United States: Tax Policy Update - November 4, 2014

Last Updated: November 10 2014
Article by Russell W. Sullivan and Danielle R. Dellerson

NUMBER OF THE WEEK: 4 Percent.

The chance that Democrats will hold on to their majority in the Senate after tonight's election results are tallied (or possibly not until after a Dec. 6 runoff in Louisiana), according to a Washington Post election model.

LAME-DUCK LEGISLATIVE LANDSCAPE

The Post-Election Extender-Ganza. For those of you who've waited patiently for tax extenders to return to the legislative limelight, the time is nigh. Regardless of the outcome of today's midterm elections, leaders in both the House and Senate have repeatedly said they will deal with the nearly 60 expired tax breaks during the lame-duck session.

But the question is how? A partisan battle over the amendment process — or lack thereof — blocked passage of the EXPIRE Act (S. 2260, offered as an amendment in the nature of a substitute for H.R. 3474) in the Senate last spring after it passed out of the Finance Committee with bipartisan support. The EXPIRE Act extends all 55 currently expired and soon-to-expire tax provisions for the 2014 and 2015 tax years.

The House, on the other hand, passed H.R. 4 on Sept. 18, to permanently extend a limited selection of tax provisions — six, to be exact — along with some modifications and expansions to their original versions. The House bill also repeals the medical device tax and replaces the 30-hour threshold for classification as a full-time employee for purposes of the employer mandate under Obamacare with a 40-hour threshold.

Neither of the extender packages would be paid for by revenue offsets, which is significant given that the House bill is estimated to reduce federal revenues by more than $572 billion over 10 years, and President Obama has said he would veto any permanent tax cut extensions without budgetary offsets. The two-year extension proposed in the Senate bill would cost $85 billion over the 10-year window.

So, the question is, can lawmakers negotiate a deal to bridge their disparate approaches after the election, and will post-election realities help or hurt chances for a lame-duck deal?

We expect House Republicans to continue the fight to make at least some of the tax breaks permanent. High on the permanency priority list are the R&D tax credit, increased expensing under Section 179 and bonus depreciation — a trio of pro-business provisions with hefty price tags. Permanent extension of these provisions — especially the R&D tax credit — also has support from some Democrats. But, in return, Dems will demand extensions of tax breaks for low- to middle-income families, including the expanded Earned Income Tax Credit, Child Tax Credit and American Opportunity Tax Credit, all of which are set to expire in 2017.

Senate Dems will also push for at least short-term extension of tax provisions promoting renewable energy, but their bargaining power appears likely to take a hit after today's election results come into view.

Here is a side-by-side recap of the key business-related provisions that will be on the negotiating table when House and Senate leaders and tax writers return next week.

Provision

Senate (H.R. 3474)(2-year Extension of All Provisions)

House (H.R. 4)

Est. Cost 10-year

R&D credit

(Sec. 41)

A credit of 20 percent of research expenses over a base amount, determined by average receipts and expenses for the 4 preceding taxable years.

A 14 percent alternative simplified credit also available. Modified to allow qualifying startup businesses to claim unused credits against their payroll tax after applying credit to income tax liability.

Permanent 20 percent credit for qualified research expenses over a base amount equal to 50 percent of average qualified research expenses for the 3 preceding taxable years; and 20 percent of amounts paid to an energy research consortium for energy research. Provides a special rule permitting a credit for taxpayers having no qualified research expenses in any of the 3 preceding taxable years; the credit is equal to 10 percent of such expenses.

Senate: $16

House: $155

(in billions)

Sec. 179 Expensing

Increased annual expensing limit ($500,000 limit, $2 million phaseout threshold) and expanded definition of qualifying property.

Makes the increased expensing limit permanent.

Senate: $3

House: $73

(in billions)

Bonus Depreciation (Sec. 168(k))

Provides a depreciation deduction equal to 50 percent of the adjusted basis of qualifying property in the first year the property is placed into service. Another provision allows corporations to elect to increase their AMT credit limit in lieu of bonus first-year depreciation.

Makes bonus depreciation permanent and extends the allowance to a tree or vine bearing fruit or nuts. Makes permanent the election for the increased AMT credit limit in lieu of bonus depreciation.

Senate: $3.4

House: $270

(in billions)

S-Corp reduced recognition period for built-in gains tax

Reduces the holding period for S-corporations to avoid a built-in gain tax following a conversion to an S corp from 10 years to 5 years. (Sec. 1374(d)(7))

Makes the 5-year recognition period permanent.

Senate: $232 million

House: $1.5 billion

S-Corp basis adjustment

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))

Makes the provision permanent.

Senate: $104

House: $662

(in millions)

Exceptions under Subpart F for active financing income

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.

No provision.

$10 billion

Look-through rules for payments between related CFCs

Allows deferral for certain payments (interest, dividends, rents and royalties) between commonly controlled foreign corporations.

No provision.

$2.5 billion

Production tax credit

Extends the 2.3 cent per kilowatt-hour tax credit for wind and other renewable electricity produced for a 10-year period from a facility that has commenced construction by the end of 2015.

No provision.

$13 billion

Work Opportunity Tax Credit

Allows businesses to claim a tax credit equal to 40 percent of the first $6,000 of wages paid to each new hire in one of eight targeted groups, including unemployed veterans. Bill adds long-term unemployed to list of eligible populations for qualifying new hires.

No provision.

$3 billion

In addition to these business-related extenders, there are a number of provisions related to charitable giving that have bipartisan support — at least substantively — in both houses of Congress.

The Senate's EXPIRE Act included a two-year extension of a provision that permits IRA owners over 70 years old to exclude from gross income up to $100,000 per year in IRA distributions to certain public charities. The House Ways & Means Committee passed a similar bill out of committee that would make the IRA charitable rollover permanent, but the provision was not included in the House-passed extender package. Similarly, the Ways & Means Committee reported out a bill that would make the charitable deduction for conservation easements permanent, whereas the EXPIRE Act included only a two-year extension of the deduction.

Keep in mind that when lawmakers return next week, tax extenders are only one of several high priorities in what will most likely be a very brief work period before wrapping up the legislative session by mid-December. Funding the government beyond the Dec. 11 expiration of the current continuing resolution, the Defense Authorization Act (not to mention related debates over handling of the Islamic State), the renewal of the moratorium on Internet access taxes, ebola and a likely fervent push to confirm nominations in the Senate will also be competing for lawmakers' attention.

LOOKING AHEAD

Thursday, Nov. 6

Bloomberg BNA and KPMG's "The Elections: What's Next for U.S. Tax"

9 a.m. – 12:30 p.m. – Free event, in person and live streaming, 1801 K Street NW, DC.
Bloomberg BNA and KPMG are co-hosting a post-election analysis and discussion on what's next for U.S. tax policy. Register for free, live streaming of the event here .

Speakers include:

  • Russell Sullivan, partner at McGuireWoods; senior adviser at McGuireWoods Consulting; former staff director at Senate Finance Committee
  • John Buckley, former chief of staff, Joint Committee on Taxation; and former chief tax counsel, Committee on Ways and Means
  • George Callas, majority staff director, Ways and Means Subcommittee on Select Revenue Measures
  • Aruna Kalyanam, Democratic tax counsel and staff director, Subcommittee on Select Revenue Measures, Committee on Ways and Means
  • Kenneth (Ken) Kies, managing director of the Federal Policy Group, LLC; former staff director, Joint Tax Committee
  • Cathy Koch, chief adviser to the majority leader, Tax and Economic Policy Committee
  • Jim Lyons, tax counsel, Senate Finance Committee, Republican staff
  • Karen B. McAfee, Democratic chief tax counsel, Committee on Ways and Means
  • Todd Metcalf, chief tax counsel, Senate Finance Committee, Democratic staff
  • Warren Payne, majority policy director, Ways & Means Committee
  • Mark Prater, deputy staff director, chief tax counsel, Senate Finance Committee, Republican staff
  • Catherine Schultz, vice president, tax policy, National Foreign Trade Council, Inc.
  • Robert Stack, deputy assistant secretary, tax policy, Department of Treasury (International Tax Affairs)

Beginning Nov. 17: Congressional Leadership and Committee Assignments

  • The House will hold leadership votes on Nov. 17 and will select committee chairmen Nov. 17 and 18. The first round of general committee assignments, including those for the three open seats on the Ways & Means Committee, are expected by Nov. 20. The remaining committee assignments are expected the week of Dec. 1.
  • The Senate is less predictable. If we know which party has the majority by the time lawmakers return next week — and we may not — then it's a fairly simple calculation. If Republicans gain their net six seats, ranking members become committee chairs and vice versa, and Leader Reid becomes Minority Leader Reid. Assuming current Minority Leader Mitch McConnell wins re-election, he will ascend to majority leader.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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