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By Aaron E. Lorenzo
Dec. 16 — The push to make numerous temporary tax provisions permanent is nearing the finish line.
With House and Senate votes lining up, Congress appears poised to pass a tax cut package that would make about a third of the current extenders perpetual parts of the U.S. tax code going forward, renew the remainder for periods ranging between two and five years, and reshape dozens of other elements in tax law.
“It's a darn good bill that both sides have a lot to praise,” said Senate Finance Committee Chairman Orrin G. Hatch (R-Utah).
He told reporters he expects the tax relief in the bipartisan bill to soon become law. The year-end legislation will hit the House floor on Dec. 17, where it is expected to pass with mostly Republican support, since a sizeable bloc of Democrats has signaled opposition, and then get merged with a spending bill at a later date to pass the Senate in a single package.
President Barack Obama and administration officials have voiced support.
“This is another example of an element of this proposal that reflects a bipartisan compromise,” White House Press Secretary Josh Earnest told reporters before a positive statement of administration policy was released. “That means that the administration doesn't support every element of the agreement, but there are a lot of reasons for the president to feel good about what was accomplished in those negotiations.”
The bill would add $622 billion to federal debt from fiscal years 2016-25, according to a conventional score (JCX-143-15) from the Joint Committee on Taxation. It would cut the number of temporary tax provisions to 33, from 52 separate tax extenders that expired at the end of last year. In addition to the 19 of those 52 that it would make permanent, it also would make three household tax credits permanent rather than face expiration in 2017.
Expanding R&D Credit
The costliest of the many business tax benefits that would become permanent, the research and development tax credit, includes multiple modifications.
In addition to permanency, the bill would let qualified small businesses claim the research credit against the alternative minimum tax and their payroll taxes, two factors that supporters said would greatly expand access to the credit. In recent years, most of the tax benefit has accrued to only a handful of large tech-sector corporations with annual earnings of $1 billion or more.
The provision would cost $113 billion over a decade, according to the JCT, which Hatch said is calculating a dynamic score of the entire tax package that House Ways and Means Committee Chairman Kevin Brady (R-Texas) said would get released next month.
The legislation would also permanently extend increased expensing limits under Section 179 of the tax code, boosting the small business expensing limitation and phase-out amounts to $500,000 and $2 million from current levels of $25,000 and $200,000, respectively.
In addition, the tax deal offers two long-sought international benefits for U.S. companies doing business in other countries.
It would permanently extend a rule that permits banking and finance companies to conduct operations in foreign countries without paying current U.S. taxes under Subpart F, as long as the income is derived from active sources. In addition, the rule lets businesses that provide goods or services outside the U.S. finance their foreign customers without being currently taxed in the U.S. on the resulting active income.
A second provision would provide a five-year extension through 2019, including a retroactive renewal for this year, for the look-through treatment of payments between related controlled foreign corporations under tax code Section 954(c)(6). Under this code section, these payments won't be treated as foreign personal holding company income if they aren't attributable to Subpart F income or effectively connected income of the payor CFC.
Also extended over the same period: bonus depreciation for property purchased and put in service this year through 2019.
The depreciation percentage is 50 percent for this year, next year and 2017, and phases down to 40 percent in 2018 and 30 percent in 2019. The provision continues to allow taxpayers to elect to accelerate the use of AMT credits in lieu of bonus depreciation under special rules for 2015, but beginning next year it would increase the amount of unused AMT credits that may be claimed in lieu of bonus depreciation.
Among other business extenders to be made permanent, the bill includes a 15-year, straight-line cost recovery for qualified leasehold, restaurant and retail improvements; excludes 100 percent of the gain on certain small business stock for non-corporate taxpayers to stock acquired and held for more than five years; cuts the period in which an S corporation must hold its assets after converting from a C corporation to avoid built-in gains taxes in half to five years from 10; and allows the passthrough character of interest-related dividends and short-term capital gains dividends from regulated investment companies to foreign investors.
The bill proposes permanency for a number of deductions for charitable giving, such as tax-free charitable distributions from individual retirement accounts. Also for individual taxpayers, it would make permanent the option to claim an itemized deduction for state and local general sales taxes in lieu of an itemized deduction for state and local income taxes, and enhanced versions of the child tax credit, American Opportunity Tax Credit and Earned Income Tax Credit.
As for passage of the bill—which also includes sections to restrict tax-free spinoffs into real estate investment trusts, address allegations of political targeting by the Internal Revenue Service and alter taxpayer interactions with the U.S. Tax Court—Brady declined to say whether Democratic buy-in would prove necessary.
Some are certain to vote no, including Ways and Means ranking member Sander M. Levin (D-Mich.). He circulated a Dear Colleague letter on the House floor complaining about the tax bill's cost, though not all on his side of the aisle are expected to follow that lead. It could have been much more expensive, said Rep. Bill Pascrell Jr. (D-N.J.), a Ways and Means member.
High price tags for making bonus depreciation and the CFC look-through rule permanent limited their extensions to five years, said Rep. Charles Boustany Jr. (R-La.), another Ways and Means member.
“I'm hopeful Democrats realize there are very pro-growth, bipartisan measures,” Brady said. “I'm hopeful they recognize this is the permanence, jobs and certainty the country needs.”
Looking father ahead, Brady, Hatch and others said the tax bill would pave the way toward more broadly reshaping the U.S. tax code, partly because making so many of the long-temporary provisions permanent resets the budget baseline. That would make it less costly to buy down tax rates including the 35 percent statutory corporate tax rate, which Hatch said he would like to reduce to 20 percent.
“I think this is one of the biggest steps toward a re-write of our tax code that we have made in many years, and it will help us start a pro-growth bold tax reform agenda in 2016,” House Speaker Paul D. Ryan (R-Wis.) said at a news conference.
With assistance from Casey Wooten in Washington.
To contact the reporter on this story: Aaron E. Lorenzo in Washington at firstname.lastname@example.org
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Texts of the extenders bill, a section-by-section summary and JCX-143-15 are in TaxCore.
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