United States

Tax extender bills pass House Ways and Means Committee

TAX ALERT  | 

Six of the more than 50 tax provisions that expired December 2013 are showing new signs of life in the House Ways and Means Committee. On April 29, 2014, the committee passed six separate bills seeking to make certain specific expired tax incentives permanent. These bills focus specifically on (1) an increased alternative simplified research tax credit, (2) enhanced section 179 expensing, (3) reducing built-in gain recognition periods for S corporations, (4) the rules on basis adjustments from S corporation charitable contributions, (5) the controlled foreign corporation look-through rule, and (6) the active financing exceptions under subpart F. An overview of the six bills and their related tax provisions appears below.

  1. Research (R&D) Credit Simplified and Made Permanent (H.R. 4438), section 41, estimated revenue effect of ($155.5 billion)

    The first of these bills, The American Research and Competitiveness Act of 2014, would make permanent the alternative simplified credit method (repealing the traditional method) and increase the rate to 20 percent. Therefore, the credit would be equal to 20 percent of the qualified research expenses that exceed 50 percent of the average qualified research expenses for the three preceding tax years. A House floor vote is expected on this bill any day now, with other extender bills to be scheduled in the coming weeks.
  2. Expense Certain Depreciable Business Assets for Small Business (H.R. 4457), section 179, estimated revenue effect of ($73.1 billion)

    The bill would retroactively reinstate the previous section 179 expense limitation of $500,000 of the cost of qualified property placed in service for the tax year (the expense limit for 2014 is currently $25,000). The expense would be reduced by the amount of the cost of qualifying property that exceeds $2 million. Both the expense and limitation thresholds would be annually indexed for inflation. Qualifying property would include off-the-shelf computer software, qualified real property, and air conditioning and heating units. 

  3. Reduced Recognition Period for Built-In Gains of S Corporations (H.R. 4453), section 1374, estimated revenue effect of ($1.5 billion)

    The temporary five-year recognition period for built-in gains of S corporations would be permanently reinstated (instead of the 10-year recognition period under current law). The five-year period would also apply to real estate investment trusts and regulated investment companies that do not elect “deemed sale” treatment.
  4. Make Permanent Certain Rules Regarding Basis Adjustments to Stock of S Corporations Making Charitable Contributions of Property (H.R. 4454), section 1367, estimated revenue effect of ($0.7 billion)

    The proposed rule would permanently provide that a shareholder’s basis reduction in stock of an S corporation by reason of a charitable contribution made by the corporation would be equal to the shareholder’s pro rata share of the adjusted basis of the contributed property − not the contributed property’s fair market value.
  5. Look-through Treatment of Payments Between Related Controlled Foreign Corporations (H.R. 4464), section 954(c)(6), estimated revenue effect of ($20.3 billion)

    The look-through rule would be made permanent and allow certain income received or accrued by one controlled foreign corporation (CFC) from a related CFC to not be classified as foreign personal holding company income to the extent attributable or properly allocable to income of the payor, provided that the income is neither subpart F income nor treated as income effectively connected with a U.S. trade or business.  
     
  6. Make Permanent the Subpart F Exemption for Active Financing Income (H.R. 4429), sections 953 and 954, estimated revenue effect of ($58.8 billion)

    The subpart F exemption for active financing income would be made permanent. Exceptions from subpart F would be provided for certain income that is derived in the active conduct of a banking, financing or similar business, as a securities dealer, or in the conduct of an insurance business, including foreign personal holding company income, foreign base company services income, and insurance income.  

Insights

The Senate Finance Committee previously passed on April 3, 2014, nearly 50 provisions as a part of the Expiring Provisions Improvement Reform and Efficiency (EXPIRE) Act. The House Ways and Means Committee, however, is taking a more deliberate approach. Committee Chairman David Camp (R-Mich) has said he plans to put more provisions to votes in the coming months. In the meantime, these six provisions were identified as the most important for the economy and, therefore, are the first to be addressed. “Short-term tax policy is bad for business and bad for economic growth and jobs. The United States is the only country in the world that allows such important pieces of its tax code to expire on a regular basis,” Camp said. Camp’s previously proposed tax reform plan (see Chairman Dave Camp’s tax plan: The end of the beginning?) aims to reduce tax rates, broaden the tax base and simplify the tax law, partially by eliminating unnecessary tax breaks. This focused approach appears to be consistent with that goal.

Critics oppose the passing of these six tax provisions without budgetary offsets. Rep. Sander Levin (D-Mich) suggested the proposal would add approximately $310 billion to the federal deficit, adding that it is “fiscal irresponsibility.” Generally, House budgeting rules require revenue offsets for any provisions that increase spending or lower taxes in order to not add to the deficit. The House Ways and Means Committee has refuted the need for an offset, claiming these proposed provisions are not technically tax cuts but merely preventing a tax increase.

These six tax provisions would be effective for tax years beginning after Dec. 31, 2013.

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