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Tax Extenders in Limbo

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By Michael Cohn
April 14, 2014

The House Ways and Means Committee held a hearing last week to discuss the perennial issue of the tax extenders, the temporary tax provisions that expire year after year and are usually renewed.

However, dozens of provisions that expired at the end of last year have yet to be renewed by Congress and may not be extended if lawmakers can’t agree on which ones to keep (see Congressional Tax Writers Clash on Paying to Extend U.S. Corporate Breaks). This is occurring against the backdrop of the tax reform discussion draft that Ways and Means Committee chairman Dave Camp, R-Mich., released in February, and tax extenders legislation that recently was passed by the Senate Finance Committee (see House Ways and Means Chairman Camp Releases Tax Reform Proposal and Tax Extenders Legislation Advances in Senate).

“In past years, the fight has been between Democrats who wanted to pay for extending some of these types of temporary tax provisions and Republicans who didn’t want to, whereas that isn’t really the argument that we’re having this time around,” said Dustin Stamper, a director in Grant Thornton’s Washington National Tax Office, in an interview last week. “There was some complaining from the Democratic side during the House hearing about not paying for some of the extensions. But most of the ire seemed to be that Chairman Camp, at least for now, is intent on making only a few of these permanent instead of extending a broader range of provisions. So we’ve got a different fight between Senate Democrats who just marked up a bill that would extend most of the expired provisions for two years and wouldn’t pay for it, and the House Republicans who are looking to make permanent only a narrow band of these provisions and would presumably allow others to expire.”

Dave Camp

That is happening against the backdrop of Camp’s recent announcement that he won’t seek re-election and the recent departure of his counterpart in the Senate Finance Committee, former chairman Max Baucus, D-Mont., who is now U.S. ambassador to China. Camp and Baucus had been working closely together on tax reform, but now the tax reform plans are looking doubtful with midterm elections approaching in November. Lawmakers have decided to make tax extenders the priority for now, although they can’t agree on how to pay for them.

“The Senate Democrats seem to be of the position this year that these are temporary tax provisions that we’ve always counted on, and they’ve sort of been a de facto part of the [Tax] Code, so they aren’t like new provisions that you have to pay for, but provisions that taxpayers are expecting,” said Stamper. “And now that they’ve expired, we have to do them retroactively. It appears they would rather see them moved more easily and sooner rather than later.”

Last week’s hearing only covered a few of the tax credits, but Stamper cautioned against concluding that the ones that weren’t discussed at the hearing have been dropped. “We don’t know exactly what the House intends on doing because all we have so far is this first hearing, where they discussed only a limited number of the provisions,” he said. “The chairman didn’t indicate this was the end of the road. He didn’t say there couldn’t possibly be any other provisions besides those seven that were discussed.”

Camp’s overall tax reform discussion draft would only make a handful of the extender provisions permanent, however, Stamper acknowledged. “He seems to be most focused on making permanent those that were included in the discussion draft, but it’s not clear that he’s going to refuse outside the tax reform process to move extensions of anything else not in that draft.”

Still, there is a good chance that Democrats and Republicans in the House and Senate will eventually agree to extend many of the expired tax credits, bowing to pressure from various interest groups. But that doesn’t mean they will be any more permanent than they have been in previous years.

“Ultimately I think Camp is going to have a hard time making any of these provisions permanent,” said Stamper. “I think ultimately the status quo has been to extend these every couple of years and I think that’s probably the most likely outcome, that we’ll get something along the lines of what the Senate has proposed. Unfortunately for taxpayers, by the time we get to that kind of resolution, that could be very late in the year.”

Camp’s announcement that he is not running for re-election could make him less influential with his colleagues.

“I certainly think that his colleagues knowing he’s not going to be around this time next year probably weakens his leverage a little bit,” said Stamper. “Certainly the prospects were already looking fairly dim for tax reform this year. We don’t really see sweeping tax reform happening before 2014 is out. I think that probably increases the chance that Camp is going to have to agree to go along with what the Senate is proposing, with the extenders for temporary extensions for most items rather than permanent extensions of just a few items. His impetus for doing that is really to help him tee up tax reform. It would give him a better revenue baseline to pursue tax reform in the future. But given that he’s not going to be around and tax reform doesn’t look particularly likely in the near term at this point, I think it’s more likely that we get a temporary extension of a lot of these provisions.”

In the meantime, accountants such as Stamper’s colleagues at Grant Thornton can expect to hear questions from clients about what to do.

“We get a lot of questions from clients about, ‘What should we do, what’s going to happen with these provisions?’ And we try to give them the legislative outlook,” he said. “A couple of the important things are you can’t take them into account for financial accounting purposes until they’re actually signed by the president and enacted into law. But we want our clients to keep in mind that there is a very good chance that a lot of these provisions will be extended retroactively.”

Stamper recommends telling clients to be sure to document any of the tax credits and deductions they intend to claim, even if it’s for a tax break that has expired for now.

“You have to make sure you’re still doing all the things that will be necessary to claim the credits or benefits once the provisions do become extended if they become extended,” he said. “For instance, with the research credit, you want to make sure you’re still tracking all your research expenditures according to all the requirements that will be needed to claim the credit. For the Work Opportunity Tax Credit, you want to make sure you’re tracking all your new hires and will be able to certify them as qualified new hires should the Work Opportunity Tax Credit be enacted retroactively.”

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