Congress Approves Tax Extenders for 2014

December 16, 2014

Andrew Lundeen

Andrew Lundeen

The U.S. Senate has approved a one-year extension of the tax extenders bill, a grab bag of around 50 tax provisions for businesses and individuals. The bill will cost $42 billion over ten years and applies retroactively to the 2014 tax year. The House of Representatives passed their version of the bill last week.

The one-year extension passed by the House and Senate leaves the package to expire again at the end of this month, which will set up discussion on the tax extenders again in 2015.

We have written previously that not all tax extenders are good tax policy, and thus most should not be extended. There are a handful of provisions, though, that provide a more neutral tax code and should become permanent tax provisions. These include provisions that help more accurately define business income—such as bonus depreciation and section 179—and provide more neutral treatment—such as look-through treatment and active financing.

The table below includes a breakdown of each of the tax provisions in the bill.

One-Year Extension of Tax Extenders by House and Senate for 2014

Provision

10-year revenue effect of 1 year extension (2015-2024, Millions of Dollars)

Individual Extenders

  

Above-the-line deduction for teacher classroom expenses

-$214

Discharge of indebtedness on principal residence excluded from gross income of individuals

-$3,143

Parity for exclusion from income for employer-
provided mass transit and parking benefits

-$10

Mortgage insurance premiums treated as qualified residence interest

-$919

Deduction for State and local general sales taxes

-$3,142

Contributions of capital gain real property made for conservation purposes

-$129

Above-the-line deduction for qualified tuition and related expenses

-$300

Tax-free distributions from IRAs to certain public
charities for individuals age 70-1/2 or older, not
to exceed $100,000 per taxpayer per year

-$384

Business Extenders

  

Research credit

-$7,629

Minimum LIHTC rate for non-Federally subsidized new buildings (9%)

$2

Military housing allowance exclusion for determining area median gross income

$2

Indian employment tax credit

-$62

New markets tax credit

-$978

Railroad track maintenance credit

-$207

Mine rescue team training credit

-$3

Employer wage credit for activated military reservists

-$1

Work opportunity tax credit

-$1,375

Qualified zone academy bonds

-$126

Classification of certain race horses as 3-year property

$0

15-year straight-line cost recovery for qualified leasehold improvements, qualified restaurant buildings and improvements, and qualified retail improvements

-$2,382

7-year recovery period for motorsports entertainment complexes

-$33

Accelerated depreciation for business property
on an Indian reservation

-$79

Bonus depreciation

-$1,492

Enhanced charitable deduction for contributions
of food inventory

-$143

Increased expensing limitations and treatment of
certain real property as section 179 property

-$1,434

Election to expense mine safety equipment

$0

Special expensing rules for certain film and
television productions

-$6

Deduction allowable with respect to income
attributable to domestic production activities in
Puerto Rico

-$109

Modification of tax treatment of certain payments
under existing arrangements to controlling exempt
organizations

-$18

Treatment of certain dividends of RICs

-$97

Treatment of RICs as “qualified investment
entities” under section 897 (FIRPTA)

-$44

Exception under subpart F for active financing
income

-$5,082

Look-through treatment of payments between
related CFCs under foreign personal holding company
income rules

-$1,154

Exclusion of 100 percent of gain on certain
small business stock

-$881

Basis adjustment to stock of S corporations
making charitable contributions of property

-$51

Reduction in S corporation recognition period for
built-in gains tax

-$94

Empowerment zone tax incentives

-$251

Temporary increase in limit on cover over of rum
excise tax revenues (from $10.50 to $13.25 per proof
gallon) to Puerto Rico and the Virgin Islands

-$168

American Samoa economic development credit

-$14

Energy Tax Extenders

  

Credit for section 25C nonbusiness energy
property

-$832

Second generation biofuel producer credit

-$25

Incentives for biodiesel and renewable diesel

-$1,297

Credit for the production of Indian coal

-$38

Beginning-of-construction date for renewable
power facilities eligible to claim the electricity
production credit or investment credit in lieu of
the production credit

-$6,392

Credit for construction of energy-efficient new
homes

-$267

Special allowance for second generation biofuel
plant property

$2

Energy efficient commercial buildings deduction

-$127

Special rule for sales or dispositions to
implement Federal Energy Regulatory Commission
(“FERC”) or State electric restructuring policy for
qualified electric utilities

$0

Excise tax credits relating to certain fuels

-$397

Alternative fuel vehicle refueling property

-$41

Other

  

Automatic extension of amortization periods

-$28

Extension of shortfall funding method and
endangered and critical rules

$0

Total

-$41,599

Note: Details differ from total due to rounding.

Source: Joint Committee on Taxation

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Outlining a Path for Tax Policy Compromises

A tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities.

An S corporation is a business entity which elects to pass business income and losses through to its shareholders. The shareholders are then responsible for paying individual income taxes on this income. Unlike subchapter C corporations, an S corporation (S corp) is not subject to the corporate income tax (CIT).

A sales tax is levied on retail sales of goods and services and, ideally, should apply to all final consumption with few exemptions. Many governments exempt goods like groceries; base broadening, such as including groceries, could keep rates lower. A sales tax should exempt business-to-business transactions which, when taxed, cause tax pyramiding.

An excise tax is a tax imposed on a specific good or activity. Excise taxes are commonly levied on cigarettes, alcoholic beverages, soda, gasoline, insurance premiums, amusement activities, and betting, and typically make up a relatively small and volatile portion of state and local and, to a lesser extent, federal tax collections.

Depreciation is a measurement of the “useful life” of a business asset, such as machinery or a factory, to determine the multiyear period over which the cost of that asset can be deducted from taxable income. Instead of allowing businesses to deduct the cost of investments immediately (i.e., full expensing), depreciation requires deductions to be taken over time, reducing their value and discouraging investment.

Cost recovery is the ability of businesses to recover (deduct) the costs of their investments. It plays an important role in defining a business’ tax base and can impact investment decisions. When businesses cannot fully deduct capital expenditures, they spend less on capital, which reduces worker’s productivity and wages. 

Bonus depreciation allows firms to deduct a larger portion of certain “short-lived” investments in new or improved technology, equipment, or buildings, in the first year. Allowing businesses to write off more investments partially alleviates a bias in the tax code and incentivizes companies to invest more, which, in the long run, raises worker productivity, boosts wages, and creates more jobs.

A tax credit is a provision that reduces a taxpayer’s final tax bill, dollar-for-dollar. A tax credit differs from deductions and exemptions, which reduce taxable income, rather than the taxpayer’s tax bill directly.