secs. 304-305
of ERISA).............................................. 109
TITLE III--REVENUE PROVISIONS.................................... 116
1. Penalty for failure to meet the due diligence
requirements for the child tax credit (sec. 301 of the
bill and sec. 6695 of the Code)........................ 116
2. 100 percent continuous levy authority on payments to
Medicare providers and suppliers (sec. 302 of the bill
and sec. 6331 of the Code)............................. 118
3. Exclusion from gross income of certain clean coal
power grants (sec. 303 of the bill).................... 120
4. Reform of rules related to qualified tax collection
contracts, and special compliance personnel program
(secs. 304 and 305 of the bill and sec. 6306 and new
sec. 6307 of the Code)................................. 121
5. Exclusion of dividends from controlled foreign
corporations from the definition of personal holding
company income for purposes of the personal holding
company rules (sec. 306 of the bill and sec. 543 of the
Code).................................................. 124
6. Inflation adjustment for certain civil penalties under
the Internal Revenue Code (sec. 307 of the bill and
secs. 6651, 6652(c), 6695, 6698, 6699, 6721, and 6722
of the Code)........................................... 126
III. BUDGET EFFECTS OF THE BILL.................................. 127
A. Committee Estimates....................................... 127
B. Budget Authority and Tax Expenditures..................... 133
C. Consultation with Congressional Budget Office............. 133
IV. VOTES OF THE COMMITTEE....................................... 133
V. REGULATORY IMPACT AND OTHER MATTERS........................... 134
A. Regulatory Impact......................................... 134
B. Unfunded Mandates Statement............................... 134
C. Tax Complexity Analysis................................... 134
VI. CHANGES IN EXISTING LAW MADE BY THE BILL, AS REPORTED........ 138
Calendar No. 366
113th Congress } { Report
SENATE
2d Session } { 113-154
======================================================================
EXPIRING PROVISIONS IMPROVEMENT REFORM AND EFFICIENCY (EXPIRE) ACT OF
2014
_______
April 28, 2014.--Ordered to be printed
_______
Mr. Wyden, from the Committee on Finance,
submitted the following
R E P O R T
[To accompany S. 2260]
The Committee on Finance, having considered an original
bill, S. 2260, to amend the Internal Revenue Code of 1986 to
extend certain expiring provisions, and for other purposes,
having considered the same, reports favorably thereon and
recommends that the bill do pass.
I. LEGISLATIVE BACKGROUND
The Committee on Finance, having considered S. ___, the
``Expiring Provisions Improvement Reform and Efficiency
(EXPIRE) Act of 2014,'' to amend the Internal Revenue Code of
1986 to extend certain expiring provisions for the last time
and provide taxpayers two years of certainty about their tax
bills while building a bridge to tax reform, reports favorably
thereon and recommends that the bill do pass.
Background and need for legislative action
In the late 1970s and early 1980s, Congress began the
practice of enacting temporary tax incentives, either because
they were unproven and it was appropriate to establish a
schedule to review their effectiveness, or because the
incentives were intended only to provide a ``jump start'' for a
new industry. For example, in 1981, Congress first enacted the
research and development tax credit and set it to expire at the
end of 1985. Similarly, in 1978, Congress created credits for
the installation of residential renewable energy equipment set
to expire at the end of 1985.
As time went on, the practice of enacting temporary tax
provisions became more common. Under budgetary ``scorekeeping''
conventions, temporary provisions lost less revenue than
permanent provisions. As a result, temporary provisions became
an attractive way to enact changes to the tax laws while
masquerading the actual revenue loss of the change. The number
of expiring provisions that had to be extended rose
dramatically. After the Tax Reform Act of 1986 was enacted,
there were 14 tax provisions that were scheduled to expire. By
2012, there were 142. As a result, the Committees on Finance
and Ways and Means have devoted an increasing share of their
time and attention to legislation extending most or all of the
expired and expiring provisions.
Along with the growth of the number of extenders the
understanding of the adverse impact of temporary provisions has
also grown. There are at least three perceived problems. First,
the extension of tax provisions for short periods creates
uncertainty because taxpayers cannot plan their affairs with a
clear understanding of whether relevant tax provisions will be
maintained. Second, the consideration of extenders bills had
become an ``all-or-nothing'' process, with the extenders being
considered as a single package, effectively foreclosing any
analysis of the individual provisions' effectiveness or whether
they merit continuation. Third, the multi-decade practice of
renewing these provisions for short periods, often without
offsets, implies permanent policy while masking the prohibitive
cost of permanence. Making the provisions that expired in 2013
or are schedule to expire over the next decade permanent is
projected to cost nearly $1 trillion though 2024.\1\
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\1\Congressional Budget Office, ``The Budget and Economic Outlook
2014 to 2024,'' Table 1-5.
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Something had to change.--In 2012, faced with many expired
or soon to expire provisions there was a strong member
consensus that each extender should be reviewed with some level
of individual attention rather than extended as a single
package. To this end, in 2011-12, the Finance and Ways and
Means Committees each held hearings to review the expired and
expiring provisions. In speeches Chairmen Baucus and Camp each
said that extenders should be reviewed based on the merits. On
August 2, 2012, the Committee on Finance favorably reported an
extenders bill that actually allowed a number of provisions to
expire. A similar set of provisions was later enacted in Titles
II, III, and IV of the American Taxpayer Relief Act of 2012.
The need for tax reform spurred the Finance Committee to
hold an extensive series of hearings from 2010 through 2012.
The Finance Committee also published tax reform options papers
in spring and summer of 2013. The Majority Staff published
several tax reform discussion drafts in the fall of 2013. On a
parallel track, Chairman Camp of the House Ways and Means
Committee released a comprehensive tax reform draft on February
26, 2014. Finally, Chairman Wyden stated that based on the
years he spent developing a bipartisan federal income tax
reform plan, he believes the Senate can settle the extenders
question on a bipartisan basis and then pursue tax reform.
In early 2014, Finance Committee Members acknowledged that
a bipartisan plan on comprehensive tax reform legislation would
still take time to reach. In the meantime, temporary provisions
of the tax law continue to expire, leaving jobs, innovation and
research, and people's homes in limbo. Instead, Finance
Committee members agreed on the need to deliver two years of
tax certainty and predictability in support of businesses and
job creation, veterans, families, homeowners, and students by
favorably reporting an extenders bill. Chairman Wyden intended
that this fifteenth congressional effort at renewing the
extenders be the final one, saying that ``I want to be
straightforward on one point--this will be the last tax
extenders bill the committee takes up as long as I'm chairman.
That's why the bill is called the EXPIRE Act. It is meant to
expire.'' During the Committee's business meeting, several
members of the Committee expressed similar views that the
EXPIRE Act should be the last extenders bill.
Overview.--The EXPIRE Act of 2014 is intended to be a
bridge to tax reform. As a result, the focus is on temporarily
extending provisions that enjoyed broad bipartisan support as-
is while improving other provisions that lawmakers felt had
merit but required updating to continue functioning as
productive economic incentives. The focus was decidedly not on
reconsidering the merits of each individual temporary
provision, a job that will be undertaken in comprehensive tax
reform. The scope of the business meeting was limited to
extending provisions in the tax code that expired in 2013 or
will expire in 2014 through December 31, 2015, for a total of
55 provisions.
At the conclusion of the business meeting, with a majority
and a quorum present, the Committee favorably reported the
EXPIRE Act of 2014, as amended, by voice vote.
Individuals and Families.--The EXPIRE Act of 2014 continues
key provisions that provide tax relief to individuals and
families. One such provision extends mortgage debt relief for
families that have benefited from mortgage loan modifications
by providing that any cancelled mortgage debt does not become
includible in gross income. The EXPIRE Act of 2014 provides tax
relief by extending the above-the-line deduction for qualified
higher education expenses and the deduction for general state
and local sales taxes. The EXPIRE Act also extends the above-
the-line deduction for teachers of up to $250 in qualified
educational expenses. Finally, the bill extends the $250
monthly exclusion for employer-provided transit and vanpool
benefits, continuing important parity with the exclusion for
employer-provided parking benefits and allows individuals to
exclude up to $20 per month of expenses associated with the use
of a bike-sharing program.
Business Investment.--The EXPIRE Act of 2014 continues and
expands tax incentives for research and experimentation to
maintain U.S. global competitiveness, by extending the research
and experimentation credit. The bill expands the R&E credit to
start-up businesses (companies less than five years old with
less than $5 million in gross receipts) which will be able to
claim up to $250,000 per year of the credit against their
payroll tax liability (after first applying the credit to any
income tax liability). The EXPIRE Act of 2014 allows the R&E
credit to count against AMT liability. Recognizing that
continued business investment will help sustain the economic
recovery, the bill extends the higher section 179 small
business expensing limit and phase-out threshold ($500,000 and
$2 million respectively) and indexes these amounts to inflation
beginning in 2014. The bill also extends the first-year 50
percent bonus depreciation to qualified property and the placed
in service dates. Finally, the EXPIRE Act of 2014 extends the
look-through treatment of payments between related controlled
foreign corporations.
Community Investment.--The EXPIRE Act of 2014 continues and
modifies provisions designed to help certain communities and
workers. For example, the Act extends the Health Coverage Tax
Credit, which helps cover the cost of health care for
dislocated individuals eligible for trade adjustment assistance
or who are over 55 and receive pension benefits from the
Pension Benefit Guaranty Corporation. The bill extends the Work
Opportunity Tax Credit, which provides a wage credit to
employers that hire veterans and recipients of Temporary
Assistance for Needy Families, and expands the credit to
individuals who have exhausted their 26 weeks of regular
unemployment benefits. The employer wage credit for active
military reservists, which helps defray the cost of wages paid
to employees on active duty, is expanded to allow all
businesses regardless of size to claim the credit, and the
credit is boosted from 20% to 100% of up to $20,000 of
differential pay. The EXPIRE Act of 2014 extends the Qualified
Zone Academy Bond program that helps certain school districts
finance the modernization of public school facilities, and
increases the tax credit bond's potential utilization by
reducing the private sector match requirement that has limited
bond issuance. The bill extends Empowerment Zones, which offer
an array of tax incentives to businesses to hire and invest in
economically distressed communities. The bill adds a new
category of allocations to the New Markets Tax Credit for
manufacturing investments in communities that have experienced
a major job loss event. Finally, a modification to the Low-
Income Housing Tax Credit Program establishes a 4% minimum
credit rate for the acquisition of existing housing that is not
federally subsidized.
Energy Efficiency and Investment.--The EXPIRE Act of 2014
extends, improves and expands a dozen tax incentives that
promote energy efficiency or the production and use of
renewable or alternative energy. The goals of these provisions
are to make the current incentives more effective, maintain
renewable and alternative energy jobs, and further the U.S.
global competitive position in the development of renewable and
alternative energy technology. In particular, the bill extends
the section 45 and 48 incentives for energy property used in
the production of wind and other renewable sources of
electricity. The bill modifies the section 179D deduction for
energy efficient commercial building property, raising the
qualifying efficiency standards and allowing tribal governments
and non-profits to allocate the deduction to designers. The
bill amends and expands the credit for energy efficient
improvements to existing homes. The Act also extends incentives
that promote the use of alternative fuels. The EXPIRE Act of
2014 does not extend the section 45M credit for energy
efficiency appliances as well as the placed-in-service date for
partial expensing of certain refinery property.
Offsets.--Revenue-raising provisions were included to fully
offset modifications that increased the revenue loss of
provisions relative to current policy. Such provisions include
requiring the Secretary of the Treasury to employ third-party
tax collectors to aid in tax collection, increasing levy
authority on payments to Medicare providers with delinquent tax
debts, and applying paid preparer Earned Income Tax Credit due
diligence requirements to the child tax credit.
II. EXPLANATION OF THE BILL
A. Sense of the Senate
(Sec. 2 of the bill)
The bill expresses the sense of the Senate that a process
of comprehensive tax reform should commence in the 114th
Congress and conclude before January 1, 2016; that Congress
should endeavor, as part of such a tax reform process, to
eliminate temporary provisions from the Internal Revenue Code
of 1986 by making permanent those provisions that merit
permanency and allowing others to expire; that a major focus of
such tax reform process should be fostering economic growth and
lowering tax rates by broadening the tax base; and that the
Chairman and Ranking Member of the Committee on Finance of the
Senate should consult with the Chairman and Ranking Member of
the Committee on the Budget of the Senate to ensure that the
appropriate baseline is used in determining the economic
effects of, and rate adjustments under, tax reform.
TITLE I--PROVISIONS EXPIRING IN 2013
A. Subtitle A--Individual Tax Extenders
1. Health coverage tax credit (sec. 101 of the bill and sec. 35 of the
Code)
PRESENT LAW
In the case of an eligible individual, a refundable tax
credit is provided for 72.5 percent of the individual's
premiums for qualified health insurance of the individual and
qualifying family members for each eligible coverage month
beginning in the taxable year.\2\ The credit is commonly
referred to as the health coverage tax credit (``HCTC''). The
credit is available only with respect to amounts paid by the
individual for the qualified health insurance.
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\2\Qualifying family members are the individual's spouse and any
dependent for whom the individual is entitled to claim a dependency
exemption. Any individual who has certain specified coverage is not a
qualifying family member.
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Eligibility for the credit is determined on a monthly
basis. In general, an eligible coverage month is any month if
(1) the month begins before January 1, 2014, and (2) as of the
first day of the month, the individual is an eligible
individual, is covered by qualified health insurance, the
premium for which is paid by the individual, does not have
other specified coverage, and is not imprisoned under Federal,
State, or local authority. In the case of a joint return, the
eligibility requirements are met if at least one spouse
satisfies the requirements.
An eligible individual is an individual who is (1) an
eligible Trade Adjustment Assistance (``TAA'') recipient, (2)
an eligible alternative TAA recipient, or (3) an eligible
Pension Benefit Guaranty Corporation (``PBGC'') pension
recipient. In general, an individual is an eligible TAA
recipient for a month if the individual (1) receives for any
day of the month a trade readjustment allowance under the Trade
Act of 1974 or would be eligible to receive such an allowance
but for the requirement that the individual exhaust
unemployment benefits before being eligible to receive an
allowance and (2) with respect to such allowance, is covered
under a required certification. An individual is an eligible
alternative TAA recipient for a month if the individual
participates in a certain program under the Trade Act of 1974
and receives a related benefit for the month. Generally, an
individual is an eligible PBGC pension recipient for any month
if the individual (1) is age 55 or over as of the first day of
the month and (2) receives a benefit for the month, any portion
of which is paid by the PBGC. A person who may be claimed as a
dependent on another person's tax return is not an eligible
individual. In addition, an otherwise eligible individual is
not eligible for the credit for a month if, as of the first day
of the month, the individual has certain specified coverage,
such as certain employer-provided coverage or coverage under
certain governmental health programs.
The credit is available on an advance payment basis by
means of payments by the Department of the Treasury
(``Treasury'') once a qualified health insurance costs credit
eligibility certificate is in effect.\3\ In some cases,
Treasury may also make retroactive payments on behalf of a
certified individual for qualified health insurance coverage
for eligible coverage months occurring before the first month
for which an advance payment is otherwise made on behalf of the
individual.
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\3\Sec. 7527.
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REASONS FOR CHANGE
The HCTC has played an important role in enabling
individuals who receive a trade adjustment allowance, or whose
pension is paid by the PBGC, to purchase health insurance
coverage. The Committee wishes to continue providing this
assistance to such individuals.
EXPLANATION OF PROVISION
The provision amends the definition of eligible coverage
month for HCTC purposes to include months beginning before
January 1, 2016 (rather than only months beginning before
January 1, 2014 under present law), if the requirements for an
eligible coverage month are otherwise met.
EFFECTIVE DATE
The provision is effective for coverage months beginning
after December 31, 2013.
2. Extension of deduction for certain expenses of elementary and
secondary school teachers (sec. 102 of the bill and sec. 62(a)(2)(D) of
the Code)
PRESENT LAW
In general, ordinary and necessary business expenses are
deductible. However, unreimbursed employee business expenses
generally are deductible only as an itemized deduction and only
to the extent that the individual's total miscellaneous
deductions (including employee business expenses) exceed two
percent of adjusted gross income. For taxable years beginning
after 2012, an individual's otherwise allowable itemized
deductions may be further limited by the overall limitation on
itemized deductions, which reduces itemized deductions for
taxpayers with adjusted gross income in excess of a threshold
amount. In addition, miscellaneous itemized deductions are not
allowable under the alternative minimum tax.
Certain expenses of eligible educators are allowed as an
above-the-line deduction. Specifically, for taxable years
beginning prior to January 1, 2014, an above-the-line deduction
is allowed for up to $250 annually of expenses paid or incurred
by an eligible educator for books, supplies (other than
nonathletic supplies for courses of instruction in health or
physical education), computer equipment (including related
software and services) and other equipment, and supplementary
materials used by the eligible educator in the classroom.\4\ To
be eligible for this deduction, the expenses must be otherwise
deductible under section 162 as a trade or business expense. A
deduction is allowed only to the extent the amount of expenses
exceeds the amount excludable from income under section 135
(relating to education savings bonds), 529(c)(1) (relating to
qualified tuition programs), and section 530(d)(2) (relating to
Coverdell education savings accounts).
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\4\Sec. 62(a)(2)(D).
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An eligible educator is a kindergarten through grade twelve
teacher, instructor, counselor, principal, or aide in a school
for at least 900 hours during a school year. A school means any
school that provides elementary education or secondary
education (kindergarten through grade 12), as determined under
State law.
The above-the-line deduction for eligible educators is not
allowed for taxable years beginning after December 31, 2013.
REASONS FOR CHANGE
The Committee recognizes that many elementary and secondary
school teachers provide substantial classroom resources at
their own expense, and believe that it is appropriate to extend
the present law deduction for such expenses in order to
continue to partially offset the substantial costs such
educators incur for the benefit of their students.
EXPLANATION OF PROVISION
The provision extends the deduction for eligible educator
expenses for two years, through December 31, 2015.
EFFECTIVE DATE
The provision applies to taxable years beginning after
December 31, 2013.
3. Extension of exclusion from gross income of discharges of
acquisition indebtedness on principal residences (sec. 103 of the bill
and sec. 108 of the Code)
PRESENT LAW
In general
Gross income includes income that is realized by a debtor
from the discharge of indebtedness, subject to certain
exceptions for debtors in Title 11 bankruptcy cases, insolvent
debtors, certain student loans, certain farm indebtedness, and
certain real property business indebtedness (secs. 61(a)(12)
and 108).\5\ In cases involving discharges of indebtedness that
are excluded from gross income under the exceptions to the
general rule, taxpayers generally reduce certain tax
attributes, including basis in property, by the amount of the
discharge of indebtedness.
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\5\A debt cancellation which constitutes a gift or bequest is not
treated as income to the donee debtor (sec. 102).
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The amount of discharge of indebtedness excluded from
income by an insolvent debtor not in a Title 11 bankruptcy case
cannot exceed the amount by which the debtor is insolvent. In
the case of a discharge in bankruptcy or where the debtor is
insolvent, any reduction in basis may not exceed the excess of
the aggregate bases of properties held by the taxpayer
immediately after the discharge over the aggregate of the
liabilities of the taxpayer immediately after the discharge
(sec. 1017).
For all taxpayers, the amount of discharge of indebtedness
generally is equal to the difference between the adjusted issue
price of the debt being cancelled and the amount used to
satisfy the debt. These rules generally apply to the exchange
of an old obligation for a new obligation, including a
modification of indebtedness that is treated as an exchange (a
debt-for-debt exchange).
Qualified principal residence indebtedness
An exclusion from gross income is provided for any
discharge of indebtedness income by reason of a discharge (in
whole or in part) of qualified principal residence
indebtedness. Qualified principal residence indebtedness means
acquisition indebtedness (within the meaning of section
163(h)(3)(B), except that the dollar limitation is $2 million)
with respect to the taxpayer's principal residence. Acquisition
indebtedness with respect to a principal residence generally
means indebtedness which is incurred in the acquisition,
construction, or substantial improvement of the principal
residence of the individual and is secured by the residence. It
also includes refinancing of such indebtedness to the extent
the amount of the indebtedness resulting from such refinancing
does not exceed the amount of the refinanced indebtedness. For
these purposes, the term ``principal residence'' has the same
meaning as under section 121 of the Code.
If, immediately before the discharge, only a portion of a
discharged indebtedness is qualified principal residence
indebtedness, the exclusion applies only to so much of the
amount discharged as exceeds the portion of the debt which is
not qualified principal residence indebtedness. Thus, assume
that a principal residence is secured by an indebtedness of $1
million, of which $800,000 is qualified principal residence
indebtedness. If the residence is sold for $700,000 and
$300,000 debt is discharged, then only $100,000 of the amount
discharged may be excluded from gross income under the
qualified principal residence indebtedness exclusion.
The basis of the individual's principal residence is
reduced by the amount excluded from income under the provision.
The qualified principal residence indebtedness exclusion
does not apply to a taxpayer in a Title 11 case; instead the
general exclusion rules apply. In the case of an insolvent
taxpayer not in a Title 11 case, the qualified principal
residence indebtedness exclusion applies unless the taxpayer
elects to have the general exclusion rules apply instead.
The exclusion does not apply to the discharge of a loan if
the discharge is on account of services performed for the
lender or any other factor not directly related to a decline in
the value of the residence or to the financial condition of the
taxpayer.
The exclusion for qualified principal residence
indebtedness is effective for discharges of indebtedness before
January 1, 2014.
REASONS FOR CHANGE
The Committee believes the provision should be extended
because taxpayers restructuring their acquisition debt on a
principal residence or losing their principal residence in a
foreclosure, are also likely, due to their economic
circumstances, to lack the necessary liquidity to pay taxes on
the resulting discharged debt, were it to be included in gross
income.
EXPLANATION OF PROVISION
The provision extends for two additional years (through
December 31, 2015) the exclusion from gross income for
discharges of qualified principal residence indebtedness.
EFFECTIVE DATE
The provision applies to discharges of indebtedness on or
after January 1, 2014.
4. Parity for exclusion from income for employer-provided mass transit
and parking benefits (sec. 104 of the bill and 132(f) of the Code)
PRESENT LAW
Qualified transportation fringes
Qualified transportation fringe benefits provided by an
employer are excluded from an employee's gross income for
income tax purposes and from an employee's wages for employment
tax purposes.\6\ Qualified transportation fringe benefits
include parking, transit passes, vanpool benefits, and
qualified bicycle commuting reimbursements. No amount is
includible in the income of an employee merely because the
employer offers the employee a choice between cash and
qualified transportation fringe benefits (other than a
qualified bicycle commuting reimbursement). Qualified
transportation fringe benefits also include a cash
reimbursement (under a bona fide reimbursement arrangement) by
an employer to an employee for parking, transit passes, or
vanpooling. In the case of transit passes, however, a cash
reimbursement is considered a qualified transportation fringe
benefit only if a voucher or similar item that may be exchanged
only for a transit pass is not readily available for direct
distribution by the employer to the employee.
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\6\Secs. 132(a)(5) and (f), 3121(a)(20), 3231(e)(5), 3306(b)(16)
and 3401(a)(19).
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Mass transit parity
Before February 17, 2009, the amount that could be excluded
as qualified transportation fringe benefits was limited to $100
per month in combined transit pass and vanpool benefits and
$175 per month in qualified parking benefits. These limits are
adjusted annually for inflation, using 1998 as the base year;
for 2014, the limits are $130 and $250, respectively. Effective
for months beginning on or after February 17, 2009,\7\ and
before January 1, 2014, parity in qualified transportation
fringe benefits is provided by temporarily increasing the
monthly exclusion for combined employer-provided transit pass
and vanpool benefits to the same level as the exclusion for
employer-provided parking.
---------------------------------------------------------------------------
\7\Parity was originally provided by the American Recovery and
Reinvestment Act of 2009 (``ARRA''), Pub. L. No. 111-5, effective for
months beginning on or after February 17, 2009, the date of enactment
of ARRA.
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Effective January 1, 2014, the amount that can be excluded
as qualified transportation fringe benefits is limited to $130
per month in combined transit pass and vanpool benefits and
$250 per month in qualified parking benefits.
Qualified bicycle commuting reimbursements
Qualified bicycle commuting reimbursements with respect to
a calendar year are limited to employer reimbursements during
the 15 month period beginning on the first day of the calendar
year for expenses incurred during the calendar year for the
purchase of a bicycle and bicycle improvements, repairs and
storage, by an employee who regularly uses the bicycle for
commuting. For this purpose, commuting means to use the bicycle
for a substantial portion of the travel between the employee's
residence and place of employment. In the case of qualified
bicycle commuting reimbursements, the amount that can be
excluded for a taxable year is limited to $20 multiplied by the
number of months during the year that the employee regularly
uses the bicycle for commuting and does not receive another
qualified transportation fringe benefit.
REASONS FOR CHANGE
Maintaining parity between parking and mass transit
benefits provides employees with an incentive to use public
transportation and vanpools for their commute rather than
driving to work in their personal vehicles, thus potentially
easing traffic congestion and pollution.
Some employees who regularly commute to work by bicycle do
not use their own bicycles but use bicycles available through a
bicycle-share program. The Committee believes that
reimbursement from employers for an employee's use of a
bicycle-share program for commuting to work should be accorded
the same tax treatment as reimbursement for the cost of
purchase and maintenance by an employee of his or her own
bicycle used for commuting.
EXPLANATION OF PROVISION
Mass transit parity
The provision extends parity in the exclusion for combined
employer-provided transit pass and vanpool benefits and for
employer-provided parking benefits for two years through
December 31, 2015. Thus, for 2014, the monthly limit on the
exclusion for combined transit pass and vanpool benefits is
$250, the same as the monthly limit on the exclusion for
qualified parking benefits.
In order for the extension to be effective retroactive to
January 1, 2014, expenses incurred for months beginning after
December 31, 2013, and before enactment of the provision, by an
employee for employer-provided vanpool and transit benefits may
be reimbursed (under a bona fide reimbursement arrangement) by
employers on a tax-free basis to the extent they exceed $130
per month and are no more than $250 per month. The Committee
intends that the rule that an employer reimbursement is
excludible only if vouchers are not available to provide the
benefit continues to apply, except in the case of
reimbursements for vanpool or transit benefits between $130 and
$250 for months beginning after December 31, 2013, and before
enactment of the provision. Further, the Committee intends that
reimbursements for expenses incurred for months beginning after
December 31, 2013, and before enactment of the provision, may
be made in addition to the provision of benefits or
reimbursements of up to $250 per month for expenses incurred
for months beginning during 2014 and after enactment of the
provision.
Qualified bicycle commuting reimbursements
Under the provision, an employer reimbursement of the
expense of a bicycle-share program for an employee who
regularly uses the program for commuting qualifies for
exclusion from gross income (and wages for employment tax
purposes) as a qualified bicycle commuting reimbursement,
subject to the $20-per-month limit on this exclusion and
provided the employee does not receive another qualified
transportation fringe benefit for the month. This provision
only applies to reimbursement for taxable years beginning
before January 1, 2016.
EFFECTIVE DATE
The provision relating to parity in the exclusion for
combined employer-provided transit pass and vanpool benefits
and for employer-provided parking benefits applies to months
after December 31, 2013. The provision related to qualified
bicycle commuting reimbursements is effective for taxable years
beginning after December 31, 2013.
5. Extension of mortgage insurance premiums treated as qualified
residence interest (sec. 105 of the bill and sec. 163 of the Code)
PRESENT LAW
In general
Present law provides that qualified residence interest is
deductible notwithstanding the general rule that personal
interest is nondeductible.\8\
---------------------------------------------------------------------------
\8\Sec. 163(h).
---------------------------------------------------------------------------
Acquisition indebtedness and home equity indebtedness
Qualified residence interest is interest on acquisition
indebtedness and home equity indebtedness with respect to a
principal and a second residence of the taxpayer. The maximum
amount of home equity indebtedness is $100,000. The maximum
amount of acquisition indebtedness is $1 million. Acquisition
indebtedness means debt that is incurred in acquiring,
constructing, or substantially improving a qualified residence
of the taxpayer, and that is secured by the residence. Home
equity indebtedness is debt (other than acquisition
indebtedness) that is secured by the taxpayer's principal or
second residence, to the extent the aggregate amount of such
debt does not exceed the difference between the total
acquisition indebtedness with respect to the residence, and the
fair market value of the residence.
Private mortgage insurance
Certain premiums paid or accrued for qualified mortgage
insurance by a taxpayer during the taxable year in connection
with acquisition indebtedness on a qualified residence of the
taxpayer are treated as interest that is qualified residence
interest and thus deductible. The amount allowable as a
deduction is phased out ratably by 10 percent for each $1,000
by which the taxpayer's adjusted gross income exceeds $100,000
($500 and $50,000, respectively, in the case of a married
individual filing a separate return). Thus, the deduction is
not allowed if the taxpayer's adjusted gross income exceeds
$110,000 ($55,000 in the case of married individual filing a
separate return).
For this purpose, qualified mortgage insurance means
mortgage insurance provided by the Department of Veterans
Affairs, the Federal Housing Administration, or the Rural
Housing Service, and private mortgage insurance (defined in
section two of the Homeowners Protection Act of 1998 as in
effect on the date of enactment of the provision).
Amounts paid for qualified mortgage insurance that are
properly allocable to periods after the close of the taxable
year are treated as paid in the period to which they are
allocated. No deduction is allowed for the unamortized balance
if the mortgage is paid before its term (except in the case of
qualified mortgage insurance provided by the Department of
Veterans Affairs or Rural Housing Service).
The provision does not apply with respect to any mortgage
insurance contract issued before January 1, 2007. The provision
terminates for any amount paid or accrued after December 31,
2013, or properly allocable to any period after that date.
Reporting rules apply under the provision.
REASONS FOR CHANGE
The Committee believes it is appropriate to extend the
present-law temporary provision. The Committee understands that
the purpose of the provisions permitting deduction of home
mortgage interest is to encourage home ownership while limiting
significant disincentives to saving. The Committee believes
that it would be consistent with the purpose of the provisions
permitting deduction of home mortgage interest to permit the
deduction of mortgage insurance premiums. While these premiums
are not in the nature of interest, the Committee notes that
purchase of such insurance is often demanded by lenders in
order for home buyers to obtain financing (depending on the
size of the buyer's down payment). The Committee believes that
permitting deductibility of premiums for this type of insurance
connected with home purchases will foster home ownership. In
the case of higher income taxpayers who may not purchase
mortgage insurance, however, the Committee believes the
incentive of deductibility becomes unnecessary, and a phase-out
is appropriate. It is not intended that prepayments be
currently deductible, but rather, that they be deductible only
in the period to which they relate. Reporting of payments is
generally necessary to administer the provision.
EXPLANATION OF PROVISION
The provision extends the deduction for private mortgage
insurance premiums for two years (with respect to contracts
entered into after December 31, 2006). Thus, the provision
applies to amounts paid or accrued in 2014 and 2015 (and not
properly allocable to any period after 2015).
EFFECTIVE DATE
The provision applies to amounts paid or accrued after
December 31, 2013.
6. Extension of deduction for State and local general sales taxes (sec.
106 of the bill and sec. 164 of the Code)
PRESENT LAW
For purposes of determining regular tax liability, an
itemized deduction is permitted for certain State and local
taxes paid, including individual income taxes, real property
taxes, and personal property taxes. The itemized deduction is
not permitted for purposes of determining a taxpayer's
alternative minimum taxable income. For taxable years beginning
before 2014, at the election of the taxpayer, an itemized
deduction may be taken for State and local general sales taxes
in lieu of the itemized deduction provided under present law
for State and local income taxes. As is the case for State and
local income taxes, the itemized deduction for State and local
general sales taxes is not permitted for purposes of
determining a taxpayer's alternative minimum taxable income.
Taxpayers have two options with respect to the determination of
the sales tax deduction amount. Taxpayers may deduct the total
amount of general State and local sales taxes paid by
accumulating receipts showing general sales taxes paid.
Alternatively, taxpayers may use tables created by the
Secretary that show the allowable deduction. The tables are
based on average consumption by taxpayers on a State-by-State
basis taking into account number of dependents, modified
adjusted gross income and rates of State and local general
sales taxation. Taxpayers who live in more than one
jurisdiction during the tax year are required to pro-rate the
table amounts based on the time they live in each jurisdiction.
Taxpayers who use the tables created by the Secretary may, in
addition to the table amounts, deduct eligible general sales
taxes paid with respect to the purchase of motor vehicles,
boats, and other items specified by the Secretary. Sales taxes
for items that may be added to the tables are not reflected in
the tables themselves.
A general sales tax is a tax imposed at one rate with
respect to the sale at retail of a broad range of classes of
items.\9\ No deduction is allowed for any general sales tax
imposed with respect to an item at a rate other than the
general rate of tax. However, in the case of food, clothing,
medical supplies, and motor vehicles, the above rules are
relaxed in two ways. First, if the tax does not apply with
respect to some or all of such items, a tax that applies to
other such items can still be considered a general sales tax.
Second, the rate of tax applicable with respect to some or all
of these items may be lower than the general rate. However, in
the case of motor vehicles, if the rate of tax exceeds the
general rate, such excess is disregarded and the general rate
is treated as the rate of tax.
---------------------------------------------------------------------------
\9\Sec. 164(b)(5)(B).
---------------------------------------------------------------------------
A compensating use tax with respect to an item is treated
as a general sales tax, provided such tax is complementary to a
general sales tax and a deduction for sales taxes is allowable
with respect to items sold at retail in the taxing jurisdiction
that are similar to such item.
REASONS FOR CHANGE
The Committee believes an extension of the option to deduct
State and local sales taxes in lieu of deducting State and
local income taxes is appropriate to continue to provide
similar Federal tax treatment to residents of States that rely
on sales taxes, rather than income taxes, to fund State and
local governmental functions.
EXPLANATION OF PROVISION
The provision extends the provision allowing taxpayers to
elect to deduct State and local sales taxes in lieu of State
and local income taxes for two years, through 2015.
EFFECTIVE DATE
The provision applies to taxable years beginning after
December 31, 2013.
7. Extension of special rule for contributions of capital gain real
property made for conservation purposes (sec. 107 of the bill and sec.
170(b) of the Code)
PRESENT LAW
Charitable contributions generally
In general, a deduction is permitted for charitable
contributions, subject to certain limitations that depend on
the type of taxpayer, the property contributed, and the donee
organization. The amount of deduction generally equals the fair
market value of the contributed property on the date of the
contribution. Charitable deductions are provided for income,
estate, and gift tax purposes.\10\
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\10\Secs. 170, 2055, and 2522, respectively.
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In general, in any taxable year, charitable contributions
by a corporation are not deductible to the extent the aggregate
contributions exceed 10 percent of the corporation's taxable
income computed without regard to net operating or capital loss
carrybacks. Total deductible contributions of an individual
taxpayer to public charities, private operating foundations,
and certain types of private nonoperating foundations generally
may not exceed 50 percent of the taxpayer's contribution base,
which is the taxpayer's adjusted gross income for a taxable
year (disregarding any net operating loss carryback). To the
extent a taxpayer has not exceeded the 50-percent limitation,
(1) contributions of capital gain property to public charities
generally may be deducted up to 30 percent of the taxpayer's
contribution base, (2) contributions of cash to most private
nonoperating foundations and certain other charitable
organizations generally may be deducted up to 30 percent of the
taxpayer's contribution base, and (3) contributions of capital
gain property to private foundations and certain other
charitable organizations generally may be deducted up to 20
percent of the taxpayer's contribution base.
Contributions in excess of the applicable percentage limits
generally may be carried over and deducted over the next five
taxable years, subject to the relevant percentage limitations
on the deduction in each of those years.
Capital gain property
Capital gain property means any capital asset or property
used in the taxpayer's trade or business the sale of which at
its fair market value, at the time of contribution, would have
resulted in gain that would have been long-term capital gain.
Contributions of capital gain property to a qualified charity
are deductible at fair market value within certain limitations.
Contributions of capital gain property to charitable
organizations described in section 170(b)(1)(A) (e.g., public
charities, private foundations other than private non-operating
foundations, and certain governmental units) generally are
deductible up to 30 percent of the taxpayer's contribution
base. An individual may elect, however, to bring all these
contributions of capital gain property for a taxable year
within the 50-percent limitation category by reducing the
amount of the contribution deduction by the amount of the
appreciation in the capital gain property. Contributions of
capital gain property to charitable organizations described in
section 170(b)(1)(B) (e.g., private non-operating foundations)
are deductible up to 20 percent of the taxpayer's contribution
base.
For purposes of determining whether a taxpayer's aggregate
charitable contributions in a taxable year exceed the
applicable percentage limitation, contributions of capital gain
property are taken into account after other charitable
contributions.
Qualified conservation contributions
Qualified conservation contributions are one exception to
the ``partial interest'' rule, which generally bars deductions
for charitable contributions of partial interests in
property.\11\ A qualified conservation contribution is a
contribution of a qualified real property interest to a
qualified organization exclusively for conservation purposes. A
qualified real property interest is defined as: (1) the entire
interest of the donor other than a qualified mineral interest;
(2) a remainder interest; or (3) a restriction (granted in
perpetuity) on the use that may be made of the real property.
Qualified organizations include certain governmental units,
public charities that meet certain public support tests, and
certain supporting organizations. Conservation purposes
include: (1) the preservation of land areas for outdoor
recreation by, or for the education of, the general public; (2)
the protection of a relatively natural habitat of fish,
wildlife, or plants, or similar ecosystem; (3) the preservation
of open space (including farmland and forest land) where such
preservation will yield a significant public benefit and is
either for the scenic enjoyment of the general public or
pursuant to a clearly delineated Federal, State, or local
governmental conservation policy; and (4) the preservation of
an historically important land area or a certified historic
structure.
---------------------------------------------------------------------------
\11\Secs. 170(f)(3)(B)(iii) and 170(h).
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Qualified conservation contributions of capital gain
property are subject to the same limitations and carryover
rules as other charitable contributions of capital gain
property.
Temporary rules regarding contributions of capital gain real property
for conservation purposes
In general
Under a temporary provision\12\ the 30-percent contribution
base limitation on contributions of capital gain property by
individuals does not apply to qualified conservation
contributions (as defined under present law). Instead,
individuals may deduct the fair market value of any qualified
conservation contribution to the extent of the excess of 50
percent of the contribution base over the amount of all other
allowable charitable contributions. These contributions are not
taken into account in determining the amount of other allowable
charitable contributions.
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\12\Sec. 170(b)(1)(E).
---------------------------------------------------------------------------
Individuals are allowed to carry over any qualified
conservation contributions that exceed the 50-percent
limitation for up to 15 years.
For example, assume an individual with a contribution base
of $100 makes a qualified conservation contribution of property
with a fair market value of $80 and makes other charitable
contributions subject to the 50-percent limitation of $60. The
individual is allowed a deduction of $50 in the current taxable
year for the non-conservation contributions (50 percent of the
$100 contribution base) and is allowed to carry over the excess
$10 for up to 5 years. No current deduction is allowed for the
qualified conservation contribution, but the entire $80
qualified conservation contribution may be carried forward for
up to 15 years.
Farmers and ranchers
In the case of an individual who is a qualified farmer or
rancher for the taxable year in which the contribution is made,
a qualified conservation contribution is allowable up to 100
percent of the excess of the taxpayer's contribution base over
the amount of all other allowable charitable contributions.
In the above example, if the individual is a qualified
farmer or rancher, in addition to the $50 deduction for non-
conservation contributions, an additional $50 for the qualified
conservation contribution is allowed and $30 may be carried
forward for up to 15 years as a contribution subject to the
100-percent limitation.
In the case of a corporation (other than a publicly traded
corporation) that is a qualified farmer or rancher for the
taxable year in which the contribution is made, any qualified
conservation contribution is allowable up to 100 percent of the
excess of the corporation's taxable income (as computed under
section 170(b)(2)) over the amount of all other allowable
charitable contributions. Any excess may be carried forward for
up to 15 years as a contribution subject to the 100-percent
limitation.\13\
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\13\Sec. 170(b)(2)(B).
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As an additional condition of eligibility for the 100
percent limitation, with respect to any contribution of
property in agriculture or livestock production, or that is
available for such production, by a qualified farmer or
rancher, the qualified real property interest must include a
restriction that the property remain generally available for
such production. (There is no requirement as to any specific
use in agriculture or farming, or necessarily that the property
be used for such purposes, merely that the property remain
available for such purposes.)
A qualified farmer or rancher means a taxpayer whose gross
income from the trade or business of farming (within the
meaning of section 2032A(e)(5)) is greater than 50 percent of
the taxpayer's gross income for the taxable year.
Termination
The temporary rules regarding contributions of capital gain
real property for conservation purposes do not apply to
contributions made in taxable years beginning after December
31, 2013.\14\
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\14\Secs. 170(b)(1)(E)(vi) and 170(b)(2)(B)(iii).
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REASONS FOR CHANGE
The Committee believes that the special rule that provides
an increased incentive to make charitable contributions of
partial interests in real property for conservation purposes is
an important way of encouraging conservation and preservation,
and should be extended for two additional years.
EXPLANATION OF PROVISION
The provision extends the increased percentage limits and
extended carryforward period for contributions of capital gain
real property for conservation purposes for two additional
years, i.e., for contributions made in taxable years beginning
before January 1, 2016.
EFFECTIVE DATE
The provision is effective for contributions made in
taxable years beginning after December 31, 2013.
8. Deduction for qualified tuition and related expenses (sec. 108 of
the bill and sec. 222 of the Code)
PRESENT LAW
An individual is allowed a deduction for qualified tuition
and related expenses for higher education paid by the
individual during the taxable year.\15\ The deduction is
allowed in computing adjusted gross income. The term qualified
tuition and related expenses is defined in the same manner as
for the Hope and Lifetime Learning credits, and includes
tuition and fees required for the enrollment or attendance of
the taxpayer, the taxpayer's spouse, or any dependent of the
taxpayer with respect to whom the taxpayer may claim a personal
exemption, at an eligible institution of higher education for
courses of instruction of such individual at such
institution.\16\ The expenses must be in connection with
enrollment at an institution of higher education during the
taxable year, or with an academic period beginning during the
taxable year or during the first three months of the next
taxable year. The deduction is not available for tuition and
related expenses paid for elementary or secondary education.
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\15\Sec. 222.
\16\The deduction generally is not available for expenses with
respect to a course or education involving sports, games, or hobbies,
and is not available for student activity fees, athletic fees,
insurance expenses, or other expenses unrelated to an individual's
academic course of instruction.
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The maximum deduction is $4,000 for an individual whose
adjusted gross income for the taxable year does not exceed
$65,000 ($130,000 in the case of a joint return), or $2,000 for
other individuals whose adjusted gross income does not exceed
$80,000 ($160,000 in the case of a joint return). No deduction
is allowed for an individual whose adjusted gross income
exceeds the relevant adjusted gross income limitations, for a
married individual who does not file a joint return, or for an
individual with respect to whom a personal exemption deduction
may be claimed by another taxpayer for the taxable year. The
deduction is not available for taxable years beginning after
December 31, 2013.
The amount of qualified tuition and related expenses must
be reduced by certain scholarships, educational assistance
allowances, and other amounts paid for the benefit of such
individual,\17\ and by the amount of such expenses taken into
account for purposes of determining any exclusion from gross
income of: (1) income from certain U.S. savings bonds used to
pay higher education tuition and fees; and (2) income from a
Coverdell education savings account.\18\ Additionally, such
expenses must be reduced by the earnings portion (but not the
return of principal) of distributions from a qualified tuition
program if an exclusion under section 529 is claimed with
respect to expenses eligible for the qualified tuition
deduction. No deduction is allowed for any expense for which a
deduction is otherwise allowed or with respect to an individual
for whom a Hope or Lifetime Learning credit is elected for such
taxable year.
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\17\Secs. 222(d)(1) and 25A(g)(2).
\18\Sec. 222(c). These reductions are the same as those that apply
to the Hope and Lifetime Learning credits.
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REASONS FOR CHANGE
The Committee observes that the cost of a college education
continues to rise, and thus believes that the extension of the
qualified tuition deduction is appropriate to mitigate the
impact of rising tuition costs on students and their families.
The Committee further believes that the tuition deduction
provides an important financial incentive for individuals to
pursue higher education.
EXPLANATION OF PROVISION
The provision extends the qualified tuition deduction for
two years, through 2015.
EFFECTIVE DATE
The provision applies to taxable years beginning after
December 31, 2013.
9. Extension of tax-free distributions from individual retirement plans
for charitable purposes (sec. 109 of the bill and sec. 408(d)(8) of the
Code)
PRESENT LAW
In general
If an amount withdrawn from a traditional individual
retirement arrangement (``IRA'') or a Roth IRA is donated to a
charitable organization, the rules relating to the tax
treatment of withdrawals from IRAs apply to the amount
withdrawn and the charitable contribution is subject to the
normally applicable limitations on deductibility of such
contributions. An exception applies in the case of a qualified
charitable distribution.
Charitable contributions
In computing taxable income, an individual taxpayer who
itemizes deductions generally is allowed to deduct the amount
of cash and up to the fair market value of property contributed
to the following entities: (1) a charity described in section
170(c)(2); (2) certain veterans' organizations, fraternal
societies, and cemetery companies;\19\ and (3) a Federal,
State, or local governmental entity, but only if the
contribution is made for exclusively public purposes.\20\ The
deduction also is allowed for purposes of calculating
alternative minimum taxable income.
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\19\Secs. 170(c)(3)-(5).
\20\Sec. 170(c)(1).
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The amount of the deduction allowable for a taxable year
with respect to a charitable contribution of property may be
reduced depending on the type of property contributed, the type
of charitable organization to which the property is
contributed, and the income of the taxpayer.\21\
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\21\Secs. 170(b) and (e).
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A taxpayer who takes the standard deduction (i.e., who does
not itemize deductions) may not take a separate deduction for
charitable contributions.\22\
---------------------------------------------------------------------------
\22\Sec. 170(a).
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A payment to a charity (regardless of whether it is termed
a ``contribution'') in exchange for which the donor receives an
economic benefit is not deductible, except to the extent that
the donor can demonstrate, among other things, that the payment
exceeds the fair market value of the benefit received from the
charity. To facilitate distinguishing charitable contributions
from purchases of goods or services from charities, present law
provides that no charitable contribution deduction is allowed
for a separate contribution of $250 or more unless the donor
obtains a contemporaneous written acknowledgement of the
contribution from the charity indicating whether the charity
provided any good or service (and an estimate of the value of
any such good or service provided) to the taxpayer in
consideration for the contribution.\23\ In addition, present
law requires that any charity that receives a contribution
exceeding $75 made partly as a gift and partly as consideration
for goods or services furnished by the charity (a ``quid pro
quo'' contribution) is required to inform the contributor in
writing of an estimate of the value of the goods or services
furnished by the charity and that only the portion exceeding
the value of the goods or services may be deductible as a
charitable contribution.\24\
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\23\Sec. 170(f)(8). For any contribution of a cash, check, or other
monetary gift, no deduction is allowed unless the donor maintains as a
record of such contribution a bank record or written communication from
the donee charity showing the name of the donee organization, the date
of the contribution, and the amount of the contribution. Sec.
170(f)(17).
\24\Sec. 6115.
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Under present law, total deductible contributions of an
individual taxpayer to public charities, private operating
foundations, and certain types of private nonoperating
foundations generally may not exceed 50 percent of the
taxpayer's contribution base, which is the taxpayer's adjusted
gross income for a taxable year (disregarding any net operating
loss carryback). To the extent a taxpayer has not exceeded the
50-percent limitation, (1) contributions of capital gain
property to public charities generally may be deducted up to 30
percent of the taxpayer's contribution base, (2) contributions
of cash to most private nonoperating foundations and certain
other charitable organizations generally may be deducted up to
30 percent of the taxpayer's contribution base, and (3)
contributions of capital gain property to private foundations
and certain other charitable organizations generally may be
deducted up to 20 percent of the taxpayer's contribution base.
Contributions by individuals in excess of the 50-percent,
30-percent, and 20-percent limits generally may be carried over
and deducted over the next five taxable years, subject to the
relevant percentage limitations on the deduction in each of
those years.
In general, a charitable deduction is not allowed for
income, estate, or gift tax purposes if the donor transfers an
interest in property to a charity (e.g., a remainder) while
also either retaining an interest in that property (e.g., an
income interest) or transferring an interest in that property
to a noncharity for less than full and adequate
consideration.\25\ Exceptions to this general rule are provided
for, among other interests, remainder interests in charitable
remainder annuity trusts, charitable remainder unitrusts, and
pooled income funds, and present interests in the form of a
guaranteed annuity or a fixed percentage of the annual value of
the property.\26\ For such interests, a charitable deduction is
allowed to the extent of the present value of the interest
designated for a charitable organization.
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\25\Secs. 170(f), 2055(e)(2), and 2522(c)(2).
\26\Sec. 170(f)(2).
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IRA rules
Within limits, individuals may make deductible and
nondeductible contributions to a traditional IRA. Amounts in a
traditional IRA are includible in income when withdrawn (except
to the extent the withdrawal represents a return of
nondeductible contributions). Certain individuals also may make
nondeductible contributions to a Roth IRA (deductible
contributions cannot be made to Roth IRAs). Qualified
withdrawals from a Roth IRA are excludable from gross income.
Withdrawals from a Roth IRA that are not qualified withdrawals
are includible in gross income to the extent attributable to
earnings. Includible amounts withdrawn from a traditional IRA
or a Roth IRA before attainment of age 59-\1/2\ are subject to
an additional 10-percent early withdrawal tax, unless an
exception applies. Under present law, minimum distributions are
required to be made from tax-favored retirement arrangements,
including IRAs. Minimum required distributions from a
traditional IRA must generally begin by April 1 of the calendar
year following the year in which the IRA owner attains age 70-
\1/2\.\27\
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\27\Minimum distribution rules also apply in the case of
distributions after the death of a traditional or Roth IRA owner.
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If an individual has made nondeductible contributions to a
traditional IRA, a portion of each distribution from an IRA is
nontaxable until the total amount of nondeductible
contributions has been received. In general, the amount of a
distribution that is nontaxable is determined by multiplying
the amount of the distribution by the ratio of the remaining
nondeductible contributions to the account balance. In making
the calculation, all traditional IRAs of an individual are
treated as a single IRA, all distributions during any taxable
year are treated as a single distribution, and the value of the
contract, income on the contract, and investment in the
contract are computed as of the close of the calendar year.
In the case of a distribution from a Roth IRA that is not a
qualified distribution, in determining the portion of the
distribution attributable to earnings, contributions and
distributions are deemed to be distributed in the following
order: (1) regular Roth IRA contributions; (2) taxable
conversion contributions;\28\ (3) nontaxable conversion
contributions; and (4) earnings. In determining the amount of
taxable distributions from a Roth IRA, all Roth IRA
distributions in the same taxable year are treated as a single
distribution, all regular Roth IRA contributions for a year are
treated as a single contribution, and all conversion
contributions during the year are treated as a single
contribution.
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\28\Conversion contributions refer to conversions of amounts in a
traditional IRA to a Roth IRA.
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Distributions from an IRA (other than a Roth IRA) are
generally subject to withholding unless the individual elects
not to have withholding apply.\29\ Elections not to have
withholding apply are to be made in the time and manner
prescribed by the Secretary.
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\29\Sec. 3405.
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Qualified charitable distributions
Otherwise taxable IRA distributions from a traditional or
Roth IRA are excluded from gross income to the extent they are
qualified charitable distributions.\30\ The exclusion may not
exceed $100,000 per taxpayer per taxable year. Special rules
apply in determining the amount of an IRA distribution that is
otherwise taxable. The otherwise applicable rules regarding
taxation of IRA distributions and the deduction of charitable
contributions continue to apply to distributions from an IRA
that are not qualified charitable distributions. A qualified
charitable distribution is taken into account for purposes of
the minimum distribution rules applicable to traditional IRAs
to the same extent the distribution would have been taken into
account under such rules had the distribution not been directly
distributed under the qualified charitable distribution
provision. An IRA does not fail to qualify as an IRA as a
result of qualified charitable distributions being made from
the IRA.
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\30\Sec. 408(d)(8). The exclusion does not apply to distributions
from employer-sponsored retirement plans, including SIMPLE IRAs and
simplified employee pensions (``SEPs'').
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A qualified charitable distribution is any distribution
from an IRA directly by the IRA trustee to an organization
described in section 170(b)(1)(A) (other than an organization
described in section 509(a)(3) or a donor advised fund (as
defined in section 4966(d)(2)). Distributions are eligible for
the exclusion only if made on or after the date the IRA owner
attains age 70-\1/2\ and only to the extent the distribution
would be includible in gross income (without regard to this
provision).
The exclusion applies only if a charitable contribution
deduction for the entire distribution otherwise would be
allowable (under present law), determined without regard to the
generally applicable percentage limitations. Thus, for example,
if the deductible amount is reduced because of a benefit
received in exchange, or if a deduction is not allowable
because the donor did not obtain sufficient substantiation, the
exclusion is not available with respect to any part of the IRA
distribution.
If the IRA owner has any IRA that includes nondeductible
contributions, a special rule applies in determining the
portion of a distribution that is includible in gross income
(but for the qualified charitable distribution provision) and
thus is eligible for qualified charitable distribution
treatment. Under the special rule, the distribution is treated
as consisting of income first, up to the aggregate amount that
would be includible in gross income (but for the qualified
charitable distribution provision) if the aggregate balance of
all IRAs having the same owner were distributed during the same
year. In determining the amount of subsequent IRA distributions
includible in income, proper adjustments are to be made to
reflect the amount treated as a qualified charitable
distribution under the special rule.
Distributions that are excluded from gross income by reason
of the qualified charitable distribution provision are not
taken into account in determining the deduction for charitable
contributions under section 170.
Under present law, the exclusion does not apply to
distributions made in taxable years beginning after December
31, 2013.
REASONS FOR CHANGE
The Committee believes that facilitating charitable
contributions from IRAs will increase giving to charitable
organizations. Therefore, the Committee believes that the
exclusion for qualified charitable distributions should be
extended for two years.
EXPLANATION OF PROVISION
The provision extends the exclusion from gross income for
qualified charitable distributions from an IRA for two
additional years, i.e., for distributions made in taxable years
beginning before January 1, 2016.
EFFECTIVE DATE
The provision is effective for distributions made in
taxable years beginning after December 31, 2013.
B. Subtitle B--Business Tax Extenders
1. Extension and modification of research credit (sec. 111 of the bill
and secs. 38 and 41 and new sec. 3111(f) of the Code)
PRESENT LAW
Research credit
General rule
For general research expenditures, a taxpayer may claim a
research credit equal to 20 percent of the amount by which the
taxpayer's qualified research expenses for a taxable year
exceed its base amount for that year.\31\ Thus, the research
credit is generally available with respect to incremental
increases in qualified research. An alternative simplified
research credit (with a 14 percent rate and a different base
amount) may be claimed in lieu of this credit.\32\
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\31\Sec. 41(a)(1).
\32\Sec. 41(c)(5).
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A 20-percent research tax credit also is available with
respect to the excess of (1) 100 percent of corporate cash
expenses (including grants or contributions) paid for basic
research conducted by universities (and certain nonprofit
scientific research organizations) over (2) the sum of (a) the
greater of two minimum basic research floors plus (b) an amount
reflecting any decrease in nonresearch giving to universities
by the corporation as compared to such giving during a fixed-
base period, as adjusted for inflation.\33\ This separate
credit computation commonly is referred to as the basic
research credit.\34\
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\33\Sec. 41(a)(2). The base period for the basic research credit
generally extends from 1981 through 1983.
\34\Sec. 41(e).
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Finally, a research credit is available for a taxpayer's
expenditures on research undertaken by an energy research
consortium.\35\ This separate credit computation commonly is
referred to as the energy research credit. Unlike the other
research credits, the energy research credit applies to all
qualified expenditures, not just those in excess of a base
amount.
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\35\Sec. 41(a)(3).
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The research credit, including the basic research credit
and the energy research credit, expires for amounts paid or
incurred after December 31, 2013.\36\
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\36\Sec. 41(h).
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Computation of general research credit
The general research tax credit applies only to the extent
that the taxpayer's qualified research expenses for the current
taxable year exceed its base amount. In general, the base
amount for the current year generally is computed by
multiplying the taxpayer's fixed-base percentage by the average
amount of the taxpayer's gross receipts for the four preceding
years. If a taxpayer both incurred qualified research expenses
and had gross receipts during each of at least three years from
1984 through 1988, then its fixed-base percentage is the ratio
that its total qualified research expenses for the 1984-1988
period bears to its total gross receipts for that period
(subject to a maximum fixed-base percentage of 16 percent).
Special rules apply to all other taxpayers (so called start-up
firms).\37\ In computing the research credit, a taxpayer's base
amount cannot be less than 50 percent of its current-year
qualified research expenses.
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\37\The Small Business Job Protection Act of 1996 expanded the
definition of start-up firms under section 41(c)(3)(B)(i) to include
any firm if the first taxable year in which such firm had both gross
receipts and qualified research expenses began after 1983. A special
rule (enacted in 1993) is designed to gradually recompute a start-up
firm's fixed-base percentage based on its actual research experience.
Under this special rule, a start-up firm is assigned a fixed-base
percentage of three percent for each of its first five taxable years
after 1993 in which it incurs qualified research expenses. A start-up
firm's fixed-base percentage for its sixth through tenth taxable years
after 1993 in which it incurs qualified research expenses is a phased-
in ratio based on the firm's actual research experience. For all
subsequent taxable years, the taxpayer's fixed-base percentage is its
actual ratio of qualified research expenses to gross receipts for any
five years selected by the taxpayer from its fifth through tenth
taxable years after 1993. Sec. 41(c)(3)(B).
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Alternative simplified credit
The alternative simplified research credit is equal to 14
percent of qualified research expenses that exceed 50 percent
of the average qualified research expenses for the three
preceding taxable years.\38\ The rate is reduced to six percent
if a taxpayer has no qualified research expenses in any one of
the three preceding taxable years.\39\ An election to use the
alternative simplified credit applies to all succeeding taxable
years unless revoked with the consent of the Secretary.\40\
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\38\Sec. 41(c)(5)(A).
\39\Sec. 41(c)(5)(B).
\40\Sec. 41(c)(5)(C).
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Eligible expenses
Qualified research expenses eligible for the research tax
credit consist of: (1) in-house expenses of the taxpayer for
wages and supplies attributable to qualified research; (2)
certain time-sharing costs for computer use in qualified
research; and (3) 65 percent of amounts paid or incurred by the
taxpayer to certain other persons for qualified research
conducted on the taxpayer's behalf (so-called contract research
expenses).\41\ Notwithstanding the limitation for contract
research expenses, qualified research expenses include 100
percent of amounts paid or incurred by the taxpayer to an
eligible small business, university, or Federal laboratory for
qualified energy research.
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\41\Under a special rule, 75 percent of amounts paid to a research
consortium for qualified research are treated as qualified research
expenses eligible for the research credit (rather than 65 percent under
the general rule under section 41(b)(3) governing contract research
expenses) if (1) such research consortium is a tax-exempt organization
that is described in section 501(c)(3) (other than a private
foundation) or section 501(c)(6) and is organized and operated
primarily to conduct scientific research, and (2) such qualified
research is conducted by the consortium on behalf of the taxpayer and
one or more persons not related to the taxpayer. Sec. 41(b)(3)(C).
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To be eligible for the credit, the research not only has to
satisfy the requirements of section 174, but also must be
undertaken for the purpose of discovering information that is
technological in nature, the application of which is intended
to be useful in the development of a new or improved business
component of the taxpayer, and substantially all of the
activities of which constitute elements of a process of
experimentation for functional aspects, performance,
reliability, or quality of a business component. Research does
not qualify for the credit if substantially all of the
activities relate to style, taste, cosmetic, or seasonal design
factors.\42\ In addition, research does not qualify for the
credit if: (1) conducted after the beginning of commercial
production of the business component; (2) related to the
adaptation of an existing business component to a particular
customer's requirements; (3) related to the duplication of an
existing business component from a physical examination of the
component itself or certain other information; (4) related to
certain efficiency surveys, management function or technique,
market research, market testing, or market development, routine
data collection or routine quality control; (5) related to
software developed primarily for internal use by the taxpayer;
(6) conducted outside the United States, Puerto Rico, or any
U.S. possession; (7) in the social sciences, arts, or
humanities; or (8) funded by any grant, contract, or otherwise
by another person (or government entity).\43\
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\42\Sec. 41(d)(3).
\43\Sec. 41(d)(4).
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Relation to deduction
Deductions allowed to a taxpayer under section 174 (or any
other section) are reduced by an amount equal to 100 percent of
the taxpayer's research tax credit determined for the taxable
year.\44\ Taxpayers may alternatively elect to claim a reduced
research tax credit amount under section 41 in lieu of reducing
deductions otherwise allowed.\45\
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\44\Sec. 280C(c).
\45\Sec. 280C(c)(3).
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FICA taxes
The Federal Insurance Contributions Act (``FICA'') imposes
tax on employers and employees based on the amount of wages (as
defined for FICA purposes) paid to an employee during the year,
often referred to as ``payroll'' taxes.\46\ The tax imposed on
the employer and on the employee is each composed of two parts:
(1) the Social Security or old age, survivors, and disability
insurance (``OASDI'') tax equal to 6.2 percent of covered wages
up to the taxable wage base ($117,000 for 2014); and (2) the
Medicare or hospital insurance (``HI'') tax equal to 1.45
percent of all covered wages.\47\ The employee portion of the
FICA tax generally must be withheld and remitted to the Federal
government by the employer.
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\46\Secs. 3101-3128.
\47\Beginning 2013, the employee portion of the HI tax under FICA
(not the employer portion) is increased by an additional tax of 0.9
percent on wages received in excess of a threshold amount. The
threshold amount is $250,000 in the case of a joint return, $125,000 in
the case of a married individual filing a separate return, and $200,000
in any other case.
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An employer generally files quarterly employment tax
returns showing its liability for FICA taxes with respect to
its employees' wages for the quarter, as well as the employee
FICA taxes and income taxes withheld from the employees' wages.
General business credit
For any taxable year, the general business credit (which is
the sum of the various business credits) generally may not
exceed the excess of the taxpayer's net income tax\48\ over the
greater of (1) the taxpayer's tentative minimum tax or (2) 25
percent of so much of the taxpayer's net regular tax
liability\49\ as exceeds $25,000.\50\ Any general business
credit in excess of this limitation may be carried back one
year and forward up to 20 years.\51\ The tentative minimum tax
is an amount equal to specified rates of tax imposed on the
excess of the alternative minimum taxable income over an
exemption amount.\52\
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\48\The term ``net income tax'' means the sum of the regular tax
liability and the tax imposed by section 55, reduced by the credits
allowable under subparts A and B of this part. Sec. 38(c)(1).
\49\The term ``net regular tax liability'' means the regular tax
liability reduced by the sum of credits allowable under subparts A and
B of this part. Sec. 38(c)(1).
\50\Sec. 38(c)(1).
\51\Sec. 39(a)(1).
\52\See sec. 55(b).
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In applying the tax liability limitation to certain credits
(``specified credits'') that are part of the general business
credit, the tentative minimum tax is treated as being zero.\53\
Thus, specified credits may offset both regular tax and
alternative minimum tax (``AMT'') liabilities.
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\53\See section 38(c)(4)(B) for the list of specified credits,
which does not presently include the research credit determined under
section 41.
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Eligible small businesses for 2010 were allowed to offset
both regular tax and AMT liabilities with their eligible small
business credits.\54\ For this purpose, eligible small business
credits were defined as the sum of the general business credits
determined for the taxable year with respect to an eligible
small business.\55\ An eligible small business was, with
respect to any taxable year, a corporation, the stock of which
was not publicly traded, or a partnership, which met the gross
receipts test of section 448(c), substituting $50 million for
$5 million each place it appears.\56\ In the case of a sole
proprietorship, the gross receipts test was applied as if it
were a corporation. Credits determined with respect to a
partnership or S corporation were not treated as eligible small
business credits by a partner or shareholder unless the partner
or shareholder met the gross receipts test for the taxable year
in which the credits were treated as current year business
credits.\57\
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\54\Sec. 38(c)(5).
\55\Sec. 38(c)(5)(B).
\56\Sec. 38(c)(5)(C).
\57\Sec. 38(c)(5)(D).
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REASONS FOR CHANGE
The Committee acknowledges that research is important to
the economy. Research is the basis of new products, new
services, new industries, and new jobs. There can be cases
where an individual business may not find it profitable to
invest in research as much as it otherwise might because it is
difficult to capture the full benefits from the research and
prevent such benefits from being used by competitors. At the
same time, research may create great benefits that spill over
to society at large. To encourage activities that will result
in these spillover benefits to society at large, the government
acts to promote research in a variety of ways, including
granting patents and direct funding of research. Another way
for the government to promote research is through tax
incentives such as the research credit. The Committee therefore
believes it is appropriate to extend the present-law research
credit.
In addition, the Committee wants to help small businesses
have better access to and be able to benefit from the research
credit. In some cases, a small business may not have sufficient
income tax liability for a particular year against which to
apply the credit. In that case, the Committee believes it is
appropriate to allow a limited amount of a taxpayer's research
credit to be claimed against its payroll tax liability. The
Committee also believes that in the case of small businesses it
is appropriate to allow the research credit to be claimed
against the AMT.\58\
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\58\See secs. 38 and 39. For example, assume a taxpayer is subject
to AMT of $100,000 and regular tax of $80,000, and calculates a
research credit of $90,000 for the taxable year at issue (assuming no
other general business credits). Under present law, the taxpayer's
research credit would be limited to the excess of $100,000 over the
greater of (1) $100,000 or (2) $13,750 (25% of the excess of $80,000
over $25,000). Accordingly, no research credit may be claimed
($100,000-$100,000 = $0). As a result, the taxpayer would owe $100,000
of tax and carry back or forward its $90,000 research credit, as
applicable.
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EXPLANATION OF PROVISION
Research credit
The provision extends the present law credit for two years,
for qualified research expenses paid or incurred before January
1, 2016.
Payroll tax credit
In general
Under the provision, a qualified small business may elect
for any taxable year to claim a certain amount of its research
credit as a payroll tax credit against its employer OASDI
liability, rather than against its income tax liability.\59\ A
qualified small business is defined, with respect to any
taxable year, as a corporation (including an S corporation) or
partnership (1) with gross receipts of less than $5 million for
the taxable year\60\ and (2) that did not have gross receipts
for any taxable year before the five taxable year period ending
with the taxable year. An individual carrying on one or more
trades or businesses also may be considered a qualified small
business if the individual meets the conditions set forth in
(1) and (2), taking into account its aggregate gross receipts
received with respect to all trades or businesses. A qualified
small business does not include an organization exempt from
income tax under section 501.
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\59\The credit does not apply against its employer HI liability or
against the employee's FICA taxes the employer is required to withhold
and remit to the government.
\60\For this purpose, gross receipts are determined under the rules
of section 448(c)(3), without regard to subparagraph (A) thereof.
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The payroll tax credit portion is the least of (1) an
amount specified by the taxpayer that does not exceed $250,000,
(2) the research credit determined for the taxable year, or (3)
in the case of a qualified small business other than a
partnership or S corporation, the amount of the business credit
carryforward under section 39 from the taxable year (determined
before the application of this provision to the taxable year).
For purposes of this provision, all members of the same
controlled group or group under common control are treated as a
single taxpayer.\61\ The $250,000 amount is allocated among the
members in proportion to each member's expenses on which the
research credit is based. Each member may separately elect the
payroll tax credit, but not in excess of its allocated dollar
amount.
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\61\For this purpose, all persons or entities treated as a single
taxpayer under section 41(f)(1) are treated as a single person for
purposes of this section.
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A taxpayer may make an annual election under this section,
specifying the amount of its research credit not to exceed
$250,000 that may be used as a payroll tax credit, on or before
the due date (including extensions) of its originally filed
return.\62\ A taxpayer may not make an election for a taxable
year if it has made such an election for five or more preceding
taxable years. An election to apply the research credit against
OASDI liability may not be revoked without the consent of the
Secretary of the Treasury (``Secretary''). In the case of a
partnership or S corporation, an election to apply the credit
against its OASDI liability is made at the entity level.
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\62\In the case of a qualified small business that is a
partnership, the return required to be filed under section 6031. In the
case of a qualified small business that is an S corporation, the return
required to be filed under section 6037. In the case of any other
qualified small business, the return of tax for the taxable year.
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Application of credit against OASDI tax liability
The payroll tax portion of the research credit is allowed
as a credit against the qualified small business's OASDI tax
liability for the first calendar quarter beginning after the
date on which the qualified small business files its income tax
or information return for the taxable year. The credit may not
exceed the OASDI tax liability for a calendar quarter on the
wages paid with respect to all employees of the qualified small
business.
If the payroll tax portion of the credit exceeds the
qualified small business's OASDI tax liability for a calendar
quarter, the excess is allowed as a credit against the OASDI
liability for the following calendar quarter.
Other rules
The Secretary is directed to prescribe such regulations as
are necessary to carry out the purposes of the provision,
including (1) to prevent the avoidance of the purposes of the
limitations and aggregation rules through the use of successor
companies or other means, (2) to minimize compliance and
record-keeping burdens, and (3) for recapture of the credit
amount applied against OASDI taxes in the case of an adjustment
to the payroll tax portion of the research credit, including
requiring amended returns in such a case.
General business credit
In the case of an eligible small business (as defined in
the provision relating to eligible small business credits for
2010), the research credit determined under section 41 for
taxable years beginning after December 31, 2013 is a specified
credit. Thus, these research credits of an eligible small
business may offset both regular tax and AMT liabilities.\63\
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\63\Using the above example, under this provision, the limitation
would be the excess of $80,000 over the greater of (1) $0 or (2)
$13,750. Since $13,750 is greater than $0, the $80,000 would be reduced
by $13,750 such that the research credit limitation would be $66,250.
Hence, the taxpayer would be able to claim a research credit of $66,250
against its net income tax liability, as well as its AMT liability,
which would result in $33,250 of total tax owed ($100,000-$66,250). The
remaining $23,750 of its research credit ($90,000-$66,250) may be
carried back or forward, as applicable.
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EFFECTIVE DATE
The provision to extend the research credit for two years
is effective for amounts paid or incurred after December 31,
2013. The provision to allow the research credit against FICA
taxes is effective for credits determined for taxable years
beginning after December 31, 2013. The provision to allow the
research credit against AMT is effective for research credits
of eligible small businesses determined for taxable years
beginning after December 31, 2013, and to carrybacks of such
credits.
2. Extension and modification of temporary minimum low-income housing
tax credit rate for non-Federally subsidized buildings (sec. 112 of the
bill and sec. 42 of the Code)
PRESENT LAW
In general
The low-income housing credit may be claimed over a 10-year
credit period after each low-income building is placed-in-
service. The amount of the credit for any taxable year in the
credit period is the applicable percentage of the qualified
basis of each qualified low-income building.
Present value credit
The calculation of the applicable percentage is designed to
produce a credit equal to: (1) 70 percent of the present value
of the building's qualified basis in the case of newly
constructed or substantially rehabilitated housing that is not
Federally subsidized (the ``70-percent credit''); or (2) 30
percent of the present value of the building's qualified basis
in the case of newly constructed or substantially rehabilitated
housing that is Federally subsidized and existing housing that
is substantially rehabilitated (the ``30-percent credit'').
Where existing housing is substantially rehabilitated, the
existing housing is eligible for the 30-percent credit and the
qualified rehabilitation expenses (if not Federally subsidized)
are eligible for the 70-percent credit.
Calculation of the applicable percentage
In general
The credit percentage for a low-income building is set for
the earlier of: (1) the month the building is placed in
service; or (2) at the election of the taxpayer, (a) the month
the taxpayer and the housing credit agency enter into a binding
agreement with respect to such building for a credit
allocation, or (b) in the case of a tax-exempt bond-financed
project for which no credit allocation is required, the month
in which the tax-exempt bonds are issued.
These credit percentages (used for the 70-percent credit
and 30-percent credit) are adjusted monthly by the IRS on a
discounted after-tax basis (assuming a 28-percent tax rate)
based on the average of the Applicable Federal Rates for mid-
term and long-term obligations for the month the building is
placed in service. The discounting formula assumes that each
credit is received on the last day of each year and that the
present value is computed on the last day of the first year. In
a project consisting of two or more buildings placed in service
in different months, a separate credit percentage may apply to
each building.
Special rule
Under this rule the applicable percentage is set at a
minimum of 9 percent for newly constructed non-Federally
subsidized buildings placed in service after July 30, 2008, and
before January 1, 2014.
REASONS FOR CHANGE
There is a critical shortage of affordable housing.
Historically low Federal interest rates result in lower credit
amounts for low-income housing tax credit properties. To reduce
uncertainty and financial risk in the adjustable rate, the
Committee believes that an extension of the temporary minimum
percentage for newly constructed non-Federally subsidized
buildings is warranted. Similarly, the Committee believes
establishing a temporary minimum percentage for existing non-
Federally subsidized buildings also is appropriate to increase
the financial feasibility for the renovation and preservation
of older properties.
EXPLANATION OF PROVISION
The provision extends the temporary minimum applicable
percentage of 9 percent for newly constructed non-Federally
subsidized buildings with respect to which credit allocations
are made before January 1, 2016. The provision also establishes
a 4-percent minimum credit rate for acquisition of existing
housing that is not Federally subsidized. Any existing housing
that is also financed with tax-exempt bonds is considered
Federally subsidized for this purpose and therefore is not
eligible for the 4-percent minimum credit rate. The 4-percent
minimum credit rate applies to buildings placed in service
after the date of enactment with respect to which credit
allocations are made before January 1, 2016.
EFFECTIVE DATE
The provision is effective on January 1, 2014.
3. Extension of military housing allowance exclusion for determining
area median gross income (sec. 113 of the bill and secs. 42 and 142 of
the Code)
PRESENT LAW
In general
In order to be eligible for the low-income housing credit,
a qualified low-income building must be part of a qualified
low-income housing project. In general, a qualified low-income
housing project is defined as a project that satisfies one of
two tests at the election of the taxpayer. The first test is
met if 20 percent or more of the residential units in the
project are both rent-restricted, and occupied by individuals
whose income is 50 percent or less of area median gross income
(the ``20-50 test''). The second test is met if 40 percent or
more of the residential units in such project are both rent-
restricted, and occupied by individuals whose income is 60
percent or less of area median gross income (the ``40-60
test''). These income figures are adjusted for family size.
Rule for income determinations before July 30, 2008 and on or after
January 1, 2014
The recipients of the military basic housing allowance must
include these amounts for purposes of low-income credit
eligibility income test, as described above.
Special rule for income determination before January 1, 2014
Under the provision the basic housing allowance (i.e.,
payments under 37 U.S.C. sec. 403) is not included in income
for the low-income credit income eligibility rules. The
provision is limited in application to qualified buildings. A
qualified building is defined as any building located:
1. any county which contains a qualified military
installation to which the number of members of the Armed Forces
assigned to units based out of such qualified military
installation has increased by 20 percent or more as of June 1,
2008, over the personnel level on December 31, 2005; and
2. any counties adjacent to a county described in (1),
above.
For these purposes, a qualified military installation is
any military installation or facility with at least 1000
members of the Armed Forces assigned to it.
The provision applies to income determinations: (1) made
after July 30, 2008, and before January 1, 2014, in the case of
qualified buildings which received credit allocations on or
before July 30, 2008, or qualified buildings placed in service
on or before July 30, 2008, to the extent a credit allocation
was not required with respect to such building by reason of
42(h)(4) (i.e., such qualified building was at least 50 percent
tax-exempt bond financed with bonds subject to the private
activity bond volume cap) but only with respect to bonds issued
before July 30, 2008; and (2) made after July 30, 2008, in the
case of qualified buildings which received credit allocations
after July 30, 2008 and before January 1, 2014, or qualified
buildings placed in service after July 30, 2008, and before
January 1, 2014, to the extent a credit allocation was not
required with respect to such qualified building by reason of
42(h)(4) (i.e., such qualified building was at least 50 percent
tax-exempt bond financed with bonds subject to the private
activity bond volume cap) but only with respect to bonds issued
after July 30, 2008, and before January 1, 2014.
REASONS FOR CHANGE
The Committee believes that encouraging owners of low-
income housing credit properties to rent such subsidized units
to military families is appropriate.
EXPLANATION OF PROVISION
The provision extends the special rule two additional years
(through December 31, 2015).
EFFECTIVE DATE
The provision is effective as if included in the enactment
of section 3005 of the Housing Assistance Tax Act of 2008.
4. Extension of Indian employment tax credit (sec. 114 of the bill and
sec. 45A of the Code)
PRESENT LAW
In general, a credit against income tax liability is
allowed to employers for the first $20,000 of qualified wages
and qualified employee health insurance costs paid or incurred
by the employer with respect to certain employees.\64\ The
credit is equal to 20 percent of the excess of eligible
employee qualified wages and health insurance costs during the
current year over the amount of such wages and costs incurred
by the employer during 1993. The credit is an incremental
credit, such that an employer's current-year qualified wages
and qualified employee health insurance costs (up to $20,000
per employee) are eligible for the credit only to the extent
that the sum of such costs exceeds the sum of comparable costs
paid during 1993. No deduction is allowed for the portion of
the wages equal to the amount of the credit.
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\64\Sec. 45A.
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Qualified wages means wages paid or incurred by an employer
for services performed by a qualified employee. A qualified
employee means any employee who is an enrolled member of an
Indian tribe or the spouse of an enrolled member of an Indian
tribe, who performs substantially all of the services within an
Indian reservation, and whose principal place of abode while
performing such services is on or near the reservation in which
the services are performed. An ``Indian reservation'' is a
reservation as defined in section 3(d) of the Indian Financing
Act of 1974\65\ or section 4(10) of the Indian Child Welfare
Act of 1978.\66\ For purposes of the preceding sentence,
section 3(d) is applied by treating ``former Indian
reservations in Oklahoma'' as including only lands that are (1)
within the jurisdictional area of an Oklahoma Indian tribe as
determined by the Secretary of the Interior, and (2) recognized
by such Secretary as an area eligible for trust land status
under 25 C.F.R. Part 151 (as in effect on August 5, 1997).
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\65\Pub. L. No. 93-262.
\66\Pub. L. No. 95-608.
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An employee is not treated as a qualified employee for any
taxable year of the employer if the total amount of wages paid
or incurred by the employer with respect to such employee
during the taxable year exceeds an amount determined at an
annual rate of $30,000 (which after adjusted for inflation is
$45,000 for 2013). In addition, an employee will not be treated
as a qualified employee under certain specific circumstances,
such as where the employee is related to the employer (in the
case of an individual employer) or to one of the employer's
shareholders, partners, or grantors. Similarly, an employee
will not be treated as a qualified employee where the employee
has more than a five percent ownership interest in the
employer. Finally, an employee will not be considered a
qualified employee to the extent the employee's services relate
to gaming activities or are performed in a building housing
such activities.
The wage credit is available for wages paid or incurred in
taxable years that begin on or before December 31, 2013.
REASONS FOR CHANGE
To further encourage employment on Indian reservations, the
Committee believes it is appropriate to extend the Indian
employment credit an additional two years.
EXPLANATION OF PROVISION
The provision extends for two years the present-law
employment credit provision (through taxable years beginning on
or before December 31, 2015).
EFFECTIVE DATE
The provision is effective for taxable years beginning
after December 31, 2013.
5. Extension and modification of new markets tax credit (sec. 115 of
the bill and sec. 45D of the Code)
PRESENT LAW
Section 45D provides a new markets tax credit for qualified
equity investments made to acquire stock in a corporation, or a
capital interest in a partnership, that is a qualified
community development entity (``CDE'').\67\ The amount of the
credit allowable to the investor (either the original purchaser
or a subsequent holder) is (1) a five-percent credit for the
year in which the equity interest is purchased from the CDE and
for each of the following two years, and (2) a six-percent
credit for each of the following four years.\68\ The credit is
determined by applying the applicable percentage (five or six
percent) to the amount paid to the CDE for the investment at
its original issue, and is available to the taxpayer who holds
the qualified equity investment on the date of the initial
investment or on the respective anniversary date that occurs
during the taxable year.\69\ The credit is recaptured if at any
time during the seven-year period that begins on the date of
the original issue of the investment the entity (1) ceases to
be a qualified CDE, (2) the proceeds of the investment cease to
be used as required, or (3) the equity investment is
redeemed.\70\
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\67\Section 45D was added by section 121(a) of the Community
Renewal Tax Relief Act of 2000, Pub. L. No. 106-554.
\68\Sec. 45D(a)(2).
\69\Sec. 45D(a)(3).
\70\Sec. 45D(g).
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A qualified CDE is any domestic corporation or partnership:
(1) whose primary mission is serving or providing investment
capital for low-income communities or low-income persons; (2)
that maintains accountability to residents of low-income
communities by their representation on any governing board of
or any advisory board to the CDE; and (3) that is certified by
the Secretary as being a qualified CDE.\71\ A qualified equity
investment means stock (other than nonqualified preferred
stock) in a corporation or a capital interest in a partnership
that is acquired at its original issue directly (or through an
underwriter) from a CDE for cash, and includes an investment of
a subsequent purchaser if such investment was a qualified
equity investment in the hands of the prior holder.\350\
Substantially all of the investment proceeds must be used by
the CDE to make qualified low-income community investments and
the investment must be designated as a qualified equity
investment by the CDE. For this purpose, qualified low-income
community investments include: (1) capital or equity
investments in, or loans to, qualified active low-income
community businesses; (2) certain financial counseling and
other services to businesses and residents in low-income
communities; (3) the purchase from another CDE of any loan made
by such entity that is a qualified low-income community
investment; or (4) an equity investment in, or loan to, another
CDE.\72\
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\71\Sec. 45D(c).
\72\Sec. 45D(d).
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A ``low-income community'' is a population census tract
with either (1) a poverty rate of at least 20 percent or (2)
median family income which does not exceed 80 percent of the
greater of metropolitan area median family income or statewide
median family income (for a non-metropolitan census tract, does
not exceed 80 percent of statewide median family income). In
the case of a population census tract located within a high
migration rural county, low-income is defined by reference to
85 percent (as opposed to 80 percent) of statewide median
family income.\73\ For this purpose, a high migration rural
county is any county that, during the 20-year period ending
with the year in which the most recent census was conducted,
has a net out-migration of inhabitants from the county of at
least 10 percent of the population of the county at the
beginning of such period.
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\73\Sec. 45D(e).
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The Secretary is authorized to designate ``targeted
populations'' as low-income communities for purposes of the new
markets tax credit.\74\ For this purpose, a ``targeted
population'' is defined by reference to section 103(20) of the
Riegle Community Development and Regulatory Improvement Act of
1994\75\ (the ``Act'') to mean individuals, or an identifiable
group of individuals, including an Indian tribe, who are low-
income persons or otherwise lack adequate access to loans or
equity investments. Section 103(17) of the Act provides that
``low-income'' means (1) for a targeted population within a
metropolitan area, less than 80 percent of the area median
family income; and (2) for a targeted population within a non-
metropolitan area, less than the greater of--80 percent of the
area median family income, or 80 percent of the statewide non-
metropolitan area median family income.\76\ A targeted
population is not required to be within any census tract. In
addition, a population census tract with a population of less
than 2,000 is treated as a low-income community for purposes of
the credit if such tract is within an empowerment zone, the
designation of which is in effect under section 1391 of the
Code, and is contiguous to one or more low-income communities.
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\74\Sec. 45D(e)(2).
\75\Pub. L. No. 103-325.
\76\Pub. L. No. 103-325.
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A qualified active low-income community business is defined
as a business that satisfies, with respect to a taxable year,
the following requirements: (1) at least 50 percent of the
total gross income of the business is derived from the active
conduct of trade or business activities in any low-income
community; (2) a substantial portion of the tangible property
of the business is used in a low-income community; (3) a
substantial portion of the services performed for the business
by its employees is performed in a low-income community; and
(4) less than five percent of the average of the aggregate
unadjusted bases of the property of the business is
attributable to certain financial property or to certain
collectibles.\77\
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\77\Sec. 45D(d)(2).
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The maximum annual amount of qualified equity investments
was $3.5 billion for calendar years 2010, 2011, 2012, and 2013.
The new markets tax credit expired on December 31, 2013. No
amount of unused allocation limitation may be carried to any
calendar year after 2018.
REASONS FOR CHANGE
The Committee believes that the new markets tax credit has
proved to be an effective means of providing equity and other
investments to benefit businesses in low income communities,
and that it is appropriate to provide for the allocation of
additional tax credit authority for another two calendar years.
The Committee also believes that providing for an allocation
for certain areas impacted by declines in manufacturing would
spur manufacturing investment to help create jobs and replace
jobs that those communities lost.
EXPLANATION OF PROVISION
The provision extends the new markets tax credit for two
years, through 2015, permitting up to $3.5 billion in qualified
equity investments for each of the 2014 and 2015 calendar
years. The provision also extends for two years, through 2020,
the carryover period for unused new markets tax credits.
The provision also modifies the new markets tax credit to
include allocations for certain areas impacted by declines in
manufacturing. The provision allows unallocated amounts of the
new markets tax credit to be carried forward after December 31,
2018, but only if such amounts are made available for qualified
community development entities a significant mission of which
is providing investments and services to persons in the trade
or business of manufacturing products in communities which have
suffered major manufacturing job losses or a major
manufacturing job loss event, as designated by the Secretary.
EFFECTIVE DATE
The provision applies to calendar years beginning after
December 31, 2013.
6. Extension of railroad track maintenance credit (sec. 116 of the bill
and sec. 45G of the Code)
PRESENT LAW
Present law provides a 50-percent business tax credit for
qualified railroad track maintenance expenditures paid or
incurred by an eligible taxpayer during taxable years beginning
before January 1, 2014.\78\ The credit is limited to the
product of $3,500 times the number of miles of railroad track
(1) owned or leased by an eligible taxpayer as of the close of
its taxable year, and (2) assigned to the eligible taxpayer by
a Class II or Class III railroad that owns or leases such track
at the close of the taxable year.\79\ Each mile of railroad
track may be taken into account only once, either by the owner
of such mile or by the owner's assignee, in computing the per-
mile limitation. The credit also may reduce a taxpayer's tax
liability below its tentative minimum tax.\80\ Basis of the
railroad track must be reduced (but not below zero) by an
amount equal to 100 percent of the taxpayer's qualified
railroad track maintenance tax credit determined for the
taxable year.\81\
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\78\Secs. 45G(a) and (f).
\79\Sec. 45G(b)(1).
\80\Sec. 38(c)(4).
\81\Sec. 45G(e)(3).
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Qualified railroad track maintenance expenditures are
defined as gross expenditures (whether or not otherwise
chargeable to capital account) for maintaining railroad track
(including roadbed, bridges, and related track structures)
owned or leased as of January 1, 2005, by a Class II or Class
III railroad (determined without regard to any consideration
for such expenditure given by the Class II or Class III
railroad which made the assignment of such track).\82\
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\82\Sec. 45G(d).
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An eligible taxpayer means any Class II or Class III
railroad, and any person who transports property using the rail
facilities of a Class II or Class III railroad or who furnishes
railroad-related property or services to a Class II or Class
III railroad, but only with respect to miles of railroad track
assigned to such person by such railroad under the
provision.\83\
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\83\Sec. 45G(c).
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The terms Class II or Class III railroad have the meanings
given by the Surface Transportation Board.\84\
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\84\Sec. 45G(e)(1).
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REASONS FOR CHANGE
The Committee believes that Class II and Class III
railroads are an important part of the nation's railway system.
Therefore, the Committee believes that this incentive for
railroad track maintenance expenditures should be extended.
EXPLANATION OF PROVISION
The provision extends the present law credit for two years,
for qualified railroad track maintenance expenditures paid or
incurred in taxable years beginning before January 1, 2016.
EFFECTIVE DATE
The provision is effective for expenditures paid or
incurred in taxable years beginning after December 31, 2013.
7. Extension of mine rescue team training credit (sec. 117 of the bill
and sec. 45N of the Code)
PRESENT LAW
An eligible employer may claim a general business credit
against income tax with respect to each qualified mine rescue
team employee equal to the lesser of: (1) 20 percent of the
amount paid or incurred by the taxpayer during the taxable year
with respect to the training program costs of the qualified
mine rescue team employee (including the wages of the employee
while attending the program); or (2) $10,000.\85\ A qualified
mine rescue team employee is any full-time employee of the
taxpayer who is a miner eligible for more than six months of a
taxable year to serve as a mine rescue team member by virtue of
either having completed the initial 20 hour course of
instruction prescribed by the Mine Safety and Health
Administration's Office of Educational Policy and Development,
or receiving at least 40 hours of refresher training in such
instruction.\86\
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\85\Sec. 45N(a).
\86\Sec. 45N(b).
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An eligible employer is any taxpayer which employs
individuals as miners in underground mines in the United
States.\87\ The term ``wages'' has the meaning given to such
term by section 3306(b)\88\ (determined without regard to any
dollar limitation contained in that section).\89\
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\87\Sec. 45N(c).
\88\Section 3306(b) defines wages for purposes of Federal
Unemployment Tax.
\89\Sec. 45N(d).
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No deduction is allowed for the portion of the expenses
otherwise deductible that is equal to the amount of the
credit.\90\ The credit does not apply to taxable years
beginning after December 31, 2013.\91\ Additionally, the credit
is not allowable for purposes of computing the alternative
minimum tax.\92\
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\90\Sec. 280C(e).
\91\Sec. 45N(e).
\92\Sec. 38(c).
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REASONS FOR CHANGE
The Committee believes that training mine rescue team
employees will help ensure a positive outcome for individuals
operating in and around a mine in the event of an accident.
Therefore, the Committee believes that this incentive for costs
incurred to train mine rescue teams should be extended.
EXPLANATION OF PROVISION
The provision extends the credit for two years through
taxable years beginning on or before December 31, 2015.
EFFECTIVE DATE
The provision is effective for taxable years beginning
after December 31, 2013.
8. Employer wage credit for employees who are active duty members of
the uniformed services (sec. 118 of the bill and sec. 45P of the Code)
PRESENT LAW
Differential pay
In general, compensation paid by an employer to an employee
is deductible by the employer unless the expense must be
capitalized.\93\ In the case of an employee who is called to
active duty with respect to the armed forces of the United
States, some employers voluntarily pay the employee the
difference between the compensation that the employer would
have paid to the employee during the period of military service
less the amount of pay received by the employee from the
military. This payment by the employer is often referred to as
``differential pay.''
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\93\Sec. 162(a)(1).
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Wage credit for differential pay
If an employer qualifies as an eligible small business
employer, the employer is allowed a credit against its income
tax liability for a taxable year in an amount equal to 20
percent of the sum of the eligible differential wage payments
for each of the employer's qualified employees during the year.
An eligible small business employer means, with respect to
a taxable year, an employer that: (1) employed on average less
than 50 employees on business days during the taxable year; and
(2) under a written plan of the taxpayer, provides eligible
differential wage payments to every qualified employee. For
this purpose, members of controlled groups, groups under common
control, and affiliated service groups are treated as a single
employer.\94\ The credit is not available with respect to an
employer that has failed to comply with the employment and
reemployment rights of members of the uniformed services.\95\
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\94\Sec. 414(b), (c), (m) and (o).
\95\Chapter 43 of Title 38 of the United States Code deals with
these rights.
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Differential wage payment means any payment that: (1) is
made by an employer to an individual with respect to any period
during which the individual is performing service in the
uniformed services of the United States while on active duty
for a period of more than 30 days; and (2) represents all or a
portion of the wages that the individual would have received
from the employer if the individual were performing services
for the employer.\96\ Eligible differential wage payments are
so much of the differential wage payments paid to a qualified
employee as does not exceed $20,000. A qualified employee is an
individual who has been an employee of the employer for the 91-
day period immediately preceding the period for which any
differential wage payment is made.
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\96\Sec. 3401(h)(2).
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No deduction may be taken for that portion of compensation
that is equal to the credit.\97\ In addition, the amount of any
other income tax credit otherwise allowable with respect to
compensation paid to an employee must be reduced by the
differential wage payment credit allowed with respect to the
employee. The credit is not allowable against a taxpayer's
alternative minimum tax liability. Certain rules applicable to
the work opportunity tax credit in the case of tax-exempt
organizations, estates and trusts, and regulated investment
companies, real estate investment trusts and certain
cooperatives apply also to the differential wage payment
credit.\98\
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\97\Sec. 280C(a).
\98\Sec. 52(c), (d), (e).
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The credit is available with respect to amounts paid after
June 17, 2008,\99\ and before January 1, 2014.
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\99\The credit was originally provided by the Heroes Earnings
Assistance and Relief Tax Act of 2008 (``HEART Act''), Pub. L. No. 110-
245, effective for amounts paid after June 17, 2008, the date of
enactment of the HEART Act.
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REASONS FOR CHANGE
The credit for differential wage payments serves to
encourage employers to make differential wage payments to
employees who are serving on active duty in the military.
Besides continuing the current incentive by extending the
credit, the Committee wishes to expand its incentive effect by
making the credit available to all employers, regardless of
size, and to increase the credit rate.
EXPLANATION OF PROVISION
The provision extends the availability of the differential
wage payment credit for two years to amounts paid before
January 1, 2016.
The provision also modifies the credit by making it
available to an employer of any size, rather than only to
eligible small business employers, and by increasing the credit
rate to 100 percent of eligible differential wage payments
(that is, differential wage payments up to $20,000).
EFFECTIVE DATE
The provision applies to payments made after December 31,
2013.
9. Extension and modification of work opportunity tax credit (sec. 119
of the bill and secs. 51 and 52 of the Code)
PRESENT LAW
In general
The work opportunity tax credit is available on an elective
basis for employers hiring individuals from one or more of nine
targeted groups. The amount of the credit available to an
employer is determined by the amount of qualified wages paid by
the employer. Generally, qualified wages consist of wages
attributable to service rendered by a member of a targeted
group during the one-year period beginning with the day the
individual begins work for the employer (two years in the case
of an individual in the long-term family assistance recipient
category).
Targeted groups eligible for the credit
Generally, an employer is eligible for the credit only for
qualified wages paid to members of a targeted group.
(1) Families receiving TANF
An eligible recipient is an individual certified by a
designated local employment agency (e.g., a State employment
agency) as being a member of a family eligible to receive
benefits under the Temporary Assistance for Needy Families
Program (``TANF'') for a period of at least nine months part of
which is during the 18-month period ending on the hiring date.
For these purposes, members of the family are defined to
include only those individuals taken into account for purposes
of determining eligibility for the TANF.
(2) Qualified veteran
Prior to enactment of the ``VOW to Hire Heroes Act of
2011'' (the ``VOW Act''),\100\ there were two subcategories of
qualified veterans to whom wages paid by an employer were
eligible for the credit. Employers who hired veterans who were
eligible to receive assistance under a supplemental nutritional
assistance program were entitled to a maximum credit of 40
percent of $6,000 of qualified first-year wages paid to such
individual.\101\ Employers who hired veterans who were entitled
to compensation for a service-connected disability were
entitled to a maximum wage credit of 40 percent of $12,000 of
qualified first-year wages paid to such individual.\102\
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\100\Pub. L. No. 112-56 (Nov. 21, 2011).
\101\For these purposes, a qualified veteran must be certified by
the designated local agency as a member of a family receiving
assistance under a supplemental nutrition assistance program under the
Food and Nutrition Act of 2008 for a period of at least three months
part of which is during the 12-month period ending on the hiring date.
For these purposes, members of a family are defined to include only
those individuals taken into account for purposes of determining
eligibility for a supplemental nutrition assistance program under the
Food and Nutrition Act of 2008.
\102\The qualified veteran must be certified as entitled to
compensation for a service-connected disability and (1) have a hiring
date which is not more than one year after having been discharged or
released from active duty in the Armed Forces of the United States; or
(2) have been unemployed for six months or more (whether or not
consecutive) during the one-year period ending on the date of hiring.
For these purposes, being entitled to compensation for a service-
connected disability is defined with reference to section 101 of Title
38, U.S. Code, which means having a disability rating of 10 percent or
higher for service connected injuries.
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The VOW Act modified the work opportunity credit with
respect to qualified veterans, by adding additional
subcategories. There are now five subcategories of qualified
veterans: (1) in the case of veterans who were eligible to
receive assistance under a supplemental nutritional assistance
program (for at least a three month period during the year
prior to the hiring date) the employer is entitled to a maximum
credit of 40 percent of $6,000 of qualified first-year wages;
(2) in the case of a qualified veteran who is entitled to
compensation for a service connected disability, who is hired
within one year of discharge, the employer is entitled to a
maximum credit of 40 percent of $12,000 of qualified first-year
wages; (3) in the case of a qualified veteran who is entitled
to compensation for a service connected disability, and who has
been unemployed for an aggregate of at least six months during
the one year period ending on the hiring date, the employer is
entitled to a maximum credit of 40 percent of $24,000 of
qualified first-year wages; (4) in the case of a qualified
veteran unemployed for at least four weeks but less than six
months (whether or not consecutive) during the one-year period
ending on the date of hiring, the maximum credit equals 40
percent of $6,000 of qualified first-year wages; and (5) in the
case of a qualified veteran unemployed for at least six months
(whether or not consecutive) during the one-year period ending
on the date of hiring, the maximum credit equals 40 percent of
$14,000 of qualified first-year wages.
A veteran is an individual who has served on active duty
(other than for training) in the Armed Forces for more than 180
days or who has been discharged or released from active duty in
the Armed Forces for a service-connected disability. However,
any individual who has served for a period of more than 90 days
during which the individual was on active duty (other than for
training) is not a qualified veteran if any of this active duty
occurred during the 60-day period ending on the date the
individual was hired by the employer. This latter rule is
intended to prevent employers who hire current members of the
armed services (or those departed from service within the last
60 days) from receiving the credit.
(3) Qualified ex-felon
A qualified ex-felon is an individual certified as: (1)
having been convicted of a felony under any State or Federal
law; and (2) having a hiring date within one year of release
from prison or the date of conviction.
(4) Designated community resident
A designated community resident is an individual certified
as being at least age 18 but not yet age 40 on the hiring date
and as having a principal place of abode within an empowerment
zone, enterprise community, renewal community or a rural
renewal community. For these purposes, a rural renewal county
is a county outside a metropolitan statistical area (as defined
by the Office of Management and Budget) which had a net
population loss during the five-year periods 1990-1994 and
1995-1999. Qualified wages do not include wages paid or
incurred for services performed after the individual moves
outside an empowerment zone, enterprise community, renewal
community or a rural renewal community.
(5) Vocational rehabilitation referral
A vocational rehabilitation referral is an individual who
is certified by a designated local agency as an individual who
has a physical or mental disability that constitutes a
substantial handicap to employment and who has been referred to
the employer while receiving, or after completing: (a)
vocational rehabilitation services under an individualized,
written plan for employment under a State plan approved under
the Rehabilitation Act of 1973; (b) under a rehabilitation plan
for veterans carried out under Chapter 31 of Title 38, U.S.
Code; or (c) an individual work plan developed and implemented
by an employment network pursuant to subsection (g) of section
1148 of the Social Security Act. Certification will be provided
by the designated local employment agency upon assurances from
the vocational rehabilitation agency that the employee has met
the above conditions.
(6) Qualified summer youth employee
A qualified summer youth employee is an individual: (1) who
performs services during any 90-day period between May 1 and
September 15; (2) who is certified by the designated local
agency as being 16 or 17 years of age on the hiring date; (3)
who has not been an employee of that employer before; and (4)
who is certified by the designated local agency as having a
principal place of abode within an empowerment zone, enterprise
community, or renewal community. As with designated community
residents, no credit is available on wages paid or incurred for
service performed after the qualified summer youth moves
outside of an empowerment zone, enterprise community, or
renewal community. If, after the end of the 90-day period, the
employer continues to employ a youth who was certified during
the 90-day period as a member of another targeted group, the
limit on qualified first-year wages will take into account
wages paid to the youth while a qualified summer youth
employee.
(7) Qualified supplemental nutrition assistance program
benefits recipient
A qualified supplemental nutrition assistance program
benefits recipient is an individual at least age 18 but not yet
age 40 certified by a designated local employment agency as
being a member of a family receiving assistance under a food
and nutrition program under the Food and Nutrition Act of 2008
for a period of at least six months ending on the hiring date.
In the case of families that cease to be eligible for food and
nutrition assistance under section 6(o) of the Food and
Nutrition Act of 2008, the six-month requirement is replaced
with a requirement that the family has been receiving food and
nutrition assistance for at least three of the five months
ending on the date of hire. For these purposes, members of the
family are defined to include only those individuals taken into
account for purposes of determining eligibility for a food and
nutrition assistance program under the Food and Nutrition Act
of 2008.
(8) Qualified SSI recipient
A qualified SSI recipient is an individual designated by a
local agency as receiving supplemental security income
(``SSI'') benefits under Title XVI of the Social Security Act
for any month ending within the 60-day period ending on the
hiring date.
(9) Long-term family assistance recipient
A qualified long-term family assistance recipient is an
individual certified by a designated local agency as being: (1)
a member of a family that has received family assistance for at
least 18 consecutive months ending on the hiring date; (2) a
member of a family that has received such family assistance for
a total of at least 18 months (whether or not consecutive)
after August 5, 1997 (the date of enactment of the welfare-to-
work tax credit) if the individual is hired within two years
after the date that the 18-month total is reached; or (3) a
member of a family who is no longer eligible for family
assistance because of either Federal or State time limits, if
the individual is hired within two years after the Federal or
State time limits made the family ineligible for family
assistance.
Qualified wages
Generally, qualified wages are defined as cash wages paid
by the employer to a member of a targeted group. The employer's
deduction for wages is reduced by the amount of the credit.
For purposes of the credit, generally, wages are defined by
reference to the FUTA definition of wages contained in sec.
3306(b) (without regard to the dollar limitation therein
contained). Special rules apply in the case of certain
agricultural labor and certain railroad labor.
Calculation of the credit
The credit available to an employer for qualified wages
paid to members of all targeted groups except for long-term
family assistance recipients equals 40 percent (25 percent for
employment of 400 hours or less) of qualified first-year wages.
Generally, qualified first-year wages are qualified wages (not
in excess of $6,000) attributable to service rendered by a
member of a targeted group during the one-year period beginning
with the day the individual began work for the employer.
Therefore, the maximum credit per employee is $2,400 (40
percent of the first $6,000 of qualified first-year wages).
With respect to qualified summer youth employees, the maximum
credit is $1,200 (40 percent of the first $3,000 of qualified
first-year wages). Except for long-term family assistance
recipients, no credit is allowed for second-year wages.
In the case of long-term family assistance recipients, the
credit equals 40 percent (25 percent for employment of 400
hours or less) of $10,000 for qualified first-year wages and 50
percent of the first $10,000 of qualified second-year wages.
Generally, qualified second-year wages are qualified wages (not
in excess of $10,000) attributable to service rendered by a
member of the long-term family assistance category during the
one-year period beginning on the day after the one-year period
beginning with the day the individual began work for the
employer. Therefore, the maximum credit per employee is $9,000
(40 percent of the first $10,000 of qualified first-year wages
plus 50 percent of the first $10,000 of qualified second-year
wages).
For calculation of the credit with respect to qualified
veterans, see the description of ``qualified veteran'' above.
Certification rules
Generally, an individual is not treated as a member of a
targeted group unless: (1) on or before the day on which an
individual begins work for an employer, the employer has
received a certification from a designated local agency that
such individual is a member of a targeted group; or (2) on or
before the day an individual is offered employment with the
employer, a pre-screening notice is completed by the employer
with respect to such individual, and not later than the 28th
day after the individual begins work for the employer, the
employer submits such notice, signed by the employer and the
individual under penalties of perjury, to the designated local
agency as part of a written request for certification. For
these purposes, a pre-screening notice is a document (in such
form as the Secretary may prescribe) which contains information
provided by the individual on the basis of which the employer
believes that the individual is a member of a targeted group.
An otherwise qualified unemployed veteran is treated as
certified by the designated local agency as having aggregate
periods of unemployment (whichever is applicable under the
qualified veterans rules described above) if such veteran is
certified by such agency as being in receipt of unemployment
compensation under a State or Federal law for such applicable
periods. The Secretary of the Treasury is authorized to provide
alternative methods of certification for unemployed veterans.
Minimum employment period
No credit is allowed for qualified wages paid to employees
who work less than 120 hours in the first year of employment.
Qualified tax-exempt organizations employing qualified veterans
The credit is not available to qualified tax-exempt
organizations other than those employing qualified veterans.
The special rules, described below, were enacted in the VOW
Act.
If a qualified tax-exempt organization employs a qualified
veteran (as described above) a tax credit against the FICA
taxes of the organization is allowed on the wages of the
qualified veteran which are paid for the veteran's services in
furtherance of the activities related to the function or
purpose constituting the basis of the organization's exemption
under section 501.
The credit available to such tax-exempt employer for
qualified wages paid to a qualified veteran equals 26 percent
(16.25 percent for employment of 400 hours or less) of
qualified first-year wages. The amount of qualified first-year
wages eligible for the credit is the same as those for non-tax-
exempt employers (i.e., $6,000, $12,000, $14,000 or $24,000,
depending on the category of qualified veteran).
A qualified tax-exempt organization means an employer that
is described in section 501(c) and exempt from tax under
section 501(a).
The Social Security Trust Funds are held harmless from the
effects of this provision by a transfer from the Treasury
General Fund.
Treatment of possessions
The VOW Act provided a reimbursement mechanism for the U.S.
possessions (American Samoa, Guam, the Commonwealth of the
Northern Mariana Islands, the Commonwealth of Puerto Rico, and
the United States Virgin Islands). The Treasury Secretary is to
pay to each mirror code possession (Guam, the Commonwealth of
the Northern Mariana Islands, and the United States Virgin
Islands) an amount equal to the loss to that possession as a
result of the VOW Act changes to the qualified veterans rules.
Similarly, the Treasury Secretary is to pay to each non-mirror
Code possession (American Samoa and the Commonwealth of Puerto
Rico) the amount that the Secretary estimates as being equal to
the loss to that possession that would have occurred as a
result of the VOW Act changes if a mirror code tax system had
been in effect in that possession. The Secretary will make this
payment to a non-mirror Code possession only if that possession
establishes to the satisfaction of the Secretary that the
possession has implemented (or, at the discretion of the
Secretary, will implement) an income tax benefit that is
substantially equivalent to the qualified veterans credit
allowed under the VOW Act modifications.
An employer that is allowed a credit against U.S. tax under
the VOW Act with respect to a qualified veteran must reduce the
amount of the credit claimed by the amount of any credit (or,
in the case of a non-mirror Code possession, another tax
benefit) that the employer claims against its possession income
tax.
Other rules
The work opportunity tax credit is not allowed for wages
paid to a relative or dependent of the taxpayer. No credit is
allowed for wages paid to an individual who is a more than
fifty-percent owner of the entity. Similarly, wages paid to
replacement workers during a strike or lockout are not eligible
for the work opportunity tax credit. Wages paid to any employee
during any period for which the employer received on-the-job
training program payments with respect to that employee are not
eligible for the work opportunity tax credit. The work
opportunity tax credit generally is not allowed for wages paid
to individuals who had previously been employed by the
employer. In addition, many other technical rules apply.
Expiration
The work opportunity tax credit is not available for
individuals who begin work for an employer after December 31,
2013.
REASONS FOR CHANGE
Given the level of unemployment and general economic
conditions, the Committee believes that the credit should be
extended and expanded. By expanding the credit to long-term
unemployed individuals, the Committee believes it is providing
an incentive for employers to hire individuals who have
suffered particularly acute harm during the economic downturn.
EXPLANATION OF PROVISION
The provision extends for two years the present-law
employment credit provision (through taxable years beginning on
or before December 31, 2015). Additionally, the provision
expands the work opportunity tax credit to employers who hire
individuals who are qualified long-term unemployment
recipients. For purposes of the provision, such persons are
individuals who have been certified by the designated local
agency as being in a period of unemployment of 27 weeks or
more, which includes a period in which the individual was
receiving unemployment compensation under State or Federal law.
With respect to wages paid to such individuals, employers would
be eligible for a 40 percent credit on the first $6,000 of
wages paid to such individual, for a maximum credit of $2,400
per eligible employee.
EFFECTIVE DATE
The provision is effective for individuals who begin work
for the employer after December 31, 2013.
10. Extension of qualified zone academy bonds (sec. 120 of the bill and
secs. 54E and 6431 of the Code)
PRESENT LAW
Tax-exempt bonds
Interest on State and local governmental bonds generally is
excluded from gross income for Federal income tax purposes if
the proceeds of the bonds are used to finance direct activities
of these governmental units or if the bonds are repaid with
revenues of the governmental units. These can include tax-
exempt bonds which finance public schools.\103\ An issuer must
file with the Internal Revenue Service certain information
about the bonds issued in order for that bond issue to be tax-
exempt.\104\ Generally, this information return is required to
be filed no later the 15th day of the second month after the
close of the calendar quarter in which the bonds were issued.
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\103\Sec. 103.
\104\Sec. 149(e).
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The tax exemption for State and local bonds does not apply
to any arbitrage bond.\105\ An arbitrage bond is defined as any
bond that is part of an issue if any proceeds of the issue are
reasonably expected to be used (or intentionally are used) to
acquire higher yielding investments or to replace funds that
are used to acquire higher yielding investments.\106\ In
general, arbitrage profits may be earned only during specified
periods (e.g., defined ``temporary periods'') before funds are
needed for the purpose of the borrowing or on specified types
of investments (e.g., ``reasonably required reserve or
replacement funds''). Subject to limited exceptions, investment
profits that are earned during these periods or on such
investments must be rebated to the Federal Government.
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\105\Sec. 103(a) and (b)(2).
\106\Sec. 148.
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Qualified zone academy bonds
As an alternative to traditional tax-exempt bonds, States
and local governments were given the authority to issue
``qualified zone academy bonds.''\107\ A total of $400 million
of qualified zone academy bonds is authorized to be issued
annually in calendar years 1998 through 2008, $1,400 million in
2009 and 2010, and $400 million in 2011, 2012 and 2013. Each
calendar years bond limitation is allocated to the States
according to their respective populations of individuals below
the poverty line. Each State, in turn, allocates the credit
authority to qualified zone academies within such State.
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\107\See secs. 54E and 1397E.
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A taxpayer holding a qualified zone academy bond on the
credit allowance date is entitled to a credit. The credit is
includible in gross income (as if it were a taxable interest
payment on the bond), and may be claimed against regular income
tax and alternative minimum tax liability.
Qualified zone academy bonds are a type of qualified tax
credit bond and subject to the general rules applicable to
qualified tax credit bonds.\108\ The Treasury Department sets
the credit rate at a rate estimated to allow issuance of
qualified zone academy bonds without discount and without
interest cost to the issuer.\109\ The Secretary determines
credit rates for tax credit bonds based on general assumptions
about credit quality of the class of potential eligible issuers
and such other factors as the Secretary deems appropriate. The
Secretary may determine credit rates based on general credit
market yield indexes and credit ratings. The maximum term of
the bond is determined by the Treasury Department, so that the
present value of the obligation to repay the principal on the
bond is 50 percent of the face value of the bond.
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\108\Sec. 54A.
\109\Given the differences in credit quality and other
characteristics of individual issuers, the Secretary cannot set credit
rates in a manner that will allow each issuer to issue tax credit bonds
at par.
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``Qualified zone academy bonds'' are defined as any bond
issued by a State or local government, provided that (1) at
least 100 percent of the available project proceeds are used
for the purpose of renovating, providing equipment to,
developing course materials for use at, or training teachers
and other school personnel in a ``qualified zone academy'' and
(2) private entities have promised to contribute to the
qualified zone academy certain equipment, technical assistance
or training, employee services, or other property or services
with a value equal to at least 10 percent of the bond proceeds.
A school is a ``qualified zone academy'' if (1) the school
is a public school that provides education and training below
the college level, (2) the school operates a special academic
program in cooperation with businesses to enhance the academic
curriculum and increase graduation and employment rates, and
(3) either (a) the school is located in an empowerment zone or
enterprise community designated under the Code, or (b) it is
reasonably expected that at least 35 percent of the students at
the school will be eligible for free or reduced-cost lunches
under the school lunch program established under the National
School Lunch Act.
Under section 6431 of the Code, an issuer of specified tax
credit bonds, may elect to receive a payment in lieu of a
credit being allowed to the holder of the bond (``direct-pay
bonds''). The Code provides that section 6431 is not available
for qualified zone academy bond allocations from the 2011
national limitation or any carry forward of the 2011
allocation.\110\
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\110\Sec. 6431(f)(3)(A)(iii). A technical correction may be needed
to conform the Code to provide that section 6431 is not available for
any allocations from national limitation or carryforward for years 2011
and thereafter.
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REASONS FOR CHANGE
The Committee believes there is a continuing need to
finance school renovations and therefore, extension of the
qualified zone academy bond program is warranted. Further, the
Committee believes that the inability to attract sufficient
private contributions to meet the current 10 percent private
contribution requirement may hinder the ability of some school
districts to fully utilize the qualified zone academy bond
program. Therefore, the Committee believes it is appropriate to
lower the required match to five percent to make the
requirement more manageable for school districts to meet.
EXPLANATION OF PROVISION
The provision extends the qualified zone academy bond
program for two additional years. The provision authorizes
issuance of up to $400 million of qualified zone academy bonds
per year for 2014 and 2015. The option to issue direct-pay
bonds is not available for the 2014 and 2015 bond limitation.
The provision makes two additional changes with respect to
qualified zone academy bonds. First, the provision makes a
technical correction to conform the Code to Congressional
intent that qualified zone academy bonds cannot be issued as
direct-pay bonds using national limitation allocations or
carryforwards from years after 2010. Second, the provision
reduces the private business contribution requirement from 10
percent to five percent.
EFFECTIVE DATE
The provision generally applies to obligations issued after
December 31, 2013. The technical correction is effective as if
included in section 310 of American Taxpayer Relief Act of
2012.
11. Extension of classification of certain race horses as three-year
property (sec. 121 of the bill and sec. 168 of the Code)
PRESENT LAW
A taxpayer generally must capitalize the cost of property
used in a trade or business and recover such cost over time
through annual deductions for depreciation or
amortization.\111\ Tangible property generally is depreciated
under the modified accelerated cost recovery system
(``MACRS''), which determines depreciation by applying specific
recovery periods,\112\ placed-in-service conventions, and
depreciation methods to the cost of various types of
depreciable property.\113\ In particular, the statute assigns a
three-year recovery period for any race horse (1) that is
placed in service after December 31, 2008 and before January 1,
2014\114\ and (2) that is placed in service after December 31,
2013 and that is more than two years old at such time it is
placed in service by the purchaser.\115\
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\111\See secs. 263(a) and 167.
\112\The applicable recovery period for an asset is determined in
part by statute and in part by historic Treasury guidance. Exercising
authority granted by Congress, the Secretary issued Revenue Procedure
87-56 (1987-2 C.B. 674), laying out the framework of recovery periods
for enumerated classes of assets. The Secretary clarified and modified
the list of asset classes in Revenue Procedure 88-22 (1988-1 C.B. 785).
In November 1988, Congress revoked the Secretary's authority to modify
the class lives of depreciable property. Revenue Procedure 87-56, as
modified, remains in effect except to the extent that the Congress has,
since 1988, statutorily modified the recovery period for certain
depreciable assets, effectively superseding any administrative guidance
with regard to such property.
\113\Sec. 168.
\114\Sec. 168(e)(3)(A)(i)(I), as in effect after amendment by the
Food, Conservation and Energy Act of 2008, Pub. L. No. 110-246, sec.
15344(b).
\115\Sec. 168(e)(3)(A)(i)(II). A horse is more than 2 years old
after the day that is 24 months after its actual birthdate. Rev. Proc.
87-56, 1987-2 C.B. 674, as clarified and modified by Rev. Proc. 88-22,
1988-1 C.B. 785.
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REASONS FOR CHANGE
The Committee believes that the horse industry is important
to a number of State and local economies. Therefore, the
Committee believes that this incentive for race horses should
be extended.
EXPLANATION OF PROVISION
The provision extends the present-law three-year recovery
period for race horses for two years to apply to any race horse
(regardless of age when placed in service) before January 1,
2016.
EFFECTIVE DATE
The provision applies to property placed in service after
December 31, 2013.
12. Extension of 15-year straight-line cost recovery for qualified
leasehold improvements, qualified restaurant buildings and
improvements, and qualified retail improvements (sec. 122 of the bill
and sec. 168 of the Code)
PRESENT LAW
In general
A taxpayer generally must capitalize the cost of property
used in a trade or business and recover such cost over time
through annual deductions for depreciation or amortization.
Tangible property generally is depreciated under the modified
accelerated cost recovery system (``MACRS''), which determines
depreciation by applying specific recovery periods, placed-in-
service conventions, and depreciation methods to the cost of
various types of depreciable property.\116\ The cost of
nonresidential real property is recovered using the straight-
line method of depreciation and a recovery period of 39 years.
Nonresidential real property is subject to the mid-month
placed-in-service convention. Under the mid-month convention,
the depreciation allowance for the first year in which property
is placed in service is based on the number of months the
property was in service, and property placed in service at any
time during a month is treated as having been placed in service
in the middle of the month.
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\116\Sec. 168.
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Depreciation of leasehold improvements
Generally, depreciation allowances for improvements made on
leased property are determined under MACRS, even if the MACRS
recovery period assigned to the property is longer than the
term of the lease. This rule applies regardless of whether the
lessor or the lessee places the leasehold improvements in
service. If a leasehold improvement constitutes an addition or
improvement to nonresidential real property already placed in
service, the improvement generally is depreciated using the
straight-line method over a 39-year recovery period, beginning
in the month the addition or improvement was placed in service.
However, exceptions exist for certain qualified leasehold
improvements, qualified restaurant property, and qualified
retail improvement property.
Qualified leasehold improvement property
Section 168(e)(3)(E)(iv) provides a statutory 15-year
recovery period for qualified leasehold improvement property
placed in service before January 1, 2014. Qualified leasehold
improvement property is any improvement to an interior portion
of a building that is nonresidential real property, provided
certain requirements are met.\117\ The improvement must be made
under or pursuant to a lease either by the lessee (or
sublessee), or by the lessor, of that portion of the building
to be occupied exclusively by the lessee (or sublessee). The
improvement must be placed in service more than three years
after the date the building was first placed in service.
Qualified leasehold improvement property does not include any
improvement for which the expenditure is attributable to the
enlargement of the building, any elevator or escalator, any
structural component benefiting a common area, or the internal
structural framework of the building.\118\ If a lessor makes an
improvement that qualifies as qualified leasehold improvement
property, such improvement does not qualify as qualified
leasehold improvement property to any subsequent owner of such
improvement.\119\ An exception to the rule applies in the case
of death and certain transfers of property that qualify for
non-recognition treatment.\120\
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\117\Sec. 168(e)(6).
\118\Secs. 168(e)(6) and (k)(3).
\119\Sec. 168(e)(6)(A).
\120\Sec. 168(e)(6)(B).
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Qualified leasehold improvement property is generally
recovered using the straight-line method and a half-year
convention.\121\ Qualified leasehold improvement property
placed in service after December 31, 2013 is subject to the
general rules described above.
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\121\Secs.168(b)(3)(G) and 168(d).
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Qualified restaurant property
Section 168(e)(3)(E)(v) provides a statutory 15-year
recovery period for qualified restaurant property placed in
service before January 1, 2014. Qualified restaurant property
is any section 1250 property that is a building or an
improvement to a building, if more than 50 percent of the
building's square footage is devoted to the preparation of, and
seating for on-premises consumption of, prepared meals.\122\
Qualified restaurant property is recovered using the straight-
line method and a half-year convention.\123\ Additionally,
qualified restaurant property is not eligible for bonus
depreciation.\124\ Qualified restaurant property placed in
service after December 31, 2013 is subject to the general rules
described above.
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\122\Sec. 168(e)(7).
\123\Secs. 168(b)(3)(H) and 168(d).
\124\Sec. 168(e)(7)(B). Property that satisfies the definition of
both qualified leasehold improvement property and qualified restaurant
property is eligible for bonus depreciation. Sec. 3.03(3) of Rev. Proc.
2011-26, 2011-16 I.R.B. 664, 2011.
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Qualified retail improvement property
Section 168(e)(3)(E)(ix) provides a statutory 15-year
recovery period for qualified retail improvement property
placed in service before January 1, 2014. Qualified retail
improvement property is any improvement to an interior portion
of a building which is nonresidential real property if such
portion is open to the general public\125\ and is used in the
retail trade or business of selling tangible personal property
to the general public, and such improvement is placed in
service more than three years after the date the building was
first placed in service.\126\ Qualified retail improvement
property does not include any improvement for which the
expenditure is attributable to the enlargement of the building,
any elevator or escalator, any structural component benefiting
a common area, or the internal structural framework of the
building.\127\ In the case of an improvement made by the owner
of such improvement, the improvement is a qualified retail
improvement only so long as the improvement is held by such
owner.\128\
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\125\Improvements to portions of a building not open to the general
public (e.g., stock room in back of retail space) do not qualify under
the provision.
\126\Sec. 168(e)(8).
\127\Sec. 168(e)(8)(C).
\128\Sec. 168(e)(8)(B).
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Retail establishments that qualify for the 15-year recovery
period include those primarily engaged in the sale of goods.
Examples of these retail establishments include, but are not
limited to, grocery stores, clothing stores, hardware stores,
and convenience stores. Establishments primarily engaged in
providing services, such as professional services, financial
services, personal services, health services, and
entertainment, do not qualify. Generally, it is intended that
businesses defined as a store retailer under the current North
American Industry Classification System (industry sub-sectors
441 through 453) qualify while those in other industry classes
do not qualify.
Qualified retail improvement property is recovered using
the straight-line method and a half-year convention.\129\
Additionally, qualified retail improvement property is not
eligible for bonus depreciation.\130\ Qualified retail
improvement property placed in service after December 31, 2013
is subject to the general rules described above.
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\129\Secs. 168(b)(3)(I) and 168(d).
\130\Sec. 168(e)(8)(D). Property that satisfies the definition of
both qualified leasehold improvement property and qualified retail
improvement property is eligible for bonus depreciation. Sec. 3.03(3)
of Rev. Proc. 2011-26, 2011-16 I.R.B. 664, 2011.
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REASONS FOR CHANGE
The Committee believes that taxpayers should not be
required to recover the costs of certain leasehold improvements
beyond the useful life of the investment. The 39-year recovery
period for leasehold improvements for property placed in
service after December 31, 2013, extends beyond the useful life
of many such investments. Although lease terms differ, the
Committee believes that lease terms for commercial real estate
are also typically shorter than the 39-year recovery period. In
the interests of simplicity and administrability, a uniform
period for the recovery of leasehold improvements is desirable.
Therefore, the provision extends the 15-year recovery period
for leasehold improvements.
The Committee also believes that unlike other commercial
buildings, restaurant buildings generally are more specialized
structures. Restaurants also experience considerably more
traffic and remain open longer than most commercial properties.
This daily use causes rapid deterioration of restaurant
properties and forces restaurateurs to constantly repair and
upgrade their facilities. As such, restaurant facilities
generally have a shorter life span than other commercial
establishments. The provision extends the 15-year recovery
period for improvements made to restaurant buildings and
continues to apply the 15-year recovery period to new
restaurants, to more accurately reflect the true economic life
of such properties.
The Committee believes that taxpayers should not be
required to recover the costs of certain improvements beyond
the useful life of the investment. The 39-year recovery period
for improvements to owner-occupied (i.e., not leased) retail
property extends beyond the useful life of many such
investments. Additionally, the Committee believes that
retailers should not be treated differently based on whether
the building in which they operate is owned or leased. As many
small business retailers own the building in which they operate
their business, the Committee believes this provision will
provide relief to small businesses. Therefore, the provision
extends the 15-year recovery period for qualified retail
improvements.
EXPLANATION OF PROVISION
The provision extends the present-law provisions for
qualified leasehold improvement property, qualified restaurant
property, and qualified retail improvement property for two
years to apply to property placed in service before January 1,
2016.
EFFECTIVE DATE
The provision is effective for property placed in service
after December 31, 2013.
13. Extension of seven-year recovery period for motorsports
entertainment complexes (sec. 123 of the bill and sec. 168 of the Code)
PRESENT LAW
A taxpayer generally must capitalize the cost of property
used in a trade or business and recover such cost over time
through annual deductions for depreciation or
amortization.\131\ Tangible property generally is depreciated
under the modified accelerated cost recovery system
(``MACRS''), which determines depreciation by applying specific
recovery periods,\132\ placed-in-service conventions, and
depreciation methods to the cost of various types of
depreciable property.\133\ The cost of nonresidential real
property is recovered using the straight-line method of
depreciation and a recovery period of 39 years.\134\
Nonresidential real property is subject to the mid-month
convention, which treats all property placed in service during
any month (or disposed of during any month) as placed in
service (or disposed of) on the mid-point of such month.\135\
All other property generally is subject to the half-year
convention, which treats all property placed in service during
any taxable year (or disposed of during any taxable year) as
placed in service (or disposed of) on the mid-point of such
taxable year.\136\ Land improvements (such as roads and fences)
are recovered using the 150-percent declining balance method
and a recovery period of 15 years.\137\ An exception exists for
the theme and amusement park industry, whose assets are
assigned a recovery period of seven years.\138\ Additionally, a
motorsports entertainment complex placed in service on or
before December 31, 2013 is assigned a recovery period of seven
years.\139\ For these purposes, a motorsports entertainment
complex means a racing track facility which is permanently
situated on land and which during the 36-month period following
its placed-in-service date hosts a racing event.\140\ The term
motorsports entertainment complex also includes ancillary
facilities, land improvements (e.g., parking lots, sidewalks,
fences), support facilities (e.g., food and beverage retailing,
souvenir vending), and appurtenances associated with such
facilities (e.g., ticket booths, grandstands).
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\131\See secs. 263(a) and 167.
\132\The applicable recovery period for an asset is determined in
part by statute and in part by historic Treasury guidance. Exercising
authority granted by Congress, the Secretary issued Revenue Procedure
87-56 (1987-2 C.B. 674), laying out the framework of recovery periods
for enumerated classes of assets. The Secretary clarified and modified
the list of asset classes in Revenue Procedure 88-22 (1988-1 C.B. 785).
In November 1988, Congress revoked the Secretary's authority to modify
the class lives of depreciable property. Revenue Procedure 87-56, as
modified, remains in effect except to the extent that the Congress has,
since 1988, statutorily modified the recovery period for certain
depreciable assets, effectively superseding any administrative guidance
with regard to such property.
\133\Sec. 168.
\134\Secs. 168(b)(3)(A) and 168(c).
\135\Secs. 168(d)(2)(A) and (d)(4)(B).
\136\Secs. 168(d)(1) and (d)(4)(A). However, if substantial
property is placed in service during the last three months of a taxable
year, a special rule requires use of the mid-quarter convention, which
treats all property placed in service (or disposed of) during any
quarter as placed in service (or disposed of) on the mid-point of such
quarter. Secs. 168(d)(3) and (d)(4)(C).
\137\Sec. 168(b)(2)(A) and asset class 00.3 of Rev. Proc. 87-56,
1987-2 C.B. 674, 1987. Under the 150-percent declining balance method,
the depreciation rate is determined by dividing 150 percent by the
appropriate recovery period, switching to the straight-line method for
the first taxable year where using the straight-line method with
respect to the adjusted basis as of the beginning of that year will
yield a larger depreciation allowance. Secs. 168(b)(2) and (b)(1)(B).
\138\Asset class 80.0 of Rev. Proc. 87-56, 1987-2 C.B. 674, 1987.
\139\Sec. 168(e)(3)(C)(ii).
\140\Sec. 168(i)(15).
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REASONS FOR CHANGE
The Committee believes that extending the depreciation
incentive will encourage State and local economic development.
Thus, the provision extends the seven-year recovery period for
motorsports entertainment complex property.
EXPLANATION OF PROVISION
The provision extends the present-law seven-year recovery
period for motorsports entertainment complexes for two years to
apply to property placed in service on or before December 31,
2015.
EFFECTIVE DATE
The provision is effective for property placed in service
after December 31, 2013.
14. Extension of accelerated depreciation for business property on an
Indian reservation (sec. 124 of the bill and sec. 168(j) of the Code)
PRESENT LAW
With respect to certain property used in connection with
the conduct of a trade or business within an Indian
reservation, depreciation deductions under section 168(j) are
determined using the following recovery periods:
3-year property 2 years
5-year property 3 years
7-year property 4 years
10-year property 6 years
15-year property 9 years
20-year property 12 years
Nonresidential real property 22 years\141\
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\141\Section 168(j)(2) does not provide shorter recovery periods
for water utility property, residential rental property, or railroad
grading and tunnel bores.
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``Qualified Indian reservation property'' eligible for
accelerated depreciation includes property described in the
table above which is: (1) used by the taxpayer predominantly in
the active conduct of a trade or business within an Indian
reservation; (2) not used or located outside the reservation on
a regular basis; (3) not acquired (directly or indirectly) by
the taxpayer from a person who is related to the taxpayer;\142\
and (4) is not property placed in service for purposes of
conducting gaming activities.\143\ Certain ``qualified
infrastructure property'' may be eligible for the accelerated
depreciation even if located outside an Indian reservation,
provided that the purpose of such property is to connect with
qualified infrastructure property located within the
reservation (e.g., roads, power lines, water systems, railroad
spurs, and communications facilities).\144\
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\142\For these purposes, related persons is defined in section
465(b)(3)(C).
\143\Sec. 168(j)(4)(A).
\144\Sec. 168(j)(4)(C).
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An ``Indian reservation'' means a reservation as defined in
section 3(d) of the Indian Financing Act of 1974 (25 U.S.C.
1452(d))\145\ or section 4(10) of the Indian Child Welfare Act
of 1978 (25 U.S.C. 1903(10)).\146\ For purposes of the
preceding sentence, section 3(d) is applied by treating
``former Indian reservations in Oklahoma'' as including only
lands that are (1) within the jurisdictional area of an
Oklahoma Indian tribe as determined by the Secretary of the
Interior, and (2) recognized by such Secretary as an area
eligible for trust land status under 25 C.F.R. Part 151 (as in
effect on August 5, 1997).\147\
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\145\Pub. L. No. 93-262.
\146\Pub. L. No. 95-608.
\147\Sec. 168(j)(6).
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The depreciation deduction allowed for regular tax purposes
is also allowed for purposes of the alternative minimum
tax.\148\ The accelerated depreciation for qualified Indian
reservation property is available with respect to property
placed in service on or before December 31, 2013.\149\
---------------------------------------------------------------------------
\148\Sec. 168(j)(3).
\149\Sec. 168(j)(8).
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REASONS FOR CHANGE
The Committee believes that extending this depreciation
incentive will encourage economic development within Indian
reservations and expand employment opportunities on such
reservations.
EXPLANATION OF PROVISION
The provision extends for two years the present-law
accelerated depreciation for qualified Indian reservation
property to apply to property placed in service on or before
December 31, 2015.
EFFECTIVE DATE
The provision is effective for property placed in service
after December 31, 2013.
15. Extension of bonus depreciation (sec. 125 of the bill and sec.
168(k) of the Code)
PRESENT LAW
An additional first-year depreciation deduction is allowed
equal to 50 percent of the adjusted basis of qualified property
placed in service acquired after December 31, 2007 and placed
in service either before September 9, 2010 or after December
31, 2011 and before January 1, 2014 (January 1, 2015 for
certain longer-lived and transportation property).\150\ An
additional first-year depreciation deduction is allowed equal
to 100 percent of the adjusted basis of qualified property if
it meets the requirements for the additional first-year
depreciation and also meets the following requirements.\151\
First, the taxpayer must acquire the property after September
8, 2010 and before January 1, 2012 (January 1, 2013 for certain
longer-lived and transportation property).\152\ Second, the
taxpayer must place the property in service after September 8,
2010 and before January 1, 2012 (January 1, 2013 in the case of
certain longer-lived and transportation property). Third, the
original use of the property must commence with the taxpayer
after September 8, 2010.\153\
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\150\Sec. 168(k). The additional first-year depreciation deduction
is subject to the general rules regarding whether an item must be
capitalized under section 263A.
\151\Sec. 168(k)(5).
\152\For a definition of ``acquire'' for this purpose, see section
3.02(1)(a) of Rev. Proc. 2011-26, 2011-16 I.R.B. 664, 2011.
\153\See sec. 3.02(1) of Rev. Proc. 2011-26, 2011-16 I.R.B. 664,
2011.
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The additional first-year depreciation deduction is allowed
for both regular tax and alternative minimum tax purposes,\154\
but is not allowed for purposes of computing earnings and
profits.\155\ The basis of the property and the depreciation
allowances in the year of purchase and later years are
appropriately adjusted to reflect the additional first-year
depreciation deduction.\156\ In addition, there are no
adjustments to the allowable amount of depreciation for
purposes of computing a taxpayer's alternative minimum taxable
income with respect to property to which the provision
applies.\157\ The amount of the additional first-year
depreciation deduction is not affected by a short taxable
year.\158\ The taxpayer may elect out of additional first-year
depreciation for any class of property for any taxable
year.\159\
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\154\Sec. 168(k)(2)(G).
\155\Treas. Reg. sec. 1.168(k)-1(f)(7).
\156\Sec. 168(k)(1)(B).
\157\Treas. Reg. sec. 1.168(k)-1(d).
\158\Ibid.
\159\Sec. 168(k)(2)(D)(iii).
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The interaction of the additional first-year depreciation
allowance with the otherwise applicable depreciation allowance
may be illustrated as follows. Assume that in 2013, a taxpayer
purchased new depreciable property and placed it in
service.\160\ The property's cost is $1,000, and it is five-
year property subject to the half-year convention. The amount
of additional first-year depreciation allowed is $500. The
remaining $500 of the cost of the property is depreciable under
the rules applicable to five-year property. Thus, 20 percent,
or $100, also is allowed as a depreciation deduction in
2013.\161\ The total depreciation deduction with respect to the
property for 2013 is $600. The remaining $400 adjusted basis of
the property generally is recovered through otherwise
applicable depreciation rules.
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\160\Assume that the cost of the property is not eligible for
expensing under section 179.
\161\This simplified example ignores the applicable convention
(e.g., half-year).
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Property qualifying for the additional first-year
depreciation deduction must meet all of the following
requirements. First, the property must be (1) property to which
MACRS applies with an applicable recovery period of 20 years or
less; (2) water utility property (as defined in section
168(e)(5)); (3) computer software other than computer software
covered by section 197; or (4) qualified leasehold improvement
property (as defined in section 168(k)(3)).\162\ Second, the
original use\163\ of the property must commence with the
taxpayer after December 31, 2007.\164\ Third, the taxpayer must
acquire the property within the applicable time period (as
described below). Finally, the property must be placed in
service before January 1, 2014. An extension of the placed-in-
service date of one year (i.e., before January 1, 2015) is
provided for certain property with a recovery period of 10
years or longer and certain transportation property.\165\
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\162\The additional first-year depreciation deduction is not
available for any property that is required to be depreciated under the
alternative depreciation system of MACRS. Sec. 168(k)(2)(D)(i). The
additional first-year depreciation deduction also is not available for
qualified New York Liberty Zone leasehold improvement property as
defined in section 1400L(c)(2). Sec. 168(k)(2)(D)(ii).
\163\The term ``original use'' means the first use to which the
property is put, whether or not such use corresponds to the use of such
property by the taxpayer. If in the normal course of its business a
taxpayer sells fractional interests in property to unrelated third
parties, then the original use of such property begins with the first
user of each fractional interest (i.e., each fractional owner is
considered the original user of its proportionate share of the
property). Treas. Reg. sec. 1.168(k)-1(b)(3).
\164\A special rule applies in the case of certain leased property.
In the case of any property that is originally placed in service by a
person and that is sold to the taxpayer and leased back to such person
by the taxpayer within three months after the date that the property
was placed in service, the property would be treated as originally
placed in service by the taxpayer not earlier than the date that the
property is used under the leaseback. If property is originally placed
in service by a lessor, such property is sold within three months after
the date that the property was placed in service, and the user of such
property does not change, then the property is treated as originally
placed in service by the taxpayer not earlier than the date of such
sale. Sec. 168(k)(2)(E)(ii).
\165\Property qualifying for the extended placed-in-service date
must have an estimated production period exceeding one year and a cost
exceeding $1 million. Transportation property generally is defined as
tangible personal property used in the trade or business of
transporting persons or property. Certain aircraft which is not
transportation property, other than for agricultural or firefighting
uses, also qualifies for the extended placed-in-service-date, if at the
time of the contract for purchase, the purchaser made a nonrefundable
deposit of the lesser of 10 percent of the cost or $100,000, and which
has an estimated production period exceeding four months and a cost
exceeding $200,000.
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To qualify, property must be acquired (1) after December
31, 2007, and before January 1, 2014, but only if no binding
written contract for the acquisition is in effect before
January 1, 2008, or (2) pursuant to a binding written contract
which was entered into after December 31, 2007, and before
January 1, 2014.\166\ With respect to property that is
manufactured, constructed, or produced by the taxpayer for use
by the taxpayer, the taxpayer must begin the manufacture,
construction, or production of the property after December 31,
2007, and before January 1, 2014.\167\ Property that is
manufactured, constructed, or produced for the taxpayer by
another person under a contract that is entered into prior to
the manufacture, construction, or production of the property is
considered to be manufactured, constructed, or produced by the
taxpayer.\168\ For property eligible for the extended placed-
in-service date, a special rule limits the amount of costs
eligible for the additional first-year depreciation. With
respect to such property, only the portion of the basis that is
properly attributable to the costs incurred before January 1,
2014 (``progress expenditures'') is eligible for the additional
first-year depreciation deduction.\169\
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\166\Property does not fail to qualify for the additional first-
year depreciation merely because a binding written contract to acquire
a component of the property is in effect prior to January 1, 2008.
\167\Sec. 168(k)(2)(E)(i).
\168\Treas. Reg. sec. 1.168(k)-1(b)(4)(iii).
\169\Sec. 168(k)(2)(B)(ii). For purposes of determining the amount
of eligible progress expenditures, rules similar to section 46(d)(3) as
in effect prior to the Tax Reform Act of 1986 apply.
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Property does not qualify for the additional first-year
depreciation deduction when the user of such property (or a
related party) would not have been eligible for the additional
first-year depreciation deduction if the user (or a related
party) were treated as the owner.\170\ For example, if a
taxpayer sells to a related party property that was under
construction prior to January 1, 2008, the property does not
qualify for the additional first-year depreciation deduction.
Similarly, if a taxpayer sells to a related party property that
was subject to a binding written contract prior to January 1,
2008, the property does not qualify for the additional first-
year depreciation deduction. As a further example, if a
taxpayer (the lessee) sells property in a sale-leaseback
arrangement, and the property otherwise would not have
qualified for the additional first-year depreciation deduction
if it were owned by the taxpayer-lessee, then the lessor is not
entitled to the additional first-year depreciation deduction.
---------------------------------------------------------------------------
\170\Sec. 168(k)(2)(E)(iv).
---------------------------------------------------------------------------
The limitation under section 280F on the amount of
depreciation deductions allowed with respect to certain
passenger automobiles is increased in the first year by $8,000
for automobiles that qualify (and for which the taxpayer does
not elect out of the additional first-year deduction).\171\ The
$8,000 increase is not indexed for inflation.
---------------------------------------------------------------------------
\171\Sec. 168(k)(2)(F).
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Special rule for long-term contracts
In general, in the case of a long-term contract, the
taxable income from the contract is determined under the
percentage-of-completion method. Solely for purposes of
determining the percentage of completion under section
460(b)(1)(A), the cost of qualified property with a MACRS
recovery period of 7 years or less is taken into account as a
cost allocated to the contract as if bonus depreciation had not
been enacted for property placed in service (1) after December
31, 2009 and before January 1, 2011 (January 1, 2012 in the
case of certain longer-lived and transportation property) or
(2) after December 31, 2012 and before January 1, 2014 (January
1, 2015 in the case of certain longer-lived and transportation
property).\172\ Bonus depreciation generally is taken into
account in determining taxable income under the percentage-of-
completion method for property placed in service after December
31, 2010 and before January 1, 2013.
---------------------------------------------------------------------------
\172\Sec. 460(c)(6).
---------------------------------------------------------------------------
Election to accelerate minimum tax credit in lieu of claiming bonus
depreciation
A corporation otherwise eligible for additional first year
depreciation under section 168(k) may elect to claim additional
minimum tax credits in lieu of claiming depreciation under
section 168(k) for ``eligible qualified property'' placed in
service after December 31, 2010 and before January 1, 2014
(January 1, 2015 in the case of certain longer-lived and
transportation property).\173\ A corporation making the
election increases the limitation under section 53(c) on the
use of minimum tax credits in lieu of taking bonus depreciation
deductions.\174\ The increases in the allowable credits under
this provision are treated as refundable.\175\ The depreciation
for eligible qualified property is calculated for both regular
tax and alternative minimum tax purposes using the straight-
line method in place of the method that would otherwise be used
absent the election under this provision.\176\
---------------------------------------------------------------------------
\173\Sec. 168(k)(4). Eligible qualified property means qualified
property eligible for bonus depreciation with minor effective date
differences.
\174\Sec. 168(k)(4)(B)(ii).
\175\Sec. 168(k)(4)(F).
\176\Sec. 168(k)(4)(A).
---------------------------------------------------------------------------
The minimum tax credit limitation is increased by the bonus
depreciation amount, which is equal to 20 percent of bonus
depreciation\177\ for certain eligible qualified property that
could be claimed as a deduction absent an election under this
provision.
---------------------------------------------------------------------------
\177\For this purpose, bonus depreciation is the difference between
(i) the aggregate amount of depreciation for all eligible qualified
property determined if section 168(k)(1) applied using the most
accelerated depreciation method (determined without regard to this
provision), and the shortest life allowable for each property, and (ii)
the amount of depreciation that would be determined if section
168(k)(1) did not apply using the same method and life for each
property. Sec. 168(k)(4)(C).
---------------------------------------------------------------------------
The bonus depreciation amount is limited to the lesser of
(1) $30 million or (2) six-percent of the minimum tax credits
allocable to the adjusted minimum tax imposed for, taxable
years beginning before January 1, 2006.\178\ All corporations
treated as a single employer under section 52(a) are treated as
one taxpayer for purposes of the limitation, as well as for
electing the application of this provision.\179\
---------------------------------------------------------------------------
\178\Sec. 168(k)(4)(C)(iii).
\179\Sec. 168(k)(4)(C)(iv).
---------------------------------------------------------------------------
In the case of a corporation making an election which is a
partner in a partnership, for purposes of determining the
electing partner's distributive share of partnership items,
section 168(k)(1) does not apply to any eligible qualified
property and the straight-line method is used with respect to
such property.\180\
---------------------------------------------------------------------------
\180\Sec. 168(k)(4)(G)(ii).
---------------------------------------------------------------------------
Generally an election under this provision for a taxable
year applies to subsequent taxable years.\181\
---------------------------------------------------------------------------
\181\Special election rules apply as the result of prior extensions
of this provision. See secs. 168(k)(4)(H), (I) and (J).
---------------------------------------------------------------------------
REASONS FOR CHANGE
The Committee believes that allowing additional first-year
depreciation will accelerate purchases of equipment and other
assets, and promote capital investment, modernization, and
growth.
EXPLANATION OF PROVISION
The provision extends the 50-percent additional first-year
depreciation deduction for two years, generally through 2015
(through 2016 for certain longer-lived and transportation
property).
The provision provides that solely for purposes of
determining the percentage of completion under section
460(b)(1)(A), the cost of qualified property with a MACRS
recovery period of 7 years or less which is placed in service
after December 31, 2012 and before January 1, 2016 (January 1,
2017, in the case of certain longer-lived and transportation
property) is taken into account as a cost allocated to the
contract as if bonus depreciation had not been enacted.
The provision also extends the election to increase the AMT
credit limitation in lieu of bonus depreciation for two years
to property placed in service before January 1, 2016 (January
1, 2017, in the case of certain longer-lived property and
transportation property). A bonus depreciation amount, maximum
amount, and maximum increase amount is computed separately with
respect to property to which the extension of additional first-
year depreciation applies (``round 4 extension
property'').\182\
---------------------------------------------------------------------------
\182\An election with respect to round 4 extension property is
binding for all property that is eligible qualified property solely by
reason of the extension of the 50-percent additional first-year
depreciation deduction.
---------------------------------------------------------------------------
Under the provision, a corporation that has an election in
effect with respect to round 3 extension property to claim
minimum tax credits in lieu of bonus depreciation is treated as
having an election in effect for round 4 extension property,
unless the corporation elects otherwise. The provision also
allows a corporation that does not have an election in effect
with respect to round 3 extension property to elect to claim
minimum tax credits in lieu of bonus depreciation for round 4
extension property. A separate bonus depreciation amount,
maximum amount, and maximum increase amount is computed and
applied to round 4 extension property.\183\
---------------------------------------------------------------------------
\183\In computing the maximum amount, the maximum increase amount
for round 4 extension property is reduced by bonus depreciation amounts
for preceding taxable years only with respect to round 4 extension
property.
---------------------------------------------------------------------------
The provision also includes a technical correction with
respect to the taxable year for which an election under section
168(k)(4) is made.
EFFECTIVE DATE
Except as noted below, the provision is effective for
property placed in service after December 31, 2013, in taxable
years ending after such date.
The technical correction to section 168(k)(4) is effective
as if originally included in section 331 of the American
Taxpayer Relief Act of 2012.\184\
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\184\Pub. L. No. 112-240.
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16. Extension of enhanced charitable deduction for contributions of
food inventory (sec. 126 of the bill and sec. 170 of the Code)
PRESENT LAW
Charitable contributions in general
In general, an income tax deduction is permitted for
charitable contributions, subject to certain limitations that
depend on the type of taxpayer, the property contributed, and
the donee organization.\185\
---------------------------------------------------------------------------
\185\Sec. 170.
---------------------------------------------------------------------------
Charitable contributions of cash are deductible in the
amount contributed. In general, contributions of capital gain
property are deductible at fair market value with certain
exceptions. Capital gain property means any capital asset or
property used in the taxpayer's trade or business the sale of
which at its fair market value, at the time of contribution,
would have resulted in gain that would have been long-term
capital gain. Contributions of other appreciated property
generally are deductible at the donor's basis in the property.
Contributions of depreciated property generally are deductible
at the fair market value of the property.
General rules regarding contributions of inventory
Under present law, a taxpayer's deduction for charitable
contributions of inventory generally is limited to the
taxpayer's basis (typically, cost) in the inventory, or if less
the fair market value of the inventory.
For certain contributions of inventory, C corporations may
claim an enhanced deduction equal to the lesser of (1) basis
plus one-half of the item's appreciation (i.e., basis plus one-
half of fair market value in excess of basis) or (2) two times
basis.\186\ In general, a C corporation's charitable
contribution deductions for a year may not exceed 10 percent of
the corporation's taxable income.\187\ To be eligible for the
enhanced deduction, the contributed property generally must be
inventory of the taxpayer and must be contributed to a
charitable organization described in section 501(c)(3) (except
for private nonoperating foundations), and the donee must (1)
use the property consistent with the donee's exempt purpose
solely for the care of the ill, the needy, or infants; (2) not
transfer the property in exchange for money, other property, or
services; and (3) provide the taxpayer a written statement that
the donee's use of the property will be consistent with such
requirements.\188\ In the case of contributed property subject
to the Federal Food, Drug, and Cosmetic Act, as amended, the
property must satisfy the applicable requirements of such Act
on the date of transfer and for 180 days prior to the
transfer.\189\
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\186\Sec. 170(e)(3).
\187\Sec. 170(b)(2).
\188\Sec. 170(e)(3)(A)(i)-(iii).
\189\Sec. 170(e)(3)(A)(iv).
---------------------------------------------------------------------------
A donor making a charitable contribution of inventory must
make a corresponding adjustment to the cost of goods sold by
decreasing the cost of goods sold by the lesser of the fair
market value of the property or the donor's basis with respect
to the inventory.\190\
---------------------------------------------------------------------------
\190\Treas. Reg. sec. 1.170A-4A(c)(3).
---------------------------------------------------------------------------
To use the enhanced deduction, the taxpayer must establish
that the fair market value of the donated item exceeds basis.
The valuation of food inventory has been the subject of
disputes between taxpayers and the IRS.\191\
---------------------------------------------------------------------------
\191\Lucky Stores Inc. v. Commissioner, 105 T.C. 420 (1995)
(holding that the value of surplus bread inventory donated to charity
was the full retail price of the bread rather than half the retail
price, as the IRS asserted).
---------------------------------------------------------------------------
Temporary rule expanding and modifying the enhanced deduction for
contributions of food inventory
Under a temporary provision, any taxpayer engaged in a
trade or business, whether or not a C corporation, is eligible
to claim the enhanced deduction for donations of food
inventory.\192\ For taxpayers other than C corporations, the
total deduction for donations of food inventory in a taxable
year generally may not exceed 10 percent of the taxpayer's net
income for such taxable year from all sole proprietorships, S
corporations, or partnerships (or other non C corporations)
from which contributions of apparently wholesome food are made.
For example, if a taxpayer is a sole proprietor, a shareholder
in an S corporation, and a partner in a partnership, and each
business makes charitable contributions of food inventory, the
taxpayer's deduction for donations of food inventory is limited
to 10 percent of the taxpayer's net income from the sole
proprietorship and the taxpayer's interests in the S
corporation and partnership. However, if only the sole
proprietorship and the S corporation made charitable
contributions of food inventory, the taxpayer's deduction would
be limited to 10 percent of the net income from the trade or
business of the sole proprietorship and the taxpayer's interest
in the S corporation, but not the taxpayer's interest in the
partnership.\193\
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\192\Sec. 170(e)(3)(C).
\193\The 10 percent limitation does not affect the application of
the generally applicable percentage limitations. For example, if 10
percent of a sole proprietor's net income from the proprietor's trade
or business was greater than 50 percent of the proprietor's
contribution base, the available deduction for the taxable year (with
respect to contributions to public charities) would be 50 percent of
the proprietor's contribution base. Consistent with present law, such
contributions may be carried forward because they exceed the 50 percent
limitation. Contributions of food inventory by a taxpayer that is not a
C corporation that exceed the 10 percent limitation but not the 50
percent limitation could not be carried forward.
---------------------------------------------------------------------------
Under the temporary provision, the enhanced deduction for
food is available only for food that qualifies as ``apparently
wholesome food.'' Apparently wholesome food is defined as food
intended for human consumption that meets all quality and
labeling standards imposed by Federal, State, and local laws
and regulations even though the food may not be readily
marketable due to appearance, age, freshness, grade, size,
surplus, or other conditions.
The provision does not apply to contributions made after
December 31, 2013.
REASONS FOR CHANGE
The Committee believes that charitable organizations
benefit from charitable contributions of food inventory by non
C corporations and that the enhanced deduction is a useful
incentive for the making of such contributions. Accordingly,
the Committee believes it is appropriate to extend the special
rule for charitable contributions of food inventory for two
years.
EXPLANATION OF PROVISION
The provision extends the expansion of, and modifications
to, the enhanced deduction for charitable contributions of food
inventory to contributions made before January 1, 2016.
EFFECTIVE DATE
The provision is effective for contributions made after
December 31, 2013.
17. Extension and modification of increased expensing limitations and
treatment of certain real property as section 179 property (sec. 127 of
the bill and sec. 179 of the Code)
PRESENT LAW
A taxpayer may elect under section 179 to deduct (or
``expense'') the cost of qualifying property, rather than to
recover such costs through depreciation deductions, subject to
limitation.\194\ For taxable years beginning in 2013, the
maximum amount a taxpayer may expense is $500,000 of the cost
of qualifying property placed in service for the taxable
year.\195\ The $500,000 amount is reduced (but not below zero)
by the amount by which the cost of qualifying property placed
in service during the taxable year exceeds $2,000,000.\196\ The
$500,000 and $2,000,000 amounts are not indexed for inflation.
In general, qualifying property is defined as depreciable
tangible personal property that is purchased for use in the
active conduct of a trade or business.\197\ For taxable years
beginning before 2014, qualifying property also includes off-
the-shelf computer software and qualified real property (i.e.,
qualified leasehold improvement property, qualified restaurant
property, and qualified retail improvement property).\198\ Of
the $500,000 expense amount available under section 179, the
maximum amount available with respect to qualified real
property is $250,000 for each taxable year.\199\
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\194\Additional section 179 incentives have been provided with
respect to qualified property meeting applicable requirements that is
used by a business in an enterprise zone (sec. 1397A), a renewal
community (sec. 1400J), the New York Liberty Zone (sec. 1400L(f)), or
the Gulf Opportunity Zone (sec. 1400N(e)). In addition, section 179(e)
provides for an enhanced section 179 deduction for qualified disaster
assistance property.
\195\For the years 2003 through 2006, the relevant dollar amount is
$100,000 (indexed for inflation); in 2007, the dollar limitation is
$125,000; for the 2008 and 2009 years, the relevant dollar amount is
$250,000; and for 2010, 2011, and 2012, the relevant dollar limitation
is $500,000. Sec. 179(b)(1).
\196\For the years 2003 through 2006, the relevant dollar amount is
$400,000 (indexed for inflation); in 2007, the dollar limitation is
$500,000; for the 2008 and 2009 years, the relevant dollar amount is
$800,000; and for 2010, 2011, and 2012, the relevant dollar limitation
is $2,000,000. Sec. 179(b)(2).
\197\Qualifying property does not include any property described in
section 50(b), air conditioning units, or heating units. Sec.
179(d)(1). Passenger automobiles subject to the section 280F limitation
are eligible for section 179 expensing only to the extent of the dollar
limitations in section 280F. For sport utility vehicles above the 6,000
pound weight rating, which are not subject to the limitation under
section 280F, the maximum cost that may be expensed for any taxable
year under section 179 is $25,000. Sec. 179(b)(5).
\198\Secs. 179(d)(1)(A)(ii) and (f).
\199\Sec. 179(f)(3).
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For taxable years beginning in 2014 and thereafter, a
taxpayer may elect to deduct up to $25,000 of the cost of
qualifying property placed in service for the taxable year,
subject to limitation. The $25,000 amount is reduced (but not
below zero) by the amount by which the cost of qualifying
property placed in service during the taxable year exceeds
$200,000. The $25,000 and $200,000 amounts are not indexed for
inflation. In general, qualifying property is defined as
depreciable tangible personal property (not including off-the-
shelf computer software or qualified real property) that is
purchased for use in the active conduct of a trade or business.
The amount eligible to be expensed for a taxable year may
not exceed the taxable income for such taxable year that is
derived from the active conduct of a trade or business
(determined without regard to this provision).\200\ Any amount
that is not allowed as a deduction because of the taxable
income limitation may be carried forward to succeeding taxable
years (subject to limitations). However, amounts attributable
to qualified real property that are disallowed under the trade
or business income limitation may only be carried over to
taxable years in which the definition of eligible section 179
property includes qualified real property.\201\ Thus, if a
taxpayer's section 179 deduction for 2012 with respect to
qualified real property is limited by the taxpayer's active
trade or business income, such disallowed amount may be carried
over to 2013. Any such carryover amounts that are not used in
2013 are treated as property placed in service in 2013 for
purposes of computing depreciation. That is, the unused
carryover amount from 2012 is considered placed in service on
the first day of the 2013 taxable year.\202\
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\200\Sec. 179(b)(3).
\201\Section 179(f)(4) details the special rules that apply to
disallowed amounts.
\202\For example, assume that during 2012, a company's only asset
purchases are section 179-eligible equipment costing $100,000 and
qualifying leasehold improvements costing $200,000. Assume the company
has no other asset purchases during 2012, and has a taxable income
limitation of $150,000. The maximum section 179 deduction the company
can claim for 2012 is $150,000, which is allocated pro rata between the
properties, such that the carryover to 2013 is allocated $100,000 to
the qualified leasehold improvements and $50,000 to the equipment.
Assume further that in 2013, the company had no asset purchases and
had no taxable income. The $100,000 carryover from 2012 attributable to
qualified leasehold improvements is treated as placed in service as of
the first day of the company's 2013 taxable year. The $50,000 carryover
allocated to equipment is carried over to 2013 under section
179(b)(3)(B).
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No general business credit under section 38 is allowed with
respect to any amount for which a deduction is allowed under
section 179.\203\ If a corporation makes an election under
section 179 to deduct expenditures, the full amount of the
deduction does not reduce earnings and profits. Rather, the
expenditures that are deducted reduce corporate earnings and
profits ratably over a five-year period.\204\
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\203\Sec. 179(d)(9).
\204\Sec. 312(k)(3)(B).
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An expensing election is made under rules prescribed by the
Secretary.\205\ In general, any election or specification made
with respect to any property may not be revoked except with the
consent of the Commissioner. However, an election or
specification under section 179 may be revoked by the taxpayer
without consent of the Commissioner for taxable years beginning
after 2002 and before 2014.\206\
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\205\Sec. 179(c)(1).
\206\Sec. 179(c)(2).
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REASONS FOR CHANGE
The Committee believes that section 179 expensing provides
two important benefits for small businesses. First, it lowers
the cost of capital for tangible property used in a trade or
business. With a lower cost of capital, the Committee believes
small businesses will invest in more equipment and employ more
workers. Second, it eliminates depreciation recordkeeping
requirements with respect to expensed property. In order to
increase the value of these benefits and to increase the number
of taxpayers eligible, the provision increases the amount
allowed to be expensed under section 179 and increases the
amount of the phase-out threshold. In addition, in order to
counteract the negative impact of inflation on the limit and
phase-out threshold of this provision for small businesses, the
provision indexes such amounts for inflation.
The Committee also believes that qualified real property
(i.e., qualified leasehold improvement property, qualified
restaurant property, and qualified retail improvement property)
should continue to be included in the section 179 expensing
provision to encourage small businesses to invest in these
types of real property. Further, the Committee believes that
purchased computer software should continue to be included in
the section 179 expensing provision so that it is not
disadvantaged relative to developed software. In addition, the
Committee believes that the process of making and revoking
section 179 elections should continue to be simpler and more
efficient for taxpayers by eliminating the requirement of the
consent of the Commissioner.
EXPLANATION OF PROVISION
The provision provides that the maximum amount a taxpayer
may expense, for taxable years beginning in 2014 and 2015, is
$500,000 of the cost of qualifying property placed in service
for the taxable year. The $500,000 amount is reduced (but not
below zero) by the amount by which the cost of qualifying
property placed in service during the taxable year exceeds
$2,000,000. The $500,000 and $2,000,000 amounts are indexed for
inflation for taxable years beginning after 2013.
In addition, the provision extends, for taxable years
beginning in 2014 and 2015, the treatment of off-the-shelf
computer software as qualifying property. The provision also
extends the treatment of qualified real property as eligible
section 179 property for taxable years beginning in 2014 and
2015, including the limitation on carryovers and the maximum
amount available with respect to qualified real property of
$250,000 for each taxable year. For taxable years beginning in
2014 and 2015, the provision continues to permit a taxpayer to
amend or irrevocably revoke an election for a taxable year
under section 179 without the consent of the Commissioner.
EFFECTIVE DATE
The provision applies to taxable years beginning after
December 31, 2013.
18. Extension of election to expense mine safety equipment (sec. 128 of
the bill and sec. 179E of the Code)
PRESENT LAW
A taxpayer may elect to treat 50 percent of the cost of any
qualified advanced mine safety equipment property as an expense
in the taxable year in which the equipment is placed in
service.\207\ ``Qualified advanced mine safety equipment
property'' means any advanced mine safety equipment property
for use in any underground mine located in the United States
the original use of which commences with the taxpayer and which
is placed in service after December 20, 2006, and before
January 1, 2014.\208\
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\207\Sec. 179E(a).
\208\Secs. 179E(c) and (g).
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Advanced mine safety equipment property means any of the
following: (1) emergency communication technology or devices
used to allow a miner to maintain constant communication with
an individual who is not in the mine; (2) electronic
identification and location devices that allow individuals not
in the mine to track at all times the movements and location of
miners working in or at the mine; (3) emergency oxygen-
generating, self-rescue devices that provide oxygen for at
least 90 minutes; (4) pre-positioned supplies of oxygen
providing each miner on a shift the ability to survive for at
least 48 hours; and (5) comprehensive atmospheric monitoring
systems that monitor the levels of carbon monoxide, methane,
and oxygen that are present in all areas of the mine and that
can detect smoke in the case of a fire in a mine.\209\
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\209\Sec. 179E(d).
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REASONS FOR CHANGE
The Committee believes that mine safety equipment is vital
to ensuring a safe workplace for the nation's underground mine
workforce. Therefore, the Committee believes that this
incentive for mine safety equipment property should be
extended.
EXPLANATION OF PROVISION
The provision extends for two years (through December 31,
2015) the present-law placed in service date allowing a
taxpayer to expense 50 percent of the cost of any qualified
advanced mine safety equipment property.
EFFECTIVE DATE
The provision applies to property placed in service after
December 31, 2013.
19. Extension of special expensing rules for certain film and
television productions; Special expensing for live theatrical
productions (sec. 129 of the bill and sec. 181 of the Code)
PRESENT LAW
Under section 181, a taxpayer may elect\210\ to deduct the
cost of any qualifying film and television production,
commencing prior to January 1, 2014, in the year the
expenditure is incurred in lieu of capitalizing the cost and
recovering it through depreciation allowances.\211\ A taxpayer
may elect to deduct up to $15 million of the aggregate cost of
the film or television production under this section.\212\ The
threshold is increased to $20 million if a significant amount
of the production expenditures are incurred in areas eligible
for designation as a low-income community or eligible for
designation by the Delta Regional Authority as a distressed
county or isolated area of distress.\213\
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\210\See Treas. Reg. section 1.181-2 for rules on making an
election under this section.
\211\For this purpose, a production is treated as commencing on the
first date of principal photography.
\212\Sec. 181(a)(2)(A).
\213\Sec. 181(a)(2)(B).
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A qualified film or television production means any
production of a motion picture (whether released theatrically
or directly to video cassette or any other format) or
television program if at least 75 percent of the total
compensation expended on the production is for services
performed in the United States by actors, directors, producers,
and other relevant production personnel.\214\ The term
``compensation'' does not include participations and residuals
(as defined in section 167(g)(7)(B)).\215\ Each episode of a
television series is treated as a separate production, and only
the first 44 episodes of a particular series qualify under the
provision.\216\ Qualified productions do not include sexually
explicit productions as referenced by section 2257 of title 18
of the U.S. Code.\217\ It also generally does not include live
theatrical productions.
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\214\Sec. 181(d)(3)(A).
\215\Sec. 181(d)(3)(B).
\216\Sec. 181(d)(2)(B).
\217\Sec. 181(d)(2)(C).
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For purposes of recapture under section 1245, any deduction
allowed under section 181 is treated as if it were a deduction
allowable for amortization.\218\
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\218\Sec. 1245(a)(2)(C).
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REASONS FOR CHANGE
The Committee believes that section 181 encourages domestic
film and television productions and that the provision should
be extended. The issue of runaway production (i.e., the
production of American film and television projects abroad)
affects all productions, regardless of cost, and therefore the
Committee believes that it is appropriate to continue to treat
as an expense the first $15 million ($20 million in certain
cases) of production costs of otherwise qualified film and
television productions.
The Committee also believes that section 181 should be
expanded to include some types of live theatrical productions
in order to encourage investment in and financing of these
types of commercial stage productions, thereby resulting in
more live theatre jobs and shows. Therefore, the provision
allows certain live theatrical productions to qualify for
section 181.
EXPLANATION OF PROVISION
The provision extends the special treatment for film and
television productions under section 181 for two years to
qualified film and television productions commencing prior to
January 1, 2016.
The provision also expands section 181 to include any
qualified live theatrical production. A qualified live
theatrical production is defined as a live staged production of
a play (with or without music) which is derived from a written
book or script and is produced or presented by a commercial
entity in any venue which has an audience capacity of not more
than 3,000 or a series of venues the majority of which have an
audience capacity of not more than 3,000. Similar to the
exclusion for sexually explicit productions from the present-
law definition of qualified productions, qualified live
theatrical productions do not include stage performances that
would be excluded by section 2257(h)(1) of title 18 of the U.S.
Code, if such provision were extended to live stage
performances. In general, in the case of multiple live staged
productions, each such live-staged production is treated as a
separate production.
EFFECTIVE DATE
The provision applies to productions commencing after
December 31, 2013. For purposes of this provision, the date on
which a qualified live theatrical production commences is the
date of the first public performance of such production for a
paying audience.
20. Extension of deduction allowable with respect to income
attributable to domestic production activities in Puerto Rico (sec. 130
of the bill and sec. 199 of the Code)
PRESENT LAW
General
Present law generally provides a deduction from taxable
income (or, in the case of an individual, adjusted gross
income) that is equal to nine percent of the lesser of the
taxpayer's qualified production activities income or taxable
income for the taxable year. For taxpayers subject to the 35-
percent corporate income tax rate, the nine-percent deduction
effectively reduces the corporate income tax rate to slightly
less than 32 percent on qualified production activities income.
In general, qualified production activities income is equal
to domestic production gross receipts reduced by the sum of:
(1) the costs of goods sold that are allocable to those
receipts; and (2) other expenses, losses, or deductions which
are properly allocable to those receipts.
Domestic production gross receipts generally are gross
receipts of a taxpayer that are derived from: (1) any sale,
exchange, or other disposition, or any lease, rental, or
license, of qualifying production property\219\ that was
manufactured, produced, grown or extracted by the taxpayer in
whole or in significant part within the United States; (2) any
sale, exchange, or other disposition, or any lease, rental, or
license, of qualified film\220\ produced by the taxpayer; (3)
any lease, rental, license, sale, exchange, or other
disposition of electricity, natural gas, or potable water
produced by the taxpayer in the United States; (4) construction
of real property performed in the United States by a taxpayer
in the ordinary course of a construction trade or business; or
(5) engineering or architectural services performed in the
United States for the construction of real property located in
the United States.
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\219\Qualifying production property generally includes any tangible
personal property, computer software, and sound recordings.
\220\Qualified film includes any motion picture film or videotape
(including live or delayed television programming, but not including
certain sexually explicit productions) if 50 percent or more of the
total compensation relating to the production of the film (including
compensation in the form of residuals and participations) constitutes
compensation for services performed in the United States by actors,
production personnel, directors, and producers.
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The amount of the deduction for a taxable year is limited
to 50 percent of the wages paid by the taxpayer, and properly
allocable to domestic production gross receipts, during the
calendar year that ends in such taxable year.\221\ Wages paid
to bona fide residents of Puerto Rico generally are not
included in the definition of wages for purposes of computing
the wage limitation amount.\222\
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\221\For purposes of the provision, ``wages'' include the sum of
the amounts of wages as defined in section 3401(a) and elective
deferrals that the taxpayer properly reports to the Social Security
Administration with respect to the employment of employees of the
taxpayer during the calendar year ending during the taxpayer's taxable
year.
\222\Section 3401(a)(8)(C) excludes wages paid to United States
citizens who are bona fide residents of Puerto Rico from the term wages
for purposes of income tax withholding.
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Rules for Puerto Rico
When used in the Code in a geographical sense, the term
``United States'' generally includes only the States and the
District of Columbia.\223\ A special rule for determining
domestic production gross receipts, however, provides that in
the case of any taxpayer with gross receipts from sources
within the Commonwealth of Puerto Rico, the term ``United
States'' includes the Commonwealth of Puerto Rico, but only if
all of the taxpayer's Puerto Rico-sourced gross receipts are
taxable under the Federal income tax for individuals or
corporations.\224\ In computing the 50-percent wage limitation,
the taxpayer is permitted to take into account wages paid to
bona fide residents of Puerto Rico for services performed in
Puerto Rico.\225\
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\223\Sec. 7701(a)(9).
\224\Sec. 199(d)(8)(A).
\225\Sec. 199(d)(8)(B).
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The special rules for Puerto Rico apply only with respect
to the first eight taxable years of a taxpayer beginning after
December 31, 2005 and before January 1, 2014.
REASONS FOR CHANGE
The Committee believes that, notwithstanding expiration of
the Puerto Rico and possession tax credit and the Puerto Rico
economic activity credit for taxable years beginning after
2005, the Code should grant a tax benefit for production in
Puerto Rico. Consequently, the Committee believes that it is
appropriate to treat Puerto Rico as part of the United States
for purposes of the domestic production activities deduction.
EXPLANATION OF PROVISION
The provision extends the special domestic production
activities rules for Puerto Rico to apply for the first ten
taxable years of a taxpayer beginning after December 31, 2005
and before January 1, 2016.
EFFECTIVE DATE
The provision is effective for taxable years beginning
after December 31, 2013.
21. Extension of modification of tax treatment of certain payments to
controlling exempt organizations (sec. 131 of the bill and sec. 512 of
the Code)
PRESENT LAW
In general, organizations exempt from Federal income tax
are subject to the unrelated business income tax on income
derived from a trade or business regularly carried on by the
organization that is not substantially related to the
performance of the organization's tax-exempt functions.\226\ In
general, interest, rents, royalties, and annuities are excluded
from the unrelated business income of tax-exempt
organizations.\227\
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\226\Sec. 511.
\227\Sec. 512(b).
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Section 512(b)(13) provides rules regarding income derived
by an exempt organization from a controlled subsidiary. In
general, section 512(b)(13) treats otherwise excluded rent,
royalty, annuity, and interest income as unrelated business
taxable income if such income is received from a taxable or
tax-exempt subsidiary that is 50-percent controlled by the
parent tax-exempt organization to the extent the payment
reduces the net unrelated income (or increases any net
unrelated loss) of the controlled entity (determined as if the
entity were tax exempt).
In the case of a stock subsidiary, ``control'' means
ownership by vote or value of more than 50 percent of the
stock. In the case of a partnership or other entity,
``control'' means ownership of more than 50 percent of the
profits, capital, or beneficial interests. In addition, present
law applies the constructive ownership rules of section 318 for
purposes of section 512(b)(13). Thus, a parent exempt
organization is deemed to control any subsidiary in which it
holds more than 50 percent of the voting power or value,
directly (as in the case of a first-tier subsidiary) or
indirectly (as in the case of a second-tier subsidiary).
For payments made pursuant to a binding written contract in
effect on August 17, 2006 (or renewal of such a contract on
substantially similar terms), the general rule of section
512(b)(13) applies only to the portion of payments received or
accrued in a taxable year that exceeds the amount of the
payment that would have been paid or accrued if the amount of
such payment had been determined under the principles of
section 482 (i.e., at arm's length).\228\ A 20-percent penalty
is imposed on the larger of such excess determined without
regard to any amendment or supplement to a return of tax, or
such excess determined with regard to all such amendments and
supplements. This special rule does not apply to payments
received or accrued after December 31, 2013.
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\228\Sec. 512(b)(13)(E).
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REASONS FOR CHANGE
The Committee believes that, for certain qualifying
payments of rent, royalties, annuities, or interest by a
controlled subsidiary to its exempt parent, it is appropriate
to include in the parent's unrelated business taxable income
only the portion of such payment that exceeds the amount that
would have been paid in an arm's-length transaction. The
Committee therefore believes it is desirable to extend the
special rule for an additional two years.
EXPLANATION OF PROVISION
The provision extends the special rule for two years to
payments received or accrued before January 1, 2016.
Accordingly, under the provision, payments of rent, royalties,
annuities, or interest by a controlled organization to a
controlling organization pursuant to a binding written contract
in effect on August 17, 2006 (or renewal of such a contract on
substantially similar terms), may be includible in the
unrelated business taxable income of the controlling
organization only to the extent the payment exceeds the amount
of the payment determined under the principles of section 482
(i.e., at arm's length). Any such excess is subject to a 20-
percent penalty on the larger of such excess determined without
regard to any amendment or supplement to a return of tax, or
such excess determined with regard to all such amendments and
supplements.
EFFECTIVE DATE
The provision is effective for payments received or accrued
after December 31, 2013.
22. Extension of treatment of certain dividends of regulated investment
companies (sec. 132 of the bill and sec. 871(k) of the Code)
PRESENT LAW
In general
A regulated investment company (``RIC'') is an entity that
meets certain requirements (including a requirement that its
income generally be derived from passive investments such as
dividends and interest and a requirement that it distribute at
least 90 percent of its income) and that elects to be taxed
under a special tax regime. Unlike an ordinary corporation, an
entity that is taxed as a RIC can deduct amounts paid to its
shareholders as dividends. In this manner, tax on RIC income is
generally not paid by the RIC but rather by its shareholders.
Income of a RIC distributed to shareholders as dividends is
generally treated as an ordinary income dividend by those
shareholders, unless other special rules apply. Dividends
received by foreign persons from a RIC are generally subject to
gross-basis tax under sections 871(a) or 881, and the RIC payor
of such dividends is obligated to withhold such tax under
sections 1441 and 1442.
Under a temporary provision of prior law, a RIC that earned
certain interest income that generally would not be subject to
U.S. tax if earned by a foreign person directly could, to the
extent of such net interest income, designate a dividend it
paid as derived from such interest income for purposes of the
treatment of a foreign RIC shareholder. A foreign person who is
a shareholder in the RIC generally could treat such a dividend
as exempt from gross-basis U.S. tax. Also, subject to certain
requirements, the RIC was exempt from withholding the gross-
basis tax on such dividends. Similar rules applied with respect
to the designation of certain short-term capital gain
dividends. However, these provisions relating to dividends with
respect to interest income and short-term capital gain of the
RIC have expired, and therefore do not apply to dividends with
respect to any taxable year of a RIC beginning after December
31, 2013.\229\
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\229\Secs. 871(k), 881(e), 1441(c)(12), 1441(a), and 1442.
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REASONS FOR CHANGE
The Committee believes it is appropriate to extend for two
years the provision that allows certain interest income and
short-term capital gain of RICs to be designated as not subject
to gross-basis tax, or to withholding of such tax, with respect
to foreign investors in the RIC. The Committee believes the
extension will promote greater certainty for foreign investors
in RICs.
EXPLANATION OF PROVISION
The provision extends the rules exempting from gross-basis
tax and from withholding of such tax the interest-related
dividends and short-term capital gain dividends received from a
RIC, to dividends with respect to taxable years of a RIC
beginning before January 1, 2016.
EFFECTIVE DATE
The provision applies to dividends paid with respect to any
taxable year of a RIC beginning after December 31, 2013.
23. Extension of RIC qualified investment entity treatment under FIRPTA
(sec. 133 of the bill and secs. 897 and 1445 of the Code)
PRESENT LAW
Special U.S. tax rules apply to capital gains of foreign
persons that are attributable to dispositions of interests in
U.S. real property. In general, although a foreign person (a
foreign corporation or a nonresident alien individual) is not
generally taxed on U.S. source capital gains unless certain
personal presence or active business requirements are met, a
foreign person who sells a U.S. real property interest
(``USRPI'') is subject to tax at the same rates as a U.S.
person, under the Foreign Investment in Real Property Tax Act
(``FIRPTA'') provisions codified in section 897 of the Code.
Withholding tax is also imposed under section 1445.
A USRPI includes stock or a beneficial interest in any
domestic corporation unless such corporation has not been a
U.S. real property holding corporation (as defined) during the
testing period. A USRPI does not include an interest in a
domestically controlled ``qualified investment entity.'' A
distribution from a ``qualified investment entity'' that is
attributable to the sale of a USRPI is also subject to tax
under FIRPTA unless the distribution is with respect to an
interest that is regularly traded on an established securities
market located in the United States and the recipient foreign
corporation or nonresident alien individual did not hold more
than five percent of that class of stock or beneficial interest
within the one-year period ending on the date of
distribution.\230\ Special rules apply to situations involving
tiers of qualified investment entities.
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\230\Sections 857(b)(3)(F), 852(b)(3)(E), and 871(k)(2)(E) require
dividend treatment, rather than capital gain treatment, for certain
distributions to which FIRPTA does not apply by reason of this
exception. See also section 881(e)(2).
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The term ``qualified investment entity'' includes a real
estate investment trust (``REIT'') and also includes a
regulated investment company (``RIC'') that meets certain
requirements, although the inclusion of a RIC in that
definition does not apply for certain purposes after December
31, 2013.\231\
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\231\Section 897(h).
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REASONS FOR CHANGE
The Committee believes it is appropriate to extend the
qualified investment entity treatment of RICs under FIRPTA for
two years. The Committee believes the extension will promote
greater certainty for foreign investors in RICs.
EXPLANATION OF PROVISION
The provision extends the inclusion of a RIC within the
definition of a ``qualified investment entity'' under section
897 through December 31, 2015, for those situations in which
that inclusion would otherwise have expired after December 31,
2013.
EFFECTIVE DATE
The provision is generally effective on January 1, 2014.
The provision does not apply with respect to the
withholding requirement under section 1445 for any payment made
before the date of enactment, but a RIC that withheld and
remitted tax under section 1445 on distributions made after
December 31, 2013 and before the date of enactment is not
liable to the distributee with respect to such withheld and
remitted amounts.
24. Extension of subpart F exception for active financing income (sec.
134 of the bill and secs. 953 and 954 of the Code)
PRESENT LAW
Under the subpart F rules,\232\ 10-percent-or-greater U.S.
shareholders of a controlled foreign corporation (``CFC'') are
subject to U.S. tax currently on certain income earned by the
CFC, whether or not such income is distributed to the
shareholders. The income subject to current inclusion under the
subpart F rules includes, among other things, insurance income
and foreign base company income. Foreign base company income
includes, among other things, foreign personal holding company
income and foreign base company services income (i.e., income
derived from services performed for or on behalf of a related
person outside the country in which the CFC is organized).
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\232\Secs. 951-964.
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Foreign personal holding company income generally consists
of the following: (1) dividends, interest, royalties, rents,
and annuities; (2) net gains from the sale or exchange of (a)
property that gives rise to the preceding types of income, (b)
property that does not give rise to income, and (c) interests
in trusts, partnerships, and real estate mortgage investment
conduits (``REMICs''); (3) net gains from commodities
transactions; (4) net gains from certain foreign currency
transactions; (5) income that is equivalent to interest; (6)
income from notional principal contracts; (7) payments in lieu
of dividends; and (8) amounts received under personal service
contracts.
Insurance income subject to current inclusion under the
subpart F rules includes any income of a CFC attributable to
the issuing or reinsuring of any insurance or annuity contract
in connection with risks located in a country other than the
CFC's country of organization. Subpart F insurance income also
includes income attributable to an insurance contract in
connection with risks located within the CFC's country of
organization, as the result of an arrangement under which
another corporation receives a substantially equal amount of
consideration for insurance of other country risks. Investment
income of a CFC that is allocable to any insurance or annuity
contract related to risks located outside the CFC's country of
organization is taxable as subpart F insurance income.\233\
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\233\Prop. Treas. Reg. sec. 1.953-1(a).
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Temporary exceptions from foreign personal holding company
income, foreign base company services income, and insurance
income apply for subpart F purposes for certain income that is
derived in the active conduct of a banking, financing, or
similar business, as a securities dealer, or in the conduct of
an insurance business (so-called ``active financing income'').
With respect to income derived in the active conduct of a
banking, financing, or similar business, a CFC is required to
be predominantly engaged in such business and to conduct
substantial activity with respect to such business to qualify
for the active financing exceptions. In addition, certain nexus
requirements apply, which provide that income derived by a CFC
or a qualified business unit (``QBU'') of a CFC from
transactions with customers is eligible for the exceptions if,
among other things, substantially all of the activities in
connection with such transactions are conducted directly by the
CFC or QBU in its home country, and such income is treated as
earned by the CFC or QBU in its home country for purposes of
such country's tax laws. Moreover, the exceptions apply to
income derived from certain cross border transactions, provided
that certain requirements are met. Additional exceptions from
foreign personal holding company income apply for certain
income derived by a securities dealer within the meaning of
section 475 and for gain from the sale of active financing
assets.
In the case of a securities dealer, the temporary exception
from foreign personal holding company income applies to certain
income. The income covered by the exception is any interest or
dividend (or certain equivalent amounts) from any transaction,
including a hedging transaction or a transaction consisting of
a deposit of collateral or margin, entered into in the ordinary
course of the dealer's trade or business as a dealer in
securities within the meaning of section 475. In the case of a
QBU of the dealer, the income is required to be attributable to
activities of the QBU in the country of incorporation, or to a
QBU in the country in which the QBU both maintains its
principal office and conducts substantial business activity. A
coordination rule provides that this exception generally takes
precedence over the exception for income of a banking,
financing or similar business, in the case of a securities
dealer.
In the case of insurance, a temporary exception from
foreign personal holding company income applies for certain
income of a qualifying insurance company with respect to risks
located within the CFC's country of creation or organization.
In the case of insurance, temporary exceptions from insurance
income and from foreign personal holding company income also
apply for certain income of a qualifying branch of a qualifying
insurance company with respect to risks located within the home
country of the branch, provided certain requirements are met
under each of the exceptions. Further, additional temporary
exceptions from insurance income and from foreign personal
holding company income apply for certain income of certain CFCs
or branches with respect to risks located in a country other
than the United States, provided that the requirements for
these exceptions are met. In the case of a life insurance or
annuity contract, reserves for such contracts are determined
under rules specific to the temporary exceptions. Present law
also permits a taxpayer in certain circumstances, subject to
approval by the IRS through the ruling process or in published
guidance, to establish that the reserve of a life insurance
company for life insurance and annuity contracts is the amount
taken into account in determining the foreign statement reserve
for the contract (reduced by catastrophe, equalization, or
deficiency reserve or any similar reserve). IRS approval is to
be based on whether the method, the interest rate, the
mortality and morbidity assumptions, and any other factors
taken into account in determining foreign statement reserves
(taken together or separately) provide an appropriate means of
measuring income for Federal income tax purposes.
REASONS FOR CHANGE
The Committee believes that it is appropriate to extend the
temporary provisions for an additional two years to provide
certainty and to allow for business planning.
EXPLANATION OF PROVISION
The provision extends for two years (for taxable years
beginning before January 1, 2016) the temporary exceptions from
subpart F foreign personal holding company income, foreign base
company services income, and insurance income for certain
income that is derived in the active conduct of a banking,
financing, or similar business, as a securities dealer, or in
the conduct of an insurance business.
EFFECTIVE DATE
The provision is effective for taxable years of foreign
corporations beginning after December 31, 2013, and for taxable
years of U.S. shareholders with or within which such taxable
years of such foreign corporations end.
25. Extension of look-thru treatment of payments between related
controlled foreign corporations under foreign personal holding company
rules (sec. 135 of the bill and sec. 954(c)(6) of the Code)
PRESENT LAW
In general
The rules of subpart F\234\ require U.S. shareholders with
a 10-percent or greater interest in a controlled foreign
corporation (``CFC'') to include certain income of the CFC
(referred to as ``subpart F income'') on a current basis for
U.S. tax purposes, regardless of whether the income is
distributed to the shareholders.
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\234\Secs. 951-964.
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Subpart F income includes foreign base company income. One
category of foreign base company income is foreign personal
holding company income. For subpart F purposes, foreign
personal holding company income generally includes dividends,
interest, rents, and royalties, among other types of income.
There are several exceptions to these rules. For example,
foreign personal holding company income does not include
dividends and interest received by a CFC from a related
corporation organized and operating in the same foreign country
in which the CFC is organized, or rents and royalties received
by a CFC from a related corporation for the use of property
within the country in which the CFC is organized. Interest,
rent, and royalty payments do not qualify for this exclusion to
the extent that such payments reduce the subpart F income of
the payor. In addition, subpart F income of a CFC does not
include any item of income from sources within the United
States that is effectively connected with the conduct by such
CFC of a trade or business within the United States (``ECI'')
unless such item is exempt from taxation (or is subject to a
reduced rate of tax) pursuant to a tax treaty.
The ``look-thru rule''
Under the ``look-thru rule'' (sec. 954(c)(6)), dividends,
interest (including factoring income that is treated as
equivalent to interest under section 954(c)(1)(E)), rents, and
royalties received or accrued by one CFC from a related CFC are
not treated as foreign personal holding company income to the
extent attributable or properly allocable to income of the
payor that is neither subpart F income nor treated as ECI. For
this purpose, a related CFC is a CFC that controls or is
controlled by the other CFC, or a CFC that is controlled by the
same person or persons that control the other CFC. Ownership of
more than 50 percent of the CFC's stock (by vote or value)
constitutes control for these purposes.
The Secretary is authorized to prescribe regulations that
are necessary or appropriate to carry out the look-thru rule,
including such regulations as are necessary or appropriate to
prevent the abuse of the purposes of such rule.
The look-thru rule applies to taxable years of foreign
corporations beginning after December 31, 2005 and before
January 1, 2014, and to taxable years of U.S. shareholders with
or within which such taxable years of foreign corporations end.
REASONS FOR CHANGE
The Committee believes that it is appropriate to extend the
look-thru rule for two years to help U.S. companies with
overseas operations compete more effectively with foreign
firms.
EXPLANATION OF PROVISION
The provision extends for two years the application of the
look-thru rule, to taxable years of foreign corporations
beginning before January 1, 2016, and to taxable years of U.S.
shareholders with or within which such taxable years of foreign
corporations end.
EFFECTIVE DATE
The provision is effective for taxable years of foreign
corporations beginning after December 31, 2013, and for taxable
years of U.S. shareholders with or within which such taxable
years of foreign corporations end.
26. Extension of exclusion of 100 percent of gain on certain small
business stock (sec. 136 of the bill and sec. 1202 of the Code)
PRESENT LAW
In general
A taxpayer other than a corporation may exclude 50 percent
(60 percent for certain empowerment zone businesses) of the
gain from the sale of certain small business stock acquired at
original issue and held for at least five years.\235\ The
amount of gain eligible for the exclusion by an individual with
respect to the stock of any corporation is the greater of (1)
ten times the taxpayer's basis in the stock or (2) $10 million
(reduced by the amount of gain eligible for exclusion in prior
years). To qualify as a small business, when the stock is
issued, the aggregate gross assets (i.e., cash plus aggregate
adjusted basis of other property) held by the corporation may
not exceed $50 million. The corporation also must meet certain
active trade or business requirements.
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\235\Sec. 1202.
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The portion of the gain includible in taxable income is
taxed at a maximum rate of 28 percent under the regular
tax.\236\ Seven percent of the excluded gain is an alternative
minimum tax preference.\237\
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\236\Sec. 1(h).
\237\Sec. 57(a)(7).
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Special rules for stock acquired after February 17, 2009, and before
January 1, 2014
For stock acquired after February 17, 2009, and before
September 28, 2010, the percentage exclusion for qualified
small business stock sold by an individual is increased to 75
percent.
For stock acquired after September 27, 2010, and before
January 1, 2014, the percentage exclusion for qualified small
business stock sold by an individual is increased to 100
percent and the minimum tax preference does not apply.
REASONS FOR CHANGE
The Committee believes that extending the increased
exclusion and the elimination of the minimum tax preference
will encourage and reward investment in qualified small
business stock.
EXPLANATION OF PROVISION
The provision extends the 100-percent exclusion and the
exception from minimum tax preference treatment for two years
(for stock acquired before January 1, 2016).
EFFECTIVE DATE
The provision is effective for stock acquired after
December 31, 2013.
27. Extension of basis adjustment to stock of S corporations making
charitable contributions of property (sec. 137 of the bill and sec.
1367 of the Code)
PRESENT LAW
Under present law, if an S corporation contributes money or
other property to a charity, each shareholder takes into
account the shareholder's pro rata share of the contribution in
determining its own income tax liability.\238\ A shareholder of
an S corporation reduces the basis in the stock of the S
corporation by the amount of the charitable contribution that
flows through to the shareholder.\239\
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\238\Sec. 1366(a)(1)(A).
\239\Sec. 1367(a)(2)(B).
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In the case of charitable contributions made in taxable
years beginning before January 1, 2014, the amount of a
shareholder's basis reduction in the stock of an S corporation
by reason of a charitable contribution made by the corporation
is equal to the shareholder's pro rata share of the adjusted
basis of the contributed property. For contributions made in
taxable years beginning after December 31, 2013, the amount of
the reduction is the shareholder's pro rata share of the fair
market value of the contributed property.
REASONS FOR CHANGE
The Committee believes that the treatment of contributions
of property by S corporations that applied to contributions
made in certain taxable years beginning before January 1, 2014,
is appropriate and should be extended.
EXPLANATION OF PROVISION
The provision extends the rule relating to the basis
reduction on account of charitable contributions of property
for two years to contributions made in taxable years beginning
before January 1, 2016.
EFFECTIVE DATE
The provision applies to charitable contributions made in
taxable years beginning after December 31, 2013.
28. Extension of reduction in S corporation recognition period for
built-in gains tax (sec. 138 of the bill and sec. 1374 of the Code)
PRESENT LAW
In general
A ``small business corporation'' (as defined in section
1361(b)) may elect to be treated as an S corporation. Unlike C
corporations, S corporations generally pay no corporate-level
tax. Instead, items of income and loss of an S corporation pass
through to its shareholders. Each shareholder takes into
account separately its share of these items on its own income
tax return.\240\
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\240\Sec. 1366.
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Under section 1374, a corporate level built-in gains tax,
at the highest marginal rate applicable to corporations
(currently 35 percent), is imposed on an S corporation's net
recognized built-in gain\241\ that arose prior to the
conversion of the C corporation to an S corporation and is
recognized by the S corporation during the recognition period,
i.e., the 10-year period beginning with the first day of the
first taxable year for which the S election is in effect.\242\
If the taxable income of the S corporation is less than the
amount of net recognized built-in gain in the year such built-
in gain is recognized (for example, because of post-conversion
losses), no tax under section 1374 is imposed on the excess of
such built-in gain over taxable income for that year. However,
the untaxed excess of net recognized built-in gain over taxable
income for that year is treated as recognized built-in gain in
the succeeding taxable year.\243\ Treasury regulations provide
that if a corporation sells an asset before or during the
recognition period and reports the income from the sale using
the installment method under section 453 during or after the
recognition period, that income is subject to tax under section
1374.\244\
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\241\Certain built-in income items are treated as recognized built-
in gain for this purpose. Sec. 1374(d)(5).
\242\Sec. 1374(d)(7)(A). The 10-year period refers to ten calendar
years from the first day of the first taxable year for which the
corporation was an S corporation. Treas. Reg. sec. 1.1374-1(d). A
regulated investment company (RIC) or a real estate investment trust
(REIT) that was formerly a C corporation (or that acquired assets from
a C corporation) generally is subject to the rules of section 1374 as
if the RIC or REIT were an S corporation, unless the relevant C
corporation elects ``deemed sale'' treatment. Treas. Reg. secs.
1.337(d)-7(b)(1) and (c)(1).
\243\Sec. 1374(d)(2).
\244\Treas. Reg. sec. 1.1374-4(h).
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The built-in gains tax also applies to net recognized
built-in gain attributable to any asset received by an S
corporation from a C corporation in a transaction in which the
S corporation's basis in the asset is determined (in whole or
in part) by reference to the basis of such asset (or other
property) in the hands of the C corporation.\245\ In the case
of such a transaction, the recognition period for any asset
transferred by the C corporation starts on the date the asset
was acquired by the S corporation in lieu of the beginning of
the first taxable year for which the corporation was an S
corporation.\246\
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\245\Sec. 1374(d)(8).
\246\Sec. 1374(d)(8)(B).
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The amount of the built-in gains tax under section 1374 is
treated as a loss by each of the S corporation shareholders in
computing its own income tax.\247\
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\247\Sec. 1366(f)(2). Shareholders continue to take into account
all items of gain and loss under section 1366.
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Special rules for 2009, 2010, and 2011
For any taxable year beginning in 2009 and 2010, no tax was
imposed on the net recognized built-in gain of an S corporation
under section 1374 if the seventh taxable year in the
corporation's recognition period preceded such taxable
year.\248\ Thus, with respect to gain that arose prior to the
conversion of a C corporation to an S corporation, no tax was
imposed under section 1374 if the seventh taxable year that the
S corporation election was in effect preceded the taxable year
beginning in 2009 or 2010.
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\248\Sec. 1374(d)(7)(B).
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For any taxable year beginning in 2011, no tax was imposed
on the net recognized built-in gain of an S corporation under
section 1374 if the fifth year in the corporation's recognition
period preceded such taxable year.\249\ Thus, with respect to
gain that arose prior to the conversion of a C corporation to
an S corporation, no tax was imposed under section 1374 if the
S corporation election was in effect for five years preceding
the taxable year beginning in 2011.
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\249\Sec. 1374(d)(7)(C).
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Special rules for 2012 and 2013
For taxable years beginning in 2012 and 2013, the term
``recognition period'' in section 1374, for purposes of
determining the net recognized built-in gain, is applied by
substituting a five-year period for the otherwise applicable
10-year period. Thus, for such taxable years, the recognition
period is the five-year period beginning with the first day of
the first taxable year for which the corporation was an S
corporation (or beginning with the date of acquisition of
assets if the rules applicable to assets acquired from a C
corporation apply). If an S corporation with assets subject to
section 1374 disposes of such assets in a taxable year
beginning in 2012 or 2013 and the disposition occurs more than
five years after the first day of the relevant recognition
period, gain or loss on the disposition will not be taken into
account in determining the net recognized built-in gain.
The rule requiring the excess of net recognized built-in
gain over taxable income for a taxable year to be carried over
and treated as recognized built-in gain in the succeeding
taxable year applies only to gain recognized within the
recognition period. Thus, for example, built-in gain recognized
in a taxable year beginning in 2013, from a disposition in that
year that occurs beyond the end of the temporary 5-year
recognition period, will not be carried forward under the
income limitation rule and treated as recognized built-in gain
in the taxable year beginning in 2014 (after the temporary
provision has expired and the recognition period is again 10
years).\250\
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\250\Sec. 1374(d)(2)(B).
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If an S corporation subject to section 1374 sells a built-
in gain asset and reports the income from the sale using the
installment method under section 453, the treatment of all
payments received will be governed by the provisions of section
1374(d)(7) applicable to the taxable year in which the sale was
made. Thus, for example, if an S corporation sold a built-in
gain asset in 2008 in a sale occurring before or during the
recognition period in effect at that time, and reported the
gain using the installment method under section 453, gain
recognized under that method in 2012 or 2013 (including, for
example, any gain under section 453B from a disposition of the
installment obligation in those years)\251\ is subject to tax
under section 1374. On the other hand, if a corporation sold an
asset in a taxable year beginning in 2012 or 2013, and the sale
occurred beyond the end of the then-effective 5-year
recognition period (but not beyond the end of the otherwise
applicable 10-year recognition period), then gain reported
using the installment method under section 453 in a taxable
year beginning in 2014 (after the temporary provision expires)
is not subject to tax under section 1374, because the sale was
made after the end of the recognition period applicable to that
sale. As a third example, if an S corporation sold an asset in
a taxable year beginning in 2011, and no tax would have been
imposed on the net recognized built-in gain from the sale under
section 1374(d)(7)(B)(ii) because the fifth taxable year in the
recognition period preceded such taxable year, then gain from
such sale reported using the installment method under section
453 in a taxable year beginning in 2014 is not subject to tax
under section 1374.\252\
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\251\Section 453B requires gain or loss to be recognized on
disposition of an installment obligation and treated as gain or loss
resulting from the sale or exchange of the property in respect of which
the installment obligation was received.
\252\Report of the Senate Committee on Finance to Accompany S.
3521, the Family and Business Tax Cut Certainty Act of 2012, S. Rep.
112-208, August 28, 2012, pp 69-72.
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REASONS FOR CHANGE
The Committee believes it is appropriate to extend the 5-
year recognition period provision for two years, to promote
business certainty.
EXPLANATION OF PROVISION
The provision extends, for taxable years beginning in 2014
and 2015, the special rules that applied to taxable years
beginning in 2012 and 2013.
EFFECTIVE DATE
The provision is effective for taxable years beginning
after December 31, 2013.
29. Extension of empowerment zone tax incentives (sec. 139 of the bill
and secs. 1391 and 1397B of the Code)
PRESENT LAW
The Omnibus Budget Reconciliation Act of 1993 (``OBRA
93'')\253\ authorized the designation of nine empowerment zones
(``Round I empowerment zones'') to provide tax incentives for
businesses to locate within certain targeted areas\254\
designated by the Secretaries of the Department of Housing and
Urban Development (``HUD'') and the U.S. Department of
Agriculture (``USDA''). The first empowerment zones were
established in large rural areas and large cities. OBRA 93 also
authorized the designation of 95 enterprise communities, which
were located in smaller rural areas and cities. For tax
purposes, the areas designated as enterprise communities
continued as such for the ten-year period starting in the
beginning of 1995 and ending at the end of 2004.
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\253\Pub. L. No. 103-66.
\254\The targeted areas are those that have pervasive poverty, high
unemployment, and general economic distress, and that satisfy certain
eligibility criteria, including specified poverty rates and population
and geographic size limitations.
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The Taxpayer Relief Act of 1997\255\ authorized the
designation of two additional Round I urban empowerment zones,
and 20 additional empowerment zones (``Round II empowerment
zones''). The Community Renewal Tax Relief Act of 2000 (``2000
Community Renewal Act'')\256\ authorized a total of ten new
empowerment zones (``Round III empowerment zones''), bringing
the total number of authorized empowerment zones to 40.\257\ In
addition, the 2000 Community Renewal Act conformed the tax
incentives that are available to businesses in the Round I,
Round II, and Round III empowerment zones, and extended the
empowerment zone incentives through December 31, 2009.\258\ The
Tax Relief, Unemployment Insurance Reauthorization and Job
Creation Act of 2010 (``TRUIRJCA'') extended for two years,
through December 31, 2011, the period for which the designation
of an empowerment zone was in effect, thus extending for two
years the empowerment zone tax incentives discussed below.\259\
TRUIRJCA also extended for two years, through December 31,
2016, the exclusion of 60 percent of gain for qualified small
business stock (of a corporation which is a qualified business
entity) acquired on or before February 17, 2009. The American
Taxpayer Relief Act of 2012 (``ATRA'') extended the designation
period and tax incentives for two additional years, through
December 31, 2013.\260\ ATRA also extended for two additional
years, through December 31, 2018, the exclusion of 60 percent
of gain for qualified small business stock (of a corporation
which is a qualified business entity) acquired on or before
February 17, 2009.
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\255\Pub. L. No. 105-34.
\256\Pub. L. No. 106-554.
\257\The urban part of the program is administered by HUD and the
rural part of the program is administered by the USDA. The eight Round
I urban empowerment zones are Atlanta, GA; Baltimore, MD, Chicago, IL;
Cleveland, OH; Detroit, MI; Los Angeles, CA; New York, NY; and
Philadelphia, PA/Camden, NJ. Atlanta relinquished its empowerment zone
designation in Round III. The three Round I rural empowerment zones are
Kentucky Highlands, KY; Mid-Delta, MI; and Rio Grande Valley, TX. The
15 Round II urban empowerment zones are Boston, MA; Cincinnati, OH;
Columbia, SC; Columbus, OH; Cumberland County, NJ; El Paso, TX; Gary/
Hammond/East Chicago, IN; Ironton, OH/Huntington, WV; Knoxville, TN;
Miami/Dade County, FL; Minneapolis, MN; New Haven, CT; Norfolk/
Portsmouth, VA; Santa Ana, CA; and St. Louis, Missouri/East St. Louis,
IL. The five Round II rural empowerment zones are Desert Communities,
CA; Griggs-Steele, ND; Oglala Sioux Tribe, SD; Southernmost Illinois
Delta, IL; and Southwest Georgia United, GA. The eight Round III urban
empowerment zones are Fresno, CA; Jacksonville, FL; Oklahoma City, OK;
Pulaski County, AR; San Antonio, TX; Syracuse, NY; Tucson, AZ; and
Yonkers, NY. The two Round III rural empowerment zones are Aroostook
County, ME; and Futuro, TX.
\258\If an empowerment zone designation were terminated prior to
December 31, 2009, the tax incentives would cease to be available as of
the termination date.
\259\Pub. L. No. 111-312, sec. 753 (2010). In the case of a
designation of an empowerment zone the nomination for which included a
termination date which is December 31, 2009, termination shall not
apply with respect to such designation if the entity which made such
nomination amends the nomination to provide for a new termination date
in such manner as the Secretary may provide.
\260\Pub. L. No. 112-240, sec. 327 (2013).
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The tax incentives available within the designated
empowerment zones include a Federal income tax credit for
employers who hire qualifying employees (the ``wage credit''),
accelerated depreciation deductions on qualifying equipment,
tax-exempt bond financing, deferral of capital gains tax on
sale of qualified assets sold and replaced, and partial
exclusion of capital gains tax on certain sales of qualified
small business stock.
The following is a description of the tax incentives:
Wage credit
A 20-percent wage credit is available to employers for the
first $15,000 of qualified wages paid to each employee (i.e., a
maximum credit of $3,000 with respect to each qualified
employee) who (1) is a resident of the empowerment zone, and
(2) performs substantially all employment services within the
empowerment zone in a trade or business of the employer.\261\
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\261\Sec. 1396. The $15,000 limit is annual, not cumulative such
that the limit is the first $15,000 of wages paid in a calendar year
which ends with or within the taxable year.
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The wage credit rate applies to qualifying wages paid
before January 1, 2012. Wages paid to a qualified employee who
earns more than $15,000 are eligible for the wage credit
(although only the first $15,000 of wages is eligible for the
credit). The wage credit is available with respect to a
qualified full-time or part-time employee (employed for at
least 90 days), regardless of the number of other employees who
work for the employer. In general, any taxable business
carrying out activities in the empowerment zone may claim the
wage credit, regardless of whether the employer meets the
definition of an ``enterprise zone business.''\262\
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\262\Secs. 1397C(b) and 1397C(c). However, the wage credit is not
available for wages paid in connection with certain business activities
described in section 144(c)(6)(B), including a golf course, country
club, massage parlor, hot tub facility, suntan facility, racetrack, or
liquor store, or certain farming activities. In addition, wages are not
eligible for the wage credit if paid to: (1) a person who owns more
than five percent of the stock (or capital or profits interests) of the
employer, (2) certain relatives of the employer, or (3) if the employer
is a corporation or partnership, certain relatives of a person who owns
more than 50 percent of the business.
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An employer's deduction otherwise allowed for wages paid is
reduced by the amount of wage credit claimed for that taxable
year.\263\ Wages are not to be taken into account for purposes
of the wage credit if taken into account in determining the
employer's work opportunity tax credit under section 51 or the
welfare-to-work credit under section 51A.\264\ In addition, the
$15,000 cap is reduced by any wages taken into account in
computing the work opportunity tax credit or the welfare-to-
work credit.\265\ The wage credit may be used to offset up to
25 percent of alternative minimum tax liability.\266\
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\263\Sec. 280C(a).
\264\Secs. 1396(c)(3)(A) and 51A(d)(2).
\265\Secs. 1396(c)(3)(B) and 51A(d)(2).
\266\Sec. 38(c)(2).
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Increased section 179 expensing limitation
An enterprise zone business is allowed an additional
$35,000 of section 179 expensing (for a total of up to $535,000
in 2010 and 2011)\267\ for qualified zone property placed in
service before January 1, 2012.\268\ The section 179 expensing
allowed to a taxpayer is phased out by the amount by which 50
percent of the cost of qualified zone property placed in
service during the year by the taxpayer exceeds
$2,000,000.\269\ The term ``qualified zone property'' is
defined as depreciable tangible property (including buildings)
provided that (i) the property is acquired by the taxpayer
(from an unrelated party) after the designation took effect,
(ii) the original use of the property in an empowerment zone
commences with the taxpayer, and (iii) substantially all of the
use of the property is in an empowerment zone in the active
conduct of a trade or business by the taxpayer. Special rules
are provided in the case of property that is substantially
renovated by the taxpayer.
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\267\The Small Business Jobs Act of 2010, Pub. L. No. 111-240, sec.
2021.
\268\Secs. 1397A, 1397D.
\269\Sec. 1397A(a)(2), 179(b)(2). For 2012 the limit is $500,000.
For taxable years beginning after 2012, the limit is $200,000.
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An enterprise zone business means any qualified business
entity and any qualified proprietorship. A qualified business
entity means, any corporation or partnership if for such year:
(1) every trade or business of such entity is the active
conduct of a qualified business within an empowerment zone; (2)
at least 50 percent of the total gross income of such entity is
derived from the active conduct of such business; (3) a
substantial portion of the use of the tangible property of such
entity (whether owned or leased) is within an empowerment zone;
(4) a substantial portion of the intangible property of such
entity is used in the active conduct of any such business; (5)
a substantial portion of the services performed for such entity
by its employees are performed in an empowerment zone; (6) at
least 35 percent of its employees are residents of an
empowerment zone; (7) less than five percent of the average of
the aggregate unadjusted bases of the property of such entity
is attributable to collectibles other than collectibles that
are held primarily for sale to customers in the ordinary course
of such business; and (8) less than five percent of the average
of the aggregate unadjusted bases of the property of such
entity is attributable to nonqualified financial property.\270\
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\270\Sec. 1397C(b).
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A qualified proprietorship is any qualified business
carried on by an individual as a proprietorship if for such
year: (1) at least 50 percent of the total gross income of such
individual from such business is derived from the active
conduct of such business in an empowerment zone; (2) a
substantial portion of the use of the tangible property of such
individual in such business (whether owned or leased) is within
an empowerment zone; (3) a substantial portion of the
intangible property of such business is used in the active
conduct of such business; (4) a substantial portion of the
services performed for such individual in such business by
employees of such business are performed in an empowerment
zone; (5) at least 35 percent of such employees are residents
of an empowerment zone; (6) less than five percent of the
average of the aggregate unadjusted bases of the property of
such individual which is used in such business is attributable
to collectibles other than collectibles that are held primarily
for sale to customers in the ordinary course of such business;
and (7) less than five percent of the average of the aggregate
unadjusted bases of the property of such individual which is
used in such business is attributable to nonqualified financial
property.\271\
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\271\Sec. 1397C(c).
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A qualified business is defined as any trade or business
other than a trade or business that consists predominantly of
the development or holding of intangibles for sale or license
or any business prohibited in connection with the employment
credit.\272\ In addition, the leasing of real property that is
located within the empowerment zone is treated as a qualified
business only if (1) the leased property is not residential
property, and (2) at least 50 percent of the gross rental
income from the real property is from enterprise zone
businesses. The rental of tangible personal property is not a
qualified business unless at least 50 percent of the rental of
such property is by enterprise zone businesses or by residents
of an empowerment zone.
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\272\Sec. 1397C(d). Excluded businesses include any private or
commercial golf course, country club, massage parlor, hot tub facility,
sun tan facility, racetrack, or other facility used for gambling or any
store the principal business of which is the sale of alcoholic
beverages for off-premises consumption. Sec. 144(c)(6).
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Expanded tax-exempt financing for certain zone facilities
States or local governments can issue enterprise zone
facility bonds to raise funds to provide an enterprise zone
business with qualified zone property.\273\ These bonds can be
used in areas designated enterprise communities as well as
areas designated empowerment zones. To qualify, 95 percent (or
more) of the net proceeds from the bond issue must be used to
finance: (1) qualified zone property whose principal user is an
enterprise zone business, and (2) certain land functionally
related and subordinate to such property.
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\273\Sec. 1394.
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The term enterprise zone business is the same as that used
for purposes of the increased section 179 deduction limitation
(discussed above) with certain modifications for start-up
businesses. First, a business will be treated as an enterprise
zone business during a start-up period if (1) at the beginning
of the period, it is reasonable to expect the business to be an
enterprise zone business by the end of the start-up period, and
(2) the business makes bona fide efforts to be an enterprise
zone business. The start-up period is the period that ends with
the start of the first tax year beginning more than two years
after the later of (1) the issue date of the bond issue
financing the qualified zone property, and (2) the date this
property is first placed in service (or, if earlier, the date
that is three years after the issue date).\274\
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\274\Sec. 1394(b)(3).
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Second, a business that qualifies as an enterprise zone
business at the end of the start-up period must continue to
qualify during a testing period that ends three tax years after
the start-up period ends. After the three-year testing period,
a business will continue to be treated as an enterprise zone
business as long as 35 percent of its employees are residents
of an empowerment zone or enterprise community.
The face amount of the bonds may not exceed $60 million for
an empowerment zone in a rural area, $130 million for an
empowerment zone in an urban area with zone population of less
than 100,000, and $230 million for an empowerment zone in an
urban area with zone population of at least 100,000.
Elective rollover of capital gain from the sale or exchange of any
qualified empowerment zone asset
Taxpayers can elect to defer recognition of gain on the
sale of a qualified empowerment zone asset\275\ held for more
than one year and replaced within 60 days by another qualified
empowerment zone asset in the same zone.\276\ The deferral is
accomplished by reducing the basis of the replacement asset by
the amount of the gain recognized on the sale of the asset.
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\275\The term ``qualified empowerment zone asset'' means any
property which would be a qualified community asset (as defined in
section 1400F, relating to certain tax benefits for renewal
communities) if in section 1400F: (i) references to empowerment zones
were substituted for references to renewal communities, (ii) references
to enterprise zone businesses (as defined in section 1397C) were
substituted for references to renewal community businesses, and (iii)
the date of the enactment of this paragraph were substituted for
``December 31, 2001'' each place it appears. Sec. 1397B(b)(1)(A).
\276\Sec. 1397B.
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A ``qualified community asset'' includes: (1) qualified
community stock (meaning original-issue stock purchased for
cash in an enterprise zone business), (2) a qualified community
partnership interest (meaning a partnership interest acquired
for cash in an enterprise zone business), and (3) qualified
community business property (meaning tangible property
originally used in a enterprise zone business by the taxpayer)
that is purchased or substantially improved after the date of
the enactment of this paragraph.
Partial exclusion of capital gains on certain small business stock
Generally, individuals may exclude a percentage of gain
from the sale of certain small business stock acquired at
original issue and held at least five years.\277\ For stock
acquired prior to February 18, 2009, or after December 31,
2013, the percentage is generally 50 percent, except that for
empowerment zone stock the percentage is 60 percent for gain
attributable to periods before January 1, 2019. For stock
acquired after February 17, 2009, and before January 1, 2014, a
higher percentage (either 75-percent or 100-percent) applies to
all small business stock with no additional percentage for
empowerment zone stock.\278\
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\277\Sec. 1202.
\278\Another provision extends the 100-percent exclusion to all
small business stock acquired during 2014.
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Other tax incentives
Other incentives not specific to empowerment zones but
beneficial to these areas include the work opportunity tax
credit for employers based on the first year of employment of
certain targeted groups, including empowerment zone residents
(up to $2,400 per employee), and qualified zone academy bonds
for certain public schools located in an empowerment zone, or
expected (as of the date of bond issuance) to have at least 35
percent of its students receiving free or reduced lunches.
REASONS FOR CHANGE
The Committee believes that it continues to be important to
provide tax incentives to individuals and businesses in
empowerment zones and that it is appropriate to extend such
incentives for an additional two years.
EXPLANATION OF PROVISION
The provision extends for two years, through December 31,
2015, the period for which the designation of an empowerment
zone is in effect, thus extending for two years the empowerment
zone tax incentives, including the wage credit, increased
section 179 expensing for qualifying equipment, tax-exempt bond
financing, and deferral of capital gains tax on sale of
qualified assets replaced with other qualified assets. In the
case of a designation of an empowerment zone the nomination for
which included a termination date which is December 31, 2013,
termination shall not apply with respect to such designation if
the entity which made such nomination amends the nomination to
provide for a new termination date in such manner as the
Secretary may provide.
EFFECTIVE DATE
The provision applies to periods after December 31, 2013.
30. Extension of temporary increase in limit on cover over of rum
excise taxes to Puerto Rico and the Virgin Islands (sec. 140 of the
bill and sec. 7652(f) of the Code)
PRESENT LAW
A $13.50 per proof gallon\279\ excise tax is imposed on
distilled spirits produced in or imported into the United
States.\280\ The excise tax does not apply to distilled spirits
that are exported from the United States, including exports to
U.S. possessions (e.g., Puerto Rico and the Virgin
Islands).\281\
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\279\A proof gallon is a liquid gallon consisting of 50 percent
alcohol. See sec. 5002(a)(10) and (11).
\280\Sec. 5001(a)(1).
\281\Secs. 5214(a)(1)(A), 5002(a)(15), 7653(b) and (c).
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The Code provides for cover over (payment) to Puerto Rico
and the Virgin Islands of the excise tax imposed on rum
imported (or brought) into the United States, without regard to
the country of origin.\282\ The amount of the cover over is
limited under Code section 7652(f) to $10.50 per proof gallon
($13.25 per proof gallon before January 1, 2014).
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\282\Secs. 7652(a)(3), (b)(3), and (e)(1). One percent of the
amount of excise tax collected from imports into the United States of
articles produced in the Virgin Islands is retained by the United
States under section 7652(b)(3).
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Tax amounts attributable to shipments to the United States
of rum produced in Puerto Rico are covered over to Puerto Rico.
Tax amounts attributable to shipments to the United States of
rum produced in the Virgin Islands are covered over to the
Virgin Islands. Tax amounts attributable to shipments to the
United States of rum produced in neither Puerto Rico nor the
Virgin Islands are divided and covered over to the two
possessions under a formula.\283\ Amounts covered over to
Puerto Rico and the Virgin Islands are deposited into the
treasuries of the two possessions for use as those possessions
determine.\284\ All of the amounts covered over are subject to
the limitation.
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\283\Sec. 7652(e)(2).
\284\Secs. 7652(a)(3), (b)(3), and (e)(1).
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REASONS FOR CHANGE
The Committee believes that, notwithstanding expiration of
the Puerto Rico and possession tax credit and the Puerto Rico
economic activity credit for taxable years beginning after
2005, the Code should grant a tax benefit for production in
Puerto Rico. Consequently, the Committee believes that it is
appropriate to treat Puerto Rico as part of the United States
for purposes of the domestic production activities deduction.
EXPLANATION OF PROVISION
The provision suspends for two years the $10.50 per proof
gallon limitation on the amount of excise taxes on rum covered
over to Puerto Rico and the Virgin Islands. Under the
provision, the cover over limitation of $13.25 per proof gallon
is extended for rum brought into the United States after
December 31, 2013 and before January 1, 2016. After December
31, 2015, the cover over amount reverts to $10.50 per proof
gallon.
EFFECTIVE DATE
The provision is effective for articles brought into the
United States after December 31, 2013.
31. Extension of American Samoa economic development credit (sec. 141
of the bill and sec. 119 of Pub. L. No. 109-432)
PRESENT LAW
A domestic corporation that was an existing credit claimant
with respect to American Samoa and that elected the application
of section 936 for its last taxable year beginning before
January 1, 2006 is allowed a credit based on the corporation's
economic activity-based limitation with respect to American
Samoa. The credit is not part of the Code but is computed based
on the rules of sections 30A and 936. The credit is allowed for
the first eight taxable years of a corporation that begin after
December 31, 2005, and before January 1, 2014.
A corporation was an existing credit claimant with respect
to a American Samoa if (1) the corporation was engaged in the
active conduct of a trade or business within American Samoa on
October 13, 1995, and (2) the corporation elected the benefits
of the possession tax credit\285\ in an election in effect for
its taxable year that included October 13, 1995.\286\ A
corporation that added a substantial new line of business
(other than in a qualifying acquisition of all the assets of a
trade or business of an existing credit claimant) ceased to be
an existing credit claimant as of the close of the taxable year
ending before the date on which that new line of business was
added.
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\285\For taxable years beginning before January 1, 2006, certain
domestic corporations with business operations in the U.S. possessions
were eligible for the possession tax credit. Secs. 27(b), 936. This
credit offset the U.S. tax imposed on certain income related to
operations in the U.S. possessions. Subject to certain limitations, the
amount of the possession tax credit allowed to any domestic corporation
equaled the portion of that corporation's U.S. tax that was
attributable to the corporation's non-U.S. source taxable income from
(1) the active conduct of a trade or business within a U.S. possession,
(2) the sale or exchange of substantially all of the assets that were
used in such a trade or business, or (3) certain possessions
investment. No deduction or foreign tax credit was allowed for any
possessions or foreign tax paid or accrued with respect to taxable
income that was taken into account in computing the credit under
section 936.
Under the economic activity-based limit, the amount of the credit
could not exceed an amount equal to the sum of (1) 60 percent of the
taxpayer's qualified possession wages and allocable employee fringe
benefit expenses, (2) 15 percent of depreciation allowances with
respect to short-life qualified tangible property, plus 40 percent of
depreciation allowances with respect to medium-life qualified tangible
property, plus 65 percent of depreciation allowances with respect to
long-life qualified tangible property, and (3) in certain cases, a
portion of the taxpayer's possession income taxes. A taxpayer could
elect, instead of the economic activity-based limit, a limit equal to
the applicable percentage of the credit that otherwise would have been
allowable with respect to possession business income, beginning in
1998, the applicable percentage was 40 percent.
To qualify for the possession tax credit for a taxable year, a
domestic corporation was required to satisfy two conditions. First, the
corporation was required to derive at least 80 percent of its gross
income for the three-year period immediately preceding the close of the
taxable year from sources within a possession. Second, the corporation
was required to derive at least 75 percent of its gross income for that
same period from the active conduct of a possession business. Sec.
936(a)(2). The section 936 credit generally expired for taxable years
beginning after December 31, 2005.
\286\A corporation will qualify as an existing credit claimant if
it acquired all the assets of a trade or business of a corporation that
(1) actively conducted that trade or business in a possession on
October 13, 1995, and (2) had elected the benefits of the possession
tax credit in an election in effect for the taxable year that included
October 13, 1995.
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The amount of the credit allowed to a qualifying domestic
corporation under the provision is equal to the sum of the
amounts used in computing the corporation's economic activity-
based limitation with respect to American Samoa, except that no
credit is allowed for the amount of any American Samoa income
taxes. Thus, for any qualifying corporation the amount of the
credit equals the sum of (1) 60 percent of the corporation's
qualified American Samoa wages and allocable employee fringe
benefit expenses and (2) 15 percent of the corporation's
depreciation allowances with respect to short-life qualified
American Samoa tangible property, plus 40 percent of the
corporation's depreciation allowances with respect to medium-
life qualified American Samoa tangible property, plus 65
percent of the corporation's depreciation allowances with
respect to long-life qualified American Samoa tangible
property.
The section 936(c) rule denying a credit or deduction for
any possessions or foreign tax paid with respect to taxable
income taken into account in computing the credit under section
936 does not apply with respect to the credit allowed by the
provision.
For taxable years beginning after December 31, 2011 the
credit rules are modified in two ways. First, domestic
corporations with operations in American Samoa are allowed the
credit even if those corporations are not existing credit
claimants. Second, the credit is available to a domestic
corporation (either an existing credit claimant or a new credit
claimant) only if, in addition to satisfying all the present
law requirements for claiming the credit, the corporation also
has qualified production activities income (as defined in
section 199(c) by substituting ``American Samoa'' for ``the
United States'' in each place that latter term appears).
In the case of a corporation that is an existing credit
claimant with respect to American Samoa and that elected the
application of section 936 for its last taxable year beginning
before January 1, 2006, the credit applies to the first eight
taxable years of the corporation which begin after December 31,
2005, and before January 1, 2014. For any other corporation,
the credit applies to the first two taxable years of that
corporation which begin after December 31, 2011 and before
January 1, 2014.
REASONS FOR CHANGE
The Committee believes that, notwithstanding expiration of
the possession tax credit for taxable years beginning after
2005, the U.S. Federal tax law should encourage economic
activity in American Samoa. Consequently, the Committee
believes it is appropriate to extend the American Samoa
economic development credit.
EXPLANATION OF PROVISION
The provision extends the credit to apply (a) in the case
of a corporation that is an existing credit claimant with
respect to American Samoa and that elected the application of
section 936 for its last taxable year beginning before January
1, 2006, to the first ten taxable years of the corporation
which begin after December 31, 2005, and before January 1, 2016
and (b) in the case of any other corporation, to the first four
taxable years of the corporation which begin after December 31,
2011 and before January 1, 2016.
EFFECTIVE DATE
The provision applies to taxable years beginning after
December 31, 2013.
C. Subtitle C--Energy Tax Extenders
1. Extension and modification of credit for nonbusiness energy property
(sec. 151 of the bill and sec. 25C of the Code)
PRESENT LAW
Present law provides a 10-percent credit for the purchase
of qualified energy efficiency improvements to existing
homes.\287\ A qualified energy efficiency improvement is any
energy efficiency building envelope component (1) that meets or
exceeds the prescriptive criteria for such a component
established by the 2009 International Energy Conservation Code
as such Code (including supplements) is in effect on the date
of the enactment of the American Recovery and Reinvestment Tax
Act of 2009\288\ (or, in the case of windows, skylights and
doors, and metal roofs with appropriate pigmented coatings or
asphalt roofs with appropriate cooling granules, meets the
Energy Star program requirements); (2) that is installed in or
on a dwelling located in the United States and owned and used
by the taxpayer as the taxpayer's principal residence; (3) the
original use of which commences with the taxpayer; and (4) that
reasonably can be expected to remain in use for at least five
years. The credit is nonrefundable.
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\287\Sec. 25C.
\288\Pub. L. No. 111-5, February 17, 2009.
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Building envelope components are: (1) insulation materials
or systems which are specifically and primarily designed to
reduce the heat loss or gain for a dwelling and which meet the
prescriptive criteria for such material or system established
by the 2009 International Energy Conservation Code, as such
Code (including supplements) is in effect on the date of the
enactment of the American Recovery and Reinvestment Tax Act of
2009;\289\ (2) exterior windows (including skylights) and
doors; and (3) metal or asphalt roofs with appropriate
pigmented coatings or cooling granules that are specifically
and primarily designed to reduce the heat gain for a dwelling.
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\289\Ibid.
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Additionally, present law provides specified credits for
the purchase of specific energy efficient property originally
placed in service by the taxpayer during the taxable year. The
allowable credit for the purchase of certain property is (1)
$50 for each advanced main air circulating fan, (2) $150 for
each qualified natural gas, propane, or oil furnace or hot
water boiler, and (3) $300 for each item of energy efficient
building property.
An advanced main air circulating fan is a fan used in a
natural gas, propane, or oil furnace and which has an annual
electricity use of no more than two percent of the total annual
energy use of the furnace (as determined in the standard
Department of Energy test procedures).
A qualified natural gas, propane, or oil furnace or hot
water boiler is a natural gas, propane, or oil furnace or hot
water boiler with an annual fuel utilization efficiency rate of
at least 95.
Energy-efficient building property is: (1) an electric heat
pump water heater which yields an energy factor of at least 2.0
in the standard Department of Energy test procedure, (2) an
electric heat pump which achieves the highest efficiency tier
established by the Consortium for Energy Efficiency, as in
effect on January 1, 2009,\290\ (3) a central air conditioner
which achieves the highest efficiency tier established by the
Consortium for Energy Efficiency as in effect on January 1,
2009,\291\ (4) a natural gas, propane, or oil water heater
which has an energy factor of at least 0.82 or thermal
efficiency of at least 90 percent, and (5) biomass fuel
property.
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\290\These standards are a seasonal energy efficiency ratio
(``SEER'') greater than or equal to 15, an energy efficiency ratio
(``EER'') greater than or equal to 12.5, and heating seasonal
performance factor (``HSPF'') greater than or equal to 8.5 for split
heat pumps, and SEER greater than or equal to 14, EER greater than or
equal to 12, and HSPF greater than or equal to 8.0 for packaged heat
pumps.
\291\These standards are a SEER greater than or equal to 16 and EER
greater than or equal to 13 for split systems, and SEER greater than or
equal to 14 and EER greater than or equal to 12 for packaged systems.
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Biomass fuel property is a stove that burns biomass fuel to
heat a dwelling unit located in the United States and used as a
principal residence by the taxpayer, or to heat water for such
dwelling unit, and that has a thermal efficiency rating of at
least 75 percent. Biomass fuel is any plant-derived fuel
available on a renewable or recurring basis, including
agricultural crops and trees, wood and wood waste and residues
(including wood pellets), plants (including aquatic plants),
grasses, residues, and fibers.
The credit is available for property placed in service
prior to January 1, 2014. The maximum credit for a taxpayer for
all taxable years is $500, and no more than $200 of such credit
may be attributable to expenditures on windows.
The taxpayer's basis in the property is reduced by the
amount of the credit. Special proration rules apply in the case
of jointly owned property, condominiums, and tenant-
stockholders in cooperative housing corporations. If less than
80 percent of the property is used for nonbusiness purposes,
only that portion of expenditures that is used for nonbusiness
purposes is taken into account.
For purposes of determining the amount of expenditures made
by any individual with respect to any dwelling unit,
expenditures which are made from subsidized energy financing
are not taken into account. The term ``subsidized energy
financing'' means financing provided under a Federal, State, or
local program a principal purpose of which is to provide
subsidized financing for projects designed to conserve or
produce energy.
REASONS FOR CHANGE
The Committee recognizes that residential energy use for
heating and cooling represents a large share of national energy
consumption, and accordingly believes that measures to reduce
heating and cooling energy demands have the potential to
substantially reduce national energy consumption. The Committee
further recognizes that many existing homes continue to be
inadequately insulated and have inefficient heating,
ventilation, and cooling equipment.
Therefore, the Committee believes that a two year extension
of the nonbusiness energy efficient property credit is an
appropriate measure to continue to encourage upgrades to the
energy efficiency of existing housing stock. The Committee
further believes that adjustments of certain efficiency
standards for qualifying property are necessary to ensure that
the efficiency goals are achievable, but that significant
energy savings above the norm are necessary in order to qualify
for any credit.
EXPLANATION OF PROVISION
The provision extends the credit for two years, through
December 31, 2015.
The provision expands qualifying property to include all
roof and roof products that meet Energy Star program
guidelines. The provision modifies certain efficiency standards
for qualifying property, as follows:
(1) Windows, skylights, and doors must meet Energy Star
version 6.0 standards.
(2) Natural gas, propane, or oil tankless water heaters
must have an energy factor of at least 0.9 or a thermal
efficiency of at least 90 percent. Natural gas, propane, or oil
storage water heaters must have an energy factor of at least
0.8 or a thermal efficiency of at least 90 percent. Storage
water heaters must have storage capacity of greater than 20
gallons but less than or equal to 55 gallons to claim the
credit.
(3) Biomass fuel stoves must have thermal efficiency of 75
percent evaluated at the higher heating value and tested in
accordance with Canadian Standards Administration B415.1 test
protocol.
(4) Oil hot water boilers must have an annual fuel
utilization efficiency not less than 90.
EFFECTIVE DATE
The provision is effective for property placed in service
after December 31, 2013.
2. Extension of credit for 2-wheeled plug-in electric vehicles (sec.
152 of the bill and sec. 30D of the Code)
PRESENT LAW
A 10-percent credit is available for qualifying plug-in
electric motorcycles and three-wheeled vehicles.\292\
Qualifying two- or three-wheeled vehicles must have a battery
capacity of at least 2.5 kilowatt-hours, be manufactured
primarily for use on public streets, roads, and highways, and
be capable of achieving speeds of at least 45 miles per hour.
The maximum credit for any qualifying vehicle is $2,500. The
credit is part of the general business credit. The credit is
available for vehicles acquired before January 1, 2014.
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\292\Sec. 30D(g).
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REASONS FOR CHANGE
The Committee believes that further investments in advanced
technology vehicles are necessary to transform automotive
transportation in the United States to be cleaner, more fuel
efficient, and less reliant on petroleum fuels. For this
reason, the Committee believes the credit for electric
motorcycles should be extended.
EXPLANATION OF PROVISION
The provision extends the credit for electric motorcycles
for two years, through December 31, 2015. The credit for
electric three-wheeled vehicles is not extended.
EFFECTIVE DATE
The provision is effective for vehicles acquired after
December 31, 2013.
3. Extension of second generation biofuel producer credit (sec. 153 of
the bill and sec. 40(b)(6) of the Code)
PRESENT LAW
The second generation biofuel producer credit is a
nonrefundable income tax credit for each gallon of qualified
second generation biofuel fuel production of the producer for
the taxable year. The amount of the credit per gallon is $1.01.
The provision does not apply to fuel sold or used after
December 31, 2013.
``Qualified second generation biofuel production'' is any
second generation biofuel which is produced by the taxpayer and
which, during the taxable year, is: (1) sold by the taxpayer to
another person (a) for use by such other person in the
production of a qualified second generation biofuel mixture in
such person's trade or business (other than casual off-farm
production), (b) for use by such other person as a fuel in a
trade or business, or (c) who sells such second generation
biofuel at retail to another person and places such cellulosic
biofuel in the fuel tank of such other person; or (2) used by
the producer for any purpose described in (1)(a), (b), or
(c).\293\ Special rules apply for fuel derived from algae.
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\293\In addition, for fuels derived from algae, cyanobacterial or
lemna, a special rule provides that qualified second generation biofuel
includes fuel that is sold by the taxpayer to another person for
refining by such other person into a fuel that meets the registration
requirements for fuels and fuel additives under section 211 of the
Clean Air Act.
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``Second generation biofuel'' means any liquid fuel that
(1) is produced in the United States and used as fuel in the
United States, (2) is derived by or from qualified feedstocks
and (3) meets the registration requirements for fuels and fuel
additives established by the Environmental Protection Agency
(``EPA'') under section 211 of the Clean Air Act. ``Qualified
feedstock'' means any lignocellulosic or hemicellulosic matter
that is available on a renewable or recurring basis, and any
cultivated algae, cyanobacteria or lemna. Second generation
biofuel does not include fuels that (1) are more than four
percent (determined by weight) water and sediment in any
combination, (2) have an ash content of more than one percent
(determined by weight), or (3) have an acid number greater than
25 (``unprocessed or excluded fuels''). It also does not
include any alcohol with a proof of less than 150.
The second generation biofuel producer credit cannot be
claimed unless the taxpayer is registered by the Internal
Revenue Service (``IRS'') as a producer of second generation
biofuel. Second generation biofuel eligible for the section 40
credit is precluded from qualifying as biodiesel, renewable
diesel, or alternative fuel for purposes of the applicable
income tax credit, excise tax credit, or payment provisions
relating to those fuels.
Because it is a credit under section 40(a), the second
generation biofuel producer credit is part of the general
business credits in section 38. However, the credit can only be
carried forward three taxable years after the termination of
the credit. The credit is also allowable against the
alternative minimum tax. Under section 87, the credit is
included in gross income.
REASONS FOR CHANGE
The Committee believes that extending this production
credit will encourage the industry to continue development of
these fuels and allow time for business planning.
EXPLANATION OF PROVISION
The provision extends the credit for two years, through
December 31, 2015.
EFFECTIVE DATE
The provision is effective for qualified second generation
biofuel production after December 31, 2013.
4. Extension of incentives for biodiesel and renewable diesel (secs.
154 and 311(a) and (e) of the bill and secs. 40A, 6426 and 6427(e) of
the Code)
PRESENT LAW
Biodiesel
Present law provides an income tax credit for biodiesel
fuels (the ``biodiesel fuels credit'').\294\ The biodiesel
fuels credit is the sum of three credits: (1) the biodiesel
mixture credit, (2) the biodiesel credit, and (3) the small
agri-biodiesel producer credit. The biodiesel fuels credit is
treated as a general business credit. The amount of the
biodiesel fuels credit is includible in gross income. The
biodiesel fuels credit is coordinated to take into account
benefits from the biodiesel excise tax credit and payment
provisions discussed below. The credit does not apply to fuel
sold or used after December 31, 2013.
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\294\Sec. 40A.
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Biodiesel is monoalkyl esters of long chain fatty acids
derived from plant or animal matter that meet (1) the
registration requirements established by the EPA under section
211 of the Clean Air Act (42 U.S.C. sec. 7545) and (2) the
requirements of the American Society of Testing and Materials
(``ASTM'') D6751. Agri-biodiesel is biodiesel derived solely
from virgin oils including oils from corn, soybeans, sunflower
seeds, cottonseeds, canola, crambe, rapeseeds, safflowers,
flaxseeds, rice bran, mustard seeds, camelina, or animal fats.
Biodiesel may be taken into account for purposes of the
credit only if the taxpayer obtains a certification (in such
form and manner as prescribed by the Secretary) from the
producer or importer of the biodiesel that identifies the
product produced and the percentage of biodiesel and agri-
biodiesel in the product.
Biodiesel mixture credit
The biodiesel mixture credit is $1.00 for each gallon of
biodiesel (including agri-biodiesel) used by the taxpayer in
the production of a qualified biodiesel mixture. A qualified
biodiesel mixture is a mixture of biodiesel and diesel fuel
that is (1) sold by the taxpayer producing such mixture to any
person for use as a fuel, or (2) used as a fuel by the taxpayer
producing such mixture. The sale or use must be in the trade or
business of the taxpayer and is to be taken into account for
the taxable year in which such sale or use occurs. No credit is
allowed with respect to any casual off-farm production of a
qualified biodiesel mixture.
Per IRS guidance a mixture need only contain 1/10th of one
percent of diesel fuel to be a qualified mixture.\295\ Thus, a
qualified biodiesel mixture can contain 99.9 percent biodiesel
and 0.1 percent diesel fuel.
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\295\Notice 2005-62, I.R.B. 2005-35, 443 (2005). ``A biodiesel
mixture is a mixture of biodiesel and diesel fuel containing at least
0.1 percent (by volume) of diesel fuel. Thus, for example, a mixture of
999 gallons of biodiesel and 1 gallon of diesel fuel is a biodiesel
mixture.''
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Biodiesel credit (B-100)
The biodiesel credit is $1.00 for each gallon of biodiesel
that is not in a mixture with diesel fuel (100 percent
biodiesel or B-100) and which during the taxable year is (1)
used by the taxpayer as a fuel in a trade or business or (2)
sold by the taxpayer at retail to a person and placed in the
fuel tank of such person's vehicle.
Small agri-biodiesel producer credit
The Code provides a small agri-biodiesel producer income
tax credit, in addition to the biodiesel and biodiesel mixture
credits. The credit is 10 cents per gallon for up to 15 million
gallons of agri-biodiesel produced by small producers, defined
generally as persons whose agri-biodiesel production capacity
does not exceed 60 million gallons per year. The agri-biodiesel
must (1) be sold by such producer to another person (a) for use
by such other person in the production of a qualified biodiesel
mixture in such person's trade or business (other than casual
off-farm production), (b) for use by such other person as a
fuel in a trade or business, or, (c) who sells such agri-
biodiesel at retail to another person and places such agri-
biodiesel in the fuel tank of such other person; or (2) used by
the producer for any purpose described in (a), (b), or (c).
Biodiesel mixture excise tax credit
The Code also provides an excise tax credit for biodiesel
mixtures.\296\ The credit is $1.00 for each gallon of biodiesel
used by the taxpayer in producing a biodiesel mixture for sale
or use in a trade or business of the taxpayer. A biodiesel
mixture is a mixture of biodiesel and diesel fuel that (1) is
sold by the taxpayer producing such mixture to any person for
use as a fuel or (2) is used as a fuel by the taxpayer
producing such mixture. No credit is allowed unless the
taxpayer obtains a certification (in such form and manner as
prescribed by the Secretary) from the producer of the biodiesel
that identifies the product produced and the percentage of
biodiesel and agri-biodiesel in the product.\297\
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\296\Sec. 6426(c).
\297\Sec. 6426(c)(4).
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The credit is not available for any sale or use for any
period after December 31, 2013. This excise tax credit is
coordinated with the income tax credit for biodiesel such that
credit for the same biodiesel cannot be claimed for both income
and excise tax purposes.
Payments with respect to biodiesel fuel mixtures
If any person produces a biodiesel fuel mixture in such
person's trade or business, the Secretary is to pay such person
an amount equal to the biodiesel mixture credit.\298\ The
biodiesel fuel mixture credit must first be taken against tax
liability for taxable fuels. To the extent the biodiesel fuel
mixture credit exceeds such tax liability, the excess may be
received as a payment. Thus, if the person has no section 4081
liability, the credit is refundable. The Secretary is not
required to make payments with respect to biodiesel fuel
mixtures sold or used after December 31, 2013.
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\298\Sec. 6427(e).
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Renewable diesel
``Renewable diesel'' is liquid fuel that (1) is derived
from biomass (as defined in section 45K(c)(3)), (2) meets the
registration requirements for fuels and fuel additives
established by the EPA under section 211 of the Clean Air Act,
and (3) meets the requirements of the ASTM D975 or D396, or
equivalent standard established by the Secretary. ASTM D975
provides standards for diesel fuel suitable for use in diesel
engines. ASTM D396 provides standards for fuel oil intended for
use in fuel-oil burning equipment, such as furnaces. Renewable
diesel also includes fuel derived from biomass that meets the
requirements of a Department of Defense specification for
military jet fuel or an ASTM specification for aviation turbine
fuel.
For purposes of the Code, renewable diesel is generally
treated the same as biodiesel. In the case of renewable diesel
that is aviation fuel, kerosene is treated as though it were
diesel fuel for purposes of a qualified renewable diesel
mixture. Like biodiesel, the incentive may be taken as an
income tax credit, an excise tax credit, or as a payment from
the Secretary.\299\ The incentive for renewable diesel is $1.00
per gallon. There is no small producer credit for renewable
diesel. The incentives for renewable diesel expired after
December 31, 2013.
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\299\Secs. 40A(f), 6426(c), and 6427(e).
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REASONS FOR CHANGE
The Committee believes that extending the biodiesel and
renewable diesel incentives through 2015 will give the industry
certainty and allow for business planning.
EXPLANATION OF PROVISION
The provision extends the income tax credit, excise tax
credit and payment provisions for biodiesel and renewable
diesel for two years (through December 31, 2015).
In light of the retroactive nature of the provision, as it
relates to fuel sold or used in 2014, the provision creates a
special rule to address claims regarding excise credits and
claims for payment associated with periods occurring during
2014. In particular the provision directs the Secretary to
issue guidance within 30 days of the date of enactment. Such
guidance is to provide for a one-time submission of claims
covering periods occurring during 2014. The guidance is to
provide for a 180-day period for the submission of such claims
(in such manner as prescribed by the Secretary) to begin no
later than 30 days after such guidance is issued. Such claims
shall be paid by the Secretary of the Treasury not later than
60 days after receipt. If the claim is not paid within 60 days
of the date of the filing, the claim shall be paid with
interest from such date determined by using the overpayment
rate and method under section 6621 of the Code.
EFFECTIVE DATE
The provision is effective for sales and uses after
December 31, 2013.
5. Extension and modification of credit for the production of Indian
coal (sec. 155 of the bill and sec. 45(e)(10) of the Code)
PRESENT LAW
A credit is available for the production of Indian coal
sold to an unrelated third party from a qualified facility for
a seven-year period beginning January 1, 2006, and ending
December 31, 2013. The amount of the credit for Indian coal is
$1.50 per ton for the first four years of the seven-year period
and $2.00 per ton for the last three years of the seven-year
period. Beginning in calendar years after 2006, the credit
amounts are indexed annually for inflation using 2005 as the
base year. The credit amount for 2014 is $2.317 per ton.
A qualified Indian coal facility is a facility placed in
service before January 1, 2009, that produces coal from
reserves that on June 14, 2005, were owned by a Federally
recognized tribe of Indians or were held in trust by the United
States for a tribe or its members.
The credit is a component of the general business
credit,\300\ allowing excess credits to be carried back one
year and forward up to 20 years. The credit is also subject to
the alternative minimum tax.
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\300\Sec. 38(b)(8).
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REASONS FOR CHANGE
The Committee believes that supporting the development of
energy resources on Indian lands encourages both national
energy independence and economic growth in traditionally
disadvantaged areas. For this reason the Committee believes the
credit for Indian coal should be extended.
EXPLANATION OF PROVISION
The provision extends the credit for the production of
Indian coal for two years (through December 31, 2015). The
placed-in-service date for qualified facilities is not
extended, but the provision clarifies that qualified Indian
coal facilities that are leased or subleased after December 31,
2008, do not lose their eligibility as a result of such lease
or sublease.
EFFECTIVE DATE
The provision is effective for Indian coal produced after
December 31, 2013.
6. Extension of credits with respect to facilities producing energy
from certain renewable resources (sec. 156 of the bill and secs. 45 and
48 of the Code)
PRESENT LAW
Renewable electricity production credit
An income tax credit is allowed for the production of
electricity from qualified energy resources at qualified
facilities (the ``renewable electricity production
credit'').\301\ Qualified energy resources comprise wind,
closed-loop biomass, open-loop biomass, geothermal energy,
solar energy, small irrigation power, municipal solid waste,
qualified hydropower production, and marine and hydrokinetic
renewable energy. Qualified facilities are, generally,
facilities that generate electricity using qualified energy
resources. To be eligible for the credit, electricity produced
from qualified energy resources at qualified facilities must be
sold by the taxpayer to an unrelated person.
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\301\Sec. 45. In addition to the renewable electricity production
credit, section 45 also provides income tax credits for the production
of Indian coal and refined coal at qualified facilities.
SUMMARY OF CREDIT FOR ELECTRICITY PRODUCED FROM CERTAIN RENEWABLE
RESOURCES
------------------------------------------------------------------------
Credit
amount for
Eligible electricity 2014\1\
production activity (sec. 45) (cents per Expiration\2\
kilowatt-
hour)
------------------------------------------------------------------------
Wind.......................... 2.3 December 31, 2013.
Closed-loop biomass........... 2.3 December 31, 2013.
Open-loop biomass (including 1.1 December 31, 2013.
agricultural livestock waste
nutrient facilities).
Geothermal.................... 2.3 December 31, 2013.
Solar (pre-2006 facilities 2.3 December 31, 2005.
only).
Small irrigation power........ 1.1 December 31, 2013.
Municipal solid waste 1.1 December 31, 2013.
(including landfill gas
facilities and trash
combustion facilities).
Qualified hydropower.......... 1.1 December 31, 2013.
Marine and hydrokinetic....... 1.1 December 31, 2013.
------------------------------------------------------------------------
\1\In general, the credit is available for electricity produced during
the first 10 years after a facility has been placed in service.
\2\Expires for property the construction of which begins after this
date.
Election to claim energy credit in lieu of renewable electricity
production credit
A taxpayer may make an irrevocable election to have certain
property which is part of a qualified renewable electricity
production facility be treated as energy property eligible for
a 30 percent investment credit under section 48. For this
purpose, qualified facilities are facilities otherwise eligible
for the renewable electricity production credit with respect to
which no credit under section 45 has been allowed. A taxpayer
electing to treat a facility as energy property may not claim
the renewable electricity production credit. The eligible basis
for the investment credit for taxpayers making this election is
the basis of the depreciable (or amortizable) property that is
part of a facility capable of generating electricity eligible
for the renewable electricity production credit.
REASONS FOR CHANGE
The Committee believes that additional incentives for the
production of electricity from renewable resources will help
limit the environmental consequences of continued reliance on
power generated using fossil fuels.
EXPLANATION OF PROVISION
The provision extends the renewable electricity production
credit and the election to claim the energy credit in lieu of
the electricity production credit for two years, through
December 31, 2015.
EFFECTIVE DATE
The provision is effective on January 1, 2014.
7. Extension of credit for energy-efficient new homes (sec. 157 of the
bill and sec. 45L of the Code)
PRESENT LAW
Present law provides a credit to an eligible contractor for
each qualified new energy-efficient home that is constructed by
the eligible contractor and acquired by a person from such
eligible contractor for use as a residence during the taxable
year. To qualify as a new energy-efficient home, the home must
be: (1) a dwelling located in the United States, (2)
substantially completed after August 8, 2005, and (3) certified
in accordance with guidance prescribed by the Secretary to have
a projected level of annual heating and cooling energy
consumption that meets the standards for either a 30-percent or
50-percent reduction in energy usage, compared to a comparable
dwelling constructed in accordance with the standards of
chapter 4 of the 2006 International Energy Conservation Code as
in effect (including supplements) on January 1, 2006, and any
applicable Federal minimum efficiency standards for equipment.
With respect to homes that meet the 30-percent standard, one-
third of such 30-percent savings must come from the building
envelope, and with respect to homes that meet the 50-percent
standard, one-fifth of such 50-percent savings must come from
the building envelope.
Manufactured homes that conform to Federal manufactured
home construction and safety standards are eligible for the
credit provided all the criteria for the credit are met. The
eligible contractor is the person who constructed the home, or
in the case of a manufactured home, the producer of such home.
The credit equals $1,000 in the case of a new home that
meets the 30-percent standard and $2,000 in the case of a new
home that meets the 50-percent standard. Only manufactured
homes are eligible for the $1,000 credit.
In lieu of meeting the standards of chapter 4 of the 2006
International Energy Conservation Code, manufactured homes
certified by a method prescribed by the Administrator of the
Environmental Protection Agency under the Energy Star Labeled
Homes program are eligible for the $1,000 credit provided
criteria (1) and (2), above, are met.
The credit applies to homes that are purchased prior to
January 1, 2014. The credit is part of the general business
credit.
REASONS FOR CHANGE
The Committee recognizes that residential energy use for
heating and cooling represents a large share of national energy
consumption, and accordingly believes that measures to reduce
heating and cooling energy requirements have the potential to
substantially reduce national energy consumption. The Committee
further recognizes that the most cost-effective time to achieve
home energy efficiency is when the home is under construction.
Accordingly, the Committee believes that a two year extension
of the energy efficient new homes credit is a cost effective
incentive to reduce national energy consumption.
EXPLANATION OF PROVISION
The provision extends the credit to homes that are acquired
prior to January 1, 2016.
EFFECTIVE DATE
The provision is effective for homes acquired after
December 31, 2013.
8. Extension of special allowance for second generation biofuel plant
property (sec. 158 of the bill and sec. 168(l) of the Code)
PRESENT LAW
Present law\302\ allows an additional first-year
depreciation deduction equal to 50 percent of the adjusted
basis of qualified second generation biofuel plant property. In
order to qualify, the property generally must be placed in
service before January 1, 2014.\303\
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\302\Sec. 168(l).
\303\Sec. 168(l)(2)(D).
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Qualified second generation biofuel plant property means
depreciable property used in the U.S. solely to produce any
liquid fuel that (1) is derived from qualified feedstocks, and
(2) meets the registration requirements for fuels and fuel
additives established by the Environmental Protection Agency
(``EPA'') under section 211 of the Clean Air Act.\304\
Qualified feedstocks means any lignocellulosic or
hemicellulosic matter that is available on a renewable or
recurring basis\305\ and any cultivated algae, cyanobacteria,
or lemna.\306\ Second generation biofuel does not include any
alcohol with a proof of less than 150 or certain unprocessed
fuel.\307\ Unprocessed fuels are fuels that (1) are more than
four percent (determined by weight) water and sediment in any
combination, (2) have an ash content of more than one percent
(determined by weight), or (3) have an acid number greater than
25.\308\
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\304\Secs. 168(l)(2)(A) and 40(b)(6)(E).
\305\For example, lignocellulosic or hemicellulosic matter that is
available on a renewable or recurring basis includes bagasse (from
sugar cane), corn stalks, and switchgrass.
\306\Sec. 40(b)(6)(F).
\307\Sec. 40(b)(6)(E)(ii) and (iii).
\308\Sec. 40(b)(6)(E)(iii).
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The additional first-year depreciation deduction is allowed
for both regular tax and alternative minimum tax purposes for
the taxable year in which the property is placed in
service.\309\ The additional first-year depreciation deduction
is subject to the general rules regarding whether an item is
subject to capitalization under section 263A. The basis of the
property and the depreciation allowances in the year of
purchase and later years are appropriately adjusted to reflect
the additional first-year depreciation deduction.\310\ In
addition, there is no adjustment to the allowable amount of
depreciation for purposes of computing a taxpayer's alternative
minimum taxable income with respect to property to which the
provision applies.\311\ A taxpayer is allowed to elect out of
the additional first-year depreciation for any class of
property for any taxable year.\312\
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\309\Sec. 168(l)(5).
\310\Sec. 168(l)(1)(B).
\311\Secs. 168(l)(5) and 168(k)(2)(G).
\312\Sec. 168(l)(3)(D).
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In order for property to qualify for the additional first-
year depreciation deduction, it must meet the following
requirements: (1) the original use of the property must
commence with the taxpayer on or after December 20, 2006; and
(2) the property must be (i) acquired by purchase (as defined
under section 179(d)) by the taxpayer after December 20, 2006,
and (ii) placed in service before January 1, 2014.\313\
Property does not qualify if a binding written contract for the
acquisition of such property was in effect on or before
December 20, 2006.
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\313\Sec. 168(l)(2).
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Property that is manufactured, constructed, or produced by
the taxpayer for use by the taxpayer qualifies if the taxpayer
begins the manufacture, construction, or production of the
property after December 20, 2006, and the property is placed in
service before January 1, 2014 (and all other requirements are
met).\314\ Property that is manufactured, constructed, or
produced for the taxpayer by another person under a contract
that is entered into prior to the manufacture, construction, or
production of the property is considered to be manufactured,
constructed, or produced by the taxpayer.
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\314\Sec. 168(l)(4) and 168(k)(2)(E).
---------------------------------------------------------------------------
Property any portion of which is financed with the proceeds
of a tax-exempt obligation under section 103 is not eligible
for the additional first-year depreciation deduction.\315\
Recapture rules apply if the property ceases to be qualified
second generation biofuel plant property.\316\
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\315\Sec. 168(l)(3)(C).
\316\Sec. 168(l)(6).
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Property with respect to which the taxpayer has elected 50
percent expensing under section 179C is not eligible for the
additional first-year depreciation deduction.\317\
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\317\Sec. 168(l)(7).
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REASONS FOR CHANGE
The Committee acknowledges that encouraging the
manufacturing of biofuels (including algae-based fuels) in the
United States is important for fostering innovative new
technology, encouraging energy independence, supporting the
commercial production of these fuels, and creating
manufacturing jobs in the United States. The Committee also
believes that this provision helps to spur new investment in
the production of chemicals using biomass as a feedstock,
thereby reducing the use of petroleum in chemical production.
EXPLANATION OF PROVISION
The provision extends the present law special depreciation
allowance for two years, to qualified second generation biofuel
plant property placed in service prior to January 1, 2016.
EFFECTIVE DATE
The provision applies to property placed in service after
December 31, 2013.
9. Extension and modification of energy efficient commercial buildings
deduction (sec. 159 of the bill and sec. 179D of the Code)
PRESENT LAW
In general
Code section 179D provides an election under which a
taxpayer may take an immediate deduction equal to energy-
efficient commercial building property expenditures made by the
taxpayer. Energy-efficient commercial building property is
defined as property (1) which is installed on or in any
building located in the United States that is within the scope
of Standard 90.1-2001 of the American Society of Heating,
Refrigerating, and Air Conditioning Engineers and the
Illuminating Engineering Society of North America (``ASHRAE/
IESNA''), (2) which is installed as part of (i) the interior
lighting systems, (ii) the heating, cooling, ventilation, and
hot water systems, or (iii) the building envelope, and (3)
which is certified as being installed as part of a plan
designed to reduce the total annual energy and power costs with
respect to the interior lighting systems, heating, cooling,
ventilation, and hot water systems of the building by 50
percent or more in comparison to a reference building which
meets the minimum requirements of Standard 90.1-2001 (as in
effect on April 2, 2003). The deduction is limited to an amount
equal to $1.80 per square foot of the property for which such
expenditures are made. The deduction is allowed in the year in
which the property is placed in service.
Certain certification requirements must be met in order to
qualify for the deduction. The Secretary, in consultation with
the Secretary of Energy, will promulgate regulations that
describe methods of calculating and verifying energy and power
costs using qualified computer software based on the provisions
of the 2005 California Nonresidential Alternative Calculation
Method Approval Manual or, in the case of residential property,
the 2005 California Residential Alternative Calculation Method
Approval Manual.
The Secretary is granted authority to prescribe procedures
for the inspection and testing for compliance of buildings that
are comparable, given the difference between commercial and
residential buildings, to the requirements in the Mortgage
Industry National Accreditation Procedures for Home Energy
Rating Systems.\318\ Individuals qualified to determine
compliance shall only be those recognized by one or more
organizations certified by the Secretary for such purposes.
---------------------------------------------------------------------------
\318\See IRS Notice 2006-52, 2006-1 C.B. 1175, June 2, 2006; IRS
2008-40, 2008-14 I.R.B. 725 March 11, 2008.
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For energy-efficient commercial building property
expenditures made by a public entity, such as public schools,
the deduction may be allocated to the person primarily
responsible for designing the property in lieu of the public
entity.
If a deduction is allowed under this section, the basis of
the property is reduced by the amount of the deduction.
The deduction is effective for property placed in service
prior to January 1, 2014.
Partial allowance of deduction
System-specific deductions
In the case of a building that does not meet the overall
building requirement of 50-percent energy savings, a partial
deduction is allowed with respect to each separate building
system that comprises energy efficient property and which is
certified by a qualified professional as meeting or exceeding
the applicable system-specific savings targets established by
the Secretary. The applicable system-specific savings targets
to be established by the Secretary are those that would result
in a total annual energy savings with respect to the whole
building of 50 percent, if each of the separate systems met the
system specific target. The separate building systems are (1)
the interior lighting system, (2) the heating, cooling,
ventilation and hot water systems, and (3) the building
envelope. The maximum allowable deduction is $0.60 per square
foot for each separate system.
Interim rules for lighting systems
In general, in the case of system-specific partial
deductions, no deduction is allowed until the Secretary
establishes system-specific targets.\319\ However, in the case
of lighting system retrofits, until such time as the Secretary
issues final regulations, the system-specific energy savings
target for the lighting system is deemed to be met by a
reduction in lighting power density of 40 percent (50 percent
in the case of a warehouse) of the minimum requirements in
Table 9.3.1.1 or Table 9.3.1.2 of ASHRAE/IESNA Standard 90.1-
2001. Also, in the case of a lighting system that reduces
lighting power density by 25 percent, a partial deduction of 30
cents per square foot is allowed. A pro-rated partial deduction
is allowed in the case of a lighting system that reduces
lighting power density between 25 percent and 40 percent.
Certain lighting level and lighting control requirements must
also be met in order to qualify for the partial lighting
deductions under the interim rule.
---------------------------------------------------------------------------
\319\IRS Notice 2008-40, Supra, set a target of a 10-percent
reduction in total energy and power costs with respect to the building
envelope, and 20 percent each with respect to the interior lighting
system and the heating, cooling, ventilation and hot water systems. IRS
Notice 2012-26 (2012-17 I.R.B. 847 April 23, 2012) established new
targets of 10-percent reduction in total energy and power costs with
respect to the building envelope, 25 percent with respect to the
interior lighting system and 15 percent with respect to the heating,
cooling, ventilation and hot water systems, effective beginning March
12, 2012. The targets from Notice 2008-40 may continue to be used until
December 31, 2013, but only the new targets of Notice 2012-26 will be
available under any extension of section 179D beyond December 31, 2013.
---------------------------------------------------------------------------
REASONS FOR CHANGE
The Committee recognizes that commercial buildings consume
a significant amount of energy resources and that reductions in
commercial energy use have the potential to significantly
reduce national energy consumption. The Committee believes that
a two year extension of this provision will continue to
encourage construction of buildings that are significantly more
energy efficient than the norm, thereby contributing to
decreased energy consumption. For the purpose of achieving
parity with other government entities, the Committee believes
that tribal governments should be allowed to allocate the
deduction to the person primarily responsible for designing the
property, in the same manner as is currently allowed for other
public property. In order to extend the reach of this provision
and further reduce energy consumption, the Committee also
believes that it is appropriate to allow non-profits (as
defined in section 501(c)(3)) to allocate the deduction in this
manner. Finally, given that nine years have passed since the
adoption of the energy efficient commercial building deduction,
the Committee believes it is necessary to update the efficiency
standards that must be met in order to qualify for the
deduction.
EXPLANATION OF PROVISION
The provision extends the deduction for two years, through
December 31, 2015. Additionally, the provision permits tribal
governments and non-profits (as defined in section 501(c)(3))
to allocate the deduction to the person primarily responsible
for designing the property, in the same manner as is allowed
for public property. Finally, the provision increases the
efficiency standards for property placed in service after
December 31, 2014, such that qualifying buildings are
determined relative to the ASHRAE/IESNA 90.1-2007 standards.
EFFECTIVE DATE
The provision applies to property placed in service after
December 31, 2013.
10. Extension of special rule for sales or dispositions to implement
FERC or State electric restructuring policy for qualified electric
utilities (sec. 160 of the bill and sec. 451(i) of the Code)
PRESENT LAW
A taxpayer selling property generally realizes gain to the
extent the sales price (and any other consideration received)
exceeds the taxpayer's basis in the property.\320\ The realized
gain is subject to current income tax\321\ unless the
recognition of the gain is deferred or excluded from income
under a special tax provision.\322\
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\320\See sec. 1001.
\321\See secs. 61 and 451.
\322\See, e.g., secs. 453, 1031 and 1033.
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One such special tax provision permits taxpayers to elect
to recognize gain from qualifying electric transmission
transactions ratably over an eight-year period beginning in the
year of sale if the amount realized from such sale is used to
purchase exempt utility property within the applicable
period\323\ (the ``reinvestment property'').\324\ If the amount
realized exceeds the amount used to purchase reinvestment
property, any realized gain is recognized to the extent of such
excess in the year of the qualifying electric transmission
transaction.
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\323\The applicable period for a taxpayer to reinvest the proceeds
is four years after the close of the taxable year in which the
qualifying electric transmission transaction occurs.
\324\Sec. 451(i).
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A qualifying electric transmission transaction is the sale
or other disposition of property used by a qualified electric
utility to an independent transmission company prior to January
1, 2014.\325\ A qualified electric utility is defined as an
electric utility, which as of the date of the qualifying
electric transmission transaction, is vertically integrated in
that it is both (1) a transmitting utility (as defined in the
Federal Power Act\326\) with respect to the transmission
facilities to which the election applies, and (2) an electric
utility (as defined in the Federal Power Act\327\).\328\
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\325\Sec. 451(i)(3).
\326\Sec. 3(23), 16 U.S.C. sec. 796, defines ``transmitting
utility'' as any electric utility, qualifying cogeneration facility,
qualifying small power production facility, or Federal power marketing
agency that owns or operates electric power transmission facilities
that are used for the sale of electric energy at wholesale.
\327\Sec. 3(22), 16 U.S.C. sec. 796, defines ``electric utility''
as any person or State agency (including any municipality) that sells
electric energy; such term includes the Tennessee Valley Authority, but
does not include any Federal power marketing agency.
\328\Sec. 451(i)(6).
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In general, an independent transmission company is defined
as: (1) an independent transmission provider\329\ approved by
the Federal Energy Regulatory Commission (``FERC''); (2) a
person (i) who the FERC determines under section 203 of the
Federal Power Act\330\ (or by declaratory order) is not a
``market participant'' and (ii) whose transmission facilities
are placed under the operational control of a FERC-approved
independent transmission provider no later than four years
after the close of the taxable year in which the transaction
occurs; or (3) in the case of facilities subject to the
jurisdiction of the Public Utility Commission of Texas, (i) a
person which is approved by that Commission as consistent with
Texas State law regarding an independent transmission
organization, or (ii) a political subdivision, or affiliate
thereof, whose transmission facilities are under the
operational control of an organization described in (i).\331\
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\329\For example, a regional transmission organization, an
independent system operator, or an independent transmission company.
\330\16 U.S.C. sec. 824b.
\331\Sec. 451(i)(4).
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Exempt utility property is defined as: (1) property used in
the trade or business of (i) generating, transmitting,
distributing, or selling electricity or (ii) producing,
transmitting, distributing, or selling natural gas; or (2)
stock in a controlled corporation whose principal trade or
business consists of the activities described in (1).\332\
Exempt utility property does not include any property that is
located outside of the United States.\333\
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\332\Sec. 451(i)(5).
\333\Sec. 451(i)(5)(C).
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If a taxpayer is a member of an affiliated group of
corporations filing a consolidated return, the reinvestment
property may be purchased by any member of the affiliated group
(in lieu of the taxpayer).\334\
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\334\Sec. 451(i)(7).
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REASONS FOR CHANGE
The Committee believes that the ``unbundling'' of electric
transmission assets held by vertically integrated utilities,
with the transmission assets ultimately placed under the
ownership or control of independent transmission providers (or
other similarly-approved operators), continues to be an
important policy. To continue facilitating the implementation
of this policy, the Committee believes it is appropriate to
continue to assist taxpayers in moving forward with industry
restructuring by continuing to provide a tax deferral for gain
associated with certain dispositions of electric transmission
assets. The Committee believes this provision will encourage
the sale of transmission property from electric utilities to
independent transmission companies to improve transmission
management and facilitate competitive transmission markets.
EXPLANATION OF PROVISION
The provision extends for two years the treatment under the
present-law deferral provision to sales or dispositions by a
qualified electric utility that occur prior to January 1, 2016.
EFFECTIVE DATE
The provision applies to dispositions after December 31,
2013.
11. Extension of excise tax credits relating to certain fuels
(alternative fuel and alternative fuel mixtures (including hydrogen))
(sec. 161 of the bill and sec. 6426 and 6427(e) of the Code)
PRESENT LAW
Fuel excise taxes
Fuel excise taxes are imposed on taxable fuel (gasoline,
diesel fuel or kerosene) under section 4081. In general, these
fuels are taxed when removed from a refinery, terminal rack,
upon entry into the United States, or upon sale to an
unregistered person. A back-up tax under section 4041 is
imposed on previously untaxed fuel and alternative fuel used or
sold for use as fuel in a motor vehicle or motorboat to the
supply tank of a highway vehicle. In general, the rates of tax
are 18.3 cents per gallon (or in the case of compressed natural
gas 18.3 cents per gasoline gallon equivalent), and in the case
of liquefied natural gas, and liquid fuel derived from coal or
biomass, 24.3 cents per gallon.
Alternative fuel and alternative fuel mixture credits and payments
The Code provides two per-gallon excise tax credits with
respect to alternative fuel: the alternative fuel credit, and
the alternative fuel mixture credit. For this purpose, the term
``alternative fuel'' means liquefied petroleum gas, P Series
fuels (as defined by the Secretary of Energy under 42 U.S.C.
sec. 13211(2)), compressed or liquefied natural gas, liquefied
hydrogen, liquid fuel derived from coal through the Fischer-
Tropsch process (``coal-to-liquids''), compressed or liquefied
gas derived from biomass, or liquid fuel derived from biomass.
Such term does not include ethanol, methanol, or biodiesel.
For coal-to-liquids produced after December 30, 2009, the
fuel must be certified as having been derived from coal
produced at a gasification facility that separates and
sequesters 75 percent of such facility's total carbon dioxide
emissions.
The alternative fuel credit is allowed against section 4041
liability, and the alternative fuel mixture credit is allowed
against section 4081 liability. Neither credit is allowed
unless the taxpayer is registered with the Secretary. The
alternative fuel credit is 50 cents per gallon of alternative
fuel or gasoline gallon equivalents\335\ of nonliquid
alternative fuel sold by the taxpayer for use as a motor fuel
in a motor vehicle or motorboat, sold for use in aviation or so
used by the taxpayer.
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\335\``Gasoline gallon equivalent'' means, with respect to any
nonliquid alternative fuel (for example, compressed natural gas), the
amount of such fuel having a Btu (British thermal unit) content of
124,800 (higher heating value).
---------------------------------------------------------------------------
The alternative fuel mixture credit is 50 cents per gallon
of alternative fuel used in producing an alternative fuel
mixture for sale or use in a trade or business of the taxpayer.
An ``alternative fuel mixture'' is a mixture of alternative
fuel and taxable fuel (gasoline, diesel fuel or kerosene) that
contains at least \1/10\ of one percent taxable fuel. The
mixture must be sold by the taxpayer producing such mixture to
any person for use as a fuel, or used by the taxpayer producing
the mixture as a fuel. The credits expired after December 31,
2013 (September 30, 2014 for liquefied hydrogen).
A person may file a claim for payment equal to the amount
of the alternative fuel credit (but not the alternative fuel
mixture credit). The alternative fuel credit must first be
applied to the applicable excise tax liability under section
4041 or 4081, and any excess credit may be taken as a payment.
These payment provisions generally also expire after December
31, 2013. With respect to liquefied hydrogen, the payment
provisions expire after September 30, 2014.
For purposes of the alternative fuel credit, alternative
fuel mixture credit and related payment provisions,
``alternative fuel'' does not include fuel (including lignin,
wood residues, or spent pulping liquors) derived from the
production of paper or pulp.
REASONS FOR CHANGE
The Committee believes it is appropriate to extend the
incentives for alternative fuel to provide certainty to the
industry and allow for business planning.
EXPLANATION OF PROVISION
The provision extends the alternative fuel credit and
related payment provisions, and the alternative fuel mixture
credit through December 31, 2015 (including those related to
liquefied hydrogen).
In light of the retroactive nature of the provision, as it
relates to alternative fuel sold or used in 2014, the provision
creates a special rule to address claims regarding excise
credits and claims for payment associated with periods
occurring during 2014. In particular the provision directs the
Secretary to issue guidance within 30 days of the date of
enactment. Such guidance is to provide for a one-time
submission of claims covering periods occurring during 2014.
The guidance is to provide for a 180-day period for the
submission of such claims (in such manner as prescribed by the
Secretary) to begin no later than 30 days after such guidance
is issued. Such claims shall be paid by the Secretary of the
Treasury not later than 60 days after receipt. If the claim is
not paid within 60 days of the date of the filing, the claim
shall be paid with interest from such date determined by using
the overpayment rate and method under section 6621 of such
Code.
The provision, as it relates to biodiesel and renewable
diesel, is described above in connection with section 304 of
the bill ``Incentives for Biodiesel and Renewable Diesel.''
EFFECTIVE DATE
The provision is generally effective for fuel sold or used
after December 31, 2013. As it relates to liquefied hydrogen,
the provision is effective for fuels sold or used after
September 30, 2014.
TITLE II--PROVISIONS EXPIRING IN 2014
A. Subtitle A--Energy Tax Extenders
1. Extension of credit for new qualified fuel cell motor vehicles (sec.
201 of the bill and sec. 30B of the Code)
PRESENT LAW
A credit is available through 2014 for new vehicles
propelled by chemically combining oxygen with hydrogen and
creating electricity. The base credit is $4,000 for vehicles
weighing 8,500 pounds or less. Heavier vehicles can get up to a
$40,000 credit, depending on their weight. An additional $1,000
to $4,000 credit is available to cars and light trucks to the
extent their fuel economy exceeds the 2002 base fuel economy
set forth in the Code. The credit is available to vehicles
purchased before January 1, 2015.
In general, the credit is allowed to the vehicle owner,
including the lessor of a vehicle subject to a lease. In
certain cases, where the vehicle is owned by a tax-exempt
entity, government, or foreign person, and is not subject to
lease, the credit may be claimed by the seller of the vehicle
so long as the seller clearly discloses to the user in a
document the amount that is allowable as a credit. A vehicle
must be used predominantly in the United States to qualify for
the credit.
REASONS FOR CHANGE
The Committee believes that further investments in advanced
technology vehicles are necessary to transform automotive
transportation in the United States to be cleaner, more fuel
efficient, and less reliant on petroleum fuels. For the
reasons, the Committee believes the credit for fuel cell
vehicles should be extended.
EXPLANATION OF PROVISION
The provision extends the provision for one year, for
vehicles purchased before January 1, 2016.
EFFECTIVE DATE
The provision is effective for vehicles purchased after
December 31, 2014.
2. Extension of alternative fuel vehicle refueling property (sec. 202
of the bill and sec. 30C of the Code)
PRESENT LAW
Taxpayers may claim a 30-percent credit for the cost of
installing qualified clean-fuel vehicle refueling property to
be used in a trade or business of the taxpayer or installed at
the principal residence of the taxpayer.\336\ The credit may
not exceed $30,000 per taxable year per location, in the case
of qualified refueling property used in a trade or business and
$1,000 per taxable year per location, in the case of qualified
refueling property installed on property which is used as a
principal residence.
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\336\Sec. 30C.
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Qualified refueling property is property (not including a
building or its structural components) for the storage or
dispensing of a clean-burning fuel or electricity into the fuel
tank or battery of a motor vehicle propelled by such fuel or
electricity, but only if the storage or dispensing of the fuel
or electricity is at the point of delivery into the fuel tank
or battery of the motor vehicle. The original use of such
property must begin with the taxpayer.
Clean-burning fuels are any fuel at least 85 percent of the
volume of which consists of ethanol, natural gas, compressed
natural gas, liquefied natural gas, liquefied petroleum gas, or
hydrogen. In addition, any mixture of biodiesel and diesel
fuel, determined without regard to any use of kerosene and
containing at least 20 percent biodiesel, qualifies as a clean
fuel.
Credits for qualified refueling property used in a trade or
business are part of the general business credit and may be
carried back for one year and forward for 20 years. Credits for
residential qualified refueling property cannot exceed for any
taxable year the difference between the taxpayer's regular tax
(reduced by certain other credits) and the taxpayer's tentative
minimum tax. Generally, in the case of qualified refueling
property sold to a tax-exempt entity, the taxpayer selling the
property may claim the credit.
A taxpayer's basis in qualified refueling property is
reduced by the amount of the credit. In addition, no credit is
available for property used outside the United States or for
which an election to expense has been made under section 179.
The credit is available for property placed in service
after December 31, 2005, and (except in the case of hydrogen
refueling property) before January 1, 2014. In the case of
hydrogen refueling property, the property must be placed in
service before January 1, 2015.
REASONS FOR CHANGE
The Committee believes that further investments in advanced
technology vehicles and related infrastructure are necessary to
transform automotive transportation in the United States to be
cleaner, more fuel efficient, and less reliant on petroleum
fuels. For the reasons, the Committee believes the credit for
alternative fuel refueling property should be extended.
EXPLANATION OF PROVISION
The provision extends the 30-percent credit for alternative
fuel refueling property for two years (one year in the case of
hydrogen refueling property, the credit which continues under
present law through 2014), through December 31, 2015.
EFFECTIVE DATE
The provision is effective for property placed in service
after December 31, 2013.
B. Subtitle B--Extenders Relating to Multiemployer Defined Benefit
Pension Plans
1. Multiemployer defined benefit plans (secs. 251-252 of the bill and
sec. 221(c) of the Pension Protection Act of 2006, secs. 431-432 of the
Code, and secs. 304-305 of ERISA)
PRESENT LAW
Multiemployer plans
A multiemployer plan is a plan to which more than one
unrelated employer contributes, that is established pursuant to
one or more collective bargaining agreements, and that meets
other requirements as specified by the Secretary of Labor.
Multiemployer plans are governed by a board of trustees
consisting of an equal number of employer and employee
representatives. In general, the level of contributions to a
multiemployer plan is specified in the applicable collective
bargaining agreements, and the level of plan benefits is
established by the plan trustees.
Multiemployer defined benefit plans are subject to minimum
funding requirements under the Code and the Employee Retirement
Income Security Act of 1974 (``ERISA'').\337\ Certain changes
were made to the funding requirements for multiemployer plans
by the Pension Protection Act of 2006 (``PPA'').\338\ Changes
made by PPA are effective for plan years beginning after 2007.
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\337\Secs. 412 and 431-432 of the Code and secs. 302 and 304-305 of
ERISA. Additional rules apply to multiemployer plans that are in
reorganization status or insolvent under sections 418-418E of the Code
and sections 4241-4245 of ERISA.
\338\Pub. L. No. 109-280.
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General funding requirements for multiemployer plans
Minimum required contributions
In connection with the funding requirements for a
multiemployer plan, a notional account called a ``funding
standard account'' is maintained, to which specific charges and
credits (including plan contributions) are made for each plan
year the multiemployer plan is maintained. The minimum required
contribution for a plan year is the amount, if any, needed so
that the accumulated credits to the funding standard account as
of that plan year are not less than the accumulated charges
(i.e., so the funding standard account does not have a negative
balance). If, as of the close of a plan year, accumulated
charges to the funding standard account exceed credits, the
plan has an ``accumulated funding deficiency'' equal to the
amount of the excess.\339\ For example, if, as of a plan year,
the balance of charges to the funding standard account would be
$200,000 without any contributions, then a minimum contribution
equal to that amount is required to meet the minimum funding
standard for the year (i.e., to prevent an accumulated funding
deficiency). If credits to the funding standard account exceeds
charges, a ``credit balance'' results. The amount of the credit
balance, increased with interest, reduces future required
contributions.
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\339\An excise tax under section 4971 may apply in the case of an
accumulated funding deficiency.
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Funding method; charges and credits to the funding standard
account
In the case of a multiemployer plan, an acceptable
actuarial cost method (referred to as a funding method) must be
used to determine the elements included in its funding standard
account for a year. Generally, a funding method breaks up the
cost of benefits under the plan into annual charges to the
funding standard account consisting of two elements for each
plan year. These elements are referred to as: (1) normal cost;
and (2) supplemental cost.
The plan's normal cost for a plan year generally represents
the cost of future benefits allocated to the year by the
funding method used by the plan for current employees and,
under some funding methods, for separated employees.
Specifically, it is the amount actuarially determined that
would be required as a contribution by the employer for the
plan year in order to maintain the plan if the plan had been in
effect from the beginning of service of the included employees
and if the costs for prior years had been paid, and all
assumptions (e.g., interest and mortality) had been fulfilled.
A plan's normal cost for a plan year is charged to the funding
standard account for that year.
The supplemental cost for a plan year is the cost of future
benefits that would not be met by future normal costs, future
employee contributions, or plan assets. The most common
supplemental cost is that attributable to past service
liability, which represents the cost of future benefits under
the plan: (1) on the date the plan is first effective; or (2)
on the date a plan amendment increasing plan benefits is first
effective. Other supplemental costs may be attributable to net
experience losses (e.g., worse than expected investment returns
or actuarial experience), losses from changes in actuarial
assumptions, and amounts necessary to make up funding
deficiencies for which a waiver was obtained. Supplemental
costs are amortized (i.e., recognized for funding purposes)
over a specified number of years (generally 15 years) by annual
charges to the funding standard account over that period.
Factors that result in a supplemental loss can
alternatively result in a gain that is recognized by annual
credits to the funding standard account over a 15-year
amortization period (in addition to a credit for contributions
made each the plan year). These include a reduction in plan
liabilities as a result of a plan amendment decreasing plan
benefits, net experience gains (e.g., better than expected
investment returns or actuarial experience), and gains from
changes in actuarial assumptions.
Extensions of amortization periods
Before and after PPA, the sponsor of a multiemployer plan
(that is, the board of trustees) may obtain from the Secretary
of the Treasury (``Secretary'') an extension of up to 10 years
of the amortization periods applicable in determining charges
to the funding standard account. The extension may be granted
by the Secretary if the Secretary determines that (1) the
extension would carry out the purposes of ERISA and would
provide adequate protection for participants under the plan and
(2) the failure to permit the extension would (a) result in a
substantial risk to the voluntary continuation of the plan or a
substantial curtailment of pension benefit levels or employee
compensation and (b) be adverse to the interests of plan
participants in the aggregate. The sponsor must also provide
satisfactory evidence that notice of the request, including
certain information, has been provided to plan participants and
beneficiaries, any employee organization representing
participants, and the Pension Benefit Guaranty Corporation
(``PBGC'').
Under PPA, in addition to an amortization extension
described above, the sponsor of a multiemployer plan certified
as meeting certain criteria may apply for an amortization
extension of up to five years that is required to be approved
by the Secretary (referred to as an automatic amortization
extension). Included with the application must be a
certification by the plan's actuary that (1) absent the
extension, the plan would have an accumulated funding
deficiency in the current plan year and any of the nine
succeeding plan years, (2) the sponsor has adopted a plan to
improve the plan's funding status, (3) taking into account the
extension, the plan is projected to have sufficient assets to
timely pay its expected benefit liabilities and other
anticipated expenditures, and (4) the required notice described
above has been provided. The period of any automatic
amortization extension reduces the 10-year period for which an
extension described above may be granted by the Secretary. The
provision relating to automatic amortization extensions does
not apply with respect to any application submitted after
December 31, 2014.\340\
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\340\Sec. 431(d)(1)(C) of the Code and sec. 304(d)(1)(C) of ERISA.
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Shortfall funding method
Certain plans may elect to determine the required charges
to the funding standard account under the shortfall funding
method. Under this method, the charges are computed on the
basis of an estimated number of units of service or production
for which a certain amount per unit is to be charged. The
difference between the net amount charged under this method and
the net amount that otherwise would have been charged for the
same period is a shortfall loss or gain that is amortized over
subsequent plan years.
In general, the funding method used with respect to a
multiemployer plan may be changed only with approval of the
Secretary. However, under PPA, certain multiemployer plans may
adopt, use or cease using the shortfall funding method and the
adoption, use, or cessation of use is deemed approved by the
Secretary.\341\ Plans are eligible if (1) the plan has not used
the shortfall funding method during the five-year period ending
on the day before the date the plan is to use the shortfall
funding method; and (2) the plan is not operating under an
amortization extension and did not operate under such an
extension during the five-year period. In general, plan
amendments increasing benefit liabilities of the plan cannot be
adopted while the shortfall funding method is in use. Deemed
approval of a multiemployer plan's adoption, use, or cessation
of use of the shortfall funding method does not apply to plan
years beginning after December 31, 2014.\342\
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\341\Sec. 201(b) of PPA.
\342\Sec. 221(c) of PPA.
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Additional requirements relating to endangered or critical status
In general
Under PPA, additional funding rules apply to a
multiemployer defined benefit pension plan that is in
endangered or critical status.\343\ In connection with these
rules, not later than the 90th day of each plan year, the
actuary for any multiemployer plan must certify to the
Secretary and to the sponsor whether or not the plan is in
endangered or critical status for the plan year. If a plan is
certified to be in endangered or critical status, notice of the
endangered or critical status must be provided within 30 days
after the date of certification to plan participants and
beneficiaries, the bargaining parties, the PBGC and the
Secretary of Labor. Additional notice requirements apply in the
case of a plan certified to be in critical status.
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\343\Sec. 432 of the Code as enacted by sec. 212 of PPA, and sec.
305 of ERISA, as enacted by sec. 202 of PPA.
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A multiemployer plan is in endangered status if the plan is
not in critical status and, as of the beginning of the plan
year, (1) the plan's funded percentage for the plan year is
less than 80 percent, or (2) the plan has an accumulated
funding deficiency for the plan year or is projected to have an
accumulated funding deficiency in any of the six succeeding
plan years (taking into account amortization extensions). A
plan's funded percentage is the percentage of plan assets over
accrued liability of the plan. A plan that meets the
requirements of both (1) and (2) is treated as in seriously
endangered status.
A multiemployer plan is in critical status for a plan year
if as of the beginning of the plan year:
1. The funded percentage of the plan is less than 65
percent and the sum of (A) the market value of plan
assets, plus (B) the present value of reasonably
anticipated employer and employee contributions for the
current plan year and each of the six succeeding plan
years (assuming that the terms of the collective
bargaining agreements continue in effect) is less than
the present value of all benefits projected to be
payable under the plan during the current plan year and
each of the six succeeding plan years (plus
administrative expenses),
2. (A) The plan has an accumulated funding deficiency
for the current plan year, not taking into account any
amortization extension, or (B) the plan is projected to
have an accumulated funding deficiency for any of the
three succeeding plan years (four succeeding plan years
if the funded percentage of the plan is 65 percent or
less), not taking into account any amortization
extension,
3. (A) The plan's normal cost for the current plan
year, plus interest for the current plan year on the
amount of unfunded benefit liabilities under the plan
as of the last day of the preceding year, exceeds the
present value of the reasonably anticipated employer
contributions for the current plan year, (B) the
present value of nonforfeitable benefits of inactive
participants is greater than the present value of
nonforfeitable benefits of active participants, and (C)
the plan has an accumulated funding deficiency for the
current plan year, or is projected to have an
accumulated funding deficiency for any of the four
succeeding plan years (not taking into account
amortization period extensions), or
4. The sum of (A) the market value of plan assets,
plus (B) the present value of the reasonably
anticipated employer contributions for the current plan
year and each of the four succeeding plan years
(assuming that the terms of the collective bargaining
agreements continue in effect) is less than the present
value of all benefits projected to be payable under the
plan during the current plan year and each of the four
succeeding plan years (plus administrative expenses).
Requirements during endangered or critical status
Various requirements apply to a plan in endangered or
critical status, including adoption of and compliance with (1)
a funding improvement plan in the case of a multiemployer plan
in endangered status, and (2) a rehabilitation plan in the case
of a multiemployer plan in critical status. In addition,
restrictions on certain plan amendments, benefit increases, and
reductions in employer contributions apply during certain
periods.
In the case of a multiemployer plan in critical status,
additional required contributions (referred to as employer
surcharges) apply until the adoption of a collective bargaining
that is consistent with the rehabilitation plan. In addition,
employers are relieved of liability for minimum required
contributions under the otherwise applicable funding rules (and
the related excise tax), provided that a rehabilitation plan is
adopted and followed.\344\ Moreover, subject to notice
requirements, some benefits that would otherwise be protected
from elimination or reduction may be eliminated or reduced in
accordance with the rehabilitation plan.\345\
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\344\Code sec. 4971(g)(1)(A).
\345\The rules for multiemployer plans in critical status include
the elimination or reduction of ``adjustable benefits,'' which include
some benefits that would otherwise be protected from elimination or
reduction under the anticutback rules under section 411(d)(6) of the
Code and section 204(g) of ERISA.
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A funding improvement plan is a plan consisting of actions,
including options or a range of options, to be proposed to the
bargaining parties, formulated to provide, based on reasonably
anticipated experience and reasonable actuarial assumptions,
for the attainment by the plan of certain requirements within a
certain period (generally 10 years), referred to as the funding
improvement period. The funding improvement plan must provide
that, by the end of the funding improvement period, the plan
will have a certain required increase in the funded percentage
and no accumulated funding deficiency for any plan year during
the funding improvement period.
In general, a rehabilitation plan is a plan consisting of
actions, including options or a range of options to be proposed
to the bargaining parties, formulated, based on reasonable
anticipated experience and reasonable actuarial assumptions, to
enable the plan to cease to be in critical status within a
certain period (generally 10 years), referred to as the
rehabilitation period, and may include reductions in plan
expenditures (including plan mergers and consolidations),
reductions in future benefits accruals or increases in
contributions, if agreed to by the bargaining parties, or any
combination of such actions. A rehabilitation plan must provide
annual standards for meeting the requirements of the
rehabilitation. The plan must also include the schedules
required to be provided to the bargaining parties.
If the sponsor of a plan in critical status determines
that, based on reasonable actuarial assumptions and upon
exhaustion of all reasonable measures, the plan cannot
reasonably be expected to emerge from critical status by the
end of the rehabilitation period, the plan must include
reasonable measures to emerge from critical status at a later
time or to forestall possible insolvency. In such case, the
plan must set forth alternatives considered, explain why the
plan is not reasonably expected to emerge from critical status
by the end of the rehabilitation period, and specify when, if
ever, the plan is expected to emerge from critical status in
accordance with the rehabilitation plan.
The sponsor of the multiemployer plan must update the
funding improvement or rehabilitation plan annually.
In the case of a failure to meet the requirements
applicable to a multiemployer plan in endangered or critical
status, the plan actuary, plan sponsor, or employers required
to contribute to the plan may be subject to an excise tax under
the Code or a civil penalty under ERISA.\346\
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\346\Code sec. 4971(g) and ERISA sec. 502(c)(8). In addition,
certain failures are treated as a failure to file an annual report with
respect to the multiemployer plan, subject to a civil penalty under
ERISA.
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Sunset of endangered and critical rules
The rules relating to endangered and critical status
generally do not apply to plan years beginning after December
31, 2014.\347\ However, if a multiemployer plan is operating
under a funding improvement or rehabilitation plan for its last
plan year beginning before January 1, 2015, that is, for its
2014 plan year, the multiemployer plan must continue to operate
under the funding improvement or rehabilitation plan during any
period after December 31, 2014, that the funding improvement or
rehabilitation plan is in effect, and all of the Code and ERISA
provisions relating to the operation of the funding improvement
or rehabilitation plan continue in effect during that period.
---------------------------------------------------------------------------
\347\Sec. 221(c) of PPA.
---------------------------------------------------------------------------
REASONS FOR CHANGE
The endangered and critical rules under PPA were enacted in
response to concerns that some multiemployer pension plans were
facing current or near-term funding issues. The rules provide a
structure for identifying troubled plans and require specific
measures to be taken to address funding issues. For plans in
critical status, the rules also provide a greater range of
measures that may be taken to address these issues. Since the
enactment of PPA, these rules have been used by a number of
plans to begin addressing their funding issues. The Committee
therefore considers it important to leave the endangered and
critical rules in place. At the same time, the purpose of the
PPA sunset was, in part, to provide an opportunity for the
Congress to assess the efficacy of the rules and to consider
whether changes are warranted. An extension of the sunset
continues the availability of the endangered and critical
rules, as well as providing additional time for congressional
action.
EXPLANATION OF PROVISION
Under the provision, the PPA provisions relating to
automatic extensions of amortization periods, deemed approval
of a multiemployer plan's adoption, use, or cessation of use of
the shortfall funding method, and rules relating to endangered
and critical status are extended for one year. Thus, the
provision relating to automatic amortization extensions does
not apply with respect to any application submitted after
December 31, 2015. Deemed approval of a multiemployer plan's
adoption, use, or cessation of use of the shortfall funding
method, and the rules relating to endangered and critical
status do not apply to plan years beginning after December 31,
2015. However, if a multiemployer plan is operating under a
funding improvement or rehabilitation plan for its last plan
year beginning before January 1, 2016, that is, for its 2015
plan year, the multiemployer plan must continue to operate
under the funding improvement or rehabilitation plan during any
period after December 31, 2015, that the funding improvement or
rehabilitation plan is in effect, and all of the Code and ERISA
provisions relating to the operation of the funding improvement
or rehabilitation plan continue in effect during that period.
EFFECTIVE DATE
The provision relating to automatic extensions of
amortization periods applies to applications submitted to the
Secretary after December 31, 2014. The provision relating to
deemed approval of a multiemployer plan's adoption, use, or
cessation of use of the shortfall funding method and the rules
relating to endangered and critical status applies to plan
years beginning after December 31, 2014.
TITLE III--REVENUE PROVISIONS
1. Penalty for failure to meet the due diligence requirements for the
child tax credit (sec. 301 of the bill and sec. 6695 of the Code)
PRESENT LAW
Eligibility requirements for certain refundable credits
Two refundable credits available to individuals use both
income level and the presence and number of qualifying children
as factors in determining eligibility for the credit: the child
tax credit\348\ and the earned income credit (``EIC'').\349\
Eligibility for the EIC is based on earned income, adjusted
gross income, investment income, filing status, number of
children, and immigration and work status in the United States.
The EIC generally equals a specified percentage of earned
income up to a maximum dollar amount. The maximum amount
applies over a certain income range and then diminishes to zero
over a specified phaseout range. For taxpayers with earned
income (or adjusted gross income (``AGI''), if greater) in
excess of the beginning of the phaseout range, the maximum EIC
amount is reduced by the phaseout rate multiplied by the amount
of earned income (or AGI, if greater) in excess of the
beginning of the phaseout range. For taxpayers with earned
income (or AGI, if greater) in excess of the end of the
phaseout range, no credit is allowed.
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\348\Sec. 24.
\349\Sec. 32.
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An individual is not eligible for the EIC if the aggregate
amount of disqualified income of the taxpayer for the taxable
year exceeds $3,350 (for 2014). This threshold is indexed for
inflation. Disqualified income is the sum of: (1) interest
(both taxable and tax exempt); (2) dividends; (3) net rent and
royalty income (if greater than zero); (4) capital gains net
income; and (5) net passive income that is not self-employment
income (if greater than zero).
An individual may claim a child tax credit of $1,000 for
each qualifying child under the age of 17,\350\ provided that
the child is a citizen, national, or resident of the United
States.\351\ The aggregate amount of child credits that may be
claimed is phased out for individuals with income over certain
threshold amounts. Specifically, the otherwise allowable child
tax credit is reduced by $50 for each $1,000 (or fraction
thereof) of modified adjusted gross income over $75,000 for
single individuals or heads of households, $110,000 for married
individuals filing joint returns, and $55,000 for married
individuals filing separate returns. For purposes of this
limitation, modified adjusted gross income includes certain
otherwise excludable income earned by U.S. citizens or
residents living abroad or in certain U.S. territories.\352\ If
the resulting child credit exceeds the tax liability of the
taxpayer, the taxpayer is eligible for a refundable credit
(known as the additional child tax credit)\353\ equal to 15
percent of earned income in excess of a threshold dollar amount
(the ``earned income'' formula). Prior to 2009, the threshold
dollar amount was $10,000 and was indexed for inflation. For
taxable years beginning after 2009 and before January 1, 2018,
the threshold amount is $3,000, and is not indexed for
inflation. The $3,000 threshold is currently scheduled to
expire for taxable years beginning after December 31, 2017,
after which the threshold reverts to the indexed $10,000
amount.
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\350\Sec. 24(a).
\351\Sec. 24(c).
\352\Sec. 24(b).
\353\Sec. 24(d).
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Families with three or more children may determine the
additional child tax credit using the ``alternative formula,''
if this results in a larger credit than determined under the
earned income formula. Under the alternative formula, the
additional child tax credit equals the amount by which the
taxpayer's social security taxes exceed the taxpayer's EIC.
Diligence required by preparers' returns for EIC claimants
Under Section 6695(g) of the Code, a penalty of $500 may be
imposed on a person who, as a tax return preparer,\354\
prepares a tax return for a taxpayer claiming the EIC, unless
the tax return preparer exercises due diligence with respect to
that claim. The due diligence requirements extend to both the
determination of eligibility for the credit and the amount of
the credit, as prescribed by regulations, which also detail how
to document one's compliance with those requirements.\355\ The
position taken with respect to the EIC must be based on current
and reasonable information that the paid preparer develops,
either directly from the taxpayer or by other reasonable means.
The preparer may not ignore implications of information
provided by taxpayers, and is expected to make reasonable
inquiries about incorrect, inconsistent or incomplete
information.
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\354\Sec. 7701(a)(36) provides a general definition of tax return
preparer to include persons who are compensated to prepare all or a
substantial portion of a return or claim for refund, with certain
exceptions.
\355\Treas. Reg. sec. 1.6695-2(b).
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The conclusions about eligibility and computation, as well
as the steps taken to develop those conclusions, must be
documented, using Form 8867, ``Paid Preparer's Earned Income
Credit Checklist,'' which is filed with the return.\356\ The
basis for the computation of the credit must also be
documented, either on a Computation Worksheet, or in an
alternative record containing the requisite information. The
preparer is required to maintain that documentation for three
years.
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\356\If the return preparer electronically files the return or
claim for the taxpayer, the Form 8867 is filed electronically with the
return. If the prepared return or claim is given to the taxpayer to
file, the Form 8867 is provided to the taxpayer at the same time, to
submit with the return or claim for refund.
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The penalty may be waived with respect to a particular
return or claim for refund on the basis of all facts and
circumstances. The preparer must establish that he routinely
follows reasonable office procedures to ensure compliance. The
failure to comply with the requirements must be isolated and
inadvertent.\357\ The enhanced duties of due diligence required
with respect to the EIC do not extend to other refundable
credits.
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\357\Treas. Reg. sec. 1.6695-2(d).
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REASONS FOR CHANGE
The Committee believes that more thorough efforts by return
preparers are important to improving child tax credit
compliance. Specifically, the Committee believes that imposing
a due diligence requirement discourages preparers from advising
or assisting taxpayers in claiming credits that cannot be
sustained, thus reducing the incidence of erroneous claims.
EXPLANATION OF PROVISION
The provision requires paid tax return preparers who
prepare Federal income tax returns on which a child (or
additional child) tax credit is claimed to meet due diligence
requirements similar to those applicable to returns claiming an
earned income tax credit. The provision anticipates that the
EIC checklist currently required by regulations will be adapted
by the IRS to address both the child tax credit and the EIC and
to highlight differences between the two credits. In adapting
the checklist, the IRS is to ensure that it imposes minimal
additional burden on taxpayers and paid preparers.
EFFECTIVE DATE
The provision is effective for tax years ending after
December 31, 2014.
2. 100 percent continuous levy authority on payments to Medicare
providers and suppliers (sec. 302 of the bill and sec. 6331 of the
Code)
PRESENT LAW
In general
Levy is the administrative authority of the IRS to seize a
taxpayer's property, or rights to property, to pay the
taxpayer's tax liability.\358\ Generally, the IRS is entitled
to seize a taxpayer's property by levy if a Federal tax lien
has attached to such property,\359\ the property is not exempt
from levy,\360\ and the IRS has provided both notice of
intention to levy\361\ and notice of the right to an
administrative hearing (the notice is referred to as a
``collections due process notice'' or ``CDP notice'' and the
hearing is referred to as the ``CDP hearing'')\362\ at least 30
days before the levy is made. A levy on salary or wages
generally is continuously in effect until released.\363\ A
Federal tax lien arises automatically when: (1) a tax
assessment has been made; (2) the taxpayer has been given
notice of the assessment stating the amount and demanding
payment; and (3) the taxpayer has failed to pay the amount
assessed within 10 days after the notice and demand.\364\
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\358\Sec. 6331(a). Levy specifically refers to the legal process by
which the IRS orders a third party to turn over property in its
possession that belongs to the delinquent taxpayer named in a notice of
levy.
\359\Ibid.
\360\Sec. 6334.
\361\Sec. 6331(d).
\362\Sec. 6330. The notice and the hearing are referred to
collectively as the CDP requirements.
\363\Secs. 6331(e) and 6343.
\364\Sec. 6321.
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The notice of intent to levy is not required if the
Secretary finds that collection would be jeopardized by delay.
The standard for determining whether jeopardy exists is similar
to the standard applicable when determining whether assessment
of tax without following the normal deficiency procedures is
permitted.\365\
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\365\Secs. 6331(d)(3), 6861.
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The CDP notice (and pre-levy CDP hearing) is not required
if: (1) the Secretary finds that collection would be
jeopardized by delay; (2) the Secretary has served a levy on a
State to collect a Federal tax liability from a State tax
refund; (3) the taxpayer subject to the levy requested a CDP
hearing with respect to unpaid employment taxes arising in the
two-year period before the beginning of the taxable period with
respect to which the employment tax levy is served; or (4) the
Secretary has served a Federal contractor levy. In each of
these four cases, however, the taxpayer is provided an
opportunity for a hearing within a reasonable period of time
after the levy.\366\
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\366\Sec. 6330(f).
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Federal payment levy program
To help the IRS collect taxes more effectively, the
Taxpayer Relief Act of 1997\367\ authorized the establishment
of the Federal Payment Levy Program (``FPLP''), which allows
the IRS to continuously levy up to 15 percent of certain
``specified payments'' by the Federal government if the payees
are delinquent on their tax obligations. With respect to
payments to vendors of goods, services, or property sold or
leased to the Federal government, the continuous levy may be up
to 100 percent of each payment.\368\ The levy (either up to 15
percent or up to 100 percent) generally continues in effect
until the liability is paid or the IRS releases the levy.
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\367\Pub. L. No. 105-34.
\368\Sec. 6331(h)(3). The word ``property'' was added to ``goods or
services'' in section 301 of the ``3% Withholding Repeal and Job
Creation Act,'' Pub. L. No. 112-56.
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Under FPLP, the IRS matches its accounts receivable records
with Federal payment records maintained by the Department of
the Treasury's Financial Management Service (``FMS''), such as
certain Social Security benefit and Federal wage records. When
these records match, the delinquent taxpayer is provided both
the notice of intention to levy and the CDP notice. If the
taxpayer does not respond after 30 days, the IRS can instruct
FMS to levy the taxpayer's Federal payments. Subsequent
payments are continuously levied until such time that the tax
debt is paid or the IRS releases the levy.
Payments to Medicare providers
In 2008, the Government Accountability Office (``GAO'')
found that over 27,000 Medicare providers (i.e., about six
percent of all such providers) owed more than $2 billion of tax
debt, consisting largely of individual income and payroll
taxes.\369\ As of 2008, the Centers for Medicare & Medicaid
Services (``CMS'') had not incorporated most of its Medicare
payments into the continuous levy program, despite the IRS
authority to continuously levy up to 15 percent of these
payments. The GAO noted that CMS officials promised to
incorporate about 60 percent of all Medicare fee-for-service
payments into the levy program by October 2008 and the
remaining 40 percent in the next several years. Following the
GAO study, Congress directed CMS to participate in the FPLP and
ensure that all Medicare provider and supplier payments are
processed through it, in specified graduated percentages, by
the end of fiscal year 2011.\370\ CMS has since incorporated
its payments into the continuous levy program to ensure that it
collects delinquent tax debts from Medicare providers as
authorized.
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\369\Government Accountability Office, Medicare: Thousands of
Medicare Providers Abuse the Federal Tax System (GAO-08-618), June 13,
2008.
\370\Medicare Improvement for Patients and Providers Act of 2008,
Pub. L. No. 110-275, sec. 189.
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REASONS FOR CHANGE
It has been reported that many thousands of Medicare
providers abuse the Federal tax system.\371\ Consequently, the
Committee believes that is it appropriate to increase the
permissible percentage of payments to a Medicare provider
subject to levy to 100 percent.
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\371\Government Accountability Office, Medicare: Thousands of
Medicare Providers Abuse the Federal Tax System (GAO-08-618), June 13,
2008.
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EXPLANATION OF PROVISION
The provision allows the Secretary to levy up to 100
percent of a payment to a Medicare provider to collect unpaid
taxes.
EFFECTIVE DATE
The provision is effective for payments made six months
after the date of enactment.
3. Exclusion from gross income of certain clean coal power grants (sec.
303 of the bill)
PRESENT LAW
Section 402 of the Energy Policy Act of 2005 provides
criteria for Federal financial assistance under the Clean Coal
Power Initiative. To the extent this financial assistance comes
in the form of a grant, award, or allowance, it must generally
be included in income under section 61 of the Internal Revenue
Code (the ``Code'').
Corporate taxpayers may be eligible to exclude such
financial assistance from gross income as a contribution of
capital under section 118 of the Code. The basis of any
property acquired by reason of such a contribution of capital
must be reduced by the amount of the contribution. This
exclusion is not available to non-corporate taxpayers.
REASONS FOR CHANGE
The Committee believes that Federal financial assistance
under the Clean Coal Power Initiative should be excludable from
the income of investors in order to make such assistance as
effective as possible in encouraging clean coal power. In
addition, the Committee believes that a corresponding basis
reduction is necessary in all cases to prevent any unintended
double benefit under the incentive.
EXPLANATION OF PROVISION
With respect to eligible non-corporate recipients, the
provision excludes from gross income and alternative minimum
taxable income any grant, award, or allowance made pursuant to
section 402 of the Energy Policy Act of 2005. The provision
requires that, to the extent the grant, award or allowance is
related to depreciable property, the adjusted basis is reduced
by the amount excluded from income under the provision. The
provision requires eligible non-corporate recipients to pay an
upfront payment to the Federal government equal to 1.18 percent
of the value of the grant, award, or allowance.
Under the provision, eligible non-corporate recipients are
defined as (1) any recipient (other than a corporation) of any
grant, award, or allowance made pursuant to Section 402 of the
Energy Policy Act of 2005 that (2) makes the upfront 1.18-
percent payment, where (3) the grant, award, or allowance would
have been excludable from income by reason of Code section 118
if the taxpayer had been a corporation. In the case of a
partnership, the eligible non-corporate recipients are the
partners.
EFFECTIVE DATE
The provision is effective for payments received in taxable
years beginning after December 31, 2011.
4. Reform of rules related to qualified tax collection contracts, and
special compliance personnel program (secs. 304 and 305 of the bill and
sec. 6306 and new sec. 6307 of the Code)
PRESENT LAW
Code section 6306 permits the IRS to use private debt
collection companies to locate and contact taxpayers owing
outstanding tax liabilities of any type\372\ and to arrange
payment of those taxes by the taxpayers. There must be an
assessment pursuant to section 6201 in order for there to be an
outstanding tax liability. An assessment is the formal
recording of the taxpayer's tax liability that fixes the amount
payable. An assessment must be made before the IRS is permitted
to commence enforcement actions to collect the amount payable.
In general, an assessment is made at the conclusion of all
examination and appeals processes within the IRS.\373\
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\372\This provision generally applies to any type of tax imposed
under the Internal Revenue Code.
\373\An amount of tax reported as due on the taxpayer's tax return
is considered to be self-assessed. If the IRS determines that the
assessment or collection of tax will be jeopardized by delay, it has
the authority to assess the amount immediately (sec. 6861), subject to
several procedural safeguards.
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Several steps are involved in the deployment of private
debt collection companies. First, the private debt collection
company contacts the taxpayer by letter.\374\ If the taxpayer's
last known address is incorrect, the private debt collection
company searches for the correct address. Second, the private
debt collection company telephones the taxpayer to request full
payment.\375\ If the taxpayer cannot pay in full immediately,
the private debt collection company offers the taxpayer an
installment agreement providing for full payment of the taxes
over a period of as long as five years. If the taxpayer is
unable to pay the outstanding tax liability in full over a
five-year period, the private debt collection company obtains
financial information from the taxpayer and will provide this
information to the IRS for further processing and action by the
IRS.
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\374\The provision requires that the IRS disclose confidential
taxpayer information to the private debt collection company. Section
6103(n) permits disclosure of returns and return information for ``the
providing of other services . . . for purposes of tax administration.''
\375\The private debt collection company is not permitted to accept
payment directly. Payments are required to be processed by IRS
employees.
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The Code specifies several procedural conditions under
which the provision would operate. First, provisions of the
Fair Debt Collection Practices Act apply to the private debt
collection company. Second, taxpayer protections that are
statutorily applicable to the IRS are also made statutorily
applicable to the private sector debt collection companies. In
addition, taxpayer protections that are statutorily applicable
to IRS employees are made statutorily applicable to employees
of private sector debt collection companies. Third,
subcontractors are prohibited from having contact with
taxpayers, providing quality assurance services, and composing
debt collection notices; any other service provided by a
subcontractor must receive prior approval from the IRS.
The Code creates a revolving fund from the amounts
collected by the private debt collection companies. The private
debt collection companies will be paid out of this fund. The
Code prohibits the payment of fees for all services in excess
of 25 percent of the amount collected under a tax collection
contract.
The Code also provides that up to 25 percent of the amount
collected may be used for IRS collection enforcement
activities. The law also requires Treasury to provide a
biennial report to the Committee on Finance and the Committee
on Ways and Means. The report is to include, among other items,
a cost benefit analysis, the impact of the debt collection
contracts on collection enforcement staff levels in the IRS,
and an evaluation of contractor performance.
The Omnibus Appropriations Act of 2009 (the ``Act''), which
made appropriations for the fiscal year ending September 30,
2009, included a provision stating that none of the funds made
available in the Act could be used to fund or administer
section 6306.\376\ Around the same time, the IRS announced that
the IRS would not renew its contracts with private debt
collection agencies.\377\
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\376\Pub. L. No. 111-8, March 11, 2009.
\377\IR-2009-19, March 5, 2009.
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REASONS FOR CHANGE
The Committee believes that the use of private debt
collection agencies will help facilitate the collection of
taxes owed to the Government. The Committee also believes that
the safeguards it has incorporated, such as narrowing the class
of receivables subject to collection and giving priority to
previously approved contractors, will protect taxpayers' rights
and privacy.
The Committee believes that the increased collections that
may result from the use of private debt collection agencies for
limited classes of debts should be used to improve the ability
of the Government to handle compliance matters overall. By
funding the hiring and training of special compliance
personnel, the Committee believes the IRS can establish a cadre
of well-trained personnel who perform various compliance
functions while protecting taxpayers' rights.
EXPLANATION OF PROVISION
Qualified tax collection contracts
The provision requires the Secretary to enter into
qualified tax collection contracts for the collection of
inactive tax receivables. Inactive tax receivables are defined
as any tax receivable (i) removed from the active inventory for
lack of resources or inability to locate the taxpayer, (ii) for
which more than 1/3 of the applicable limitations period has
lapsed and no IRS employee has been assigned to collect the
receivable; and (iii) for which, a receivable has been assigned
for collection but more than 365 days have passed without
interaction with the taxpayer or a third party for purposes of
furthering the collection. Tax receivables are defined as any
outstanding assessment which the IRS includes in potentially
collectible inventory.
The provision designates certain tax receivables as not
eligible for collection under qualified tax collection
contracts, specifically a contract that: (i) is subject to a
pending or active offer-in-compromise or installment agreement;
(ii) is classified as an innocent spouse case; (iii) involves a
taxpayer identified by the Secretary as being (a) deceased, (b)
under the age of 18, (c) in a designated combat zone, or (d) a
victim of identity theft; (iv) is currently under examination,
litigation, criminal investigation, or levy; or (v) is
currently subject to a proper exercise of a right of appeal.
The provision grants authority to the Secretary to prescribe
procedures for taxpayers in presidentially declared disaster
areas to request relief from immediate collection measures
under the provision.
The provision requires the Secretary to give priority to
private collection contractors and debt collection centers
currently approved by the Treasury Department's Financial
Management Service on the schedule required under section
3711(g) of title 31 of the United States Code, to the extent
appropriate to carry out the purposes of the provision.
The provision adds an additional exception to section 6103
to allow contractors to identify themselves as such and
disclose the nature, subject, and reason for the contact.
Disclosures are permitted only in situations and under
conditions approved by the Secretary.
The provision requires the Secretary to prepare two reports
for the House Committee on Ways and Means and the Senate
Committee on Finance. The first report is required annually and
due not later than 90 days after each fiscal year and is
required to include: (i) the total number and amount of tax
receivables provided to each contractor for collection under
this section, (ii) the total amounts collected by and
installment agreements resulting from the collection efforts of
each contactor and the collection costs incurred by the IRS;
(iii) the impact of such contacts on the total number and
amount of unpaid assessments, and on the number and amount of
assessments collected by IRS personnel after initial contact by
a contractor, (iv) the amount of fees retained by the Secretary
under subsection (e) and a description of the use of such
funds; and (v) a disclosure safeguard report in a form similar
to that required under section 6103(p)(5).
The second report is required biannually and is required to
include: (i) an independent evaluation of contactor
performance; and (ii) a measurement plan that includes a
comparison of the best practices used by private collectors to
the collection techniques used by the IRS and mechanisms to
identify and capture information on successful collection
techniques used by the contractors that could be adopted by the
IRS.
Special compliance personnel program
The provision requires that the amount that, under current
law, is to be retained and used by the IRS for collection
enforcement activities under section 6306 of the Code be
instead used to fund a newly created special compliance
personnel program. The provision also requires the Secretary to
establish an account for the hiring, training, and employment
of special compliance personnel. No other source of funding the
program is permitted, and funds deposited in the special
account are restricted to use for the program, including
reimbursement of the IRS and other agencies for the cost of
administering the qualified debt collection program and all
costs associated with employment of special compliance
personnel and the retraining and reassignment of other
personnel as special compliance personnel. Special compliance
personnel are individuals employed by the IRS to serve either
as revenue officers performing field collection functions, or
as persons operating the automated collection system.
The provision requires the Secretary to prepare annually a
report for the House Committee on Ways and Means and the Senate
Committee on Finance, to be submitted no later than March of
each year. In the report, the Secretary is to describe for the
preceding fiscal year accounting of all funds received in the
account, administrative and program costs, number of special
compliance personnel hired and employed as well as actual
revenue collected by such personnel. Similar information for
the current and following fiscal year, using both actual and
estimated amounts, is required.
EFFECTIVE DATE
Qualified tax collection contracts
The provision relating to qualified tax collection
contracts applies to tax receivables identified by the
Secretary after the date of enactment. The requirement to give
priority to certain private collection contractors and debt
collection centers applies to contracts and agreements entered
into after the date of enactment, and the new exception to
section 6103 applies to disclosures made after the date of
enactment. The requirement of the reports to Congress is
effective on the date of enactment.
Special compliance personnel program
The provision relating to the special compliance personnel
program applies to amounts collected and retained by the
Secretary after date of enactment.
5. Exclusion of dividends from controlled foreign corporations from the
definition of personal holding company income for purposes of the
personal holding company rules (sec. 306 of the bill and sec. 543 of
the Code)
PRESENT LAW
Personal holding company tax
In addition to the regular corporate tax, an additional tax
is imposed on a corporation that is a personal holding company.
The tax is an amount equal to the maximum rate of tax on
qualified dividends of individuals (currently 20 percent),
multiplied by the corporation's undistributed personal holding
company income above a dollar threshold.\378\ A personal
holding company is a closely held corporation at least 60
percent of the adjusted ordinary gross income (as defined) of
which is personal holding company income.\379\ Personal holding
company income includes dividends, interest, certain rents, and
other generally passive investment income.\380\
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\378\Sec. 541.
\379\Sec. 542.
\380\Sec. 543.
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Controlled foreign corporations
In general, the U.S. does not impose tax on the income of a
foreign corporation unless and until that income is distributed
to U.S. shareholders. However, the rules of subpart F\381\
provide an exception for certain passive or readily movable
income of a foreign corporation that, for a period of at least
30 days during the taxable year, is more than 50-percent owned
by U.S. shareholders each of which owns at least 10 percent of
the corporate stock after applying attribution rules (a
controlled foreign corporation). The pro rata share of such
corporate earnings is currently included as income of the 10-
percent (or greater) shareholders that hold their stock on the
last day of the taxable year. Except as otherwise provided for
specific purposes of the Code, the inclusions are not treated
as dividends. When the earnings are distributed to the U.S.
shareholders, they are not again subject to tax.\382\
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\381\Secs. 951-965.
\382\A separate set of rules applies to income of a foreign
corporation that is a passive foreign investment corporation, generally
defined as a foreign corporation 75 percent or more of the gross income
of which is passive income, or 50 percent or more of the assets of
which produce or are held for the production of passive income (sec.
1297). Such income is either subject to an interest charge for deferral
when it is ultimately distributed to a U.S. shareholder, or an election
can be made to include income currently even if not distributed (secs.
1291-1298). A corporation is not treated as a passive foreign
investment corporation with respect to any U.S. shareholder during the
period such corporation is a controlled foreign corporation of which
the shareholder is a 10-percent or greater owner under the rules
relating to controlled foreign corporations (sec. 1297(d)).
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When a controlled foreign corporation distributes money or
other property to a U.S. shareholder out of its earnings and
profits not previously included in the income of the
shareholder, the amount of money or fair market value of the
property is included in gross income as a dividend.\383\
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\383\A 10-percent corporate shareholder may be allowed a foreign
tax credit for the foreign income taxes paid on the earnings and
profits distributed as a dividend (sec. 902). Also, a dividends-
received deduction is allowed to a corporate shareholder to the extent
the dividend is attributable to certain U.S. source income, and no
foreign tax credit is allowed with respect to any such amount. (sec.
245). A dividend received by an individual is a qualified dividend,
eligible for the maximum 20-percent tax rates, if the dividend is from
a qualified foreign corporation (generally, a corporation (i) that is
eligible for certain treaty benefits or is incorporated in a U.S.
possession, or (ii) the stock of which with respect to which the
dividend is paid readily tradable on a U.S. securities market, and that
in either case is not a passive foreign investment company (sec.
1(h)(11)(C)).
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REASONS FOR CHANGE
The Committee believes that dividends paid by a controlled
foreign corporation to a 10-percent U.S. shareholder, out of
the controlled foreign corporation's earnings and profits that
were not treated as passive income inclusions to the
shareholder, are attributable to active business income of the
controlled foreign corporation. Accordingly, it is appropriate
to exclude these dividends from personal holding company income
of the shareholder.
The Committee also believes that the personal holding
company tax currently deters the repatriation of earnings that
would be repatriated if the U.S. corporate tax alone (but not
the personal holding company tax) were applicable to the
repatriated earnings.
EXPLANATION OF PROVISION
Under the provision, dividends received by a 10-percent
U.S. shareholder (as defined in section 951(b)) from a
controlled foreign corporation (as defined in section 957(a))
are excluded from the definition of personal holding company
income for purposes of the personal holding company tax.
EFFECTIVE DATE
The provision applies to taxable years ending on or after
the date of enactment.
6. Inflation adjustment for certain civil penalties under the Internal
Revenue Code (sec. 307 of the bill and secs. 6651, 6652(c), 6695, 6698,
6699, 6721, and 6722 of the Code)
PRESENT LAW
The Code provides for both civil and criminal penalties to
ensure complete and accurate reporting of tax liability and to
discourage fraudulent attempts to defeat or evade tax. Civil
and criminal penalties are applied separately. Thus, a taxpayer
convicted of a criminal tax offense may be subject to both
criminal and civil penalties, and a taxpayer acquitted of a
criminal tax offense may nonetheless be subject to civil tax
penalties. In cases involving both criminal and civil
penalties, the IRS generally does not pursue both
simultaneously, but delays pursuit of civil penalties until the
criminal proceedings have concluded.
Civil penalties are provided in Chapter 68 of the
Code.\384\ Civil penalties are categorized into two types:
additions to the tax and additional amounts (herein ``additions
to tax''), and assessable penalties. The additions to tax are
generally subject to deficiency proceedings, and some may be
waived under certain circumstances, including a showing of
reasonable cause under section 6664.\385\ Assessable penalties
can be assessed without restrictions (such as the opportunity
for preassessment judicial review) applicable in deficiency
cases.\386\ Assessable penalties may also be waived under
certain circumstances, including a showing of reasonable cause
under section 6724.
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\384\Secs. 6651-6751.
\385\Secs. 6651-6663.
\386\Secs. 6671-6725.
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Some penalties are calculated by reference to the tax
liability, while others are fixed dollar amounts. Penalties
with a fixed dollar amount include penalties in the case of (1)
failure to file a tax return or to pay tax,\387\ (2) failure to
file certain information returns, registration statements, and
certain other statements,\388\ (3) failure to furnish a copy of
the tax return to the taxpayer, failure to sign the return,
failure to furnish an identifying number, failure to retain a
completed copy of the tax return or retain on a list the name
and taxpayer identification number of the taxpayer for whom the
return was prepared, failure to file correct information
returns, negotiation of a taxpayer's check by the tax return
preparer, and failure to be diligent in determining eligibility
for the earned income credit,\389\ (4) failure of a partnership
to file a return,\390\ (5) failure of an S corporation to file
a return,\391\ (6) failure to file correct information
returns,\392\ and (7) failure to file correct payee
statements.\393\
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\387\Sec. 6651(a).
\388\Sec. 6652(c).
\389\Sec. 6695.
\390\Sec. 6698.
\391\Sec. 6699.
\392\Sec. 6721.
\393\Sec. 6722.
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The penalty provisions generally contain no automatic
mechanism to adjust the amount of the penalty for inflation.
However, the penalty provisions in sections 6721 and 6722 are
adjusted for inflation every five years and provide a rounding
rule.
REASONS FOR CHANGE
The Committee believes that indexing these fixed-dollar
penalties will encourage compliance with the tax law. By
correlating increases in the amounts to increases in other
types of dollar amounts in the economy generally, the penalties
can continue to serve as a meaningful economic deterrent to
non-compliant behavior.
EXPLANATION OF PROVISION
The provision indexes the fixed-dollar civil tax penalties
provided in sections 6651, 6652(c), 6695, 6698, 6699, 6721, and
6722 each calendar year. The provision rounds penalty amounts
down to the nearest multiple of five dollars if less than
$5,000, otherwise the provision rounds penalty amounts down to
the nearest multiple of $500. The provision does not modify the
present-law rounding rules in sections 6721 and 6722.
EFFECTIVE DATE
The provision is effective for returns required to be filed
after December 31, 2014.
III. BUDGET EFFECTS OF THE BILL
A. Committee Estimates
In compliance with paragraph 11(a) of rule XXVI of the
Standing Rules of the Senate, the following statement is made
concerning the estimated budget effects of the revenue
provisions of the ``Expiring Provisions Improvement Reform and
Efficiency (EXPIRE) Act of 2014'' as reported.
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
B. Budget Authority and Tax Expenditures
Budget authority
In compliance with section 308(a)(1) of the Budget Act, the
Committee states that no provisions of the bill as reported
involve new or increased budget authority.
Tax expenditures
In compliance with section 308(a)(2) of the Budget Act, the
Committee states that the revenue-reducing provisions of the
bill involve increased tax expenditures (see revenue table in
Part A., above). The revenue-increasing provisions of the bill
involve reduced tax expenditures (see revenue table in part A.,
above).
C. Consultation With Congressional Budget Office
In accordance with section 403 of the Budget Act, the
Committee advises that the Congressional Budget Office has not
submitted a statement on the bill. The letter from the
Congressional Budget Office will be provided separately.
IV. VOTES OF THE COMMITTEE
The Modification to the Chairman's Mark was deemed
incorporated into the Mark.
Amendment #5, Schumer/Enzi/Roberts/Stabenow/Cantwell #1, as
modified: Modification of IRC Section 41--Innovators Job
Creation Act--agreed to by voice vote.
Amendment #49, Brown/Stabenow #7: Manufacturing communities
tax credit--agreed to by voice vote.
Amendment #87, Toomey #3: Eliminate crony capitalist energy
tax credits--defeated by roll call vote, 6 ayes, 18 nays.
Ayes: Hatch, Roberts, Enzi, Burr, Isakson, Toomey.
Nays: Wyden, Rockefeller, Schumer, Stabenow, Cantwell,
Nelson (proxy), Menendez (proxy), Carper (proxy), Cardin
(proxy), Brown (proxy), Bennet, Casey (proxy), Warner (proxy),
Grassley, Crapo (proxy), Cornyn (proxy), Thune, Portman.
Amendment #6, Schumer/Warner #2: Modification of
transportation fringe benefit--bike share--agreed to by voice
vote.
Amendment #18, Stabenow #9: Extension of the special rule
for electronic transmission sales to implement FERC or state
electric restructuring--agreed to by voice vote.
Amendment #14, Stabenow #5: Two year extension of
empowerment zone tax incentives--agreed to by voice vote.
Amendment #85, Toomey/Hatch/Burr/Cornyn/Crapo/Roberts/
Portman/Isakson/Thune/Enzi #1: Save good paying American jobs
and encourage life-saving innovation by delaying the medical
device tax for two years. Senator Toomey moved to permit the
consideration of the amendment notwithstanding the ruling of
the Chair. The motion was defeated by a roll call vote, 9 ayes,
13 nays.
Ayes: Hatch, Grassley, Roberts, Enzi, Thune, Burr, Isakson,
Portman, Toomey.
Nays: Wyden, Rockefeller, Schumer, Stabenow, Cantwell,
Nelson, Menendez, Carper, Cardin, Brown, Bennet, Casey, Warner.
(Unanimous Consent granted to list Crapo as Aye)
Amendment #26, Menendez/Toomey #1: Small business inflation
protection Amendment--agreed to by voice vote.
Amendment #43, Brown/Rockefeller/Portman/Casey/Schumer/
Stabenow #1: Extension for health coverage for displaced
workers--agreed to by voice vote.
Final Passage of the Expiring Provisions Improvement Reform
and Efficiency Act of 2014--agreed to by voice vote.
V. REGULATORY IMPACT AND OTHER MATTERS
A. Regulatory Impact
Pursuant to paragraph 11(b) of rule XXVI of the Standing
Rules of the Senate, the Committee makes the following
statement concerning the regulatory impact that might be
incurred in carrying out the provisions of the bill as amended.
Impact on individuals and businesses, personal privacy and paperwork
The bill includes provisions to extend present-law tax
benefits, expand eligibility for other benefits, and creates
new tax incentives. The bill also includes provisions providing
for the inflation indexing of civil tax penalties, requiring
the Secretary to enter into a qualified tax collection contract
or contracts with respect to the collection of inactive
receivables, permitting a qualified small business to elect to
apply some or all of its research credit as does not exceed
$250,000 against its employer OASDI liability rather than
against its income tax liability, and requiring paid preparers
to meet due diligence requirements with respect to the child
tax credit similar to the earned income tax credit's
requirements.
The bill includes various other provisions that are not
expected to impose additional administrative requirements or
regulatory burdens on individuals or businesses.
The provisions of the bill do not impact personal privacy.
B. Unfunded Mandates Statement
This information is provided in accordance with section 423
of the Unfunded Mandates Reform Act of 1995 (Pub. L. No. 104-
4).
The Committee has determined that the tax provisions of the
reported bill do not contain Federal private sector mandates or
Federal intergovernmental mandates on State, local, or tribal
governments within the meaning of Public Law 104-4, the
Unfunded Mandates Reform Act of 1995. The costs required to
comply with each Federal private sector mandate generally are
no greater than the aggregate estimated budget effects of the
provision.
C. Tax Complexity Analysis
Section 4022(b) of the Internal Revenue Service Reform and
Restructuring Act of 1998 (the ``IRS Reform Act'') requires the
staff of the Joint Committee on Taxation (in consultation with
the Internal Revenue Service and the Treasury Department) to
provide a tax complexity analysis. The complexity analysis is
required for all legislation reported by the Senate Committee
on Finance, the House Committee on Ways and Means, or any
committee of conference if the legislation includes a provision
that directly or indirectly amends the Internal Revenue Code
and has widespread applicability to individuals or small
businesses. For each such provision identified by the staff of
the Joint Committee on Taxation a summary description of the
provision is provided along with an estimate of the number and
type of affected taxpayers, and a discussion regarding the
relevant complexity and administrative issues.
Following the analysis of the staff of the Joint Committee
on Taxation are the comments of the IRS and Treasury regarding
each of the provisions included in the complexity analysis.
1. EXTENSION OF BONUS DEPRECIATION
Summary description of the provision
The bill extends the 50-percent additional first-year
depreciation deduction for two years, generally through 2015
(through 2016 for certain longer-lived and transportation
property).
The bill provides that solely for purposes of determining
the percentage of completion under section 460(b)(1)(A), the
cost of qualified property with a MACRS recovery period of 7
years or less which is placed in service after December 31,
2012 and before January 1, 2016 (January 1, 2017, in the case
of certain longer-lived and transportation property) is taken
into account as a cost allocated to the contract as if bonus
depreciation had not been enacted.
The bill also extends the election to increase the AMT
credit limitation in lieu of bonus depreciation for two years
to property placed in service before January 1, 2016 (January
1, 2017, in the case of certain longer-lived property and
transportation property). A bonus depreciation amount, maximum
amount, and maximum increase amount is computed separately with
respect to property to which the extension of additional first-
year depreciation applies (``round 4 extension
property'').\394\
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\394\An election with respect to round 4 extension property is
binding for all property that is eligible qualified property solely by
reason of the extension of the 50-percent additional first-year
depreciation deduction.
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Under the bill, a corporation that has an election in
effect with respect to round 3 extension property to claim
minimum tax credits in lieu of bonus depreciation is treated as
having an election in effect for round 4 extension property,
unless the corporation elects otherwise. The bill also allows a
corporation that does not have an election in effect with
respect to round 3 extension property to elect to claim minimum
tax credits in lieu of bonus depreciation for round 4 extension
property. A separate bonus depreciation amount, maximum amount,
and maximum increase amount is computed and applied to round 4
extension property.\395\
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\395\In computing the maximum amount, the maximum increase amount
for round 4 extension property is reduced by bonus depreciation amounts
for preceding taxable years only with respect to round 4 extension
property.
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The bill also includes a technical correction with respect
to the taxable year for which an election under section
168(k)(4) is made.
Number of affected taxpayers
It is estimated that the provision will affect over ten
percent of small business tax returns.
Discussion
The reporting requirements are unchanged by this provision.
Capital assets purchased during the tax year will still need to
be reported on Form 4562; however, the current year tax
deduction associated with such assets will increase.
2. INCREASED EXPENSING LIMITATIONS AND TREATMENT OF CERTAIN REAL
PROPERTY AS SECTION 179 PROPERTY
Summary description of the provision
The bill provides that the maximum amount a taxpayer may
expense, for taxable years beginning in 2014 and 2015, is
$500,000 of the cost of qualifying property placed in service
for the taxable year. The $500,000 amount is reduced (but not
below zero) by the amount by which the cost of qualifying
property placed in service during the taxable year exceeds
$2,000,000. The $500,000 and $2,000,000 amounts are indexed for
inflation for taxable years beginning after 2013.
In addition, the bill extends, for taxable years beginning
in 2014 and 2015, the treatment of off-the-shelf computer
software as qualifying property. The bill also extends the
treatment of qualified real property as eligible section 179
property for taxable years beginning in 2014 and 2015,
including the limitation on carryovers and the maximum amount
of $250,000 for each taxable year. For taxable years beginning
in 2014 and 2015, the bill continues to permit a taxpayer to
amend or irrevocably revoke an election for a taxable year
under section 179 without the consent of the Commissioner.
Number of affected taxpayers
It is estimated that the provision will affect over ten
percent of small business tax returns.
Discussion
While taxpayers purchasing section 179 property will still
be required to complete and file Form 4562, significantly less
detail is required to be included on such form. Accordingly,
the compliance burden of many taxpayers will be reduced.
Department of the Treasury,
Internal Revenue Service,
Washington, DC, April 14, 2014.
Mr. Thomas A. Barthold,
Chief of Staff, Joint Committee on Taxation,
Washington, DC.
Dear Mr. Barthold: I am responding to your letter dated
April 8, 2014, in which you requested a complexity analysis
related to the Expiring Provisions Improvement Reform and
Efficiency (EXPIRE) Act of 2014.
Enclosed are the combined comments of the Internal Revenue
Service and the Treasury Department for inclusion in the
complexity analysis in the Senate Committee on Finance report
on the Expiring Provisions Improvement Reform and Efficiency
(EXPIRE) Act. Our analysis covers the two provisions that you
preliminarily identified in your letter: extension of bonus
depreciation and increased expensing limitations and treatment
of certain real property as section 179 property. Please note
that for purposes of this complexity analysis, IRS staff
assumed timely enactment of this legislation. If legislation is
not enacted before the end of the year, there would be
complexity for IRS and for taxpayers that is not addressed in
this response.
Our comments are based on the description of the provision
provided in your letter. This analysis does not include
administrative cost estimates for the changes that would be
required. Due to the short turnaround time, our comments are
provisional and subject to change upon a more complete and in-
depth analysis of the provisions.
Sincerely,
John A. Koskinen.
Enclosure.
COMPLEXITY ANALYSIS OF THE COMMITTEE REPORT ON EXPIRING PROVISIONS
IMPROVEMENT REFORM AND EFFICIENCY (EXPIRE) ACT OF 2014
1. Extension of Bonus Depreciation
PROVISION
The bill extends the 50-percent additional first-year
depreciation deduction for two years, generally through 2015
(through 2016 for certain longer-lived and transportation
property).
The bill provides that solely for purposes of determining
the percentage of completion under section 460(b)(1)(A), the
cost of qualified property with a MACRS recovery period of 7
years or less which is placed in service after December 31,
2012 and before January 1, 2016 (January 1, 2017, in the case
of certain longer-lived and transportation property) is taken
into account as a cost allocated to the contract as if bonus
depreciation had not been enacted.
The bill also extends the election to increase the AMT
credit limitation in lieu of bonus depreciation for two years
to property placed in service before January 1, 2016 (January
1, 2017, in the case of certain longer-lived property and
transportation property). A bonus depreciation amount, maximum
amount, and maximum increase amount is computed separately with
respect to property to which the extension of additional first-
year depreciation applies (``round 4 extension property'').
Under the bill, a corporation that has an election in
effect with respect to round 3 extension property to claim
minimum tax credits in lieu of bonus depreciation is treated as
having an election in effect for round 4 extension property,
unless the corporation elects otherwise. The bill also allows a
corporation that does not have an election in effect with
respect to round 3 extension property to elect to claim minimum
tax credits in lieu of bonus deprecation for round 4 extension
property. A separate bonus depreciation amount, maximum amount,
and maximum increase amount is computed and applied to round 4
extension property.
The bill also includes a technical correction with respect
to the taxable year for which an election under section
168(k)(4) is made.
IRS/TREASURY COMMENTS
The extension of the time period for property
eligible for additional first-year depreciation would have no
significant impact on Form 4562 or any other tax forms. The
Instructions for Form 4562, Publication 946, and other
instructions and publications would be revised to reflect the
extension.
No programming changes would be required by this
Provision.
2. Increased Expensing Limitations and Treatment of Certain Real
Property
PROVISION
The bill provides that the maximum amount a taxpayer may
expense, for taxable years beginning in 2014 and 2015, is
$500,000 of the cost of qualifying property placed in service
for the taxable year. The $500,000 amount is reduced (but not
below zero) by the amount by which the cost of qualifying
property placed in service during the taxable year exceeds
$2,000,000. The $500,000 and $2,000,000 amounts are indexed for
inflation for taxable years beginning after 2013.
In addition, the bill extends, for taxable years beginning
in 2014 and 2015, the treatment of off-the-shelf computer
software as qualifying property. The bill also extends the
treatment of qualified real property as eligible section 179
property for taxable years beginning in 2014 and 2015,
including the limitation on carryovers and the maximum amount
of $250,000 for each taxable year. For taxable years beginning
in 2014 and 2015, the bill continues to permit a taxpayer to
amend or irrevocably revoke an election for a taxable year
under section 179 without the consent of the Commissioner.
IRS/TREASURY COMMENTS
The extension of the time period for property
eligible for additional first-year depreciation would have no
significant impact on Form 4562 or any other tax forms. The
Instructions for Form 4562, Publication 946, and other
instructions and publications would be revised to reflect the
extension.
No programming changes would be required by this
provision.
VI. CHANGES IN EXISTING LAW MADE BY THE BILL, AS REPORTED
In the opinion of the Committee, it is necessary in order
to expedite the business of the Senate, to dispense with the
requirements of paragraph 12 of rule XXVI of the Standing Rules
of the Senate (relating to the showing of changes in existing
law made by the bill as reported by the Committee).