The House, on May 29, by a vote of 215-204, approved a $56 billion tax bill, the “American Jobs and Closing Tax Loopholes Act”. The Senate has already approved a similar measure. President Obama is expected to sign the bill. Most of the provisions retroactively extend to December 31, 2010, tax provisions that expired on December 31, 2009. Among significant items:
¶ The bill extends until December 31, 2010, the additional standard deduction of $500 ($1,000 for married filing jointly) for qualified state and local real property taxes available for non-itemizing persons..
¶ The bill extends through December 31, 2010 a provision allowing taxpayers the choice of itemizing either (i) state or local income taxes or (ii) state or local sales taxes.
¶ Extended through December 31, 2010 is a provision allowing qualified taxpayers an above-the-line deduction for qualified higher education tuition and expenses. The maximum deduction of $4,000 is available for individuals with adjusted gross income not exceeding $65,000 ($130,000 married/joint). A $2,000 deduction is available for taxpayers whose AGI does not exceed $80,000 ($160,000 married/joint).
New Tax Revenues
Although the focus of the bill is to extend expiring tax provisions, the measure also contains several tax revenue proposals. Among them:
¶ Congress is concerned with the perceived manipulation of employment taxes by professionals operating through an S corporation or limited partnership and receiving a low salary. The bill addresses this perceived abuse through new rules taking effect January 1, 2011.
¶ The House has proposed increasing the federal oil spill recovery trust excise tax to $0.32 per barrel through December 31, 2020. The “single spill incident expenditure cap” would be eliminated from the Oil Spill Liability Trust Fund.
¶ The bill would increase estimated tax payments for large corporations by 30.5 percent due in July, August and September 2015.
Provisions for Businesses
Congress appears ready to enact various business incentives. Among them:
¶ The bill would extend until December 31, 2010, the qualified research and experimentation tax credit.
¶ The 15-year MACRS recovery period for (i) qualified leasehold improvement property (normally depreciated over 39 years) and (ii) qualified retail improvement property, placed in service before January 1, 2010 would be extended to January 1, 2011.
¶ The bill extends expiring provisions relating to regulated investment companies until December 31, 2010. The provisions relate primarily to short-term capital gain treatment of dividends of mutual funds. The bill also addresses (i) the estate tax treatment of non-U.S. citizens and (ii) the tax treatment of dispositions of U.S. real property by mutual funds investments by non-U.S. citizens.
¶ The bill extends through December 31, 2010, expiring provisions relating to investments by U.S. shareholders in controlled foreign corporations (CFCs). The provisions extend several exceptions to the rule requiring U.S. shareholders of CFCs to report income not currently distributed.
¶ The bill extends until December 31, 2010 a provision allowing individuals 70½ or more to donate up to $100,000 from IRA accounts to a charitable organization without recognizing income and without itemized charitable deduction limitations.
¶ The bill extends until December 31, 2010, provisions set to expire on December 31, 2009, which provide special rules for contributions of real property for conservation purposes.
¶ The bill extends until December 31, 2010, a provision allowing special deductions for charitable contributions by corporations of contributions of computer technology and computer equipment.
Congress also favors the following energy incentives:
¶ Tax credits for hybrid automobiles, and hybrid light trucks, medium trucks and heavy trucks, now due expire in 2009, 2010 and 2014, would each be extended for one year.
¶ Tax credits for (i) natural gas; (ii) liquefied petroleum gas used as transportation fuel; (iii) biodiesel fuel and (iv) renewable biodiesel fuel would be extended through December 31, 2010.
¶ The bill also proposes (i) extending the energy efficient home credit; (ii) modifying credits for energy efficient windows by allowing for regional climate variations; (iii) extending incentives for alternative fuel and alternative fuel mixtures; and (iv) extending the suspension of taxable income limit to tax years beginning before January 1, 2011, for the depletion of qualified marginal oil and gas wells.
The bill extends the provisions of the 2008 National Disaster Relief Act through December 31, 2010. The 2008 Act provides temporary relief to taxpayers affected by a qualified disaster. Other measures related to national disasters include the following:
¶ The bill extends, through December 31, 2011, a provision waiving the personal casualty loss deduction limitation of 10 percent of adjusted gross income for personal casual losses qualifying as “net disaster losses.” Net disaster losses are defined as the excess of personal casualty losses in a disaster area over personal casualty gains.
¶ The bill extends the allowance of an additional 50 percent bonus depreciation for property which rehabilitates or replaces business property affected by a federally declared disaster if placed in service before January 1, 2011.
¶ The bill extends until December 31, 2010, a provision allowing “qualified businesses” to deduct currently, rather than capitalize, disaster clean-up and repair expenses. Qualified expenses include those incurred in connection with a federally declared disaster for (i) abatement of hazardous substances; (ii) debris removal or demolition of structures damaged or destroyed; or (iii) repair of business-related property.
¶ The bill extends until December 31, 2010, a provision allowing a five-year net operating loss (NOL) carryback for “qualified disaster losses.”
The bill addresses the funding of shortfalls in underfunded defined benefit pension plans. Single-employer pension plans funding shortfalls must now be amortized in equal installments over seven years. Under the proposal, the sponsor could elect to amortize the shortfall over either nine years or 15 years.
The nine-year method would provide for interest only payments for the first two years. The 15-year method would require equal payments over the 15-year period. The bill would also allow a single-employer defined benefit plan to apply a minimum contribution credit balance to a later year if the plan is at least 80 percent funded. The measure would apply to minimum contributions made to plans in 2009 through 2011.
President Obama has expressed concern that the foreign tax credit is being manipulated in a manner that allows corporations to avoid U.S. tax on foreign-source income that is never repatriated to the U.S. Under the House proposal, recognition of foreign tax credits would be suspended until the related foreign income was subject to U.S. tax.
The bill also addresses the perceived abuse of tax treaties to increase foreign source income, which in turn increases the available foreign tax credit. The bill would prevent source-shifting of U.S. securities and other assets to increase the foreign tax credit.
Carried interest represents a partner’s interest in future profits received in exchange for services. Carried interest is currently taxed at capital gains rates. Under the bill, 50 percent of carried interest would be taxed as ordinary income beginning January 1, 2011. Beginning January 1, 2013, 75 percent of carried interest would be subject to ordinary income tax rates.