In addition, Grassley said the legislation extends for two more years the tax deduction for tuition that was created in 2001 tax legislation he sponsored as chairman of the tax-writing committee in the Senate, and it extends the tax deduction for teachers who buy supplies for their classrooms.
The measure also continues the research and development tax credit for business innovation and tax relief for certain restaurant and retail improvements. “These provisions will be a big shot in the arm for the economy at a time of great anxiety about the economy,” Grassley said. “The last thing people need right now is a tax increase, and this bill prevents it. It helps to protect family budgets that are already stretched by higher prices for gas and groceries, it helps teachers and college students, and it encourages job-creating business activity.” The overall “tax extender” bill also includes a more than $6 billion disaster tax relief package authored by Grassley to give help that goes beyond direct federal dollars to flood and tornado victims in Iowa and other states. The disaster tax relief legislation is modeled after what Congress passed for the Gulf Coast after Hurricane Katrina to help families rebuild their lives, small businesses recover and make payroll, communities rebuild infrastructure, and charities raise more money.
Grassley is now Ranking Member of the tax-writing committee in the Senate.
He worked to reach agreement on the overall year-end tax legislation so that it could be passed before Congress adjourns for the elections. Now that the Senate has acted, Grassley urged the House of Representatives to take up the tax bill quickly so that it can be sent to the President’s desk to be signed into law.
Grassley has worked repeatedly to enact legislation in recent years to protect middle-income taxpayers from being hit by the Alternative Minimum Tax, which went on the books in 1969 in response to the discovery that 155 wealthy taxpayers were able to eliminate their entire tax liabilities through legal.
Congress didn’t index the AMT’s rates and exemptions for inflation. As a result, middle-income taxpayers are getting hit with a tax they were never intended to pay. In 2001, as Chairman of the Finance Committee, Grassley shepherded through five years of protection against any more taxpayers falling into the AMT. In 1999, Congress passed a tax relief bill that would have phased out the AMT entirely, but President Clinton vetoed it. Below is summary information about the tax relief provisions included in this year’s bipartisan tax extenders bill. These provisions are separate from the disaster tax relief sponsored by Grassley and also included in the overall bill.
ALTERNATIVE MINIMUM TAX (AMT)
AMT Patch. Currently, a taxpayer receives an exemption of $33,750 (individuals) and $45,000 (married filing jointly) under the AMT. Current law also does not allow personal credits against the AMT. At the end of last year, H.R. 3996 increased the exemptions to $44,350 and $66,250, respectively, and allowed the personal credits against the AMT to hold the number of taxpayers subject to the AMT at bay. The provision expired December 31, 2007. The proposal increases the exemption amounts to $46,200 (individuals) and $69,950 (married filing jointly) for 2008. The proposal will also allow the personal credits against the AMT. The estimated cost of this proposal is $61.817 billion over ten years.
Extension and Modification of AMT Credit Allowance Against Incentive Stock Options (ISOs). Many companies offer Incentive Stock Options (ISOs) as compensation. Under the regular tax, ISOs are not taxed upon exercise. Under the AMT, however, a taxpayer must pay tax on the stock value when the option is exercised. The economic downturn in 2000 resulted in many individuals having to pay tax on “phantom income” because the stock prices dropped dramatically since the date of exercise. In 2006, Congress provided relief for these situations, but additional relief is needed to correct this problem. Under current law, an individual is allowed a refundable AMT credit amount that is the greater of (1) the lesser of $5,000 or the unused AMT credit amount or (2) 20 percent of the unused AMT tax credit. The AMT credit amount is reduced for those with adjusted gross income (AGI) above $150,000 (joint filers) and $100,000 (single filers). The proposal would allow 50% of long-term unused minimum tax credits to be refunded over each of two years instead of 20% over each of five years, eliminate the income phase-out, and abate any underpayment of tax outstanding on the date of enactment related to ISOs and the AMT including interest. The estimated cost of eliminating the income phase-out is $966 million over ten years and for the incentive stock option proposal is $1.325 billion over ten years. The total estimated cost of this proposal is $2.291 billion over ten years.
INDIVIDUAL EXTENDER PROVISIONS
Deduction of State and Local General Sales Taxes.The American Jobs Creation Act (AJCA) provided that a taxpayer may elect to take an itemized deduction for State and local general sales taxes in lieu of the itemized deduction. The provision expired on December 31, 2007. The proposal would extend the provision to the end of 2009. The proposal is effective for tax years beginning after December 31, 2007. The estimated cost of this proposal is $3.304 billion over ten years.
Qualified Tuition Deduction. The Economic Growth and Tax Relief Reconciliation Act (EGTRRA) created an above-the-line tax deduction for qualified higher education expenses. The maximum deduction was $4,000 for taxpayers with AGI of $65,000 or less ($130,000 for joint returns) or $2,000 for taxpayers with AGI of $80,000 or less ($160,000 for joint returns). This deduction expired on December 31, 2007. The proposal would extend the deduction to the end of 2009. The estimated cost of this proposal is $5.333 billion over ten years.
Teacher Expense Deduction. The bill extends the provision allowing teachers an above-the-line deduction for up to $250 for educational expenses. The provision expired on December 31, 2007. The proposal extends the deduction to the end of 2009. The proposal is effective for taxable years beginning after December 31, 2007. The estimated cost of this proposal is $410 million over ten years. IRA Rollover Provision. The Pension Protection Act of 2006 (PPA) created a provision allowing taxpayers to make tax-free contributions from their IRA plans to qualified charitable organizations. This tax benefit expired on December 31, 2007. The proposal would extend the provision through 2009. The proposal is effective for distributions after December 31, 2007. The estimated cost of this proposal is $795 million over ten years.
Treatment of Certain Dividends of Regulated Investment Companies (RICs). The bill extends a provision allowing a RIC, under certain circumstances, to designate all or a ortion of a dividend as an “interest-related dividend,” by written notice mailed to its hareholders not later than 60 days after the close of its taxable year. In addition, an nterest-related dividend received by a foreign person generally is exempt from U.S. ross-basis tax under sections 871(a), 881, 1441 and 1442 of the Code. The proposal xtends the treatment of interest-related dividends and short-term capital gain dividends eceived by a RIC to taxable years of the RIC beginning before January 1, 2010. The roposal is effective for dividends with respect to taxable years of RICs beginning after ecember 31, 2007. The estimated cost of this proposal is $134 million over ten years.
Estate Tax Look-Through for Certain RIC Stock held by Nonresidents. lthough sock issued by a domestic corporation generally is treated as property within the United tates, stock of a RIC that was owned by a nonresident non-citizen is not deemed roperty within the United States in the proportion that, at the end of the quarter of the IC’s taxable year immediately before a decedent’s date of death, the assets held by the IC are debt obligations, deposits, or other property that would be treated as situated utside the United States if held directly by the estate (the “estate tax look-through rule or RIC stock”). This estate tax look-through rule for RIC stock does not apply to estates of decedents dying after December 31, 2007. The proposal permits the estate tax lookthrough rule for RIC stock to apply to estates of decedents dying before January 1, 2010. The proposal is effective for decedents dying after December 31, 2007. This proposal has a negligible revenue effect.
Extend the Treatment of RICs as “Qualified Investment Entities”. The proposal would extend the inclusion of a RIC within the definition of a “qualified investment entity” under section 897 of the Code through December 31, 2009, for those situations in which that inclusion otherwise expired at the end of 2007. The proposal is effective on January 1, 2008. The estimated cost of this proposal is $20 million over ten years. Additional Standard Deduction for Real Property Taxes. The Housing and Economic Recovery Act of 2008 added a real property tax calculation to the standard deduction for taxpayers who do not itemize. The real property tax deduction is the lesser of the amount allowable as a deduction of State and local and foreign real property taxes, or $500 ($1,000 in the case of a joint return). The provision expires at the end of 2008. The proposal extends the provision to the end of 2009. The proposal is effective on the date of enactment. The estimated cost of the proposal is $1.495 billion over ten years.
BUSINESS EXTENDER PROVISIONS
Research and Development Credit. The bill would extend the research tax credit equal to 20 percent of the amount by which a taxpayer’s qualified research expenses for a taxable year exceed its base amount for that year. The provision expired December 31, 2007. The proposal would extend current law to the end of 2009. In addition, the proposal would increase the alternative simplified credit from 12% to 14% for the 2009 tax year, and repeal the alternative incremental research credit for the 2009 tax year. The proposal is effective for amounts paid or incurred after December 31, 2007. The estimated cost of this proposal is $19.084 billion over ten years. 15-Year Straight-Line Cost Recovery for Qualified Leasehold, Restaurant, and
Retail Improvements. In AJCA, Congress shortened the cost recovery of certain leasehold improvements and restaurant property from 39 to 15 years. The proposal would extend the provision to the end of 2009 and allows retail owners and new restaurants to receive the shortened recovery period for 2009 only. The extension is effective for property placed in service after December 31, 2007. The allowance of the 15 year depreciation to retail and new restaurants is effective for property placed in service after December 31, 2008. The estimated cost of this proposal is $8.721 billion over ten years.
Modification of Tax Treatment of Certain Payments to Controlling ExemptOrganizations. In general, interest, rent, royalties, and annuities paid to a tax–exempt organization from a controlled entity are treated as unrelated business income of the tax-exempt organization. The PPA provided that if a payment to a tax-exempt organization by a controlled entity is less than fair market value, then the payment is excludable from the tax-exempt organization’s unrelated business income. The provision expired on December 31, 2007. The proposal would extend the provision to the end of 2009. The proposal is effective for payments received or accrued after December 31, 2007. The estimated cost of this proposal is $47 million over ten years.
Basis Adjustment to Stock of an S Corporation Making Charitable Contributions ofProperty. Prior to the PPA, if an S corporation made a contribution to a charity, shareholders reduced the basis in their stock by their pro rata share of the fair market value of the contribution. The PPA provided the amount of a shareholder’s basis reduction in the S corporation stock will be equal to the shareholder’s pro rata share of the adjusted basis of the contributed property. The provision expired December 31, 2007. The proposal would extend the provision to the end of 2009. The proposal would also make a technical correction clarifying the application of this provision. The proposal is effective for tax years beginning after December 31, 2007. The estimated cost of this proposal is $132 million over ten years.
Temporary Increase in Limit on Cover over of Rum Excise Tax Revenues to PuertoRico and the Virgin Islands.The present law imposes a $13.50 per proof gallon excise tax on distilled spirits produced in or imported into the United States. The Code provides a payment to Puerto Rico and the Virgin Islands of the excise tax on rum imported into the United States. The payment is limited to $10.50 per proof gallon. This was increased to $13.25 per proof gallon during the period July 1, 1999 through December 31, 2007. The proposal would extend the provision to the end of 2009. The proposal is effective for articles brought into the United States after December 31, 2007. The estimated cost of this proposal is $192 million over ten years. American Samoa Economic Development Credit. Certain domestic corporations operating in American Samoa were eligible for a possessions tax credit, which offsets their U.S. tax liability on income earned in American Samoa from active business operations, sales of assets used in a business, or certain investments in American Samoa. Further, the credit was held to an economic activity-based limit, measuring the credit against wages, depreciation, and American Samoa income taxes. The provision expired December 31, 2007. The proposal extends the provision to the end of 2009. The proposal is effective for tax years beginning after December 31, 2007. The estimated cost of this proposal is $33 million over ten years.
Mine Rescue Team Training Credit. Present law provides a credit of up to $10,000 for the training of mine rescue team members. The provision expires on December 31, 2008. The proposal extends present law to the end of 2009. The estimated cost of the proposal is $4 million over ten years. Election to Expense Advanced Mine Safety Equipment. Present law provides 50% immediate expensing for qualified underground mine safety equipment (that goes above and beyond current safety equipment requirements), including: (1) communications technology enabling miners to remain in constant contact with an individual above ground; (2) electronic tracking devices that enable an individual above ground to locate miners in the mine at all times; (3) self-contained self-rescue emergency breathing apparatuses carried by the miners and additional oxygen supplies stored in the mine; and (4) mine atmospheric monitoring equipment to measure levels of carbon monoxide, methane, and oxygen in the mine. This provision will encourage mining companies to invest in safety equipment that goes above and beyond current safety equipment requirements. The provision expires December 31, 2008. The proposal would extend present law to the end of 2009. The proposal is estimated to be revenue neutral over ten years.
Deduction Allowable with Respect to Income Attributable to Domestic ProductionActivities in Puerto Rico. The bill extends a provision allowing a section 199 domestic production activities deduction for activities in Puerto Rico. This provision expired on December 31, 2007. The proposal would extend the provision to the end of 2009. The proposal is effective for tax years beginning after December 31, 2007. The estimated cost of this proposal is $243 million over ten years.
Qualified Zone Academy Bonds (QZABs). QZABs help school districts with lowincome populations save on interest costs associated with public financing school (below the post-secondary level) renovations and repairs. QZABs cannot be used for new construction but can be used for the following activities: renovating and repairing buildings, investing in equipment and up-to-date technology, developing challenging curricula, and training quality teachers. The QZABs offer the holder a federal tax credit instead of interest (there has been an allocation of $400 million of QZABs each year since 1998). The QZAB provision expired on December 31, 2007. This proposal allows another $400 million of issuing authority to state and local governments for 2008 and 2009 for qualified zone academy bonds. The proposal also modifies the provision. The proposal is effective for obligations issued after December 31, 2007. The estimated cost of this proposal is $379 million over ten years.
Indian Employment Credit. The bill allows a business tax credit for employers of qualified employees that work and live on or near an Indian reservation. The credit is for wages and health insurance costs paid to qualified employees (up to $20,000) in the current year over the amount paid in 1993. Wages for which the Work Opportunity Tax Credit is available are not qualified wages for the Indian employment tax credit. This provision expired on December 31, 2007. The proposal would extend the provision to the end of 2009. The proposal is effective for taxable years beginning after December 31, 2007. The estimated cost of this proposal is $119 million over ten years.
Accelerated Depreciation for Business Property on Indian Reservation. A special depreciation recovery period applies to qualified Indian reservation property placed in service before January 1, 2008. In general, qualified Indian reservation property is property used predominantly in the active conduct of a trade or business within an Indian reservation, which is not used outside the reservation on a regular basis and was not acquired from a related person. This proposal would extend the placed-in-service date for the special depreciation recovery period for qualified Indian reservation property to the end of 2009. The proposal is effective for property placed in service after December 31, 2007. The estimated cost of this proposal is $295 million over ten years.
Extend and Expand 50% Tax Credit for Certain Expenditures for MaintainingRailroad Tracks. The railroad maintenance credit provides Class II and Class III railroads (short-line railroads) with a tax credit equal to 50% of gross expenditures for maintaining railroad tracks that they own or lease. The credit expired on December 31,2007. The proposal extends the provision to the end of 2009, and allows the credit against the AMT. The proposal is effective for expenses paid or incurred during the taxable years beginning after December 31, 2007. The estimated cost of this proposal is $331 million over ten years.
7-Year Recovery Period for Certain Motorsports Racetrack Property. The bill extends a special 7-year cost recovery period or property used for land improvement and support facilities at motorsports entertainment complexes. Absent this provision, the cost recovery period for these facilities would be 15 years. The provision expired on December 31, 2007. This proposal extends the provision to the end of 2009. The proposal is effective for property placed in service after December 31, 2007. The estimated cost of this proposal is $100 million over ten years.
Expensing of “Brownfields” Environmental Remediation Costs. The bill extends a provision allowing for the expensing of costs associated with cleaning up contaminated sites. The provision expired on December 31, 2007. This proposal extends present law to the end of 2009. The proposal is effective for property placed in service after December 31, 2007. The estimated cost of this proposal is $357 million over ten years.
Extend Work Opportunity Tax Credit (WOTC) for Hurricane Katrina Employees. The proposal extends through August 28, 2009 the work opportunity tax credit for those employed within the Hurricane Katrina core disaster area. The proposal is effective on August 28, 2007. The estimated cost of this proposal is $29 million over ten years.
Extension of Increased Rehabilitation Credit for Structures in the Gulf Opportunity Zone. The Gulf Opportunity Zone Act of 2005 increased the rehabilitation credit, within the Gulf Opportunity Zone, from 10 percent to 13 percent of qualified expenditures for any qualified rehabilitated building other than a certified historic structure. It also increased the credit from 20 percent to 26 percent of qualified expenditures for any certified historic structure. This provision expires at the end of 2008. This proposal would extend the provision through December 31, 2009. The estimated cost of this proposal is $50 million over ten years.
Enhanced Charitable Deduction for Qualified Computer Contributions.The bill would extend for two years, through 2009, a provision that encourages businesses to contribute computer equipment and software to elementary, secondary, and postsecondary schools by allowing an enhanced deduction for such contributions. The proposal is effective for contributions made during taxable years beginning after December 31, 2007. The estimated cost of this proposal is $356 million over ten years.
New Markets Tax Credit. Current law provides a credit for taxpayers who hold a qualified equity investment on a credit allowance date. The provision expires December 31, 2008. The proposal would extend the provision through 2009. The proposal is effective for investments made after December 31, 2008. The estimated cost of this proposal is $1.315 billion over ten years.
Exception under Subpart F for Active Financing Income. The U.S. parent of a foreign subsidiary engaged in a banking, financing, or similar business is eligible for deferral of tax on such subsidiary’s earnings if the subsidiary is predominantly engaged in such business and conducts substantial activity with respect to such business. The subsidiary must pass an entity level income test to demonstrate that the income is active income and not passive income. The provision expires December 31, 2008. The proposal would extend the provision to the end of 2009. The proposal is effective for tax years beginning after December 31, 2008. The estimated cost of this proposal is $3.97 billion over ten years.
Look-Through Treatment of Payments between Related CFCs under the ForeignPersonal Holding Company Rules. The bill allows deferral for certain payments (interest, dividends, rents and royalties) between commonly controlled foreign corporations (CFC). This provision allows U.S. taxpayers to deploy capital from one CFC to another without triggering U.S. tax. The provision expires December 31, 2008. The proposal extends present law to the end of 2009. The proposal is effective for tax years beginning after December 31, 2008. The estimated cost of this proposal is $611 million over ten years.
Tax Incentives for Investments in the District of Columbia. The bill provides for the designation of certain economically depressed census tracts within the District as the DC Enterprise Zone. Businesses and individual residents within this enterprise zone are eligible for special tax incentives. First time home buyers receive a $5,000 credit for DC. The bill extends the provision through the end of 2009. The proposal is effective for tax years beginning after December 31, 2007. The estimated cost of this proposal is $179 million over ten years.
Enhanced Charitable Deduction for Food Inventory. The bill would extend for two years, through 2009, the provision allowing businesses to claim an enhanced deduction for the contribution of food inventory. The proposal is effective for contributions made after December 31, 2007. The proposal also eliminates the percentage limitation for contributions made by certain farmers and ranchers after December 31, 2007, but before January 1, 2009. The estimated cost of this proposal is $149 million over ten years.
Enhanced Charitable Deduction for Contributions of Book Inventory to Schools. The bill would extend a provision that allowing C corporations an enhanced charitable deduction for donations of books to schools, public libraries and literacy programs. This provision expired after December 31, 2007. The proposal extends the provision to the end of 2009. The proposal is effective for contributions made after December 31, 2007.The estimated cost of this proposal is $49 million over ten years.
Wool Trust Fund. The bill would extend a provision that reduces import duties on a limited quantity of imported wool fabrics and places duties otherwise collected on the import of certain wool products into the Wool Trust Fund, which promotes the competitiveness of American wool. The provision is extended for five years. Theestimated cost of the proposal is $148 million over ten years.
Special Expensing Rules for Certain Film and Television Productions.Under current law, a producer can elect to take a single-year deduction of up to $15 million in production costs incurred in the U.S. If the production costs are over $15 million, this deduction does not apply. The maximum deduction is increased to $20 million if the costs are significantly incurred in economically depressed areas. No other depreciation or amortization is allowed for a production for which this deduction is taken. The provision expires December 31, 2008. The proposal would extend the provision to the end of 2009. The proposal would also allow expensing of the first $15 million ($20 million if the costs are significantly incurred in economically depressed areas), regardless of the ultimate cost of the film. The proposal is effective for taxable years beginning after December 31, 2007. The estimated cost of this proposal is $81 million over ten years.