House Passes One Year Renewal of Tax Extenders

On Wednesday of this week, the U.S. House of Representatives passed a $42 billion package that would extend the nearly 50 taxA 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. provisions in the “tax extenders” bill through the end of 2014.

The one year extension came following a veto threat from the president that halted talks between Senate Majority Leader Harry Reid (D-NV) and House Ways and Means Chairman Dave Camp (R-MI) on a $400 billion permanent extension of most of the tax provisions.

As we have written before, not all tax extenders are good policy. Only a handful of tax extenders should be permanent components of the tax code.

The provisions that should be extended on a permanent basis are the extenders that help make the tax code more neutral. These provisions primarily deal with business investment. Four provisions that clearly qualify as neutral tax policy are:

• Section 179: In past years, Section 179 has allowed businesses to expense up to $500,000 in capital investment rather than depreciating them overtime. This moves the tax code closer to neutral treatment of capital investments.
• Bonus DepreciationBonus 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. : Bonus DepreciationDepreciation 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. , or 50 percent expensing, allows businesses to deduct 50 percent of their costs in software and equipment, in the year the purchases are made. This helps mitigate the tax codes bias against capital investment by moving us closer to full expensingFull expensing allows businesses to immediately deduct the full cost of certain investments in new or improved technology, equipment, or buildings. It 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. . If done so on a permanent basis, it would also provide a boost to the economy.
• Look-Through Treatment: Look-through treatment allows U.S. companies to move money between their foreign subsidiaries without triggering a U.S. tax liability. This is a necessary band aid for our current worldwide tax systemA worldwide tax system for corporations, as opposed to a territorial tax system, includes foreign-earned income in the domestic tax base. As part of the 2017 Tax Cuts and Jobs Act (TCJA), the United States shifted from worldwide taxation towards territorial taxation. . The complete fix would be a shift to a territorial tax systemA territorial tax system for corporations, as opposed to a worldwide tax system, excludes profits multinational companies earn in foreign countries from their domestic tax base. As part of the 2017 Tax Cuts and Jobs Act (TCJA), the United States shifted from worldwide taxation towards territorial taxation. .
• Active Financing: Active financing also provides a slight fix for our uncompetitive international tax system. The provision extends deferral to banks and businesses that finance the foreign sale of their products, which grants these businesses the same treatment as other U.S. businesses. Again, a shift to territorial would eliminate the need for this provision.

Additionally, arguments could be made for other provisions, such as the research and development tax creditA 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. and the state and local sales tax deductionA tax deduction is a provision that reduces taxable income. A standard deduction is a single deduction at a fixed amount. Itemized deductions are popular among higher-income taxpayers who often have significant deductible expenses, such as state and local taxes paid, mortgage interest, and charitable contributions. .

It’s important that these four provisions become a permanent part of the tax code, though.

At the current time, that may not be politically feasible. In this case, the best solution may be a measure that extends all the provisions for 2014 at the least, and, ideally, through the end of 2015 or beyond. This would give Congress the opportunity to map out a permanent solution in 2015, while giving businesses some amount of stability for 2014 and 2015.

The full list of the extenders passed by the House for 2014 are in the table, below. Keep in mind that the revenue estimates are for the next decade.

List of Extenders Passed in the House on December 3, 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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