United States: Tax Policy Update - Tax Extenders: What's In And What's Out Of The Chairman's Mark

As we reported earlier today, the Senate Finance Committee released tax extender legislation, the "Expiring Provisions Improvement Reform and Efficiency (EXPIRE) Act," set for markup this Thursday, April 3, 2014. The Chairman's Mark is a $67 billion bill that would jettison 12 provisions, while extending the remaining provisions for two years in most cases.

Almost as interesting as what made it into the Chairman's Mark is what did not. Finance Committee members have until noon tomorrow to file amendments, and we expect there to be quite a few, as we discussed last week.

Gone With the Wind? Notably absent from the mark is the production tax credit for renewable energy -- widely known for its importance to the wind industry and its history of support from Chairman Wyden. We do, however, expect to see the PTC make it into the final package, either as a modification to the Chairman's Mark or offered as an amendment that will be voted on separately during the markup.

Look-Through No More? The bill is also silent with respect to the so-called look-through rule that, until its expiration at the end of 2013, allowed U.S.-based multinationals to move dividends, interest, rents and royalties among its related controlled foreign corporations (CFCs) as payments without triggering a current U.S. tax to the extent the payor CFC earns active foreign business income that would not constitute subpart F income.

Again, we would expect to see this either included in a modified version of the Chairman's Mark or introduced as an amendment and voted on during Thursday's markup. It, too, will likely be a part of the final reported bill -- especially considering it was originally authored by the committee's ranking member, Sen. Orrin Hatch (R-UT).

WHAT'S OUT

• Seven-year recovery period for motorsports entertainment complexes (Secs. 168(i)(15) and 168(e)(3)(C)(ii)).
• The foreign personal holding company lookthrough rules for payments between related controlled foreign corporations: Treats dividends, interest, rents, and royalties received or accrued from a controlled foreign corporation that is a related person as not foreign personal holding company income to the extent they are attributable or properly allocable to income of the related person that is neither subpart F income nor income treated as effectively connected with the conduct of a trade or business in the United States (Sec. 954(c)(6)).
• Beginning-of-construction date for renewable power facilities eligible to claim the electricity production credit or investment credit in lieu of the production credit: A credit is allowed for the production of electricity by a renewable power facility, or in the alternative, an energy credit for the cost of the construction of the facility, if construction of the facility began before 2014. These credits apply to wind, closed-loop biomass, open-loop biomass, geothermal or solar, small irrigation power, trash, refined coal production, qualified hydropower, Indian coal production, and marine and hydrokinetic renewable energy facilities (Secs. 45(d) and 48(a)(5)).
• Energy-efficient appliances credit: A credit for qualified energy-efficient appliances produced by the taxpayer (Sec. 45M).
• Placed-in-service date for partial expensing of certain refinery property: Allows taxpayers to treat 50 percent of the cost of any qualified refinery property as an expense that is not chargeable to capital account but instead as a deduction in the year the property is placed in service (Sec. 179C).
• Energy-efficient commercial buildings deduction: Permits businesses to deduct the cost of energy-efficient commercial building property placed in service during the year, up to a limit of $1.80 per square foot and limited by prior Sec. 179D deductions on the building (Sec. 179D).
• Special rule for sales or dispositions to implement Federal Energy Regulatory Commission (FERC) or state electric restructuring policy: Allows taxpayers to elect to defer the recognition of qualified gain from a qualifying electric transmission transaction (Sec. 451(i)).
• Nonbusiness energy property credit: A credit of 10 percent of qualified improvements and expenditures, subject to a lifetime maximum (Sec. 25C).
• Special rules for contributions of capital gain real property made for conservation purposes: Permits qualified conservation contributions to be deducted up to 50 percent of a taxpayer's contribution base (100 percent for qualified farmers and ranchers) (Sec. 170(b)).
• Special film and television production expensing rules: Allows taxpayers to treat costs of any qualified film or television production as an expense that is not chargeable to capital account but instead as a deduction (Sec. 181).
• Various empowerment zone tax incentives: Includes the designation of empowerment zones, tax-exempt enterprise zone facility bonds, the empowerment zone employment credit, increased expensing under Sec. 179 for enterprise zone businesses, nonrecognition of gain on rollover of empowerment zone investments, and increased exclusion of gain for small business stock of empowerment zone businesses (Secs. 1202, 1391, 1394, 1396, 1397A, and 1397B).
• Credit for health insurance costs of eligible individuals: A credit equal to 72.5 percent of the amount paid by the taxpayer for qualified health insurance coverage of the taxpayer and qualifying family members for eligible coverage months (Sec. 35).

WHAT'S IN

The Chairman's Mark extends the following provisions for two years, applying retroactively to the beginning of 2014 and through the end of the 2015 tax year, unless otherwise noted.

General Business and Cost Recovery Provisions

• Research and development (R&D) credit: A credit of 20 percent of research expenses over a base amount (Sec. 41).
• Bonus 50 percent first-year depreciation: Provides a depreciation deduction equal to 50 percent of the adjusted basis of qualifying property in the first year the property is placed in service (Sec. 168(k)).
• Election to accelerate certain credits in lieu of bonus first-year depreciation: Allows corporations to elect not to claim bonus depreciation but instead increase their AMT credit limit under Sec. 53(c) (Sec. 168(k)(4)).
• The $500,000 expensing limit and $2,000,000 phaseout threshold and expanded definition of Sec. 179 property: The proposal also extends, for taxable years beginning in 2014 and 2015, the treatment of off-the-shelf computer software as qualifying property (Sec. 179).
• Fifteen-year straight-line cost recovery for certain improvements: Allows taxpayers to use 15-year straight-line recovery for qualified leasehold improvements, qualified restaurant buildings and improvements, and qualified retail improvements (Secs. 168(e)(3)(E) and 168(e)(7)(A)).
• Railroad track maintenance credit: A credit equal to 50 percent of the qualified railroad track maintenance expenditures paid or incurred by an eligible taxpayer (Sec. 45G(f)).
• Three-year depreciation for racehorses 2 years old or younger (Sec. 168(e)(3)(A)).
• Accelerated depreciation for business property on an Indian reservation: Provides owners of qualifying property used predominantly in the active conduct of a trade or business within an Indian reservation with accelerated recovery periods (Sec. 168(j)).
• Work opportunity tax credit: A credit equal to 40 percent of the qualified first-year wages of employees who are members of a targeted group (Sec. 51).
• New markets tax credit: A credit for investments in businesses or real estate in low-income communities. (Sec. 45D(f)(1)).
• Special treatment of dividends from regulated investment companies: Exempts interest-related dividends and short-term capital gain dividends from a regulated investment company from tax (Secs. 871(k)(1) and (k)(2)).
• Indian employment tax credit: A credit for employers of enrolled members of Indian tribes (or their spouses) who work on and live on or near an Indian reservation (Sec. 45A).

Energy Provisions

• Alternative fuel (non-hydrogen) vehicle refueling property credit: A credit of 30 percent of the cost of any qualified alternative fuel vehicle refueling property placed in service by the taxpayer during the tax year (Sec. 30C).
• Credit for two- or three-wheeled plug-in electric vehicles: A credit of up to $7,500, based on battery capacity, for each new qualified plug-in electric drive motor vehicle placed in service by the taxpayer during the tax year (Sec. 30D).
• Second-generation biofuel producer credit (cellulosic biofuel producer credit): A credit for each gallon of qualified second generation biofuel production (Sec. 40(b)(6)).
• Biodiesel and renewable diesel fuel credits: Includes the biodiesel mixture credit, the biodiesel credit, and the small agri-biodiesel producer credit (Sec. 40A).
• Biodiesel and renewable diesel fuel excise tax credits and outlay payments: A credit based on the number of gallons of biodiesel used by the taxpayer in producing any biodiesel mixture for sale or use in the taxpayer's trade or business. As an alternative, a taxpayer may receive a payment in the amount of the credit (Secs. 6426(c) and 6427(e)(6)(B)).
• Credit for new qualified fuel cell motor vehicles: This provision does not expire until the end of 2014, and the proposal would extend it for one additional year, through the end of 2015. The base credit is $4,000, but heavier vehicles can get up to a $40,000 credit, depending on weight.
• Indian coal production credit: Provides an increased credit for each ton of Indian coal produced by the taxpayer (Sec. 45(e)(10)(A)(i)).
• New energy-efficient homes credit: A credit for each qualified new energy-efficient home constructed by an eligible contractor and acquired by a person from the eligible contractor for use as a residence during the tax year (Sec. 45L(g)).
• Excise tax credits for alternative fuel mixtures: A credit of 50 cents per gallon of alternative fuel used in producing an alternative fuel mixture for sale or use in a trade or business (Sec. 6426(e)).
• Special depreciation allowance for second-generation biofuel plant property: Provides a depreciation allowance equal to 50 percent of the adjusted basis of qualified second-generation biofuel plant property (Sec. 168(l)).
• Parity between the exclusion from income for employer-provided mass transit and parking benefits: Equalizes the limit for the monthly tax exclusion for employer-provided transit pass and vanpool with the limit for employer-provided parking benefits. For 2014, this amount is $250 (Sec. 132(f)).

International Provisions

• Regulated investment company treatment under Foreign Investment in Real Property Tax Act (FIRPTA): Provides that qualified investment entity includes any regulated investment company that is a U.S. real property holding corporation (Sec. 897(h)(4)).
• Subpart F active financing income exceptions: Exempts certain insurance income and net gains from sale of property that produces qualified banking or financing income from income that is treated as subpart F income (Secs. 953(e)(10) and 954(h)(9)).

Key Real Estate/ Housing Provisions

• Exclusion for discharge-of-indebtedness income on principal residence: Excludes from gross income discharge-of-indebtedness income from the discharge of qualified principal residence indebtedness (Sec. 108(a)(1)(E)).
• Premiums for private mortgage insurance deductible as qualified residence interest: Permits taxpayers whose income is below certain thresholds to deduct the cost of premiums on private mortgage insurance purchased in connection with acquisition indebtedness on the taxpayer's principal residence (Sec. 163(h)(3)). (Note: The Chairman's Mark does not extend this provision for otherwise qualifying taxpayers whose mortgage insurance is provided by the Department of Veterans Affairs, the Federal Housing Administration, or the Rural Housing Service.)
• Determination of low-income housing credit rate for credit allocations with respect to nonfederally subsidized buildings: This provision allows a 9 percent minimum low-income housing credit rate for nonfederally subsidized new buildings (Sec. 42(b)(2)).
• Treatment of military basic housing allowances under the low-income housing credit: Treats buildings located in counties with qualified military installations as qualified buildings for purposes of the low-income housing credit (Sec. 142(d)).

Small Business Provisions

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

Charitable

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

Education

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

General Individual Provisions

• Deduction for state and local general sales taxes: Allows individuals to deduct state and local general sales taxes paid instead of state and local income taxes (Sec. 164(b)(5)).
• Extenders relating to Multiemployer Defined Benefit Pension Plans: (Sec. 431 and Sec. 432)

Specialized Business Provisions

• Mine rescue team training credit: A credit for a portion of training costs for qualified mine rescue team employees (Sec. 45N).
• American Samoa economic development credit: (P.L. 109-432 as amended by P.L. 111-312).
• Election to expense advanced mine safety equipment: Permits taxpayers to elect to treat 50 percent of the cost of any qualified advanced mine safety equipment as an expense that is not chargeable to capital account but instead as a deduction in the year the property is placed in service (Sec. 179E).
• Deduction for domestic production activities in Puerto Rico: Treats Puerto Rico as part of the United States for purposes of the domestic production activities deduction (Sec. 199(d)(8)).
• The temporary increase in limit on cover over of rum excise tax revenues: Increases the limit on cover over of rum excise taxes from $10.50 to $13.25 per proof gallon to Puerto Rico and the Virgin Islands (Sec. 7652(f)).

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