United States

Legislation to renew expired tax incentives moves one step forward

EXPIRE Act passes Senate Finance Committee

TAX ALERT  | 

Expired tax credits and incentives clear first hurdle towards extension—Senate Finance Committee passes extenders legislation.

Many federal tax credits and other incentives are not permanent provisions of the Internal Revenue Code and must be periodically reapproved by Congress. This approach was originally intended to result in more careful Congressional oversight of each provision requiring periodic renewal–much like the concept of “zero-based” budgeting. In reality, the almost constant, recurring need for short-term “extenders” legislation creates tremendous uncertainty in the business community and may actually stifle the activities these incentives were created to encourage. There are many reasons this suboptimal incentive system has grown to its present state, but two factors stand out: (1) the high cost, within the 10-year budget window, of making any of the provisions a permanent part of the tax code, and (2) the reluctance of Congress to reduce costs by winnowing out less-deserving provisions. As a result, the original purpose for giving each of these provisions an expiration date has not been well-served. To the contrary, a tradition has developed of considering all of the expiring provisions together as one extenders package, with accompanying budgetary and accounting gymnastics to find ways to pay for the entire package within the 10-year budget window.

In any event, the first critical step in the latest installment of the tax extenders drama took place on April 3, 2014, when the Senate Finance Committee voted to approve legislation with the clever name of the EXPIRE Act, standing for the Expiring Provisions Improvement Reform and Efficiency Act. Highlights of this proposed legislation are discussed below.

Research and development tax credit

The research and development (R&D) tax credit would be extended, retroactively, to cover 2014 and 2015. In addition, the Committee approved an amendment allowing certain companies that have existed less than five years and have less than $5 million in annual gross receipts to claim a credit of up to $250,000 against their payroll taxes rather than their income taxes. This would enable start-up companies that are not yet sufficiently profitable to incur income tax liabilities to benefit from this tax incentive. The Committee approved another amendment that would allow the R&D credit to be taken against the alternative minimum tax.

Capital cost recovery

The following favorable cost-recovery provisions would be extended to cover 2014 and 2015:

  • Section 179 expensing limitation of $500,000 (an increase from prior law), phased-out starting at $2 million of qualified property, along with the treatment of certain real property as section 179 property
  • 50 percent additional first-year (bonus) depreciation
  • 15-year straight-line cost recovery for qualified leasehold improvements, qualified restaurant buildings and improvements, and qualified retail improvements
  • Election to accelerate alternative minimum tax credit in lieu of bonus depreciation
  • Seven-year recovery period for motorsports entertainment complexes
  • Accelerated depreciation for business property in an Indian reservation
  • Special expensing rules for certain film and television productions, including an amendment to expand the provision to certain theatrical productions

Other business tax incentives

Several other business tax credits and incentives would be extended for 2014 and 2015, including:

  • The temporary minimum low income housing tax credit rate of 9 percent for newly constructed non-federally-subsidized buildings
  • Indian employment tax credit
  • New markets tax credit, permitting up to $3.5 billion in qualified equity investments for each of the 2014 and 2015 calendar years and including an amendment to apply unused credit allocations to qualified community development entities that invest in communities that have suffered major losses in manufacturing
  • Differential wage payments tax credit for military reservists
  • Work opportunity tax credit, including an amendment expanding credit eligibility to include the long-term unemployed
  • Domestic production activities deduction for activities in Puerto Rico
  • Subpart F exception for active financing income
  • Look-through treatment of payments between related controlled foreign corporations
  • Reduction in S corporation recognition period for built-in gains tax from 10 to five years

Alternative energy credits and incentives

There are a large number of temporary incentives for alternative and renewable energy that would be extended for 2014 and 2015, including:

  • Alternative fuel refueling property credit
  • Second generation biofuel producer credit
  • Income tax credits for biodiesel mixtures, biodiesel and small agri-biodiesel
  • Biodiesel mixture excise tax credits and payments
  • Income tax credits for renewable diesel and renewable diesel mixtures
  • Renewable diesel excise tax credits and payments
  • Energy efficient new homes credit
  • Special depreciation deduction for second generation biofuel plant property
  • Section 179D energy efficient commercial building deduction, including updating the comparable energy savings standards and an amendment to enable charities and Indian tribes to allocate the deduction to building design firms the way government entities were able to do under prior law
  • Alternative fuel and alternative fuel mixture excise tax credits and payments
  • Renewable electricity production tax credit, including a “begun construction” exception and safe harbor

What happens now?

The next step is that the Senate Finance Committee version of the EXPIRE Act will go to the Senate floor for a full vote. It is expected to pass after some debate, notwithstanding pockets of opposition to various provisions, such as the renewable electricity production tax credit for wind energy. Although Majority Leader Harry Reid (D-NV) and Minority Leader Mitch McConnell (R-KY) support an extenders package, the timing of the actual floor vote is uncertain.

Although the House Ways and Means Committee had been focused on tax reform, they are now discussing extenders. It is unclear whether the House will mark up its own extenders bill or accept the version the Senate passes. Another big question is whether there will be any action on a bill before the mid-term elections. A more likely scenario is that extenders legislation will be passed during a post-election “lame duck” session of Congress.

In any event, we expect many of these credits and incentives to be extended retroactively, which means companies should be taking steps now to document qualification under the applicable provisions to ensure they are positioned to take advantage of the credits and incentives that are ultimately made available.

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