[Senate Report 114-118]
[From the U.S. Government Publishing Office]
Calendar No. 198
114th Congress } { Report
SENATE
1st Session } { 114-118
_______________________________________________________________________
TAX RELIEF EXTENSION ACT OF 2015
__________
R E P O R T
[to accompany s. 1946]
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]
August 5, 2015.--Ordered to be printed
______
U.S. GOVERNMENT PUBLISHING OFFICE
49-010 WASHINGTON : 2015
C O N T E N T S
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Page
I. LEGISLATIVE BACKGROUND............................................1
II. EXPLANATION OF THE BILL...........................................1
A. Sense of the Senate (sec. 2 of the bill).............. 1
TITLE I--PROVISIONS THAT EXPIRED IN 2014......................... 2
A. Individual Tax Extenders.............................. 2
1. Extension and modification of deduction for
certain expenses of elementary and secondary
school teachers (sec. 101 of the bill and sec.
62(a)(2)(D) of the Code)......................... 2
2. Extension and modification of exclusion from gross
income of discharges of acquisition indebtedness
on principal residences (sec. 102 of the bill and
sec. 108 of the Code)............................ 3
3. Extension of parity for employer-provided mass
transit and parking benefits and modification of
exclusion for bicycle commuting reimbursements
(sec. 103 of the bill and 132(f) of the Code).... 5
4. Extension of mortgage insurance premiums treated
as qualified residence interest (sec. 104 of the
bill and sec. 163 of the Code)................... 7
5. Extension of deduction for State and local general
sales taxes (sec. 105 of the bill and sec. 164 of
the Code)........................................ 9
6. Extension of special rule for contributions of
capital gain real property made for conservation
purposes (sec. 106 of the bill and sec. 170(b) of
the Code)........................................ 10
7. Extension of deduction for qualified tuition and
related expenses (sec. 107 of the bill and sec.
222 of the Code)................................. 13
8. Extension of tax-free distributions from
individual retirement plans for charitable
purposes (sec. 108 of the bill and sec. 408(d)(8)
of the Code)..................................... 15
B. Business Tax Extenders................................ 19
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)........................ 19
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).................... 25
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) 27
4. Extension of Indian employment tax credit (sec.
114 of the bill and sec. 45A of the Code)........ 28
5. Extension and modification of new markets tax
credit (sec. 115 of the bill and sec. 45D of the
Code)............................................ 29
6. Extension and modification of railroad track
maintenance credit (sec. 116 of the bill and sec.
45G of the Code)................................. 32
7. Extension of mine rescue team training credit
(sec. 117 of the bill and sec. 45N of the Code).. 33
8. Extension and modification of 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)................................. 34
9. Extension and modification of work opportunity tax
credit (sec. 119 of the bill and secs. 51 and 52
of the Code)..................................... 35
10. Extension and modification of qualified zone
academy bonds (sec. 120 of the bill and secs. 54E
and 6431 of the Code)............................ 42
11. Extension of classification of certain race
horses as three-year property (sec. 121 of the
bill and sec. 168 of the Code)................... 44
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)................... 45
13. Extension of seven-year recovery period for
motorsports entertainment complexes (sec. 123 of
the bill and sec. 168 of the Code)............... 48
14. Extension and modification of accelerated
depreciation for business property on an Indian
reservation (sec. 124 of the bill and sec. 168(j)
of the Code)..................................... 49
15. Extension of bonus depreciation (sec. 125 of the
bill and sec. 168(k) of the Code)................ 51
16. Extension of enhanced charitable deduction for
contributions of food inventory (sec. 126 of the
bill and sec. 170 of the Code)................... 55
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)................... 57
18. Extension of election to expense mine safety
equipment (sec. 128 of the bill and sec. 179E of
the Code)........................................ 59
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)........ 60
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)........................ 62
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)..................................... 64
22. Extension of treatment of certain dividends of
regulated investment companies (sec. 132 of the
bill and sec. 871(k) of the Code)................ 65
23. Extension of RIC qualified investment entity
treatment under FIRPTA (sec. 133 of the bill and
secs. 897 and 1445 of the Code).................. 66
24. Extension of subpart F exception for active
financing income (sec. 134 of the bill and secs.
953 and 954 of the Code)......................... 67
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)............................................ 70
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).................. 71
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)........................................ 72
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)....... 73
29. Extension and modification of empowerment zone
tax incentives (sec. 139 of the bill and secs.
1391 and 1394 of the Code)....................... 75
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)............................. 81
31. Extension of American Samoa Economic Development
Credit (sec. 141 of the bill and sec. 119 of Pub.
L. No. 109-432).................................. 82
C. Energy Tax Extenders.................................. 84
1. Extension and modification of credit for
nonbusiness energy property (sec.151 of the bill
and sec. 25C of the Code)........................ 84
2. Extension of credit for fuel cell motor vehicles
(sec. 152 of the bill and sec. 30B of the Code).. 87
3. Extension of credit for alternative fuel vehicle
refueling property (sec. 153 of the bill and
section 30C of the Code)......................... 87
4. Extension of second generation biofuel producer
credit (sec. 154 of the bill and sec. 40 of the
Code)............................................ 88
5. Extension and modification of incentives for
biodiesel and renewable diesel (sec. 155 of the
bill and sec. 40A, 6426 and 6427(e) of the Code). 89
6. Extension of credit for the production of Indian
coal facilities placed in service before 2009
(sec. 156 of the bill and sec. 45 of the Code)... 94
7. Extension of credits with respect to facilities
producing energy from certain renewable resources
(sec. 157 of the bill and sec. 45 of the Code)... 95
8. Extension of credit for energy-efficient new homes
(sec. 158 of the bill and sec. 45L of the Code).. 96
9. Extension of special allowance for second
generation biofuel plant property (sec. 159 of
the bill and sec. 168(l) of the Code)............ 97
10. Extension and modification of energy efficient
commercial buildings deduction (sec. 160 of the
bill and sec. 179D of the Code).................. 99
11. Extension of special rule for sales or
dispositions to implement FERC or State electric
restructuring policy for qualified electric
utilities (sec. 161 of the bill and sec. 451(i)
of the Code)..................................... 102
12. Extension of excise tax credits and payment
provisions relating to alternative fuel (sec. 162
of the bill and secs. 6426 and 6427 of the Code). 103
TITLE II--PROVISION THAT EXPIRED IN 2013......................... 105
A. Extension of Credit for Electric Motorcycles (sec. 201
of the bill and sec. 30D of the Code)................ 105
TITLE III--REVENUE RAISING PROVISIONS............................ 106
1. Exclusion from gross income of certain clean coal
power grants to non-corporate taxpayers (sec. 301
of the bill)..................................... 106
2. Treatment of certain persons as employers with
respect to motion picture projects (sec. 302 of
the bill and new sec. 3512 of the Code).......... 107
3. Equalization of Excise Tax and Credits for
Liquefied Natural Gas and Liquefied Petroleum Gas
(sec. 303 of the bill and sec. 4041 of the Code). 110
4. Additional information on returns relating to
mortgage interest (sec. 304 of the bill and sec.
6050H of the Code)............................... 112
III.BUDGET EFFECTS OF THE BILL......................................113
A. Committee Estimates................................... 113
B. Budget Authority and Tax Expenditures................. 121
C. Consultation with Congressional Budget Office......... 121
IV. VOTES OF THE COMMITTEE..........................................128
V. REGULATORY IMPACT AND OTHER MATTERS.............................128
A. Regulatory Impact..................................... 128
B. Unfunded Mandates Statement........................... 128
C. Tax Complexity Analysis............................... 129
VI. CHANGES IN EXISTING LAW MADE BY THE BILL, AS REPORTED...........136
Calendar No. 198
114th Congress } { Report
SENATE
1st Session } { 114-118
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TAX RELIEF EXTENSION ACT OF 2015
_______
August 5, 2015.--Ordered to be printed
_______
Mr. Hatch, from the Committee on Finance,
submitted the following
R E P O R T
[To accompany S. 1946]
The Committee on Finance, having considered an original
bill, S. 1946, to amend the Internal Revenue Code of 1986 to
extend certain expiring provisions, and for other purposes,
reports favorably thereon without amendment and recommends that
the bill do pass.
I. LEGISLATIVE BACKGROUND
On July 21, 2015, the Senate Committee on Finance marked up
original legislation to amend the Internal Revenue Code of 1986
to extend certain expired tax provisions. With a majority and
quorum present, the Committee ordered the bill favorably
reported, with two amendments. This report describes the
provisions of the bill.
II. EXPLANATION OF THE BILL
A. Sense of the Senate
(Sec. 2 of the bill)
The bill expresses the sense of the Senate that Congress
should pursue comprehensive tax reform that eliminates
temporary provisions from the tax code, thus making permanent
those provisions that merit such treatment and allowing others
to expire, and that a major focus of tax reform should be
fostering economic growth and lowering tax rates by broadening
the tax base.
TITLE I--PROVISIONS THAT EXPIRED IN 2014
A. Individual Tax Extenders
1. Extension and modification of deduction for certain expenses of
elementary and secondary school teachers (sec. 101 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. 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, 2015, 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.\1\ 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), section 529(c)(1)
(relating to qualified tuition programs), and section 530(d)(2)
(relating to Coverdell education savings accounts).
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\1\Sec. 62(a)(2)(D). Except where otherwise provided, all section
references are to the Internal Revenue Code of 1986, as amended (the
``Code'').
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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, 2014.
REASONS FOR CHANGE
The Committee recognizes that many elementary and secondary
school teachers provide substantial classroom resources at
their own expense and believes 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.
Additionally, the Committee recognizes that teachers must often
incur out-of-pocket expenses for professional development, and
believes that it is appropriate to include these amounts as
expenses eligible for the deduction. Finally, the Committee
believes that it is appropriate to index the $250 maximum
deduction amount for inflation, so as to prevent the value of
the deduction from eroding over time.
EXPLANATION OF PROVISION
The provision extends the deduction for eligible educator
expenses for two years, through December 31, 2016. The
provision indexes the $250 maximum deduction amount for
inflation, and provides that expenses for professional
development shall also be considered eligible expenses for
purposes of the deduction.
EFFECTIVE DATE
The provision applies to taxable years beginning after
December 31, 2014.
2. Extension and modification of exclusion from gross income of
discharges of acquisition indebtedness on principal residences (sec.
102 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.\2\ 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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\2\Secs. 61(a)(12) and 108. 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.\3\
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\3\Sec. 1017.
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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.
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 of 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, 2015.
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. Additionally, the Committee also believes it is
appropriate to provide relief to taxpayers who may have entered
into a binding arrangement for the discharge of indebtedness
prior to the expiration of the provision, but for whom the
indebtedness was not actually discharged until the following
taxable year.
Explanation of Provision
The provision extends for two additional years (through
December 31, 2016) the exclusion from gross income for
discharges of qualified principal residence indebtedness. The
provision also provides for an exclusion from gross income in
the case of those taxpayers' whose qualified principal
residence indebtedness was discharged on or after January 1,
2017, if the discharge was pursuant to a binding written
agreement entered into prior to January 1, 2017.
EFFECTIVE DATE
The provision applies to discharges of indebtedness after
December 31, 2014.
3. Extension of parity for employer-provided mass transit and parking
benefits and modification of exclusion for bicycle commuting
reimbursements (sec. 103 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.\4\ Qualified transportation fringe benefits
include parking, transit passes, vanpool benefits, and
qualified bicycle commuting reimbursements.
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\4\Secs. 132(a)(5) and (f), 3121(a)(20), 3231(e)(5), 3306(b)(16)
and 3401(a)(19).
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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,
in general, 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.
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 2015, the limits are $130 and $250, respectively. Effective
for months beginning on or after February 17, 2009,\5\ and
before January 1, 2015, 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.
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\5\Parity was provided originally 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, 2015, 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, that is,
through December 31, 2016. Thus, for 2015, 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. Similarly, for 2016, the same
monthly limit will apply on the exclusion for combined transit
pass and vanpool benefits and the exclusion for qualified
parking benefits.
In order for the extension to be effective retroactive to
January 1, 2015, expenses incurred for months beginning after
December 31, 2014, 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, 2014, and before
enactment of the provision. Further, the Committee intends that
reimbursements for expenses incurred for months beginning after
December 31, 2014, 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 2015 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
applies to reimbursements for taxable years beginning before
January 1, 2017.
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, 2014. The provision related to qualified
bicycle commuting reimbursements is effective for taxable years
beginning after December 31, 2014.
4. Extension of mortgage insurance premiums treated as qualified
residence interest (sec. 104 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.\6\
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\6\Sec. 163(h).
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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.
Qualified 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
(or fraction thereof) 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 $109,000 ($54,500 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,
2014, 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 2015 and 2016 (and not
properly allocable to any period after 2016).
EFFECTIVE DATE
The provision applies to amounts paid or accrued after
December 31, 2014.
5. Extension of deduction for State and local general sales taxes (sec.
105 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 2015, 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.\7\ 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.
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\7\Sec. 164(b)(5)(B).
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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 2016.
EFFECTIVE DATE
The provision applies to taxable years beginning after
December 31, 2014.
6. Extension of special rule for contributions of capital gain real
property made for conservation purposes (sec. 106 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.\8\
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\8\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.\9\ 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.
---------------------------------------------------------------------------
\9\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\10\ 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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\10\Sec. 170(b)(1)(E).
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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.\11\
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\11\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, 2014.\12\
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\12\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 years, i.e.,
for contributions made in taxable years beginning before
January 1, 2017.
EFFECTIVE DATE
The provision is effective for contributions made in
taxable years beginning after December 31, 2014.
7. Extension of deduction for qualified tuition and related expenses
(sec. 107 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.\13\ 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.\14\ 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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\13\Sec. 222.
\14\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, 2014.
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,\15\ 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.\16\ 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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\15\Secs. 222(d)(1) and 25A(g)(2).
\16\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 2016.
EFFECTIVE DATE
The provision applies to taxable years beginning after
December 31, 2014.
8. Extension of tax-free distributions from individual retirement plans
for charitable purposes (sec. 108 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;\17\ and (3) a Federal,
State, or local governmental entity, but only if the
contribution is made for exclusively public purposes.\18\ The
deduction also is allowed for purposes of calculating
alternative minimum taxable income.
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\17\Secs. 170(c)(3)-(5).
\18\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.\19\
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\19\Secs. 170(b) and (e).
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A taxpayer who takes the standard deduction (who does not
itemize deductions) may not take a separate deduction for
charitable contributions.\20\
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\20\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.\21\ 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.\22\
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\21\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).
\22\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.\23\ 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.\24\ 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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\23\Secs. 170(f), 2055(e)(2), and 2522(c)(2).
\24\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\.\25\
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\25\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 IRA's
nondeductible contributions to the IRA's 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, in
general, the value of the account, income on the account, and
investment in the contract (basis) 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;\26\ (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.
---------------------------------------------------------------------------
\26\Conversion contributions refer to conversions of amounts in a
traditional IRA to a Roth IRA and rollovers of nonRoth amounts from an
employer-sponsored plan to a Roth IRA.
---------------------------------------------------------------------------
Taxable distributions from an IRA are generally subject to
withholding unless the individual elects not to have
withholding apply.\27\ Elections not to have withholding apply
are to be made in the time and manner prescribed by the
Secretary.
---------------------------------------------------------------------------
\27\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.\28\ The amount excluded 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.
---------------------------------------------------------------------------
\28\Sec. 408(d)(8). The exclusion does not apply to distributions
from employer-sponsored retirement plans, including SIMPLE IRAs and
simplified employee pensions (``SEPs'').
---------------------------------------------------------------------------
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, 2014.
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 years,
i.e., for distributions made in taxable years beginning before
January 1, 2017.
EFFECTIVE DATE
The provision is effective for distributions made in
taxable years beginning after December 31, 2014.
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.\29\ Thus, the research
credit is generally available with respect to incremental
increases in qualified research. An alternative simplified
credit (with a 14-percent rate and a different base amount) may
be claimed in lieu of this credit.\30\
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\29\Sec. 41(a)(1). Except where otherwise specified, all section
references are to the Internal Revenue Code of 1986, as amended (the
``Code'').
\30\Sec. 41(c)(5).
---------------------------------------------------------------------------
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.\31\ This separate
credit computation commonly is referred to as the basic
research credit.
---------------------------------------------------------------------------
\31\Sec. 41(a)(2) and (e). The base period for the basic research
credit generally extends from 1981 through 1983.
---------------------------------------------------------------------------
Finally, a research credit is available for a taxpayer's
expenditures on research undertaken by an energy research
consortium.\32\ 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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\32\Sec. 41(a)(3).
---------------------------------------------------------------------------
The research credit, including the basic research credit
and the energy research credit, expires for amounts paid or
incurred after December 31, 2014.\33\
---------------------------------------------------------------------------
\33\Sec. 41(h).
---------------------------------------------------------------------------
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. 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).\34\ 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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\34\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 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.\35\ The rate is reduced to 6 percent if a
taxpayer has no qualified research expenses in any one of the
three preceding taxable years.\36\ An election to use the
alternative simplified credit applies to all succeeding taxable
years unless revoked with the consent of the Secretary.\37\
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\35\Sec. 41(c)(5)(A).
\36\Sec. 41(c)(5)(B).
\37\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).\38\ 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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\38\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.\39\ 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).\40\
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\39\Sec. 41(d)(3).
\40\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.\41\ Taxpayers may alternatively elect to claim a reduced
research tax credit amount under section 41 in lieu of reducing
deductions otherwise allowed.\42\
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\41\Sec. 280C(c). For example, assume that a taxpayer makes credit-
eligible research expenditures of $1 million during the year and that
the base amount is $600,000. Under the standard credit calculation
(i.e., where a taxpayer may claim a research credit equal to 20 percent
of the amount by which its qualified expenses for the year exceed its
base period amount), the taxpayer is allowed a credit equal to 20
percent of the $400,000 increase in research expenditures, or $80,000
(($1 million - $600,000) * 20% = $80,000). To avoid a double benefit,
the amount of the taxpayer's deduction under section 174 is reduced by
$80,000 (the amount of the research credit), leaving a deduction of
$920,000 ($1 million - $80,000).
\42\Sec. 280C(c)(3). Taxpayers making this election reduce the
allowable research credit by the maximum corporate tax rate (currently
35 percent). Continuing with the example from the prior footnote, an
electing taxpayer would have its credit reduced to $52,000 ($80,000 -
($80,000 * 0.35%)), but would retain its $1 million deduction for
research expenses. For example, this option might be desirable for a
taxpayer who cannot claim the full amount of the research credit
otherwise allowable due to the limitation imposed by the alternative
minimum tax.
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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.\43\ 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 ($118,500 for 2015); and (2) the
Medicare or hospital insurance (``HI'') tax equal to 1.45
percent of all covered wages.\44\ The employee portion of the
FICA tax generally must be withheld and remitted to the Federal
government by the employer.
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\43\Secs. 3101-3128.
\44\For taxable years beginning after 2012, 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.
Specified credits allowed against alternative minimum tax
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\45\ 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\46\ as exceeds $25,000.\47\ Any general business
credit in excess of this limitation may be carried back one
year and forward up to 20 years.\48\ 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.\49\ Generally, the tentative minimum tax of a
C corporation with average annual gross receipts of less than
$7.5 million for prior three-year periods is zero.\50\
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\45\The term ``net income tax'' means the sum of the regular tax
liability and the alternative minimum tax, reduced by the credits
allowable under sections 21 through 30D. Sec. 38(c)(1).
\46\The term ``net regular tax liability'' means the regular tax
liability reduced by the sum of certain nonrefundable personal and
other credits. Sec. 38(c)(1).
\47\Sec. 38(c)(1).
\48\Sec. 39(a)(1).
\49\See sec. 55(b). For example, assume a taxpayer has a regular
tax of $80,000, a tentative minimum tax of $100,000, and a research
credit determined under section 41 of $90,000 for a taxable year (and
no other credits). Under present law, the taxpayer's research credit is
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) for the
taxable year and the taxpayer's net tax liability is $100,000. The
$90,000 research credit may be carried back or forward under the rules
applicable to the general business credit.
\50\Sec. 55(e).
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In applying the tax liability limitation to a list of
``specified credits'' that are part of the general business
credit, the tentative minimum tax is treated as being zero.\51\
Thus, the specified credits generally may offset both regular
tax and alternative minimum tax (``AMT'') liabilities.
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\51\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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For taxable years beginning in 2010, an eligible small
business was allowed to offset both the regular and AMT
liability with the general business credits determined for the
taxable year (``eligible small business credits'').\52\ For
this purpose, an eligible small business was, with respect to
any taxable year, a corporation, the stock of which was not
publicly traded, a partnership, or a sole proprietor, if the
average annual gross receipts did not exceed $50 million.\53\
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.\54\
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\52\Sec. 38(c)(5)(B).
\53\Sec. 38(c)(5)(C).
\54\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.
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, 2017.
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.\55\ If
a taxpayer makes an election under this provision, the amount
so elected is treated as a research credit for purposes of
section 280C.\56\
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\55\The credit does not apply against its employer HI liability or
against the employee portion of FICA taxes the employer is required to
withhold and remit to the government.
\56\Thus, taxpayers are either denied a section 174 deduction in
the amount of the credit or may elect a reduced research credit amount.
The election is not taken into account for purposes of determining any
amount allowable as a payroll tax deduction.
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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,\57\ 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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\57\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.\58\ The $250,000 amount is allocated among the
members in proportion to each member's qualified research
expenses. Each member may separately elect the payroll tax
credit, but not in excess of its allocated dollar amount.
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\58\For this purpose, all persons or entities treated as a single
taxpayer under section 41(f)(1) are treated as a single person.
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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.\59\ 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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\59\In the case of a qualified small business that is a
partnership, this is the return required to be filed under section
6031. In the case of a qualified small business that is an S
corporation, this is the return required to be filed under section
6037. In the case of any other qualified small business, this is 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. Any amount not
credited for the following calendar quarter is allowed as a
credit against the qualified small business's OASDI tax
liability in succeeding calendar quarters until the entire
credit amount is used.
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.
Specified credits allowed against alternative minimum tax
The provision also provides that, in the case of an
eligible small business (as defined in section 38(c)(5)(C)),
the research credit determined under section 41 for taxable
years beginning after December 31, 2014 is a specified credit.
Thus, these research credits of an eligible small business may
offset both regular tax and AMT liabilities.\60\
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\60\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 $33,750 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,
2014. The provision to allow the research credit against
employer OASDI tax is effective for credits determined for
taxable years beginning after December 31, 2014. 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, 2014, 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 nine percent for newly constructed non-Federally
subsidized buildings placed in service after July 30, 2008, and
before January 1, 2015.
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 nine percent for newly constructed non-Federally
subsidized buildings with respect to which credit allocations
are made before January 1, 2017. The provision also establishes
a four-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 four-percent minimum credit rate. This minimum
credit rate only applies to the acquisition of existing
buildings that receive housing credit dollar allocations which
are subject to caps from State housing credit agencies. The
four-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, 2017.
EFFECTIVE DATE
The provision is effective on January 1, 2015.
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, 2015
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, 2015
Under a temporary 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, 2015, 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
section 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, 2015, or
qualified buildings placed in service after July 30, 2008, and
before January 1, 2015, 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, 2015.
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, 2016).
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.\61\ 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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\61\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\62\ or section 4(10) of the Indian Child Welfare
Act of 1978.\63\ 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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\62\Pub. L. No. 93-262.
\63\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 adjustment for inflation is
$45,000 for 2014).\64\ 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.
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\64\See Instructions for Form 8845, Indian Employment Credit
(2014).
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The wage credit is available for wages paid or incurred in
taxable years beginning on or before December 31, 2014.
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 Indian
employment credit (through taxable years beginning on or before
December 31, 2016).
EFFECTIVE DATE
The provision is effective for taxable years beginning
after December 31, 2014.
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'').\65\ 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.\66\ 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.\67\ 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.\68\
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\65\Section 45D was added by section 121(a) of the Community
Renewal Tax Relief Act of 2000, Pub. L. No. 106-554.
\66\Sec. 45D(a)(2).
\67\Sec. 45D(a)(3).
\68\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.\69\ 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.\70\
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.\71\
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\69\Sec. 45D(c).
\70\Sec. 45D(b).
\71\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.\72\ 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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\72\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.\73\ 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\74\ (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.\75\ 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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\73\Sec. 45D(e)(2).
\74\Pub. L. No. 103-325.
\75\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.\76\
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\76\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, 2013, and
2014. The new markets tax credit expired on December 31, 2014.
No amount of unused allocation limitation may be carried to any
calendar year after 2019.
REASONS FOR CHANGE
The Committee believes that the new markets tax credit has
proven 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 it is appropriate to provide
for a one-time adjustment to the credit limitation (by the rate
of inflation from 2008 through 2014) in order to partially
offset allocation erosion due to inflation.
EXPLANATION OF PROVISION
The provision extends the new markets tax credit for two
years, through 2016, permitting up to $3.94 billion in
qualified equity investments for each of the 2015 and 2016
calendar years. The provision also extends for two years,
through 2021, the carryover period for unused new markets tax
credits.
EFFECTIVE DATE
The provision applies to calendar years beginning after
December 31, 2014.
6. Extension and modification 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, 2015.\77\ 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.\78\ 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.\79\ 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.\80\
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\77\Sec. 45G(a) and (f).
\78\Sec. 45G(b)(1).
\79\Sec. 38(c)(4).
\80\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).\81\
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\81\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.\82\
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\82\Sec. 45G(c).
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The terms Class II or Class III railroad have the meanings
given by the Surface Transportation Board.\83\
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\83\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 and
expanded prospectively to apply to qualified railroad track
owned or leased by January 1, 2015.
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 after December 31, 2014,
and before January 1, 2017.
The provision also provides that 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,
2015, 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).
EFFECTIVE DATE
The provision is effective for expenditures paid or
incurred in taxable years beginning after December 31, 2014.
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.\84\ 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.\85\
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\84\Sec. 45N(a).
\85\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.\86\ The term ``wages'' has the meaning given to such
term by section 3306(b)\87\ (determined without regard to any
dollar limitation contained in that section).\88\
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\86\Sec. 45N(c).
\87\Section 3306(b) defines wages for purposes of Federal
Unemployment Tax.
\88\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.\89\ The credit does not apply to taxable years
beginning after December 31, 2014.\90\ Additionally, the credit
is not allowable for purposes of computing the alternative
minimum tax.\91\
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\89\Sec. 280C(e).
\90\Sec. 45N(e).
\91\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, 2016.
EFFECTIVE DATE
The provision is effective for taxable years beginning
after December 31, 2014.
8. Extension and modification of 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.\92\ 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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\92\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.\93\ 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.\94\
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\93\Sec. 414(b), (c), (m) and (o).
\94\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.\95\ 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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\95\Sec. 3401(h)(2).
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No deduction may be taken for that portion of compensation
that is equal to the credit.\96\ 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, regulated investment
companies, real estate investment trusts and certain
cooperatives apply also to the differential wage payment
credit.\97\
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\96\Sec. 280C(a).
\97\Sec. 52(c), (d), (e).
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The credit is available with respect to amounts paid after
June 17, 2008,\98\ and before January 1, 2015.
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\98\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, that is, to amounts paid
before January 1, 2017.
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,
2014.
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''),\99\ 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.\100\ 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.\101\
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\99\Pub. L. No. 112-56 (Nov. 21, 2011).
\100\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.
\101\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 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 section
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,
2014.
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 (for qualified wages paid to
individuals who begin work prior to January 1, 2017).
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, 2014.
10. Extension and modification 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.\102\ 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.\103\ 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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\102\Sec. 103.
\103\Sec. 149(e).
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The tax exemption for State and local bonds does not apply
to any arbitrage bond.\104\ 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.\105\ 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.
---------------------------------------------------------------------------
\104\Sec. 103(a) and (b)(2).
\105\Sec. 148.
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Qualified zone academy bonds
As an alternative to traditional tax-exempt bonds, State
and local governments were given the authority to issue
``qualified zone academy bonds.''\106\ 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, 2013 and 2014.
Each calendar year's bond limitation is allocated to the States
according to their respective populations of individuals below
the poverty line. Each State, in turn, allocates the bond
authority to qualified zone academies within such State.
---------------------------------------------------------------------------
\106\See secs. 54E and 1397E.
---------------------------------------------------------------------------
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.\107\ 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.\108\ 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.
---------------------------------------------------------------------------
\107\Sec. 54A.
\108\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.
---------------------------------------------------------------------------
``Qualified zone academy bonds'' are defined as any bond
issued by a State or local government, provided that (1) 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, 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'').
Section 6431 is not available for qualified zone academy bond
allocations from the national limitation for years after 2010
or any carry forward of those allocations.
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 years. The provision authorizes issuance of up
to $400 million of qualified zone academy bonds for 2015 and
$400 million for 2016. The option to issue direct-pay bonds is
not available. The provision also reduces the private business
contribution requirement from 10 percent to five percent.
EFFECTIVE DATE
The provision applies to obligations issued after December
31, 2014.
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.\109\ Tangible property generally is depreciated
under the modified accelerated cost recovery system
(``MACRS''), which determines depreciation by applying specific
recovery periods,\110\ placed-in-service conventions, and
depreciation methods to the cost of various types of
depreciable property.\111\ 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,
2015\112\ and (2) that is placed in service after December 31,
2014 and that is more than two years old at such time it is
placed in service by the purchaser.\113\ A seven-year recovery
period is assigned to any race horse that is placed in service
after December 31, 2014 and that is two years old or younger at
the time it is placed in service.\114\
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\109\See secs. 263(a) and 167.
\110\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.
\111\Sec. 168.
\112\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).
\113\Sec. 168(e)(3)(A)(i)(II). A horse is more than two 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.
\114\Rev. Proc. 87-56, 1987-2 C.B. 674, asset class 01.225.
---------------------------------------------------------------------------
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) which is placed in
service before January 1, 2017. Subsequently, the three-year
recovery period for race horses will only apply to those which
are more than two years old when placed in service by the
purchaser after December 31, 2016.
EFFECTIVE DATE
The provision applies to property placed in service after
December 31, 2014.
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.\115\ 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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\115\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, 2015. Qualified leasehold
improvement property is any improvement to an interior portion
of a building that is nonresidential real property, provided
certain requirements are met.\116\ 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.\117\ 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.\118\ An exception to the rule applies in the case
of death and certain transfers of property that qualify for
non-recognition treatment.\119\
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\116\Sec. 168(e)(6).
\117\Sec. 168(e)(6) and (k)(3).
\118\Sec. 168(e)(6)(A).
\119\Sec. 168(e)(6)(B).
---------------------------------------------------------------------------
Qualified leasehold improvement property is generally
recovered using the straight-line method and a half-year
convention.\120\ Qualified leasehold improvement property
placed in service after December 31, 2014 is subject to the
general rules described above.
---------------------------------------------------------------------------
\120\Sec. 168(b)(3)(G) and (d).
---------------------------------------------------------------------------
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, 2015. 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.\121\
Qualified restaurant property is recovered using the straight-
line method and a half-year convention.\122\ Additionally,
qualified restaurant property is not eligible for bonus
depreciation unless it also satisfies the definition of
qualified leasehold improvement property.\123\ Qualified
restaurant property placed in service after December 31, 2014
is subject to the general rules described above.
---------------------------------------------------------------------------
\121\Sec. 168(e)(7).
\122\Sec. 168(b)(3)(H) and (d).
\123\Sec. 168(e)(7)(B).
---------------------------------------------------------------------------
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, 2015. 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\124\ 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.\125\ 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.\126\ 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.\127\
---------------------------------------------------------------------------
\124\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.
\125\Sec. 168(e)(8).
\126\Sec. 168(e)(8)(C).
\127\Sec. 168(e)(8)(B).
---------------------------------------------------------------------------
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.\128\
Additionally, qualified retail improvement property is not
eligible for bonus depreciation unless it also satisfies the
definition of qualified leasehold improvement property.\129\
Qualified retail improvement property placed in service after
December 31, 2014 is subject to the general rules described
above.
---------------------------------------------------------------------------
\128\Sec. 168(b)(3)(I) and (d).
\129\Sec. 168(e)(8)(D).
---------------------------------------------------------------------------
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, 2014, 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,
2017.
EFFECTIVE DATE
The provision is effective for property placed in service
after December 31, 2014.
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.\130\ Tangible property generally is depreciated
under the modified accelerated cost recovery system
(``MACRS''), which determines depreciation by applying specific
recovery periods,\131\ placed-in-service conventions, and
depreciation methods to the cost of various types of
depreciable property.\132\ The cost of nonresidential real
property is recovered using the straight-line method of
depreciation and a recovery period of 39 years.\133\
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.\134\
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.\135\ Land improvements (such as roads and fences)
are recovered using the 150-percent declining balance method
and a recovery period of 15 years.\136\ An exception exists for
the theme and amusement park industry, whose assets are
assigned a recovery period of seven years.\137\ Additionally, a
motorsports entertainment complex placed in service on or
before December 31, 2014 is assigned a recovery period of seven
years.\138\ 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.\139\ 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).
---------------------------------------------------------------------------
\130\See secs. 263(a) and 167.
\131\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.
\132\Sec. 168.
\133\Sec. 168(b)(3)(A) and (c).
\134\Sec. 168(d)(2)(A) and (d)(4)(B).
\135\Sec. 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.
Sec. 168(d)(3) and (d)(4)(C).
\136\Sec. 168(b)(2)(A) and asset class 00.3 of Rev. Proc. 87-56,
1987-2 C.B. 674. 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. Sec. 168(b)(2) and (b)(1)(B).
\137\Asset class 80.0 of Rev. Proc. 87-56, 1987-2 C.B. 674.
\138\Sec. 168(e)(3)(C)(ii).
\139\Sec. 168(i)(15).
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REASONS FOR CHANGE
The Committee believes that extending the depreciation
incentive for the motorsports industry 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,
2016.
EFFECTIVE DATE
The provision is effective for property placed in service
after December 31, 2014.
14. Extension and modification 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\140\
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\140\Section 168(j)(2) does not provide shorter recovery periods
for water utility property, residential rental property, or railroad
grading and tunnel bores.
---------------------------------------------------------------------------
``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;\141\
and (4) is not property placed in service for purposes of
conducting gaming activities.\142\ 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).\143\
---------------------------------------------------------------------------
\141\For these purposes, the term ``related persons'' is defined in
section 465(b)(3)(C).
\142\Sec. 168(j)(4)(A).
\143\Sec. 168(j)(4)(C).
---------------------------------------------------------------------------
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))\144\ or section 4(10) of the Indian Child Welfare Act
of 1978 (25 U.S.C. 1903(10)).\145\ 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).\146\
---------------------------------------------------------------------------
\144\Pub. L. No. 93-262.
\145\Pub. L. No. 95-608.
\146\Sec. 168(j)(6).
---------------------------------------------------------------------------
The depreciation deduction allowed for regular tax purposes
is also allowed for purposes of the alternative minimum
tax.\147\ The accelerated depreciation for qualified Indian
reservation property is available with respect to property
placed in service on or before December 31, 2014.\148\
---------------------------------------------------------------------------
\147\Sec. 168(j)(3).
\148\Sec. 168(j)(8).
---------------------------------------------------------------------------
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. In addition, the Committee believes that allowing
taxpayers to elect out of accelerated recovery periods for
qualified Indian reservation property for a taxable year will
make the provision more consistent with the electability of
other accelerated depreciation provisions.\149\
---------------------------------------------------------------------------
\149\See, e.g., sec. 168(g)(7), (k)(2)(D)(iii), (l)(3)(D),
(m)(2)(B)(iii), and (n)(2)(B)(v).
---------------------------------------------------------------------------
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, 2016.
The provision also provides that a taxpayer may annually
elect out of section 168(j) on a class-by-class basis for
qualified Indian reservation property placed in service after
December 31, 2014 and before January 1, 2017.
EFFECTIVE DATE
The provision is effective for property placed in service
after December 31, 2014.
15. Extension of bonus depreciation (sec. 125 of the bill and sec.
168(k) of the Code)
PRESENT LAW
In general
An additional first-year depreciation deduction is allowed
equal to 50 percent of the adjusted basis of qualified property
acquired and placed in service before January 1, 2015 (January
1, 2016 for certain longer-lived and transportation
property).\150\
---------------------------------------------------------------------------
\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.
---------------------------------------------------------------------------
The additional first-year depreciation deduction is allowed
for both the regular tax and the alternative minimum tax
(``AMT''),\151\ but is not allowed in computing earnings and
profits.\152\ 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.\153\ The amount of the additional
first-year depreciation deduction is not affected by a short
taxable year.\154\ The taxpayer may elect out of additional
first-year depreciation for any class of property for any
taxable year.\155\
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\151\Sec. 168(k)(2)(G). See also Treas. Reg. sec. 1.168(k)-1(d).
\152\Treas. Reg. sec. 1.168(k)-1(f)(7).
\153\Sec. 168(k)(1)(B).
\154\Ibid.
\155\Sec. 168(k)(2)(D)(iii). See Treas. Reg. sec. 1.168(k)-1(e)(2)
for the definition of a class of property.
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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 2014, a taxpayer
purchased new depreciable property and placed it in
service.\156\ The property's cost is $10,000, and it is five-
year property subject to the 200 percent declining balance
method and half-year convention. The amount of additional
first-year depreciation allowed is $5,000. The remaining $5,000
of the cost of the property is depreciable under the rules
applicable to five-year property. Thus, $1,000\157\ also is
allowed as a depreciation deduction in 2014. The total
depreciation deduction with respect to the property for 2014 is
$6,000. The remaining $4,000 adjusted basis of the property
generally is recovered through otherwise applicable
depreciation rules.
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\156\Assume that the cost of the property is not eligible for
expensing under section 179 or Treas. Reg. sec. 1.263(a)-1(f).
\157\The $1,000 depreciation deduction results from the application
of the half-year convention and the 200 percent declining balance
method to the remaining $5,000.
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Property qualifying for the additional first-year
depreciation deduction must meet all of the following
requirements.\158\ First, the property must be (1) property to
which the modified accelerated cost recovery system (``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)).\159\ Second, the original
use\160\ of the property must commence with the taxpayer.\161\
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, 2015. An
extension of the placed-in-service date of one year (i.e.,
before January 1, 2016) is provided for certain property with a
recovery period of 10 years or longer and certain
transportation property.\162\
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\158\Requirements relating to actions taken before 2008 are not
described herein since they have little (if any) remaining effect.
\159\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).
\160\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).
\161\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).
\162\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) before January 1,
2015, or (2) pursuant to a binding written contract which was
entered before January 1, 2015. 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 before January 1,
2015.\163\ 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.\164\ 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, 2015 (``progress
expenditures'') is eligible for the additional first-year
depreciation deduction.\165\
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\163\Sec. 168(k)(2)(E)(i).
\164\Treas. Reg. sec. 1.168(k)-1(b)(4)(iii).
\165\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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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).\166\ The
$8,000 amount is not indexed for inflation.
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\166\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.\167\ 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 seven 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 before January
1, 2015 (January 1, 2016 in the case of certain longer-lived
and transportation property).\168\
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\167\See sec. 460.
\168\Sec. 460(c)(6). Other dates involving prior years are not
described herein.
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Election to accelerate AMT credits in lieu of bonus depreciation
A corporation otherwise eligible for additional first-year
depreciation may elect to claim additional AMT credits in lieu
of claiming additional depreciation with respect to ``eligible
qualified property.''\169\ In the case of a corporation making
this election, the straight line method is used for the regular
tax and the AMT with respect to eligible qualified
property.\170\
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\169\Sec. 168(k)(4). Eligible qualified property means qualified
property eligible for bonus depreciation with minor effective date
differences having little (if any) remaining significance.
\170\Sec. 168(k)(4)(A).
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Generally, an election under this provision for a taxable
year applies to subsequent taxable years. However, each time
the provision has been extended, a corporation which has
previously made an election has been allowed to elect not to
claim additional minimum tax credits, or, if no election had
previously been made, to make an election to claim additional
credits with respect to property subject to the extension.\171\
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\171\Sec. 168(k)(4)(H), (I), (J), and (K).
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A corporation making an election increases the tax
liability limitation under section 53(c) on the use of minimum
tax credits by the bonus depreciation amount.\172\ The
aggregate increase in credits allowable by reason of the
increased limitation is treated as refundable.\173\
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\172\Sec. 168(k)(4)(B)(ii).
\173\Sec. 168(k)(4)(F).
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The bonus depreciation amount generally is equal to 20
percent of bonus depreciation\174\ for eligible qualified
property that could be claimed as a deduction absent an
election under this provision. As originally enacted, the bonus
depreciation amount for all taxable years was limited to the
lesser of (1) $30 million, or (2) six percent of the minimum
tax credits allocable to the adjusted net minimum tax imposed
for taxable years beginning before January 1, 2006.\175\
However, extensions of this provision have provided that this
limitation applies separately to property subject to each
extension.
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\174\For this purpose, bonus depreciation is the difference between
(i) the aggregate amount of depreciation determined if section
168(k)(1) applied to all eligible qualified property placed in service
during the taxable year, and (ii) the amount of depreciation that would
be so determined if section 168(k)(1) did not so apply. This
determination is made using the most accelerated depreciation method
and the shortest life otherwise allowable for each property. Sec.
168(k)(4)(C).
\175\Sec. 168(k)(4)(C)(iii).
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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.\176\
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\176\Sec. 168(k)(4)(C)(iv).
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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,
bonus depreciation does not apply to any eligible qualified
property and the straight line method is used with respect to
that property.\177\
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\177\Sec. 168(k)(4)(G)(ii).
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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 2016
(through 2017 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 seven years or less which is placed in
service before January 1, 2017 (January 1, 2018, 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, 2017 (January
1, 2018, 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 5 extension
property'').\178\
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\178\An election with respect to round 5 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 provision, a corporation that has an election in
effect with respect to round 4 extension property to claim
minimum tax credits in lieu of bonus depreciation is treated as
having an election in effect for round 5 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 4 extension property to elect to claim
minimum tax credits in lieu of bonus depreciation for round 5
extension property. A separate bonus depreciation amount,
maximum amount, and maximum increase amount is computed and
applied to round 5 extension property.\179\
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\179\In computing the maximum amount, the maximum increase amount
for round 5 extension property is reduced by bonus depreciation amounts
for preceding taxable years only with respect to round 5 extension
property.
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EFFECTIVE DATE
The provision is effective for property placed in service
after December 31, 2014, in taxable years ending after such
date.
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.\180\
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\180\Sec. 170.
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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.\181\ In general, a C corporation's charitable
contribution deductions for a year may not exceed 10 percent of
the corporation's taxable income.\182\ 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.\183\ 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.\184\
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\181\Sec. 170(e)(3).
\182\Sec. 170(b)(2).
\183\Sec. 170(e)(3)(A)(i)-(iii).
\184\Sec. 170(e)(3)(A)(iv).
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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.\185\
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\185\Treas. Reg. sec. 1.170A-4A(c)(3).
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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.\186\
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\186\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).
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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.\187\ 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.\188\
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\187\Sec. 170(e)(3)(C).
\188\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.
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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, 2014.
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 special rule for charitable
contributions of food inventory for two years to contributions
made before January 1, 2017.
EFFECTIVE DATE
The provision is effective for contributions made after
December 31, 2014.
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. For taxable years beginning in 2014, the maximum
amount a taxpayer may expense is $500,000 of the cost of
qualifying property placed in service for the taxable
year.\189\ 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.\190\ 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.\191\ Qualifying property
excludes investments in air conditioning and heating
units.\192\ For taxable years beginning before 2015, 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).\193\ 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.\194\
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\189\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 the years 2010 through 2013, the relevant dollar
limitation is $500,000. Sec. 179(b)(1).
\190\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 the years 2010 through 2013, the relevant dollar
limitation is $2,000,000. Sec. 179(b)(2).
\191\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).
\192\Sec. 179(d)(1) flush language.
\193\Sec. 179(d)(1)(A)(ii) and (f).
\194\Sec. 179(f)(3).
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For taxable years beginning in 2015 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, qualified real property, or air
conditioning and heating units) 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).\195\ 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.\196\ Thus, if a
taxpayer's section 179 deduction for 2013 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 2014. Any such carryover amounts that are not used in
2014 are treated as property placed in service in 2014 for
purposes of computing depreciation. That is, the unused
carryover amount from 2013 is considered placed in service on
the first day of the 2014 taxable year.\197\
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\195\Sec. 179(b)(3).
\196\Section 179(f)(4) details the special rules that apply to
disallowed amounts with respect to qualified real property.
\197\For example, assume that during 2013, 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 2013, and has a taxable income
limitation of $150,000. The maximum section 179 deduction the company
can claim for 2013 is $150,000, which is allocated pro rata between the
properties, such that the carryover to 2014 is allocated $100,000 to
the qualified leasehold improvements and $50,000 to the equipment.
Assume further that in 2014, the company had no asset purchases and
had no taxable income. The $100,000 carryover from 2013 attributable to
qualified leasehold improvements is treated as placed in service as of
the first day of the company's 2014 taxable year under section
179(f)(4)(C). The $50,000 carryover allocated to equipment is carried
over to 2014 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.\198\ 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.\199\
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\198\Sec. 179(d)(9).
\199\Sec. 312(k)(3)(B).
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An expensing election is made under rules prescribed by the
Secretary.\200\ 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 2015.\201\ Such revocation, once made, is
irrevocable.
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\200\Sec. 179(c)(1).
\201\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 2015 and 2016, 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 2014.
In addition, the provision extends, for taxable years
beginning in 2015 and 2016, 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 2015 and
2016, 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
2015 and 2016, the provision continues to allow a taxpayer to
revoke an election, or any specification contained therein,
made under section 179 without the consent of the Commissioner.
EFFECTIVE DATE
The provision applies to taxable years beginning after
December 31, 2014.
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.\202\ ``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, 2015.\203\
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\202\Sec. 179E(a).
\203\Sec. 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.\204\
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\204\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,
2016) 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, 2014.
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\205\ to deduct the
cost of any qualifying film and television production,
commencing prior to January 1, 2015, in the year the
expenditure is incurred in lieu of capitalizing the cost and
recovering it through depreciation allowances.\206\ A taxpayer
may elect to deduct up to $15 million of the aggregate cost of
the film or television production under this section.\207\ 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.\208\
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\205\See Treas. Reg. section 1.181-2 for rules on making an
election under this section.
\206\For this purpose, a production is treated as commencing on the
first date of principal photography.
\207\Sec. 181(a)(2)(A).
\208\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.\209\ The term
``compensation'' does not include participations and residuals
(as defined in section 167(g)(7)(B)).\210\ 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.\211\ Qualified productions do not include sexually
explicit productions as referenced by section 2257 of title 18
of the U.S. Code.\212\
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\209\Sec. 181(d)(3)(A).
\210\Sec. 181(d)(3)(B).
\211\Sec. 181(d)(2)(B).
\212\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.\213\
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\213\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, 2017.
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. In addition,
qualified live theatrical productions include any live staged
production which is produced or presented by a taxable entity
no more than 10 weeks in a taxable year in any venue which has
an audience capacity of not more than 6,500. An annualization
rule applies in the case of a short taxable year for purposes
of determining the number of weeks for which a production is
produced or presented. In general, in the case of multiple
live-staged productions, each such live-staged production is
treated as a separate production. 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.
EFFECTIVE DATE
The provision applies to productions commencing after
December 31, 2014. 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\214\ 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\215\ 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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\214\Qualifying production property generally includes any tangible
personal property, computer software, and sound recordings.
\215\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.\216\ 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.\217\
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\216\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.
\217\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.\218\ 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.\219\ 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.\220\
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\218\Sec. 7701(a)(9).
\219\Sec. 199(d)(8)(A).
\220\Sec. 199(d)(8)(B).
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The special rules for Puerto Rico apply only with respect
to the first nine taxable years of a taxpayer beginning after
December 31, 2005 and before January 1, 2015.
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.
DESCRIPTION OF PROVISION
The provision extends the special domestic production
activities rules for Puerto Rico to apply for the first eleven
taxable years of a taxpayer beginning after December 31, 2005
and before January 1, 2017.
EFFECTIVE DATE
The provision is effective for taxable years beginning
after December 31, 2014.
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.\221\ In
general, interest, rents, royalties, and annuities are excluded
from the unrelated business income of tax-exempt
organizations.\222\
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\221\Sec. 511.
\222\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).\223\ 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, 2014.
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\223\Sec. 512(b)(13)(E).
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REASONS FOR CHANGE
For certain qualifying payments of rent, royalties,
annuities, or interest by a controlled subsidiary to its exempt
parent pursuant to a binding written contract in effect on
August 17, 2006 (or renewal of such a contract on substantially
similar terms), the Committee believes that 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, 2017.
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, 2014.
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
designated 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, 2014.\224\
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\224\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, 2017.
EFFECTIVE DATE
The provision applies to dividends paid with respect to any
taxable year of a RIC beginning after December 31, 2014.
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.\225\ Special rules apply to situations involving
tiers of qualified investment entities.
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\225\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, 2014.\226\
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\226\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, 2016, for those situations in which
that inclusion would otherwise have expired after December 31,
2014.
EFFECTIVE DATE
The provision is generally effective on January 1, 2015.
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, 2014 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,\227\ 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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\227\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.\228\
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\228\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.
The temporary exceptions apply for taxable years of foreign
corporations beginning after December 31, 1998 and before
January 1, 2015, and for taxable years of U.S. shareholders
with or within which such taxable years of such foreign
corporations end.
REASONS FOR CHANGE
The Committee believes that it is appropriate to extend the
temporary provision 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, 2017) 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, 2014, 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\229\ 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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\229\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, 2015, 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.
DESCRIPTION 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, 2017, 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, 2014, 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.\230\ 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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\230\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.\231\ Seven percent of the excluded gain is an alternative
minimum tax preference.\232\
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\231\Sec. 1(h).
\232\Sec. 57(a)(7).
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Special rules for stock acquired after February 17, 2009, and before
January 1, 2015
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, 2015, 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.
DESCRIPTION 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, 2017).
EFFECTIVE DATE
The provision is effective for stock acquired after
December 31, 2014.
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.\233\ 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.\234\
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\233\Sec. 1366(a)(1)(A).
\234\Sec. 1367(a)(2)(B).
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In the case of charitable contributions made in taxable
years beginning before January 1, 2015, 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, 2014, 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 made in certain taxable years
beginning before January 1, 2015, 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, 2017.
EFFECTIVE DATE
The provision applies to charitable contributions made in
taxable years beginning after December 31, 2014.
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.\235\
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\235\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\236\ 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.\237\
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.\238\ 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.\239\
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\236\Certain built-in income items are treated as recognized built-
in gain for this purpose. Sec. 1374(d)(5).
\237\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).
\238\Sec. 1374(d)(2).
\239\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.\240\ 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.\241\
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\240\Sec. 1374(d)(8).
\241\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.\242\
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\242\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.\243\ 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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\243\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.\244\ 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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\244\Sec. 1374(d)(7)(C).
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Special rules for 2012, 2013 and 2014
For taxable years beginning in 2012, 2013, and 2014, 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, 2013, or 2014 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.
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.
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 two years, to taxable years
beginning in 2015 and 2016, the special rules that applied to
taxable years beginning in 2012, 2013, and 2014.
EFFECTIVE DATE
The provision is effective for taxable years beginning
after December 31, 2014.
29. Extension and modification of empowerment zone tax incentives (sec.
139 of the bill and secs. 1391 and 1394 of the Code)
PRESENT LAW
The Omnibus Budget Reconciliation Act of 1993 (``OBRA
93'')\245\ authorized the designation of nine empowerment zones
(``Round I empowerment zones'') to provide tax incentives for
businesses to locate within certain targeted areas\246\
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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\245\Pub. L. No. 103-66.
\246\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\247\ 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'')\248\ authorized a total of 10 new
empowerment zones (``Round III empowerment zones''), bringing
the total number of authorized empowerment zones to 40.\249\ 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.\250\ 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.\251\
The American Taxpayer Relief Act of 2012 (``ATRA'') extended
the designation period and tax incentives for two additional
years, through December 31, 2013.\252\ The Tax Increase
Prevention Act of 2014 extended the designation period and tax
incentives for one year, through December 31, 2014.\253\
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\247\Pub. L. No. 105-34.
\248\Pub. L. No. 106-554.
\249\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.
\250\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.
\251\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.
\252\Pub. L. No. 112-240, sec. 327 (2013).
\253\Pub. L. No. 113-295, sec. 139 (2014).
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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''),
increased expensing of qualifying depreciable property, tax-
exempt bond financing, deferral of capital gains tax on the
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.\254\
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\254\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, 2015. 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.''\255\
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\255\Secs. 1397C(b) and 1397C(c). However, under section 1396, 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 other facility used for gambling, or liquor
store. In addition, wages are not eligible for the wage credit if paid
to: (1) employees of farms whose assets exceed $500,000, (2) certain
temporary employees (employed for less than 90 days), (3) a person who
owns more than five percent of the stock (or capital or profits
interests) of the employer, (4) certain relatives of the employer, or
(5) 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.\256\ 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.\257\ 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.\258\ The wage credit may be used to offset up to
25 percent of alternative minimum tax liability.\259\
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\256\Sec. 280C(a).
\257\Secs. 1396(c)(3)(A) and 51A(d)(2).
\258\Secs. 1396(c)(3)(B) and 51A(d)(2).
\259\Sec. 38(c)(2).
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Increased section 179 expensing limitation
An enterprise zone business is allowed up to an additional
$35,000 of section 179 expensing (for a total of up to $535,000
in 2014) for qualified zone property placed in service before
January 1, 2015.\260\ For taxable years beginning after 2009
and before 2015, the section 179 expensing allowed to a
taxpayer is phased out by the amount by which the cost of
qualifying property placed in service during the taxable year
exceeds $2,000,000. However, only 50 percent of the cost of
qualified zone property placed in service during the year by
the taxpayer is taken into account in determining the
limitation amount.\261\ 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.\262\ Special
rules are provided in the case of property that is
substantially renovated by the taxpayer.
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\260\Secs. 1397A, 1397D, and 179(b)(1)(B). The additional section
179 expensing equals the lesser of $35,000 or the cost of section 179
property that is qualified zone property placed in service during the
taxable year.
\261\Secs. 1397A(a)(2) and 179(b)(2). For taxable years beginning
after 2014, the limit is $200,000.
\262\Sec. 1397D. Note, however, only depreciable tangible personal
property is generally eligible for section 179 expensing. For taxable
years beginning before 2015, property qualifying for section 179
expensing 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). Sec. 179(d)(1)(A)(ii) and (f).
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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.\263\
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\263\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.\264\
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\264\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.\265\ 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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\265\Sec. 1397C(d). Excluded businesses include a farm with assets
exceeding $500,000, 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. Secs. 1397C(d)(5) and 144(c)(6)(B).
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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.\266\ 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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\266\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).\267\
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\267\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\268\ held for more
than one year and replaced within 60 days by another qualified
empowerment zone asset in the same zone.\269\ 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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\268\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).
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.
\269\Sec. 1397B.
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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.\270\ For stock
acquired prior to February 18, 2009, or after December 31,
2014, 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, 2015, a
higher percentage (either 75-percent or 100-percent) applies to
all small business stock with no additional percentage for
empowerment zone stock.\271\
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\270\Sec. 1202.
\271\As discussed above, section 136 of the Tax Relief Extension
Act of 2015 extends the 100-percent exclusion to small business stock
acquired during 2015 and 2016.
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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. In addition, the
Committee believes that for purposes of the tax-exempt
enterprise zone facility bonds, expanding the requirements to
allow businesses to hire employees from distressed Census
tracts within the city in which the empowerment zone is located
will encourage growth because more taxpayers will use these
bonds to invest in the country's hardest-hit cities.
EXPLANATION OF PROVISION
Extension
The provision extends for two years, through December 31,
2016, 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 property, 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, 2014,
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.
Modification of enterprise zone facility bond employment requirement
The provision also amends the requirements for tax-exempt
enterprise zone facility bonds to treat an employee as a
resident of an empowerment zone for purposes of the 35 percent
in-zone employment requirement if they are a resident of an
empowerment zone, an enterprise community, or a qualified low-
income community within an applicable nominating jurisdiction.
The applicable nominating jurisdiction means, with respect to
any empowerment zone or enterprise community, any local
government that nominated such community for designation under
section 1391. The definition of a qualified low-income
community is similar to the definition of a low-income
community provided in section 45D(e) (concerning eligibility
for the new markets tax credit). A ``qualified 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. 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.
The Secretary is authorized to designate ``targeted
populations'' as qualified low-income communities. 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 (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 (a) 80 percent of the area median family income,
or (b) 80 percent of the statewide non-metropolitan area median
family income.
EFFECTIVE DATE
The provision generally applies to periods after December
31, 2014. The provision regarding the special rule for the
employee residence test in the context of tax-exempt enterprise
zone facility bonds applies to bonds issued before, on, or
after the date of enactment and not redeemed before the date of
enactment.
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\272\ excise tax is imposed on
distilled spirits produced in or imported into the United
States.\273\ 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).\274\
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\272\A proof gallon is a liquid gallon consisting of 50 percent
alcohol. See sec. 5002(a)(10) and (11).
\273\Sec. 5001(a)(1).
\274\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.\275\ 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, 2015).
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\275\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.\276\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.\277\ All of the amounts covered over are subject to
the limitation.
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\276\Sec. 7652(e)(2).
\277\Secs. 7652(a)(3), (b)(3), and (e)(1).
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REASONS FOR CHANGE
The Committee believes that the needs of Puerto Rico and
the Virgin islands justify the extension of the cover over
amount of $13.25 per gallon.
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, 2014 and before January 1, 2017. After December
31, 2016, 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, 2014.
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 nine taxable years of a corporation that begin after
December 31, 2005, and before January 1, 2015.
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\278\ in an election in effect for
its taxable year that included October 13, 1995.\279\ 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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\278\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.
\279\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 nine
taxable years of the corporation which begin after December 31,
2005, and before January 1, 2015. For any other corporation,
the credit applies to the first three taxable years of that
corporation which begin after December 31, 2011 and before
January 1, 2015.
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.
DESCRIPTION OF PROVISION
The provision extends the credit for two years 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 eleven taxable years of
the corporation which begin after December 31, 2005, and before
January 1, 2017, and (b) in the case of any other corporation,
to the first five taxable years of the corporation which begin
after December 31, 2011 and before January 1, 2017.
EFFECTIVE DATE
The provision applies to taxable years beginning after
December 31, 2014.
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.\280\ 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\281\ (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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\280\Sec. 25C.
\281\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;\282\ (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.
---------------------------------------------------------------------------
\282\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,\283\ (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,\284\ (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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\283\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.
\284\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.
---------------------------------------------------------------------------
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, 2015. 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, 2016.
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, 2014.
2. Extension of credit for fuel cell motor vehicles (sec. 152 of the
bill and sec. 30B of the Code)
PRESENT LAW
A credit is available through 2014 for 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.
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 fuel cell
vehicles should be extended.
EXPLANATION OF PROVISION
The provision extends the fuel cell vehicle credit for two
years, through December 31, 2016.
EFFECTIVE DATE
The provision is effective for vehicles placed in service
after December 31, 2014.
3. Extension of credit for alternative fuel vehicle refueling property
(sec. 153 of the bill and section 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.\285\ 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.
---------------------------------------------------------------------------
\285\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
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 this reason, the Committee believes the credit for
alternative fuel refueling property should be extended.
EXPLANATION OF PROVISION
The provision extends for two years the 30-percent credit
for alternative fuel refueling property, through December 31,
2016.
EFFECTIVE DATE
The provision is effective for property placed in service
after December 31, 2014.
4. Extension of second generation biofuel producer credit (sec. 154 of
the bill and sec. 40 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 qualified second generation
biofuel production after December 31, 2014.
``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).\286\ Special rules apply for fuel derived from algae.
---------------------------------------------------------------------------
\286\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. '
---------------------------------------------------------------------------
``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 two years, through
December 31, 2016.
EFFECTIVE DATE
The provision is effective for qualified second generation
biofuel production after December 31, 2014.
5. Extension and modification of incentives for biodiesel and renewable
diesel (sec. 155 of the bill and sec. 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'').\287\ 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, 2014.
---------------------------------------------------------------------------
\287\Sec. 40A.
---------------------------------------------------------------------------
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.\288\ Thus, a
qualified biodiesel mixture can contain 99.9 percent biodiesel
and 0.1 percent diesel fuel.
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\288\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.'
---------------------------------------------------------------------------
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.\289\ 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.\290\
---------------------------------------------------------------------------
\289\Sec. 6426(c).
\290\Sec. 6426(c)(4).
---------------------------------------------------------------------------
The credit is not available for any sale or use for any
period after December 31, 2014. 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.\291\ 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, 2014.
---------------------------------------------------------------------------
\291\Sec. 6427(e).
---------------------------------------------------------------------------
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.\292\ 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, 2014.
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\292\Secs. 40A(f), 6426(c), and 6427(e).
---------------------------------------------------------------------------
Excise tax treatment of biodiesel
Section 4081(a)(1) imposes tax on certain removals,
entries, and sales of taxable fuel. Section 4083 defines
taxable fuel as diesel fuel, gasoline, and kerosene. The Code
imposes tax on gasoline, diesel fuel, and kerosene upon removal
from a refinery or on importation, unless the fuel is
transferred in bulk by registered pipeline or barge to a
registered terminal facility.\293\ Treasury regulations define
diesel fuel as any liquid that, without further processing or
blending, is suitable for use as a fuel in a diesel-powered
highway vehicle or diesel-powered train, however diesel fuel
does not include ``excluded liquid.''\294\ The definition of
excluded liquid includes any liquid that contains less than
four percent normal paraffins. Biodiesel, although suitable for
use as a fuel in a diesel-powered highway vehicle or diesel-
powered train, contains less than four percent normal paraffins
and, therefore, is excluded liquid for purposes of the
definition of diesel fuel.
---------------------------------------------------------------------------
\293\Sec. 4081(a)(1).
\294\Treas. Reg. section 48.4081-1(c)(2)(i) and 48.4081-
1(c)(2)(ii).
---------------------------------------------------------------------------
Section 4081(b)(1) imposes tax on taxable fuel removed or
sold by the blender thereof. Section 4082 provides exemptions
from this tax. Blended taxable fuel generally means any taxable
fuel that is produced outside the bulk transfer/terminal system
by mixing taxable fuel with respect to which tax has been
imposed under section 4081(a) and any other liquid on which tax
has not been imposed under section 4081. If biodiesel is used
in the production of blended taxable fuel, tax is imposed by
section 4081(b)(1) on the removal or sale of the blended
taxable fuel.
Section 4041(a)(1) imposes tax on any liquid other than
gasoline sold for use or used as a fuel in a diesel-powered
highway vehicle or diesel-powered train unless tax was imposed
on the liquid by section 4081 and not credited or refunded. If
biodiesel is sold for use or used as a fuel in a diesel-powered
highway vehicle or a diesel-powered train, tax is imposed by
section 4041(a)(1).
REASONS FOR CHANGE
The Committee believes it is important to encourage the
creation of American jobs by encouraging the domestic
production of biodiesel fuel. The Committee believes that
changing the credit to a producer credit and having that same
person be responsible for the excise tax on the fuel will
improve tax administration and compliance.
EXPLANATION OF PROVISION
Extension of present law and special rule for claim submission for 2015
The provision extends the present law income tax credit,
excise tax credit and payment provisions for biodiesel and
renewable diesel through December 31, 2015. As it relates to
fuel sold or used in 2015, the provision creates a special rule
to address claims regarding excise credits and claims for
payment associated with periods occurring during 2015. 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 2015. 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.\295\ 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.
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\295\This guidance is provided by Notice 2015-3, 2015-6 I.R.B 583.
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Conversion of incentives to a producer incentive for 2016
The provision coverts the incentives for biodiesel and
renewable diesel into an incentive for producers of such fuel
in the United States. Under the provision, a limited class of
blenders of biodiesel and diesel fuel (those who blended at
least 10 million gallons of biodiesel in the previous year)
would be treated as producers. The general delivery mechanism
and coordination of the incentives (income tax credit, excise
tax credit and payment) remain.
Income tax credit
For eligible taxpayers, the provision provides an a credit
of $1 per gallon of biodiesel (1) sold by the producer of the
biodiesel (A) to another person for use by such other person's
trade or business as a fuel or in the production of a biodiesel
mixture (other than casual off-farm production); or (B) to
another person who sells such biodiesel at retail to another
person and places such biodiesel in the fuel tank of such other
person; or (2) used by the producer of such biodiesel for any
of the purposes previously described.
There is an additional 10 cents per gallon for eligible
small producers for the first 15 million gallons of biodiesel
produced during the taxable year. The small producer credit is
not available for producers of renewable diesel.
An ``eligible taxpayer'' with respect to any gallon of
biodiesel is the producer of such gallon if such producer has
paid the tax imposed by section 4081 on such biodiesel
(discussed below). An eligible discretionary blender is any
person registered with the IRS as a blender of qualified
biodiesel mixtures and has used 10 million gallons or more of
biodiesel in the production of qualified biodiesel mixtures in
the preceding taxable year. For this purpose an eligible
discretionary blender is treated as producing a gallon of
biodiesel in the taxable year in which the sale or use of the
qualified biodiesel mixture occurs. A ``qualified biodiesel
mixture `` is a mixture of biodiesel and diesel fuel
(determined without regard to any use of kerosene) which is
sold by the eligible discretionary blender producing such
mixture to any person for use as a fuel, or is used as a fuel
by the eligible discretionary blender. All sales or uses will
only be taken into account if in the trade or business of the
taxpayer.
An ``eligible discretionary blender'' will be treated as
the producer of a gallon of biodiesel for purposes of claiming
the credit if the producer of such biodiesel (determined
without regard to eligible discretionary blender rule) did not
pay the tax imposed by section 4081 with respect to such
gallon, and assigns the credit to the discretionary blender (in
such form and manner as provided by the Secretary) and the
eligible discretionary blender pays the tax imposed under
section 4081 with respect to such gallon. Eligible
discretionary blenders are required to register with the IRS as
such.
Excise tax credits and payments
The provisions affords a $1-per-gallon excise tax credit to
producers of biodiesel to be used against section 4081
liability under rules similar to the income tax credit, except
there is no additional 10 cents per gallon for small producers.
The excise tax credit may be taken as a payment to the extent
it exceeds tax liability.
Treatment of biodiesel as a taxable fuel
The provision treats biodiesel as a taxable fuel. For this
purpose, facilities used to produce biodiesel and biodiesel
blending facilities are treated as refineries for purposes of
the imposition of tax. A biodiesel blending facility is any
facility operated by an eligible discretionary blender. Thus,
the removal of biodiesel from a biodiesel production or
blending facility will be subject to a tax of 24.4 cents per
gallon. An exception is provided for transfers from such
facilities to registered terminals. For biodiesel, the bulk
transfer between registered facilities does not have to be by
registered pipeline or barge. However, the transfer of
biodiesel to an unregistered person (other than as part of the
direct bulk transfer of the biodiesel to a registered facility)
will result in the imposition of tax on the biodiesel. The same
exemptions for nontaxable use are applicable to biodiesel (e.g.
if indelibly dyed and other requirements are met).
EFFECTIVE DATE
The extension of present law is effective for fuel sold or
used after December 31, 2014. The conversion of the incentives
into producer-level credits and payments, and the treatment of
biodiesel as a taxable fuel, is effective for fuel sold or used
after December 31, 2015.
6. Extension of credit for the production of Indian coal facilities
placed in service before 2009 (sec. 156 of the bill and sec. 45 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 nine-year period beginning January 1, 2006, and ending
December 31, 2014. The amount of the credit is $2.00 per ton
(adjusted for inflation; $2.317 for 2014). 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,\296\ allowing excess credits to be carried back one
year and forward up to 20 years. The credit is not permitted
against the alternative minimum tax.
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\296\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, 2016).
EFFECTIVE DATE
The provision is effective for Indian coal produced after
December 31, 2014.
7. Extension of credits with respect to facilities producing energy
from certain renewable resources (sec. 157 of the bill and sec. 45 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'').\297\ 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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\297\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
------------------------------------------------------------------------
Eligible electricity Credit amount for
production activity 2015\1\ (cents per Expiration\2\
(sec. 45) kilowatt-hour)
------------------------------------------------------------------------
Wind 2.3 December 31, 2014
Closed-loop biomass 2.3 December 31, 2014
Open-loop biomass 1.2 December 31, 2014
(including
agricultural
livestock waste
nutrient facilities)
Geothermal 2.3 December 31, 2014
Small irrigation power 1.2 December 31, 2014
Municipal solid waste 1.2 December 31, 2014
(including landfill
gas facilities and
trash combustion
facilities)
Qualified hydropower 1.2 December 31, 2014
Marine and 1.1 December 31, 2014
hydrokinetic
------------------------------------------------------------------------
\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 for two years the renewable
electricity production credit and the election to claim the
energy credit in lieu of the electricity production credit,
through December 31, 2016.
EFFECTIVE DATE
The provision is effective for facilities the construction
of which begins after December 31, 2014.
8. Extension of credit for energy-efficient new homes (sec. 158 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, 2015. 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, 2017.
EFFECTIVE DATE
The provision is effective for homes acquired after
December 31, 2014.
9. Extension of special allowance for second generation biofuel plant
property (sec. 159 of the bill and sec. 168(l) of the Code)
PRESENT LAW
Present law\298\ 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, 2015.\299\
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\298\Sec. 168(l).
\299\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.\300\
Qualified feedstocks means any lignocellulosic or
hemicellulosic matter that is available on a renewable or
recurring basis\301\ and any cultivated algae, cyanobacteria,
or lemna.\302\ Second generation biofuel does not include any
alcohol with a proof of less than 150 or certain unprocessed
fuel.\303\ 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.\304\
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\300\Secs. 168(l)(2)(A) and 40(b)(6)(E).
\301\For example, lignocellulosic or hemicellulosic matter that is
available on a renewable or recurring basis includes bagasse (from
sugar cane), corn stalks, and switchgrass.
\302\Sec. 40(b)(6)(F).
\303\Sec. 40(b)(6)(E)(ii) and (iii).
\304\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.\305\ 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.\306\ 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.\307\ A taxpayer is allowed to elect out of
the additional first-year depreciation for any class of
property for any taxable year.\308\
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\305\Sec. 168(l)(5).
\306\Sec. 168(l)(1)(B).
\307\Sec. 168(l)(5) and (k)(2)(G).
\308\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; and (2) the property must be (i)
acquired by purchase (as defined under section 179(d)) by the
taxpayer, and (ii) placed in service before January 1,
2015.\309\ 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 before January 1, 2015 (and all
other requirements are met).\310\ 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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\309\Sec. 168(l)(2). Requirements relating to actions taken before
2007 are not described herein since they have little (if any) remaining
effect.
\310\Sec. 168(l)(4) and (k)(2)(E).
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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.\311\
Recapture rules apply if the property ceases to be qualified
second generation biofuel plant property.\312\
---------------------------------------------------------------------------
\311\Sec. 168(l)(3)(C).
\312\Sec. 168(l)(6).
---------------------------------------------------------------------------
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.\313\
---------------------------------------------------------------------------
\313\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, 2017.
EFFECTIVE DATE
The provision applies to property placed in service after
December 31, 2014.
10. Extension and modification of energy efficient commercial buildings
deduction (sec. 160 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.\314\ Individuals qualified to determine
compliance shall only be those recognized by one or more
organizations certified by the Secretary for such purposes.
---------------------------------------------------------------------------
\314\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.
---------------------------------------------------------------------------
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, 2015.
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.\315\ 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.
---------------------------------------------------------------------------
\315\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 be used until December
31, 2013, but the targets of Notice 2012-26 apply thereafter.
---------------------------------------------------------------------------
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, 2016. 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, 2015, 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, 2014.
11. Extension of special rule for sales or dispositions to implement
FERC or State electric restructuring policy for qualified electric
utilities (sec. 161 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.\316\ The realized
gain is subject to current income tax\317\ unless the
recognition of the gain is deferred or excluded from income
under a special tax provision.\318\
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\316\See sec. 1001.
\317\See secs. 61 and 451.
\318\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\319\ (the ``reinvestment property'').\320\ 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.
---------------------------------------------------------------------------
\319\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.
\320\Sec. 451(i).
---------------------------------------------------------------------------
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, 2015.\321\ 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\322\) with respect to the transmission
facilities to which the election applies, and (2) an electric
utility (as defined in the Federal Power Act\323\).\324\
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\321\Sec. 451(i)(3).
\322\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.
\323\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.
\324\Sec. 451(i)(6).
---------------------------------------------------------------------------
In general, an independent transmission company is defined
as: (1) an independent transmission provider\325\ approved by
the Federal Energy Regulatory Commission (``FERC''); (2) a
person (i) who the FERC determines under section 203 of the
Federal Power Act\326\ (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).\327\
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\325\For example, a regional transmission organization, an
independent system operator, or an independent transmission company.
\326\16 U.S.C. sec. 824b.
\327\Sec. 451(i)(4).
---------------------------------------------------------------------------
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).\328\
Exempt utility property does not include any property that is
located outside of the United States.\329\
---------------------------------------------------------------------------
\328\Sec. 451(i)(5).
\329\Sec. 451(i)(5)(C).
---------------------------------------------------------------------------
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).\330\
---------------------------------------------------------------------------
\330\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, 2017.
EFFECTIVE DATE
The provision applies to dispositions after December 31,
2014.
12. Extension of excise tax credits and payment provisions relating to
alternative fuel (sec. 162 of the bill and secs. 6426 and 6427 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\331\ 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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\331\``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).
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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, 2014.
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, 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
In general
The provision extends the alternative fuel credit and
related payment provisions, and the alternative fuel mixture
credit through December 31, 2016.
In light of the retroactive nature of the provision, as it
relates to alternative fuel sold or used in 2015, the provision
creates a special rule to address claims regarding excise
credits and claims for payment associated with periods
occurring during 2015. 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 2015.
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.\332\ 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.
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\332\This guidance is provided by Notice 2015-3, 2015-6 I.R.B. 583.
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Liquefied petroleum gas and liquefied natural gas
Under section 303 of the bill, the alternative fuel excise
tax credits and outlay payment provisions related to liquefied
natural gas and liquefied petroleum gas also are converted to
the same energy equivalent basis used for the purpose of the
tax. For LNG, the credit is 50 cents per energy equivalent of
diesel fuel (approximately 29 cents per gallon of LNG) and for
liquefied petroleum gas the credit is 50 cents per energy
equivalent of gasoline (approximately 36 cents per gallon).
EFFECTIVE DATE
The provision is generally effective for fuel sold or used
after December 31, 2014.
TITLE II--PROVISION THAT EXPIRED IN 2013
A. Extension of Credit for Electric Motorcycles (sec. 201 of the bill
and sec. 30D of the Code)
PRESENT LAW
For vehicles acquired before 2014, a 10-percent credit was
available for qualifying plug-in electric motorcycles and
three-wheeled vehicles.\333\ Qualifying two- or three-wheeled
vehicles needed to 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 hours. The maximum credit for
any qualifying vehicle was $2,500.
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\333\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 reauthorizes the credit for electric
motorcycles acquired in 2015 and 2016 (but not 2014). The
credit for electric three-wheeled vehicles is not extended.
EFFECTIVE DATE
The provision is effective for vehicles acquired after
December 31, 2014.
TITLE III--REVENUE RAISING PROVISIONS
1. Exclusion from gross income of certain clean coal power
grants to non-corporate taxpayers (sec. 301 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.
2. Treatment of certain persons as employers with respect to motion
picture projects (sec. 302 of the bill and new sec. 3512 of the Code)
PRESENT LAW
FICA and FUTA 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.\334\ 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 OASDI wage base
($118,500 for 2015); and (2) the Medicare or hospital insurance
(``HI'') tax equal to 1.45 percent of all covered wages.\335\
The employee portion of the FICA tax generally must be withheld
and remitted to the Federal government by the employer.
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\334\Secs. 3101-3128.
\335\For taxable years beginning after 2012, 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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The Federal Unemployment Tax Act (``FUTA'') imposes a tax
on employers of six percent of wages up to the FUTA wage base
of $7,000.\336\ An employer may take a credit against its FUTA
tax liability for its contributions to a State unemployment
fund and, in certain cases, an additional credit for
contributions that would have been required if the employer had
been subject to a higher contribution rate under State law. For
purposes of the credit, the term ``contributions'' means
payments required by State law to be made by an employer into
an unemployment fund, to the extent the payments are made by
the employer without being deducted or deductible from
employees' remuneration.
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\336\Secs. 3301-3311. FICA taxes, FUTA taxes, taxes under the
Railroad Retirement Tax Act or ``RRTA'' (secs. 3201-3241) and income
tax withholding (secs. 3401-3404) are commonly referred to collectively
as employment taxes. Sections 3501-3511 provide additional employment
tax rules.
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Responsibility for employment tax compliance
FICA and FUTA tax responsibility generally rests with the
person who is the employer of an employee under a common-law
test that has been incorporated into Treasury regulations.\337\
Under the regulations, an employer-employee relationship
generally exists if the person for whom services are performed
has the right to control and direct the individual who performs
the services, not only as to the result to be accomplished by
the work, but also as to the details and means by which that
result is accomplished. That is, an employee is subject to the
will and control of the employer, not only as to what is to be
done, but also as to how it is to be done. It is not necessary
that the employer actually control the manner in which the
services are performed, rather it is sufficient that the
employer have a right to control. Whether the requisite control
exists is determined on the basis of all the relevant facts and
circumstances. The test of whether an employer-employee
relationship exists often arises in determining whether a
worker is an employee or an independent contractor. However,
the same test applies in determining whether a worker is an
employee of one person or another.
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\337\Treas. Reg. secs. 31.3121(d)-1(c)(1) and 31.3306(i)-1(a).
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In some cases, a person other than the common-law employer
(a ``third party'') may be liable for employment taxes. In
particular, if wages are paid to an employee by a third party
and the third party, rather than the employer, has control of
the payment of the wages, the third party is the ``statutory''
employer responsible for complying with applicable employment
tax requirements.\338\
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\338\Sec. 3401(d)(1) (for purposes of income tax withholding, if
the employer does not have control of the payment of wages, the person
having control of the payment of such wages is treated as the
employer); Otte v. United States, 419 U.S. 43 (1974) (the person who
has the control of the payment of wages is treated as the employer for
purposes of withholding the employee's share of FICA taxes from wages);
In re Armadillo Corporation, 561 F.2d 1382 (10th Cir. 1977), and In re
The Laub Baking Company v. United States, 642 F.2d 196 (6th Cir. 1981)
(the person who has control of the payment of wages is the employer for
purposes of the employer's share of FICA taxes and FUTA tax). The mere
fact that wages are paid by a person other than the employer does not
necessarily mean that the payor has control of the payment of the
wages. Rather, control depends on the facts and circumstances. See, for
example, Consolidated Flooring Services v. United States, 38 Fed. Cl.
450 (1997), and Winstead v. United States, 109 F. 2d 989 (4th Cir.
1997).
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As indicated above, remuneration with respect to employment
with a particular employer for a year is excepted from OASDI or
FUTA taxes to the extent it exceeds the applicable OASDI or
FUTA wage base.\339\ In contrast, if an employee works for
multiple employers during a year, a separate wage base
generally applies in determining the employer share of OASDI
tax and FUTA tax with respect to remuneration for employment
with each employer, even if the wages earned with all the
employers are paid by the same third party.\340\
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\339\An employee is subject to OASDI tax only with respect to
remuneration up to the applicable wage base for a year, regardless of
whether the employee works for only one employer or for more than one
employer during the year. If, as a result of working for more than one
employer, OASDI tax is withheld with respect to remuneration above the
applicable wage base, the employee is allowed a credit under section
31(b).
\340\Cencast Services, L.P. v. United States, 729 F.3d 1352 (Fed.
Cir. 2013).
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REASONS FOR CHANGE
In the motion picture industry, payroll and various other
administrative services are commonly handled by a company that
specializes in such services (referred to as a motion picture
payroll service company or ``MPPSC''), rather than by the
entity created for each motion picture project. In many cases,
even if an employee works on various motion picture projects
over the course of a year, all of the employee's wages are paid
by the same MPPSC. Although not a common law employer, an MPPSC
generally has control of the payment of employee wages and is
thus the statutory employer responsible for employment tax
compliance. The Committee believes that the use of MPPSCs
furthers employment tax compliance and considers it appropriate
to treat an MPPSC as the employer for purposes of applying the
OASDI and FUTA wage bases.
EXPLANATION OF PROVISION
Under the provision, for purposes of the OASDI and FUTA
wage bases, remuneration paid by a ``motion picture project
employer'' during a calendar year to a ``motion picture project
worker'' is treated as remuneration paid with respect to
employment of the motion picture project worker by the motion
picture project employer. As a result, all remuneration paid by
the motion picture project employer to a motion picture project
worker during a calendar year is subject to a single OASDI wage
base and a single FUTA wage base, without regard to the
worker's status as a common law employee of multiple clients of
the motion picture project employer during the year.
A person must meet several criteria to be treated as a
motion picture project employer. The person (directly or
through an affiliate\341\) must (1) be a party to a written
contract covering the services of motion picture project
workers with respect to motion picture projects\342\ in the
course of the trade or business of a client of the motion
picture project employer, (2) be contractually obligated to pay
remuneration to the motion picture project workers without
regard to payment or reimbursement by any other person, (3)
control the payment (within the meaning of the Code) of
remuneration to the motion picture project workers and pay the
remuneration from its own account or accounts, (4) be a
signatory to one or more collective bargaining agreements with
a labor organization that represents motion picture project
workers, and (5) have treated substantially all motion picture
project workers whom the person pays as employees (and not as
independent contractors) during the calendar year for purposes
of determining FICA, FUTA and other employment taxes. In
addition, at least 80 percent of all FICA remuneration paid by
the person in the calendar year must be paid to motion picture
project workers.
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\341\For purposes of the proposal, ``affiliate'' and ``affiliated''
status are based on the aggregation rules applicable for retirement
plan purposes under section 414(b) and (c).
\342\For purposes of the provision, a motion picture project
generally means a project for the production of a motion picture film
or video tape as described in section 168(f)(3).
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A motion picture project worker means any individual who
provides services on motion picture projects for clients of a
motion picture project employer that are not affiliated with
the motion picture project employer.
EFFECTIVE DATE
The provision applies to remuneration paid after December
31, 2015.
3. Equalization of Excise Tax and Credits for Liquefied Natural Gas and
Liquefied Petroleum Gas (sec. 303 of the bill and sec. 4041 of the
Code)\343\
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\343\After the provision was considered by the Committee, a
significant portion of the provision, as it relates to the changes in
the section 4041 tax, was included in H.R. 3236, the ``Surface
Transportation and Veterans Health Care Choice Improvement Act of
2015,'' which was passed by the House of Representatives on July 29,
2015, and the Senate on July 30, 2015, and signed into law on July 31,
2015.
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PRESENT LAW
Excise Taxes
The Code imposes an excise tax on gasoline, diesel fuel,
kerosene, and certain alternative fuels at the following
rates:\344\
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\344\These fuels are subject to an additional 0.1-cent-per-gallon
excise tax to fund the Leaking Underground Storage Tank (``LUST'')
Trust Fund (secs. 4041(d) and 4081(a)(2)(B)). That tax is imposed as an
``add-on'' to other existing taxes.
Gasoline 18.3 cents per gallon
Diesel fuel and kerosene 24.3 cents per gallon\345\
Alternative fuels 24.3 and 18.3 cents per gallon\346\
The Code imposes tax on gasoline, diesel fuel, and kerosene
upon removal from a refinery or on importation, unless the fuel
is transferred in bulk by registered pipeline or barge to a
registered terminal facility.\347\ The imposition of tax on
alternative fuels generally occurs at retail when the fuel is
sold to an owner, lessee or other operator of a motor vehicle
or motorboat for use as a fuel in such motor vehicle or
motorboat.
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\345\Diesel-water emulsions are taxed at 19.7 cents per gallon
(sec. 4081(a)(2)(D)).
\346\The rate of tax is 24.3 cents per gallon in the case of
liquefied natural gas, any liquid fuel (other than ethanol or methanol)
derived from coal, and liquid hydrocarbons derived from biomass. Other
alternative fuels sold or used as motor fuel are generally taxed at
18.3 cents per gallon. ``Alternative fuel'' also includes compressed
natural gas. The rate for compressed natural gas is 18.3 cents per
energy equivalent of a gallon of gasoline. See sec. 4041(a)(2) and (3).
\347\Sec. 4081(a)(1).
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Liquefied natural gas (``LNG'') and liquefied petroleum gas
(also known as propane) are classified as alternative fuels.
LNG is taxed at the same per gallon rate as diesel, 24.3 cents
per gallon. According to the Oak Ridge National Laboratory,
diesel fuel has an energy content of 128,700 Btu per gallon
(lower heating value) and LNG has an energy content of 74,700
Btu per gallon (lower heating value). Therefore, a gallon of
LNG produces approximately 58 percent of the energy produced by
a gallon of diesel fuel.
Liquefied petroleum gas is taxed at the same per gallon
rate as gasoline, 18.3 cents per gallon. According to the Oak
Ridge National Laboratory, gasoline has an energy content of
115,400 Btu per gallon (lower heating value), and liquefied
petroleum gas has an energy content of 83,500 Btu per gallon
(lower heating value). Therefore, a gallon of liquefied
petroleum gas produces approximately 72 percent of the energy
produced by a gallon of gasoline.
Alternative fuel credits and outlay 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.
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\348\ 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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\348\``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).
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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.
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.
REASONS FOR CHANGE
LNG is a transportation fuel source used for large trucks
and some marine and rail vessels. Currently, the excise tax
rate for both LNG and diesel fuel is set at 24.3 cents per
gallon. However, LNG produces less energy per gallon than
diesel fuel. It takes approximately 1.7 gallons of LNG to equal
the energy in one gallon of diesel fuel, resulting in LNG being
taxed at approximately 170 percent of the rate of diesel fuel
on an energy equivalent basis. The current tax system can
result in thousands of dollars of additional cost for companies
choosing to utilize LNG. Similarly, liquefied petroleum gas and
gasoline are both taxed at 18.3 cents per gallon. However, a
gallon of liquefied petroleum gas has only 72 percent of the
energy content of a gallon of gasoline but is taxed at 138
percent of the rate of gasoline on an energy equivalent basis.
Therefore, the Committee believes it is appropriate to lower
the tax rate of both liquefied petroleum gas and LNG, basing
the tax rate on the energy content of those fuels as compared
with gasoline and diesel, respectively.
EXPLANATION OF PROVISION
Excise taxes
The provision changes the tax rate of LNG to a rate based
on its energy equivalent of a gallon of diesel (approximately
14.1 cents per gallon) and changes the tax rate of liquefied
petroleum gas to a rate based on its energy equivalent of a
gallon of gasoline (approximately 13.2 cents per gallon).
Specifically, the provision provides that liquefied
petroleum gas is taxed at 18.3 cents per energy equivalent of a
gallon of gasoline. For this purpose, ``energy equivalent of a
gallon of gasoline'' means, with respect to liquefied petroleum
gas, the amount of such fuel having a Btu content of 115,400
(lower heating value). LNG is taxed at 24.3 cents per energy
equivalent of a gallon of diesel fuel. For this purpose,
``energy equivalent of a gallon of diesel'' means, with respect
to a liquefied natural gas fuel, the amount of such fuel having
a Btu content of 128,700 (lower heating value).
Excise tax credit and outlay payments
The alternative fuel excise tax credits and outlay payment
provisions related to liquefied natural gas and liquefied
petroleum gas also are converted to the same energy equivalent
basis used for the purpose of the tax. For LNG, the credit is
50 cents per energy equivalent of diesel fuel (approximately 29
cents per gallon of LNG) and for liquefied petroleum gas the
credit is 50 cents per energy equivalent of gasoline
(approximately 36 cents per gallon).
EFFECTIVE DATE
The provision is effective for fuel sold or used after
December 31, 2014.
4. Additional information on returns relating to mortgage interest
(sec. 304 of the bill and sec. 6050H of the Code)\349\
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\349\A similar provision was included in H.R.3236, Surface
Transportation and Veterans Health Care Choice Improvement Act of 2015,
which was passed by the House of Representatives on July 29, 2015 and
the Senate on July 30, 2015, and signed into law on July 31, 2015.
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PRESENT LAW
Any person who, in the course of a trade or business during
a calendar year, received from an individual $600 or more of
interest during a calendar year on an obligation secured by
real property (such as mortgage interest) must file an
information return with the IRS and must provide a copy of that
return to the payor.\350\ The information return generally must
include the name, address, and taxpayer identification number
of the individual from whom the interest was received, and the
amount of the interest and points received for the calendar
year.
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\350\Sec. 6050H.
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REASONS FOR CHANGE
The Committee believes that the reporting of certain
additional information with respect to a debt secured by real
property will help to further improve taxpayer compliance in
this area.\351\ The Committee also believes that the expansion
of these information reporting requirements does not impose a
substantial tax compliance burden on mortgage servicers and
their vendors.
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\351\Government Accountability Office, Report to the Joint
Committee on Taxation, Home Mortgage Interest Deduction: Despite
Challenges Presented by Complex Tax Rules, IRS Could Enhance
Enforcement and Guidance, (GAO-09-769), July 29, 2009 (report found
that expanding information reporting on taxpayers' mortgages to include
property addresses, debt balances, and an indicator of loan refinancing
would allow the IRS to identify taxpayers reporting mortgage interest
exceeding the acquisition debt limit).
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EXPLANATION OF PROVISION
Under the provision, the following additional information
is required to be included in information returns filed with
the IRS and statements furnished to the payor with respect to a
debt secured by real property: (i) the amount of outstanding
principal on the mortgage as of the beginning of the calendar
year, (ii) the address of the property securing the mortgage,
and (iii) the loan origination date.
EFFECTIVE DATE
The provision applies to returns and statements due after
December 31, 2016.
III. BUDGET EFFECTS OF THE BILL
A. Committee Estimates
1. Budgetary revenue estimate
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 S. ___, a bill to amend the Internal Revenue Code
of 1986 to extend certain expired tax provisions, as reported.
2. Macroeconomic effects
Pursuant to the Concurrent Resolution on the Budget for
Fiscal Year 2016, section 3112, the staff of the Joint
Committee on Taxation (``Joint Committee staff'') has estimated
the budgetary effects of changes in economic output,
employment, and capital stock resulting from the ``Tax Relief
Extension Act of 2015.'' The estimate of the macroeconomic
revenue feedback effects of this legislation and the following
supplementary analysis were produced using the Joint Committee
staff's Macroeconomic Equilibrium Growth model to simulate the
macroeconomic effects of the bill.
Overview
The following discussion analyzes the macroeconomic effects
of the bill. This analysis is presented relative to the 2015
economic and receipts baseline (``present law''), published by
the Congressional Budget Office (``CBO'') in January,
2015.\352\
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\352\Congressional Budget Office, The Budget and Economic Outlook:
Fiscal Years 2015-2025, January 26, 2015.
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The bill provides for the temporary extension of a number
of provisions in the Internal Revenue Code that provide
favorable tax treatment for certain activities of businesses
and individuals. The provisions in the bill affecting taxation
of personal income are relatively small and projected to have
little effect on incentives to supply labor to the economy. The
provisions affecting businesses, especially the extension of 50
percent expensing, are expected to have a more significant,
although temporary, impact on the after-tax cost of capital.
Thus, the primary effect of the bill on the economy is expected
to be an initial increase in the stock of business capital of
about 0.3 percent in the first half of the budget period,
resulting in an increase in production, output, and receipts by
about 0.1 percent during that period. After the expiration of
these provisions, the growth of capital is expected to decrease
gradually, reversing these effects. These changes in investment
are projected to be mirrored by small changes in hours worked
and wages. The gradual decline in investment in the later
period is primarily caused by the loss of the tax incentives,
and partially by the effects of the increase in the deficit on
costs of private sector borrowing. Because the size of these
effects depends on how strongly investors respond to the
incentives, and to a lesser extent for this proposal, on the
actions of the Federal Reserve Board, the exact magnitude of
these effects is subject to some uncertainty.
Fiscal Years 2016-2025
The growth generated by the increase in capital stock at
the beginning of the budget period is projected to increase
revenues relative to present law by about $17.2 billion over
the 2016-2025 budget period. By the end of this period, as the
capital stock returns to pre-policy levels, this revenue
feedback effect is diminished. At the same time, a small
increase in interest rates generated by the increase in Federal
debt is expected to increase the cost of Federal debt service
by about $6.8 billion over the budget window. Because the bill
is projected to have a negligible effect on employment and
consumption, it is projected to have a negligible effect on
other outlays. Overall, the budgetary effects of changes in
economic growth are projected to reduce the deficit by $10.4
billion during the budget window. Details of the estimate
appear on Table 1, below.
Second and Third Decade Effects
In the second and third decade after enactment, because the
bill is expected to result in an increase in Federal debt, it
is expected to make private borrowing more expensive, thus
slightly lowering the capital stock relative to present law and
reducing economic growth and associated revenues relative to
present law. The expected increase in debt generated by the
proposal is quite small relative to the overall size of the
economy; therefore the long run effect is expected to be small.
Data, models, and assumptions used in the analysis
The Joint Committee staff analyzed the proposal using the
staff's Macroeconomic Equilibrium Growth Model (``MEG'').\353\
While the model is based on economic data from the National
Income and Product Accounts, taxable income is adjusted to
reflect taxable income as measured by reporting on tax returns.
The MEG model is based on the standard, neoclassical assumption
that the amount of output is determined by the availability of
labor and capital, and in the long run demand for labor and
capital equals the amount supplied by households. Individuals
are assumed to make decisions based on observed characteristics
of the economy, including wages, prices, interest rates, tax
rates, and government spending levels. Individuals in the MEG
model do not anticipate future changes in the economy or
government finances; thus, this type of model is often referred
to as a ``myopic'' behavior model.
---------------------------------------------------------------------------
\353\A detailed description of the MEG model and its behavioral
parameters may be found in: Joint Committee on Taxation, Macroeconomic
Analysis of Various Proposals to Provide $500 Billion in Tax Relief,
(JCX-4-05), March 1, 2005, and Joint Committee on Taxation, Overview of
the Work of the Staff of the Joint Committee on Taxation to Model the
Macroeconomic Effects of Proposed Tax Legislation to Comply with House
Rule XIII.3(h)(2), (JCX-105-03), December 22, 2003.
---------------------------------------------------------------------------
Monetary policy conducted by the Federal Reserve Board is
explicitly modeled, with lagged price adjustments allowing for
the economy to be temporarily out of equilibrium in response to
fiscal and monetary policy changes. Under an ``Aggressive Fed''
policy, it is assumed that the Federal Reserve Board would work
to counteract any demand incentives resulting from fiscal
policy. ``Neutral Fed'' simulations assume that the Federal
Reserve Board targets a fixed monetary growth rate, and does
not try to counteract fiscal policy. The policy is only in
effect during 2015 and 2016, a period in which the Federal
Reserve Board is not expected to counteract expansionary fiscal
policy; thus the macroeconomic revenue effects provided in the
estimate were generated using the ``Neutral Fed'' simulation.
Labor supply decisions are modeled separately for four
groups: low income primary earners, low income secondary
earners, other primary earners, and other secondary earners.
Firms make investment decisions based on an expected after-tax
rate of return. The simulation used for this estimate includes
the high substitution elasticity parameters for labor supply.
Information about the effects of the proposal on individual
and business average and effective marginal tax rates, and on
after-tax returns to capital and labor is obtained from various
Joint Committee staff tax models\354\ (used in the production
of conventional revenue estimates) to characterize the effects
of the bill within the MEG model. Changes in deductions,
credits and exclusions can impact effective marginal tax rates
as well as average tax rates. The table below provides a
summary of key behavioral parameters in the MEG model.
---------------------------------------------------------------------------
\354\Descriptions of the Joint Committee staff conventional
estimating models may be found in JCX-46-11, Testimony of the Staff of
the Joint Committee on Taxation before the House Committee on Ways and
Means Regarding Economic Modeling, September 21, 2011, JCX-75-15,
Estimating Changes in the Federal Individual Income tax: Description of
the Individual Tax Model, April 24, 2015, and other documents at
www.jct.gov under ``Estimating Methodology.''
KEY PARAMETER ASSUMPTIONS IN THE MEG MODEL
------------------------------------------------------------------------
High Low
Labor supply elasticities in Income Elasticity Elasticity
disaggregated labor supply Substitution Substitution
------------------------------------------------------------------------
Low income primary............ -0.1 0.2 0.15
Other primary................. -0.1 0.1 0.1
Low income secondary.......... -0.3 0.8 0.4
Other secondary............... -0.2 0.6 0.3
Wage-weighted population -0.1 0.2 0.1
average with baseline rates..
------------------------------------------------------------------------
Savings/consumption parameters
------------------------------------------------------------------------
Rate of time preference....... 0.015
Intertemporal elasticity of 0.35
substitution.................
Derived long-run savings 0.25
elasticity to the after tax
rate of return on capital....
------------------------------------------------------------------------
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 provision of the
bill involves increased 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.
U.S. Congress,
Congressional Budget Office,
Washington, DC, August 4, 2015.
Hon. Orrin G. Hatch,
Chairman, Committee on Finance,
U.S. Senate, Washington, DC.
Dear Mr. Chairman: The Congressional Budget Office has
prepared the enclosed cost estimate for the Tax Relief
Extension Act of 2015.
If you wish further details on this estimate, we will be
pleased to provide them. The CBO staff contact is Pamela
Greene.
Sincerely,
Robert A. Sunshine
(For Keith Hall).
Enclosure.
Tax Relief Extension Act of 2015
Summary: The Tax Relief Extension Act of 2015 would
reinstate and extend certain expired tax provisions through
December 31, 2016; almost all of the provisions expired on
December 31, 2014, and those provisions would be retroactively
reinstated, extended, and in a few cases amended. The bill also
would make a few additional changes to tax law.
Because of the magnitude of its budgetary effects, this
bill is ``major legislation,'' as defined in section 3112 of S.
Con. Res. 11, the Concurrent Resolution on the Budget for
Fiscal Year 2016. Hence, the cost estimate prepared by CBO and
the staff of the Joint Committee on Taxation (JCT) incorporates
the federal budgetary effects of changes in economic output and
other macroeconomic variables that would result from enacting
the legislation.
Specifically, JCT estimates that enacting the bill would
increase deficits by about $87 billion over the 2015-2025
period. That estimate includes two components. First, excluding
macroeconomic feedback effects, JCT estimates that the bill
would increase deficits by about $97 billion over the 2015-2025
period. In addition, the macroeconomic feedback would reduce
deficits by about $10 billion over that period, JCT
estimates.\1\ Most of the effects on deficits would result from
changes in revenues.
---------------------------------------------------------------------------
\1\For more details, see Joint Committee on Taxation, A Report to
the Congressional Budget Office of the Macroeconomic Effects of the
``Tax Relief Extension Act of 2015,'' as Ordered to be Reported by the
Senate Committee on Finance (JCX-107-15), August 4, 2015.
---------------------------------------------------------------------------
Enacting the legislation would affect direct spending and
revenues; therefore, pay-as-you-go procedures apply.
JCT has determined that the bill contains no
intergovernmental or private-sector mandates as defined in the
Unfunded Mandates Reform Act (UMRA).
Estimated cost to the Federal Government: The estimated
budgetary impacts of the bill are shown in Table 1.
TABLE 1. SUMMARY OF ESTIMATED EFFECTS ON DIRECT SPENDING AND REVENUES OF THE TAX RELIEF EXTENSION ACT OF 2015
--------------------------------------------------------------------------------------------------------------------------------------------------------
By fiscal year, in billions of dollars--
------------------------------------------------------------------------------------------------------
2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2015-2020 2015-2025
--------------------------------------------------------------------------------------------------------------------------------------------------------
ESTIMATED CHANGES WITHOUT MACROECONOMIC FEEDBACK
Effects on Outlays............................... * * 0 0 0 0 0 0 0 0 * *
Effects on Revenues.............................. -153 -17 34 21 14 7 1 * -2 -2 -100 -97
Effects on the Deficit\a\........................ 154 17 -34 -21 -14 -7 -1 * 2 2 101 97
ESTIMATED BUDGETARY IMPACT OF MACROECONOMIC FEEDBACK
Effects on Outlays............................... 2 1 1 1 1 * * * * * 6 7
Effects on Revenues.............................. 2 2 2 2 2 2 2 2 1 1 10 17
Effects on the Deficit\a\........................ * -1 -1 -1 -1 -1 -1 -1 -1 -1 -4 -10
TOTAL ESTIMATED CHANGES, INCLUDING MACROECONOMIC FEEDBACK
Effects on Outlays............................... 2 1 1 1 1 * * * * * 6 7
Effects on Revenues.............................. -152 -14 37 23 16 8 3 1 -1 -1 -91 -79
Effects on the Deficit\a\........................ 154 16 -36 -22 -15 -8 -3 -1 1 1 97 87
--------------------------------------------------------------------------------------------------------------------------------------------------------
Sources: Congressional Budget Office; staff of the Joint Committee on Taxation.
Note: * = between -$0.5 billion and $0.5 billion.
\a\Positive numbers indicate increases in the deficit, and negative numbers indicate reductions in the deficit.
Because the estimate of macroeconomic effects incorporates
the impact of all of the bill's provisions taken together, the
estimates of the bill's effects by type of provision do not
reflect the macroeconomic feedback effects. Those estimates are
shown in Table 2.
TABLE 2. ESTIMATE OF DIRECT SPENDING AND REVENUE EFFECTS OF THE TAX RELIEF EXTENSION ACT OF 2015
--------------------------------------------------------------------------------------------------------------------------------------------------------
By fiscal year, in billions of dollars--
----------------------------------------------------------------------------------------------------------------
2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2015-2020 2015-2025
--------------------------------------------------------------------------------------------------------------------------------------------------------
ESTIMATED CHANGES WITHOUT MACROECONOMIC FEEDBACK
Changes in Revenues:
Individual Tax Extensions.......... -9.8 -6.8 -0.3 -0.1 -0.1 -0.1 -0.1 -0.1 -0.1 -0.1 -17.1 -17.6
Business Tax Extensions............ -138.4 -8.3 35.1 21.9 15.2 8.1 2.9 1.1 -0.2 -0.1 -74.4 -62.6
Energy Tax Extensions.............. -5.2 -1.4 -0.4 -0.9 -1.1 -1.3 -1.4 -1.5 -1.6 -1.7 -9.0 -16.6
Other Provisions................... * * * * 0.1 * * * * * 0.1 0.2
Total Revenues................. -153.4 -16.6 34.4 21.1 14.1 6.7 1.4 -0.5 -1.9 -1.9 -100.5 -96.6
On-budget.................. -153.4 -16.5 34.4 21.1 14.1 6.7 1.4 -0.5 -1.9 -1.9 -100.4 -96.5
Off-budget................. -0.1 * 0 0 0 0 0 0 0 0 -0.1 -0.1
Changes in Direct Spending:
Rum Excise Tax Payments:
Estimated Budget Authority..... 0.3 * 0 0 0 0 0 0 0 0 0.3 0.3
Estimated Outlays.............. 0.3 * 0 0 0 0 0 0 0 0 0.3 0.3
Net Increase or Decrease (-) in the
Deficit from Changes in Direct
Spending and Revenues Without
Macroeconomic Feedback:
Effects on Deficits................ 153.7 16.6 -34.4 -21.1 -14.1 -6.7 -1.4 0.5 1.9 1.9 100.8 96.9
On-budget...................... 153.7 16.6 -34.4 -21.1 -14.1 -6.7 -1.4 0.5 1.9 1.9 100.7 96.9
Off-budget..................... 0.1 * 0 0 0 0 0 0 0 0 0.1 0.1
ESTIMATED BUDGETARY IMPACT OF MACROECONOMIC FEEDBACK
Effects on Outlays..................... 1.8 1.4 1.0 0.7 0.6 0.4 0.3 0.2 0.1 0.1 5.6 6.8
Effects on Revenues.................... 1.7 2.3 2.2 1.8 1.7 1.7 1.7 1.6 1.4 1.2 9.6 17.2
Effects on the Deficita................ 0.1 -0.9 -1.2 -1.0 -1.1 -1.3 -1.4 -1.3 -1.2 -1.1 -4.1 -10.4
TOTAL ESTIMATED CHANGES, INCLUDING MACROECONOMIC FEEDBACK
Effects on Outlays..................... 2.1 1.4 1.0 0.7 0.6 0.4 0.3 0.2 0.1 0.1 5.9 7.1
Effects on Revenues.................... -151.7 -14.3 36.6 22.8 15.7 8.4 3.2 1.1 -0.5 -0.7 -90.8 -79.4
Effects on the Deficita................ 153.9 15.7 -35.6 -22.1 -15.2 -8.0 -2.8 -0.8 0.7 0.8 96.7 86.6
--------------------------------------------------------------------------------------------------------------------------------------------------------
Sources: Congressional Budget Office; staff of the Joint Committee on Taxation.
Notes: Details may not add to totals because of rounding; * = between -$50 million and $50 million.
aPositive numbers indicate increases in the deficit, and negative numbers indicate reductions in the deficit.
Basis of Estimate: JCT provided the estimates of all
provisions except one dealing with outlays of certain rum
excise taxes. The estimates reflect an assumed enactment date
of October 1, 2015.
Estimates Excluding Macroeconomic Feedback
JCT and CBO estimate that the Tax Relief Extension Act of
2015 would increase deficits by about $97 billion over the
2015-2025 period, excluding the effects of macroeconomic
feedback. The effects of the main provisions, excluding any
macroeconomic feedback, are highlighted below.
Extensions of Individual Tax Provisions. The individual
income tax provisions would reduce revenues by $17.6 billion
over the 2016-2025 period, JCT estimates. Those amounts
include, among others, the effects of extending provisions that
would allow:
Individuals to claim state and local sales taxes
as an itemized deduction in lieu of state and local income
taxes in calculating their individual income tax liability; JCT
estimates that enacting this provision would reduce revenues by
a total of $6.7 billion over the 2016-2018 period.
An exclusion from gross income for the discharge
of indebtedness on a principal residence; JCT estimates that
this provision would reduce revenues by $5.2 billion over
fiscal years 2016 and 2017.
Extensions of Business Tax Provisions. The business tax
provisions would reduce revenues by $62.6 billion over the
2016-2025 period, JCT estimates. In addition, CBO estimates
that those provisions would increase outlays by $0.3 billion
over the 2016-2025 period. Those amounts include, among others,
the effects of provisions that would allow:
Businesses to qualify for both additional first-
year depreciation of 50 percent of the basis for qualifying
property and additional expensing (that is, immediate deduction
from taxable income) for qualifying property under section 179
of the Internal Revenue Code. JCT estimates that those
provisions would reduce revenues by $113.2 billion in 2016, and
increase revenues by $106.7 billion over the 2017-2025 period,
with the net effect of reducing revenues by $6.5 billion over
the 2016-2025 period.
Businesses to claim the research tax credit,
which JCT estimates would reduce revenues by $22.6 billion over
the 2016-2025 period. The provision would extend the credit in
effect in 2014 in modified form.
Certain foreign subsidiaries that engage in
banking, financial, and related businesses to defer taxation of
certain income until it is repatriated to the U.S. parent
corporation; JCT estimates that the provision would reduce
revenues by $13.5 billion over fiscal years 2016 and 2017.
The Treasuries of Puerto Rico and the Virgin
Islands to receive increased payments relating to excise taxes
on rum manufactured in those places as well as rum imported
from other countries. CBO estimates that those payments, which
are recorded in the budget as outlays, would total $336 million
over the 2016-2025 period.
Extensions of Energy Tax Provisions. The extension of the
energy tax provisions would lower revenues by about $16.6
billion over the 2016-2025 period, JCT estimates. The provision
with the largest effect on revenues--reducing them by an
estimated $10.5 billion over the 2017-2025 period--would
extend, to the end of 2016, the date by which construction must
begin in order for renewable power facilities to be eligible
for the electricity production credit or the investment credit
in lieu of the production credit.
Other Provisions. JCT estimates that the three other
provisions in the bill would increase revenues by $0.2 billion
over the 2016-2025 period. The other provision with the largest
effect would modify the tax credit for certain alternative
fuels.
Macroeconomic Feedback Effects
JCT has separately provided a description of the
macroeconomic feedback effects of the bill (see Joint Committee
on Taxation, JCX-107-15). CBO has incorporated those effects
into the estimates shown here.
JCT estimates that the bill would increase the capital
stock at the beginning of the budget period, increasing
revenues by about $17 billion over the 2016-2025 period. At the
same time, a small increase in interest rates from higher
federal debt would increase the cost of federal debt service by
about $7 billion over the 2016-2025 period. The net effect of
the macroeconomic feedback would be to reduce deficits by about
$10 billion over the 10-year period.
Long-term impacts
CBO and JCT estimate that enacting the legislation would
not increase direct spending, revenues, or the deficit by at
least $5 billion in any of the four consecutive 10-year periods
beginning in 2026. That estimate includes macroeconomic
feedback.
In the second and third decade after enactment, because the
bill is expected to result in an increase in federal debt, JCT
expects it to make private borrowing more expensive, thus
slightly lowering the capital stock relative to present law and
reducing economic growth and associated revenues relative to
present law. The expected increase in debt generated by the
proposal is quite small relative to the overall size of the
economy; therefore the long-run effect is expected to be small.
Pay-As-You-Go considerations: The Statutory Pay-As-You-Go
Act of 2010 establishes budget-reporting and enforcement
procedures for legislation affecting direct spending or
revenues. The net changes in revenues and outlays that are
subject to those pay-as-you-go procedures are shown in the
following table and include macroeconomic feedback. Only on-
budget changes to outlays or revenues are subject to pay-as-
you-go procedures.
TABLE 3. CBO ESTIMATE OF PAY-AS-YOU-GO EFFECTS FOR THE TAX RELIEF EXTENSION ACT OF 2015, AS ORDERED REPORTED BY THE SENATE COMMITTEE ON FINANCE ON JULY 21, 2015
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
By fiscal year, in millions of dollars 2015--
-----------------------------------------------------------------------------------------------------------------------------------------------
2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2016-2020 2016-2025
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
NET INCREASE OR DECREASE (-) IN THE ON-BUDGET DEFICIT
Statutory Pay-As-You-Go Effects................. 0 155,494 17,191 -35,118 -22,105 -15,217 -8,044 -2,878 -911 540 602 100,245 89,552
Memorandum:
Changes in Revenues......................... 0 -153,347 -15,773 36,137 22,854 15,783 8,485 3,214 1,149 -393 -542 -94,345 -82,430
Changes in Outlays.......................... 0 2,147 1,418 1,019 749 566 441 336 238 147 60 5,900 7,122
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Sources: Congressional Budget Office and staff of the Joint Committee on Taxation.
Intergovernmental and private-sector impact: JCT has
determined that the bill contains no intergovernmental or
private sector mandates as defined in UMRA.
Estimate prepared by: Federal revenues: Pamela Greene and
staff of the Joint Committee on Taxation; Federal spending:
Matthew Pickford; Macroeconomic feedback: Staff of the Joint
Committee on Taxation.
Estimate approved by: Mark Booth, Unit Chief, Revenue
Estimating.
IV. VOTES OF THE COMMITTEE
The Modification to the Chairman's Mark was deemed
incorporated into the Mark.
Amendment #2, Grassley/Cantwell/Thune #2: Biodiesel Tax
Incentive Reform Act--approved by voice vote.
Amendment #68, Stabenow/Heller/Menendez/Isakson/Brown/
Casey/Cardin #4, as modified: Refinement to the Mortgage
Forgiveness Tax Relief Act to Provide More Certainty to
Struggling Homeowners--approved by voice vote.
Final Passage of an Original Bill to Extend Certain
Expiring Tax Provisions--approved by roll call vote of 23 ayes,
3 nays.
Ayes: Hatch, Grassley, Crapo, Roberts, Cornyn (proxy),
Thune (proxy), Burr, Isakson (proxy), Portman, Heller, Scott,
Wyden, Schumer, Stabenow, Cantwell, Nelson (proxy), Menendez,
Carper, Cardin, Brown (proxy), Bennet, Casey, Warner (proxy).
Nays: Enzi, Toomey, Coats.
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 section 179 expensing, 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 expanding information reporting with respect to
mortgages.
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 bill contains one
private sector mandate: additional information on returns
relating to mortgage interest.\355\ The costs required to
comply with the Federal private sector mandate generally are no
greater than the aggregate estimated budget effects of the
provision.
---------------------------------------------------------------------------
\355\A similar provision was included in H.R.3236, Surface
Transportation and Veterans Health Care Choice Improvement Act of 2015,
which was passed by the House of Representatives on July 29, 2015 and
the Senate on July 30, 2015, and signed into law on July 31, 2015.
---------------------------------------------------------------------------
The Committee has determined that the bill does not impose
a Federal intergovernmental mandate on State, local, or tribal
governments.
C. Tax Complexity Analysis
Section 4022(b) of the Internal Revenue Service
Restructuring and Reform Act of 1998 (the ``IRS Reform Act'')
requires the staff of the Joint Committee on Taxation (in
consultation with the Internal Revenue Service (``IRS'') 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.
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 2016
(through 2017 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 before January 1, 2017
(January 1, 2018, 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, 2017 (January
1, 2018, 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 5 extension property'').
Under the bill, a corporation that has an election in
effect with respect to round 4 extension property to claim
minimum tax credits in lieu of bonus depreciation is treated as
having an election in effect for round 5 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 4 extension property to elect to claim minimum
tax credits in lieu of bonus depreciation for round 5 extension
property. A separate bonus depreciation amount, maximum amount,
and maximum increase amount is computed and applied to round 5
extension property.
Number of affected taxpayers
It is estimated that the provision will affect over 10
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, Depreciation and Amortization
(Including Information on Listed Property); however, the
current year tax deduction associated with such assets will
increase.
Extension and modification of 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 2015 and 2016, 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 2014.
In addition, the bill extends, for taxable years beginning
in 2015 and 2016, 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 2015 and 2016,
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 2015 and
2016, the bill continues to allow a taxpayer to revoke an
election, or any specification contained therein, made under
section 179 without the consent of the Commissioner.
Number of affected taxpayers
It is estimated that the provision will affect over 10
percent of small business tax returns.
Discussion
While taxpayers purchasing section 179 property will still
be required to complete and file Form 4562, Depreciation and
Amortization (Including Information on Listed Property),
significantly less detail is required to be included on such
form. Accordingly, the compliance burden of many taxpayers will
be reduced.
Additional information on returns relating to mortgage interest\356\
---------------------------------------------------------------------------
\356\A similar provision was included in H.R. 3236, Surface
Transportation and Veterans Health Care Choice Improvement Act of 2015,
which was passed by the House of Representatives on July 29, 2015 and
the Senate on July 30, 2015, and signed into law on July 31, 2015.
---------------------------------------------------------------------------
Summary description of the provision
The bill expands information reporting with respect to an
obligation secured by real property by requiring the following
additional information to be included in information returns
filed with the IRS and provided to the payor: (i) the amount of
outstanding principal on the mortgage as of the beginning of
the calendar year, (ii) the address of the property securing
the mortgage, and (iii) the loan origination date. The
provision applies to returns and statements due after December
31, 2016.
Number of affected taxpayers
It is estimated that the provision will affect over 10
percent of individual tax returns.
Discussion
The additional information reporting requirements imposed
on those who, in the course of a trade or business, receive
from any individual mortgage interest of $600 or more in a
calendar year will result in additional information being
provided to mortgage payors. The additional information
received is not expected to result in additional complexity for
individuals who receive the additional information. The
additional information may make it easier for individuals who
are payors of mortgage interest to identify deductible amounts
with respect to each loan and each property that is mortgaged.
For example, the additional information can assist taxpayers to
distinguish among home mortgage, home equity, and investment
interest payments with respect to mortgaged properties. Thus,
these additional information reporting requirements could have
a simplification benefit for individuals, rather than causing
them additional complexity.
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
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).
[all]