Congress Acting on Extension of Tax Breaks

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By Robert Steere, Toolkit Staff Writer

At the end of 2009, we reported that legislative leaders were so preoccupied with their massive health care restructuring effort that routine, yet essential, legislative work on important tax matters had been ignored. As a result, "tax extender" legislation, as it was called, never even came up for consideration in the Senate. Dozens of tax provisions benefiting individuals, businesses and charities—tax provisions that the leaders claimed to support—were allowed to expire as of December 31, 2009.

The "tax extender" legislation has now risen from the ashes in a new form. House Ways and Means Committee Chairman Sander Levin (D-MI) and Senate Finance Committee Chairman Max Baucus (D-MT) have just released legislative text of the American Jobs and Closing Tax Loopholes Act--legislation that extends (generally through 2010) various tax breaks for American taxpayers and extends financial support for America's unemployed workers through the end of this year. In addition, it includes a whole lot more that we will review below.

Unfortunately, the legislation does not include any provision to fix the estate tax law, which continues to throw a wrench into efforts to effectively plan for transfer of assets upon death. Furthermore, it ignores the alternative minimum tax (AMT). Also expired at the end of 2009 was the annual AMT "patch." Unless the series of patches is extended to cover 2010, millions of new taxpayers will be subject to AMT.

Chairmen Levin and Baucus anticipate that action on the legislation will be taken by both houses of Congress before the Memorial Day recess. Following are many of the provisions included in the proposed act.

Business tax breaks. Some of the more significant business tax breaks extended through 2010 in the legislation are listed here:

• probably the most important is the extension of the research and development (R and D) credit;
• the Subpart F active financing exception and the look-through treatment of payments between related controlled foreign corporations that exempts certain foreign earned income from U.S. taxation;
• 15-year straight-line cost recovery for qualified leasehold improvements, restaurant buildings and improvements, and retail improvements which would otherwise be subject to 29-year cost recovery;
• the seven-year straight-line cost recovery period for motorsports entertainment complexes (read: the "NASCAR" tax break); and
• special expensing rules for U.S. film and television productions (read: the "Hollywood" tax break).

Individual tax breaks. Here are some of the tax breaks for individuals that are extended through 2010 by the legislation:

• the optional itemized deduction of state and local sales taxes;
• the additional $500 standard deduction ($1,000 for joint filers) for real property taxes;
• the $4,000 deduction for qualified tuition and tuition-related expenses (reducing adjusted gross income); and
• the $250 deduction for classroom supplies purchased by school teachers (also reducing adjusted gross income).

Charitable tax breaks. Charitable provisions in the act include provisions encouraging charitable contributions of real property subject to capital gains tax for conservation purposes and providing for the enhanced charitable deduction for contributions of food inventory and of computer equipment for educational purposes. The deduction for tax-free distributions from individual retirement plans for charitable purposes is also extended by the legislation. All these provisions are extended only through 2010.

Extended unemployment compensation. Several provisions are included in the act that extend financial support for unemployed workers. The Emergency Unemployment Compensation (EUC) program is scheduled to phase-out at the end of May. The program provides up 53 weeks of extended benefits. The act extends the program through December 2010. The act also extends federal funding for the Extended Benefits (EB) program, also scheduled to phase out at the end of May, through December 2010. It also extends through the end of the year the federal additional compensation of $25 per week for regular unemployment benefits, also set to expire at the end of May.

Extended COBRA coverage. Last year, the provisions of COBRA were amended to create a federal funding program that provides a subsidy of 65 percent of COBRA health insurance premiums for workers who are involuntarily terminated from their jobs. The subsidy is for up to 15 months of premiums. Under current provisions, the program is soon to phase out. Individuals who are terminated after May 31, 2010 will not be eligible for the program. The act extends the program to apply to individuals terminated on or before December 31, 2010.

Miscellaneous provisions. A whole hodge-podge of other provisions found their way into the act. Included among them are many other "tax extenders". Also included are some major tax increases and changes for certain types of businesses and business persons. In addition, some serious tweaks to the health care reform legislation enacted in March are included. Here is a sampling of some of the other issues addressed in the legislation:

• an extension of SBA loan program enhancements for small business loans;
• an extension of several infrastructure investment-related benefits including Build America Bonds
• relief provisions for private pension plans allowing for reduced funding levels;
• an extension of funding for a summer jobs program for youth ages 16 to 21;
• various trade provisions propping up subsidies to the textile industry;
• various disaster relief provisions such as subsidies for "agricultural disasters" and elimination of the cap on liabilities payable from the Oil Spill Liability Trust Fund;
• revision of the tax code to "close foreign tax loopholes;"
• taxation of "carried interest" earned by investment fund managers at ordinary tax rates rather than capital gain rates;
• imposition of Social Security and Medicare taxes on the earnings of certain S corporation shareholders;
• the "doc fix" (intentionally disregarded in the earlier health care legislation because of its high cost) allowing for increased Medicare payments to physicians; and
• other tweaks to the health care legislation enacted in March.

"Provisions in this legislation will help companies and State and local governments spur job growth while also providing critical tax relief and economic assistance to American families who were hit hard by the recession," said Ways and Means Chairman Levin. "This legislation also contains a vital extension of unemployment and health benefits through the end of the year," he said, "to help workers and their families make ends meet while they continue to seek out their next job opportunity."

"Our economy is just beginning to show signs of recovery, yet too many hard-working Americans lost their jobs in this recession and we can't leave them behind," Finance Chairman Baucus said. "Our bill will provide the tax cuts American businesses need to grow and hire more workers, and it will ensure American families continue to have the support of unemployment insurance and other programs they depend on while we work to create jobs."

House Republican leadership, including Ways and Means Ranking Member Dave Camp, (R-MI), faulted the measure for increasing the federal deficit and predicted the legislation would fail to create jobs. "This is just more spending on the same failed policies and no net tax relief. This isn't a 'tax extender' bill; it is a 'deficit extender' bill," said Congressman Camp.

The American Jobs and Closing Tax Loopholes Act is being released as a House Amendment to the Senate Amendment to H.R. 4213. The original legislation, the Tax Extenders Act of 2009, passed the House of Representatives as H.R. 4213 on December 9, 2009. The Senate passed a similar package, the American Workers, State and Business Relief Act, as an amendment to that bill on March 10, 2010. Messrs. Baucus and Levin worked with House and Senate leadership and their colleagues to merge the two earlier packages into the American Jobs and Closing Tax Loopholes Act they are releasing now.