- Center for Federal Tax Policy
- Business Taxes
- Corporate Income Taxes
- Individual Income and Payroll Taxes
- Individual Tax Expenditures, Credits, and Deductions
Not All Tax Extenders Are Worth Extending
Every year, a grab bag of tax provisions expires unless Congress elects to extend them – they are often called “extenders” because they must be extended annually to remain enacted. Congress typically passes a bill to keep the provisions before a year ends, but Congress has yet to extend the 55 tax provisions for 2014.
Often, Congress keeps all of the extenders – which includes a whole slew of tax breaks for individuals and businesses – but they shouldn’t. Many of the 55 expired provisions are economically distortive, encouraging some economic activities over others. In fact, there are only a small few that should be kept in order to make the tax code more neutral by mitigating the tax code’s biases against savings and investment. Towards that end, here are some of the extenders that Congress should consider.
Extenders dealing with cost recovery such as Bonus Depreciation and Section 179
Typically, when a business calculates its taxable income for the IRS, it takes its revenue and subtracts its costs (such as wages, raw materials, and state and local taxes). However, with capital investments (buildings, machines, and other equipment) the calculation is much more complicated. Businesses in the U.S. are generally not allowed to immediately deduct the cost of their capital investments. Instead they are required to write them off over several years or even decades. Due to inflation and the time value of money, businesses end up not being able to recover the full cost of these investments, boosting taxable income higher than it actually is.
In the absence of full expensing, these tax extenders such as Bonus Depreciation and Section 179 help alleviate some of the current shortcoming of the United States’ cost recovery regime. For example, Section 179 permits businesses to expense up to $500,000 in capital investments rather than depreciating them over time. Likewise, bonus depreciation allows an additional write-off for capital investments for larger businesses. Ideally, the tax code would allow for full expensing, so allowing this provision and other non-targeted provisions like it to expire would incorrectly define business taxable income and move cost recovery policy in the wrong direction.
Research and Development Tax Credit
Currently some businesses cannot deduct the full cost of their research and development in the year that they incurred them. Instead, they have to write some of these costs of over time. Ideally, business should be able to deduct the full cost of these expenses. In absence of full expensing, a second-best option is the research and development tax credit, which theoretically compensates businesses for the shortfall in the US’s cost recovery system. In addition one can make the argument that research and development is a public good.
However, there are still some problems with the credit. It is extremely complex in its implementation. It also has been extremely unstable, being altered, repealed and implemented overtime. Due to this, it is difficult to determine whether this credit has even had its desired effects. If politicians decide to keep it, they should make it permanent.
Companies need the ability to freely move money from one area of a business to another in order to pursue the best investments. Look-through treatment ensure businesses are able to do this.
Specifically, look-through treatment allows U.S. companies to move money between their foreign subsidiaries without triggering a U.S. tax liability. As long as the money is earned internationally, businesses are able to reinvest their money as well as make certain payments of dividends, interests, rents, and royalties. This helps make U.S. companies that operate internationally more competitive with foreign businesses. Without the look-through treatment, the money involved in these investments could be classified as income and taxed as such.
A shift to full territorial would make this rule null and further improve the competitiveness of U.S. businesses abroad.
Like look-through treatment, active financing also exists to help mitigate the uncompetitive nature of the U.S. international tax system and help businesses compete abroad. Active financing is the equivalent of deferral for banks and businesses that finance the foreign sale of their own products (such as tractors).
Generally, the active income of U.S. companies that also operate internationally is only subject to taxation when a company brings that income back to the U.S. That isn’t always the case for businesses in the financial sector, so active financing works to ensure that financial institutions receive the same treatment and are readily able to compete with international competitors.
Again, a shift to full territorial would simplify the code and remove the need for this rule, allowing businesses to more easily compete internationally.
Mortgage Loan Forgiveness
The IRS rules state that if an individual owes a debt and all or part of that debt is forgiven, the amount of debt forgiveness may be counted as income for tax purposes. In 2007, when the housing market was upside-down, Congress passed the 2007 Mortgage Debt Relief Act, which allowed taxpayers to exclude their forgiven debt as income. The provision was extended the beginning of last year, but expired on December 31, 2013 along with the 55 other provisions.
From the perspective of ability to pay, it makes sense to extend this provision. A taxpayer who is unable to make mortgage payments or has a house underwater most likely does not have the ability to pay the amount of income taxes required on a loan forgiveness. Say a person has $100,000 of their home loan forgiven. Without this provision, the $100,000 in loan forgiveness would be counted as income on a taxpayer’s tax return. The typical taxpayer in this situation would not have much cash on hand and would likely have a difficult time coming up with the roughly $16,000 required on tax day.
|Estimated Revenue Cost
|Tax Provisions Expiring on 12/31/2013||2013||2014|
|Individual tax extenders|
|Credit for health insurance costs for eligible individuals1||$0.20||$0.20|
|Extension of deduction for certain expenses of elementary and secondary school teachers.||$0.24||$0.16|
|Extension of exclusion from gross income of discharge of qualified principal residence indebtedness.||$0.20||$1.13|
|Extension of parity for exclusion from income for employer-provided mass transit and parking benefits.||$0.19||$0.03|
|Extension of mortgage insurance premiums treated as qualified residence interest.||$0.79||$0.51|
|Extension of deduction of State and local general sales taxes.||$2.86||$2.40|
|Extension of special rule for contributions of capital gain real property made for conservation purposes.||$0.08||$0.05|
|Extension of above-the-line deduction for qualified tuition and related expenses.||$0.94||$0.76|
|Extension of tax-free distributions from individual retirement plans for charitable purposes.||$0.59||$0.28|
|Total of Individual Provisions||$6.10||$5.53|
|Business tax extenders|
|Extension of research credit.||$6.23||$1.99|
|Extension of temporary minimum low-income tax credit rate for non-federally subsidized new buildings.||*||$0.00|
|Extension of housing allowance exclusion for determining area median gross income for qualified residential rental project exempt facility bonds.||$0.00||$0.00|
|Extension of Indian employment tax credit.||$0.07||$0.04|
|Extension of new markets tax credit.||$0.01||$0.03|
|Extension of railroad track maintenance credit.||$0.23||$0.10|
|Extension of mine rescue team training credit.||$0.00||$0.00|
|Extension of employer wage credit for employees who are active duty members of the uniformed services.||$0.00||$0.00|
|Extension of work opportunity tax credit.||$0.95||$0.57|
|Extension of qualified zone academy bonds.||$0.00||$0.01|
|Extension of classification of certain race horses as 3-year property.||*||*|
|Extension of 15-year straight-line cost recovery for qualified leasehold improvements, qualified restaurant buildings and improvements, and qualified retail improvements.||$0.28||$0.37|
|Extension of 7-year recovery period for motorsports entertainment complexes.||$0.05||$0.02|
|Extension of accelerated depreciation for business property on an Indian reservation.||$0.31||$0.27|
|Extension of bonus depreciation.||$34.44||$15.84|
|Extension of enhanced charitable deduction for contributions of food inventory.||$0.22||$0.10|
|Extension of increased expensing limitations and treatment of certain real property as section 179 property.||$8.09||$4.04|
|Extension of election to expense mine safety equipment.||$0.03||$0.00|
|Extension of special expensing rules for certain film and television productions.||$0.27||$0.16|
|Extension of deduction allowable with respect to income attributable to domestic production activities in Puerto Rico.||$0.24||$0.12|
|Extension of modification of tax treatment of certain payments to controlling exempt organizations.||$0.04||$0.01|
|Extension of treatment of certain dividends of regulated investment companies.||$0.12||$0.03|
|Extension of RIC qualified investment entity treatment under FIRPTA.||$0.05||$0.01|
|Extension of subpart F exception for active financing income.||$9.40||$1.83|
|Extension of look-thru treatment of payments between related controlled foreign corporations under foreign personal holding company rules.||$1.20||$0.30|
|Extension of temporary exclusion of 100 percent of gain on certain small business stock.||-$0.01||-$0.01|
|Extension of basis adjustment to stock of S corporations making charitable contributions of property.||$0.09||$0.05|
|Extension of reduction in S-corporation recognition period for built-in gains tax.||$0.18||$0.05|
|Extension of empowerment zone tax incentives.||$0.36||$0.04|
|Extension of temporary increase in limit on cover over of rum excise taxes to Puerto Rico and the Virgin Islands.||$0.20||$0.02|
|Extension of American Samoa economic development credit.||$0.04||$0.02|
|Election to accelerate AMT credit in lieu of bonus depreciation||$0.16||$0.14|
|Total of Business Tax Provisions||$63.23||$26.17|
|Energy tax extenders|
|Extension of credit for energy-efficient existing homes.||$1.46||$0.99|
|Extension of credit for alternative fuel vehicle refueling property.||$0.03||$0.01|
|Extension of credit for 2- or 3-wheeled plug-in electric vehicles.||$0.00||$0.00|
|Extension of second generation biofuel producer credit.||$1.88||$0.30|
|Extension of incentives for biodiesel and renewable diesel.||*||*|
|Extension of production credit for Indian coal facilities placed in service before 2009.||$0.00||*|
|Extension of credits with respect to facilities producing energy from certain renewable resources.||$0.12||$0.45|
|Extension of credit for energy-efficient new homes.||$0.07||$0.03|
|Extension of credits for energy-efficient appliances.||$0.16||$0.08|
|Extension of special allowance for second generation biofuel plant property.||$0.00||$0.00|
|Extension of placed in service date for election to expense certain refineries.||*||$0.10|
|Extension of energy efficient commercial buildings deduction.1||$0.10||$0.10|
|Extension of special rule for sales or dispositions to implement FERC or State electric restructuring policy for qualified electric utilities.||$0.60||$0.05|
|Extension of alternative fuels excise tax credits.||$0.31||$0.06|
|Total of Energy Tax Provisions||$4.72||$2.16|
|Total Cost of All Extenders||$74.05||$33.86|
1. JCT Tax Expenditure Estimates, February 2013
*Under $50 million