Senate Finance Committee Chairman Max Baucus, D-Mont., introduced the latest version of the tax cuts extenders bill on Thursday in another effort to extend a large number of tax breaks that have either expired or are about to expire for individuals and businesses, including new incentives for companies to hire workers.
The bill is paid for by closing tax loopholes for wealthy investment managers by changing the taxation of carried interest, as well as for corporations by taxing dividends received from certain types of business reorganizations and clarifying the gains recognized in some types of spin-off transactions.
The bill would cut taxes for families paying college tuition, state and local taxes, and property taxes. It would also cut taxes for employers to spur research and development and investment, freeing up cash to expand and hire new workers. In addition, the legislation would bolster career training programs and provide wage assistance to help employers hire workers.
This bill helps our economy grow by investing in our infrastructure and cutting taxes for employers, said Baucus in a statement. American workers, families and small businesses need this relief and this certainty as our economy continues to recover.
Baucus asked for unanimous consent to pass the extenders bill, but Sen. Orrin Hatch, R-Utah, blocked the bill, calling for an open amendment process.
The legislation includes provisions from the American Jobs and Closing Tax Loopholes Act (also known as the tax extenders bill). Baucus has been working for months to pass the tax cuts, which Republicans have blocked from moving forward on the Senate floor since May (see Senate Again Fails to Pass Tax Extenders Bill).
Provisions included in the latest version of the bill, now called the Job Creation and Tax Cuts Act, would reinstate the research credit for one year through the end of 2010. The credit expired at the end of last year. The bill would also provide refundable Alternative Minimum Tax credits for corporations making domestic investments. The bill would also extend for one year (through 2010) the special 15-year cost recovery period for certain leasehold improvements, restaurant buildings and improvements, and retail improvements. In addition, the bill would extend for one year (through 2010) the active financing exception from Subpart F of the Tax Code.
For individuals, the bill would extend for one year (through 2010) the election to take an itemized deduction for state and local general sales taxes in lieu of the itemized deduction permitted for state and local income taxes. It would also extend for one year (through 2010) the additional standard deduction for state and local real property taxes.
In addition, it would extend for one year (through 2010) the above-the-line tax deduction for qualified education expenses. Plus, it would extend for one year (through 2010) the $250 above-the-line tax deduction for teachers and other school professionals for expenses paid or incurred for books, supplies (other than non-athletic supplies for courses of instruction in health or physical education), computer equipment (including related software and service), other equipment, and supplementary materials used by the educator in the classroom
The bill would also support over 350,000 jobs for youth ages 14 to 24 through youth employment programs. The funding will allow local Workforce Investment Boards to expand successful youth jobs programs that were funded in the American Recovery and Reinvestment Act. In addition, the bill would extend the Temporary Assistance for Needy Families jobs and emergency fund, which is scheduled to expire on Sept.30.
In response to the Gulf oil spill, the bill would increase the Oil Spill Liability Trust Fund cap from $1 billion to $5 billion, and increase the amount that oil companies are required to pay into the fund from 8 cents a barrel to 78 cents a barrel. In response to recent mining disasters, the bill would extend for one year (through 2010) the credit for training mine rescue team members and would allow this credit to be claimed against the AMT and extend for one year (through 2010) the provision that provides businesses with 50 percent bonus depreciation for certain qualified underground mine safety equipment.
To pay for the tax breaks, the bill attempts to close certain loopholes, including changing the taxation of carried interest. The bill would prevent investment fund managers from paying taxes entirely at capital gains rates on investment management services income received as carried interest in an investment fund. To the extent that carried interest reflects a return on invested capital, the bill would continue to tax carried interest at capital gain tax rates.
However, to the extent that carried interest does not reflect a return on invested capital, the bill would require investment fund managers to treat 75 percent of the remaining carried interest as ordinary income beginning on January 1, 2011. The amount that would be treated as ordinary income is reduced to 50 percent for carried interest that does not reflect a return on invested capital but which is attributable to the sale of assets which are held for five or more years.
The lower recharacterization percentage also applies to the gain or loss attributable to the underlying assets held for five or more years when a partnership interest is sold as well as to gain attributable to section 197 intangibles of a entity providing specific investment management services when the partnership interest has been held for five or more years.
In addition, the bill would close corporate tax loopholes, including ones with exotic names like Reverse Morris Trust transactions and the boot-within-gain limitation. In one of these, the bill would clarify the gain recognized in certain spin-off transactions, such as the Reverse Morris Trust.
Under current law, taxes are generally imposed on parent corporations where they extract value in excess of basis from their subsidiaries prior to engaging in a tax-free spin-off transaction. Therefore, if a subsidiary corporation distributes cash or other property to its parent in excess of the parents basis in the subsidiary or if a subsidiary corporation assumes parent debt in excess of the parents basis in the subsidiary, the parent corporation will recognize gain.
However, taxes are not assessed if a subsidiary corporation distributes its own debt securities to a parent corporation prior to a spin off transaction even where the value of these securities would exceed the parent corporations basis in its subsidiary. The bill would treat distributions of debt securities in a tax-free spin-off transaction in the same manner as distributions of cash or other property. Subject to transition rules, the provision would apply to exchanges after Dec. 31, 2010.
Another loophole closer would tax dividends received in certain business reorganizations. Under current law, if a shareholder receives property other than stock (called boot by tax practitioners) in connection with certain business reorganizations, then the amount of the dividend that the shareholder is required to recognize as income is limited to the amount of gain realized in the exchange (commonly referred to as the boot within gain limitation). This is so even if the property received would otherwise be considered to be a dividend for tax purposes.
The Presidents FY 2011 Budget states that there is not a significant policy reason to vary the treatment of a distribution that otherwise qualified as a dividend by reference to whether it is received in the normal course of a corporations operations or is instead received as part of a reorganization exchange. In addition, the administration has identified specific abuses of this rule in cross-border reorganizations. They state, in cross-border reorganizations, the boot-within-gain limitation can permit U.S. shareholders to repatriate previously-untaxed earnings and profits of foreign subsidiaries with minimal U.S. tax consequences.
The bill would repeal the boot-within-gain limitation in the case of any reorganization transaction (that is, it would apply to both domestic and cross-border transactions) if the exchange has the effect of the distribution of a dividend. The bill would also ensure that an appropriate amount of earnings is taken into account in determining the amount of the dividend. Subject to a transition rule, the provision would apply to exchanges after Dec. 31, 2010.
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