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    Congress Votes to Extend Business Tax Breaks
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    Congress Votes to Extend Business Tax Breaks

    May 2014


    Do we have reason to celebrate? The House Ways and Means Committee recently agreed to make permanent handful of business tax breaks that expired in December 2013. Included in the bill now advancing to a full House vote are:


    • §179 expensing: This would maintain the expensing level at $500,000 that existed before extenders expired in December 2013.
    • Research credit: Also known as the research and development or R&D credit, this would include an increased alternative simplified credit of 20 percent (up from 14 percent) and would be available to taxpayers who file amended tax returns.
    • Basis reduction rule for S corporations making charitable contributions of property: The amount of a shareholder's basis reduction in the stock of an S corporation by reason of a charitable contribution made by the corporation will be equal to the shareholder's pro rata share of the adjusted basis of the contributed property.
    • The five-year recognition period for built-in gains of S corporations: If an S corporation that was previously taxed as a C corporation has built-in gains attributable to the period during which it was a C corporation, it is subject to a corporate level tax (the built-in gains or BIG tax) when it recognizes the built-in gains within five years after its conversion to S corporation status.
    • Active financing exemption for lenders under subpart F of the code: This makes exceptions for foreign personal holding company income. To be eligible, a controlled foreign corporation must be predominantly engaged in the active conduct of banking, financing or a similar business and must conduct substantial activity with respect to this business.
    • Look-through treatment of payments between related controlled foreign corporations under the foreign personal holding company rules (sec. 954(c)(6)): Certain payments of dividends, interest, rents and royalties that would otherwise be included in foreign personal holding company income may be excepted if the payments are received from a related controlled foreign corporation and are properly attributable and allocable to income of the payor that is neither subpart F income nor treated as effectively connected to a US trade or business.



    As we've discussed, more than 50 tax provisions expired at the end of 2013, and it would seem that votes for permanent extension of some of those credits would be good news. But should businesses be celebrating? Not yet. This bill has a long road ahead of it. To become law, it still needs to be passed by the full House, then the Senate, and finally signed by the President (who could veto the entire thing at the eleventh hour). I am not certain it stands that kind of chance. The Joint Commission on Taxation estimates that the six permanent tax breaks included in the Ways and Means package will cost about $310 billion over a 10-year period. And since no offsets have been proposed by the Republican dominated Ways and Means Committee, Democrats are lining up to criticize the bill. Also remember that both parties are becoming increasingly preoccupied with getting re-elected this November. That means meaningful discussions or decisions on tax policy are very unlikely.

    My guess is that, if this bill even makes it to the Senate chamber this year, it will largely be dismissed. A two year retroactive extension of the current tax credits is the best we can hope for this year given the mid-term elections. Implementing permanent tax extenders, or reforming tax policy in any true sense, will just have to wait.

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