House Passes Extenders BillJanuary 06, 2010
By Andrew Lattimer, CPA
On December 9, 2009 the House of Representatives passed the "Tax Extenders Act of 2009" ("the Act"). The Act extends a host of expiring tax provisions and adopts several new provisions that are aimed at raising revenue. The next step in the process is to have the Senate and President approve the Act in order to make it law. This may be the tricky part as the revenue raisers will cause the Senate some angst. Before discussing those revenue raisers, let's review the expiring tax provisions which were tax breaks for individuals and businesses.
There were several tax breaks for individuals that, if not extended, would expire on December 31, 2009. The Act, as it now stands, would extend the following through December 31, 2010.
- Election to take an itemized deduction for sales taxes in lieu of income taxes;
- The additional standard deduction for state and local real property taxes;
- Allowance by teachers and other school professionals to deduct above the line $250 paid for books, supplies and other materials used in the classroom;
- Deduction for qualified tuition and related expenses above the line; and
- Permitting taxpayers who are age 70 ½ or older to make a tax-free distribution up to $100,000 per taxpayer, per year to charity from an Individual Retirement Account.
In addition to the tax breaks for individuals, the Act also would extend through 2010 several tax credits and deductions for businesses. The Act extended the following:
- The enhanced charitable deduction for contributions of food inventory;
- The enhanced deduction for C Corporations making contributions or book inventory, computer equipment and software to public schools;
- The Research and Development credit;
- Fifteen-year straight-line depreciation for qualified leasehold improvements, restaurant buildings and improvements and retail improvements;
- Seven-year straight-line depreciation for property used for land improvements and support facilities at motorsports entertainment complexes;
- Five-year depreciation for most machinery and equipment used in a farming business;
- The railroad track maintenance credit;
- The active financing exemption from Subpart F of the Internal Revenue Code;
- The current law look-through treatment of payments between related controlled foreign corporations;
- Elective expensing of Brownfield site cleaning costs;
- Election by film and television producers to expense the first $15 million of production costs incurred in the United States;
- The $1 per gallon production credit for biodiesel, the small agri-biodiesel producer credit of 10 cents per gallon and the $1 per gallon production tax credit for diesel fuel created from biomass; and
- The alternative motor vehicle credit for heavy hybrids, which are not passenger automobiles or light trucks.
There are many more tax extenders on the table that are more specific to certain industries. If you are aware of any tax breaks you are currently receiving that will expire at the end of 2009 that I have not mentioned, it still is a good possibility that it may be included in this act.
As with all great tax breaks, usually lurking right behind it are a couple of revenue raisers. The Act includes three provisions that would pay for the cost of the extended tax breaks. The first tax provision has to do with new compliance requirements related to foreign accounts. The new provision would generally apply for payments made through 2012 and require withholding taxes. The purpose of this provision is to enforce the new reporting requirements on specific foreign accounts owned by U.S. persons (individuals and businesses).
Effective for tax years after the date of enactment, there would be new disclosure requirements regarding information related to those foreign financial assets, and will require information reporting of passive foreign investment company activities. In addition, there would be a new accuracy-related penalty for underpayments attributable to undisclosed foreign financial assets. Finally, the statute of limitations would be extended to six years to assess tax on understatements of income attributable to foreign financial assets.
The second revenue raiser would be to tax carried interest as ordinary income. Currently, investment fund managers pay taxes at the capital gains rates on management services income received as a carried interest. The new law would require the fund managers to treat the carried interest as ordinary income to the extent that the carried interest does not reflect a reasonable return on the invested capital. The carried interest could still be taxed as a capital gain as long as it is considered a reasonable rate of return on the invested capital. The issue here could be what constitutes a reasonable rate of return. Will it be defined or up to interpretation?
Finally, estimated taxes would be accelerated for large corporations in 2014. Any estimated tax that would be due in July, August or September of 2014 would be increased by 26.5%. Accordingly, the next estimated tax payment would then be reduced. This does nothing but accelerate the amount of the estimated tax by three months.
It appears that the Act would have an easier time getting passed without the revenue raisers but, with the deficit growing, I am not sure the president and Senate will be able to pass without it. The revenue raisers will be a huge stumbling block for the senate and president. The outcome will be an interesting one. Stay tuned......