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 tax 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 Depreciation: Bonus Depreciation, 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 expensing. 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 system. The complete fix would be a shift to a territorial tax system.
  • 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 credit and the state and local sales tax deduction.

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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