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Congress Releases Compromised Legislation To Extend Tax Relief
May 20, 2010
FEI Summary
On May 20, 2010, House Ways and Means Chairman Sander Levin (D-Mich.) and Senate Finance Chairman Max Baucus (D-Mont.) released a new compromised version of tax-extenders legislation that continues dozens of expired or expiring tax provisions. The bill is known as H.R. 4213, The American Workers, State and Business Relief Act of 2010. The House and Senate have been working to reconcile differences between the two versions of this legislation, and running into roadblocks related to how these tax benefits will be paid for.
Once the bill was released, many moderate democrats expressed opposition to some of the provisions related to Medicare, and it appears that consideration of the bill in the House has been pushed to next week. Meanwhile the Senate must finish debate on the Financial Stability Act before it can begin consideration of this measure.
FEI’s Committee on Private Company Policy (CPC-P) has been active in this debate, and you can view a recent letter sent to congressional leadership by this committee on the FEI Web site.
The following is a summary of the tax provisions in the compromised legislation (you can view a comprehensive committee-prepared summary here). The full bill text can be found here. For further analysis, please review this Tax Insight from PricewaterhouseCoopers.
Tax Relief Provisions
1. Extends Small Business Lending Programs.
2. Extends/Expands the Build America Bonds Program and Recovery Zone Bonds to help state and local governments make infrastructure improvements.
3. Reinstates the Research and Development Tax Credit for 2010.
4. Refundable AMT Credit: Allows corporations to receive a refund of a portion of their AMT credits if they invest in capital equipment in 2010.
5. Pension Funding Relief
a. Provides an extended (2+7 amortization period) for single employer shortfalls in defined benefit plans.
b. Allows plans to use their funded percentage for the last plan year beginning before Sept. 30, 2010.
c. Allows an employer to use its credit balances for the period of 2009-2011 if the plan was at least 80 percent funded prior to the financial crisis.
d. Requires additional reporting if aggregate unfunded vested benefits of plans maintained by the sponsor exceed $75 million.
6. Individual tax relief such as extending the deduction for state and local sales taxes, real property taxes, and qualified tuition expenses.
7. Extends unemployment benefits, and COBRA benefits through December 2010, and also the Medicare “doc fix.”
Revenue Offsets for Tax Relief Provisions
1. Oil Industry: Increases the liability cap on the Oil Spill Liability Trust Fund, and increases the amount oil companies are required to pay (per barrel) into the fund.
2. International Taxation Provisions ($14.4 billion)
a. Foreign Tax Credit Splitters: Suspends the recognition of foreign tax credit until the related income is repatriated to the U.S.
b. Covered Asset Acquisitions: Prevents taxpayers from claiming the foreign tax credit if the income is never subject to U.S. taxation because of a covered asset acquisition.
c. Tax Treaties: Prevents U.S. subsidiaries of foreign-owned companies based in countries without U.S. tax treaties from avoiding taxes they would otherwise owe by sending the money to an affiliate in a country with a tax treaty.
d. Limits the Hopscotch Rule: Limits the amount of foreign tax credits that may be claimed under section 956 to the amount that would have been allowed with respect the actual dividend.
e. Redemptions by Foreign Subsidiaries: Prevents a foreign subsidiary’s earnings from being reduced and thus the earnings would remain subject to U.S. tax when repatriated to the foreign parent corporation as a dividend.
f. Interest Expense: Strengthens Anti-Abuse Rules related to allocating interest expenses.
g. Repeal 80/20 rules: However, it provides an exemption for companies that are currently not abusing the 80/20 rules.
3. Other Business Taxation Provisions
a. Tax carried interest from investment management activity at ordinary income levels when the interest does not reflect an actual return on investment, but maintains the taxation at capital gains tax levels when the interest reflects a return.
b. Payroll Tax on S Corporations Active Income: Requires the payment of payroll taxes on income from any S corporation:
i. That is engaged in professional services, principally based on the reputation and skill of three or fewer individuals, OR
ii. That is a partner in a professional service business.
iii. Clarifies that individuals who are engaged in professional services businesses are unable to avoid employment taxes by routing their earnings through a limited liability corporation or limited partnership.
c. Distributions of Spin-Offs: Treats distribution of debt securities in a tax-free spin-off transaction in the same manner as distributions of cash or other property.
d. Repeal Boot Within Gain: Repeals this provision in the case of any reorganization transaction if the exchange has the effect of a dividend distribution.
Posted May 20, 2010 by Cady North (cnorth@financialexecutives.org) manager of Government Affairs, Financial Executives International (FEI). This summary does not represent FEI opinion unless specifically noted above.
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