Congress has a lot of tax issues on its plate between now and the end of the year. The tax cuts from the 2001 and 2003 tax acts are still scheduled to expire for all taxpayers at the end of this year. The payroll tax reduction is scheduled to expire at the end of this year. Across-the-board spending cuts are scheduled to take effect at the end of this year. The tax provisions of the health care reform law, left intact by the Supreme Court, continue to come into effect, with the Medicare contribution taxes scheduled to commence in 2013. And the ever-growing list of regularly expiring provisions represents provisions that expired at the end of 2011 and have not yet been renewed.
Of all of these issues, the only one that has so far seen a bipartisan effort at compromise this year is the regularly expiring provisions. The bipartisan effort to extend these provisions is taking a significantly different form, however, than past efforts.
In the past, the vast majority of expiring provisions were included in the extenders package, usually with a few additional ones thrown in. This time around, however, Congress appears to be looking much more closely at the merits of each individual provision. And the initial indications are that a number of them will be allowed to expire and not be renewed.
The list of what gets extended and what gets left behind seems to change every time Congress looks at the issue again. Here is a current list of what seems most likely to be extended, and most likely to be left behind. The revenue cost of this current list is $205 billion over 10 years.
MOST LIKELY TO BE EXTENDED
Most of the popular and well-known regularly expiring provisions are included for extension in the bipartisan Senate package. These include the Alternative Minimum Tax relief package extending and increasing by a few dollars the AMT exemption amount and allowing nonrefundable credits for AMT purposes. An earlier draft had included only a one-year AMT relief extension, while other expiring provisions had a two-year extension through 2013. The latest draft adds two-year AMT relief as well.
Other individual provisions on the list for extension are the above-the-line deduction for teachers' classroom expenses; the deduction for state and local general sales taxes; the deduction for qualified tuition and fees; tax-free distributions from IRAs to charities for people age 70-1/2 or older; contributions of capital gain real property made for qualified conservation purposes; exclusion from gross income for discharge of indebtedness on a principal residence; deduction for mortgage insurance premiums; the extension and modification of Code Sec. 25C non-business energy property; and parity for the exclusion for mass transit and parking benefits.
Other, more recent individual provisions proposed to be extended include the disclosure of prisoner return information to prison officials and the disregarding of refunds in the administration of federal programs and federally assisted programs.
Among business extenders included for two-year extensions are the research credit. Both Republicans and Democrats have called for making the research credit permanent, but a two-year extension is all that is provided in this proposal.
Other business provisions with two-year extensions include -- in order of appearance in the Tax Code -- the Indian employment tax credit; the new markets tax credit; the tax credit for expenditures to maintain railroad tracks; the mine rescue team training credit; the employer wage credit for activated military reservists; the Work Opportunity Credit (including the more recently enacted credit for qualified veterans); qualified zone academy bonds; the 15-year depreciation for qualified leaseholds, restaurants, and retail improvements; accelerated depreciation for business property on Indian reservations; enhanced charitable deductions for contributions of food inventory; increased Code Sec. 179 small-business expensing limits; the election to expense mine safety equipment; special expensing rules for certain film and television productions; the deduction allowable with respect to income attributable to domestic production activities in Puerto Rico; the treatment of certain regulated investment company dividends; extension of the treatment of RICs as "qualified investment entities under Code Sec. 897;" the exception under Subpart F for active financing income; the special rules applicable to qualified small-business stock; look-through treatment of payments between related controlled foreign corporations under the foreign personal holding company income rules; empowerment zone tax incentives; basis adjustments to the stock of S corporations making charitable contributions of property; reduction in the recognition period for S corporation built-in gains tax; New York Liberty Zone tax-exempt bond financing; the temporary increase in the limit on cover over of rum excise tax revenues to Puerto Rico and the Virgin Islands; the seven-year recovery period for certain motor sports racing track facilities; the modification of the tax treatment of certain payments under existing arrangements to controlling exempt organizations; and the extension and expansion of economic development credit for American Samoa.
Business-related energy provisions proposed for extension include alternative fuel vehicle refueling property; credit for the production of cellulosic biofuel; extension of credit for biodiesel and renewable diesel; credit for renewable diesel fuel and renewable diesel used to produce a qualified mixture; excise tax credits and outlay payments for biodiesel fuel and mixtures; excise tax credit and outlay payments for renewable diesel fuel mixtures; credit for production of Indian coal; credit for construction of energy-efficient new homes; credit for energy-efficient appliances; special depreciation allowance for cellulosic biofuel plant property (and inclusion of algae-based fuel plant property); special rule for sales or dispositions to implement FERC or state electric restructuring policy; incentives for alternative fuel and alternative fuel mixtures; the modification of the expiration date for the renewable electricity production credit to construction; and the election to claim the energy credit in lieu of the electricity production credit.
Some of these business and energy provisions were to be dropped in the original version of the bill, but were restored in subsequent negotiations.
The bill also includes a revenue raiser -- a clarification that paper that is commonly recycled does not constitute a qualified energy resource under the Code Sec. 45 credit for renewable electricity production.
Although the above list of provisions proposed for extension may look fairly complete, there are an unusually large number of expired provisions being left off of the extension list.
A number of the expired provisions not picked up for renewal are energy-related. Perhaps the most significant of these relate to the income and excise tax credits for ethanol and other ethanol-related incentives. Other such provisions include the placed-in-service date for facilities eligible to claim the refined coal production credit; the special rule to implement electric transmission restructuring; suspension of the limitation of percentage depletion for oil and natural gas from marginal properties; and grants for specified energy property in lieu of tax credits.
Although the provision for charitable contribution of food inventory was picked up for renewal, provisions for the charitable deduction of contributions of book inventories and computer inventory were not included.
The remaining tax breaks relating to Hurricane Katrina and the Gulf Opportunity Zone are not on the list for extension. These include the increased rehabilitation credit, the placed-in-service deadline for low-income housing credits, GO Zone tax-exempt bond financing, and bonus depreciation for specified GO Zone extension property.
Although other tax incentives are proposed to be continued for specific territories or areas of the country, the tax incentives for investment in the District of Columbia are not on the current extension list.
Although not as common as adding provisions in negotiations, a few extenders included in the original version of the legislation were dropped in subsequent negotiations. These include look-through treatment of some mutual fund stock for determining the gross estates of non-residents and the expensing of brownfield remediation costs.
Tax practitioners have already had to deal with the fact that these expired provisions have not been officially available for all of 2012. In the past, the assumption was usually that they would be extended eventually, even if retroactively. With just a few exceptions, that has been the case in the past. Now, however, it appears that a number of expired provisions will be allowed to just stay expired. For the others, it remains a planning quagmire as to whether to assume that they will be extended by year's end.
For many of the business provisions, including the research credit and most of the others, business planning has had to proceed for 2012 without knowing whether those tax breaks are available. Even for some individual provisions, the delay in extension has affected their use. A prime example is the charitable contribution directly from an IRA, with many clients over age 70-1/2 forced to take required minimum distributions by the end of the year without knowing whether they could have been allowed to make the distributions directly to charity.
The purpose that many of these provisions were designed to achieve is continually being frustrated by the uncertainty taxpayers face with their continued expiration and retroactive renewal.
George G. Jones, JD, LL.M, is managing editor, and Mark A. Luscombe, JD, LL.M, CPA, is principal analyst, at CCH Tax and Accounting, a Wolters Kluwer business.
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