Tax Reform Act of 2014 Discussion Draft Section-by-Section Summary
2014ARD 041-10113th Congress
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Tax Reform Act of 2014Discussion Draft Section-by-Section SummaryTable of Contents
Section 1.
Short Title; Etc.
Title I -
Tax Reform for Individuals
Title II -
Alternative Minimum Tax Repeal
Title III -
Business Tax Reform
Title IV -
Participation Exemption System for the Taxation of Foreign Income
Title V -
Tax Exempt Entities
Title VI -
Tax Administration and Compliance
Title VII -
Excise Taxes
Title VIII
- Deadwood and Technical Provisions
Tax Reform Act of 2014Discussion Draft Section-by-Section SummarySection 1. Short Title; Etc.
This
section provides: (1) a short title for the discussion draft, the “Tax Reform
Act of 2014”; (2) that when the discussion draft amends or repeals a particular
section or other provision, such amendment or repeal generally should be
considered as referring to sections or provisions of the Internal Revenue Code
of 1986; and (3) a table of contents.
Title I - Tax Reform for IndividualsSubtitle A - Individual Income Tax Rate ReformSecs. 1001-1003. Simplification of individual income tax rates; Deduction for adjusted net capital gain; Conforming amendments related to simplification of individual income tax rates.
Current
law: Under current law, a taxpayer generally determines his regular tax
liability by applying the tax rate schedules (or the tax tables) to his regular
taxable income. The rate schedules are broken into several ranges of income,
known as income brackets, and the marginal tax rate increases as a taxpayer's
income increases. Separate rate schedules apply based on an individual's filing
status. For 2014, there are seven regular individual income tax brackets of 10
percent, 15 percent, 25 percent, 28 percent, 33 percent, 35 percent, and 39.6
percent. In addition, there are five categories of filing status: single, head
of household, married filing jointly (and surviving spouses), married filing
separately, and estates and trusts. For married individuals filing jointly, the
upper bounds of the 10- and 15-percent brackets are exactly double the upper
bounds that apply to single individuals, to prevent a marriage penalty from
applying at these income levels. The income levels for each bracket threshold
are indexed annually based on increases in the Consumer Price Index (CPI).
A separate
rate schedule applies to adjusted net capital gain and qualified dividends, with
rates of 0 percent, 15 percent, and 20 percent. Additional rates of 25 percent
and 28 percent apply to unrecaptured section 1250 gain and 28-percent rate gain
(collectibles gain and section 1202 gain), respectively. Special rules (i.e.,
the so-called “kiddie tax”) apply to certain unearned income of children, taxing
a portion of such income at the parents' tax bracket.
Provision:
Under the provision, the current seven tax brackets would be consolidated and
simplified into three brackets: 10 percent, 25 percent, and 35 percent.
Generally, the new 10-percent bracket would replace the current 10- and
15-percent brackets; the new 25-percent bracket would replace the current 25-,
28-, 33-, and 35-percent brackets; and the new 35-percent bracket would replace
the current 39.6-percent bracket. While the current 25-percent bracket begins at
$72,500 (2013 dollars) for joint filers (half that amount for single filers),
the new 25-percent bracket would begin at $71,200 (2013 dollars) for joint
filers (half that amount for single filers). The new 35-percent bracket would
begin at the same income levels as the current 39.6-percent bracket (e.g.,
$400,000 for single filers and $450,000 for joint filers in 2013). Beginning in
tax year 2015, these income levels would be indexed for chained CPI instead of
CPI, a slightly different measure of inflation.
The
35-percent bracket would not apply to qualified domestic manufacturing income
(QDMI), meaning that such income would be subject to a maximum statutory rate of
25 percent. QDMI generally would be net income attributable to domestic
manufacturing gross receipts. Domestic manufacturing gross receipts would
include gross receipts derived from (1) any lease, rental, license, sale,
exchange, or other disposition of tangible personal property that is
manufactured, produced, grown, or extracted by the taxpayer in whole or in
significant part within the United States, or (2) construction of real property
in the United States as part of the active conduct of a construction trade or
business. Income that either is net earnings from self-employment or results
from an adjustment under Code section 481 (for changes in accounting methods)
would not qualify as QDMI. Puerto Rico would be considered “domestic” for these
purposes, and other rules similar to those under current-law Code section 199
would apply. Finally, the exemption of QDMI from the 35-percent bracket would be
phased in over three years, with only one-third of QDMI being excluded from the
top bracket in tax year 2015, and two-thirds being excluded in 2016.
In
addition, certain tax preferences could only be taken against the 25-percent
bracket, but not the 35-percent bracket. These tax preferences would include:
the standard deduction; all itemized deductions except the deduction for
charitable contributions; the foreign earned income exclusion (including the
exclusions for income from Puerto Rico and U.S. possessions); tax-exempt
interest; employer contributions to health, accident, and defined contribution
retirement plans to the extent excluded from gross income; the deduction for
health premiums of the self-employed; the deduction for contributions to Health
Savings Accounts; and the portion of Social Security benefits excluded from
gross income.
The
25-percent cap that would apply to both the maximum rate imposed on QDMI and the
rate against which certain tax preferences may be taken would be administered by
imposing the difference between the 25-percent bracket and the 35-percent
bracket (i.e., 10 percentage points) on modified adjusted gross income (MAGI)
rather than taxable income. MAGI would equal adjusted gross income, plus the
above-the-line deductions and exclusions listed above, minus QDMI and charitable
contributions.
For
high-income taxpayers, the provision would phase out the tax benefit of the
10-percent bracket, measured as the difference between what the taxpayer pays
and what the taxpayer would have paid had the first dollar of taxable income
been subject to the 25-percent bracket. This tax benefit is phased out at a rate
of $5 of tax savings for every $100 of modified adjusted gross income in excess
of $250,000 (single filers) or $300,000 (joint filers). These thresholds are
adjusted for chained CPI in tax years after 2013.
The
special rate structure for net capital gain would be repealed. Instead,
non-corporate taxpayers could claim an above-the-line deduction equal to 40
percent of adjusted net capital gain. Adjusted net capital gain would equal the
sum of net capital gain and qualified dividends, reduced by net collectibles
gain.
The
provision would be effective for tax years beginning after 2014.
Considerations:
JCT
estimate: According to JCT, the provisions, along with sections 3132 and
3139 of the discussion draft, would reduce revenues by $498.7 billion over
2014-2023, and increase outlays by $0.4 billion over 2014-2023.
Subtitle B - Simplification of Tax Benefits for Families
Considerations
for Subtitle B:
Sec. 1101. Standard deduction.
Current
law: Under current law, an individual reduces adjusted gross income (AGI) by
any personal exemption deductions and either (1) the applicable standard
deduction or (2) his itemized deductions to determine taxable income. The basic
standard deduction varies depending upon a taxpayer's filing status. For 2013,
the amount of the standard deduction was $6,100 for single individuals and
married individuals filing separate returns, $8,950 for heads of households, and
$12,200 for married individuals filing a joint return (and surviving spouses).
An additional standard deduction is allowed with respect to any individual who
is elderly or blind. The amounts of the basic and additional standard deductions
are indexed annually for inflation (CPI). In lieu of taking the applicable
standard deductions, an individual may elect to itemize deductions.
Provision:
Under the provision, the basic and additional standard deductions would be
consolidated into a single standard deduction of $22,000 for joint filers (and
surviving spouses) and $11,000 for other individual filers. Single filers with
at least one qualifying child could claim an additional deduction of $5,500,
regardless of whether or not they itemize deductions. These amounts would be
adjusted annually from tax year 2013 based on changes in the chained CPI.
The
standard deduction - or in the case of itemizers, an equivalent amount of
itemized deductions - would phase out by $20 for every $100 by which modified
adjusted gross income (MAGI) exceeds $517,500 for joint filers and $358,750 for
single filers. The additional deduction for single filers with a qualifying
child would phase out by one dollar for every dollar by which AGI exceeds
$30,000. The phase-out threshold amounts also are adjusted for inflation based
on 2013 dollars.
The
provision would be effective for tax years beginning after 2014.
Considerations:
JCT
estimate: According to JCT, the provision would reduce revenues by $578.3
billion over 2014-2023, and increase outlays by $87.9 billion over
2014-2023.
Sec. 1102. Increase and expansion of child tax credit.
Current
law: Under current law, an individual may claim a tax credit for each
qualifying child under the age of 17. The amount of the credit per child is
$1,000. The aggregate amount of child credits that may be claimed is phased out
by $50 for each $1,000 of MAGI over $75,000 for single filers and $110,000 for
joint filers. Neither the $1,000 credit amount nor the MAGI thresholds are
indexed for inflation. The taxpayer must submit a valid taxpayer identification
number (TIN) for each child for whom the credit is claimed.
To the
extent the child credit exceeds the taxpayer's tax liability, the taxpayer is
eligible for a refundable credit (the additional child tax credit, or ACTC)
equal to 15 percent of earned income in excess of $3,000 for tax years beginning
before 2018, or $10,000 thereafter, indexed for changes in the CPI since
calendar year 2000. The taxpayer is not required to have a Social Security
number (SSN) to claim the refundable portion of the credit, and (unlike with the
EITC) taxpayers claiming the foreign earned income exclusion may qualify for the
refundable portion of the credit.
Provision:
Under the provision, the child credit would be increased to $1,500 and would be
allowed for qualifying children under the age of 18. A reduced credit of $500
would be allowed for non-child dependents. Both the $1,500 and $500 credit
amounts would be indexed annually for changes in the chained CPI. The credit
would be refundable to the extent of 25 percent of the taxpayer's earned income
(earned income in excess of $3,000 before 2018). The credit would not begin to
phase out until MAGI exceeds $413,750 for single filers and $627,500 for joint
filers (indexed for inflation, using 2013 dollars).
To reduce
waste, fraud, and abuse, a taxpayer would be required to provide his SSN, but
not an SSN for the child or dependent, to claim the refundable portion of the
credit. The IRS would be granted math error authority to adjust the returns of
taxpayers failing to satisfy the identification requirements. The refundable
portion of the credit would be disallowed for taxpayers claiming the foreign
earned income exclusion.
The
provision would be effective for tax years beginning after 2014.
Considerations:
JCT
estimate: According to JCT, the provision would reduce revenues by $277.9
billion over 2014-2023, and increase outlays by $276.1 billion over
2014-2023.
Sec. 1103. Modification of earned income tax credit.
Current
law: Under current law, a refundable earned income tax credit (EITC) is
available to low-income workers who satisfy certain requirements. The amount of
the EITC varies depending upon the taxpayer's earned income and whether the
taxpayer has zero, one, two, or more than two qualifying children. In 2013, the
maximum EITC (regardless of filing status) was $6,044 for taxpayers with more
than two qualifying children, $5,372 for taxpayers with two qualifying children,
$3,250 for taxpayers with one qualifying child, and $487 for taxpayers with no
qualifying children. For tax year 2013, the credit amount begins to phase out at
an income level of $17,530 ($7,970 for taxpayers with no qualifying children).
The phase-out percentages are 15.98 percent for taxpayers with one qualifying
child, 17.68 percent for two or more qualifying children, and 7.65 percent for
no qualifying children.
Provision:
Under the provision, the EITC would be modified so that it would refund
employment-related taxes (i.e., payroll taxes and self-employment taxes) paid by
or with respect to the individual. The employee's share of payroll taxes would
be offset by a credit against such taxes, while the employer's share would be
rebated through a refundable income tax credit. Only taxpayers with at least one
qualifying child could qualify for the credit against the employer's share of
payroll taxes. For taxpayers without a qualifying child, the maximum credit
amount would be $200 for joint filers ($100 for other filers). For taxpayers
with one qualifying child, the maximum credit would be $2,400. For taxpayers
with more than one qualifying child, the maximum credit would be $4,000 in the
case of a joint return and $3,000 in other cases. These credit amounts would be
indexed for chained CPI based on 2013 dollars.
A special
rule would apply to tax years 2015, 2016, and 2017 that would make the credit
equal to 200 percent of the taxpayer's payroll taxes (both employee and employer
shares). In addition, taxpayers with one qualifying child could claim a maximum
credit of $3,000 (rather than $2,400), and taxpayers with two or more qualifying
children could claim a maximum credit of $4,000, regardless of filing
status.
The credit
would phase out as AGI exceeds certain levels. For taxpayers with qualifying
children, the credit would begin phasing out at $20,000 for single filers and
$27,000 for joint filers. For taxpayers without qualifying children, the credit
would begin phasing out at $8,000 for single filers and $13,000 for joint
filers. These thresholds would be indexed to chained CPI, based on 2013 dollars.
The phase-out percentages would be 19 percent for filers with one or more
qualifying children and 7.65 percent for no qualifying children.
Finally,
the provision would require the Treasury Department to report to Congress,
within 180 days of the date of enactment, recommendations for providing advance
payments of the EITC (1) as promptly as feasible, and (2) with minimal
administrative burden imposed on employers and the IRS.
The
provision would be effective for tax years beginning after 2014.
Considerations:
JCT
estimate: According to JCT, the provision would reduce revenues by $160.8
billion over 2014-2023, and reduce outlays by $378.0 billion over 2014-2023.
Sec. 1104. Repeal of deduction for personal exemptions.
Current
law: Under current law, a taxpayer generally may claim personal exemptions
for the taxpayer, the taxpayer's spouse, and any dependents. For 2013, taxpayers
may deduct $3,900 for each personal exemption. This amount is indexed annually
for inflation (CPI). Additionally, the personal exemption phase-out (PEP)
reduces a taxpayer's personal exemptions by 2 percent for each $2,500 ($1,250
for married filing separately) by which the taxpayer's AGI exceeds $250,000
(single), $275,000 (head-of-household), $300,000 (married filing jointly), and
$150,000 (married filing separately). These threshold amounts apply to tax year
2013 and also are indexed for inflation.
Provision:
Under the provision, the deduction for personal exemptions would be repealed.
The provision would be effective for tax years beginning after 2014.
Considerations:
JCT
estimate: According to JCT, the provision would increase revenues by $859.1
billion over 2014-2023, and reduce outlays by $128.1 billion over 2014-2023.
Subtitle C - Simplification of Education Incentives
Considerations
for Subtitle C:
Sec. 1201. American opportunity tax credit.
Current
law: Under current law, the American Opportunity Tax Credit (AOTC) replaces
the pre-existing Hope Scholarship Credit (HSC) through the end of 2017. The AOTC
provides a 100-percent tax credit for the first $2,000 of certain higher
education expenses and a 25-percent tax credit for the next $2,000 of such
expenses, for a maximum credit of $2,500. The expenses that are eligible for the
AOTC include tuition, fees and course materials. Up to 40 percent of the AOTC is
refundable. The AOTC is available for up to four years of post-secondary
education in a degree or certificate program, and generally phases out between
modified adjusted gross income (MAGI) of $160,000 and $180,000 for joint filers
and $80,000 and $90,000 for other filers.
After
2017, the AOTC expires and taxpayers may claim the HSC instead. Generally, the
HSC is less generous than the AOTC in that it: (1) provides a credit of 100
percent of the first $1,000 in expenses and 50 percent of the next $1,000 in
expenses; (2) applies only to tuition and fees; (3) is available only for two
years of post-secondary education; (4) phases out at MAGI of $80,000 to $100,000
(joint filers) and $40,000 to $50,000 (other filers); and (5) is not refundable.
(Under the HSC, all dollar amounts are indexed for inflation using 2000 as the
base year.) As an alternative to the AOTC or the HSC, taxpayers may instead
elect the Lifetime Learning Credit (LLC) for 20 percent of up to $10,000 of
qualified education expenses for post-secondary education. There is no limit on
the number of years the LLC may be claimed for each student. For 2014, the LLC
generally phases out for taxpayers with MAGI between $54,000 and $64,000
($108,000 and $128,000 for joint filers). These income phase-outs are adjusted
for inflation.
Prior to
2014, an individual also could claim an above-the-line deduction for qualified
tuition and related expenses incurred. The maximum amount of the deduction was
$4,000 for taxpayers whose adjusted gross income (AGI) did not exceed $65,000
($130,000 in the case of a joint return), and $2,000 for taxpayers whose AGI did
not exceed $80,000 ($160,000 in the case of a joint return).
Pell
Grants generally may be used for a wider array of expenses than the AOTC or the
HSC. However, Pell Grants must be first used against the expenses that are also
covered by the AOTC or the HSC. These ordering rules have led to taxpayer
confusion.
Certain
educational institutions are also subject to Federal tax reporting requirements
regarding tuition and related expenses that may be satisfied by providing either
the amounts billed or the amounts paid.
Provision:
Under the provision, the four existing higher education tax benefits described
above - AOTC, HSC, LLC, and the tuition deduction - would be consolidated into a
permanent, reformed AOTC. The new AOTC, like the current, temporary AOTC, would
provide a 100-percent tax credit for the first $2,000 of certain higher
education expenses and a 25-percent tax credit for the next $2,000 of such
expenses. Also like the current AOTC, it would be available for up to four years
of higher education, and eligible expenses would include tuition, fees and
course materials. The provision would provide greater refundability, with the
first $1,500 of the credit being refundable. The credit would generally phase
out for MAGI between $86,000 and $126,000 for joint filers and $43,000 and
$63,000 for other filers. The credit amounts and phase-out ranges would be
indexed for inflation starting in 2018. The HSC, LLC, and tuition deduction
would be repealed.
The
provision would deem Pell Grants to be applied first against expenses not
covered by the AOTC. Thus, qualified tuition and related expenses that may be
used for calculating the AOTC would be reduced by Pell Grants only to the extent
the Pell Grants exceed the non-AOTC covered costs of college attendance.
To reduce
credit overpayments, educational institutions subject to current reporting
requirements would be required to report amounts paid rather than amounts
billed.
The
provision would be effective for tax years beginning after 2014.
Consideration:
The provision would help to simplify the tax benefits relating to education by
consolidating four similar, but not identical, tax benefits - AOTC, HSC, and
LLC, and the deduction for qualified tuition and related expenses - into a
single, easy-to-understand tax credit.
JCT
estimate: According to JCT, the provision, along with section 1202 of the
discussion draft, would increase revenues by $29.4 billion over 2014-2023 and
would increase outlays by $38.1 billion over 2014-2023.
Sec. 1202. Expansion of Pell Grant exclusion from gross income.
Current
law: Under current law, qualified scholarship amounts, such as Pell Grants,
received by a degree candidate at a qualifying educational organization are
generally excluded from gross income. However, such scholarship amounts are only
excluded if used for qualified tuition and related expenses, a category that
does not include room and board.
Provision:
Under the provision, all Pell Grants would be excluded from income regardless of
how they are used. The provision would be effective for tax years beginning
after 2014.
JCT
estimate: The revenue effect of the provision over 2014-2023 is included in
the JCT estimate provided for section 1201 of the discussion draft.
Sec. 1203. Repeal of exclusion of income from United States savings bonds used to pay higher education tuition and fees.
Current
law: Under current law, interest on United States savings bonds is excluded
from income if used to pay qualified higher education expenses. Only taxpayers
with MAGI below certain (inflation-adjusted) levels qualify for the exclusion.
For 2014, the exclusion phases out between $113,950 and $143,950 for joint
returns and between $76,700 and $91,000 for other returns.
Provision:
The provision would repeal the exclusion for interest on United States savings
bonds used to pay qualified higher education expenses. The provision would be
effective for tax years beginning after 2014.
JCT
estimate: According to JCT, the provision would increase revenues by $0.1
billion over 2014-2023.
Sec. 1204. Repeal of deduction for interest on education loans.
Current
law: Under current law, an individual may claim an above-the-line deduction
for interest payments on qualified education loans for qualified higher
education expenses of the taxpayer, the taxpayer's spouse, or dependents. The
maximum amount of the deduction is $2,500. Only taxpayers with MAGI below
certain inflation-adjusted amounts qualify for the exclusion. For 2014, the
exclusion phases out between $130,000 and $160,000 for joint returns and between
$65,000 and $80,000 for other returns.
Provision:
The provision would repeal the deduction for interest on education loans. The
provision would be effective for tax years beginning after 2014.
JCT
estimate: According to JCT, the provision would increase revenues by $13.0
billion over 2014-2023.
Sec. 1205. Repeal of deduction for qualified tuition and related expenses.
Current
law: Under current law, an individual could claim an above-the-line
deduction for qualified tuition and related expenses incurred in tax years
beginning before 2014. The maximum amount of the deduction was $4,000 for
taxpayers whose adjusted gross income (AGI) did not exceed $65,000 ($130,000 in
the case of a joint return), and $2,000 for taxpayers whose AGI did not exceed
$80,000 ($160,000 in the case of a joint return).
Provision:
The provision would repeal the deduction for qualified tuition and related
expenses. The provision would be effective for tax years beginning after
2013.
JCT
estimate: According to JCT, the provision would have no revenue effect over
2014-2023.
Sec. 1206. No new contributions to Coverdell education savings accounts.
Current
law: Under current law, Coverdell education savings accounts, which are
established for the purpose of paying qualified education expenses of a named
beneficiary, are exempt from tax. Contributions are not deductible and may not
exceed $2,000 per beneficiary annually, and may not be made after the designated
beneficiary reaches age 18 (except in the case of a special needs beneficiary).
The contribution limit is phased out for contributors with modified adjusted
gross income between $95,000 and $110,000 ($190,000 and $220,000 for married
taxpayers filing a joint return). Distributions from a Coverdell account are
excludable from the gross income of the beneficiary if used to pay for qualified
education expenses. Qualified education expenses include qualified higher
education expenses and qualified elementary and secondary school expenses for
attendance in kindergarten through grade 12.
Provision:
The provision would prohibit new contributions to Coverdell education savings
accounts after 2014 (except rollover contributions), but would allow tax-free
rollovers from Coverdell accounts into section 529 plans. The provision would be
effective for contributions made and distributions after 2014.
JCT
estimate: According to JCT, the provision would increase revenues by $0.2
billion over 2014-2023.
Sec. 1207. Repeal of exclusion for discharge of student loan indebtedness.
Current
law: Under current law, discharge of indebtedness generally constitutes
taxable income. However, an exception applies to student loans that are forgiven
because the former students work for a period of time in certain professions or
for certain classes of employers. The exception also applies to loan repayments
as part of the National Health Services Corps Loan Repayment Program and loan
repayments or forgiveness under certain State loan repayment programs intended
to provide for increased health care services in certain areas.
Provision:
Under the provision, the exclusion for discharge of student loan indebtedness
would be repealed. The provision would be effective for amounts discharged after
2014.
JCT
estimate: According to JCT, the provision would increase revenues by $1.1
billion over 2014-2023.
Sec. 1208. Repeal of exclusion for qualified tuition reductions.
Current
law: Under current law, qualified tuition reductions provided by educational
institutions to their employees, spouses, or dependents are excluded from
income. The exclusion may be provided in the form of either reduced tuition or
cash. The reduction must be part of a program that does not discriminate in
favor of highly compensated employees and may not apply to graduate programs
(except for a graduate student who is teaching or a research assistant).
Provision:
Under the provision, the exclusion for qualified tuition reduction programs
would be repealed. The provision would be effective for tax years beginning
after 2014.
JCT
estimate: According to JCT, the provision would increase revenues by $2.5
billion over 2014-2023.
Sec. 1209. Repeal of exclusion for education assistance programs.
Current
law: Under current law, employer-provided education assistance is excluded
from income. The exclusion is limited to $5,250 per year and applies to both
graduate and undergraduate courses. The education assistance must be part of a
written plan of the employer that does not discriminate in favor of highly
compensated employees.
Provision:
Under the provision, the exclusion for education assistance programs would be
repealed. Employer-provided education assistance may still be excluded as a
working condition fringe benefit, however, if it is related to the employee's
performance of his job duties for the employer. The provision would be effective
for amounts paid or incurred after 2014.
JCT
estimate: According to JCT, the provision would increase revenues by $10.5
billion over 2014-2023.
Sec. 1210. Repeal of exception to 10-percent penalty for higher education expenses.
Current
law: Under current law, an additional 10-percent tax generally is imposed on
distributions from retirement plans and Individual Retirement Accounts (IRAs)
occurring before the account holder reaches age 591/2. This 10-percent tax is in
addition to any income tax that may be due on the distribution. There are
several exceptions to the early withdrawal penalty, including early
distributions to pay for higher education expenses.
Provision:
Under the provision, the exception to the additional 10-percent tax for early
distributions used to pay for higher education expenses would be repealed. The
provision would be effective for distributions after 2014.
Consideration:
This provision would help Americans achieve greater retirement security by
encouraging taxpayers not to make withdrawals from their accounts before
retirement.
JCT
estimate: The revenue effect of the provision over 2014-2023 is included in
the JCT estimate provided for section 1605 of the discussion draft.
Subtitle D - Repeal of Certain Credits for IndividualsSec. 1301. Repeal of dependent care credit.
Current
law: Under current law, a taxpayer may claim a non-refundable credit for a
portion of the taxpayer's employment-related expenses for household services and
the care of qualifying individuals. The credit takes into account up to $3,000
of such expenses for households with one qualifying individual, and $6,000 for
two qualifying individuals. Taxpayers whose adjusted gross income is $15,000 or
less may claim a credit of 35 percent of expenses. The credit rate phases down
to 20 percent as adjusted gross income increases from $15,000 to $43,000
(meaning that taxpayers with incomes exceeding $43,000 may claim a maximum
credit of $600).
Provision:
Under the provision, the dependent care credit would be repealed. The provision
would be effective for tax years beginning after 2014.
Considerations:
JCT
estimate: According to JCT, the provision would increase revenues by $20.0
billion over 2014-2023, and would reduce outlays by $6.0 billion over
2014-2023.
Sec. 1302. Repeal of credit for adoption expenses.
Current
law: Under current law, a taxpayer may claim an adoption tax credit of
$13,190 per eligible child for 2014 (both special needs and non-special needs
adoptions). These benefits are phased-out for taxpayers with modified adjusted
gross income (MAGI) between $197,880 and $237,880 for 2014. The amount of the
credit and the income phase-outs are indexed for inflation. For a non-special
needs adoption, the credit amount is limited to actual adoption expenses. The
credit is not refundable, but unused amounts may be carried forward for five
years.
Provision:
Under the provision, the adoption credit would be repealed. The provision would
be effective for amounts paid or incurred after 2014 for non-special needs
adoptions. For special needs adoptions, amounts deemed to have been paid for
purposes of the credit shall be treated as paid on the date the adoption was
finalized.
Considerations:
JCT
estimate: According to JCT, the provision would increase revenues by $4.7
billion over 2014-2023.
Sec. 1303. Repeal of credit for nonbusiness energy property.
Current
law: Under current law, a taxpayer could claim a credit of 10 percent of
expenditures for energy-efficient improvements to the building envelope (e.g.,
windows, doors, skylights, and roofs) of principal residences and credits of
fixed dollar amounts ranging from $50 to $300 for energy-efficient property
including furnaces, boilers, biomass stoves, heat pumps, water heaters, central
air conditioners and circulating fans, for property placed in service before
2014. The credit was subject to a lifetime cap of $500. The credit expired at
the end of 2013.
Provision:
Under the provision, the credit for nonbusiness energy property would be
repealed. The provision would be effective for property placed in service after
2013.
JCT
estimate: According to JCT, the provision would have no revenue effect over
2014-2023.
Sec. 1304. Repeal of credit for residential energy efficient property.
Current
law: Under current law, a taxpayer may claim a credit for the purchase of
qualified solar electric property and qualified solar water heating property
that is used exclusively for purposes other than heating swimming pools and hot
tubs. The credit is equal to 30 percent of qualifying expenditures. There also
is a 30-percent credit for the purchase of qualified geothermal heat pump
property, qualified small wind energy property, and qualified fuel cell power
plants. The credit applies to property placed in service prior to 2017.
Provision:
Under the provision, the credit for residential energy efficient property would
be repealed. The provision would be effective for property placed in service
after 2014.
JCT
estimate: According to JCT, the provision would increase revenues by $2.3
billion over 2014-2023.
Sec. 1305. Repeal of credit for qualified electric vehicles.
Current
law: Under current law, a taxpayer could claim a 10-percent credit for the
cost of a qualified plug-in electric-drive motor vehicle that is either a
low-speed vehicle, motorcycle, or three-wheeled vehicle prior to 2012. Two- or
three-wheeled vehicles must have a battery capacity of at least 2.5
kilowatt-hours. Other vehicles must have a battery capacity of at least 4
kilowatt-hours. The maximum credit for such vehicles was $2,500. The credit was
available for vehicles acquired after February 17, 2009, and before January 1,
2012.
Provision:
Under the provision, the credit for qualified electric vehicles would be
repealed. The provision would be effective for vehicles acquired after 2011.
JCT
estimate: According to JCT, the provision would have no revenue effect over
2014-2013.
Sec. 1306. Repeal of alternative motor vehicle credit.
Current
law: Under current law, a taxpayer may claim a credit for each new qualified
fuel cell vehicle, hybrid vehicle, advanced lean burn technology vehicle, and
alternative fuel vehicle placed in service by the taxpayer during the tax year.
The credit amount varies depending upon the type of technology used, the weight
class of the vehicle, the amount by which the vehicle exceeds certain fuel
economy standards, and, for some vehicles, the estimated lifetime fuel savings.
The credit generally is available for vehicles purchased after 2005, but
terminates after 2009, 2010, or 2014, depending on the type of vehicle.
Provision:
Under the provision, the credit for qualified fuel cell motor vehicles would be
repealed. The provision would be effective for property purchased after
2014.
JCT
estimate: According to JCT, the provision would have no revenue effect over
2014-2023.
Sec. 1307. Repeal of alternative fuel vehicle refueling property credit.
Current
law: Under current law, a taxpayer may claim a 30-percent credit for the
cost of installing qualified clean-fuel vehicle refueling property to be used in
a trade or business of the taxpayer or installed at the principal residence of
the taxpayer. The credit may not exceed $30,000 per tax year per location in the
case of a trade or business, and $1,000 per tax year per location in the case of
a principal residence.
Provision:
Under the provision, the alternative motor vehicle credit would be repealed. The
provision would be effective for property placed in service after 2014.
JCT
estimate: According to JCT, the provision would have no revenue effect over
2014-2023.
Sec. 1308. Repeal of credit for new qualified plug-in electric drive motor vehicles.
Current
law: Under current law, a taxpayer may claim a credit for each qualified
plug-in electric-drive motor vehicle placed in service. A qualified plug-in
electric-drive motor vehicle is a motor vehicle that has at least four wheels,
is manufactured for use on public roads, meets certain emissions standards
(except for certain heavy vehicles), draws propulsion using a traction battery
with at least four kilowatt hours of capacity, and is capable of being recharged
from an external source of electricity.
For
plug-in electric drive vehicles acquired after 2009, the maximum credit is
capped at $7,500 regardless of vehicle weight. In addition, after that date, no
credit is available for low speed plug-in vehicles or for plug-in vehicles
weighing 14,000 pounds or more. After 2009, the 250,000 total plug-in vehicle
limitation is replaced with a 200,000 plug-in vehicles per manufacturer
limitation. Under the new limitation, the credit phases out over four calendar
quarters beginning in the second calendar quarter following the quarter in which
the manufacturer limit is reached. A limited $2,500 credit was available for
certain 2- and 3-wheel vehicles through the end of 2013.
Provision:
Under the provision, the credit for new qualified plug-in drive vehicles would
be repealed. The provision would be effective for vehicles acquired after
2014.
JCT
estimate: According to JCT, the provision would increase revenues by $5.0
billion over 2014-2023.
Sec. 1309. Repeal of credit for health insurance costs of eligible individuals.
Current
law: Under current law, certain individuals could claim a refundable health
coverage tax credit (HCTC) equal to 72.5 percent of the cost of certain types of
health coverage purchased prior to 2014. In general, the HCTC was available to
individuals who received certain unemployment assistance due to trade-related
events (i.e., Trade Adjustment Assistance), as well as individuals over age 55
who received pension benefits from the Pension Benefit Guaranty Corporation. The
credit was available for certain employer-based insurance, State-based insurance
and, in some cases, insurance purchased in the individual market. The credit
expired for coverage months beginning after 2013.
Provision:
Under the provision, the HCTC would be repealed. The provision would be
effective for months beginning after 2013.
JCT
estimate: According to JCT, the provision would have no revenue effect over
2014-2023.
Sec. 1310. Repeal of first-time homebuyer credit.
Current
law: Under current law, a first-time homebuyer could claim a refundable tax
credit of up to 10 percent of the purchase price of a principal residence in the
United States for residences purchased on or after April 9, 2008, and before May
1, 2010 (or June 30, 2011, for taxpayers on qualified official extended duty
outside of the United States). The credit amount was limited to $8,000 ($4,000
for married individuals filing a separate return). The credit phased out for
taxpayers with MAGI of $125,000 ($225,000 for married taxpayers filing a joint
return).
Provision:
Under the provision, the first-time homebuyer credit would be repealed. The
provision would be effective for residences purchased after June 30, 2011.
JCT
estimate: According to JCT, the provision would have no revenue effect over
2014-2023.
Subtitle E - Deductions, Exclusions, and Certain Other Provisions
Note: The
JCT revenue estimate for the discussion draft reports only the combined,
aggregate revenue effect of a number of separate provisions making changes to
certain itemized deductions. The specific provisions for which JCT reports only
this aggregate revenue effect are as follows:
According
to JCT, these provisions, taken together, would increase revenues by $853.7
billion over 2014-2023, and reduce outlays by $4.7 billion over 2014-2023.
Sec. 1401. Exclusion of gain from sale of a principal residence.
Current
law: Under current law, a taxpayer may exclude from gross income up to
$500,000 for joint filers ($250,000 for other filers) of gain on the sale of a
principal residence. The property generally must have been owned and used as the
taxpayer's principal residence for two out of the previous five years. A
taxpayer may only use this exclusion once every two years.
Provision:
Under the provision, a taxpayer would have to own and use a home as the
taxpayer's principal residence for five out of the previous eight years to
qualify for the exclusion. In addition, the taxpayer would only be able to use
the exclusion once every five years. The exclusion would be phased out by one
dollar for every dollar by which a taxpayer's modified adjusted gross income
(MAGI) exceeds $500,000 ($250,000 for single filers). The provision would be
effective for sales and exchanges after 2014.
Considerations:
JCT
estimate: According to JCT, the provision would increase revenues by $15.8
billion over 2014-2023.
Sec. 1402. Mortgage interest.
Current
law: Under current law, a taxpayer may claim an itemized deduction for
mortgage interest paid with respect to a principal residence and one other
residence of the taxpayer. Itemizers may deduct interest payments on up to $1
million in acquisition indebtedness (for acquiring, constructing, or
substantially improving a residence), and up to $100,000 in home equity
indebtedness. Under the alternative minimum tax (AMT), however, the deduction
for home equity indebtedness is disallowed.
Premiums
paid before 2014 on a private mortgage insurance contract issued after 2006 for
acquisition indebtedness are generally deductible as qualified residence
interest, but this deduction phases out for taxpayers with adjusted gross income
exceeding $100,000.
In
addition, the discharge of up to $2 million in mortgage debt with respect to a
principal residence was not subject to tax if the discharge occurred before 2014
and was on account of a decline in the value of the residence or the financial
condition of the borrower.
Provision:
Under the provision, a taxpayer may continue to claim an itemized deduction for
interest on acquisition indebtedness, but the $1 million limitation would be
reduced to $500,000 in four annual increments, so that the limitation would be
$875,000 for debt incurred in 2015, $750,000 for debt incurred in 2016, $625,000
for debt incurred in 2017, and $500,000 for debt incurred thereafter. Similar to
the current-law AMT rule, interest on home equity indebtedness incurred after
the effective date would not be deductible. The provision would generally be
effective for interest paid on debt incurred after 2014. In the case of
refinancings of debt incurred prior to 2018, the refinanced debt generally would
be treated as incurred on the same date that the original debt was incurred for
purposes of determining the limitation amount applicable to the refinanced
debt.
The
provision also would require that information reporting for mortgage interest
also include the mortgage origination date and the amount of the outstanding
principal on the mortgage as of the beginning of the calendar year. The
information reporting provision would be effective for returns and statements
for calendar years after 2014.
Considerations:
JCT
estimate: For information about JCT's revenue estimate for this provision,
see the note immediately following the heading for Subtitle E of Title I in this
document.
Sec. 1403. Charitable contributions.
Current
law: Under current law, a taxpayer may claim an itemized deduction for
charitable contributions. To be eligible, a contribution must be made by the
last day of the tax year for which a return is filed. Thus, for a calendar year
taxpayer, a contribution must be made on or before December 31 to be included on
a tax return for that tax year, which must be filed by April 15 of the following
year.
A
charitable contribution deduction is limited to a certain percentage of the
individual's adjusted gross income (AGI). The AGI limitation varies depending on
the type of property contributed and the type of exempt organization receiving
the property. In general, cash contributed to public charities, private
operating foundations, and certain non-operating private foundations may be
deducted up to 50 percent of the donor's AGI. Contributions that do not qualify
for the 50-percent limitation (e.g., contributions to private foundations) may
be deducted up to the lesser of (1) 30 percent of AGI, or (2) the excess of the
50-percent-of-AGI limitation for the tax year over the amount of charitable
contributions subject to the 30-percent limitation.
Capital
gain (i.e., appreciated) property contributed to public charities, private
operating foundations, and certain non-operating private foundations may be
deducted up to 30 percent of AGI. Capital gain property contributed to
non-operating private foundations may be deducted up to the lesser of (1) 20
percent of AGI, or (2) the excess of the 30-percent-of-AGI limitation over the
amount of property subject to the 30-percent limitation for contributions of
capital gain property. In general, qualified conservation contributions (e.g.,
conservation easements) are subject to the 30-percent limitation. Under a
temporary provision, however, qualified conservation contributions made in tax
years beginning before 2014 may be deducted up to 50 percent of AGI, or up to
100 percent of AGI in the case of property used in agriculture or livestock
production.
If an
individual contributes more than the applicable AGI limits, the excess
contribution generally may be carried over and deducted in the following five
tax years, or 15 years in the case of qualified conservation contributions.
In
general, taxpayers may deduct the fair market value of a charitable
contribution. A variety of complex rules under current law, however, limit the
amount of a charitable deduction to less than fair market value (e.g., the
taxpayer's adjusted basis) based on the type of property and charitable
organization receiving the contribution.
In
general, a charitable deduction is disallowed to the extent a taxpayer receives
a benefit in return. A special rule, however, permits taxpayers to deduct as a
charitable contribution 80 percent of the value of a contribution made to an
educational institution to secure the right to purchase tickets for seating at
an athletic event in a stadium at that institution.
In
general, the value of a deduction for intellectual property is limited to the
property's adjusted basis. Under current law, however, the donor is allowed an
additional deduction equal to a percentage of the income generated by the
intellectual property over the 12 years following the contribution, even though
that income is likely earned by a tax-exempt entity.
Provision:
Under the provision, numerous changes would be made to the rules applicable to
charitable contributions, all of which, unless otherwise indicated, would be
effective for tax years after 2014.
Extension
of time to file : Under the provision, individual taxpayers would be
permitted to deduct charitable contributions made after the close of the tax
year but before the due date of the return (April 15 for calendar year
taxpayers) for the tax year covered by the return.
AGI
limitations : Under the provision, the AGI limitations on deductible
contributions would be substantially simplified. First, the 50-percent
limitation for cash contributions and the 30-percent limitation for
contributions of capital gain property to public charities and certain private
foundations would be harmonized at a single limit of 40 percent. Second, the
30-percent contribution limit for cash contributions and the 20-percent
limitation for contributions of capital gain property that apply to
organizations not covered by the current 50-percent limitation rule would be
harmonized at a single limit of 25 percent. Thus, contributions to this latter
group of organizations would be allowed to the extent they do not exceed the
lesser of (1) 25 percent of AGI or (2) the excess of 40 percent of AGI for the
tax year over the amount of charitable contributions subject to the 25-percent
limitation.
Two-percent
floor : Under the provision, an individual's charitable contributions could
be deducted only to the extent they exceed 2 percent of the individual's AGI.
The reduction would apply to charitable contributions in the following order:
first, to contributions subject to the 25-percent of AGI limitation; second, to
qualified conservation contributions; and third, to contributions subject to the
40-percent limitation.
Value
of deduction generally limited to adjusted basis : Under the provision, the
rules for determining the value of the deduction for contributions of property
(e.g., fair market value or adjusted basis) would be substantially simplified.
The amount of any charitable deduction generally would be equal to the adjusted
basis of the contributed property. For the following types of property, however,
the deduction would be based on the fair market value of the property less any
ordinary gain that would have been realized if the property had been sold by the
taxpayer at its fair market value:
In
addition, in the case of inventory contributed solely for the care of the ill,
needy, or infants, the provision would preserve the current law rule that
provides a higher valuation for the charitable deduction.
Qualified
conservation contributions : Under the provision, the special, temporary
rules for conservation easements, including the rules for farmers or ranchers,
would be made permanent. The general rule would provide that deductions for
conservation easements would be limited to 40 percent of AGI. Farmers and
ranchers would still be allowed a charitable deduction up to 100 percent of AGI
for property used in agricultural or livestock production. The provision also
would clarify that no deduction is permitted for land reasonably expected to be
used as a golf course. This portion of the provision would be effective for tax
years after 2013.
College
athletic event seating rights : Under the provision, the special rule that
provides a charitable deduction of 80 percent of the amount paid for the right
to purchase tickets for athletic events would be repealed.
Income
from intellectual property : Under the provision, income from intellectual
property contributed to a charitable organization would no longer be allowed as
an additional contribution by the donor. The deduction for the contribution of
the intellectual property would be retained.
Considerations:
JCT
estimate: For information about JCT's revenue estimate for this provision,
see the note immediately following the heading for Subtitle E of Title I in this
document.
Sec. 1404. Denial of deduction for expenses attributable to the trade or business of being an employee.
Current
law: Under current law, a taxpayer generally may claim a deduction for trade
and business expenses, regardless of whether the taxpayer itemizes deductions or
take the standard deduction. Taxpayers generally may claim expenses relating to
the trade or business of being an employee only if they itemize deductions.
Certain expenses attributable to the trade or business of being an employee,
however, are allowed as above-the-line deductions, including reimbursed expenses
included in the employee's income, certain expenses of performing artists,
certain expenses of State and local government officials, certain expenses of
elementary and secondary school teachers (for tax years beginning after 2001 and
before 2014), and certain expenses of members of reserve components of the
United States military.
Provision:
Under the provision, a taxpayer would not be allowed an itemized deduction for
expenses attributable to the trade or business of performing services as an
employee. In addition, the only above-the-line deductions allowed for expenses
attributable to the trade or business of being an employee would be those for
reimbursed expenses and certain expenses of members of reserve components of the
United States military. The provision would be effective for tax years beginning
after 2014.
Considerations:
JCT
estimate: For information about JCT's revenue estimate for this provision,
see the note immediately following the heading for Subtitle E of Title I in this
document.
Sec. 1405. Repeal of deduction for taxes not paid or accrued in a trade or business.
Current
law: Under current law, an individual may claim an itemized deduction for
State and local government income and property taxes paid. In lieu of the
itemized deduction for State and local income taxes, individuals may claim, for
tax years beginning before 2014, an itemized deduction for State and local
government sales taxes.
Provision:
Under the provision, individuals would only be allowed a deduction for State and
local taxes paid or accrued in carrying on a trade or business or producing
income. The provision would be effective for tax years beginning after December
31, 2014.
Considerations:
JCT
estimate: For information about JCT's revenue estimate for this provision,
see the note immediately following the heading for Subtitle E of Title I in this
document.
Sec. 1406. Repeal of deduction for personal casualty losses.
Current
law: Under current law, an individual may claim an itemized deduction for
personal casualty losses (i.e., losses not connected with a trade or business or
entered into for profit), including property losses arising from fire, storm,
shipwreck, or other casualty, or from theft.
Provision:
Under the provision, the deduction for personal casualty losses would be
repealed. The provision would be effective for tax years beginning after
2014.
JCT
estimate: For information about JCT's revenue estimate for this provision,
see the note immediately following the heading for Subtitle E of Title I in this
document.
Sec. 1407. Limitation on wagering losses.
Current
law: Under current law, a taxpayer may claim an itemized deduction for
losses from gambling, but only to the extent of gambling winnings. However,
taxpayers may claim other deductions connected to gambling that are deductible
regardless of gambling winnings.
Provision:
Under the provision, all deductions for expenses incurred in carrying out
wagering transactions (not just gambling losses) would be limited to the extent
of wagering winnings. The provision would be effective for tax years beginning
after 2014.
JCT
estimate: According to JCT, the provision would increase revenues by $0.1
billion over 2014-2023.
Sec. 1408. Repeal of deduction for tax preparation expenses.
Current
law: Under current law, an individual may claim an itemized deduction for
tax preparation expenses.
Provision:
Under the provision, an individual would not be allowed an itemized deduction
for tax preparation expenses. The provision would be effective for tax years
beginning after 2014
JCT
estimate: For information about JCT's revenue estimate for this provision,
see the note immediately following the heading for Subtitle E of Title I in this
document.
Sec. 1409. Repeal of deduction for medical expenses.
Current
law: Under current law, a taxpayer may claim an itemized deduction for
out-of-pocket medical expenses of the taxpayer, a spouse, or a dependent. This
deduction is allowed only to the extent the expenses exceed 10 percent of the
taxpayer's adjusted gross income.
Provision:
Under the provision, the itemized deduction for medical expenses would be
repealed. The provision would be effective for tax years beginning after
2014.
JCT
estimate: For information about JCT's revenue estimate for this provision,
see the note immediately following the heading for Subtitle E of Title I in this
document.
Sec. 1410. Repeal of disqualification of expenses for over-the-counter drugs under certain accounts and arrangements.
Current
law: Under prior law, expenses incurred for over-the-counter medicine could
constitute qualified medical expenses for purposes of receiving tax-favored
reimbursements from Health Savings Accounts, Archer MSAs, and Health Flexible
Spending Arrangements (“health accounts”). Pursuant to section 9003 of the
Patient Protection and Affordable Care Act, however, taxpayers now may not
receive tax-free disbursements from health accounts to pay for medicine other
than prescription medication and insulin.
Provision:
Under the provision, the prohibition on using tax-free funds from health
accounts to pay for over-the-counter drugs would be repealed, and expenses for
such medication could again constitute qualified medical expenses. The provision
would be effective for expenses incurred after 2014.
Considerations:
JCT
estimate: According to JCT, the provision would reduce revenues by $3.3
billion over 2014-2023.
Sec. 1411. Repeal of deduction for alimony payments and corresponding inclusion in gross income.
Current
law: Under current law, alimony payments generally are an-above-the line
deduction for the payor and included in the income of the payee. However,
alimony payments are not deductible by the payor or includible in the income of
the payee if designated as such by the divorce decree or separation
agreement.
Provision:
Under the provision, alimony payments would not be deductible by the payor or
includible in the income of the payee. The provision would be effective for any
divorce decree or separation agreement executed after 2014 and to any
modification after 2014 of any such instrument executed before such date if
expressly provided for by such modification.
Considerations:
JCT
estimate: According to JCT, the provision would increase revenues by $5.5
billion over 2014-2023.
Sec. 1412. Repeal of deduction for moving expenses.
Current
law: Under current law, a taxpayer may claim a deduction for moving expenses
incurred in connection with starting a new job, regardless of whether or not the
taxpayer itemizes his deductions. To qualify, the new workplace generally must
be at least 50 miles farther from the former residence than the former place of
work or, if the taxpayer had no former workplace, at least 50 miles from the
former residence.
Provision:
Under the provision, the deduction for moving expenses would be repealed. The
provision would be effective for tax years beginning after 2014.
JCT
estimate: According to JCT, the provision would increase revenues by $8.0
billion over 2014-2023.
Sec. 1413. Termination of deduction and exclusions for contributions to medical savings accounts.
Current
law: Under current law, an individual may claim an above-the-line deduction
for contributions to an Archer Medical Savings Account (MSA) and exclude from
income employer contributions to an MSA. In general, Archer MSAs may be set up
by an individual working for a small employer and who participates in the
employer's high-deductible health plan. The total amount of monthly
contributions to an Archer MSA may not exceed one-twelfth of 65 percent of the
annual deductible for an individual with a self-only plan and one-twelfth of 75
percent of the annual deductible for an individual with family coverage.
Distributions from the accounts used to pay qualified medical expenses are not
taxable. Archer MSAs may not be established after 2005. Archer MSA balances may
be rolled over on a tax-free basis to another Archer MSA or to a Health Savings
Account (HSA).
Provision:
Under the provision, no deduction would be allowed for contributions to an
Archer MSA, and employer contributions to an Archer MSA would not be excluded
from income. Existing Archer MSA balances, however, could continue to be rolled
over on a tax-free basis to an HSA. The provision would be effective for tax
years beginning after 2014.
Considerations:
JCT
estimate: According to JCT, the provision would have negligible revenue
effect over 2014-2023.
Sec. 1414. Repeal of 2-percent floor on miscellaneous itemized deductions.
Current
law: Under current law, “miscellaneous” itemized deductions may only be
claimed to the extent such deductions in the aggregate exceed 2 percent of
adjusted gross income. The floor applies to all itemized deductions except for
those relating to interest, taxes, casualty or theft losses, wagering losses,
charitable contributions, medical expenses, impairment-related work expenses,
the estate tax for income in respect of a decedent, personal property used in a
short sale, computation of tax where the taxpayer restores a substantial amount
held under claim of right, annuity payments that cease before the investment is
recovered, amortizable bond premium, and cooperative housing corporations. The
floor applies after the application of any other limits on such deductions.
Provision:
Under the provision, the 2-percent floor on miscellaneous itemized deductions
would be repealed. The provision would be effective for tax years after
2014.
JCT
estimate: For information about JCT's revenue estimate for this provision,
see the note immediately following the heading for Subtitle E of Title I in this
document.
Sec. 1415. Repeal of overall limitation on itemized deductions.
Current
law: Under current law, the total amount of otherwise allowable itemized
deductions (other than medical expenses, investment interest, and casualty,
theft, or wagering losses) is limited for certain upper-income taxpayers
(sometimes referred to as the “Pease limitation”). This limitation applies on
top of any other limitations applicable to such deductions. Under the Pease
limitation, the otherwise allowable total amount of itemized deductions is
reduced by 3 percent of the amount by which the taxpayer's adjusted gross income
exceeds a threshold amount. For 2013, the threshold amount is (1) $250,000 for
single individuals, (2) $300,000 for married couples filing joint returns and
surviving spouses, (3) $275,000 for heads of households, and (4) $150,000 for
married individuals filing a separate return. These amounts are indexed for
inflation for tax years beginning after 2013. The Pease limitation does not
reduce itemized deductions by more than 80 percent.
Provision:
Under the provision, the overall limitation on itemized deductions would be
repealed. The provision would be effective for tax years after 2014.
Consideration:
The Pease limitation functions as a hidden increase in the top marginal rate for
individuals - about 1.2 percent - and adds significant complexity.
JCT
estimate: For information about JCT's revenue estimate for this provision,
see the note immediately following the heading for Subtitle E of Title I in this
document.
Sec. 1416. Deduction for amortizable bond premium allowed in determining adjusted gross income.
Current
law: Under current law, the holder of a taxable debt instrument purchased at
a premium (i.e., on which the holder paid more for the instrument than the
principal payable at maturity) may amortize and deduct the premium over the term
of the bond. However, bond premium amortization deductions may only be claimed
as itemized deductions (although the deductions are not subject to the 2-percent
floor generally applicable to itemized deductions).
Provision:
Under the provision, bond premium amortization deductions would be allowed as
above-the-line deductions (i.e., without regard to whether a taxpayer itemizes
deductions). The provision would apply for tax years beginning after 2014.
JCT
estimate: According to JCT, the provision would reduce revenues by less than
$50 million over 2014-2023.
Sec. 1417. Repeal of exclusion, etc., for employee achievement awards.
Current
law: Under current law, employee achievement awards are excluded from
employees' income. To qualify for the tax exclusion, an employee achievement
award must be given in recognition of the employee's length of service or safety
achievement at a ceremony that is a meaningful presentation. Furthermore, the
conditions and circumstances cannot suggest a significant likelihood of the
payment of disguised compensation. The employee is taxed to the extent that the
cost (or value, if greater) of the award exceeds the employer's deduction for
the award. The employer's deduction for employee achievement awards for any
employee in any year cannot exceed $1,600 for qualified plan awards, and $400
otherwise. A qualified plan award is an employee achievement award that is part
of an established written program of the employer, which does not discriminate
in favor of highly compensated employees. In addition, the average award (not
counting those of nominal value) may not exceed $400.
Provision:
The provision would repeal the exclusion for employee achievement awards, so
that such awards would constitute taxable compensation to the recipient. The
provision also would repeal the restrictions on employer deductions for such
awards. The provision would be effective for tax years beginning after 2014.
JCT
estimate: According to JCT, the provision would increase revenues by $3.4
billion over 2014-2023.
Sec. 1418. Clarification of special rule for certain governmental plans.
Current
law: Under current law, amounts received as reimbursement of medical
expenses under an employer-provided accident or health insurance plan generally
are excluded from an employee's gross income. An accident or health insurance
plan, however, is disqualified if the plan permits amounts to be paid as medical
benefits to a designated beneficiary, other than the employee's spouse or
dependents. In such a case, all amounts paid as medical expense reimbursement
are includible in the employee's gross income.
Similar
rules apply to a governmental accident or health plan that is funded by a
medical trust established in connection with a public retirement system and that
either has been authorized by a State legislature or received a favorable IRS
ruling providing that the trust's income is tax-exempt under Code section 115,
which generally exempts States and municipalities from Federal income tax. A
special rule provides that such a governmental accident or health plan will not
be disqualified (and amounts paid as medical benefits will be excluded from the
employee's gross income) if the plan permitted the payment of medical benefits
to a deceased participant's beneficiaries (including non-spousal and
non-dependent beneficiaries) on or before January 1, 2008. This special rule
does not affect the tax treatment of amounts received by the beneficiary, which
continue to be taxable. The special rule does not apply to accident or health
plans of certain State or political subdivisions, including plans organized as
voluntary employees' beneficiary associations (VEBAs) that are exempt from tax
under Code section 501(c)(9).
Provision:
Under the provision, the special rule would be extended to accident or health
plans established in connection with a public retirement system or established
by or on behalf of a State or political subdivision that either has been
authorized by a State legislature or received a favorable ruling from the IRS
that the trust's income is not includible in gross income under either Code
section 115 or section 501(c)(9), and that on or before January 1, 2008,
provided for payment of medical benefits to a deceased participant's
beneficiary. The provision would be effective for payments after the date of
enactment.
JCT
estimate: According to JCT, the provision would reduce revenues by less than
$50 million over 2014-2023.
Sec. 1419. Limitation on exclusion for employer-provided housing.
Current
law: Under current law, housing and meals provided to an employee and the
employee's spouse or dependents for the convenience of the employer are excluded
from income if the meals are on the business premises of the employer and the
employee is required to accept lodging on the premises of the employer as a
condition of employment. In the case of educational institutions, the value of
housing provided to their employees also is excluded to the extent the rent paid
by the employee is at least the lesser of 5 percent of the lodging's appraised
value or the average of the rent paid by individuals (other than employees or
students of the educational institution) for comparable lodging provided by the
educational institution.
Provision:
Under the provision, the exclusion for housing provided for the convenience of
the employer and for employees of educational institutions would be limited to
$50,000 ($25,000 for a married individual filing a joint return). The exclusion
also would be limited to one residence. The provision would be effective for tax
years beginning after 2014.
JCT
estimate: According to JCT, the provision would increase revenues by less
than $50 million over 2014-2023.
Sec. 1420. Fringe benefits.
Current
law: Under current law, various fringe benefits provided by employers to
employees are not included in employee income, including no-additional cost
services and qualified transportation fringes. No-additional cost services
include free air transportation to an employee, retired employee, or dependent,
spouse or parent of an employee or retired employee, or widowed spouse of a
deceased employee.
A
qualified transportation fringe includes, for 2014, up to $250 per month for
qualified parking and up to $130 for any transit pass provided by an employer to
employees (with these amounts adjusted for inflation). The qualified
transportation fringe also includes qualified bicycle commuting reimbursement of
up to $20 per month.
Provision:
The provision would repeal the exclusion from income for air transportation
provided as a no-additional cost service to the parent of an employee. For the
qualified transportation fringe benefit, the provision would set the qualified
transportation fringe excludable qualified parking amount at $250 per month, and
the excludable transit pass amount at $130 per month. These amounts would no
longer be adjusted for inflation. The provision would repeal the qualified
bicycle commuting reimbursement. The provision would be effective for tax years
beginning after 2014.
JCT
estimate: According to JCT, the provision would increase revenues by $39.0
billion over 2014-2023.
Sec. 1421. Repeal of exclusion of net unrealized appreciation in employer securities.
Current
law: Under current law, distributions from tax-deferred retirement plans
generally are subject to tax, including the value of any securities distributed.
In the case of a lump-sum distribution of employer securities, however, any net
unrealized appreciation in the securities is excluded from income, unless the
individual elects to forgo the exclusion. A distributee's basis in distributed
employer securities is the securities' fair market value, less the unrealized
appreciation excluded from gross income, thus preserving any capital gain if the
securities are later sold.
Employer
securities include the securities issued by the employer or a parent or
subsidiary of the employer. The “net unrealized appreciation” is the excess of
the fair market value of the employer securities over the retirement plan's cost
of acquiring them.
Provision:
Under the provision, the exclusion for net unrealized appreciation in
distributed employer securities would be repealed. The distributee generally
would have income in the amount of the value of the distributed securities. The
provision would be effective for distributions after 2014.
JCT
estimate: According to JCT, the provision would increase revenues by $0.9
billion over 2014-2023.
Sec. 1422. Consistent basis reporting between estate and person acquiring property from decedent.
Current
law: Under current law, the basis of property acquired by a beneficiary from
a decedent generally is the fair market value of the property on the date of the
decedent's death. Similarly, property included in a decedent's gross estate for
estate tax purposes generally also must be the fair market value on the date of
death. However, while both provisions generally require that fair market value
on the date of death be used, there is no requirement that the valuations be the
same.
Provision:
Under the provision, the basis of property acquired from a decedent may not
exceed the fair market value of property as reported for estate for tax
purposes. This provision would apply to property if inclusion of the property in
the decedent's estate results in additional estate tax liability or if an
executor is required to file an estate tax return. The estate would be required
to report the value of the property to the IRS and to the beneficiary receiving
the property, and the estate would be subject to a penalty for failure to file
such an information return. Any underpayment of tax due to the understatement of
basis under this provision would be subject to a 20-percent accuracy-related
penalty. The provision would be effective for transfers for which an estate tax
return is filed after the date of enactment.
JCT
estimate: According to JCT, the provision would increase revenues by $1.6
billion over 2014-2023.
Subtitle F - Employment Tax ModificationsSec. 1501. Modifications of deduction for Social Security taxes in computing net earnings from self-employment.
Current
law: Under current law, a tax is imposed under the Self-Employment
Contributions Act (SECA) on the self-employment income of an individual to help
finance the Social Security and Medicare trust funds. Under the Social Security
component, the rate of tax is 12.4 percent of the first $117,000 (for 2014) of
self-employment income, which is indexed for inflation. Under the Medicare
component, the rate is 2.9 percent, and the amount of self-employment income
subject to the Medicare component is not capped. An additional 0.9-percent tax
applies for individuals with self-employment income in excess of $200,000
(single filers) or $250,000 (married couples).
Under
current law, self-employed individuals may deduct one-half of self-employment
taxes for income tax purposes. This deduction reflects the fact that under the
Federal Insurance Contributions Act (FICA), a similar tax is imposed on an
employee's wages, with the liability to pay the tax divided evenly between
employer and employee. The deduction is intended to provide parity between FICA
and SECA taxes because an employer may deduct, as a business expense, its share
of FICA taxes paid. The SECA deduction, however, is larger than the amount
needed to make SECA taxes the economic equivalent of FICA taxes because the
calculation does not properly reflect the fact that net earnings from
self-employment are inclusive of SECA taxes. In addition, the calculation does
not take into account the fact that wages above the Social Security wage base
(i.e., $117,000 for 2014) are subject to tax only at the hospital insurance rate
of 2.9 percent.
Provision:
Under the provision, the deduction with respect to net earnings from
self-employment would be modified to make SECA taxes economically equivalent to
FICA taxes. The provision would be effective for tax years beginning after
2014.
JCT
estimate: According to JCT, the provision would increase revenues by $5.1
billion over 2014-2023.
Sec. 1502. Determination of net earnings from self-employment.
Current
law: Under current law, for SECA tax purposes, net earnings from
self-employment - upon which the calculation of self-employment income and the
SECA tax are based - means the gross income derived by an individual from any
trade or business carried on by the individual, less the allowable deductions.
Specified types of income or loss are excluded, such as rentals from real estate
in certain circumstances, dividends and interest, and gains or losses from the
sale or exchange of a capital asset, and certain other property.
Application
of the SECA tax can depend on the form of business entity through which the
taxpayer operates. For an individual who is a general partner in a partnership,
net earnings from self-employment generally include the partner's distributive
share of income or loss from any trade or business carried on by the partnership
(excluding specified types of income described above). A limited partner's
distributive share of partnership income or loss, however, is excluded from
SECA. This exclusion does not apply to guaranteed payments for services actually
rendered by the limited partner. The IRS takes the position that owners of a
limited liability company, which is taxed as a partnership, are treated as
general partners for SECA tax purposes.
In
contrast, an S corporation shareholder who is an employee of the S corporation
is subject to FICA taxes on wages, but is not subject to SECA on S corporation
distributions. The question of how much of the shareholder's distributive share
should constitute wages turns on the definition of reasonable compensation,
which has been the subject of much controversy and case law.
Provision:
Under the provision, the SECA tax would be clarified to apply to general and
limited partners of a partnership (including limited liability companies) as
well as to shareholders of an S corporation to the extent of their distributive
share of the entity's income or loss (subject to the exclusions for certain
types of income described above under current law). In determining net earnings
from self-employment, partners and S corporation shareholders would be allowed a
new deduction designed to approximate the return on invested capital. The effect
of the deduction would be that partners and S corporation shareholders who
materially participate in the trade or business of the partnership or S
corporation would treat 70 percent of their combined compensation and
distributive share of the entity's income as net earnings from self-employment
(and thus subject to FICA or SECA, as applicable) and the remaining 30 percent
as earnings on invested capital not subject to SECA. For partners and S
corporation shareholders who do not materially participate in the trade or
business (i.e., passive investors), the effect of the deduction would be that no
amount would be treated as net earnings from self-employment. The provision
would be effective for tax years beginning after 2014.
Considerations:
JCT
estimate: According to JCT, the provision would increase revenues by $15.3
billion over 2014-2023.
Sec. 1503. Repeal of exemption from FICA taxes for certain foreign workers.
Current
law: Under current law, certain foreign workers from the Bahamas, Jamaica,
and the other British West Indies (or any possession of such country) are exempt
from the FICA tax provided they are lawfully admitted to the United States on a
temporary basis to perform agricultural services. A similar exemption applies to
certain foreign students and their families present in the United States on a
temporary basis for educational purposes and to foreign participants in
international cultural exchange programs in the United States.
Provision:
Under the provision, the exceptions for foreign agricultural workers, foreign
students, and foreign participants in international cultural exchange programs
would be repealed. Thus, earnings by such foreign individuals while in the
United States would be subject to FICA on the same basis as other employees in
the United States. The provision would be effective for remuneration received
for services performed after 2014.
JCT
estimate: According to JCT, the provision would increase revenues by $7.7
billion over 2014-2023.
Sec. 1504. Repeal of exemption from FICA taxes for certain students.
Current
law: Under current law, an exemption from FICA is provided in the case of
certain services performed by a student employed by a school, college, or
university, provided that the student is enrolled and regularly attending
classes at the school, college, or university. The exception also applies to
students who perform certain domestic services in a college club, fraternity or
sorority.
Provision:
Under the provision, the FICA exception for students would be limited to the
student's earnings that are less than the amount needed to receive a quarter of
Social Security coverage for the year ($1,200 for 2014). The provision would be
effective for remuneration received for services performed after 2014.
JCT
estimate: According to JCT, the provision would increase revenues by $13.0
billion over 2014-2023.
Sec. 1505. Override of Treasury guidance providing that certain employer-provided supplemental unemployment benefits are not subject to employment taxes.
Current
law: Under current law, certain supplemental unemployment benefit payments
(e.g., severance pay) are treated as wages for purposes of income tax
withholding. The IRS has issued administrative guidance concluding that
severance pay meeting certain requirements is exempt from payroll tax
withholding under the Federal Insurance Contribution Act (FICA), Federal
Unemployment Tax Act (FUTA), and the Railroad Retirement Tax Act (RRTA). The
courts have issued conflicting rulings concerning the extent to which severance
benefit payments not covered by the IRS administrative guidance are similarly
exempt from withholding under FICA, FUTA, and RRTA.
Provision:
Under the provision, the IRS guidance exempting certain supplemental
unemployment benefit payments from payroll tax withholding would be overridden
and the general tax treatment of severance benefit payments would be clarified,
so that all such payments would be subject to income and payroll taxes (i.e.,
FICA, FUTA and RRTA). The provision would be effective for amounts paid after
2014.
JCT
estimate: According to JCT, the provision would increase revenues by $0.9
billion over 2014-2023.
Sec. 1506. Certified professional employer organizations.
Current
law: Under current law, employers are responsible for withholding and
payment of certain employment taxes with respect to their employees. In some
cases, employers contract with professional employer organizations (PEOs) for
human-resource services, such as managing employee payroll and employment taxes.
Despite such arrangements, the contractual agreement between the employer and
the PEO does not release the employer from responsibility for all taxes due with
respect to its employees if the PEO fails to withhold or remit the taxes or
otherwise comply with related reporting requirements.
Provision:
Under the provision, if an employer becomes a customer of a certified PEO under
a contract for employment-tax services with respect to the customer's work site
employees, the certified PEO, and not the customer, would be treated as the
employer of such work site employees for Federal employment tax purposes. Thus,
the customer would be released from liability for employment taxes. To qualify,
at least 85 percent of individuals performing services for the customer at the
work site (subject to exceptions for certain workers, such as temporary or
part-time workers) would have to be covered by a PEO services contract. The
services contract would be required to provide that the certified PEO is
responsible for wages, employee benefits (if any), and employment taxes
regardless of whether the customer pays the certified PEO for such services.
For a PEO
to be certified by the IRS, the business must satisfy various requirements
intended to ensure that the PEO properly remits wages and employment taxes.
Under these requirements, the PEO must satisfy applicable reporting obligations,
submit audited financial statements and quarterly auditing reports, and post a
bond against the PEO's failure to satisfy its employment tax withholding and
payment obligations. The bond would be posted on April 1 and be equal to the
greater of 5 percent of employment taxes for the previous calendar year (but not
to exceed $1 million) or $50,000. A special rule would reduce the bond to
$50,000 during the first three years of a PEO's operations, provided the PEO's
employment tax liability for the calendar year does not exceed $5 million. The
provision would apply only for purposes of employment taxes under Chapter 25 of
the Code and would not create any inference with respect to who is an employee
or employer for any other provision of law.
The
provision would be effective for wages for services performed on or after
January 1 of the first calendar year beginning more than 12 months after date of
enactment (e.g., January 1, 2016, assuming the date of enactment is during
calendar year 2014), and the IRS would be required to establish the PEO
certification program no later than six months prior to such date.
JCT
estimate: According to JCT, the provision would increase revenues by less
than $50 million over 2014-2023.
Subtitle G - Pensions and RetirementPart 1 - Individual Retirement PlansSecs. 1601-1603. Elimination of income limits on contributions to Roth IRAs; No new contributions to traditional IRAs; Inflation adjustment for Roth IRA contributions.
Current
law: Under current law, taxpayers may contribute to traditional Individual
Retirement Accounts (IRAs) up to $5,500 for 2014, with an additional $1,000
catch-up contribution permitted for those at least 50 years old. These
contribution limits are indexed for inflation. Contributions to a traditional
IRA are deductible, earnings are not taxed currently, and distributions are
included in income. Taxpayers may also make non-deductible IRA contributions
with after-tax dollars, and earnings on amounts invested in the IRA are not
currently taxed, but distributions (less previously taxed contributions) are
subject to tax. Additionally, taxpayers may contribute up to the same limits to
Roth IRAs but with after-tax contributions. Earnings and distributions from Roth
IRAs are excluded from income. The $5,500 and $1,000 annual limits apply in the
aggregate to the three types of IRAs.
Taxpayers
covered by employer-sponsored retirement plans may not contribute to a
traditional IRA if they are married filing separately, or if they exceed certain
income levels. In 2014, the phase-out range for participation in a traditional
IRA is $60,000 to $70,000 for singles and heads of households, $96,000 to
$116,000 for joint returns for a spouse who is covered by an employer-sponsored
plan, and $181,000 to $191,000 for the spouse who is not covered. Taxpayers not
covered by an employer-sponsored plan may contribute to a traditional IRA
regardless of income. There are no income limits on eligibility to contribute to
non-deductible traditional IRAs. For Roth IRAs, eligibility does not depend on
participation in an employer plan, but the contribution limit phases out over a
range of $114,000 to $129,000 for singles and $181,000 to $191,000 for joint
returns.) These amounts are indexed for inflation.
Provision:
Under the provisions, the income eligibility limits for contributing to Roth
IRAs would be eliminated and new contributions to traditional IRAs and
non-deductible traditional IRAs would be prohibited. The inflation adjustment of
the annual limit on Roth IRA contributions also would be suspended until tax
year 2024, at which time inflation indexing would recommence based off of the
frozen level. The provisions would be effective for tax years beginning after
2014.
Considerations:
JCT
estimate: According to JCT, the provisions would increase revenues by $14.8
billion over 2014-2023, and would reduce outlays by $1.9 billion over
2014-2023.
Sec. 1604. Repeal of special rule permitting recharacterization of Roth IRA contributions as traditional IRA contributions.
Current
law: Under current law, an individual may re-characterize a contribution to
a traditional IRA as a contribution to a Roth IRA (and vice versa). An
individual may also re-characterize a conversion of a traditional IRA to a Roth
IRA. The deadline for re-characterization generally is October 15 of the year
following the contribution or conversion. When a re-characterization occurs, the
individual is treated for tax purposes as having made the original contribution
to the second account or not having made the conversion. The re-characterization
must include any net earnings related to the contribution.
Provision:
Under the provision, the rule allowing re-characterization of Roth IRA
contributions or conversions would be repealed. Note that under other provisions
of the discussion draft, no new contributions to traditional IRAs would be
permitted. The provision would be effective for tax years beginning after
2014.
Consideration:
This provision would prevent a taxpayer from gaming the system by converting to
a Roth IRA, investing in an extremely aggressive fashion and benefiting from any
gains (which are never subject to tax), but retroactively reversing the
conversion if the taxpayer suffers a loss to avoid taxes on some or all of the
converted amount.
JCT
estimate: According to JCT, the provision would increase revenues by $0.4
billion over 2014-2023.
Sec. 1605. Repeal of exception to 10-percent penalty for first home purchases.
Current
law: Under current law, an additional 10-percent tax generally is imposed on
distributions from retirement plans and Individual Retirement Accounts (IRAs)
occurring before the account holder reaches age 591/2. This 10-percent tax is in
addition to any income tax that may be due on the distribution. There are
several exceptions to the early withdrawal penalty, including early
distributions of up to $10,000 to pay for first-time homebuyer expenses.
Provision:
Under the provision, the exception to the additional 10-percent tax for early
distributions used to pay for first-time homebuyer expenses would be repealed.
The provision would be effective for distributions after 2014.
Consideration:
The provision would help Americans achieve greater retirement security by
encouraging taxpayers not to make withdrawals from their accounts before
retirement.
JCT
estimate: According to JCT, the provision, along with section 1210 of the
discussion draft, would increase revenues by $0.3 billion over 2014-2023.
Part 2 - Employer-Provided PlansSecs. 1611-1612. Termination for new SEPs; Termination for new SIMPLE 401(k)s.
Current
law: Under current law, certain employers may offer a Simplified Employee
Pension (SEP) IRA, which generally may only accept employer contributions.
(Certain grandfathered SEPs, called SARSEPs, also may accept employee
contributions.) The maximum contribution to a SEP is the lesser of the overall
limit for contributions to a defined-contribution plan ($52,000 for 2014,
indexed for inflation) or 25 percent of the employee's compensation. Employers
must make contributions on behalf of all employees, which generally must be the
same percentage of compensation for all employees.
For
employers with no more than 100 employees, the Savings Incentive Match Plan for
Employees (SIMPLE) option allows sponsoring employers to set up a SIMPLE 401(k)
plan or a SIMPLE IRA. Under the SIMPLE 401(k) plan, the employer generally may
satisfy the nondiscrimination rules by matching contributions up to 2 percent of
compensation or non-elective contributions equal to 3 percent of compensation. A
SIMPLE 401(k) must allow each eligible employee to participate through salary
reduction contributions equal to a specified percentage of compensation up to
$12,000 for 2014 (indexed for inflation). Individuals who are at least 50 years
old may contribute annually up to another $2,500 (indexed for inflation). Under
the SIMPLE IRA, sponsoring employers generally must follow similar contribution
requirements, and the employee contribution annual limits are the same, but with
individual IRA accounts established for the participating employees.
Provision:
Under the provisions, employers would not be permitted to establish new SEPs or
SIMPLE 401(k) plans after 2014. Employers would be permitted to continue making
contributions to existing SEPs and SIMPLE 401(k) plans. SIMPLE IRAs would
continue to be available. The SEP provision would be effective for tax years
beginning after 2014, and the SIMPLE 401(k) provision would be effective for
plan years beginning after 2014.
Considerations:
JCT
estimate: According to JCT, the provisions would increase revenues by $0.6
billion over 2014-2023.
Sec. 1613. Rules related to designated Roth contributions.
Current
law: Under current law, 401(k) plans may offer either traditional accounts
alone or both traditional and Roth accounts. Contributions to a traditional
401(k) account are not included in the employee's income and earnings are not
currently taxed, while distributions are treated as taxable income.
Contributions to a 401(k) Roth account are made out of the employee's after-tax
income. Earnings in a Roth account are not taxable currently, and distributions
generally are not taxable if the employee meets certain holding period and age
requirements. If a 401(k) plan has a Roth option, the employee (but not the
employer) may contribute to the Roth account, the traditional account, or both.
Employer contributions to a 401(k) plan for employees with Roth accounts must be
made into separate traditional accounts for the employee for whom the
contribution is made. For these purposes, 403(b) plans and 457(b) plans are
treated like 401(k) plans.
Provision:
Under the provision, employees would generally be able to contribute up to half
the maximum annual elective deferral amount (including catch-up contributions
for employees at least 50 years old, if applicable) into a traditional account.
(For 2014, the maximum annual elective deferral amount is $17,500, and the
maximum catch-up amount is $5,500 (for a total of $23,000 for such employees)).
Any contributions in excess of half of these limits - $8,750 and $11,500,
respectively - would be to a Roth account. Employees could contribute up to the
entire annual elective deferral amount into a Roth account if they wish. Plans
would generally be required to offer Roth accounts. Employer contributions would
continue to be made to traditional accounts.
The
provision would not apply to employers with 100 or fewer employees. In addition,
employers may choose to have Roth accounts in a SIMPLE IRA, and if an employer
with a SIMPLE IRA elects to limit traditional employee contributions to half the
annual contribution limits, the employee contribution limits to such SIMPLE IRA
would be increased to the contribution limits for a 401(k) plan. For purposes of
this provision, 403(b) plans and 457(b) plans would be treated like 401(k)
plans. The provision would generally be effective for plan years and tax years
beginning after 2014. The SIMPLE IRA portion of the provision would be effective
for tax years and calendar years beginning after 2014.
Considerations:
JCT
estimate: According to JCT, the provision would increase revenues by $143.7
billion over 2014-2023.
Sec. 1614. Modifications of required distribution rules for pension plans.
Current
law: Under current law, owners of traditional IRAs and employees in
employer-sponsored retirement plans (both defined contribution and defined
benefit plans) are subject to required minimum distribution (RMD) rules, which
generally require the IRA owner (other than Roth IRAs) or employee (if he has
retired, except for a 5-percent owner) to take minimum distributions beginning
at age 701/2 or pay a 50-percent excise tax on the amount of such distributions.
Special rules apply when the IRA owner (including a Roth IRA owner) or employee
dies before the entire account balance has been withdrawn. If the death occurs
on or after the required beginning date for RMDs, the remaining amount must be
distributed to the beneficiaries at least as rapidly as distributed to the
decedent as of the date of death (but over the life expectancy of any designated
beneficiary, if longer). Absent a designated beneficiary, the distribution
period is the remaining life expectancy of the IRA owner or employee at the time
of death. If an IRA owner or employee dies before the required beginning date
and any part of the benefit is payable to a designated beneficiary,
distributions generally must begin within one year of death and are spread over
the life expectancy of the designated beneficiary. If the IRA owner or employee
dies before the required beginning date and there is no designated beneficiary,
the entire remaining account balance generally must be distributed to the estate
by the end of the fifth year following the death.
Provision:
Under the provision, if an employee becomes a 5-percent owner after age 701/2
but before retiring, the required beginning date for RMDs would be April 1 of
the following year. With respect to IRAs and employer-sponsored retirement plans
that exist when the IRA owner or employee dies distributions would be required
within five years (regardless of whether the IRA owner or employee dies before
or after RMDs have begun). An exception would apply if the beneficiary is a
spouse, is disabled, chronically ill, not more than 10 years younger than the
deceased, or is a child, and would permits distributions to begin within one
year of death and be spread over the life expectancy of the beneficiary.
However, if that beneficiary dies or a child beneficiary turns 21, the general
five-year-distribution rule would apply upon such occurrence.
The
provision regarding RMDs after the death of an IRA owner or employee generally
would be effective for distributions with respect to IRA owners or employees who
die after 2014. The provisions would not apply to certain qualified annuities
that are binding annuity contracts in effect on the date of enactment and at all
times thereafter. The provision changing RMDs for 5-percent owners generally
would become effective for employees becoming 5-percent owners with respect to
plan years ending in calendar years beginning before, on, or after the date of
enactment - except that the provision would not result in a required beginning
date earlier than April 1, 2015.
Considerations:
JCT
estimate: According to JCT, the provision would increase revenues by $3.5
billion over 2014-2023.
Sec. 1615. Reduction in minimum age for allowable in-service distributions.
Current
law: Under current law, defined-contribution plans generally are not
permitted to allow in-service distributions (i.e., distributions while an
employee is still working for the employer) attributable to tax-deferred
contributions if the employee is less than 591/2 years old. For State and local
government defined-contribution plans, and for all defined-benefit plans, the
restriction on in-service distributions applies if the employee is less than age
62.
Provision:
Under the provision, all defined-benefit plans as well as State and local
government defined-contribution plans would be permitted to make in-service
distributions beginning at age 591/2. The provision would be effective for
distributions made after 2014.
Considerations:
JCT
estimate: According to JCT, the provision would increase revenues by $0.2
billion over 2014-2023.
Sec. 1616. Modification of rules governing hardship distributions.
Current
law: Under current law, defined-contribution plans are generally not
permitted to allow in-service distributions (distributions while an employee is
still working for the employer) attributable to elective deferrals if the
employee is less than 591/2 years old. One exception is for hardship
distributions, which plans have the option of offering participants, but only if
the plan follows guidelines such as that any distribution be necessary for an
immediate and heavy financial need of the employee. Treasury regulations require
that plans not allow employees taking hardship distributions to make
contributions to the plan for six months after the distribution.
Provision:
Under the provision, the IRS would be required within one year of the date of
enactment to change its guidance to allow employees taking hardship
distributions to continue making contributions to the plan. The provision would
be effective for plan years beginning after 2014.
Considerations:
JCT
estimate: According to JCT, the provision would have negligible revenue
effect over 2014-2023.
Sec. 1617. Extended rollover period for the rollover of plan loan offset amounts in certain cases.
Current
law: Under current law, defined-contribution plans are permitted (but not
required) to allow plan loans. If the employee fails to abide by the applicable
rules, the loan is treated as a taxable distribution that may also be subject to
the 10-percent penalty for early withdrawals. If a plan terminates or an
employee's employment terminates while a plan loan is outstanding, the employee
has 60 days to contribute the loan balance to an individual retirement account
(IRA), or the loan is treated as a distribution.
Provision:
Under the provision, employees whose plan terminates or who separate from
employment while they have plan loans outstanding would have until the due date
for filing their tax return for that year to contribute the loan balance to an
IRA in order to avoid the loan being taxed as a distribution. The provision
would apply to tax years beginning after 2014.
Considerations:
JCT
estimate: According to JCT, the provision would have negligible revenue
effect over 2014-2023.
Sec. 1618. Coordination of contribution limitations for 403(b) plans and governmental 457(b) plans.
Current
law: Under current law, 401(k) plans generally may allow employees to make
elective deferrals of up to $17,500 for 2014 and an additional $5,500 catch-up
contribution for those who are at least 50 years old. Total employer and
employee contributions may not exceed $52,000 for 2014. Contributions generally
may not exceed employee compensation and may only be made by active employees.
These amounts are indexed for inflation.
Certain
employees with more than 15 years of service who are participants in 403(b)
plans may make an additional contribution of up to $3,000 per year. Entities
sponsoring 403(b) plans (typically tax-exempt organizations) also may make
non-elective employer contributions of up to $52,000 in 2014 (indexed for
inflation) for up to five years after the employee has separated from service.
Similarly, a church may contribute a maximum of $10,000 per year, even if the
participant has no taxable compensation, up to a lifetime limit of $40,000 per
participant. For foreign missionaries with $17,000 or less in adjusted gross
income, a church may contribute up to $3,000 per year (even in the absence of
U.S. taxable compensation).
Participants
in 457 plans sponsored by State and local governments are allowed to make
additional contributions of up to $35,000 for 2014 (indexed for inflation) for
the three years prior to normal retirement age. State and local government
employees may participate in both a 457 plan and either a 403(b) plan or a
401(k) plan in which case the employee may make the maximum allowable annual
contributions to each of the plans.
Provision:
Under the provision, all defined-contribution plans would be subject to the
annual contribution limits currently applicable to 401(k) plans and would not
have additional limits for different classes of employees at certain types of
employers. The provision would apply to plan years and tax years beginning after
2014.
Consideration:
The provision would simplify the Code by treating employees the same regardless
of whether they work for private, non-profit or public employers.
JCT
estimate: According to JCT, the provisions would increase revenues by $0.9
billion over 2014-2023.
Sec. 1619. Application of 10-percent early distribution tax to governmental 457 plans.
Current
law: Under current law, early distributions from employer-sponsored
retirement plans and IRAs are generally subject to an additional tax of 10
percent. This additional tax does not apply to early distributions from 457
plans sponsored by State and local governments.
Provision:
Under the provision, participants in governmental 457 plans would be subject to
the 10-percent additional tax on early distributions. The provision would be
effective for withdrawals after February 26, 2014.
Consideration:
The provision would simplify the Code by treating employees the same regardless
of whether they work for private, non-profit or public employers.
JCT
estimate: According to JCT, the provision would increase revenues by $0.6
billion over 2014-2023.
Secs. 1620-1624. Inflation adjustments for qualified plan benefit and contribution limitations; Inflation adjustments for qualified plan elective deferral limitations; Inflation adjustments for SIMPLE retirement accounts; Inflation adjustments for catch-up contributions for certain employer plans; Inflation adjustments for governmental and tax-exempt organization plans.
Current
law: Under current law, the myriad retirement plan alternatives generally
have contributions limits that are indexed for inflation. For 2014, the maximum
benefit under a tax-qualified defined benefit plan is an annual payment equal to
the lesser of an employee's average compensation for the three highest
compensation years or $210,000. For 401(k), 403(b), and 457 plans (as well as
grandfathered SARSEPs), the maximum annual elective deferral by employees is
$17,500 (not counting catch-up contributions for employees at least 50 years
old). The maximum combined contribution by employer and employee to a defined
contribution plan (as well as SEPs) in 2014 is $52,000. SIMPLE IRA and SIMPLE
401(k) plans sponsored by small businesses are subject to a maximum annual
contribution of $12,000 (not counting catch-up contributions for employees at
least 50 years old) for 2014.
Employees
in certain retirement plans who are at least 50 years old may make additional
catch-up contributions beyond the otherwise applicable annual contribution
limits. For 401(k), 403(b), and 457 plans, the maximum annual catch-up
contribution is $5,500 for 2014. For SIMPLE IRAs and SIMPLE 401(k) plans, the
maximum annual catch-up contribution is $2,500 for 2014.
Provision:
Under the provisions, the inflation adjustments for the maximum benefit under a
defined benefit plan, the maximum combined contribution by an employer and
employee to a defined contribution plan, the maximum elective deferrals with
respect to each type of SEP, SIMPLE IRA, and defined contribution plan (i.e.,
401(k), 403(b), and 457(b)), and catch-up contributions would be suspended until
2024, at which time inflation indexing would recommence based off of the frozen
level. The provisions generally would be effective after 2014. More
specifically, the inflation adjustments for qualified plan benefit and
contribution limitations would be effective for years ending with or within a
calendar year beginning after 2014; the inflation adjustments for qualified plan
elective deferral limitations would be effective for plan years and tax years
beginning after 2014; the inflation adjustments for SIMPLE retirement accounts
would be effective for calendar years beginning after 2014; and the inflation
adjustments for catch-up contributions for certain employer plans and for
governmental and tax-exempt organization plans would be effective for tax years
beginning after 2014.
Consideration:
When interest rates are relatively low, as they have been for the last several
years, these provisions would have little or no effect on the annual
contribution limitations. For example, the maximum employee contribution levels
of $12,000 for SIMPLE IRAs and $17,500 for 401(k) plans were the same in 2013
and 2014.
JCT
estimate: According to JCT, the provisions would increase revenues by $63.4
billion over 2014-2023.
Subtitle H - Certain Provisions Related to Members of Indian TribesSecs. 1701-1703. Indian general welfare benefits; Tribal Advisory Committee; Other relief for Indian tribes.
Current
law: Under current law, taxpayers must generally include all items of income
in computing gross income. IRS guidance has established a general welfare
exclusion under which payments made to individuals by governmental entities
pursuant to legislatively provided social benefit programs for the promotion of
the general welfare are not included in the recipient's gross income. To qualify
under the general welfare exclusion, payments must not be lavish or extravagant,
they must be made under a government program based on need, and such payments
may not constitute compensation. Under proposed IRS guidance, the IRS will
conclusively presume that payments from Indian tribes to tribal members and
their spouses and dependents will qualify under the general welfare exclusion if
certain requirements are met. Specifically, the payments must be made pursuant
to a specific Indian tribal government program with written guidelines, be
available to any tribal member meeting those guidelines, not discriminate in
favor of the tribe's governing body members, not be compensation for services,
and not be extravagant. Taxpayers may rely on the proposed rule until additional
guidance is published. Additionally, taxpayers may rely on the proposed rules
retroactively to file for refunds for any open tax years.
Provision:
Under the provisions, the proposed IRS guidance specifically applying the
general welfare exclusion to Indian tribes and payments received by tribal
members, their spouses and children generally would be codified. The provisions
also would require the IRS to establish a Tribal Advisory Committee to advise
the IRS on matters relating to taxation of tribal members including training and
education for IRS agents dealing with tribal members. Additionally, the
provisions would provide the IRS with discretion to waive any interest and
penalties under the Code for any tribe or tribal member with regard to the
general welfare exclusion. The provision codifying the IRS guidance concerning
the general welfare exclusion would be effective for tax years for which the
period of limitations is open as of the date of enactment, and taxpayers would
have one additional year from the date of enactment to file for a refund with
respect to any such open tax year.
JCT
estimate: According to JCT, the provisions would have negligible revenue
effect over 2014-2023.
Title II - Alternative Minimum Tax RepealSec. 2001. Repeal of alternative minimum tax.
Current
law: Under current law, taxpayers must compute their income for purposes of
both the regular income tax and the alternative minimum tax (AMT), and their tax
liability is equal to the greater of their regular income tax liability or AMT
liability. In computing the AMT, only alternative minimum taxable income (AMTI)
above an AMT exemption amount is taken into account, but AMTI represents a
broader base of income than regular taxable income. For example, personal
exemptions, the standard deduction, and certain itemized deductions (such as the
deduction for State and local taxes) are not allowed in calculating AMTI. In
addition, many business tax preferences that are allowed for regular taxable
income are not allowed in determining AMTI, including accelerated depreciation.
Corporations and, in some cases, non-corporate taxpayers receive a credit for
AMT paid, which they may carry forward and claim against regular tax liability
in future tax years (to the extent such liability exceeds AMT in a particular
year), and which never expire.
For
individuals, estates, and trusts, the AMT has a 26-percent bracket and a
28-percent bracket, but capital gains and dividends are taxed under the AMT at
the highest rate that such items are taxed under the regular income tax. The
26-percent tax rate applies to the first $182,500 of AMTI (half that amount for
married couples filing separately), and the 28-percent rate applies to AMTI in
excess of that amount. For 2014, the AMT exemption amounts for non-corporate
taxpayers are $52,800 for single filers, $82,100 for joint filers, $41,050 for
married individuals filing separately, and $23,500 for estates and trusts. The
AMT exemption amounts begin phasing out at a 25-percent rate at $156,500 for
joint returns, $117,300 for singles, and $78,250 for married individuals filing
separately and trusts and estates. These amounts are indexed for inflation.
The
corporate AMT rate is 20 percent, and the exemption amount is $40,000, though
corporations with average gross receipts of less than $7.5 million for the
preceding three tax years are exempt from the AMT. The exemption amount for
corporations phases out at a 25-percent rate starting at $150,000.
Provision:
Under the provision, the AMT would be repealed. If a taxpayer has AMT credit
carryforwards, the taxpayer would be able to claim a refund of 50 percent of the
remaining credits (to the extent the credits exceed regular tax for the year) in
tax years beginning in 2016, 2017, and 2018. Taxpayers would be able to claim a
refund of all remaining credits in the tax year beginning in 2019. The provision
would generally be effective for tax years beginning after 2014.
Considerations:
JCT
estimate: According to JCT, the repeal of the individual AMT would reduce
revenues by $1,331.8 billion over 2014-2023, and the repeal of the corporate AMT
would reduce revenues by $110.2 billion over 2014-2023.
Title III - Business Tax ReformSubtitle A - Tax RatesSec. 3001. 25-percent corporate tax rate.
Current
law: Under current law, a corporation's regular income tax liability
generally is determined by applying the following tax rate schedule to its
taxable income:
The 15-
and 25-percent rates are phased out for corporations with taxable income between
$100,000 and $335,000. As a result, a corporation with taxable income between
$335,000 and $10,000,000 effectively is subject to a flat tax rate of 34
percent. Similarly, the 34-percent rate is gradually phased out for corporations
with taxable income between $15,000,000 and $18,333,333, such that a corporation
with taxable income of $18,333,333 or more effectively is subject to a flat rate
of 35 percent.
Personal
service corporations are not entitled to use the graduated corporate rates below
the 35-percent rate. A personal service corporation is a corporation the
principal activity of which is the performance of personal services in the
fields of health, law, engineering, architecture, accounting, actuarial science,
performing arts, or consulting, and such services are substantially performed by
the employee-owners.
Provision:
Under the provision, the corporate tax rate would be a flat 25-percent rate
beginning in 2019. A transition rule would set the rate for taxable income up to
$75,000 to 25 percent beginning in 2015, with the rate on income above that
level phased down to 25 percent as follows:
The
special rule applicable to personal services corporations would be repealed. The
provision would be effective for tax years beginning after 2014.
Considerations:
JCT
estimate: According to JCT, the provision would reduce revenues by $680.3
billion over 2014-2023.
Subtitle B - Reform of Business-related Exclusions and DeductionsSec. 3101. Revision of treatment of contributions to capital.
Current
law: Under current law, the gross income of a corporation generally does not
include contributions to its capital (i.e., transfers of money or property to
the corporation by a non-shareholder such as a government entity). In addition,
a corporation does not recognize gain or loss on the receipt of money or
property in exchange for stock of the corporation, nor does it recognize gain or
loss with respect to any lapse or acquisition of an option to buy or sell its
stock.
Provision:
Under the provision, the gross income of a corporation would include
contributions to its capital (including any premiums received by the corporation
with respect to an option written by the corporation to sell its stock), to the
extent the amount of money and fair market value of property contributed to the
corporation exceeds the fair market value of any stock that is issued in
exchange for such money or property. Similar rules would apply to contributions
to the capital of any non-corporate entity, such as a partnership. Under section
3423 of the discussion draft, however, the tax liability of a corporation would
not take into account income, gains, losses, or deductions with regard to a
derivative that relates to the corporation's stock, except for income received
with regard to certain forward contracts that relate to the corporation's stock.
The provision would be effective for contributions made, and transactions
entered into, after the date of enactment.
Consideration:
This provision would remove a Federal tax subsidy for State and local
governments to offer incentives and concessions to business that locate
operations within their jurisdiction (usually in lieu of locating operations in
a different State or locality). In conjunction with section 3423 of the
discussion draft, the provision also would eliminate current-law loopholes for
corporations that engage in transactions involving their own stock.
JCT
estimate: According to JCT, the provision would increase revenues by $8.8
billion over 2014-2023.
Sec. 3102. Repeal of deduction for local lobbying expenses.
Current
law: Under current law, businesses generally may deduct ordinary and
necessary expenses paid or incurred in connection with carrying on any trade or
business. An exception to the general rule, however, disallows deductions for
lobbying and political expenditures with respect to legislation and candidates
for office, except for lobbying expenses with respect to legislation before
local or Indian tribal government bodies.
Provision:
Under the provision, deductions for lobbying expenses with respect to
legislation before local government bodies (including Indian tribal governments)
would be disallowed. The provision would be effective for amounts paid or
incurred after 2014.
JCT
estimate: According to JCT, the provision would increase revenues by $0.6
billion over 2014-2023.
Sec. 3103. Expenditures for repairs in connection with casualty losses.
Current
law: Under current law, a taxpayer that is engaged in a trade or business
generally may deduct any property loss sustained during the tax year (e.g., as a
result of a natural disaster) that is not compensated by insurance or otherwise.
A taxpayer's loss is limited to the adjusted basis of the property, and adjusted
basis is reduced if a casualty loss is deducted. Taxpayers engaged in a trade or
business also may deduct amounts paid or incurred to maintain property,
including repairs for damage as a result of a natural disaster. If the repairs
rise to the level of a permanent improvement or betterment made to increase the
value of the property (rather than just to maintain the property), the costs
must be capitalized in the basis and recovered over the depreciable life of the
property. Some taxpayers have taken the position that both the casualty-loss
deduction and the deduction for amounts paid or incurred for repairs may be
claimed with respect to the same property damaged in a natural disaster.
Provision:
Under the provision, taxpayers could elect either to claim a casualty loss for
damaged property (with a corresponding decrease to the property's basis) or to
deduct the repair of such property, but not both. The provision would be
effective for losses sustained after 2014.
JCT
estimate: According to JCT, the provision would have negligible revenue
effect over 2014-2023.
Sec. 3104. Reform of accelerated cost recovery system.
Current
law: Under current law, a taxpayer may recover, through annual depreciation
deductions, the cost of certain property used in a trade or business or for the
production of income. The amount of the depreciation deduction with respect to
tangible property for a tax year is determined under the modified accelerated
cost recovery system (MACRS). Under MACRS, different types of property generally
are assigned applicable recovery periods and depreciation methods.
The MACRS
recovery periods applicable to most tangible personal property range from three
to 25 years. In general, the recovery periods for real property are 39 years for
non-residential real property and 27.5 years for residential rental property.
The depreciation methods generally applicable to tangible personal property are
the 200-percent and 150-percent declining balance methods, switching to the
straight-line method for the tax year in which the straight-line method would
provide a larger deduction. However, in certain circumstances - such as with
respect to corporate taxpayers subject to the alternative minimum tax (AMT) -
property must be depreciated under the alternative depreciation system (ADS),
which requires longer recovery periods and the use of the straight-line
depreciation method. The primary source of IRS guidance for class lives is
Revenue Procedure 87-56, 1987-2 C.B. 674, which has not been updated since its
release in 1987 (as the result of a statutory prohibition enacted by
Congress).
Special
depreciation provisions enacted in recent years have also accelerated cost
recovery for certain assets. For example, in general, property with a recovery
period of less than 20 years placed in service from 2008 through 2013 is
eligible for bonus depreciation of either 50 percent or 100 percent, depending
on the year. In addition, qualified leasehold improvement property, qualified
restaurant property, and qualified retail improvement property placed in service
before 2014 were eligible for an accelerated recovery period of 15 years.
Provision:
Under the provision, MACRS recovery periods and methods would be repealed and
rules substantially similar to the ADS rules would apply to depreciable
property. Thus, in general, class lives would match more closely the true
economic useful life of assets, and depreciation deductions would be determined
under the straight-line method. In addition, a taxpayer could elect to take an
additional depreciation deduction to account for the effects of inflation on
depreciable personal property, calculated by multiplying the year-end adjusted
basis in the property (determined without regard to inflation deductions) by the
chained CPI rate for the year.
The
provision also would repeal the following special depreciation provisions: bonus
depreciation, the special recovery periods for Indian reservation property, the
special allowance for second generation biofuel plant property, the special
allowance for certain reuse and recycling property, and the special allowance
for qualified disaster assistance property. In addition, the special
depreciation provisions for qualified leasehold improvement property, qualified
restaurant property, and qualified retail improvement property would be
repealed. The provision would require the Treasury Department, in consultation
with the Bureau of Economic Analysis, to develop a new schedule of economic
depreciation, and submit a report to Congress containing the new schedule and
other recommendations by December 31, 2017. The provision would be effective for
property placed in service after 2016. Thus, current law would apply to property
placed in service during 2014, 2015 and 2016.
Considerations:
JCT
estimate: According to JCT, the provision would increase revenues by $269.5
billion over 2014-2023.
Sec. 3105. Repeal of amortization of pollution control facilities.
Current
law: Under current law, a taxpayer may elect to recover the cost of a
certified pollution control facility over a period of 60 months (84 months in
the case of certain atmospheric pollution control facilities used in connection
with a power plant or other property that is primarily coal-fired) rather than
through annual depreciation deductions based on the useful life of the property.
A corporate taxpayer must reduce the amount of basis otherwise eligible for the
60-month recovery by 20 percent.
Provision:
Under the provision, the special election for amortization of pollution control
facilities would be repealed. Accordingly, such facilities would be subject to
the general depreciation rules, with the cost recovery of pollution control
facilities generally based on the class life of the underlying property (e.g.,
the building to which the pollution control facility is attached would have a
40-year life). The provision would be effective for facilities placed in service
after 2014.
JCT
estimate: According to JCT, the provision would increase revenues by $7.9
billion over 2014-2023.
Sec. 3106. Net operating loss deduction.
Current
law: Under current law, a net operating loss (NOL) generally is the amount
by which a taxpayer's current-year business deductions exceed its current-year
gross income. NOLs may not be deducted in the year generated, but may be carried
back two years and carried forward 20 years to offset taxable income in such
years. The AMT rules provide that a taxpayer's NOL deduction may not reduce the
taxpayer's alternative minimum taxable income by more than 90 percent.
Different
rules apply with respect to NOLs arising in certain circumstances. A special
five-year carryback applies to NOLs arising from a farming loss, losses arising
from certain bad debts of commercial banks, and certain amounts related to the
Hurricane Katrina and the Gulf Opportunity Zone before 2010. Special rules also
apply to specified liability losses (ten-year carryback) and excess interest
losses (no carryback to any year preceding a corporate equity reduction
transaction). Additionally, a special rule applied to losses incurred in 2008
and 2009 (up to a five-year carryback) and a special rule applied to certain
electric utility companies with respect to NOLs arising in 2003 through 2005
(five-year carryback).
Provision:
Under the provision, C corporations could deduct an NOL carryover or carryback
only to the extent of 90 percent of the corporation's taxable income (determined
without regard to the NOL deduction) - conforming to the current-law AMT rule.
The provision also would repeal the special carryback rules for specified
liability losses, bad debts losses of commercial banks, excess interest losses
relating to corporate equity reduction transactions, and certain farming losses.
Additionally, the provision would repeal the expired special rules regarding
losses incurred in 2008 and 2009, losses of certain electric utility companies,
and losses related to the Hurricane Katrina and the Gulf Opportunity Zone. The
provision generally would be effective for tax years beginning after 2014 and
losses incurred after 2014 and carried back to prior years.
JCT
estimate: According to JCT, the provision would increase revenues by $70.5
billion over 2014-2023.
Sec. 3107. Circulation expenditures.
Current
law: Under current law, expenditures that produce benefits in future tax
years to a taxpayer's business or income-producing activities generally are
capitalized and recovered over time through depreciation, amortization, or
depletion deductions. A special rule, however, allows taxpayers to deduct
immediately expenditures to establish, maintain, or increase the circulation of
a newspaper, magazine, or other periodical. Under the AMT, however, circulation
expenditures must be capitalized and amortized over 36 months.
Provision:
Under the provision, taxpayers would recover the cost of circulation
expenditures by capitalizing and amortizing such costs over 36 months -
conforming to the current-law AMT rule. The provision would be effective for
amounts paid or incurred in tax years beginning after 2015, with a three-year
phase-in period in which 75 percent of circulation expenditures would be
deductible in 2016 (25 percent amortized), 50 percent would be deductible in
2017 (50 percent amortized), and 25 percent deductible in 2018 (75 percent
amortized).
JCT
estimate: According to JCT, the provision would increase revenues by $0.6
billion over 2014-2023.
Sec. 3108. Amortization of research and experimental expenditures.
Current
law: Under current law, business expenditures associated with the
development and creation of an asset having a useful life extending beyond the
current year generally must be capitalized and depreciated over such useful
life. As an exception to this general rule, taxpayers may elect to deduct
currently certain research or experimentation (R&E) expenditures paid or
incurred in connection with a trade or business. Such deductions must be reduced
by the amount of the taxpayer's research tax credit.
Provision:
Under the provision, all R&E expenditures would be amortized over a
five-year period beginning with the midpoint of the tax year in which the
expenditure is paid or incurred. The five-year period would continue even in the
event any property with respect to which amortization deductions were made is
retired or abandoned. Expenditures incurred for the development of software
would be treated as R&E expenditures.
The
provision would be effective for amounts paid or incurred in tax years beginning
after 2014, but would be phased in slowly over several years. For tax years
beginning in 2015, a taxpayer could expense 60 percent and amortize 40 percent
over two years; for tax years beginning in 2016 and 2017, a taxpayer could
expense 40 percent and amortize 60 percent over three years; and for tax years
beginning in 2018, 2019, and 2020, a taxpayer could expense 20 percent and
amortize 80 percent over four years. When adding together, the percentage that
is permitted to be expensed in any particular year and the amortized percentages
from prior years that are also available as a deduction in that particular year,
the effect of this formula is to permit a deduction of at least 80 percent of
the amount that is deductible under current law (assuming constant levels of
annual investment). Alternatively, a taxpayer may elect to apply the five-year
amortization rule to all R&E expenditures immediately.
Considerations:
JCT
estimate: According to JCT, the provision would increase revenues by $192.6
billion over 2014-2023.
Sec. 3109. Repeal of deductions for soil and water conservation expenditures and endangered species recovery expenditures.
Current
law: Under current law, a taxpayer engaged in the business of farming may
deduct immediately, rather than recover over time through annual depreciation
deductions, costs paid or incurred during the tax year for the purpose of soil
or water conservation in respect of land used in farming, for the prevention of
erosion of land used in farming, or for endangered species recovery. Such
expenditures are allowed as a deduction, not to exceed 25 percent of the gross
income derived from farming during the tax year, with any excess amount carried
over to a succeeding year subject to the same percentage limitations.
Provision:
Under the provision, the special deduction for soil and water conservation and
for the prevention of erosion in land used in farming and endangered species
recovery would be repealed. Accordingly, such costs would be capitalized in the
basis of the underlying property. The provision would be effective for amounts
paid or incurred after 2014.
JCT
estimate: According to JCT, the provision would increase revenues by $0.8
billion over 2014-2023.
Sec. 3110. Amortization of certain advertising expenses.
Current
law: Under current law, a deduction is allowed for ordinary and necessary
expenses paid or incurred in carrying on any trade or business. However,
expenditures that create a long-term benefit generally must be capitalized and
recovered through depreciation or amortization, rather than deducted currently.
Although advertising expenditures are not addressed specifically in the Code,
the IRS generally allows taxpayers to treat advertising expenditures as an
ordinary and necessary business expense. In addition, a special regulatory
exception applies to amounts paid to develop a package design. This includes the
design of shapes, colors, words, pictures, lettering, and other elements on a
given product package or the design of a container to hold a given product. Even
though such design cost may have a useful life beyond the current tax year,
current regulations permit taxpayers to deduct such costs in the year
incurred.
Provision:
Under the provision, 50 percent of certain advertising expenses would be
currently deductible and 50 percent would be amortized ratably over a ten-year
period. This rule would phase in for tax years beginning before 2018 as follows:
for tax years beginning in 2015, 80 percent of advertising costs would be
deductible and 20 percent amortized; in 2016, 70 percent of advertising costs
would be deductible and 30 percent amortized; and in 2017, 60 percent of
advertising costs would be deductible and 40 percent amortized. The provision
would also permit taxpayers to expense the first $1,000,000 of advertising
expenditures. However, the $1,000,000 would be reduced to the extent a
taxpayer's advertising costs exceed $1,500,000, and completely phased out once
advertising costs exceed $2,000,000. All of these thresholds would be adjusted
for inflation.
Advertising
expenses would include any amount paid or incurred for development, production,
or placement (including any form of transmission, broadcast, publication,
display, or distribution) of any communication to the general public intended to
promote the taxpayer's trade or business (including any service, facility, or
product provided pursuant to such trade or business). In addition, advertising
expenses would include wages paid to employees primarily engaged in activities
related to advertising and the direct supervision of employees engaged in such
activities. Advertising expenses, however, would not include: depreciable
property, amortizable section 197 intangibles, discounts, certain communications
on the taxpayer's property, the creation of logos (and trade names), marketing
research, business meals, and qualified sponsorship payments.
Under the
provision, no deduction of unamortized expenses would be allowed if any property
with respect to which amortizable advertising expenses are paid or incurred is
retired or abandoned during the 10-year amortization period.
Under the
provision, the regulatory exception permitting the immediate deduction of
packaging-design costs would be repealed, and such costs would be capitalized
into the cost of producing the packaging and recovered as the packaging (and
products the packaging contains) are sold.
The
provision would be effective for amounts paid or incurred in tax years beginning
after 2014.
Considerations:
JCT
estimate: According to JCT, the provision would increase revenues by $169.0
billion over 2014-2023.
Sec. 3111. Expensing certain depreciable business assets for small business.
Current
law: Under current law, a taxpayer is allowed to recover, through annual
depreciation deductions, the cost of certain property used in a trade or
business or for the production of income. Under Code section 179, a taxpayer may
deduct immediately (“expense”) the cost of investments in property, equipment,
and computer software rather than depreciating such costs over the recovery
period of such property under the Code. For 2008 and 2009, taxpayers could
expense up to $250,000 of qualifying property, reduced proportionately to the
extent that the taxpayer placed in service more than $800,000 of qualifying
property. From 2010 through 2013, the expensing limitation was $500,000 and
phase-out threshold was $2 million. For tax years after 2013, the expensing
limitation under Code section 179 drops to $25,000, and the phase-out begins
once investments exceed $200,000. Computer software and certain types of real
property (qualifying leasehold improvements, investments in restaurant property,
and improvements to retail property) were eligible for expensing if placed in
service before 2014. However, the amount of real property that could be expensed
was limited to $250,000. Investments in air conditioning and heating units do
not qualify for expensing.
Provision:
Under the provision, Code section 179 expensing would be made permanent at the
2008-2009 levels. Taxpayers would be able to expense up to $250,000 of
investments in new equipment and property per year, with the deduction phased
out for investments exceeding $800,000 (with both amounts indexed for
inflation). The provision would also would also restore and make permanent rules
allowing computer software and certain investments in real property to qualify
for section 179 expensing. In addition, the provision would allow investments in
air conditioning and heating units to qualify for section 179 expensing. The
provision would be effective for tax years beginning after 2013.
Considerations:
JCT
estimate: According to JCT, the provision would reduce revenues by $54.9
billion over 2014-2023.
Sec. 3112. Repeal of election to expense certain refineries.
Current
law: Under current law, a taxpayer could elect to expense 50 percent of the
cost of any qualified property used for processing liquid fuel from crude oil or
qualified fuels prior to 2014. The remaining 50 percent was recovered under
normal depreciation rules. Qualified refinery property included assets located
in the United States and used in the refining of liquid fuels. The expensing
election expired for property placed in service after 2013.
Provision:
Under the provision, the deduction would be repealed. The provision would be
effective for property placed in service after 2013.
JCT
estimate: According to JCT, the provision would have no revenue effect over
2014-2023.
Sec. 3113. Repeal of deduction for energy efficient commercial buildings.
Current
law: Under current law, a taxpayer could claim a deduction with respect to
certain energy-efficient commercial building property expenditures incurred
prior to 2014. The deduction was limited to an amount equal to $1.80 per square
foot of the property for which such expenditures were made. The deduction was
allowed in the year in which the property was placed in service. The deduction
expired at the end of 2013.
Provision:
Under the provision, the deduction would be repealed. The provision would be
effective for property placed in service after 2013.
JCT
estimate: According to JCT, the provision would have no revenue effect over
2014-2023.
Sec. 3114. Repeal of election to expense advanced mine safety equipment.
Current
law: Under current law, a taxpayer could deduct immediately, rather than
recover through annual depreciation deductions, 50 percent of the cost of any
qualified advanced mine safety equipment property that was placed in service
before 2014. The deduction expired at the end of 2013.
Provision:
Under the provision, the special rule for immediately deducting 50 percent of
the cost of advanced mine safety equipment would be repealed. The provision
would be effective for property placed in service after 2013.
JCT
estimate: According to JCT, the provision would have no revenue effect over
2014-2023.
Sec. 3115. Repeal of deduction for expenditures by farmers for fertilizer, etc.
Current
law: Under current law, a taxpayer engaged in the business of farming may
elect to deduct immediately expenditures for fertilizer, lime, ground limestone,
marl, or other materials to enrich, neutralize, or condition land used in
farming.
Provision:
Under the provision, the special rule for deducting expenditures for fertilizer
and other farming-related materials would be repealed. The provision would be
effective for expenses paid or incurred in tax years beginning after 2014.
JCT
estimate: According to JCT, the provision would increase revenues by $3.4
billion over 2014-2023.
Sec. 3116. Repeal of special treatment of certain qualified film and television productions.
Current
law: Under current law, a taxpayer could elect to deduct immediately the
cost of a qualifying film and television production (up to a maximum deduction
of $15 million), commencing prior to 2014, rather than capitalizing and
recovering the costs through depreciation deductions generally in relation to
the forecasted income from the production. The threshold was increased to $20
million if a significant amount of the production expenditures were incurred in
certain low-income, distressed or isolated areas in the United States.
Provision:
Under the provision, the special rule allowing an immediate deduction of
qualifying film and television production costs would be repealed. The provision
would be effective for productions commencing after 2013.
JCT
estimate: According to JCT, the provision would have no revenue effect over
2014-2023.
Sec. 3117. Repeal of special rules for recoveries of damages of antitrust violations, etc.
Current
law: Under current law, a taxpayer who recovers damages from certain
antitrust violations, patent infringements, or breaches of contract or fiduciary
duty and includes the damages in income, may claim a special deduction intended
to offset any losses relating to such antitrust violation, etc. that did not
result in a tax benefit to the taxpayer. This rule, enacted in 1969, addressed
cases in which a taxpayer did not have sufficient income to offset the losses
resulting from the antitrust violation in the year the loss occurred or could
not carryover such losses to the year in which the litigation damages were
recovered due to the limitations on net operating loss carryovers (NOLs), which
varied between five and seven years until 1981. Under current law, NOLs may be
carried forward for 20 years.
Provision:
Under the provision, the special deduction for antitrust violations would be
repealed. The provision would be effective for tax years beginning after
2014.
JCT
estimate: According to JCT, the provision would increase revenues by less
than $50 million over 2014-2023.
Sec. 3118. Treatment of reforestation expenditures.
Current
law: Under current law, costs incurred to improve property used in a trade
or business generally must be capitalized and recovered through depreciation
deductions over the useful life of the property. A taxpayer, however, may elect
to amortize reforestation expenditures over 84 months (i.e., seven years). In
addition, a taxpayer may also elect to deduct up to $10,000 of certain
reforestation expenditures that otherwise would be capitalized. To the extent
that reforestation expenditures exceed the $10,000 limit, a taxpayer may elect
to amortize the remaining expenditures over 84 months. The special rule applies
to property in the United States that generally contains any type of trees in
significant commercial quantities and that is held by the taxpayer for planting,
cultivating, caring for and cutting of trees for sale or use in the commercial
production of timber products.
Provision:
Under the provision, the election to deduct up to $10,000 for reforestation
expenditures would be repealed. For purposes of the 84-month amortization
election, the provision would limit the definition of qualifying timber property
to U.S. property that (1) contains evergreen trees in commercial quantities that
are reasonably expected to be cut down after they are more than six years old,
and (2) is held for the planting, cultivating, caring for, and cutting of such
trees for ornamental purposes. The provision would be effective for expenditures
paid or incurred in tax years beginning after 2014.
JCT
estimate: According to JCT, the provision would increase revenues by $1.4
billion over 2014-2023.
Sec. 3119. 20-year amortization of goodwill and certain other intangibles.
Current
law: Under current law, when a taxpayer acquires intangible assets held in
connection with a trade or business, any value properly attributable to such
intangible assets is amortizable on a straight-line basis over 15 years. For
these purposes, intangible assets generally include: goodwill; going-concern
value; workforce in place; business books and records; any patent, copyright,
formula, process, design, pattern, know-how, or similar item; any franchise,
trademark or trade name; customer- and supplier-based intangibles; any license,
permit, or other rights granted by governmental units; and any other similar
item. Certain assets are excluded from the rule, such as mortgage servicing
rights, which are amortizable over nine years.
Provision:
Under the provision, the amortization period for acquired intangible assets
would be extended to 20 years. The provision also would treat mortgage servicing
rights as intangible assets subject to amortization over 20 years. The provision
would be effective for property acquired after 2014.
JCT
estimate: According to JCT, the provision would increase revenues by $13.0
billion over 2014-2023.
Sec. 3120. Treatment of environmental remediation costs.
Current
law: Under current law, taxpayers generally must capitalize amounts paid or
incurred for permanent improvements or betterments made to increase the value of
any property used in carrying on any trade or business. Thus, environmental
remediation costs relating to the abatement or control of hazardous substances
at a qualified contaminated site are capitalized into the cost of the land and
recovered only when the land is sold. Prior to 2012, taxpayers could elect to
treat environmental expenditures as deductible in the year paid.
Provision:
Under the provision, environmental remediation costs would be recovered ratably
over 40 years beginning with the midpoint of the tax year in which the
expenditures are paid or incurred. The provision would be effective for
expenditures paid or incurred after 2014.
JCT
estimate: According to JCT, the provision would reduce revenues by less than
$50 million over 2014-2023.
Sec. 3121. Repeal of expensing of qualified disaster expenses.
Current
law: Under current law, taxpayers generally must capitalize amounts paid or
incurred to acquire property or for permanent improvements or betterments made
to increase the value of any property used in carrying on any trade or business.
A special rule permitted taxpayers to deduct qualified disaster expenses in 2008
and 2009 relating to Hurricane Katrina and the Gulf Opportunity Zone.
Provision:
Under the provision, the special rule for expensing certain disaster expenses
would be repealed as obsolete. The provision would be effective for amounts paid
or incurred after 2014.
JCT
estimate: According to JCT, the provision would have no revenue effect over
2014-2023.
Sec. 3122. Phaseout and repeal of deduction for income attributable to domestic production activities.
Current
law: Under current law, taxpayers may claim a deduction equal to 9 percent
(6 percent in the case of certain oil and gas activities) of the lesser of the
taxpayer's qualified production activities income or the taxpayer's taxable
income for the tax year. The deduction is limited to 50 percent of the W-2 wages
paid by the taxpayer during the calendar year. Qualified production activities
income is equal to domestic production gross receipts less the cost of goods
sold and expenses properly allocable to such receipts. Qualifying receipts are
derived from property that was manufactured, produced, grown, or extracted
within the United States; qualified film productions; production of electricity,
natural gas, or potable water; construction activities performed in the United
States; and certain engineering or architectural services. Qualifying receipts
do not include gross receipts derived from the sale of food or beverages
prepared at a retail establishment; the transmission or distribution of
electricity, gas, and potable water; or the disposition of land.
Provision:
Under the provision, the deduction for domestic production activities would be
phased out, with the deduction reduced to 6 percent for tax years beginning in
2015 and 3 percent for tax years beginning in 2016. The deduction would be
repealed for tax years beginning after 2016.
JCT
estimate: According to JCT, the provision would increase revenues by $115.8
billion over 2014-2023.
Sec. 3123. Unification of deduction for organizational expenditures.
Current
law: Under current law, new businesses may deduct up to $5,000 of start-up
expenses (i.e., costs incurred prior to the commencement of the business'
operation). The deduction phases out to the extent that start-up expenses exceed
$50,000. Start-up expenses that do not qualify for the deduction may be
amortized over 15 years. Partnerships and C corporations also may deduct up to
$5,000 of organizational expenses (i.e., expenses relating to the commencement
of the business). The additional deduction phases out to the extent
organizational expenses exceed $50,000, with excess expenses amortized over a
15-year period.
Provision:
Under the provision, the various existing provisions for start-up and
organizational expenses would be combined into a single provision applicable to
all businesses. The provision would allow a taxpayer to deduct up to $10,000 in
start-up and organizational costs, with a phase-out beginning at $60,000. The
additional deduction for organizational expenses incurred by a partnership or C
corporation would be repealed. Expenses above the new increased limit would
continue to be deductible over the 15-year period following the start of the
business. The provision would be effective for expenses paid or incurred in tax
years beginning after 2014.
JCT
estimate: According to JCT, the provision would reduce revenues by $0.6
billion over 2014-2023.
Sec. 3124. Prevention of arbitrage of deductible interest expense and tax-exempt interest income.
Current
law: Under current law, taxpayers may not deduct interest on indebtedness
incurred to purchase or carry obligations if the interest income from the
obligations is exempt from tax (tax-exempt obligations). The rule is intended to
prevent taxpayers from engaging in tax arbitrage by deducting interest on
indebtedness used to purchase tax-exempt obligations. There are two methods for
determining the amount of the disallowance: The first method, which applies to
all taxpayers other than financial institutions or dealers in tax-exempt
obligations, asks whether a taxpayer's borrowing can be traced to its holding of
tax-exempt obligations and disallows an interest deduction for that portion used
to purchase the tax-exempt obligations. The second method, which applies to
financial institutions and dealers in exempt obligations, disallows interest
deductions based on the percentage of the taxpayer's assets comprised of
tax-exempt obligations. Under the second method, a special rule excludes certain
qualified small issuer tax-exempt obligations from the pro rata disallowance
rule; instead, 20 percent of the interest allocable to such obligations is
disallowed.
Under
current law, individuals may not deduct investment interest in excess of net
investment income. Investment interest generally is the interest paid or accrued
on indebtedness with respect to property held for investment, excluding
home-mortgage interest. Property considered held for investment currently does
not include property that generates tax-exempt interest. Disallowed investment
interest deductions may be carried over to the succeeding tax year.
Provision:
Under the provision, C corporations, including financial institutions and
dealers in tax-exempt obligations, would be required to use the same
interest-disallowance method. Thus, the interest deduction of any taxpayer would
be disallowed based on the percentage of the taxpayer's assets comprised of
tax-exempt obligations. The special rule under present law for qualified small
issuer tax-exempt obligations also would be repealed.
The
provision also would permanently disallow the investment-interest deduction of a
taxpayer (other than a corporation or financial institution) by the amount of
tax-exempt interest received. Any remaining interest deduction would still be
limited to the taxpayer's net investment income.
The
provision relating to the interest-disallowance method would be effective for
tax years ending after and obligations issued after February 26, 2014. The
provision relating to the investment-interest deduction would be effective for
tax years beginning after 2014.
JCT
estimate: According to JCT, the provision would increase revenues by $1.6
billion over 2014-2023.
Sec. 3125. Prevention of transfer of certain losses from tax indifferent parties.
Current
law: Under current law, a deduction is generally disallowed for a loss on
the sale or exchange of property to certain related parties or controlled
partnerships. If a loss has been disallowed in such a case, the transferee
generally may reduce any gain later recognized on a disposition of the asset by
the amount of loss disallowed to the transferor. In effect, this rule has the
effect of shifting the benefit of the loss from the transferor to the
transferee. Special rules apply in the case of transfers of property within a
controlled group of businesses.
Provision:
Under the provision, the related-party loss rules would be modified to prevent
losses from being shifted from a tax-indifferent party (e.g., a foreign person
not subject to U.S. tax) to another party in whose hands any gain or loss with
respect to the property would be subject to U.S. tax. The provision would be
effective for sales and exchanges after 2014.
JCT
estimate: According to JCT, the provision would increase revenues by $0.7
billion over 2014-2023.
Sec. 3126. Entertainment, etc. expenses.
Current
law: Under current law, no deduction is allowed for expenses relating to
entertainment, amusement or recreation activities, or facilities (including
membership dues with respect to such activities or facilities), unless the
taxpayer establishes that the item was directly related to the active conduct of
the taxpayer's trade or business, in which case the taxpayer may deduct up to 50
percent of expenses relating to meals and entertainment. An item is considered
directly related if it is associated with a substantial and bona fide business
discussion.
A
taxpayer also may deduct the cost of certain fringe benefits provided to
employees (e.g., employee discounts, working condition and transportation fringe
benefits), even though such benefits are excluded from the employee's income
under Code section 132. Additionally, a taxpayer may deduct expenses for goods,
services, and facilities to the extent that the expenses are reported by the
taxpayer as compensation and wages to an employee (or includible in gross income
of a recipient who is not an employee).
A
taxpayer may deduct certain reimbursed expenses, including reimbursement
arrangements in which an employer reimburses the expenses incurred by employees
of a subcontractor, provided such expenses are properly substantiated and not
treated as income to the employee.
Provision:
Under the provision, no deduction would be allowed for entertainment, amusement
or recreation activities, facilities or membership dues relating to such
activities or other social purposes. In addition, no deduction would be allowed
for transportation fringe benefits or for amenities provided to an employee that
are primarily personal in nature and that involve property or services not
directly related to the employer's trade or business, except to the extent that
such benefits are treated as taxable compensation to an employee (or includible
in gross income of a recipient who is not an employee). The 50-percent
limitation under current law also would apply only to expenses for food or
beverages and to qualifying business meals under the provision, with no
deduction allowed for other entertainment expenses. Furthermore, no deduction
would be allowed for reimbursed entertainment expenses paid as part of a
reimbursement arrangement that involves a tax-indifferent party such as a
foreign person or an entity exempt from tax. The provision would be effective
for amounts paid or incurred after 2014.
Considerations:
JCT
estimate: According to JCT, the provision would increase revenues by $14.7
billion over 2014-2023.
Sec. 3127. Repeal of limitation on corporate acquisition indebtedness.
Current
law: Under current law, a corporation's interest deduction may be limited if
it issues debt as consideration for the acquisition of stock in another
corporation or for the acquisition of assets of another corporation. However,
there are several exceptions to this general rule.
Provision:
Under the provision, the interest-limitation rule for debt issued with respect
to corporate acquisitions would be repealed. The provision would be effective
for interest paid or incurred with respect to indebtedness incurred after
2014.
JCT
estimate: According to JCT, the provision would reduce revenues by $0.1
billion over 2014-2023.
Sec. 3128. Denial of deductions and credits for expenditures in illegal businesses.
Current
law: Under current law, no deduction or credit is allowed for an amount paid
or incurred in carrying on a trade or business if the activities of the business
consist of trafficking in controlled substances that are prohibited by Federal
law or the State law in which the business is conducted. Current law, however,
does not generally deny deductions or credits to illegal businesses, generally,
however.
Provision:
Under the provision, the rule denying deductions and credits would be expanded
to include any trade or business if carrying out such business is a felony under
Federal law or the law of any State in which the business is conducted. The
provision would be effective for amounts paid or incurred after the date of
enactment in tax years ending after the date of enactment.
JCT
estimate: According to JCT, the provision would increase revenues by less
than $50 million over 2014-2023.
Sec. 3129. Limitation on deduction for FDIC premiums.
Current
law: Under current law, amounts paid by insured depository institutions
pursuant to an assessment by the Federal Deposit Insurance Corporation (FDIC) to
support the Deposit Insurance Fund (DIF) are currently deductible as a trade or
business expense.
Provision:
Under the provision, a percentage of such assessments would be non-deductible
for institutions with total consolidated assets in excess of $10 billion. The
percentage of non-deductible assessments would be equal to the ratio that total
consolidated assets in excess of $10 billion bears to $40 billion, so that
assessments would be completely non-deductible for institutions with total
consolidated assets in excess of $50 billion. The provision would be effective
for tax years beginning after 2014.
Consideration:
The provision corrects for the fact that, when the FDIC determines the amount of
assessments that are necessary to maintain an adequate balance in the DIF, it
does so on a pre-tax basis and does not take into account the deductibility of
the premium payments. These deductions diminish the General Fund and effectively
result in a General Fund transfer to the DIF.
JCT
estimate: According to JCT, the provision would increase revenues by $12.2
billion over 2014-2023.
Sec. 3130. Repeal of percentage depletion.
Current
law: Under current law, depletion, like depreciation, is a form of capital
cost recovery. In both cases, the taxpayer is allowed a deduction in recognition
of the fact that an asset is being expended to produce income. Under the
percentage-depletion method, a percentage, varying from 5 percent to 22 percent
(generally 15 percent for certain oil and gas properties), of the taxpayer's
gross income from a producing property is allowed as a deduction in each tax
year. The deduction generally may not exceed 50 percent (100 percent in the case
of certain oil and gas properties) of the net income from the property in any
year (the “net-income limitation”). Additionally, the percentage depletion
deduction for all oil and gas properties may not exceed 65 percent of the
taxpayer's overall taxable income for the year. Because percentage depletion,
unlike cost depletion, is computed without regard to the taxpayer's basis in the
property, cumulative depletion deductions may be greater than the amount
expended by the taxpayer to acquire or develop the property.
Provision:
Under the provision, the percentage-depletion method would be repealed. The
provision would be effective for tax years beginning after 2014.
Consideration:
All taxpayers are allowed a depreciation deduction for their assets that are
being used to produce income. However, only extractive industries are allowed to
recover more than their investment. The provision would create parity among all
businesses with respect to recovering costs.
JCT
estimate: According to JCT, the provision would increase revenues by $5.3
billion over 2014-2023.
Sec. 3131. Repeal of passive activity exception for working interests in oil and gas property.
Current
law: Under current law, the passive loss rules limit deductions and credits
from passive trade or business activities. Deductions attributable to passive
activities, to the extent they exceed income from passive activities, generally
may not be deducted against other income. Deductions and credits that are
suspended under these rules are carried forward and treated as deductions and
credits from passive activities in subsequent years. The suspended losses from a
passive activity are allowed in full when a taxpayer disposes of his entire
interest in the passive activity to an unrelated person. Pursuant to a special
rule, a passive activity does not include a working interest in any oil or gas
property that the taxpayer holds directly or through an entity that does not
limit the liability of the taxpayer with respect to the interest. Thus, losses
and credits from such interests may be used to offset other income of the
taxpayer without limitation under the passive loss rule. This special rule
applies without regard to whether the taxpayer materially participates in the
activity.
Provision:
Under the provision, the passive activity exception for working interests in oil
and gas property would be repealed. The provision would be effective for tax
years beginning after 2014.
Consideration:
Generally, individual taxpayers are not allowed to deduct passive losses against
their active or wage income under current law. However, a special rule exists
for taxpayers that have an interest in oil and gas property. The provision
creates parity among all taxpayers by removing this special exception.
JCT
estimate: According to JCT, the provision would increase revenues by $0.1
billion over 2014-2023.
Sec. 3132. Repeal of special rules for gain or loss on timber, coal, or domestic iron ore.
Current
law: Under current law, a taxpayer may elect to treat the cutting of timber
for sale or use in the taxpayer's business as a sale or exchange of such timber
cut during the year. A taxpayer that makes the election converts part of the
ordinary gain resulting from the sale of the timber into capital gain. To elect
this treatment, a taxpayer must have owned the timber or held a contract right
to cut the timber for more than a year. Under the election, gain equal to the
difference between the adjusted basis of the timber and the fair market value as
of the first day of the tax year in which it was cut is treated as capital gain.
Any additional gain attributable to the difference between the fair market value
of the timber on the first day of the tax year and the proceeds from the sale of
products produced from the timber cut (less ordinary and necessary business
expenses) is ordinary. A similar election is permitted for the disposal of
timber or coal or iron ore mined in the United States held for more than one
year before the disposal.
Provision:
Under the provision, gain from timber cut by an owner and used in its trade or
business, and from the disposal of timber or coal or domestic iron ore held for
more than one year before the disposal, would no longer be treated as capital
gain. Thus, all gain in these circumstances would be treated as ordinary income.
This provision generally would be effective for tax years beginning after
2014.
JCT
estimate: The revenue effect of the provision over 2014-2023 is included in
the JCT estimate provided for sections 1001-1003 of the discussion draft.
Sec. 3133. Repeal of like-kind exchanges.
Current
law: Under current law, an exchange of property, like a sale, generally is a
taxable transaction. A special rule provides that no gain or loss is recognized
to the extent that property held for productive use in the taxpayer's trade or
business, or property held for investment purposes, is exchanged for property of
a like-kind that also is held for productive use in a trade or business or for
investment. The taxpayer receives a basis in the new property equal to the
taxpayer's adjusted basis in the exchanged property. The like-kind exchange rule
applies to a wide range of property from real estate to tangible personal
property. It does not apply, however, to exchanges of stock in trade or other
property held primarily for sale, stocks, bonds, partnership interests,
certificates of trust or beneficial interest, other securities or evidences of
indebtedness or interest, or to certain exchanges involving livestock or
involving foreign property. A like-kind exchange does not require that the
properties be exchanged simultaneously - as long as the property to be received
in the exchange is identified within 45 days and ultimately received within 180
days of the sale of the originally property, gain is deferred.
Provision:
Under the provision, the special rule allowing deferral of gain on like-kind
exchanges would be repealed. The provision would be effective for transfers
after 2014. However, a like-kind exchange would be permitted if a written
binding contract is entered into on or before December 31, 2014, and the
exchange under the contract is completed before January 1, 2017.
Considerations:
JCT
estimate: According to JCT, the provision would increase revenues by $40.9
billion over 2014-2023.
Sec. 3134. Restriction on trade or business property treated as similar or related in service to involuntarily converted property in disaster areas.
Current
law: Under current law, gain or loss realized from the sale or other
disposition of property generally must be recognized at the time of the sale or
other disposition. However, a special exception applies to certain involuntary
or compulsory conversions of property (e.g., the property's destruction is due
to a natural disaster, theft, seizure, requisition or condemnation) and
generally permits such property to be replaced within two years with property
that is similar or related in service or use to the property converted without
recognizing taxable gain. If the trade or business is located in a Federally
declared disaster area, any tangible property held for productive use in the
trade or business is treated as similar or related in service or use. Thus, a
taxpayer could replace lost inventory with a building, and no gain would be
recognized.
Provision:
Under the provision, tangible business property that is involuntarily converted
in a Federally declared disaster area would qualify for deferral of gain
recognition only if the depreciation class life of replacement property does not
exceed that of the converted property. The provision would be effective for
disasters declared after 2014.
JCT
estimate: According to JCT, the provision would increase revenues by $0.1
billion over 2014-2023.
Sec. 3135. Repeal of rollover of publicly traded securities gain into specialized small business investment companies.
Current
law: Under current law, gain or loss generally is recognized on any sale,
exchange, or other disposition of property. A special rule permits an individual
or corporation to roll over without recognition of income any capital gain
realized on the sale of publicly traded securities when the proceeds are used to
purchase common stock or a partnership interest in a specialized small business
investment corporation (SSBIC) within 60 days of the sale of the securities.
SSBICs are a special type of investment fund licensed by the U.S. Small Business
Administration until 1996 when the program was repealed (though certain existing
SSBICs were grandfathered). The amount of gain that a taxpayer may roll over in
a tax year is limited to the lesser of (1) $50,000 ($250,000 for corporations)
or (2) $500,000 ($1,000,000 for corporations) reduced by the gain previously
excluded under the provision.
Provision:
Under the provision, the special rule permitting gains on publicly traded
securities to be rolled over to an SSBIC would be repealed. The provision would
be effective for sales after 2014.
JCT
estimate: According to JCT, the provision would increase revenues by $1.3
billion over 2014-2023.
Sec. 3136. Termination of special rules for gain from certain small business stock.
Current
law: Under current law, a taxpayer (other than a corporation) may exclude 50
percent of the gain from the sale of certain small business stock acquired at
original issue and held for at least five years. For stock acquired in 2009
through 2013, the exclusion is 75 percent or 100 percent, depending on the
timing of the acquisition. The amount of gain eligible for the exclusion with
respect to the stock of any qualifying domestic C corporation is the greater of
ten times the taxpayer's basis in the stock or $10 million (reduced by the
amount of gain eligible for exclusion in prior years). To qualify, the small
business must have aggregate gross assets of $50 million or less when the stock
is issued and meet certain active trade or business requirements. A taxpayer may
elect to roll over gain from the sale of qualified small business stock held
more than six months when other qualified small business stock is purchased
during the 60-day period beginning on the date of sale.
Provision:
Under the provision, the exclusion of gain from the sale of certain small
business stock would be repealed. The provision would be effective for gains
with respect to stock issued after the date of enactment. For rollover of gains,
the provision would not apply to sales of qualifying small business stock
acquired before the date of enactment.
Considerations:
JCT
estimate: According to JCT, the provision would increase revenues by $4.8
billion over 2014-2023.
Sec. 3137. Certain self-created property not treated as a capital asset.
Current
law: Under current law, a self-created patent, invention, model or design
(whether or not patented), or secret formula or process is treated as a capital
asset. However, the following self-created property is not treated as a capital
asset: copyrights; literary, musical or artistic compositions; and letters or
memoranda. Any gain or loss recognized as a result of the sale, exchange, or
other disposition of such property is generally ordinary in character. The
creator of musical compositions or copyrights in musical works, however, may
elect to treat such property as a capital asset.
Provision:
Under the provision, gain or loss from the disposition of a self-created patent,
invention, model or design (whether or not patented), or secret formula or
process would be ordinary in character. This would be consistent with the
treatment of copyrights under current law. In addition, the election to treat
musical works as a capital asset would be repealed. The provision would be
effective for sales, exchanges, and other dispositions of such property after
2014.
JCT
estimate: According to JCT, the provision would increase revenues by $0.6
billion over 2014-2023.
Sec. 3138. Repeal of special rule for sale or exchange of patents.
Current
law: Under current law, an individual who creates a patent and an unrelated
individual who acquires a patent from its creator prior to the actual commercial
use of the patent may treat any gains on the transfer of the patent as long-term
capital gains. To qualify, a transfer must be of substantially all the rights to
the patent (or an undivided interest therein) and cannot be by gift, inheritance
or devise.
Provision:
Under the provision, the special rule treating the transfer of a patent prior to
its commercial exploitation as long-term capital gain would be repealed. The
provision would be effective for transfers after 2014.
JCT
estimate: According to JCT, the provision would increase revenues by $0.2
billion over 2014-2023.
Sec. 3139. Depreciation recapture on gain from disposition of certain depreciable realty.
Current
law: Under current law, the disposition of most property used in a business
on which depreciation deductions were taken results in gain or loss that is
treated as ordinary or capital depending on whether there is a net gain or a net
loss. A net loss may be deducted fully against ordinary income. A net gain
generally results in long-term capital gain treatment, subject to the
depreciation recapture rules. The depreciation recapture rules require taxpayers
to recognize ordinary income in an amount equal to all or a portion of the gain
realized as a result of the basis reduction attributable to accumulated
depreciation deductions. For depreciable real property (e.g., buildings or
structural components of buildings) held for more than one year, gain is treated
as ordinary income, rather than capital gain to the extent that the accelerated
depreciation taken with respect to the property exceeds the amount of
depreciation that would have been taken had the straight-line method been used.
For depreciable real property held for one year or less, all of the depreciation
is recaptured. For corporations, the recaptured amount treated as ordinary
income generally is increased by an amount equal to 20 percent of all of the
depreciation deductions taken with respect to the asset.
Provision:
Under the provision, the recapture rules with respect to depreciable real
property are revised to limit the amount treated as ordinary income to the
lesser of: (1) the difference between the accelerated depreciation and
straight-line depreciation attributable to periods before 2015, plus the total
amount of depreciation attributable to periods after 2014, or (2) the excess of
the amount realized over the adjusted basis. The provision would be effective
for dispositions after 2014.
JCT
estimate: The revenue effect of the provision over 2014-2023 is included in
the JCT estimate provided for sections 1001-1003 of the discussion draft.
Sec. 3140. Common deduction conforming amendments.
Current
law: Not applicable.
Provision:
Under the provision, a number of conforming changes that are common to various
sections in Subtitle B of Title III of the discussion draft would be made. These
sections revise or repeal business-related exclusions and deductions. The
provision generally would be effective for tax years beginning after 2014.
JCT
estimate: According to JCT, the provision would have no revenue effect over
2014-2023.
Subtitle C - Reform of Business CreditsSec. 3201. Repeal of credit for alcohol, etc., used as fuel.
Current
law: Under current law, a taxpayer could claim per-gallon incentives
relating to alcohol (including ethanol) and cellulosic biofuels. The ethanol
credit expired at the end of 2011. For alcohol other than ethanol, the amount of
the credit was 60 cents per gallon, and for ethanol, the credit was 45 cents per
gallon, with an extra 10 cents per gallon available for small ethanol
producers.
The
cellulosic biofuel producer credit was a nonrefundable income tax credit for
each gallon of qualified cellulosic fuel produced during the tax year. The
amount of the credit per gallon is $1.01. The credit expired at the end of
2013.
Provision:
Under the provision, these fuel tax credits would be repealed. The provision
would be effective for fuels sold or used after 2013.
JCT
estimate: According to JCT, the provision would have no revenue effect over
2014-2023.
Sec. 3202. Repeal of credit for biodiesel and renewable diesel used as fuel.
Current
law: Under current law, the biodiesel fuels credit was the sum of three
credits: (1) the biodiesel fuel-mixture credit, (2) the biodiesel credit, and
(3) the small agri-biodiesel producer credit. Prior to 2014, a taxpayer could
claim a credit of $1.00 per gallon for producing a biodiesel fuel mixture,
biodiesel and renewable diesel. The agri-biodiesel credit was a
10-cents-per-gallon credit for up to 15 million gallons of agri-biodiesel
produced by small producers, defined generally as persons whose agri-biodiesel
production capacity did not exceed 60 million gallons per year. The credits
expired at the end of 2013.
Provision:
Under the provision, these fuel tax credits would be repealed. The provision
would be effective for fuels sold or used after 2013.
JCT
estimate: According to JCT, the provision would have no revenue effect over
2014-2023.
Sec. 3203. Research credit modified and made permanent.
Current
law: Under current law, a taxpayer could claim a credit for qualified,
U.S.-based research expenses prior to 2014. The research credit had three
components, and in general, the credit was available for incremental increases
in qualified research. First, a taxpayer could claim a credit equal to 20
percent of the amount by which the taxpayer's qualified research expenses for a
tax year exceeded its base amount for that year. An alternative simplified
research credit (ASC) could be claimed in lieu of the basic credit. The ASC was
equal to 14 percent of the qualified research expenses for the tax year that
exceeded 50 percent of the average qualified research expenses for the three tax
years preceding the tax year for which the credit was being determined. Under
the ASC, if a taxpayer did not have any qualified research expenses in any of
the three preceding tax years, the taxpayer could claim a research credit equal
to 6 percent of qualified expenses incurred in the current year.
Second, a
taxpayer also could claim a 20-percent credit for amounts paid (including grants
or contributions) over a base amount to universities and certain non-profit
scientific research organizations for basic research. Third, a 20-percent credit
could be claimed for all expenses (without regard to a base amount) paid to an
energy-research consortium for research conducted for the taxpayer. The research
credit is not available for qualified expenses paid or incurred after 2013.
A
taxpayer's qualified research expenses included: (1) in-house expenses for wages
and supplies attributable to qualified research; (2) certain time-sharing costs
for computer use in qualified research; and (3) 65 percent (higher in certain
cases) of amounts paid or incurred to certain other entities for qualified
research conducted on the taxpayer's behalf (contract research expenses).
To be
eligible for the credit, qualified research must have been: (1) undertaken for
the purpose of discovering information that was technological in nature; (2) the
application of which was intended to be useful in the development of a new or
improved business component; and (3) substantially all the activities of which
constituted elements of a process of experimentation for the functional aspects,
performance, reliability, or quality of a business component. In general,
computer software developed by a taxpayer primarily for internal use was not
qualified research. However, computer software was qualified research if for use
in an activity that constituted qualified research, or in a production process
that met the requirements for qualified research.
In
addition, deductions otherwise allowed a taxpayer (for example for research and
development expenses under Code section 174) were reduced by the amount of the
taxpayer's research credit for the tax year. Alternatively, a taxpayer could
elect to claim a reduced research credit in lieu of reducing deductions
otherwise allowed.
Provision:
Under the provision, a modified research credit would be made permanent. The
research credit would equal: (1) 15 percent of the qualified research expenses
for the tax year that exceed 50 percent of the average qualified research
expenses for the three tax years preceding the tax year for which the credit is
determined (thus making the ASC permanent), plus (2) 15 percent of the basic
research payments for the tax year that exceed 50 percent of the average basic
research payments for the three tax years preceding the tax year for which the
credit is determined. The provision would retain the rule under the ASC that
allows a taxpayer to claim a reduced research credit if the taxpayer has no
qualified research expenses in any one of the three preceding tax years. The
general 20-percent credit would be repealed, as well as the 20-percent credit
for amounts paid for basic research and the 20-percent credit for amounts paid
to an energy research consortium.
Under the
provision, amounts paid for supplies or with respect to computer software would
no longer qualify as qualified research expenses. In addition, the special rule
allowing 75 percent of amounts paid to a qualified research consortium and 100
percent of amounts paid to eligible small businesses, universities, and Federal
laboratories to qualify as contract research expenses would be repealed (though
such amounts still would qualify as contract research expenses subject to the
65-percent inclusion rule).
In
addition, the provision would repeal the election to claim a reduced research
credit in lieu of reducing deductions otherwise allowed.
The
provision would be effective for tax years beginning after 2013, and for amounts
paid and incurred after 2013.
Considerations:
JCT
estimate: According to JCT, the provision would reduce revenues by $34.1
billion over 2014-2023.
Sec. 3204. Low-income housing tax credit.
Current
law: Under current law, owners of certain residential rental property may
claim a low-income housing tax credit (LIHTC) over a ten-year period for the
cost of rental housing occupied by qualifying low-income tenants. However,
rental housing must remain qualified low-income housing for a 15-year compliance
period, beginning with the first year of the credit period (even though the
credit period is only ten years). The amount of the credit for any tax year in
the credit period is the applicable percentage of the qualified basis of each
qualified low-income building. The applicable percentage is adjusted monthly by
the IRS so that the ten annual installments of the credit have a present value
of either 70 percent or 30 percent of the total qualified basis. With certain
exceptions, the qualified basis for any tax year equals the eligible basis of
the building dedicated to low-income housing, based generally on the number of
units or floor space of such units in the building.
In
general, buildings subject to the 70-percent rule should yield a 9-percent
credit, and buildings subject to the 30-percent rule should yield a 4-percent
credit, although the credit amounts depend on the applicable interest rate used
for discounting the building's basis for the particular tax year. A temporary
provision under current law provided an applicable percentage of 9 percent with
respect to the 70-percent rule for newly constructed non-Federally subsidized
buildings placed in service before 2014.
Housing
that qualifies for the 9-percent credit must be either newly constructed or
substantially rehabilitated, and may not be Federally subsidized (including
through tax-exempt bond financing). A new building generally is considered
Federally subsidized if it also receives tax-exempt bond financing. The
4-percent credit is available, in general, for Federally subsidized buildings
and existing housing.
To claim
the credit, the owner of a qualified building must receive a housing credit
allocation from the State or local housing credit agency. A State's available
credit allocation has four components: (1) the State's unused housing amount, if
any, from the prior calendar year; (2) the credit amount for the current year;
(3) any credits returned to the State during the calendar year from previous
allocations; and (4) the State's share, if any, of the national pool of unused
credits from other States that failed to use them. Only States that allocated
their entire credit authority for the preceding calendar year are eligible for a
share of the national pool. For calendar year 2013, each State's credit
authority was $2.25 per resident, with a minimum annual cap of $2,590,000 for
certain small population States. These amounts are indexed for inflation.
Certain buildings that also receive financing with proceeds of tax-exempt bonds
do not require an allocation to qualify for the LIHTC.
Generally,
buildings located in two types of high-cost areas - qualified census tracts and
difficult development areas - are eligible for an enhanced credit, under which
the applicable basis of the property is increased from 100 percent to 130
percent. In addition, a building designated by a State housing credit agency may
qualify if the enhanced credit is required for such building to be financially
feasible.
Property
subject to the credit generally must continue to be a low-income housing project
for a compliance period of 15 years, beginning on the first day of the first tax
year in which the credit is claimed. The penalty for any building failing to
remain qualified is the recapture of the accelerated portion of the credit, with
interest, for all prior years. Generally, a change in ownership of a building is
a recapture event, subject to an exception if it can reasonably be expected that
the building will continue to be operated as qualified low-income housing for
the remainder of the compliance period.
Current
law includes a number of other eligibility criteria for the LIHTC. While the
residential units in a qualified low-income housing project must be available
for use by the general public (e.g., the owner complies with certain housing
non-discrimination policies and does not restrict occupancy based on membership
in a social organization or employment by specific employers), a project may
impose occupancy restrictions or preferences that favor tenants: (1) with
special needs; (2) who are members of specified group under a Federal program or
State program or policy that supports housing for such a specified group; or (3)
who are involved in artistic and literary activities. Additionally, each State
must develop a plan for allocating credits, and certain selection criteria must
be considered when evaluating projects for credit allocations. The criteria are:
(1) project location; (2) housing needs characteristics; (3) project
characteristics (including whether the project uses existing housing as part of
a community revitalization plan); (4) sponsor characteristics; (5) tenant
populations with special needs; (6) tenant populations of individuals with
children; (7) projects intended for eventual tenant ownership; (8) the energy
efficiency of the project; and (9) the historic nature of the project. The State
allocation plan must give preference to housing projects that serve the
lowest-income tenants, that are obligated to serve qualified tenants for the
longest periods, and that are located in qualified census tracts and the
development of which contributes to a concerted community revitalization
plan.
Provision:
Under the provision, the LIHTC would be modified in several ways.
Allocation
of basis : Under the provision, State and local housing authorities would
allocate qualified basis, rather than credit amounts. The annual amount of
allocable basis for each State would be equal to $31.20 multiplied by the
State's population, with a minimum annual amount of $36,300,000. The annual
amount would continue to include unused basis allocations from the prior year
plus basis allocations returned to the State during the calendar year from
previous allocations. The national pool of unused credits, however, would be
eliminated.
Credit
period : Under the provision, the credit period would be extended from 10
years to 15 years to match the current 15-year compliance period. Because the
credit period would be aligned with the compliance period, the recapture rules
also would be repealed as no longer necessary to ensure that the building
continues to be a low-income housing project for the duration of the tax
benefit.
Credit
amount : Under the provision, the 4-percent credit would be repealed. The
9-percent credit for newly constructed property and substantial rehabilitations
would be retained. In addition, Federally funded grants would not be taken into
account in determining the eligible basis of a building for purposes of the
credit. As a result, the credit would apply to private funding of low-income
housing and not provide an additional subsidy for Federal funding of such
projects. The amount of the credit would continue to equal the qualified basis
in the qualified low-income building multiplied by the applicable percentage.
Under the provision, the IRS would determine the applicable percentage generally
for the month that the building is placed in service, which would be equal to
the percentage that would yield over a 15-year period a credit amount that would
have a present value equal to 70 percent of the qualified basis of the
building.
Other
changes : Under the provision, several other rules would be modified. First,
the increased basis rule for high-cost and difficult development areas would be
repealed. Second, the general-public-use requirement would be revised to
eliminate the special occupancy preference for members of specific groups under
certain Federal or State programs and the special preference for individuals
involved in artistic and literary activities. Instead, occupancy preferences
would only be permitted for individuals with special needs and for veterans.
Third, the provision would repeal the requirement that States include in their
low-income-housing selection criteria the energy efficiency of the project and
the historic nature of the project.
The
provision would be effective for State basis amounts and allocations of such
amounts determined for calendar years after 2014. A transition rule would
translate credit allocations prior to 2015 into equivalent amounts of eligible
basis for purposes of determining new allocations of basis after 2014.
Considerations:
JCT
estimate: According to JCT, the provision would increase revenues by $10.7
billion over 2014-2023.
Sec. 3205. Repeal of enhanced oil recovery credit.
Current
law: Under current law, taxpayers may claim a credit equal to 15 percent of
enhanced oil recovery (EOR) costs. The EOR credit is ratably reduced over a $6
phase-out range when the reference price for domestic crude oil exceeds $28 per
barrel (adjusted for inflation after 1991). The EOR credit currently is
phased-out based on the current price of a barrel of oil.
Provision:
Under the provision, the enhanced oil recovery credit would be repealed. The
provision would be effective on the date of enactment.
JCT
estimate: According to JCT, the provision would have no revenue effect over
2014-2023.
Sec. 3206. Phaseout and repeal of credit for electricity produced from certain renewable resources.
Current
law: Under current law, a taxpayer may claim a credit a credit (the
production tax credit or PTC) is allowed for the production of electricity from
qualified energy resources. Qualified energy resources are comprised of wind,
closed-loop biomass, open-loop biomass, geothermal energy, solar energy, small
irrigation power, municipal solid waste, qualified hydropower production, and
marine and hydrokinetic renewable energy. To be eligible for the PTC,
electricity produced from qualified energy resources at qualified facilities
must be sold by the taxpayer to an unrelated person. The base amount of the PTC
is 1.5 cents (indexed annually for inflation) per kilowatt-hour of electricity
produced. The amount of the credit is generally 2.3 cents per kilowatt-hour for
2013. A taxpayer generally may claim a credit every year during a 10-year period
for projects that begin construction before 2014.
Provision:
Under the provision, the inflation adjustment would be repealed, effective for
electricity and refined coal produced or sold after 2014. Therefore, taxpayers'
credit amount would revert to 1.5 cents per kilowatt-hour for the remaining
portion of the 10-year period. The entire production tax credit would be
repealed, effective for electricity and refined coal produced and sold after
2024.
Consideration:
Businesses in the wind industry have represented to the Committee that that the
industry could survive with a credit worth 60 percent of the current credit,
implying that the credit provides a windfall that does not serve the intended
policy.
JCT
estimate: According to JCT, the provision would increase revenues by $9.6
billion over 2014-2023.
Sec. 3207. Repeal of Indian employment credit.
Current
law: Under current law, a taxpayer could claim a credit equal to 20 percent
of qualifying wages and health insurance costs (up to $20,000, for a maximum
credit amount of $4,000) paid prior to 2014 to enrolled members of an Indian
tribe (or spouses) living on or near an Indian reservation for services
performed on a reservation. The credit was limited to employees earning wages of
$45,000 or less. The credit expired for tax years beginning after 2013.
Provision:
Under the provision, the Indian employment credit would be repealed. The
provision would be effective for tax years beginning after 2013.
JCT
estimate: According to JCT, the provision would have no revenue effect over
2014-2023.
Sec. 3208. Repeal of credit for portion of employer Social Security taxes paid with respect to employee cash tips.
Current
law: Under current law, an employer may claim an income tax credit equal to
its share of FICA taxes attributable to tips received from customers in
connection with the provision of food or beverages if tipping is customary. The
credit is available only to the extent such tips exceed the amount of tips that
the employer uses to meet the minimum wage requirements for the employee under
the Fair Labor Standards Act. An employer may not claim a deduction for any
amount taken into account in determining the credit.
Provision:
Under the provision, the tip credit would be repealed. The provision would be
effective for tips received for services performed after 2014.
JCT
estimate: According to JCT, the provision would increase revenues by $10.1
billion over 2014-2023.
Sec. 3209. Repeal of credit for clinical testing expenses for certain drugs for rare diseases or conditions.
Current
law: Under current law, a taxpayer may claim a credit equal to 50 percent of
qualified clinical testing expenses incurred in testing certain drugs for rare
diseases or conditions, often referred to as “orphan drugs.” Expenses taking
into account for purposes of the orphan drug credit do not qualify for the
general research credit.
Provision:
Under the provision, the tax credit for orphan drugs would be repealed. The
provision would be effective for amounts paid or incurred in tax years beginning
after 2014.
JCT
estimate: According to JCT, the provision would increase revenues by $9.1
billion over 2014-2023.
Sec. 3210. Repeal of credit for small employer pension plan startup costs.
Current
law: Under current law, a taxpayer may claim a credit to help offset the
start-up costs associated with a small employer pension plan. The credit is only
available for the first three years of the plan and is limited to the lesser of
$500 per year or 50 percent of the start-up costs for a qualified plan under
Code section 401(a), an annuity plan under Code section 403(a), a Simplified
Employee Pension (SEP) plan, or a SIMPLE retirement plan.
Provision:
Under the provision, the credit for small employer pension plan start-up costs
would be repealed. The provision would be effective for costs paid or incurred
after 2014 with respect to qualified employer plans first effective after such
date.
JCT
estimate: According to JCT, the provision would increase revenues by less
than $50 million over 2014-2023.
Sec. 3211. Repeal of employer-provided child care credit.
Current
law: Under current law, an employer may claim a credit equal to 25 percent
of qualified expenses for employee child care and 10 percent of qualified
expenses for child-care resource and referral services. The credit is limited to
$150,000 per tax year.
Provision:
Under the provision, the credit for employer-provided child care would be
repealed. The provision would be effective for tax years beginning after
2014.
JCT
estimate: According to JCT, the provision would increase revenues by $0.2
billion over 2014-2023.
Sec. 3212. Repeal of railroad track maintenance credit.
Current
law: Under current law, an eligible taxpayer could claim a credit equal to
50 percent of qualified railroad track maintenance expenditures paid or incurred
in a tax year prior to 2014. The credit generally was limited to $3,500
multiplied by the number of miles of railroad track owned or leased by the
eligible taxpayer as of the close of its tax year. The credit expired at the end
of 2013.
Provision:
Under the provision, the railroad track maintenance credit would be repealed.
The provision would be effective for tax years beginning after 2013.
JCT
estimate: According to JCT, the provision would have no revenue effect over
2014-2023.
Sec. 3213. Repeal of credit for production of low sulfur diesel fuel.
Current
law: Under current law, a small business refiner may claim, with respect to
expenses paid or incurred before 2010, a credit of 5 cents per gallon for each
gallon of low sulfur diesel fuel produced during the tax year. The total
production credit claimed by the taxpayer was limited to 25 percent of the
qualified costs incurred to come into compliance with the EPA diesel fuel
requirements. The credit for low sulfur diesel fuel expired at the end of
2009.
Provision:
Under the provision, the credit would be repealed. The provision would be
effective for expenses paid or incurred in tax years after 2014.
JCT
estimate: According to JCT, the provision would have no revenue effect over
2014-2023.
Sec. 3214. Repeal of credit for producing oil and gas from marginal wells.
Current
law: Under current law, producers may claim a $3-per-barrel credit (adjusted
for inflation) for the production of crude oil and a
50-cents-per-1,000-cubic-feet credit (also adjusted for inflation) for the
production of qualified natural gas. In both cases, the credit is available only
for domestic production. The credit is not available for production if the
reference price of oil exceeds $18 ($2 for natural gas). The credit is reduced
proportionately for reference prices between $15 and $18 ($1.67 and $2 for
natural gas). Currently, the credit is phased out completely based on the
current price of a barrel of oil.
Provision:
Under the provision, the credit would be repealed. The provision would be
effective for tax years after 2014.
JCT
estimate: According to JCT, the provision would have no revenue effect over
2014-2023.
Sec. 3215. Repeal of credit for production from advanced nuclear power facilities.
Current
law: Under current law, a taxpayer producing electricity at a qualifying
advanced nuclear power facility may claim a credit equal to 1.8 cents per
kilowatt-hour of electricity produced for the eight-year period starting when
the facility is placed in service.
Provision:
Under the provision, the credit would be repealed. The provision would be
effective for electricity produced and sold after 2014.
JCT
estimate: According to JCT, the provision would increase revenues by $0.6
billion over 2014-2023.
Sec. 3216. Repeal of credit for producing fuel from a nonconventional source.
Current
law: Under current law, a taxpayer producing coke and coke gas in the United
States at qualified facilities and sold to unrelated parties could claim a
credit equal to $3 (generally adjusted for inflation) per Btu oil barrel
equivalent. The credit for fuel from a non-conventional source expired at the
end of 2009.
Provision:
Under the provision, the credit would be repealed. The provision would be
effective for fuel produced and sold after 2013.
JCT
estimate: According to JCT, the provision would have no revenue effect over
2014-2023.
Sec. 3217. Repeal of new energy efficient home credit.
Current
law: Under current law, an eligible contractor could claim the new
energy-efficient home credit for the construction of a qualified new
energy-efficient home prior to 2014. The credit was equal to either $1,000 or
$2,000, depending on whether it met the 30-percent or 50-percent standard as
prescribed by the IRS to achieve either a 30-percent or 50-percent reduction in
heating and cooling energy consumption compared to a comparable dwelling
constructed in accordance with the standards of chapter 4 of the 2006
International Energy Conservation Code. The credit expired at the end of
2013.
Provision:
Under the provision, the credit would be repealed. The provision would be
effective for homes acquired after 2013.
JCT
estimate: According to JCT, the provision would have no revenue effect over
2014-2023.
Sec. 3218. Repeal of energy efficient appliance credit.
Current
law: Under current law, a taxpayer could claim a credit for the production
of certain energy-efficient dishwashers, clothes washers, and refrigerators
prior to 2014. The amount of the credit varied for each appliance depending on
when the appliance was manufactured and how much energy or water it saved. The
credit expired at the end of 2013.
Provision:
Under the provision, the credit would be repealed. The provision would be
effective for appliances produced after 2013.
JCT
estimate: According to JCT, the provision would have no revenue effect over
2014-2023.
Sec. 3219. Repeal of mine rescue team training credit.
Current
law: Under current law, a taxpayer could claim a credit with respect to
employees serving on a mine-rescue team prior to 2014. The credit was equal to
the lesser of 20 percent of the taxpayer's mine-rescue training program costs
(including the wages of the employee while attending the program) or $10,000.
The credit expired at the end of 2013.
Provision:
Under the provision, the mine rescue team training credit would be repealed. The
provision would be effective for tax years beginning after 2013.
JCT
estimate: According to JCT, the provision would have no revenue effect over
2014-2023.
Sec. 3220. Repeal of agricultural chemicals security credit.
Current
law: Under current law, a taxpayer could claim a credit equal to 30 percent
of certain chemical security expenditures incurred by qualifying agricultural
businesses prior to 2013. The credit was limited to $100,000 per facility,
reduced by the amount of credits claimed in the prior five years, and a
taxpayer's annual credit amount was limited to $2 million. The credit is not
available for expenses incurred after 2012.
Provision:
Under the provision, the agricultural chemicals security credit would be
repealed. The provision would be effective for amounts paid or incurred after
2012.
JCT
estimate: According to JCT, the provision would have no revenue effect over
2014-2023.
Sec. 3221. Repeal of credit for carbon dioxide sequestration.
Current
law: Under current law, a taxpayer may claim a credit of $20 per metric ton
for qualified carbon dioxide captured by the taxpayer at a qualified facility
and disposed of by such taxpayer in secure geological storage ($10 per metric
ton if used by such taxpayer as a tertiary injectant in a qualified enhanced oil
or natural gas recovery project). Both credit amounts are adjusted for inflation
after 2009.
Provision:
Under the provision, the carbon dioxide sequestration credit would be repealed.
The provision would be effective for credits determined for tax years beginning
after 2014.
JCT
estimate: According to JCT, the provision would increase revenues by $1.1
billion over 2014-2023.
Sec. 3222. Repeal of credit for employee health insurance expenses of small employers.
Current
law: Under current law, a qualified small business employer may claim a
credit for up to two years if the small business pays at least half of its
employees' health insurance premiums. For tax years 2010 to 2013, the maximum
credit is 35 percent of premiums paid by eligible small businesses and 25
percent of premiums paid by eligible tax-exempt organizations. Beginning in
2014, the maximum tax credit will increase to 50 percent of premiums paid by
eligible small business employers and 35 percent of premiums paid by eligible
tax-exempt organizations, but the credit will only be available for health
insurance coverage purchased through a State exchange. A qualified small
business employer generally is an employer with no more than 25 full-time
equivalent employees (FTEs) during the tax year, with annual full-time
equivalent wages averaging no more than $50,000 (indexed for inflation beginning
in 2014). The full amount of the credit is available only to an employer with 10
or fewer FTEs and whose employees have average annual full-time equivalent wages
of less than $25,000 (indexed for inflation beginning in 2014). Tax-exempt
organizations generally may apply the credit against the organization's payroll
tax liability.
Provision:
Under the provision, the credit for employee health insurance expenses of small
employers would be repealed. The provision would be effective for amounts paid
or incurred for tax years beginning after 2014.
Considerations:
JCT
estimate: According to JCT, the provision would increase revenues by $11.1
billion over 2014-2023 and would reduce outlays by $1.1 billion over
2014-2023.
Sec. 3223. Repeal of rehabilitation credit.
Current
law: Under current law, a taxpayer may claim a credit for expenses incurred
to rehabilitate old and/or historic buildings. A 20-percent credit is allowed
for qualified rehabilitation expenditures with respect to a certified historic
structure, while a 10-percent credit is allowed for qualified rehabilitation
expenditures with respect to a qualified rehabilitated building. To qualify for
the 10-percent credit, the rehabilitation expenditures during the 24-month
period selected by the taxpayer and ending within the tax year must exceed the
greater of the adjusted basis of the building (and its structural components) or
$5,000.
Provision:
Under the provision, the rehabilitation credit would be repealed. The provision
would be effective for amounts paid after 2014. Under a transition rule, the
credit would continue to apply to expenditures incurred through the end of 2016,
to rehabilitate a qualified rehabilitated building or a certified historic
structure acquired before 2015. However, for a qualified rehabilitated building,
the 24-month rehabilitation period for claiming the credit must also begin on or
before January 1, 2015.
JCT
estimate: According to JCT, the provision would increase revenues by $10.5
billion over 2014-2023.
Sec. 3224. Repeal of energy credit.
Current
law: Under current law, taxpayers may claim up to a 30-percent
nonrefundable, business energy credit for the cost of certain new equipment that
either (1) uses solar energy to generate electricity, to heat or cool a
structure, or to provide solar process heat, or (2) is used to produce,
distribute, or use energy derived from a geothermal deposit (but only, in the
case of electricity generated by geothermal power, up to the electric
transmission stage). Property used to generate energy for the purposes of
heating a swimming pool is not eligible solar energy property. The credit
expires at the end of 2016.
Provision:
Under the provision, the credit would be repealed. The provision is effective
for property placed in service after 2016.
JCT
estimate: According to JCT, the provision would have no revenue effect over
2014-2023.
Sec. 3225. Repeal of qualifying advanced coal project credit.
Current
law: Under current law, a taxpayer may claim an investment tax credit for
power generation projects that use integrated gasification combined cycle (IGCC)
or other advanced coal-based electricity generation technologies. Credits are
available only for projects certified by the Secretary of Treasury, in
consultation with the Secretary of Energy.
Provision:
Under the provision, the credit would be repealed. The provision would be
effective for allocations and reallocations after 2014.
JCT
estimate: According to JCT, the provision would increase revenues by $0.9
billion over 2014-2023.
Sec. 3226. Repeal of qualifying gasification project credit.
Current
law: Under current law, a taxpayer may claim an investment credit for
certain qualifying gasification projects. Only property that is part of a
qualifying gasification project and necessary for the gasification technology of
such project is eligible for the gasification credit. The maximum amount of
credits allocated under the program may not exceed $600 million.
Provision:
Under the provision, the credit would be repealed. The provision would be
effective for allocations and reallocations after 2014.
JCT
estimate: According to JCT, the provision would increase revenues by $0.3
billion over 2014-2023.
Sec. 3227. Repeal of qualifying advanced energy project credit.
Current
law: Under current law, a 30-percent credit is available for investments in
certain property used in a qualified advanced energy manufacturing project. A
qualified advanced energy project is a project that re-equips, expands, or
establishes a manufacturing facility for certain specified green energy uses.
Credits are available only for projects certified by the Secretary of Treasury,
in consultation with the Secretary of Energy. The maximum amount of credit
allocated under the program may not exceed $2.3 billion.
Provision:
Under the provision, the credit would be repealed. The provision would be
effective for allocations and reallocations after 2014.
JCT
estimate: According to JCT, the provision would increase revenues by $0.3
billion over 2014-2023.
Sec. 3228. Repeal of qualifying therapeutic discovery project credit.
Current
law: Under current law, a taxpayer could claim a credit equal to 50 percent
of its investments in qualifying therapeutic discovery projects in 2009 and
2010. Under the program, the IRS, in consultation with the Secretary of HHS,
awarded certifications for qualified investments.
Provision:
Under the provision, the credit for therapeutic discovery projects would be
repealed. The provision would be effective for allocations and reallocations
after 2014.
JCT
estimate: According to JCT, the provision would have no revenue effect over
2014-2023.
Sec. 3229. Repeal of work opportunity tax credit.
Current
law: Under current law, an employer could claim the work opportunity tax
credit if it hired individuals from one or more of nine targeted groups prior to
2014. An employer calculated the credit based on the amount of qualified wages
paid to the employee. Generally, qualified wages consisted of wages attributable
to services rendered by a member of a targeted group during the one-year period
beginning with the day the individual began work for the employer. The credit is
not available for wages paid or incurred after 2013.
Provision:
Under the provision, the work opportunity tax credit would be repealed. The
provision would be effective for wages paid or incurred to individuals who begin
work after 2013.
Consideration:
Under the now-expired WOTC, it often has not been possible for an employer to
determine whether an individual is eligible for the credit until well after that
individual has been hired and certified by the appropriate State agencies. This
fact calls into serious question whether the WOTC encourages the hiring of
individuals from the favored groups. Nevertheless, the WOTC has been shown to
result in significant compliance costs for employers.
JCT
estimate: According to JCT, the provision would have no revenue effect over
2014-2023.
Sec. 3230. Repeal of deduction for certain unused business credits.
Current
law: Under current law, a taxpayer may carry unused business credits may be
carried back one year and carried forward 20 years. However, a taxpayer
generally may deduct unused credits after the end of the carryforward period or
when a business ceases to exist.
Provision:
Under the provision, the deduction for general business credits unused after 20
years would be repealed. The provision would be effective for tax years
beginning after 2014.
JCT
estimate: According to JCT, the provision would increase revenues by $0.1
billion over 2014-2023.
Subtitle D - Accounting MethodsSec. 3301. Limitation on use of cash method of accounting.
Current
law: Under current law, taxpayers using the cash method of accounting (“cash
method”) generally recognize income when actually or constructively received and
expenses when paid. Taxpayers using an accrual method of accounting (“accrual
method”) generally accrue income when all the events have occurred that fix the
right to receive the income and the amount of the income can be determined with
reasonable accuracy. Taxpayers using an accrual method generally may not deduct
expenses before all events have occurred that fix the obligation to pay the
liability, the amount of the liability can be determined with reasonable
accuracy, and economic performance has occurred.
Current
law includes an array of rules for determining whether a taxpayer may use the
cash method, with different kinds of businesses subject to different sets of
rules. For example, a C corporation or a partnership that has a C corporation as
a partner generally may use the cash method only if its average annual gross
receipts are $5 million or less. A corporation or a partnership with a corporate
partner engaged in farming generally may only use a cash method of accounting if
its average annual gross receipts are $1 million or less ($25 million or less
for family farm corporations). Sole proprietors and qualified personal service
corporations (i.e., corporations that primarily perform services in the fields
of health, law, engineering, architecture, accounting, actuarial science,
performing arts, or consulting, and that are owned by individuals performing
such services) are allowed to use the cash method without regard to their
average annual gross receipts. Additionally, a business generally must use an
accrual method of accounting if it has inventory.
Provision:
Under the provision, businesses with average annual gross receipts of $10
million or less may use the cash method of accounting; whereas businesses with
more than $10 million would be required to use accrual accounting. The provision
would not apply to farming businesses, which would continue to be subject to
current-law accounting rules. Sole proprietors also would continue to be able to
use the cash method regardless of the level of gross receipts. The provision
would be effective for tax years beginning after 2014. A taxpayer generally
would be permitted to include any positive adjustments to income resulting from
the provision over a four-year period beginning with its first tax year
beginning after 2018 in the following amounts: 10 percent included in the first
year (2019); 15 percent in the second year (2020); 25 percent in the third year
(2021); and 50 percent in the fourth year (2022). At the election of the
taxpayer, the four-year inclusion of the adjustment could begin prior to
2019.
Considerations:
JCT
estimate: According to JCT, the provisions would increase revenues by $23.6
billion over 2014-2023.
Sec. 3302. Rules for determining whether taxpayer has adopted a method of accounting.
Current
law: Under current law, a taxpayer's method of accounting used to compute
taxable income must clearly reflect income. A taxpayer generally must secure the
consent of the IRS Commissioner before changing a method of accounting for
Federal income tax purposes. Current law does not provide rules for determining
whether a taxpayer has adopted a method of accounting. The IRS takes the
position that if a taxpayer treats an item properly in the first return that
reflects the item, the taxpayer has adopted a method of accounting. Similarly,
under IRS guidance, when a taxpayer treats an item in the same erroneous manner
on two consecutive returns, a taxpayer also has adopted a method of accounting
(and any change would require the consent of the Commissioner).
Provision:
Under the provision, the IRS guidance with respect to determining whether a
taxpayer has adopted a method of accounting would be codified. The provision
would be effective for tax years beginning after 2014.
JCT
estimate: According to JCT, the provision would have negligible revenue
effect over 2014-2023.
Sec. 3303. Certain special rules for taxable year of inclusion.
Current
law: Under current law, a taxpayer is required to include any item of income
in the taxpayer's gross income in the year in which the income is received,
unless the taxpayer's method of accounting used to compute taxable income
permits inclusion in a different period. There are, however, numerous exceptions
to this rule. For example, cash and accrual method taxpayers that receive
advance payments for certain goods or services may elect to defer inclusion of
the income for up to two years. Cash method taxpayers who receive insurance
proceeds or Federal disaster payments as a result of destruction or damage to
crops may elect to defer inclusion of such proceeds in income until the
following tax year. Similarly, a cash method taxpayer may defer until the
following tax year income resulting from the sale or exchange of livestock if
the taxpayer demonstrates that such sales would not have occurred under his
normal business practices if it were not for drought, flood, or other
weather-related conditions occurring in a Federally declared disaster area.
Another special exception applies to utility companies required to sell electric
transmission property to an independent transmission company prior to January 1,
2008 (January 1, 2014, in the case of a qualified electric utility) to implement
certain Federal and State electric-restructuring policy. Under the exception,
the utility companies that use the accrual method of accounting could elect to
recognize gain from the sale or exchange of qualifying transmission property
ratably over an eight-year period if the proceeds are used to purchase approved
reinvestment property.
Provision:
Under the provision, a taxpayer on the accrual method of accounting for tax
purposes would be required to include an item of income no later than the tax
year in which such item is included for financial statement purposes. The
provision also would provide that cash and accrual method taxpayers may defer
the inclusion of advance payments for certain goods and services in income for
tax purposes up to one year (but not longer than any deferral for financial
statement purposes). Additionally, the provision would repeal (1) the exceptions
for crop insurance proceeds and disaster payments (for destruction and damage to
crops and natural disasters occurring after 2014), (2) the special exception for
livestock sales (for sales and exchanges after 2014), and (3) the special
exception for utility-restructuring transactions (for sales and dispositions
after 2013). Except as noted, the provision would be effective for tax years
beginning after 2014, with any adjustments resulting from accounting-method
changes taken into account over the four years following the effective date.
JCT
estimate: According to JCT, the provision would increase revenues by $10.4
billion over 2014-2023.
Sec. 3304. Installment sales.
Current
law: Under current law, a taxpayer generally may use the installment method
to defer inclusion of amounts that are to be received from the disposition of
certain types of property until payment in cash is received, with the gain from
the disposition spread over the series of payments. Dealers in property may not
use the installment method, except for sales of farm property, timeshares, and
residential lots. Taxpayers with large installment sales are subject to an
interest charge on the tax deferral to the extent that the taxpayer's aggregate
installment sales exceed $5 million. In determining the $5 million limitation,
the taxpayer includes only installment sales of more than $150,000 arising
during and remaining outstanding at the close of any tax year. The interest
charge rules do not apply to sales by dealers of farm property, and special
interest charges apply to sales by dealers of timeshares and residential
lots.
Provision:
Under the provision, the interest charge rules would apply to any installment
sale in excess of $150,000, provided the obligation remains outstanding at the
end of the tax year, eliminating the aggregate $5 million limitation. The
provision also would repeal the exceptions and special rules for sales of farm
property, timeshares, and residential lots. The provision would be effective for
sales and other dispositions after 2014.
JCT
estimate: According to JCT, the provision would increase revenues by $1.1
billion over 2014-2023.
Secs. 3305-3306. Repeal of special rule for prepaid subscription income; Repeal of special rule for prepaid dues income of certain membership organizations.
Current
law: Under current law, a special rule permits prepaid income from a
newspaper, magazine or other periodical subscription to be deferred until the
year in which the taxpayer provides the periodical even if such time is more
than a year in the future. A similar rule permits a membership organization to
defer prepaid dues income until the year in which the organization provides the
services or other membership privileges for which the dues were prepaid.
Provision:
Under the provision, the special rules for prepaid subscription income and
prepaid membership dues would be repealed. Taxpayers would still be able to
defer the inclusion of advanced payments until the following tax year (as
provided in section 3303 of the discussion draft). The provision would be
effective for payments received after 2014.
JCT
estimate: According to JCT, the provisions would increase revenues by $0.4
billion over 2014-2023.
Sec. 3307. Repeal of special rule for magazines, paperbacks, and records returned after close of the taxable year.
Current
law: Under current law, sales of merchandise by a taxpayer on the accrual
method of accounting generally must be included in income in the tax year when
all events have occurred that fix the right to receive the income and the amount
can be determined with reasonable accuracy. In cases where merchandise is
returned for a credit or refund, the reduction in income generally must be
recognized in the tax year in which the merchandise return occurs. A special
rule permits taxpayers to elect to exclude from gross income sales of any
magazine or other periodical, paperback book, or record (including discs, tapes,
etc.) that is returned within two-and-a-half months (for magazines) or
four-and-a-half months (in the case of paperbacks and records) after the close
of the tax year in which the item was sold.
Provision:
Under the provision, the special rule for magazines, paperbacks, and records
returned after close of the tax year would be repealed. The provision would be
effective for tax years beginning after 2014, with any adjustments resulting
from accounting-method changes taken into account over the four years following
the effective date.
JCT
estimate: According to JCT, the provision would increase revenues by $0.2
billion over 2014-2023.
Sec. 3308. Modification of rules for long-term contracts.
Current
law: Under current law, a taxpayer that produces property pursuant to a
long-term contract must determine the taxable income from the contract under the
percentage-of-completion method (PCM), which generally requires the taxpayer to
include in gross income the portion of the contract price equal to the
percentage of the contract completed during the year.
There is
an exception for certain home construction contracts and for other contracts
estimated to be completed within two years by taxpayers with average gross
receipts of $10 million or less over a three-year period. Taxpayers qualifying
for either exception may use the completed-contract method, under which income
is generally not included until the contract is completed. Special rules apply
to certain construction contracts for multi-unit housing (i.e., more than four
dwelling units) under which taxpayers generally may treat 70 percent of the
construction contract under PCM and 30 percent under the completed-contract
method. Similarly, taxpayers with certain ship-building contracts may elect a
blended approach, with 40 percent of the contract treated under PCM and 60
percent under the completed-contract method.
Provision:
Under the provision, the completed-contract method would be limited to contracts
estimated to be completed within two years for taxpayers with average gross
receipts of $10 million or less over a three-year period. The provision also
would repeal the special exceptions to the PCM rules for multi-unit housing
contracts and ship-building contracts. The provision would be effective for
contracts entered into after 2014.
Considerations:
JCT
estimate: According to JCT, the provision would increase revenues by $6.5
billion over 2014-2023.
Sec. 3309. Nuclear decommissioning reserve funds.
Current
law: Under current law, a taxpayer responsible for decommissioning a nuclear
power plant may establish a nuclear decommissioning reserve fund to resolve
certain tort liabilities. The income of a nuclear decommissioning reserve fund
is taxed at a reduced rate of 20 percent. Contributions to nuclear
decommissioning reserve funds are generally deductible by an accrual method
taxpayer in the tax year such contributions are made, even though the fund will
not perform its obligation to pay the beneficiaries or fund the costs of
decommissioning the nuclear plant until a subsequent tax year. Contributions to
a nuclear decommissioning reserve fund may be returned to the contributing
company provided such returned funds are included in income.
Provision:
Under the provision, the special 20-percent tax rate for nuclear decommissioning
reserve funds would be repealed, and the tax rate generally applicable to
corporations would apply. For distributions by a nuclear decommissioning reserve
fund that are used for non-qualified purposes (e.g., return of funds to the
contributing company), the provision would require the contributing taxpayer to
include the balance of the fund in income in the tax year of the distribution.
The provision would be effective for tax years beginning after 2014.
JCT
estimate: According to JCT, the provision would increase revenues by $1.2
billion over 2014-2023.
Sec. 3310. Repeal of last-in, first-out method of inventory.
Current
law: Under current law, a taxpayer must account for inventories if the
production, purchase, or sale of merchandise is a material income-producing
factor in the taxpayer's trade or business. There are two primary inventory
accounting methods: last-in, first-out (LIFO) and first-in, first-out (FIFO).
Under the LIFO inventory accounting method, it is assumed that the last item
entered into the inventory is the first item sold. Accordingly, the taxpayer's
cost of goods sold is valued at the most recent costs, and any effects of cost
fluctuations are reflected in the ending inventory, which is valued at
historical costs rather than the most recent costs. A taxpayer may only use the
LIFO method for tax purposes, however, if it reports income for financial
statement purposes using the LIFO method. Under the FIFO inventory accounting
method, it is assumed that the first item entered into inventory is the first
item sold. Thus, ending inventory is valued at its most recent costs rather than
at historical costs. Taxpayers that use LIFO are required to calculate and track
their LIFO reserves, which is the difference between the accounting cost of
inventory calculated using the FIFO method and the same inventory using the LIFO
method. The LIFO reserve is the deferred taxable income that results from using
the most recent inventory costs to calculate cost of goods sold, rather than the
lower cost associated with historic inventory, and under certain circumstances
(e.g., sales exceed purchases, dissolution or sale of the business), the
deferred income is realized by the taxpayer and is thus subject to tax.
Provision:
Under the provision, the LIFO inventory accounting method would no longer be
permitted. Thus, taxpayers could use FIFO or any other method that conforms to
the best accounting practice in a particular trade or business and clearly
reflects income. A taxpayer would include its LIFO reserve in income over a
four-year period beginning with its first tax year beginning after 2018 in the
following amounts: 10 percent included in the first year (2019); 15 percent in
the second year (2020); 25 percent in the third year (2021); and 50 percent in
the fourth year (2022). Taxpayers could elect to begin the four-year inclusion
period in an earlier tax year. Closely held entities - generally defined as
having no more than 100 owners as of February 26, 2014 (using rules similar to
those used for S corporations and taking indirect ownership into account) -
would be subject to a reduced 7-percent tax rate on their LIFO reserves. The
provision would apply to tax years beginning after 2014.
Considerations:
JCT
estimate: According to JCT, the provision would increase revenues by $79.1
billion over 2014-2023.
Sec. 3311. Repeal of lower of cost or market method of inventory.
Current
law: Under current law, for Federal income tax purposes, taxpayers generally
must account for inventories if the production, purchase, or sale of merchandise
is a material income-producing factor to the taxpayer. Because of the difficulty
of accounting for inventory on an item-by-item basis, taxpayers often use
conventions that assume certain item or cost flows. Among these conventions are
the “first-in, first-out” (FIFO) method, which assumes that the items in ending
inventory are those most recently acquired by the taxpayer. Taxpayers that
maintain inventories under the FIFO method may determine the value of ending
inventory under the “lower of cost or market” (LCM) method. Under the LCM
method, the taxpayer may write down the value of ending inventory (and thus take
a deduction for the amount of the write-down) if its market value is less than
its cost. Additionally, under the LCM method, subnormal goods (e.g., goods that
are unsalable at normal prices or in the normal way because of damage,
imperfections, shop wear, changes of style, odd or broken lots, or similar
causes) may be written down to the net selling price.
Provision:
Under the provision, the lower-of-cost-or-market method would be repealed. The
provision would be effective for tax years beginning after 2014. A taxpayer
generally would include any positive adjustments to income resulting from the
provision over a four-year period beginning with its first tax year beginning
after 2018 in the following amounts: 10 percent included in the first year
(2019); 15 percent in the second year (2020); 25 percent in the third year
(2021); and 50 percent in the fourth year (2022). At the election of the
taxpayer, the four-year inclusion of the adjustment could begin prior to
2019.
Considerations:
JCT
estimate: According to JCT, the provision would increase revenues by $3.8
billion over 2014-2023.
Sec. 3312. Modification of rules for capitalization and inclusion in inventory costs of certain expenses.
Current
law: Under current law, the uniform capitalization (UNICAP) rules require
certain direct costs (e.g., materials and labor) and indirect costs (e.g.,
overhead and administrative expenses) allocable to real or tangible personal
property produced by the taxpayer to be capitalized into the basis of such
property or included in inventory, as applicable. For real or personal property
acquired by the taxpayer for resale, the UNICAP rules generally require direct
and indirect costs allocable to such property to be included in inventory.
However, the UNICAP rules do not apply to timber and certain trees; free-lance
authors, photographers and artists; and businesses with $10 million or less of
average annual gross receipts that acquire property for resale.
Provision:
Under the provision, the exception to the UNICAP rules for businesses with
average annual gross receipts of $10 million or less that acquire property for
resale would be expanded to include all types of property (e.g., real property
and tangible personal property), whether produced or acquired by the taxpayer.
The provision would repeal the special exceptions for timber and certain trees,
and for free-lance authors, photographers and artists. The provision's expanded
exemption from the UNICAP rules for qualifying businesses, however, would apply
in these cases. The provision would be effective for tax years beginning after
2014.
JCT
estimate: According to JCT, the provision would reduce revenues by $4.5
billion over 2014-2023.
Sec. 3313. Modification of income forecast method.
Current
law: Under current law, the cost of motion picture films, sound recordings,
copyrights, books, and patents may be recovered using the income-forecast method
(IFM). The property's depreciation deduction for a tax year is determined by
multiplying the adjusted basis of the property by a fraction equal to the gross
income generated by the property during the year over the total estimated gross
income anticipated by the close of the tenth tax year after the property is
placed in service. A look-back rule requires a recomputation of the forecast
based on actual income earned in connection with the property before the end of
the third and tenth years, with interest applicable to any adjustment. Any costs
that are not recovered by the end of the tenth tax year may be deducted in that
year.
In
determining the adjusted basis of property under the IFM, taxpayers may only
include amounts when economic performance has occurred (e.g., the property is
delivered or service is performed). A special exception under the IFM applies to
participations and residuals (e.g., amounts under a film or recording contract
that vary according the earnings), which may be included in the basis if they
are paid with respect to income to be derived from the property before the close
of the tenth year. Alternatively, a taxpayer may deduct those payments as they
are paid.
Under
Treasury regulations, the cost of intangible assets may be recovered over the
useful life of the asset, if such life can be determined with reasonable
accuracy. If the useful life cannot be estimated with reasonable accuracy or a
specific recovery period is not assigned to the property, a taxpayer may elect
to treat the intangible as having a useful life of 15 years.
Provision:
Under the provision, the forecast period under the IFM would be extended to 20
years, with required computations based on the income earned before the close of
the fifth, tenth, fifteenth and twentieth years. The provision also would modify
the rule for participations and residuals by excluding such costs from the
adjusted basis of the property under the IFM and require that such costs be
deducted in the year paid. As an alternative to the IFM, the provision would
permit taxpayers to depreciate property otherwise qualifying for the IFM under
the straight-line method over a 20-year period. Finally, the provision would
direct the IRS to revise the election under the regulations concerning
intangible assets with an unknown useful life to conform to the new 20-year
period for the IFM. The provision generally would be effective for property
placed in service after 2014.
JCT
estimate: According to JCT, the provision would increase revenues by $0.5
billion over 2014-2023.
Sec. 3314. Repeal of averaging for farm income.
Current
law: Under current law, an individual engaged in certain farming or fishing
businesses may elect to compute his current year tax liability by averaging,
over the prior three-year period, all or a portion of his taxable income from
the trade or business of farming or fishing.
Provision:
Under the provision, the farm income-averaging method would be repealed. The
provision would be effective for tax years beginning after 2014.
JCT
estimate: According to JCT, the provision would increase revenues by $0.3
billion over 2014-2023.
Sec. 3315. Treatment of patent or trademark infringement awards.
Current
law: Under current law, the Code does not provide rules regarding the
treatment of patent or trademark infringement awards. The courts have held that
such infringement awards constitute ordinary income as damages relating to lost
profits unless the taxpayer can demonstrate that such payments reflect damages
relating to impairment of capital (e.g., goodwill), in which case the payments
are treated as a return of capital to the extent of the taxpayer's basis in the
patent or trademark.
Provision:
Under the provision, the judicial standard for determining the treatment of
patent or trademark infringement awards would be codified. The provision would
be effective for payments pursuant to judgments and settlements after 2014.
JCT
estimate: According to JCT, the provision would increase revenues by $0.1
billion over 2014-2023.
Sec. 3316. Repeal of redundant rules with respect to carrying charges.
Current
law: Under current law, a taxpayer may elect to capitalize certain taxes and
carrying charges (e.g., interest) with respect to certain property, and in such
a case no deduction is permitted for the capitalized costs. This provision is
redundant because other provisions of the Code permit taxes and carrying charges
to be capitalized, even though such costs are otherwise deductible.
Provision:
Under the provision, the redundant rules with respect to capitalization of
certain taxes and carrying charges would be repealed. The provision would be
effective for amounts paid or incurred after 2014.
JCT
estimate: According to JCT, the provision would have negligible revenue
effect over 2014-2023.
Sec. 3317. Repeal of recurring item exception for spudding of oil or gas wells.
Current
law: Under current law, an accrual-method taxpayer generally may deduct an
expense only when all events have occurred that fix the fact of the liability,
the amount of the liability is determinable with reasonable accuracy, and
economic performance has occurred. An exception applies to certain expenses that
are recurring in nature (e.g., State and local income taxes that are fixed at
year-end but generally not paid until the tax return is filed in the following
year), which is commonly referred to as the “recurring item” exception. To
qualify, the expense must be paid no later than eight and a half months after
the close of the tax year to which it relates. The recurring-item exception is
not available for a tax shelter, unless the tax shelter involves drilling oil or
gas wells and the drilling commences within 90 days of the close of the tax year
to which the expense relate.
Provision:
Under the provision, the special exception for oil or gas well tax shelters
would be repealed, and the recurring item exception would not apply to any
associated drilling expenses. The provision would be effective for tax years
beginning after 2014.
JCT
estimate: According to JCT, the provision would increase revenues by $0.2
billion over 2014-2023.
Subtitle E - Financial InstrumentsPart 1 - Derivatives and HedgesSec. 3401. Treatment of certain derivatives.
Current
law: Under current law, the tax treatment of gains and losses from entering
into derivative financial transactions (e.g., futures, forward contracts, swaps,
and options) is highly dependent upon the type of derivative, the profile of the
taxpayer (e.g., dealers vs. non-dealers), and other factors. For example, gain
or loss from entering into an option generally is not recognized until the
option is exercised or lapses, and the character of the gain or loss generally
is determined based upon the character of the optioned property in the hands of
the taxpayer. However, certain options that are traded on exchanges - non-equity
options (i.e., options on property other than stock or on an index) and dealer
equity options - are marked to market (meaning that changes in the value of such
options that are outstanding at the end of the tax year result in taxable gain
or loss), and gain or loss on such options are treated as 60-percent long-term
capital gain or loss and 40-percent short-term capital gain or loss.
Provision:
Under the provision, derivative financial transactions generally would be marked
to market at the end of each tax year, and any gains or losses from marking a
derivative to market would be treated as ordinary income or loss. The provision
would not apply to transactions that are properly identified as hedging
transactions for tax purposes. The provision also would not apply to
transactions that require the physical delivery of commodities or to certain
specified transactions that are commercial (as opposed to financial) or
non-speculative in nature. For offsetting financial positions that include at
least one derivative position, all positions in the straddle would be marked to
market. The provision would be effective for tax years ending after 2014, in the
case of property acquired and positions established after 2014, and for tax
years ending after 2019, in the case of any other property or position.
Considerations:
JCT
estimate: According to JCT, the provision would increase revenues by $15.7
billion over 2014-2023.
Sec. 3402. Modification of certain rules related to hedges.
Current
law: Under current law, taxpayers are permitted to match the timing and
character of taxable gains and losses on certain hedging transactions with the
gains and losses associated with the price, currency or interest rate risk being
hedged. Taxpayers are only allowed such hedging tax treatment, however, if they
properly identify the transaction as a hedge on the day they enter into the
transaction, regardless of whether the taxpayer is properly treating the
transaction as a hedge for financial accounting purposes. In addition, hedging
tax treatment is available only if the risk being hedged relates to ordinary
property held (or to be held) by the taxpayer or obligations incurred (or to be
incurred) by the taxpayer. In practice, insurance companies typically acquire
debt instruments of varying durations to hedge risks associated with holding
assets that are used to honor future claims arising from insurance policies that
they have written. The tax treatment of these transactions under the current-law
hedging rules is unclear, however, because the assets held by the insurance
companies are capital assets, rather than ordinary property.
Provision:
Under the provision, taxpayers could rely upon - for tax purposes - an
identification of a transaction as a hedge that they have made for financial
accounting purposes. The provision also would modify the hedging tax rules so
that the rules would apply when an insurance company acquires a debt instrument
to hedge risks relating to assets that support the company's ability to honor
future insurance claims. The provision would be effective for hedging
transactions entered into after 2014.
JCT
estimate: According to JCT, the provision would have negligible revenue
effect over 2014-2023.
Part 2 - Treatment of Debt InstrumentsSec. 3411. Current inclusion in income of market discount.
Current
law: Under current law, when a borrower issues debt at a discount (i.e., the
loan proceeds are less than the principal amount to be repaid), the borrower and
the lender are required to deduct and include in income, respectively, the
discount as additional interest over the life of the loan. When a bond that
already has been issued by the borrower is subsequently purchased on the
secondary market at a discount, the purchaser is required to include the
discount in taxable income as additional interest but, unlike discount when a
loan is initially made, this discount does not have to be included by the
purchaser of the bond until the bond is retired or the purchaser resells the
bond. The amount of secondary market discount that holders must include in
taxable income appears to include discount associated with deterioration in the
creditworthiness of the borrower, even though it may have been intended that
current law should only apply to discount associated with increases in interest
rates.
Provision:
Under the provision, purchasers of bonds at a discount on the secondary market
would be required to include the discount in taxable income over the
post-purchase life of the bond, rather than only upon retirement of the bond or
resale of the bond by the purchaser. Any loss that results from the retirement
or resale of such a bond would be treated as an ordinary (rather than capital)
loss to the extent of previously accrued market discount.
The
provision also would limit taxable secondary market discount to an amount that
approximates increases in interest rates since the loan was originally made.
Specifically, the provision would limit this amount to the greater of (1) the
original yield on the bond plus 5 percentage points, or (2) the applicable
Federal rate plus 10 percentage points.
The
provision would be effective for bonds acquired after 2014.
JCT
estimate: According to JCT, the provision would increase revenues by $0.9
billion over 2014-2023.
Sec. 3412. Treatment of certain exchanges of debt instruments.
Current
law: Under current law, when the terms of an outstanding debt instrument are
significantly modified, the issue price of the modified debt instrument (i.e.,
the principal amount of the debt instrument for tax purposes) does not
necessarily equal the issue price of the debt instrument prior to modification.
In particular, the issue price of the modified debt instrument can be
substantially lower than the issue price of the debt instrument prior to
modification if the debt instrument has lost significant value since the loan
was originally made (e.g., the value of real estate or other collateral
supporting the loan has declined) - even if the lender has not forgiven any
actual principal owed by the borrower. The reduction in the issue price
resulting from the modification of the debt instrument constitutes taxable
cancellation of indebtedness income to the borrower, although the borrower still
owes the same actual principal amount as was owed prior to the modification.
Conversely, the holder of a modified debt instrument may be required to
recognize taxable gain as a result of modifying the debt instrument - even when
the actual principal owed by the borrower has not increased - if the holder
purchased the debt instrument at a discount.
Provision:
Under the provision, the issue price of a modified debt instrument generally
would be equal to the lesser of (1) the issue price of the debt instrument
before it was modified, or (2) the stated principal amount of the modified debt
instrument (assuming the modified debt instrument has an adequate rate of stated
interest). In addition, the holder of a debt instrument generally would not
recognize taxable gain or loss as a result of modifying a debt instrument. The
provision would be effective for debt modifications that occur after 2014.
Considerations:
JCT
estimate: According to JCT, the provision would reduce revenues by $0.8
billion over 2014-2023.
Sec. 3413. Coordination with rules for inclusion not later than for financial accounting purposes.
Current
law: Under current law, the holder of a debt instrument that is issued with
original issue discount (OID) generally accrues and includes in income (as
interest) the OID over the life of the obligation, regardless of when the OID
income actually is received. In the case of prepaid interest, OID treatment
results in a deferral of taxable income. Certain fees earned by credit card
issuers and other financial institutions have been treated as OID income, which
allows these institutions to postpone the imposition of tax on this income to
later tax years.
Provision:
Under the provision, fees and other amounts received by a taxpayer would not be
treated as OID income to the extent they are subject to section 3303 of the
discussion draft, which would require taxpayers on the accrual method of
accounting to include an item of income no later than the tax year in which such
item is included for financial statement purposes. The provision would be
effective for tax years beginning after 2014.
JCT
estimate: According to JCT, the provision would increase revenues by $9.5
billion over 2014-2023.
Sec. 3414. Rules regarding certain government debt.
Current
law: Under current law, individuals and other taxpayers who use a cash basis
method of accounting and who purchase non-interest bearing obligations at a
discount may elect to include in current income the increase in the value of the
obligations as the discount accretes. (Absent such an election, the increase in
value is not taken into income until maturity or disposition of the obligation.)
In addition, discount on certain short-term obligations (e.g., Treasury bills)
does not accrue until the obligation is paid at maturity or otherwise disposed
but, in the case of taxpayers using an accrual method of accounting and certain
other taxpayers, discount on short-term obligations is required to be included
currently in taxable income. Also, any increase in the redemption value of a
U.S. savings bond generally is includible in gross income in the tax year the
bond is redeemed or the tax year of final maturity, whichever is earlier.
Finally, U.S. obligations may be exchanged without recognition of gain or
loss.
Provision:
Under the provision, certain clerical amendments to the current-law rules would
be made to reflect that some of the rules have been superseded by subsequently
enacted tax rules relating to the accrual of original issue discount. Similarly,
the current-law rule that permits U.S. obligations to be exchanged without
recognition of gain or loss would be repealed because the rule has become
obsolete as a result of the Treasury Department no longer issuing Series H or HH
savings bonds (which were exchangeable for Series E or EE savings bonds). The
provision would be effective on the date of enactment.
JCT
estimate: According to JCT, the provision would have negligible revenue
effect over 2014-2023.
Part 3 - Certain Rules for Determining Gain and LossSec. 3421. Cost basis of specified securities determined without regard to identification.
Current
law: Under current law, when a taxpayer purchases shares of a particular
company (or other substantially identical securities) at multiple times and at
different prices, and later sells some (but not all) of these shares, the shares
generally are deemed to have been sold on a first-in, first-out (FIFO) basis. In
other words, the earliest acquired shares are treated as having been sold for
purposes of determining the taxpayer's basis in the sold shares (and resulting
gain or loss from the sale). Taxpayers, however, may specifically identify which
shares have been sold, and such shares could have a basis that is different from
the basis in the earliest acquired shares (and thus result in a different amount
of gain or loss from the sale).
Provision:
Under the provision, taxpayers who sell a portion of their holdings in
substantially identical stock generally would be required to determine their
taxable gain or loss on a FIFO basis. The provision generally would be
coordinated with the recently enacted basis reporting requirements so that
taxpayers could continue to determine basis in their stock on an
account-by-account basis, except that multiple accounts with the same broker
would be aggregated and treated as a single account. The provision would be
effective for sales of stock occurring after 2014.
JCT
estimate: According to JCT, the provision would increase revenues by $3.8
billion over 2014-2023.
Sec. 3422. Wash sales by related parties.
Current
law: Under current law, a taxpayer may not deduct losses from the
disposition of stock or securities if the taxpayer acquires substantially
identical stock or securities during the period beginning 30 days before, and
ending 30 days after, the date of sale. If a loss is disallowed, the basis of
the acquired stock or securities is increased to reflect the disallowed
loss.
Provision:
Under the provision, losses from the disposition of stock or securities also
would be disallowed if certain parties that are closely related to the taxpayer
acquire substantially identical stock or securities within 30 days before or
after the disposition. If a loss has been disallowed under the provision and the
taxpayer reacquires substantially identical stock or securities during the
period that begins 30 days before the disposition and ends with the close of the
first tax year that begins after the disposition, then the basis of the
reacquired stock or securities would be increased to reflect the disallowed
loss. The provision would be effective for sales of stock or securities
occurring after 2014.
JCT
estimate: According to JCT, the provision would increase revenues by $0.1
billion over 2014-2023.
Sec. 3423. Nonrecognition for derivative transactions by a corporation with respect to its stock.
Current
law: Under current law, a corporation does not recognize gain or loss on the
receipt of money or other property in exchange for its own stock. Likewise, a
corporation does not recognize gain or loss when it redeems its stock with cash
for more or less than it received when the stock was issued. In addition, a
corporation does not recognize gain or loss on any lapse or acquisition of an
option to buy or sell its stock.
Provision:
Under the provision, a corporation generally would not recognize income, gains,
losses, or deductions with respect to derivatives that relate to the
corporation's own stock, except for certain transactions that involve the
corporation acquiring its own stock and entering into a forward contract with
respect to its own stock. In conjunction with section 3101 of the discussion
draft, the provision would require a corporation to recognize income to the
extent that the receipt of a contribution of money or property exceeds the value
of stock issued in exchange for such money or property, and also would require a
corporation to recognize income from the receipt of any premium received with
respect to an option on its own stock. The provision would be effective for
transactions entered into after the date of enactment.
JCT
estimate: According to JCT, the provision would increase revenues by $0.2
billion over 2014-2023.
Part 4 - Tax Favored BondsSecs. 3431-3432. Termination of private activity bonds; Termination of credit for interest on certain home mortgages.
Current
law: Under current law, interest on both governmental bonds and private
activity bonds (PABs) is excluded from gross income (and thus exempt from tax).
Governmental bonds typically are issued to finance projects that constitute
public goods (e.g., roads, schools, and parks). By contrast, the proceeds of
PABs finance the activities of, or loans to, private parties, with indirect
benefits accruing to the State or locality that issues the bond. The exclusion
of interest on PABs generally is disallowed under the alternative minimum tax
(AMT), meaning that AMT payers pay tax on such interest. Only specific
categories of PABs qualify for the tax preference. Those categories include
exempt facility bonds, qualified mortgage bonds, qualified veterans' mortgage
bonds, qualified small issue bonds, qualified student loan bonds, qualified
redevelopment bonds, and qualified 501(c)(3) bonds. Most PABs are subject to a
single, aggregate national volume cap that is allocated annually among States by
population, while other PABs have separate volume caps. For calendar year 2014,
the per-State volume cap is the greater of (1) $100 multiplied by the State
population, or (2) $296,825,000. These amounts are indexed for inflation.
Some
State and local governments issue PABs to finance owner-occupied residences. In
lieu of issuing such bonds, State and local governments may provide homebuyers a
Federal tax credit for interest on certain home mortgages by providing them with
mortgage credit certificates.
Provision:
Under the provisions, interest on newly issued PABs would be included in income
and thus subject to tax. Additionally, no Federal tax credits would be allowed
for mortgage credit certificates issued after 2014. The provisions would be
effective for bonds issued after 2014 with regard to PABs and tax years ending
after 2014 with regard to mortgage credit certificates.
Considerations:
JCT
estimate: According to JCT, the provisions would increase revenues by $23.9
billion over 2014-2023.
Sec. 3433. Repeal of advance refunding bonds.
Current
law: Under current law, a refunding bond is any bond used to pay principal,
interest, or redemption price on a prior bond issue (the refunded bond). A
current refunding occurs when the refunded bond is redeemed within 90 days of
issuance of the refunding bonds. An advance refunding is issued more than 90
days before the redemption of the refunded bond. Interest on current refunding
bonds is generally not taxable. Interest on advanced refunding bonds is
generally not taxable for governmental bonds but is taxable for PABs.
Provision:
Under the provision, interest on advanced refunding bonds (i.e., refunding bonds
issued more than 90 days before the redemption of the refunded bonds) would be
taxable. Interest on current refunding bonds would continue to be tax-exempt.
The provision would be effective for advance refunding bonds issued after
2014.
Considerations:
JCT
estimate: According to JCT, the provision would increase revenues by $8.3
billion over 2014-2023.
Sec. 3434. Repeal of tax credit bond rules.
Current
law: Under current law, State and local governments and other entities may
issue various categories of tax credit bonds to finance specific types of
projects. Each category of tax credit bond has its own set of rules regarding
volume cap, if any, and allocation. Holders of tax credit bonds receive Federal
tax credits fully or partially in lieu of interest payments from the issuer,
depending on the level of Federal subsidy. For some of these bonds, during 2009
and 2010, issuers had the option of instead issuing taxable bonds and receiving
direct payments from the Federal government.
The
authority to issue some types of tax credit bonds has expired, and the volume
cap to issue some of these bonds has been fully used. There are some types of
tax credit bonds for which there is still outstanding volume cap and issuing
authority has not expired.
Provision:
Under the provision, the rules relating to tax credit bonds generally would be
repealed. Holders and issuers would continue receiving tax credits and payments
for tax credit bonds already issued, but no new bonds could be issued. The
provision would be effective for bonds issued after the date of enactment.
JCT
estimate: According to JCT, the provisions would reduce revenues by $0.4
billion over 2014-2023, and reduce outlays by $2.6 billion over 2014-2023.
Subtitle F - Insurance ReformsSec. 3501. Exception to pro rata interest expense disallowance for corporate-owned life insurance restricted to 20-percent owners.
Current
law: Under current law, business interest deductions are reduced to the
extent the interest is allocable to insurance policy cash values based on a pro
rata formula, unless the insurance policy insures the lives of officers,
directors, employees, or 20-percent owners of the business. A similar rule
applies in the case of businesses that are insurance companies.
Provision:
Under the provision, the exception to the pro rata interest expense disallowance
rule would not apply to officers, directors, or employees, and thus only would
apply to 20-percent owners of the business that holds the insurance contract.
The provision would be effective for insurance contracts issued after 2014 with
any material increase in the death benefit or other material changes to existing
contracts being treated as new contracts.
Considerations:
JCT
estimate: According to JCT, the provision would increase revenues by $7.3
billion over 2014-2023.
Sec. 3502. Net operating losses of life insurance companies.
Current
law: Under current law, net operating losses of a trade or business
generally may be carried back up to two tax years or carried forward up to 20
tax years. In the case of life insurance companies, however, net operating
losses may be carried back up to three tax years or carried forward up to 15 tax
years.
Provision:
Under the provision, life insurance companies would be allowed to carry net
operating losses back up to two tax years or forward up to 20 tax years, in
conformity with the general net operating loss carryover rules. The provision
would be effective for losses arising in tax years beginning after 2014.
JCT
estimate: According to JCT, the provision would increase revenues by $0.3
billion over 2014-2023.
Sec. 3503. Repeal of small life insurance company deduction.
Current
law: Under current law, life insurance companies may deduct 60 percent of
their first $3 million of life insurance-related income. The deduction is phased
out for companies with income between $3 million and $15 million. In addition,
the deduction is not available to life insurance companies with assets of at
least $500 million.
Provision:
Under the provision, the special deduction for small life insurance companies
would be repealed. The provision would be effective for tax years beginning
after 2014.
Consideration:
JCT
estimate: According to JCT, the provision would increase revenues by $0.3
billion over 2014-2023.
Sec. 3504. Computation of life insurance tax reserves.
Current
law: Under current law, life insurance companies may deduct net increases in
life insurance company reserves, while net decreases in such reserves are
included in gross income. In computing changes in reserves, the life insurance
reserve for a contract generally is the greater of the net surrender value of
the contract or the reserve determined under rules provided in the Code, which
for discounting purposes employ a prescribed interest rate that is equal to the
greater of the applicable Federal rate or the prevailing State assumed interest
rate. The “prevailing State assumed interest rate” is equal to the highest
assumed interest rate permitted to be used in at least 26 States in computing
regulatory life insurance reserves. The discount rate used by property and
casualty (P&C) insurance companies for reserves is the average applicable
Federal mid-term rate over the 60 months ending before the beginning of the
calendar year for which the determination is made.
Provision:
Under the provision, the current-law prescribed discount rate for life insurance
reserves would be replaced with the average applicable Federal mid-term rate
over the 60 months ending before the beginning of the calendar year for which
the determination is made, plus 3.5 percentage points. The provision would be
effective for tax years beginning after 2014. The effect of the provision on
computing reserves for contracts issued before the effective date would be taken
into account ratably over the succeeding eight tax years.
Consideration:
Replacing the current-law prescribed interest rate with an interest rate based
on an enhanced mid-term applicable Federal rate that generally tracks corporate
bond rates over the long run would better reflect economic reality. The
current-law rule that uses a regulatory-based measurement generally understates
income.
JCT
estimate: According to JCT, the provision would increase revenues by $24.5
billion over 2014-2023.
Sec. 3505. Adjustment for change in computing reserves.
Current
law: Under current law, taxpayers are required to make adjustments to
taxable income when they change a tax accounting method, so that the accounting
method change does not result in an omission or duplication of income or
expense. For taxpayers other than life insurance companies, an adjustment that
reduces taxable income generally is taken into account in the tax year during
which the accounting method change occurs, while an adjustment that increases
taxable income generally may be taken into account over the course of four tax
years, beginning with the tax year during which the accounting method change
occurs. For life insurance companies, an adjustment in computing reserves (which
is similar to a change in tax accounting method for other businesses) may be
taken into account over ten years (regardless of whether the adjustment reduces
or increases taxable income).
Provision:
Under the provision, the special 10-year period for adjustments to take into
account changes in computing reserves by life insurance companies would be
repealed. As a result, the general rule for making tax accounting method
adjustments would apply to changes in computing reserves by life insurance
companies. The provision would be effective for tax years beginning after
2014.
JCT
estimate: According to JCT, the provision would increase revenues by $2.5
billion over 2014-2023.
Sec. 3506. Modification of rules for life insurance proration for purposes of determining the dividends received deduction.
Current
law: Under current law, for insurance companies, deductions are limited or
disallowed in certain circumstances if they are related to the receipt of exempt
income. Under so-called “proration” rules, life insurance companies are required
to reduce deductions, including dividends-received deductions and reserve
deductions to account for the fact that a portion of dividends and tax-exempt
interest received is used to fund tax-deductible reserves for the companies'
obligations to policyholders. This portion is determined by a formula that
computes the respective shares of net investment income that belong to the
company and to the policyholders. Current law is unclear as to what methods
companies may use to compute the company share.
Provision:
Under the provision, the portion of dividends and tax-exempt interest received
that is set aside for obligations to policyholders would be determined
separately for the company's general account (which supports non-variable
insurance products) and for each separate account (which supports variable life
insurance and annuity contracts). In addition, the formula for determining this
portion would be modified so that it compares mean reserves to mean assets of
each account (rather than computing the respective shares of net investment
income that belong to the company and to the policyholders). The provision would
be effective for tax years beginning after 2014.
Consideration:
The current-law rules for computing net investment income are essentially based
on a previous system of life insurance company taxation that was changed over 30
years ago, and the provision would provide an updated measure of the company and
policyholder shares of net investment income that is simpler and more
accurate.
JCT
estimate: According to JCT, the provision would increase revenues by $4.5
billion over 2014-2023.
Sec. 3507. Repeal of special rule for distributions to shareholders from pre-1984 policyholders surplus account.
Current
law: Tax rules for insurance companies that were enacted in 1959 included a
rule that half of a life insurer's operating income was taxed only when the
company distributed it, and a “policyholders surplus account” kept track of the
untaxed income. In 1984, this deferral of taxable income was repealed, although
existing policyholders' surplus account balances remained untaxed until they
were distributed. Legislation enacted in 2004 provided a two-year holiday that
permitted tax-free distributions of these balances during 2005 and 2006. During
this period, most companies eliminated or significantly reduced their
balances.
Provision:
Under the provision, the rules for policyholders' surplus accounts would be
repealed. The provision would generally be effective for tax years beginning
after 2014, and any remaining balances would be subject to tax, payable in eight
annual installments.
JCT
estimate: According to JCT, the provision would increase revenues by less
than $50 million over 2014-2023.
Sec. 3508. Modification of proration rules for property and casualty insurance companies.
Current
law: Under current law, deductions are limited or disallowed in certain
circumstances if they are related to the receipt of exempt income. Under
so-called “proration” rules that reflect the fact that reserves generally are
funded in part by certain untaxed income, property and casualty (P&C)
insurance companies are required to reduce reserve deductions for losses
incurred by 15 percent of (1) the company's tax-exempt interest, (2) the
deductible portion of dividends received, and (3) the increase for the tax year
in the cash value of life insurance, endowment, or annuity contracts the company
owns.
Provision:
Under the provision, the fixed 15-percent reduction in the reserve deduction for
P&C insurance companies would be replaced with a formula whereby the reserve
deduction is reduced by a percentage that is equal to the ratio of the
tax-exempt assets of the company to all assets of the company. The provision
would be effective for tax years beginning after 2014.
Consideration:
The provision would replace an arbitrary fixed-percentage reduction in reserve
deductions with a formula that would result in P&C insurance companies more
accurately measuring the reserve deduction.
JCT
estimate: According to JCT, the provision would increase revenues by $2.9
billion over 2014-2023.
Sec. 3509. Repeal of special treatment of Blue Cross and Blue Shield organizations, etc.
Current
law: Under current law, charitable and social welfare organizations are
eligible for tax-exempt status only if no substantial part of their activities
consists of providing commercial-type insurance. When this rule was enacted in
1986, special rules were provided for existing, tax-exempt Blue Cross and Blue
Shield (BCBS) organizations that stood to lose their tax-exempt status. These
rules also apply to other health insurance organizations that satisfy certain
requirements.
The
special rules provide a deduction equal to 25 percent of claims incurred and
expenses incurred in administering such claims, to the extent the amount of
claims and expenses incurred exceeds the adjusted surplus of the organization at
the beginning of the tax year. In addition, these rules provide an exception
from the application of a 20-percent reduction in the deduction for increases in
unearned premiums that applies generally to P&C companies. The special rules
also provide that these organizations are treated as stock insurance companies
for purposes of the Code.
Provision:
Under the provision, the special rules for BCBS and certain other health
insurance organizations would be repealed. With regard to the 25-percent
deduction and the exception from the application of the 20-percent reduction in
the deduction for increases in unearned premiums, the provision would be
effective for tax years beginning after 2014. With regard to the treatment of
these organizations as stock insurance companies, the provision would be
effective for tax years beginning after 2016.
Consideration:
Special transition rules enacted in 1986 when the BCBS organizations initially
became subject to tax are no longer necessary and provide preferential tax
treatment to some health insurance providers over other providers in a market in
which health insurance premiums are now regulated.
JCT
estimate: According to JCT, the provision would increase revenues by $4.0
billion over 2014-2023.
Sec. 3510. Modification of discounting rules for property and casualty insurance companies.
Current
law: Under current law, a P&C insurance company may deduct unpaid losses
that are discounted using mid-term applicable Federal rates and based on a loss
payment pattern. The loss payment pattern for each line of insurance business is
determined by reference to the industry-wide historical loss payment pattern
applicable to such line of business, although companies may elect to use their
own particular historical loss payment patterns.
The loss
payment pattern is computed based upon the assumption that all losses are paid
(1) in general, during the accident year and the three calendar years following
the accident year, or (2) in the case of lines of business relating to auto or
other liability, medical malpractice, workers' compensation, multiple peril
lines, international coverage, and reinsurance, during the accident year and the
ten calendar years following the accident year. In the case of long-tail lines
of business, a special rule extends the loss payment pattern period, so that the
amount of losses which would have been treated as paid in the tenth year after
the accident year is treated as paid in the tenth year and in each subsequent
year (up to five years) in an amount equal to the amount of the losses treated
as paid in the ninth year after the accident year.
Provision:
Under the provision, P&C insurance companies would use the corporate bond
yield curve (as specified by Treasury) to discount the amount of unpaid losses.
In addition, the special rule that extends the loss payment pattern period for
long-tail lines of business would be applied similarly to all lines of business
(but without the 5-year limitation on the extended period), so that (1) in
general, the amount of losses that would have been treated as paid in the third
year after the accident year would be treated as paid in the third year and in
each subsequent year in an amount equal to the amount of the losses treated as
paid in the second year after the accident year, and (2) in the case of lines of
business relating to auto or other liability, medical malpractice, workers'
compensation, multiple peril lines, international coverage, and reinsurance, the
amount of losses which would have been treated as paid in the tenth year after
the accident year would be treated as paid in the tenth year and in each
subsequent year in an amount equal to the amount of the losses treated as paid
in the ninth year after the accident year. The provision also would repeal the
election to use company-specific, rather than industry-wide, historical loss
payment patterns. The provision generally would be effective for tax years
beginning after 2014, with a transition rule that would spread adjustments
relating to pre-effective date losses and expenses over such tax year and the
succeeding seven tax years.
Considerations:
JCT
estimate: According to JCT, the provision would increase revenues by $17.9
billion over 2014-2023.
Sec. 3511. Repeal of special estimated tax payments.
Current
law: Under current law, insurance companies may elect to claim a deduction
equal to the difference between the amount of reserves computed on a discounted
basis and the amount computed on an undiscounted basis. Companies that make this
election are required to make a special estimated tax payment equal to the tax
benefit attributable to the deduction. In addition, the deductions are added to
a special loss discount account and, as losses are paid in future years, amounts
are subtracted from the account and made subject to tax (net of prior special
estimated tax payments). Amounts added to the special loss discount account are
automatically subtracted from the account and made subject to tax if they have
not already been subtracted after 15 years.
Provision:
Under the provision, the elective deduction and related special estimated tax
payment rules would be repealed. The provision would be effective for tax years
beginning after 2014.
JCT
estimate: According to JCT, the provision would increase revenues by less
than $50 million over 2014-2023.
Sec. 3512. Capitalization of certain policy acquisition expenses.
Current
law: Under current law, the expenses of a life insurance company that are
associated with earning a stream of premium income generally are required to be
spread over ten years rather than deducted immediately, to reflect the fact that
such income ordinarily is collected over a period of years. The expenses that
are spread are calculated using a simplified method that reflects expense ratios
for three broad categories of insurance contracts. The expenses that must be
spread are the lesser of: (1) a specified percentage of the net premiums
received on each of a company's three categories of insurance contracts; or (2)
the company's general deductions. For annuity contracts, the specified
percentage is 1.75 percent; for group life insurance contracts, it is 2.05
percent; and for all other specified insurance contracts, it is 7.7 percent.
Provision:
Under the provision, the categories of insurance contracts and the percentages
of expenses to be spread would be updated to reflect current expense ratios for
insurance products. The three categories of insurance contracts would be
replaced with two categories: (1) group contracts; and (2) all other specified
contracts. The percentage of net premiums that would be spread over ten years
would be 5 percent for group insurance contracts and 12 percent for all other
specified contracts. The provision would be effective for tax years beginning
after 2014.
JCT
estimate: According to JCT, the provision would increase revenues by $11.7
billion over 2014-2023.
Secs. 3513-3514. Tax reporting for life settlement transactions; Clarification of tax basis of life insurance contracts.
Current
law: Under current law, the seller of a life insurance contract (including a
sale back to the issuer, or “settlement”) generally must report as taxable
income the difference between the amount received from the buyer and the
adjusted basis in the contract. The IRS has taken the position that a taxpayer's
basis in a life insurance contract generally is equal to all premiums paid by
the taxpayer if the taxpayer settles the contract, but that the taxpayer's basis
must be reduced by the cost of insurance (i.e., the non-investment component of
the premiums paid) if the taxpayer sells the contract to a third party.
The buyer
of a previously issued life insurance contract who subsequently receives a death
benefit generally is subject to tax on the difference between the death benefit
received and the sum of the amount paid for the contract and premiums
subsequently paid by the buyer.
Provision:
Under the provision, a taxpayer that purchases an interest in an existing life
insurance contract with a death benefit equal to or exceeding $500,000 would be
required to report (1) the purchase price, the identity of the buyer and seller,
and the issuer and policy number to both the IRS and the seller, and (2) the
identity of the buyer and seller, and the issuer and policy number to the
issuing insurance company. Upon the payment of any policy benefits to the buyer
of a previously issued life insurance contract, the insurance company would be
required to report the gross benefit payment, the identity of the buyer, and the
insurance company's estimate of the buyer's basis to the IRS and to the payee.
This aspect of the provision would be effective for reportable sales of life
insurance contracts and payments of death benefits occurring after 2014.
In
addition, a taxpayer's basis in a life insurance contract would not be reduced
by the cost of insurance, regardless of whether the taxpayer settles or sells
the contract. This aspect of the provision would be effective for transactions
entered into after August 25, 2009.
JCT
estimate: According to JCT, the provisions, along with section 3515 of the
discussion draft, would increase revenues by $0.2 billion over 2014-2023.
Sec. 3515. Exception to transfer for valuable consideration rules.
Current
law: Under current law, a payment received under a life insurance contract
upon the death of the insured is excluded from income. If the life insurance
contract was transferred for valuable consideration, however, the recipient must
include the payment less the recipient's basis in the contract, unless (1) the
contract has a carryover basis, or (2) the contract was transferred to the
person whose life is insured under the contract or to a partner of the insured,
or a partnership or corporation in which the insured is a partner or
shareholder.
Provision:
Under the provision, the exception for carryover basis transfers and transfers
to the person whose life is insured (or to a partner of the insured, or a
partnership or corporation in which the insured is a partner or shareholder)
would not apply if the acquirer of the life insurance contract has no
substantial relationship with the insured apart from the acquirer's interest in
the contract (i.e., the acquirer must include the amount of the payment on the
death of the insured, reduced by the acquirer's basis in the contract). The
provision would be effective for transfers after 2014.
JCT
estimate: The revenue effect of the provision over 2014-2023 is included in
the JCT estimate provided for sections 3513-3514 of the discussion draft.
Subtitle G - Pass-Thru and Certain Other EntitiesPart 1 - S Corporations
Considerations
for Subtitle G, Part 1:
Sec. 3601. Reduced recognition period for built-in gains made permanent.
Current
law: Under current law, an S corporation is subject to an entity-level tax
at the highest corporate rate on certain built-in gains of property that it held
while operating as a C corporation. The tax applies to gain recognized within
ten years from the date that the C corporation elected to be an S corporation.
Through 2013, a temporary provision reduced this period to five years.
Provision:
Under the provision, the temporary five-year period would be made permanent. The
provision would be effective for tax years beginning after 2013.
JCT
estimate: According to JCT, the provision would reduce revenues by $3.0
billion over 2014-2023.
Sec. 3602. Modifications to S corporation passive investment income rules.
Current
law: Under current law, an S corporation that previously operated as a C
corporation may be subject to tax at the highest corporate rate on certain
passive income if more than 25 percent of its gross receipts are derived from
passive investment income. In addition, if the S corporation exceeds the
25-percent passive income threshold for three consecutive years, the
corporation's election to be treated as an S corporation is terminated
automatically.
Provision:
Under the provision, the passive-income threshold would be increased from 25
percent to 60 percent. The provision also would repeal the current-law provision
terminating the S corporation election for excessive passive income. The
provision would be effective for tax years beginning after 2014.
JCT
estimate: According to JCT, the provision would reduce revenues by $3.6
billion over 2014-2023.
Sec. 3603. Expansion of qualifying beneficiaries of an electing small business trust.
Current
law: Under current law, an S corporation is limited to 100 or fewer
shareholders, which generally must be individuals who are U.S. citizens or
residents or certain exempt organizations and trusts. Current law also permits
special trusts, known as electing small business trusts (ESBTs), to be S
corporation shareholders. Generally, the eligible beneficiaries of an ESBT
include individuals, estates, and certain charitable organizations eligible to
hold S corporation stock directly. A nonresident alien individual may not be a
shareholder of an S corporation and may not be a potential current beneficiary
of an ESBT. The portion of an ESBT that consists of the stock of an S
corporation is treated as a separate trust. In general, this trust is taxed on
its share of the S corporation's income at the highest rate of tax imposed on
individual taxpayers. Such income (whether or not distributed by the ESBT) is
not taxed to the beneficiaries of the ESBT.
Provision:
Under the provision, a nonresident alien individual could be a potential current
beneficiary of an ESBT. Accordingly, a nonresident alien individual would be
permitted to own shares in an S corporation, provided such ownership is indirect
through an ESBT. The provision would be effective on January 1, 2015.
JCT
estimate: According to JCT, the provision would reduce revenues by $0.1
billion over 2014-2023.
Sec. 3604. Charitable contribution deduction for electing small business trusts.
Current
law: Under current law, an electing small business trust (ESBT) may be a
shareholder of an S corporation. Because an ESBT is a trust, it must follow the
rules for deducting charitable contributions that are applicable to trusts,
rather than those applicable to individuals. Generally, a trust is allowed a
deduction for charitable contributions without any limitation on the amount of
the deduction relative to the trust's gross income. If a trust makes
contributions in excess of its gross income, no carryover of the excess is
allowed as a deduction in a future year. In contrast, an individual may deduct
charitable contributions up to certain percentages of adjusted gross income and
is generally permitted to carry forward excess contributions for five years.
Provision:
Under the provision, the charitable contribution rules applicable to
individuals, rather than to trusts, would apply to ESBTs. Thus, the percentage
limitations and carryforward provisions applicable to individuals would apply to
contributions made by the portion of an ESBT holding S corporation stock. The
provision would be effective for tax years beginning after 2014.
JCT
estimate: According to JCT, the provision would reduce revenues by $0.1
billion over 2014-2023.
Sec. 3605. Permanent rule regarding basis adjustment to stock of S corporations making charitable contributions of property.
Current
law: Under current law, if an S corporation contributes money or other
property to a charity, each shareholder takes into account his pro rata share of
the contribution in determining his own income tax liability. A shareholder
reduces the basis in his S corporation stock by the amount of the S
corporation's charitable contribution that flows through to the shareholder. For
contributions made in tax years beginning before 2014, the basis reduction in
the S corporation stock is equal to the shareholder's pro rata share of the
adjusted basis of the contributed property. For contributions made in tax years
beginning after 2013, the amount of the reduction is the shareholder's pro rata
share of the fair market value of the contributed property.
Provision:
Under the provision, the pre-2014 basis-adjustment rule would be made permanent.
Thus, an S corporation shareholder would reduce the basis in his S corporation
stock by his pro rata share of the adjusted basis of the contributed property.
This rule would provide consistent treatment of charitable contributions between
S corporation shareholders and partners in a partnership. The provision would be
effective for tax years beginning after 2013.
JCT
estimate: According to JCT, the provision would reduce revenues by $1.1
billion over 2014-2023.
Sec. 3606. Extension of time for making S corporation elections.
Current
law: Under current law, a small business corporation may elect to be treated
as an S corporation for any tax year at any time during the preceding tax year
or by the 15th day of the third month of the tax year for which the election is
made. An election to be an S corporation made by the 15th day of the third month
of a corporation's tax year is effective for that tax year if the corporation
meets all eligibility requirements for the portion of the tax year prior to
filing the election and all the required shareholders consent to the election.
If these requirements are not met, the election becomes effective for the
following tax year. An election continues in effect for subsequent tax years
until it is terminated (including revocation by the taxpayer).
Similar
rules apply to an election to treat an S corporation subsidiary as a qualified S
corporation subsidiary (QSub) - which allows the S corporation to treat the
subsidiary as a division of the S corporation and file a single return. In
addition, Qualified Subchapter S Trusts (QSST) and Electing Small Business
Trusts (ESBT) may elect to qualify as S corporation shareholders if the election
is made by the 15th day of the third month after the transfer of stock to the
trust.
Provision:
Under the provision, the election process would be simplified by permitting a
small business corporation to elect on its income tax return to be treated as an
S corporation for the tax year to which the return relates, provided that the
return is filed not later than the applicable due date (with extensions). The
provision also would provide that the IRS may accept as timely a late filed
revocation if there is reasonable cause shown. In addition, the provision would
apply election procedures to QSubs that are similar to the rules for electing S
corporation status. Lastly, the provision would permit the IRS to coordinate the
election rules for a QSST and ESBT with the new election rules for S
corporations and QSubs. The provision would apply to elections for tax years
beginning after 2014. In the case of revocation, the provision would apply to
revocations after 2014.
JCT
estimate: According to JCT, the provision would reduce revenues by less than
$50 million over 2014-2023.
Sec. 3607. Relocation of C corporation definition.
Current
law: Under current law, the definition of a C corporation as being a
corporation other than an S corporation is located in Subchapter S of the
Code.
Provision:
Under the provision, the definition would be moved to Code section 7701, which
provides generally applicable definitions. The provision would be effective on
the date of enactment.
JCT
estimate: According to JCT, the provision would have no revenue effect over
2014-2023.
Part 2 - Partnerships
Considerations
for Subtitle G, Part 2:
Sec. 3611. Repeal of rules relating to guaranteed payments and liquidating distributions.
Current
law: Under current law, guaranteed payments made by a partnership to a
partner generally are payments made without regard to the income of the
partnership and are for services or for the use of capital (e.g., loans)
provided by the partner. Guaranteed payments are distinct from a partnership
distribution of income or capital, and from payments by the partnership to a
partner not acting in his capacity as a partner. Guaranteed payments generally
are deductible by the partnership and includible in the partner's taxable
income.
Current
law also provides rules for treating payments made in the liquidation of a
retiring or deceased partner's partnership interest. Such payments are treated
either as (1) a distributive share or guaranteed payment or (2) payments in
exchange for the partner's interest in partnership property. For a deceased
partner, income earned prior to death (i.e., income in respect of a decedent) is
includible in the deceased partner's gross income in the year of death, and
special rules apply for determining the basis of the partnership interest in the
hands of the successor partner.
Provision:
Under the provision, the rules relating to guaranteed payments to partners would
be repealed. Thus, payments received by partners would constitute either
payments in their capacity as partners (i.e., part of their distributive shares
of partnership income or loss) or in their capacity as non-partners (i.e., as an
independent third party). In addition, the provision would repeal the special
rule for deceased or retiring partners that treats certain payments in
liquidation as guaranteed payments, subjecting such payments to the general
rules applicable to the transaction (e.g., the provisions relating to payments
of deferred compensation) or the applicable rules governing income in respect of
a decedent. The provision would be effective for tax years beginning after 2014
and transfers to decedents made after 2014. In addition, the provision would
apply to payments made in liquidation to partners retiring or dying after
2014.
JCT
estimate: According to JCT, the provision would increase revenues by $0.3
billion over 2014-2023.
Sec. 3612-3614. Mandatory adjustments to basis of partnership property in case of transfer of partnership interests; Mandatory adjustments to basis of undistributed partnership property; Corresponding adjustments to basis of properties held by partnership where partnership basis adjusted.
Current
law: Under current law, if a partnership makes a one-time election, or if
the partnership has a substantial built-in loss (i.e., the partnership's
adjusted basis in its property exceeds the fair market value by more than
$250,000) immediately after a transfer of a partnership interest by a partner,
the partnership must make adjustments to the basis of partnership property.
Similar rules apply in the case of a partnership distribution of property to a
partner. The adjustments are intended to account for (1) the difference that can
arise between a partner's adjusted basis in the partnership property and the
partner's basis in his partnership interest and (2) the difference in the
partnership's adjusted basis in its property with respect to partners who do not
receive distributions of property. Certain securitization partnerships and
electing investment partnerships are exempt from the basis-adjustment
requirement with respect to substantial built-in losses in certain instances.
When basis adjustments are required under current law, no corresponding
adjustments are required by upper- or lower-tier partnerships owning an interest
in the partnership making the basis adjustment.
Provision:
Under the provision, mandatory adjustment of a partnership's basis in
partnership property would be required when a partner transfers his interest in
a partnership or a partnership distributes property to a partner. These rules
would also apply to securitization and electing investment partnerships. In
addition, corresponding adjustments would be required in cases involving tiered
partnerships. The provision would be effective for transfers and distributions
after 2014.
JCT
estimate: According to JCT, the provisions would increase revenues by $1.1
billion over 2014-2023.
Sec. 3615. Charitable contributions and foreign taxes taken into account in determining limitation on allowance of partner's share of loss.
Current
law: Under current law, a partner generally may only deduct certain
expenditures and losses (including capital losses) of a partnership to the
extent of the partner's adjusted basis in his partnership interest. Charitable
contributions and foreign taxes paid by a partnership are not subject to this
limitation and, as a result, can be deducted even if they exceed the partner's
basis.
Provision:
Under the provision, a partner would be required to take into account charitable
contributions and foreign taxes paid by a partnership in calculating the
limitation on the partner's share of losses, conforming the partnership rules to
the S corporation rules and thus preventing a partner from deducting losses in
excess of basis. The provision would be effective for tax years beginning after
2014.
JCT
estimate: According to JCT, the provision would increase revenues by $0.9
billion over 2014-2023.
Sec. 3616. Revisions related to unrealized receivables and inventory items.
Current
law: Under current law, gain or loss from the sale or exchange of a
partnership interest generally is treated as gain or loss from a capital asset.
Gain is treated as ordinary income, however, on the sale or exchange of a
partnership interest when the partnership holds unrealized receivables (i.e.,
uncollected payments for goods or services) or appreciated inventory (i.e.,
appreciated more than 120 percent). Certain distributions by a partnership to a
partner are also treated as sales or exchanges when a partnership holds
unrealized receivables or substantially appreciated inventory.
Provision:
Under the provision, any distribution of an inventory item would be treated as a
sale or exchange between the partner and the partnership, eliminating the
requirement that inventory be substantially appreciated in value to trigger gain
recognition. The provision also would simplify the definition of an unrealized
receivable by providing that the term include any property other than an
inventory item, but only to the extent of the amount that would be treated as
ordinary income if the property were sold for its fair market value. The
provision would be effective for distributions and partnership tax years
beginning after 2014.
JCT
estimate: According to JCT, the provision would increase revenues by $0.8
billion over 2014-2023.
Sec. 3617. Repeal of time limitation on taxing precontribution gain.
Current
law: Under current law, if a partner contributes appreciated property to a
partnership, the partner does not recognize gain or loss at the time of the
contribution, but the pre-contribution built-in gain or loss is preserved in the
contributing partner's capital account. If the partnership subsequently
distributes the property to another partner within seven years of the
contribution, the contributing partner generally recognizes the pre-contribution
gain or loss. Similar rules apply if the contributing partner receives other
property of the partnership within seven years in what amounts to a disguised
sale of the originally contributed property.
Provision:
Under the provision, a partner who contributes property with pre-contribution
built-in gains or losses to a partnership would be required to recognize the
pre-contribution gain or loss when the partnership distributes such property. No
limitation period would apply. The provision would be effective for property
contributed to a partnership after 2014.
JCT
estimate: According to JCT, the provision would increase revenues by $0.4
billion over 2014-2023.
Sec. 3618. Partnership interests created by gift.
Current
law: Under current law, a person is treated as a partner if he owns a
capital interest in a partnership in which capital is a material
income-producing factor, whether such interest was obtained by purchase or gift
from another person. In the case of a partnership interest purchased by one
family member from another, the interest is treated as created by gift and the
fair market value of the interest is treated as donated capital to the
partnership. Current law also provides special rules to prevent donors of
partnership interests from assigning income with respect to services that the
donor performs for the partnership or with respect to the donor's contributed
capital.
Provision:
Under the provision, the rule would be clarified to provide that a person is
treated as a partner in a partnership in which capital is a material
income-producing factor whether such interest was obtained by purchase or gift
and regardless of whether such interest was acquired from a family member. The
rules preventing assignment of income would continue to apply to transfers of
partnership interests by gift. The provision would be effective for tax years
beginning after 2014.
JCT
estimate: According to JCT, the provision would increase revenues by $0.8
billion over 2014-2023.
Sec. 3619. Repeal of technical termination.
Current
law: Under current law, a partnership terminates only if: (1) no part of any
business, financial operations, or venture of the partnership continues to be
carried on by any of its partners, or (2) within a 12-month period there is a
sale or exchange of 50 percent or more of the total interests in partnership
capital and profits. The second type of termination is commonly referred to as a
technical termination. When a technical termination occurs, the business of the
partnership continues in the same legal form, but the partnership must make new
elections for various accounting methods, depreciation lives, and other
purposes.
Provision:
Under the provision, the technical termination rule would be repealed. Thus, the
partnership would be treated as continuing even if more than 50 percent of the
total capital and profits interests of the partnership are sold or exchanged,
and new elections would not be required or permitted. The provision would be
effective for tax years beginning after 2014.
JCT
estimate: According to JCT, the provision would increase revenues by $0.5
billion over 2014-2023.
Sec. 3620. Publicly traded partnership exception restricted to mining and natural resources partnerships.
Current
law: Under current law, a publicly traded partnership is a partnership the
interests in which are traded on an established securities market or are readily
tradable on a secondary market. A publicly traded partnership generally is
treated as a C corporation for Federal tax purposes. An exception from such
treatment applies to a publicly traded partnership (other than a regulated
investment company, management company or unit investment trust) if 90 percent
or more of the partnership's gross income is qualifying income. Qualifying
income includes: interest, dividends, capital gains, and rents from real
property; income and gains from certain activities relating to minerals or
natural resources (e.g., mining, production, refining, and transporting); and
income and gains from certain commodities and derivatives.
Provision:
Under the provision, the special exceptions for publicly traded partnerships
would be repealed other than for partnerships with 90 percent of their income
from activities relating to mining and natural resources (e.g., mining,
production, refining, and transporting). Thus, publicly traded partnerships
would generally be treated as C corporations. The provision would be effective
for tax years beginning after 2016.
JCT
estimate: According to JCT, the provision would increase revenues by $4.3
billion over 2014-2023.
Sec. 3621. Ordinary income treatment in the case of partnership interests held in connection with performance of services.
Current
law: Under current law, a partner holding a partnership interest includes in
income his distributive share of partnership income and gain (whether or not
actually distributed). The character of partnership items passes through to the
partners as if the items were realized directly by the partners. A partner's
basis in the partnership interest is increased by any amount of gain included in
the partner's income and is decreased by any losses. Money distributed to the
partner by the partnership is taxed to the extent the amount exceeds the
partner's basis in the partnership interest. Similarly, when a partner sells his
partnership interest, gain generally is recognized to the extent the amount
received exceeds the partner's basis in the partnership interest. The extent to
which such gain is capital in character depends on the holding period and
special partnership rules that recharacterize capital gains as ordinary income
in certain cases.
It is
common for partnerships to be used for investment purposes. In particular,
private equity funds are organized as partnerships. In a typical private equity
fund, the general partner contributes a small amount of capital and manages the
assets, typically stock of companies, in exchange for a profits interest (or
“carried interest”) in the partnership (generally a 20-percent profits
interest). Limited partners provide the additional capital needed to acquire
assets. In addition, the general partner is paid regular fees for managing the
assets, which generally consists of improving the operations, governance,
capital structure and strategic position of companies. In general, gain from the
sale of stock of the companies owned by the fund results in capital gain. Thus,
the general partner that manages the partnership will receive a distribution of
capital gain based on his profits interest when the partnership sells the stock
of any company owned by the partnership.
Provision:
Under the provision, certain partnership interests held in connection with the
performance of services would be subject to a rule that characterizes a portion
of any capital gains as ordinary income. This rule would apply to partnership
distributions and dispositions of partnership interests. An applicable
partnership interest would include any interest transferred, directly or
indirectly, to a partner in connection with the performance of services by the
partner, provided that the partnership is engaged in a trade or business
conducted on a regular, continuous and substantial basis consisting of: (1)
raising or returning capital, (2) identifying, investing in, or disposing of
other trades or businesses, and (3) developing such trades or businesses. The
provision would not apply to a partnership engaged in a real property trade or
business.
The
recharacterization formula generally would treat the service partner's
applicable share of the invested capital of the partnership as generating
ordinary income by multiplying that share by a specified rate of return (the
Federal long-term rate plus 10 percentage points), intended to approximate the
compensation earned by the service partner for managing the capital of the
partnership. The recharacterization amount would be determined (but not
realized) on an annual basis and tracked over time. To the extent a service
partner contributes capital to the partnership, the result would be less capital
gain being characterized as ordinary income. Any distribution or gain from the
sale of a partnership interest (i.e., a realization event) then would be treated
as ordinary to the extent of the partner's recharacterization account balance
for the tax year. Amounts in excess of the recharacterization account balance
would be capital gain. The invested capital of a partnership is, as of any day,
the total cumulative value, determined at the time of contribution, of all money
and other property contributed to the partnership on or before such day. Partner
loans to the partnership and indebtedness entitled to share in the equity of the
partnership would qualify as invested capital.
If a
taxpayer, at any time during a tax year, holds directly or indirectly more than
one applicable partnership interest in a single partnership interest, all
interests in a partnership would be aggregated and treated as a single
interest.
The
provision would be effective for tax years beginning after 2014.
Considerations:
JCT
estimate: According to JCT, the provision would increase revenues by $3.1
billion over 2014-2023.
Sec. 3622. Partnership audits and adjustments.
Current
law: Under current law, three different regimes exist for auditing
partnerships. For partnerships with 10 or fewer partners, the IRS generally
applies the audit procedures for individual taxpayers, auditing the partnership
and each partner separately. For most large partnerships with more than 10
partners, the IRS conducts a single administrative proceeding (under the
so-called TEFRA rules, which were adopted as part of the Tax Equity and Fiscal
Responsibility Act of 1982) to resolve audit issues regarding partnership items
that are more appropriately determined at the partnership level than at the
partner level. Under the TEFRA rules, once the audit is completed and the
resulting adjustments are determined, the IRS must recalculate the tax liability
of each partner in the partnership for the particular audit year.
A third
audit regime applies to partnerships with 100 or more partners that elect to be
treated as Electing Large Partnerships (ELPs) for reporting and audit purposes.
A distinguishing feature of the ELP audit rules is that unlike the TEFRA
partnership audit rules, partnership adjustments generally flow through to the
partners for the year in which the adjustment takes effect, rather than the
audit year. As a result, the current-year partners' share of current-year
partnership items of income, gains, losses, deductions, or credits are adjusted
to reflect partnership adjustments relating to a prior year audit that take
effect in the current year. The adjustments generally do not affect prior-year
returns of any partners (except in the case of changes to any partner's
distributive share).
Provision:
Under the provision, the current TEFRA and ELP rules would be repealed, and the
partnership audit rules would be streamlined into a single set of rules for
auditing partnerships and their partners at the partnership level. Similar to
the current TEFRA rule excluding partnerships with fewer than 10 partners, the
provision would permit smaller partnerships with 100 or fewer partners (other
than partners that generally are passthrough entities themselves) to opt out of
the new rules, in which case the partnership and partners would be audited under
the general rules applicable to individual taxpayers.
Under the
streamlined audit approach, the IRS would examine the partnership's items of
income, gains, losses, deductions, credits and partners' distributive shares for
a particular year of the partnership (the “reviewed year”). Any adjustments
would be taken into account by the partnership (not the individual partners) in
the year that the audit or any judicial review is completed (the “adjustment
year”). Partnerships would have the option of demonstrating that the adjustment
would be lower if the adjustment included partner-level information from the
reviewed year rather than imputed amounts based solely on the partnership's
information in such year. A partnership would also have the option of initiating
an adjustment for a reviewed year, such as when it believes additional payment
is due, with the adjustment taken into account in the adjustment year. In cases
in which the partnership believes a refund is due, the partnership would
continue to file an amended return and provided amended information returns to
each partner. The provision would be effective for partnership tax years ending
after 2014, with partnerships permitted to elect to apply the new rules for any
partnership tax year beginning after the date of enactment.
JCT
estimate: According to JCT, the provision would increase revenues by $13.4
billion over 2014-2023.
Part 3 - REITs and RICs
Considerations
for Subtitle G, Part 3:
Sec. 3631. Prevention of tax-free spinoffs involving REITs.
Current
law: Under current law, a corporation is permitted to distribute (or spin
off) to shareholders the stock of a controlled corporation on a tax-free basis
if the transaction satisfies certain requirements. One such requirement is that
both the distributing corporation and the controlled corporation must be engaged
immediately after the distribution in the active conduct of a trade or business
that has been conducted for at least five years. In 2001, the IRS ruled that a
REIT could satisfy the active trade or business requirement for tax-free
spin-off transactions, even though gain on the sale of property that is stock in
trade of a REIT, or property that is includible in inventory of a REIT, does not
satisfy the REIT income tests.
Provision:
Under the provision, the 2001 IRS ruling would be overturned, so that REITs
could not satisfy the active trade or business requirement for tax-free spin-off
transactions. In addition, neither a distributing corporation nor a controlled
corporation would be permitted to elect to be treated as a REIT for ten years
following a tax-free spin-off transaction. The provision generally would be
effective for distributions after February 26, 2014.
JCT
estimate: According to JCT, the provision, along with section 3647 of the
discussion draft, would increase revenues by $5.9 billion over 2014-2023.
Sec. 3632. Extension of period for prevention of REIT election following revocation or termination.
Current
law: Under current law, a taxpayer generally may not elect to be treated as
a REIT within five years after the termination or revocation of a prior REIT
election.
Provision:
Under the provision, the five-year waiting period for electing to be treated as
a REIT following the termination or revocation of a prior REIT election would be
extended to ten years. The provision would be effective for terminations and
revocations after 2014.
JCT
estimate: According to JCT, the provision would increase revenues by less
than $50 million over 2014-2023.
Sec. 3633. Certain short-life property not treated as real property for purposes of REIT provisions.
Current
law: Under current law, a REIT must derive at least 95 percent of its income
from certain specified real-estate-related and other investment income, and 75
percent of its income from such specified real-estate-related investment income.
Gains from the sale or disposition of real property satisfy the 95-percent and
75-percent REIT income tests. In addition, at least 75 percent of the assets of
a REIT must be comprised of real estate assets, cash and cash items, and
government securities. The term “real estate assets” is defined to include real
property and interests in real property.
Provision:
Under the provision, the term “real property” would not include tangible
property with a class life of less than 27.5 years (as defined under the
depreciation rules) for purposes of the REIT income and asset tests. The
provision would be effective for tax years beginning after 2016.
JCT
estimate: According to JCT, the provision would increase revenues by $0.6
billion over 2014-2023.
Sec. 3634. Repeal of special rules for timber held by REITs.
Current
law: Under current law, the IRS has ruled that gains from the sale or
disposition of real property that satisfy the REIT income tests (described
above) include capital gains from the sale of standing timber. Such gains also
include capital gains from the cutting and sale of timber during tax years that
ended after May 22, 2008 and began on or before May 22, 2009.
In
addition, certain gain from the sale of property held by a REIT in connection
with the trade or business of producing timber qualifies under a safe harbor
that protects such gain from being classified as prohibited transaction income
that otherwise would be subject to a 100-percent prohibited transaction excise
tax. The excise tax generally is imposed on REIT income derived from the sale of
property that constitutes stock in trade, inventory, or property held by the
REIT primarily for sale to customers in the ordinary course of the REIT's trade
or business. Certain aspects of the special safe harbor for timber property
sales only apply to the first tax year that began after May 22, 2008 and before
May 22, 2009.
For
certain “timber REITs,” mineral royalty income from real property held in
connection with the trade or business of producing timber is treated as
satisfying the REIT income tests, and up to 25 percent of the value of a timber
REIT's assets may consist of stock in a taxable REIT subsidiary. (This special
limitation was enacted at a time when the general limitation on the value of
such stock was 20 percent, which later was also increased to 25 percent for all
REITs.) These special rules for timber REITs apply to the first tax year that
began after May 22, 2008 and before May 22, 2009.
Provision:
Under the provision, the term “real property” for purposes of the REIT rules
would not include timber, consistent with the repeal of capital gains treatment
for sales of standing and cut timber elsewhere in the discussion draft. In
addition, the other temporary special rules for timber sales and timber REITs
that have expired would be repealed. The provision would be effective for tax
years beginning after 2016.
JCT
estimate: According to JCT, the provision would increase revenues by $0.2
billion over 2014-2023.
Sec. 3635. Limitation on fixed percentage rent and interest exceptions for REIT income tests.
Current
law: Under current law, rents from real property and interest generally
satisfy the 95-percent and 75-percent REIT income tests. In general, rents from
real property and interest do not include amounts that are contingent on the
income or profits of the tenant or debtor, but do include amounts that are based
on a fixed percentage of receipts or sales of the tenant or debtor.
Provision:
Under the provision, rents from real property and interest would not include
amounts that are based on a fixed percentage of receipts or sales to the extent
that such amounts are received or accrued from a single tenant that is a C
corporation and the amounts received or accrued from such tenant constitute more
than 25 percent of the total amount received or accrued by the REIT that is
based on a fixed percentage of receipts or sales. The provision would be
effective for tax years ending after 2014.
JCT
estimate: According to JCT, the provision would increase revenues by less
than $50 million over 2014-2023.
Secs. 3636-3637. Repeal of preferential dividend rule for publicly offered REITs; Authority for alternative remedies to address certain REIT distribution failures.
Current
law: Under current law, REITs may deduct dividend distributions to their
shareholders, but they are required to distribute annually as a dividend at
least 90 percent of their income (other than net capital gain and certain other
items). A preferential dividend does not qualify for the REIT dividend deduction
and does not count toward satisfying the requirement that REITs distribute 90
percent of their income every year. A dividend is “preferential” unless it is
distributed pro rata to all shareholders, with no preference to any share of
stock over others within the same class of stock, and no preference to one class
of stock over other classes of stock (except to the extent the class is entitled
to a preference).
Provisions:
Under the provisions, the preferential dividend rule would be repealed for
publicly offered REITs. In addition, the IRS would have authority to provide an
appropriate remedy for a preferential dividend distribution by non-publicly
offered REITs in lieu of treating the dividend as not qualifying for the REIT
dividend deduction and not counting toward satisfying the requirement that REITs
distribute 90 percent of their income every year. Such authority would apply if
the preferential distribution is inadvertent or due to reasonable cause and not
due to willful neglect.
The
provisions would be effective for distributions in tax years beginning after
2014.
JCT
estimate: According to JCT, the provisions would reduce revenues by less
than $50 million over 2014-2023.
Sec. 3638. Limitations on designation of dividends by REITs.
Current
law: Under current law, a REIT dividend is ordinary income to the REIT
shareholder rather than a qualified dividend subject to a reduced rate of tax,
unless the REIT designates such dividends as being attributable to income that
is taxed to the REIT at regular corporate tax rates because it was not
previously distributed, or to qualified dividends received by the REIT from
other corporations. A REIT also may identify certain dividends as capital gain
dividends to the extent of the REIT's net capital gain, which would be subject
to tax in the hands of the REIT shareholders at the capital gains rate.
Provision:
Under the provision, the aggregate amount of dividends that could be designated
by a REIT as qualified dividends or capital gain dividends would not be
permitted to exceed the dividends actually paid by the REIT. The provision would
be effective for distributions in tax years beginning after 2014.
JCT
estimate: According to JCT, the provision would increase revenues by less
than $50 million over 2014-2023.
Sec. 3639. Non-REIT earnings and profits required to be distributed by REIT in cash.
Current
law: Under current law, REITs that accumulated earnings and profits prior to
becoming a REIT (e.g., an entity that operated as a taxable C corporation prior
to making an election to become a REIT) are required to distribute such earnings
and profits (e.g., in cash, property, or stock) by the end of the first tax year
after electing to become a REIT.
Provision:
Under the provision, REITs would be required to distribute their pre-REIT
earnings and profits in cash. The provision would be effective for distributions
after February 26, 2014.
JCT
estimate: According to JCT, the provision would increase revenues by $0.1
billion over 2014-2023.
Sec. 3640. Debt instruments of publicly offered REITs and mortgages treated as real estate assets.
Current
law: Under current law, a REIT must derive at least 95 percent of its income
from certain specified real estate-related and other investment income, and 75
percent of its income from such specified real estate-related investment income.
In addition, at least 75 percent of the assets of a REIT must be comprised of
real estate assets, cash and cash items, and government securities. The term
“real estate assets” is defined to include real property and interests in real
property.
Provision:
Under the provision, debt instruments issued by publicly offered REITs, as well
as interests in mortgages on interests in real property, would be treated as
real estate assets for purposes of the 75-percent asset test. Income from debt
instruments issued by publicly offered REITs would be treated as qualified
income for purposes of the 95-percent income test, but not the 75-percent income
test (unless they already are treated as qualified income under current law). In
addition, not more than 25 percent of the value of a REIT's assets would be
permitted to consist of such debt instruments. The provision would be effective
for tax years beginning after 2014.
JCT
estimate: According to JCT, the provision would reduce revenues by less than
$50 million over 2014-2023.
Sec. 3641. Asset and income test clarification regarding ancillary personal property.
Current
law: Under current law, a REIT must derive at least 95 percent of its income
from certain specified real estate-related and other investment income, and 75
percent of its income from such specified real estate-related investment income.
In addition, at least 75 percent of the assets of a REIT must be comprised of
real estate assets, cash and cash items, and government securities. The term
“real estate assets” is defined to include real property and interests in real
property.
Provision:
Under the provision, certain ancillary personal property that is leased with
real property would be treated as real property for purposes of the 75-percent
asset test (similar to the current-law treatment of rents from such property for
purposes of the REIT income tests). In addition, an obligation secured by a
mortgage on such property would be treated as real property for purposes of the
75-percent income and asset tests, provided the fair market value of the
personal property does not exceed 15 percent of the total fair market value of
the combined real and personal property. The provision would be effective for
tax years beginning after 2014.
JCT
estimate: According to JCT, the provision would reduce revenues by less than
$50 million over 2014-2023.
Sec. 3642. Hedging provisions.
Current
law: Under current law, a REIT must derive at least 95 percent of its income
from certain specified real-estate-related and other investment income, and 75
percent of its income from such specified real-estate-related investment income.
Income from certain REIT hedging transactions generally is not included as gross
income under either the 95-percent or 75-percent income tests.
Provision:
Under the provision, the current-law treatment of REIT hedges would be extended
to include income from hedges of previously acquired hedges that a REIT entered
to manage risk associated with liabilities or property that have been
extinguished or disposed. The provision would be effective for tax years
beginning after 2014.
JCT
estimate: According to JCT, the provision would reduce revenues by less than
$50 million over 2014-2023.
Sec. 3643. Modification of REIT earnings and profits calculation to avoid duplicate taxation.
Current
law: Under current law, REIT shareholders who receive distributions are
treated as having received a dividend to the extent of the REIT's current and
accumulated earnings and profits. Distributions in excess of earnings and
profits are treated as a return of shareholders' capital (reducing the
shareholders' basis on their REIT stock) and as capital gain of the shareholders
to the extent the distributions exceed shareholders' stock basis in the REIT. A
REIT may deduct a distribution to shareholders from its taxable income, and can
satisfy the requirement that REITs distribute as dividends at least 90 percent
of their taxable income, only to the extent of distributions that are made out
of its earnings and profits. REIT earnings and profits are computed in the same
manner as earnings and profits of other corporations and can differ from taxable
income. However, a special rule for REITs provides that current earnings and
profits are not reduced by any amount that does not reduce REIT taxable
income.
Provision:
Under the provision, current (but not accumulated) REIT earnings and profits for
any tax year would not be reduced by any amount that is not allowable in
computing taxable income for the tax year and was not allowable in computing its
taxable income for any prior tax year (e.g., certain amounts resulting from
differences in the applicable depreciation rules). The provision would apply
only for purposes of determining whether REIT shareholders are taxed as
receiving a REIT dividend or as receiving a return of capital (or capital gain
if a distribution exceeds a shareholder's stock basis). The provision would be
effective for tax years beginning after 2014.
JCT
estimate: According to JCT, the provision would reduce revenues by less than
$50 million over 2014-2023.
Sec. 3644. Reduction in percentage limitation on assets of REIT which may be taxable REIT subsidiaries.
Current
law: Under current law, a REIT generally may not own more than 10 percent of
the vote or value of a single entity. However, there is an exception for
ownership of taxable REIT subsidiaries (TRSs) that are taxed as corporations,
provided the securities of one or more TRSs do not represent more than 25
percent of the value of the REIT's assets. The 25-percent limitation was
increased from 20 percent in legislation enacted in 2008.
Provision:
Under the provision, the 25-percent TRS stock limitation would be reduced back
to 20 percent. The provision would be effective for tax years beginning after
2016.
JCT
estimate: According to JCT, the provision would increase revenues by $0.1
billion over 2014-2023.
Sec. 3645. Treatment of certain services provided by taxable REIT subsidiaries.
Current
law: Under current law, certain income from foreclosed real property
satisfies the 95-percent and 75-percent REIT income tests. In addition, REITs
are subject to a 100-percent prohibited transactions tax that prohibits REITs
from being dealers in real property and limits the number of real property sales
that a REIT may conduct.
A TRS
generally may engage in any kind of business activity, except that it is not
permitted to operate either a lodging or health care facility, although a TRS is
permitted to rent certain lodging or health care facilities from its parent REIT
and is permitted to hire an independent contractor to operate such facilities. A
100-percent excise tax applies to certain non-arm's length transactions between
a TRS and its parent REIT.
Provision:
Under the provision, TRSs would be permitted to operate foreclosed real property
without causing income from the property to fail to satisfy the REIT income
tests. In addition, TRSs would be permitted to develop and market REIT real
property without subjecting the REIT to the 100-percent prohibited transactions
tax. The provision also would expand the 100-percent excise tax on non-arm's
length transactions to include services provided by the TRS to its parent REIT.
The provision would be effective for tax years beginning after 2014.
JCT
estimate: According to JCT, the provision would reduce revenues by less than
$50 million over 2014-2023.
Sec. 3646. Study relating to taxable REIT subsidiaries.
Current
law: Under current law, rents from real property include amounts received or
accrued from TRSs, provided both the REIT and the TRS satisfy certain
requirements. A TRS generally is permitted to engage in any kind of business
activity, but is subject to corporate tax on its taxable income. Legislation
enacted in 1999 creating TRSs required the Treasury Department to conduct a
study and submit a report to Congress regarding the number of TRSs in existence
and the aggregate amount of taxes paid by TRSs.
Provision:
Under the provision, the Treasury Department would be required to conduct a
biannual study, and submit a report to the Ways and Means Committee and Senate
Finance Committee, regarding the number of TRSs in existence, the aggregate
amount of taxes paid by TRSs, and the amount by which transactions between TRSs
and their parent REITs reduce the taxable income of the TRSs. The provision
would be effective on the date of enactment.
JCT
estimate: According to JCT, the provision would have no revenue effect over
2014-2023.
Sec. 3647. C corporation election to become, or transfer assets to, a RIC or REIT.
Current
law: Under current law, a REIT or regulated investment company (RIC) that
previously operated as a C corporation is subject to an entity-level tax at the
highest corporate tax rate on certain built-in gains of property that it held
while operating as a C corporation. The tax applies to gain recognized within
ten years from the date that the C corporation elected to be a REIT or RIC. For
2013, the period was reduced to five years.
Provision:
Under the provision, the current-law entity-level tax on built-in gains would be
imposed at the time the C corporation elects to become a REIT or RIC or
transfers assets to the REIT or RIC in a carryover basis transaction, without
regard to when the gain otherwise would be recognized by the REIT or RIC. The
provision would be effective for elections and transfers after February 26,
2014.
JCT
estimate: The revenue effect of the provision over 2014-2023 is included in
the JCT estimate provided for section 3631 of the discussion draft.
Sec. 3648. Interests in RICs and REITs not excluded from definition of United States real property interests.
Current
law: Under current law, the Foreign Investment in Real Property Tax Act of
1980 (FIRPTA) imposes tax on dispositions by foreign persons of interests in
real property that is located in the United States. Specifically, FIRPTA treats
the gain or loss from such dispositions as effectively connected with a U.S.
trade or business. In addition, FIRPTA imposes a 10-percent withholding tax on
the gross proceeds from such dispositions. An interest in U.S. real property
includes an interest in a U.S. corporation the assets of which, at any time
during the five-year period preceding the disposition, have consisted
predominantly of U.S. real property. However, an interest in U.S. real property
does not include an interest in a U.S. corporation that does not hold any
interests in U.S. real property at the time of disposition and, during the
five-year period preceding the disposition of an interest in the U.S.
corporation by a foreign person, disposed of its interests in U.S. real property
in transactions in which the full amount of any gain was recognized for tax
purposes.
Provision:
Under the provision, the FIRPTA exception for interests in U.S. corporations
that have disposed of all of their interests in U.S. real property in taxable
transactions during the five-year period preceding disposition of an interest in
the U.S. corporation by a foreign person would not apply to interests in REITs
or RICs that disposed of their interests in U.S. real property with respect to
which the REIT or RIC claimed a dividends paid deduction. The provision would be
effective for dispositions after 2014.
JCT
estimate: According to JCT, the provision would increase revenues by $0.1
billion over 2014-2023.
Sec. 3649. Dividends derived from RICs and REITs ineligible for deduction for United States source portion of dividends from certain foreign corporations.
Current
law: Under current law, U.S. corporations generally may claim a deduction
for dividends received from a 10-percent owned foreign corporation to the extent
the dividend is attributable to either (1) income of the foreign subsidiary that
is effectively connected with the conduct of a U.S. trade or business, or (2)
dividends received by the foreign subsidiary from a U.S. corporation that is at
least 80-percent owned by the foreign subsidiary. In addition, RICs and REITs
may deduct dividend distributions to their shareholders, although shareholders
that are U.S. corporations generally may not claim a deduction for such
dividends.
Provision:
Under the provision, the deduction for dividends received from a foreign
subsidiary would not apply to dividends that are attributable to dividends
received by the foreign subsidiary from a RIC or REIT.
The
provision would be effective for distributions after February 26, 2014.
JCT
estimate: According to JCT, the provisions would increase revenues by $0.5
billion over 2014-2023.
Part 4 - Personal Holding CompaniesSec. 3661. Exclusion of dividends from controlled foreign corporations from the definition of personal holding company income for purposes of the personal holding company rules.
Current
law: Under current law, a tax of 20 percent is imposed on the passive income
of certain corporations (in addition to the regular corporate income tax) to
prevent the retention of corporate earnings in avoidance of the individual
income tax. Corporations are subject to the additional tax if five or fewer
individuals own more than 50 percent of the corporation's stock and more than 60
percent of the corporation's income consists of certain types of passive income
such as dividends, interest, and royalties. The tax is imposed on such passive
income only to the extent the income has not been distributed as a dividend by
the corporation. The passive income that is subject to the tax includes
dividends that are received by the corporation from any foreign subsidiaries,
even if such dividends are derived from an active trade or business of the
foreign subsidiary.
Provision:
Under the provision, dividends received from a foreign subsidiary would not be
subject to the additional 20-percent tax (although they would continue to be
subject to the regular corporate income tax). The provision would be effective
for tax years beginning after 2014.
JCT
estimate: According to JCT, the provision would increase revenues by less
than $50 million over 2014-2023.
Subtitle H - Taxation of Foreign PersonsSec. 3701. Prevention of avoidance of tax through reinsurance with non-taxed affiliates.
Current
law: Under current law, insurance companies generally may deduct premiums
paid for reinsurance. If the reinsurance transaction results in a transfer of
reserves and reserve assets to the reinsurer, potential tax liability for
earnings on those assets is generally shifted to the reinsurer as well. While
insurance income of a foreign subsidiary of a U.S. insurance company generally
is subject to current U.S. taxation (absent the temporary exception for active
financing income), insurance income of a foreign-owned foreign company that is
not engaged in a U.S. trade or business generally is not subject to U.S. income
tax. Instead, insurance and reinsurance policies issued by foreign insurers and
reinsurers with respect to U.S. risks generally are subject to an excise tax,
unless waived by treaty. In the case of reinsurance policies, this excise tax is
equal to 1 percent of the premium paid.
Provision:
Under the provision, U.S. insurance companies would not be permitted to deduct
reinsurance premiums paid to a related company that is not subject to U.S.
taxation on the premiums, unless the related company elects to treat the premium
income as effectively connected to a U.S. trade or business (and thus subject to
U.S. tax). However, if the taxpayer demonstrates to the IRS that a foreign
jurisdiction taxes the reinsurance premiums at a rate as high as or higher than
the U.S. corporate rate, the deduction for the reinsurance premiums would be
allowed. Additionally, to match income and deductions, any income from
reinsurance recovered by the U.S. insurance company, as well as any ceding
commissions received in connection with a premium deduction that has been
disallowed, would not be subject to U.S. tax. The provision would be effective
for tax years beginning after 2014.
JCT
estimate: According to JCT, the provision would increase revenues by $8.7
billion over 2014-2023.
Sec. 3702. Taxation of passenger cruise gross income of foreign corporations and nonresident alien individuals.
Current
law: Under current law, a foreign individual or corporation generally is
subject to U.S. tax on income that is effectively connected with the conduct of
a U.S. trade or business. However, income derived by a foreign individual or
corporation from the international operation of a ship is exempt from U.S. tax
if the country in which the individual or corporation is a resident grants an
equivalent exemption to U.S. taxpayers. Otherwise, a 4-percent U.S. tax is
imposed on U.S.-source gross income from regularly scheduled shipping if the
foreign individual or corporation has a fixed place of business in the United
States that is involved in earning such income.
Provision:
Under the provision, the income of foreign taxpayers that is derived from the
operation of passenger cruise ships within U.S. territorial waters would be
subject to U.S. tax, without regard to whether the country in which the taxpayer
is a resident grants an equivalent exemption to U.S. taxpayers. In addition, the
4-percent U.S. tax on U.S.-source shipping income would apply without regard to
whether the shipping is regularly scheduled or the foreign individual or
corporation has a fixed place of business in the United States. The provision
would be effective for tax years beginning after 2014.
Considerations:
JCT
estimate: According to JCT, the provision would increase revenues by $0.9
billion over 2014-2023.
Sec. 3703. Restriction on insurance business exception to passive foreign investment company rules.
Current
law: Under current law, U.S. shareholders of a passive foreign investment
company (PFIC) are taxed currently on the PFIC's earnings. A PFIC is defined as
any foreign corporation (1) 75 percent or more of the gross income of which is
passive, and (2) at least 50 percent of the assets of which produce passive
income. Among other exceptions, passive income does not include any income that
is derived in the active conduct of an insurance business if the PFIC is
predominantly engaged in an insurance business and would be taxed as an
insurance company were it a U.S. corporation.
Provision:
Under the provision, the PFIC exception for insurance companies would be amended
to apply only if (1) the PFIC would be taxed as an insurance company were it a
U.S. corporation, (2) more than 50 percent of the PFIC's gross receipts for the
tax year consist of premiums, and (3) loss and loss adjustment expenses,
unearned premiums, and certain reserves constitute more than 35 percent of the
PFIC's total assets. The provision would be effective for tax years beginning
after 2014.
JCT
estimate: According to JCT, the provision would increase revenues by $0.4
billion over 2014-2023.
Sec. 3704. Modification of limitation on earnings stripping.
Current
law: Under current law, a U.S. corporation generally may deduct interest
payments, including payments to a related party. However, if the taxpayer's
debt-to-equity ratio exceeds 1.5 to 1, interest payments to certain related
parties that are not subject to U.S. tax (e.g., foreign corporations) are
disallowed to the extent the taxpayer has “excess interest expense,” - i.e., net
interest expense (interest expense less interest income) in excess of 50 percent
of the taxpayer's adjusted taxable income (defined as taxable income without
regard to deductions for net interest expense, net operating losses, certain
cost recovery, and domestic production activities). Any disallowed interest
deductions may be carried forward indefinitely, while any “excess limitation”
(the excess of 50 percent of the corporation's adjusted taxable income over the
corporation's net interest expense) may be carried forward three years.
Provision:
Under the provision, the threshold for excess interest expense would be reduced
to 40 percent of adjusted taxable income. In addition, corporations would no
longer be permitted to carry forward any excess limitation. The provision would
be effective for tax years beginning after 2014.
JCT
estimate: According to JCT, the provision would increase revenues by $2.9
billion over 2014-2023.
Sec. 3705. Limitation on treaty benefits for certain deductible payments.
Current
law: Under current law, certain payments of fixed or determinable, annual or
periodical (FDAP) income - such as interest, dividends, rents, and annuities -
to foreign recipients are subject to a statutory 30-percent withholding tax.
Income tax treaties between the United States and other countries, however,
often reduce or eliminate this withholding tax for payments from one treaty
country to residents of the other treaty country.
Provision:
Under the provision, if a payment of FDAP income is deductible in the United
States and the payment is made by an entity that is controlled by a foreign
parent to another entity in a tax treaty jurisdiction that is controlled by the
same foreign parent, then the statutory 30-percent withholding tax on such
income would not be reduced by any treaty unless the withholding tax would be
reduced by a treaty if the payment were made directly to the foreign parent. The
provision would be effective for payments made after the date of enactment.
JCT
estimate: According to JCT, the provision would increase revenues by $6.9
billion over 2014-2023.
Subtitle I - Provisions Related to CompensationPart 1 - Executive CompensationSec. 3801. Nonqualified deferred compensation.
Current
law: Under current law, compensation generally is taxable to an employee and
deductible by an employer in the year earned, with two significant exceptions.
First, for compensation provided as part of a qualified defined benefit or
defined contribution pension plan, the employee does not take such compensation
into income until the year in which a distribution from the plan occurs, while
the employer generally may take the deduction in the year the compensation is
earned. Second, for non-qualified deferred compensation, the employee does not
take such compensation into income until the year received, but the employer's
deduction is postponed until that time. The employee generally must take
non-qualified deferred compensation into income, however, if the compensation is
put into a trust protected from the employer's creditors in bankruptcy as soon
as there is no substantial risk of forfeiture with regard to the compensation.
In addition, if the employer is located in a jurisdiction in which the employer
is not effectively subject to income tax (i.e., certain foreign jurisdictions),
the compensation is immediately taxable as soon as it is not subject to a
substantial risk of forfeiture. Other rules apply to deferred compensation paid
by a State or local government or tax-exempt organization, in which case an
employee may defer tax so long as the deferred compensation is less than the
limit on employee contributions for 401(k) plans (i.e., $17,500 for 2014).
Provision:
Under the provision, an employee would be taxed on compensation as soon as there
is no substantial risk of forfeiture with regard to that compensation (i.e.,
receipt of the compensation is not subject to future performance of substantial
services). The provision would be effective for amounts attributable to services
performed after 2014. The current-law rules would continue to apply to existing
non-qualified deferred compensation arrangements until the last tax year
beginning before 2023, when such arrangements would become subject to the
provision.
Considerations:
JCT
estimate: According to JCT, the provision would increase revenues by $9.2
billion over 2014-2023.
Sec. 3802. Modification of limitation on excessive employee remuneration.
Current
law: Under current law, a corporation generally may deduct compensation
expenses as an ordinary and necessary business expense. The deduction for
compensation paid or accrued with respect to a covered employee of a publicly
traded corporation, however, is limited to no more than $1 million per year. The
deduction limitation applies to all remuneration paid to a covered employee for
services, including cash and the cash value of all remuneration (including
benefits) paid in a medium other than cash, subject to several significant
exceptions: (1) commissions; (2) performance-based remuneration, including stock
options; (3) payments to a tax-qualified retirement plan; and (4) amounts that
are excludable from the executive's gross income.
A covered
employee is the chief executive officer (CEO) and the next four highest
compensated officers based on the Securities and Exchange Commission (SEC)
disclosure rules. Due to changes in the applicable SEC disclosure rules, IRS
guidance has interpreted “covered employee” to mean the principal executive
officer and the three highest compensated officers as of the close of the tax
year.
Provision:
Under the provision, the exceptions to the $1 million deduction limitation for
commissions and performance-based compensation would be repealed. The provision
also would revise the definition of “covered employee” to include the CEO, the
chief financial officer, and the three other highest paid employees, realigning
the definition with current SEC disclosure rules. Under the modified definition,
once an employee qualifies as a covered person, the deduction limitation would
apply for Federal tax purposes to that person so long as the corporation pays
remuneration to such person (or to any beneficiaries). The provision would be
effective for tax years beginning after 2014.
Considerations:
JCT
estimate: According to JCT, the provision would increase revenues by $12.1
billion over 2014-2023.
Sec. 3803. Excise tax on excess tax-exempt organization executive compensation.
Current
law: Under current law, the deduction allowed to publicly traded C
corporations for compensation paid with respect to chief executive officers and
certain highly paid officers is limited to no more than $1 million per year.
Similarly, current law limits the deductibility of certain severance-pay
arrangements (“parachute payments”). No parallel limitation applies to
tax-exempt organizations with respect to executive compensation and severance
payments.
Provision:
Under the provision, a tax-exempt organization would be subject to a 25-percent
excise tax on compensation in excess of $1 million paid to any of its five
highest paid employees for the tax year. The excise tax would apply to all
remuneration paid to a covered person for services, including cash and the cash
value of all remuneration (including benefits) paid in a medium other than cash,
except for payments to a tax-qualified retirement plan, and amounts that are
excludable from the executive's gross income.
Once an
employee qualifies as a covered person, the excise tax would apply to
compensation in excess of $1 million paid to that person so long as the
organization pays him remuneration. The excise tax also would apply to excess
parachute payments paid by the organization to such individuals. Under the
provision, an excess parachute payment generally would be a payment contingent
on the employee's separation from employment with an aggregate present value of
three times the employee's base compensation or more. The provision would be
effective for tax years beginning after 2014.
Considerations:
JCT
estimate: According to JCT, the provision would increase revenues by $4.0
billion over 2014-2023.
Sec. 3804. Denial of deduction as research expenditure for stock transferred pursuant to an incentive stock option.
Current
law: Under current law, an employer that transfers a share of stock to an
individual pursuant to an incentive stock option plan or employee stock purchase
plan may not claim a deduction as an ordinary and necessary business expense
under Code section 162 for the value of such stock. Some taxpayers have taken
the position that notwithstanding the foregoing prohibition, a deduction is
permitted as wages paid with respect to research expenditures under Code section
174.
Provision:
Under the provision, the rules with respect to incentive stock option plans and
employee stock purchase plans would be clarified to deny a deduction under any
provision of the Code for a transfer of stock to an individual under such plans.
The provision would be effective for stock transferred after February 26,
2014.
JCT
estimate: According to JCT, the provision would have negligible revenue
effect over 2014-2023.
Part 2 - Worker ClassificationSec. 3811. Determination of worker classification.
Current
law: Under current law, the determination of whether a worker is an employee
or an independent contractor is generally made under a common-law facts and
circumstances test that seeks to determine whether the worker is subject to the
control of the service recipient, not only as to the nature of the work
performed, but also as to the circumstances under which it is performed. Various
provisions under current law, however, specifically classify a worker as an
employee or an independent contractor. For example, certain real estate agents
and direct sellers are treated for all tax purposes as independent contractors,
while full-time life insurance salesmen are treated as employees only for
employment tax and employee benefit purposes. In some cases, salesmen are
treated as employees just for employment tax purposes. Under a special safe
harbor rule (section 530 of the Revenue Act of 1978), a service recipient may
treat a worker as an independent contractor for employment tax purposes, even
though the worker may be an employee, if the service recipient has a reasonable
basis for treating the worker as an independent contractor and certain other
requirements are met.
Provision:
Under the provision, workers qualifying for a safe harbor would not be treated
as an employee and the service recipient would not be treated as the employer
for any Federal tax purpose. The safe harbor also would apply to three-party
arrangements in which a payor other than the service recipient pays the worker.
To qualify for the safe harbor, the worker would have to satisfy certain sales
or service criteria and the worker and service recipient would be required to
have a written agreement meeting specified requirements. In addition, the
service recipient would withhold tax on the first $10,000 of payments made to
the worker in a year at a rate of 5 percent. Amounts withheld under the safe
harbor would be creditable by the worker against quarterly estimated-tax
requirements.
In any
case in which the IRS determines that the requirements of the safe harbor were
not satisfied, the provision generally would limit the IRS to reclassification
of the worker as an employee and service provider as an employer on a
prospective basis. To avoid retroactive reclassification, the worker or service
provider would have to have satisfied the written agreement and the reporting
and withholding requirements of the safe harbor and have had a reasonable basis
for claiming that the safe harbor applied.
The
provision would be effective for services performed and payments made after
2014.
Considerations:
JCT
estimate: According to JCT, the provision would reduce revenues by $2.6
billion over 2014-2023.
Subtitle J - Zones and Short-Term Regional BenefitsSec. 3821. Repeal of provisions relating to Empowerment Zones and Enterprise Communities.
Current
law: Under current law, the Secretary of Housing and Urban Development and
the Secretary of Agriculture were authorized to designate certain urban and
rural areas as Enterprise Communities and Empowerment Zones. Since 1996,
Empowerment Zones have replaced Enterprise Communities. The tax benefits
available to designated zones included: (1) a 20-percent wage credit available
to employers for the first $15,000 of qualified wages paid to an employee who
was a resident and performs substantially all employment services within the
Empowerment Zone; (2) expanded tax-exempt financing by State and local
governments for certain zone facilities as well as zone academy bonds for
certain public schools located in an Empowerment Zone; and (3) deferred
recognition of gain on the sale of qualified Empowerment Zone assets held for
more than one year and replaced within 60 days by another qualified asset in the
same zone. The Enterprise Community designations generally expired at the end of
2004. The Empowerment Zones designation expired after 2013.
Provision:
Under the provision, Enterprise Communities and Empowerment Zones and the
associated special tax benefits would be repealed. The provision generally would
be effective on the date of enactment, except for sales of qualified Empowerment
Zone assets before the date of enactment, and bonds issued before 2014.
JCT
estimate: According to JCT, the provision would have no revenue effect over
2014-2023.
Sec. 3822. Repeal of DC Zone provisions.
Current
law: Under current law, certain economically depressed census tracts within
the District of Columbia were designated as the District of Columbia Enterprise
Zone (DC Zone). Businesses and individual residents within the DC Zone were
eligible for special tax incentives generally through the end of 2011. The tax
benefits included: (1) a zero-percent capital gains rate with respect to the
sale of certain qualified DC Zone assets, provided that the property was held
for more than five years; and (2) expanded tax-exempt bond financing for certain
zone facilities as well as zone academy bonds for certain public schools located
in the zone.
Provision:
Under the provision, the DC Zone and the associated special tax incentives would
be repealed. The provision generally would be effective on the date of
enactment, except for qualifying capital assets and residences acquired, and
bonds issued, before 2012.
JCT
estimate: According to JCT, the provision would have no revenue effect over
2014-2023.
Sec. 3823. Repeal of provisions relating to renewal communities.
Current
law: Under current law, the Community Renewal Tax Relief Act of 2000
authorized the designation of 40 “Renewal Communities” within which special tax
incentives were available generally through the end of 2009. The tax benefits
included: (1) up to $12 million to be allocated by a State to each Renewal
Community for commercial revitalization expenditures (i.e., the cost of a new
building, or the cost of substantially rehabilitating an existing building, used
for commercial purposes and located in a Renewal Community), for which the
taxpayer may elect either to deduct one-half of the commercial revitalization
expenditures for the tax year the building is placed in service or amortize all
the expenditures ratably over a 120-month period; (2) a zero-percent capital
gains rate with respect to gain from the sale of certain Renewal Community
assets for gains attributable to the period between 2002 and 2014 (inclusive),
provided that the property was held for more than five years; and (3) access to
zone academy bonds for certain public schools located in an Empowerment
Zone.
Provision:
Under the provision, the Renewal Communities and the associated special tax
incentives would be repealed. The provision generally would be effective on the
date of enactment, except for qualifying assets and property acquired and placed
in service, and wages paid or incurred, before 2010.
JCT
estimate: According to JCT, the provision would have no revenue effect over
2014-2023.
Sec. 3824. Repeal of various short-term regional benefits.
Current
law: Under current law, special tax benefits applied to certain designated
areas for recovery from specific disasters. In 2002, the New York Liberty Zone
was designated to assist with the recovery from the terrorist attacks on
September 11, 2001. The tax benefits for the Liberty Zone included: (1)
additional 30-percent first-year depreciation for qualified Liberty Zone
property placed in service before 2006 (2009 for certain real property); (2)
enhanced tax-exempt bond financing for New York Liberty Bonds issued before
2014; and (3) five-year replacement period for compulsory or involuntarily
converted Liberty Zone assets as a result of the terrorist attacks.
In 2005,
the Gulf Opportunity Zone (GO Zone) was designated to provide relief for areas
damaged by Hurricanes Katrina, Rita, and Wilma. The primary tax benefits for
these areas included: (1) enhanced tax-exempt bond financing for Gulf
Opportunity Zone Bonds issued before 2012; (2) five-year carryback of certain
losses resulting from GO Zone damages; (3) increased rehabilitation credit for
qualifying expenditures before 2012; (4) special education tax benefits for
individuals attending educational institutions in the GO Zone in 2005 and 2006;
and (5) certain housing tax benefits for residents of the GO Zone in 2005 and
2006.
Provision:
Under the provision, the Liberty Zone and GO Zone designations and the
associated special tax benefits would be repealed. The provision generally would
be effective on the date of enactment or, if earlier, the date on which the
particular tax benefit expires or the date by which the bonds must be issued
under current law.
JCT
estimate: According to JCT, the provision would have no revenue effect over
2014-2023.
Title IV - Participation Exemption System for the Taxation of Foreign IncomeSubtitle A - Establishment of Exemption SystemSec. 4001. Deduction for dividends received by domestic corporations from certain foreign corporations.
Current
law: Under current law, U.S. citizens, resident individuals, and domestic
corporations generally are taxed on all income, whether earned in the United
States or abroad. Foreign income earned by a foreign subsidiary of a U.S.
corporation generally is not subject to U.S. tax until the income is distributed
as a dividend to the U.S. corporation. To mitigate the double taxation on
earnings of the foreign corporation, the United States allows a credit for
foreign income taxes paid. The foreign tax credit generally is available to
offset, in whole or in part, the U.S. tax owed on foreign income. When foreign
tax credits are insufficient to offset the U.S. tax liability on the repatriated
earnings, the additional U.S. tax the U.S. corporation must pay is referred to
as the “U.S. residual tax.” A U.S. taxpayer may elect to deduct foreign income
taxes paid rather than claim the credit.
Provision:
Under the provision, the current-law system of taxing U.S. corporations on the
foreign earnings of their foreign subsidiaries when these earnings are
distributed would be replaced with a dividend-exemption system. Under the
exemption system, 95 percent of dividends paid by a foreign corporation to a
U.S. corporate shareholder that owns 10 percent or more of the foreign
corporation would be exempt from U.S. taxation. No foreign tax credit or
deduction would be allowed for any foreign taxes (including withholding taxes)
paid or accrued with respect to any exempt dividend. The provision would be
effective for tax years of foreign corporations beginning after 2014, and for
tax years of U.S. shareholders in which or with which such tax years of foreign
subsidiaries end.
Considerations:
JCT
estimate: According to JCT, the provision would reduce revenues by $212.0
billion over 2014-2023.
Sec. 4002. Limitation on losses with respect to specified 10-percent owned foreign corporations.
Current
law: Under current law, any gain that is recognized by a U.S. parent
corporation on the sale or exchange of its stock in a foreign subsidiary
generally is treated as a dividend distribution by the foreign subsidiary to its
U.S. parent to the extent of earnings and profits (E&P) that have been
accumulated by the foreign subsidiary while it had been owned by the U.S.
parent.
In some
cases, U.S. companies may operate businesses in foreign countries directly
through a branch rather than a separate foreign subsidiary. In these situations,
U.S. companies pay U.S. taxes on the foreign earnings or deduct losses on a
current basis, as if earned directly by the U.S. parent.
Provisions:
Under the provision, a U.S. parent would reduce the basis of its stock in a
foreign subsidiary by the amount of any exempt dividends received by the U.S.
parent from its foreign subsidiary. Such basis reductions would apply only for
purposes of determining the amount of a loss (but not the amount of any gain) on
any sale or exchange of the foreign subsidiary stock by its U.S. parent. The
provision would be effective for dividends received in tax years beginning after
2014.
In
addition, if a U.S. corporation transfers substantially all of the assets of a
foreign branch to a foreign subsidiary, the U.S. corporation would be required
to include in income the amount of any post-2014 losses that previously were
incurred by the branch to the extent the U.S. corporation receives exempt
dividends from any of its foreign subsidiaries. The provision would be effective
for transfers after 2014.
JCT
estimate: The revenue effect of the provision over 2014-2023 is included in
the JCT estimate provided for section 4001 of the discussion draft.
Sec. 4003. Treatment of deferred foreign income upon transition to participation exemption system of taxation.
Current
law: Under current law, U.S. citizens, resident individuals, and domestic
corporations generally are taxed on all income, whether earned in the United
States or abroad. Foreign income earned by a foreign subsidiary that is owned by
a U.S. corporation generally is not subject to U.S. tax until the income is
distributed as a dividend to the U.S. corporation. To mitigate the double
taxation on earnings of the foreign corporation, the United States allows a
credit for foreign income taxes paid. The foreign tax credit generally is
available to offset, in whole or in part, the U.S. tax owed on foreign
income
Provision:
Under the provision, U.S. shareholders owning at least 10 percent of a foreign
subsidiary would include in income for their last tax year beginning before 2015
their pro rata share of the post-1986 historical E&P of the foreign
subsidiary to the extent such E&P has not been previously subject to U.S.
tax. The E&P would be bifurcated into E&P retained in the form of cash,
cash equivalents, or certain other short-term assets, and E&P that has been
reinvested in the foreign subsidiary's business (property, plant and equipment).
The portion of the E&P that consists of cash or cash equivalents would be
taxed at a special rate of 8.75 percent, while any remaining E&P would be
taxed at a special rate of 3.5 percent. Foreign tax credits would be partially
available to offset the U.S. tax.
At the
election of the U.S. shareholder, the tax liability would be payable over a
period of up to eight years, based on a schedule of 8 percent of the net tax
liability in each of the first 5 years; 15 percent in the sixth year; 20 percent
in the seventh year and 25 percent in the eighth year. The tax revenues
generated directly by this one-time tax on accumulated E&P would be
deposited into the Highway Trust Fund (HTF) as the revenues are received from
taxpayers. Consistent with the current allocation of fuel excise tax revenues
between the Highway Account and the Mass Transit Account in the HTF, 80 percent
of the revenues raised by this provision would be allocated to the Highway
Account, and 20 percent of the revenues would be allocated to the Mass Transit
Account.
If the
U.S. shareholder is an S corporation, the provision would not apply until the S
corporation ceases to be an S corporation, substantially all of the assets of
the S corporation are sold or liquidated, the S corporation ceases to exist or
conduct business, or stock in the S corporation is transferred.
The
provision would be effective for tax years of foreign corporations beginning
after 2014, and for tax years of U.S. shareholders in which or with which such
tax years of foreign subsidiaries end.
Considerations
:
JCT
estimate: According to JCT, the provision would increase revenues by $170.4
billion over 2014-2023, $126.5 billion of which would be attributable directly
to the one-time tax on accumulated E&P, with the remainder attributable to
indirect revenue effects.
Sec. 4004. Look-thru rule for related controlled foreign corporations made permanent.
Current
law: Under current law, a U.S. parent of a foreign subsidiary generally is
subject to current U.S. tax on dividends, interest, royalties, rents, and other
types of passive income earned by the foreign subsidiary, regardless of whether
the foreign subsidiary distributes such income to the U.S. parent. However, for
tax years of foreign subsidiaries beginning before 2014, and tax years of U.S.
shareholders in which or with which such tax years of the foreign subsidiary
end, a special “look-through” rule provided that passive income received by one
foreign subsidiary from a related foreign subsidiary generally was not
includible in the taxable income of the U.S. parent, provided such income was
not subject to current U.S. tax or effectively connected with a U.S. trade or
business.
Provision:
Under the provision, the look-through rule would be made permanent. The
provision would be effective for tax years of foreign corporations beginning
after 2013, and for tax years of U.S. shareholders in which or with which such
tax years of foreign subsidiaries end.
JCT
estimate: According to JCT, the provision would reduce revenues by $13.1
billion over 2014-2023.
Subtitle B - Modifications Related to Foreign Tax Credit SystemSec. 4101. Repeal of section 902 indirect foreign tax credits; determination of section 960 credit on current year basis.
Current
law: Under current law, foreign income earned by a foreign subsidiary of a
U.S. corporation generally is not subject to U.S. tax until the income is
distributed as a dividend to the U.S. corporation. To mitigate the double
taxation on earnings of the foreign corporation, the United States allows a
credit for foreign income taxes paid. The foreign tax credit generally is
available to offset, in whole or in part, the U.S. tax owed on foreign-source
income.
Under
certain circumstances, the U.S. parent corporation is subject to U.S. tax on
certain foreign income of its foreign subsidiaries (“subpart F income”) even if
the income is not repatriated. A U.S. parent corporation generally may claim a
credit for foreign taxes paid on the subpart F income.
Provision:
Under the provision, no foreign tax credit or deduction would be allowed for any
taxes (including withholding taxes) paid or accrued with respect to any dividend
to which the dividend exemption under section 4001 of the discussion draft would
apply. A foreign tax credit would be allowed for any subpart F income that is
included in the income of the U.S. shareholder on a current year basis, without
regard to pools of foreign earnings kept abroad. The provision would be
effective for tax years of foreign corporations beginning after 2014 and for tax
years of U.S. shareholders in which or with which such tax years of foreign
subsidiaries end.
JCT
estimate: The revenue effect of the provision over 2014-2023 is included in
the JCT estimate provided for section 4001 of the discussion draft.
Sec. 4102. Foreign tax credit limitation applied by allocating only directly allocable deductions to foreign source income.
Current
law: Under current law, a portion of expenses incurred in the United States
by a U.S. parent of a foreign subsidiary that are not directly attributable to
income earned by the foreign subsidiary must be allocated against foreign-source
income for purposes of calculating the U.S. parent's foreign-source income. The
allocation of these expenses to foreign-source income reduces the amount of
foreign tax credits a U.S. parent may use to reduce its U.S. tax on
foreign-source income. Some of the expenses that are allocated include
stewardship expenses, general and administrative expenses, and interest
expenses.
Provision:
Under the provision, only expenses that are directly attributable to income
earned by a foreign subsidiary would be allocated against foreign-source income
for purposes of calculating the U.S. parent's foreign-source income and the
amount of foreign tax credits the U.S. parent may use to reduce its U.S. tax on
foreign-source income. Directly allocable deductions include items such as
salaries of sales personnel, supplies, and shipping expenses directly related to
the production of foreign-source income. The provision would be effective for
tax years of foreign corporations beginning after 2014, and for tax years of
U.S. shareholders in which or with which such tax years of foreign subsidiaries
end.
JCT
estimate: The revenue effect of the provision over 2014-2023 is included in
the JCT estimate provided for section 4001 of the discussion draft.
Sec. 4103. Passive category income expanded to include other mobile income.
Current
law: Under current law, income earned by foreign subsidiaries is categorized
as either active or passive income. Passive income generally includes (but is
not limited to) dividends, rents, royalties and capital gains. Additionally, the
foreign taxes paid on the income are separated into active and passive baskets.
Only foreign taxes paid on passive income may be taken into account in
determining the amount of foreign tax credits that may be claimed against U.S.
tax on passive income.
Provision:
Under the provision, the use of foreign tax credits would be restricted to two
baskets: mobile and active. The mobile basket would include certain
related-party sales income, foreign intangible income, and current-law passive
income. The active basket would include all other income. The provision would be
effective for tax years of foreign corporations beginning after 2014, and for
tax years of U.S. shareholders in which or with which such tax years of foreign
subsidiaries end.
JCT
estimate: The revenue effect of the provision over 2014-2023 is included in
the JCT estimate provided for section 4211 of the discussion draft.
Sec. 4104. Source of income from sales of inventory determined solely on basis of production activities.
Current
law: Under current law, in determining the source of income for foreign tax
credit purposes, up to 50 percent of the income from the sale of inventory
property that is produced within the United States and sold outside the United
States (or vice versa) may be treated as foreign-source income, even though the
production activity takes place entirely within the United States.
Provision:
Under the provision, income from the sale of inventory property produced within
and sold outside the United States (or vice versa) would be allocated and
apportioned between sources within and outside the United States solely on the
basis of the production activities with respect to the inventory. The provision
would be effective for tax years beginning after 2014.
JCT
estimate: According to JCT, the provision would increase revenues by $1.8
billion over 2014-2023.
Subtitle C - Rules Related to Passive and Mobile IncomePart 1 - Modification of Subpart F ProvisionsSec. 4201. Subpart F income to only include low-taxed foreign income.
Current
law: Under current law, a U.S. parent of a foreign subsidiary is subject to
current U.S. tax on certain income of the foreign subsidiary (“subpart F
income”), regardless of whether or not the income is distributed to the U.S.
parent. Subpart F income generally includes certain forms of passive and highly
mobile income that are easily transferred to subsidiaries in low-tax countries.
Examples of subpart F income include dividends, interest, rents, royalties, and
certain related-party sales or services transactions. If, however, the subpart F
income has been taxed at a rate that is at least 90 percent of the U.S. tax rate
(i.e., 31.5 percent for C corporations), then the U.S. parent may elect to treat
that income as non-subpart F income.
Provision:
Under the provision, the 90-percent threshold for treating foreign income as
subpart F income would be increased to 100 percent (i.e., 25 percent for C
corporations) for foreign personal holding company income. For foreign base
company sales income, however, the threshold would be reduced to 50 percent of
the U.S. rate (i.e., 12.5 percent for C corporations) and to 60 percent of the
U.S. rate (i.e., 15 percent) for foreign base company intangible income. In
addition, such treatment would no longer be elective. The provision would be
effective for tax years of foreign corporations beginning after 2014, and for
tax years of U.S. shareholders in which or with which such tax years of foreign
subsidiaries end.
JCT
estimate: The revenue effect of the provision over 2014-2023 is included in
the JCT estimate provided for section 4211 of the discussion draft.
Sec. 4202. Foreign base company sales income.
Current
law: Under current law, a U.S. parent of a foreign subsidiary is subject to
current U.S. tax under subpart F on income earned by the foreign subsidiary from
certain related-party sales transactions (“foreign base company sales income” or
FBCSI), regardless of whether the foreign subsidiary distributes such income to
the U.S. parent. In general, FBCSI is income earned by a foreign subsidiary from
buying or selling personal property from or to, or on behalf of, related persons
if the property is (1) manufactured, produced, grown or extracted outside of the
country in which the foreign subsidiary is organized, and (2) used, consumed, or
disposed of outside of such country.
Provision:
Under the provision, FBCSI no longer would include income earned by a foreign
subsidiary that is incorporated in a country that has a comprehensive income tax
treaty with the United States, or to income that has been taxed at an effective
tax rate of 12.5 percent or greater. The provision would be effective for tax
years of foreign corporations beginning after 2014, and for tax years of U.S.
shareholders in which or with which such tax years of foreign subsidiaries
end.
JCT
estimate: The revenue effect of the provision over 2014-2023 is included in
the JCT estimate provided for section 4211 of the discussion draft.
Sec. 4203. Inflation adjustment of de minimis exception for foreign base company income.
Current
law: Under current law, a U.S. parent of a foreign subsidiary is subject to
current U.S. tax under subpart F on FBCSI and foreign income from issuing (or
reinsuring) insurance or annuity contracts, regardless of whether the foreign
subsidiary distributes such income to the U.S. parent. However, a de minimis
rule states that if the gross amount of such income is less than the lesser of 5
percent of the foreign subsidiary's gross income or $1 million, then the U.S.
parent is not subject to current U.S. tax on any of the income. The $1 million
threshold is not adjusted for inflation.
Provision:
Under the provision, the $1 million threshold would be adjusted for inflation.
The provision would be effective for tax years of foreign corporations beginning
after 2014 and for tax years of U.S. shareholders in which or with which such
tax years of foreign subsidiaries end.
JCT
estimate: The revenue effect of the provision over 2014-2023 is included in
the JCT estimate provided for section 4211 of the discussion draft.
Sec. 4204. Active finance exception extended with limitation for low-taxed foreign income.
Current
law: Under current law, a U.S. parent of a foreign subsidiary generally is
subject to current U.S. tax under subpart F on dividends, interest, royalties,
rents, and other types of passive income (collectively “foreign personal holding
company income”) earned by the foreign subsidiary, regardless of whether the
foreign subsidiary distributes such income to the U.S. parent. However, for tax
years of foreign subsidiaries beginning before 2014, and tax years of U.S.
shareholders in which or with which such tax years of the foreign subsidiary
end, there was a temporary exception for such income if it was derived in the
active conduct of a banking, financing, or similar business, or in the conduct
of an insurance business (“active financing income”).
Provision:
Under the provision, the exception would be extended for five years for active
financing income that is subject to a foreign effective tax rate of 12.5 percent
or higher. Active financing income that is subject to a lower foreign tax rate
would not be exempt, but would be subject to a reduced U.S. tax rate of 12.5
percent, before the application of foreign tax credits. The provision would be
effective for tax years of foreign corporations beginning after 2013 and before
2019, and for tax years of U.S. shareholders in which or with which such tax
years of foreign subsidiaries end.
JCT
estimate: According to JCT, the provision would reduce revenues by $18.4
billion over 2014-2023.
Sec. 4205. Repeal of inclusion based on withdrawal of previously excluded subpart F income from qualified investment.
Current
law: Foreign shipping income earned between 1976 and 1986 was not subject to
current U.S. tax under subpart F if the income was reinvested in certain
qualified shipping investments. Such income becomes subject to current U.S. tax
in a subsequent year to the extent that there is a net decrease in qualified
shipping investments during that subsequent year.
Provision:
Under the provision, the imposition of current U.S. tax on previously excluded
foreign shipping income of a foreign subsidiary if there is a net decrease in
qualified shipping investments would be repealed. The provision would be
effective for tax years of foreign corporations beginning after 2014, and for
tax years of U.S. shareholders in which or with which such tax years of foreign
subsidiaries end.
JCT
estimate: According to JCT, the provision would increase revenues by less
than $50 million over 2014-2023.
Part 2 - Prevention of Base ErosionSec. 4211. Foreign intangible income subject to taxation at reduced rate; intangible income treated as subpart F income.
Current
law: Under current law, a U.S. parent of a foreign subsidiary is subject to
current U.S. tax on its pro rata share of the subsidiary's subpart F income,
regardless of whether the income is distributed to the U.S. parent. In addition,
income earned by the U.S. parent directly for the use of its intangibles
exploited abroad, usually in the form of royalties, is subject to U.S. tax upon
receipt of the income. Under the transfer pricing rules, however, if a foreign
subsidiary of the U.S. parent owns intangible property in a foreign
jurisdiction, the U.S. parent generally may allocate substantial profits to the
foreign subsidiary without violating the subpart F rules, thus deferring U.S.
tax on those profits until they are distributed to the U.S. parent.
Provision:
Under the provision, a U.S. parent of a foreign subsidiary would be subject to
current U.S. tax on a new category of subpart F income, “foreign base company
intangible income” (FBCII). FBCII would equal the excess of the foreign
subsidiary's gross income over 10 percent of the foreign subsidiary's adjusted
basis in depreciable tangible property (excluding income and property that are
related to commodities).
The U.S.
parent could claim a deduction equal to a percentage of the foreign subsidiary's
FBCII that relates to property that is sold for use, consumption, or disposition
outside the United States or to services that are provided outside the United
States. The deduction also would be available to U.S. corporations that earn
foreign intangible income directly (rather than through a foreign subsidiary).
The deductible percentage of FBCII and foreign intangible income would be 55
percent for tax years beginning in 2015, and would phase down (in conjunction
with the phase-in of the 25-percent corporate rate) to 52 percent in 2016, 48
percent in 2017, 44 percent in 2018, and 40 percent for tax years beginning in
2019 or later.
With
regard to the treatment of FBCII as subject to current U.S. tax, the provision
would be effective for tax years of foreign corporations beginning after 2014,
and for tax years of U.S. shareholders in which or with which such tax years of
foreign subsidiaries end. With regard to the deduction of a percentage of such
income, the provision would be effective for tax years beginning after 2014.
Considerations:
JCT
estimate: According to JCT, the provision, along with sections 4103, 4201,
4202, and 4203 of the discussion draft, would increase revenues by $115.6
billion over 2014-2023.
Sec. 4212. Denial of deduction for interest expense of United States shareholders which are members of worldwide affiliated groups with excess domestic indebtedness.
Current
law: Under current law, corporations generally may deduct all of their
interest expense even if the debt was acquired to capitalize foreign
subsidiaries. Expense allocation rules, however, may require the interest
expense to be allocated against foreign source income, which may limit the
amount of foreign tax credits the U.S. parent may utilize.
Provision:
Under the provision, the deductible net interest expense of a U.S. parent of one
or more foreign subsidiaries would be reduced by the lesser of the extent to
which (1) the indebtedness of the U.S. parent (including other members of the
U.S. consolidated group) exceeds 110 percent of the combined indebtedness of the
worldwide affiliated group (including both related domestic and related foreign
entities), or (2) net interest expense exceeds 40 percent of the adjusted
taxable income of the U.S. parent. Any disallowed interest expense could be
carried forward to a subsequent tax year. The provision would be effective for
tax years beginning after 2014.
Considerations:
JCT
estimate: According to JCT, the provision would increase revenues by $24.0
billion over 2014-2023.
Title V - Tax Exempt Entities
Considerations
for Title V:
Subtitle A - Unrelated Business Income TaxSec. 5001. Clarification of unrelated business income tax treatment of entities treated as exempt from taxation under section 501(a).
Current
law: Under current law, income derived from a trade or business regularly
carried on by an organization exempt from tax under Code section 501(a)
(including pension plans) that is not substantially related to the performance
of the organization's tax-exempt functions is subject to the unrelated business
income tax (UBIT). The highest corporate rate is applied to unrelated business
income. A college or university that is an agency or instrumentality of a State
government (or political subdivision) generally is subject to UBIT on any
unrelated business taxable income. It is unclear, however, whether certain State
and local entities (such as public pension plans) that are exempt under Code
section 115(l) as government-sponsored entities as well as section 501(a) are
subject to the UBIT rules.
Provision:
Under the provision, all entities exempt from tax under section 501(a),
notwithstanding the entity's exemption under any other provision of the Code,
would be subject to the UBIT rules. The provision would be effective for tax
years beginning after 2014.
JCT
estimate: According to JCT, the provision would increase revenues by $0.1
billion over 2014-2023.
Sec. 5002. Name and logo royalties treated as unrelated business taxable income.
Current
law: Current law designates certain activities as per se unrelated
trades or businesses for UBIT purposes, including advertising activities and
debt management plan services.
Provision:
Under the provision, any sale or licensing by a tax-exempt organization of its
name or logo (including any related trademark or copyright) would be treated as
a per se unrelated trade or business, and royalties paid with respect to
such licenses would be subject to UBIT. The provision would be effective for tax
years beginning after 2014.
JCT
estimate: According to JCT, the provision would increase revenues by $1.8
billion over 2014-2023.
Sec. 5003. Unrelated business taxable income separately computed for each trade or business activity.
Current
law: Under current law, income subject to UBIT is based on the gross income
of any unrelated trade or business less the deductions directly connected with
carrying on such activity. In cases where a tax-exempt organization conducts two
or more unrelated trades or businesses, the unrelated business taxable income is
the aggregate gross income of all the unrelated trades or businesses less the
aggregate deductions allowed with respect to all such unrelated trades or
businesses. As a result, losses generated by one unrelated trade or business may
be used to offset income derived from another unrelated trade or business.
Provision:
Under the provision, a tax-exempt organization would be required to calculate
separately the net unrelated taxable income of each unrelated trade or business.
In addition, any loss derived from an unrelated trade or business could only be
used to offset income from that unrelated trade or business, with any unused
loss subject to the general rules for net operating losses - i.e., such losses
may be carried back two years and carried forward 20 years. Thus, losses
generated by one unrelated trade or business could not be used to offset income
derived from another unrelated trade or business. The provision would generally
be effective for tax years beginning after 2014. However, NOLs generated prior
to 2015 may be carried forward to offset income from any unrelated trade or
business, but NOLs generated after 2014 may only be carried back to offset
income with respect to the unrelated trade or business from which the net
operating loss arose.
JCT
estimate: According to JCT, the provision would increase revenues by $3.2
billion over 2014-2023.
Sec. 5004. Exclusion of research income limited to publicly available research.
Current
law: Under current law, income derived from a research trade or business is
exempt from UBIT in the following cases: (1) research performed for the United
States (including agencies and instrumentalities) or any State (or political
subdivision); (2) research performed by a college, university or hospital for
any person; and (3) research performed by an organization operated primarily for
the purposes of carrying on fundamental research the results of which are freely
available to the general public.
Provision:
Under the provision, the exception from the UBIT rules for fundamental research
would be limited to income derived from the research made available to the
public. Thus, income from research not made publicly available would be treated
as unrelated trade or business income and subject to the UBIT rules. The
provision would be effective for tax years beginning after 2014.
JCT
estimate: According to JCT, the provision would increase revenues by $0.7
billion over 2014-2023.
Sec. 5005. Parity of charitable contribution limitation between trusts and corporations.
Current
law: Under current law, for purposes of determining unrelated business
taxable income subject to UBIT, an organization may deduct contributions made to
other organizations. If the contributing tax-exempt entity is organized as a
corporation, the charitable contribution deduction is limited to 10 percent of
the entity's unrelated business taxable income - the same limitation that
applies to corporations. But, if the contributing tax-exempt entity is organized
as a trust, the deduction is limited to 50 percent of the entity's unrelated
business taxable income - the same limitation that applies to individuals.
Provision:
Under the provision, charitable contributions for purposes of determining UBIT
would be limited to 10 percent of the unrelated business taxable income whether
the contributing entity is organized as a corporation or a trust. The provision
would be effective for tax years beginning after 2014.
JCT
estimate: According to JCT, the provision would have negligible revenue
effect over 2014-2023.
Sec. 5006. Increased specific deduction.
Current
law: Under current law, UBIT is based on the gross income of any unrelated
trade or business less the deductions directly connected with carrying on such
activity. However, all tax-exempt organizations may claim a $1,000 deduction
against gross income subject to UBIT.
Provision:
Under the provision, the deduction would be increased to $10,000. The provision
would be effective for tax years beginning after 2014.
JCT
estimate: According to JCT, the provision would reduce revenues by $0.3
billion over 2014-2023.
Sec. 5007. Repeal of exclusion of gain or loss from disposition of distressed property.
Current
law: Under current law, UBIT is based on the gross income of any unrelated
trade or business, including gains or losses from the sale, exchange, or other
disposition of inventory. An exception to the inclusion of such gains or losses
applies to certain real property acquired by the tax-exempt organization from a
bank or savings and loan association that held the property in receivership or
conservatorship or as a result of a foreclosure. To qualify, the tax-exempt
organization generally may not expend substantial amounts to improve or develop
the distressed property and must dispose of such property within 30 months of
acquisition.
Provision:
Under the provision, the UBIT exception for acquisitions of distressed property
would be repealed. Accordingly, a tax-exempt organization would be required to
include in its unrelated trade or business income gain or loss resulting from
the sale of such property to customers. The provision would be effective for
property acquired after 2014.
JCT
estimate: According to JCT, the provision would have negligible revenue
effect over 2014-2023.
Sec. 5008. Qualified sponsorship payments.
Current
law: Under current law, for purposes of the UBIT rules, an unrelated trade
or business does not include the activity of soliciting and receiving qualified
sponsorship payments. A qualified sponsorship payment generally is any payment
made by a business sponsor with respect to which the business receives no
substantial return benefit other than the use or acknowledgment of the name or
logo (or product lines) of the business in connection with the tax-exempt
organization's activities. Such a use or acknowledgment does not include
advertising of such sponsor's products or services (i.e., qualitative or
comparative language, price information or other indications of savings or
value, or an endorsement or other inducement to purchase, sell, or use such
products or services).
Provision:
Under the provision, the UBIT exception for qualified sponsorship payments would
be modified in two respects. First, if the use or acknowledgement refers to any
of the business sponsor's product lines, the payment would not be a qualified
sponsorship payment, and, therefore, would be treated by the tax-exempt
organization as income from an advertising trade or business - which is a per
se unrelated trade or business. Second, if a tax-exempt organization
receives more than $25,000 of qualified sponsorship payments for any one event,
any use or acknowledgement of a sponsor's name or logo may only appear with,
and, in substantially the same manner as, the names of a significant portion of
the other donors to the event. Whether the number of donors is a significant
portion is determined based on the total number of donors and the total
contributions to the event, but in no event shall fewer than 2 other donors be
treated as a significant portion of other donors. Thus, a single business could
not be listed as an exclusive sponsor of an event that generates more the
$25,000 in qualified sponsorship payments. Such a contribution would be treated
as advertising income by the tax-exempt organization and subject to UBIT. The
provision would be effective for tax years beginning after 2014.
JCT
estimate: According to JCT, the provision would increase revenues by less
than $50 million over 2014-2023.
Subtitle B - PenaltiesSec. 5101. Increase in information return penalties.
Current
law: Under current law, tax-exempt organizations are required to file
certain information returns each year depending on their exempt status. If a
tax-exempt organization does not timely and completely file a required
information return (e.g., Form 990) or does not furnish the correct information,
it must pay $20 for each day the failure continues ($100 a day for organizations
with annual gross receipts exceeding $1 million). The maximum penalty for each
return may not exceed the lesser of $10,000 ($50,000 for a large organization)
or 5 percent of the gross receipts of the organization for the year. Penalties
also apply to information required of tax-exempt trusts and in certain other
cases, such as when a tax-exempt organization dissolves or liquidates all or
part of its assets. Exceptions from these penalties apply where the organization
can show the failure was due to reasonable cause. There also are penalties for
willful failures and for filing fraudulent returns and statements. A manager of
an organization subject to these penalties who fails to respond to a written
demand from the IRS to file an information return by a date certain is required
to pay a penalty of $10 for each day after the deadline has passed, limited to a
maximum of $5,000.
A manager
or other person who fails to allow for the public inspection of a tax-exempt
organization's annual returns and other publicly available documents is subject
to a penalty of $20 for each day the failure continues, limited to a maximum of
$10,000. An identical penalty and overall limitation also applies to a section
527 organization that fails to make required disclosures or fails to show any
information required to be shown by such disclosures or to show the correct
information. In addition, a person who fails to allow the public inspection of
an entity's exempt status application materials or notice materials is subject
to a penalty of $20 for each day such failure continues, with no overall
limitation.
In
addition, a trust is subject a penalty of $10 a day for failure to file an
information return. Any organization that was tax exempt in any of the five
years preceding a liquidation, dissolution, termination, or substantial
contraction is subject to a penalty of $10 a day for failure to file a final
return. In both cases, the maximum penalty cannot exceed $5,000. However, a
trust with gross income in excess of $250,000 is subject to a penalty of $100 a
day and a maximum fine of $50,000. Furthermore, a manager of an organization
subject to these penalties who fails to respond to a written demand from the IRS
to file a required return by a date certain is subject to a fine of $10 for each
day after the deadline has passed, limited to maximum of $5,000.
A
tax-exempt organization also is subject to a penalty of $100 per day for each
day the entity fails to file the required disclosure of its participation in any
prohibited tax shelter transaction and the identity of any other known party to
such transaction.
Provision:
Under the provision, the penalties for failure to file various returns,
disclosures, or public documents on organizations and managers would be
increased. The penalty for a tax-exempt organization's failure to file an
information return would be increased from $20 to $40 per day. For an
organization with more than $1 million in gross receipts, the penalty would be
increased from $100 to $200 per day. For a manager of such an organization, the
penalty would be increased from $10 to $20 per day. In the case of a person who
fails to allow for the public inspection of a tax-exempt organization's annual
returns and other publicly available documents, the penalty would be increased
from $20 to $40 per day. The penalty for failure to allow for the public
inspection of an entity's exempt status application or notice materials would
also be increased from $20 to $40 per day. In the case of trust or a terminating
tax-exempt organization, the penalty would be increased from $10 to $20 per day.
The penalty for a trust with gross income in excess of $250,000 would be
increased from $100 to $200 per day, and the penalty for the manager of a trust
or terminating exempt entity would also be increased from $10 to $20 per day.
The penalty for failure to file a tax-shelter disclosure form would be increased
from $100 to $200 per day. The provision would be effective for information
returns required to be filed on or after January 1, 2015.
JCT
estimate: According to JCT, the provision would increase revenues by $0.1
billion over 2014-2023.
Sec. 5102. Manager-level accuracy-related penalty on underpayment of unrelated business income tax.
Current
law: Under current law, individuals and corporations are subject to a
20-percent accuracy-related penalty with respect to the portion of an
underpayment that is attributable to any substantial understatement of income
tax. The accuracy-related penalty may be reduced or abated in certain cases.
A
separate accuracy-related penalty applies to a reportable transaction or a
listed transaction. A reportable transaction is defined as one that the IRS
determines must be disclosed because it has a potential for tax avoidance or
evasion. A listed transaction is a reportable transaction that is specifically
identified by the IRS as a tax avoidance transaction (or substantially similar
to such a tax avoidance transaction). The penalty rate for reportable and listed
transactions that are disclosed by the taxpayer is 20 percent, while the penalty
rate for an undisclosed transaction is 30 percent. Defenses available to avoid
the penalty vary depending on whether the transaction was adequately
disclosed.
Tax-exempt
organizations subject to UBIT must file a return each year (Form 990-T),
reporting unrelated business taxable income. Under current law, the 20-percent
accuracy-related penalty and the penalty for reportable transactions and listed
transactions apply to tax-exempt organizations, but only at the entity level. No
manager-level penalty applies in such cases, unlike other penalties under
current law that impose a penalty on both the tax-exempt organization and its
managers (e.g., penalties applicable to public charities with respect to
excess-benefit transactions and penalties on private foundations relating to
self-dealing).
Provision:
Under the provision, a 5-percent penalty would apply to managers of a tax-exempt
organization when an accuracy-related penalty is applied to the organization for
any substantial understatement of UBIT. The manager-level penalty would be
limited to $20,000. The provision also would apply a 10-percent penalty on
managers of a tax-exempt organization for an understatement of UBIT relating to
a reportable transaction or listed transaction. The manager-level penalty for
reportable transactions and listed transactions would be limited to $40,000. The
provision would be effective for tax years beginning after 2014.
JCT
estimate: According to JCT, the provision would have negligible revenue
effect over 2014-2023.
Subtitle C - Excise TaxesSec. 5201. Modification of intermediate sanctions.
Current
law: Under current law, disqualified persons and managers who engage in
excess benefit transactions with tax-exempt organizations (other than private
foundations) are subject to an excise tax on the amount of the economic benefit
that exceeds the value of the consideration (including the performance of
services) received for providing the benefit. A disqualified person (other than
a manager acting only in that capacity) is subject to a 25-percent excise tax,
and, if such tax is imposed, a manager who knowingly participated in the
transaction (unless such participation was not willful and due to reasonable
cause) is subject to a 10-percent excise tax. However, under Treasury
regulations, a manager may avoid the excise tax for knowingly participating in
an excess-benefit transaction if the manager relies on advice provided by an
appropriate professional, including legal counsel, certified public accountants,
and independent valuation experts.
A
disqualified person generally is any person in a position to exercise
substantial influence over the affairs of the public charity (e.g., officers,
directors, or trustees) at any time in the five-year period before the
excess-benefit transaction occurred. In the case of donor advised funds, the
donor and donor advisors are specifically designated as disqualified persons,
and in the case of a supporting organization, its investment advisors are
disqualified persons. A disqualified person also includes certain family members
of such a person, and certain entities that satisfy a control test with respect
to such persons.
Under
Treasury regulations, a tax-exempt organization in certain cases may avail
itself of a rebuttable presumption with respect to compensation arrangements and
property transfers for purposes of determining if the excise tax applies. If the
requirements of the rebuttable presumption are met, the IRS may overcome the
presumption of reasonableness if it develops sufficient contrary evidence to
rebut the comparability data relied upon by the authorized body.
Provision:
Under the provision, the excise tax on excess-benefit transaction would be
expanded to apply not only to public charities, but also to labor, agricultural,
and horticultural organizations (under Code section 501(c)(5)) and business
leagues, chambers of commerce, real-estate boards, and boards of trade (under
Code section 501(c)(6)).
The
provision would impose an excise tax of 10 percent on the tax-exempt
organization when the excess-benefit excise tax is imposed on a disqualified
person. The entity-level tax would be avoidable if the organization follows
minimum standards of due diligence or other procedures to ensure that no excess
benefit is provided by the organization to a disqualified person. The minimum
standards of due diligence would be satisfied if the transaction was approved by
an independent body of the organization that relied on comparability data prior
to approval and documented the basis for approving the transaction. The
provision would overrule the Treasury regulations by providing that no
presumption of reasonableness is created by the organization satisfying the
minimum standards of due diligence for purposes of imposing the excise tax on
disqualified persons and managers.
Additionally,
managers would no longer be able to rely on the professional advice safe harbor
under Treasury regulations. Thus, a manager's reliance on professional advice,
by itself, would not preclude the manager from being subject to the excise tax
for participating in an excess-benefit transaction.
The
provision also would expand the definition disqualified persons to include
athletic coaches and investment advisors regardless of whether the investment
advisor provides services to a supporting organization.
The
provision would be effective for tax years beginning after 2014.
JCT
estimate: According to JCT, the provision would have negligible revenue
effect over 2014-2023.
Sec. 5202. Modification of taxes on self-dealing.
Current
law: Under current law, disqualified persons and managers who engage in
self-dealing transactions with private foundations are subject to an excise tax.
Self-dealing transactions between a private foundation and a disqualified person
generally include: (1) a sale or exchange, or leasing, of property; (2) lending
of money or other extension of credit; and (3) the transfer to, or use by or for
the benefit of, a disqualified person of the income or assets of the private
foundation. The excise tax is imposed on the very act of self-dealing,
irrespective of whether fair market value is paid (except for the payment of
compensation, which is permitted at fair market value). The tax is imposed on
the entire amount involved in the transaction (except for the payment of
compensation, with respect to which the tax is imposed on compensation in excess
of fair market value).
A
disqualified person is subject to an excise tax of 10 percent of the value of a
self-dealing transaction. If such a tax is imposed on a disqualified person, a
tax of 5 percent of the amount involved is imposed on a foundation manager who
knowingly participated in the act of self-dealing (unless such participation was
not willful and was due to reasonable cause) up to $10,000 per act. If the act
of self-dealing is not corrected, a tax of 200 percent of the amount involved is
imposed on the disqualified person and a tax of 50 percent of the amount
involved (up to $10,000 per act) is imposed on a foundation manager who refused
to agree to correct the act of self-dealing. However, under Treasury
regulations, a private foundation manager may avoid the excise tax for knowingly
participating in a self-dealing transaction if the manager relies on advice
provided by an appropriate professional, including legal counsel, certified
public accountants, and independent valuation experts.
A
disqualified person generally is any person in a position to exercise
substantial influence over the affairs of the private foundation (e.g.,
officers, directors, or trustees). A disqualified person also includes certain
family members of such a person, and certain entities that satisfy a control
test with respect to such persons.
Provision:
Under the provision, an excise tax of 2.5 percent would be imposed on a private
foundation when the self-dealing tax is imposed on a disqualified person. The
tax rate would be 10 percent for cases in which the self-dealing involves the
payment of compensation.
Additionally,
foundation managers would no longer be able to rely on the professional advice
safe harbor. Thus, a manager's reliance on professional advice, by itself, would
not preclude the manager from being subject to the excise tax for participating
in a self-dealing transaction.
The
provision would be effective for tax years beginning after 2014.
JCT
estimate: According to JCT, the provision would have negligible revenue
effect over 2014-2023.
Sec. 5203. Excise tax on failure to distribute within 5 years contribution to donor advised fund.
Current
law: Under current law, public charities (including community foundations)
exempt from tax under Code section 501(c)(3) are permitted to establish accounts
to which donors may contribute and thereafter provide nonbinding advice or
recommendations with regard to distributions from the fund or the investment of
assets in the fund. Such accounts are commonly referred to as “donor advised
funds.” Donors who make contributions to charities sponsoring such funds
generally may claim a charitable contribution deduction at the time of the
contribution, even though the contributed funds may be held in the account
without distribution for significant periods. While the sponsoring charities
generally must have legal ownership and control over the funds held in a donor
advised fund, there is no requirement that the funds be distributed to other
charitable organizations within any period of time. Donor advised funds also are
not subject to the private foundation net investment excise tax.
Provision:
Under the provision, donor advised funds would be required to distribute
contributions within five years of receipt. An eligible distribution is a
distribution made to a public charity. Failure to make an eligible distribution
would subject the sponsoring charitable organization to an annual excise tax
equal to 20 percent of the undistributed funds. The provision would be effective
for contributions made after 2014. For contributions made before, and remaining
in the donor advised fund on, January 1, 2015, the five-year distribution period
would begin on January 1, 2015.
JCT
estimate: According to JCT, the provision would increase revenues by less
than $50 million over 2014-2023.
Sec. 5204. Simplification of excise tax on private foundation investment income.
Current
law: Under current law, private foundations and certain charitable trusts
are subject to a 2-percent excise tax on their net investment income. However,
an organization may reduce the excise tax rate to 1 percent by meeting certain
requirements regarding distributions to qualifying tax-exempt organizations
during a tax year.
A
special rule excludes “exempt operating foundations” from the excise tax. To be
an exempt operating foundation, an organization must: (1) be an operating
foundation, which is an organization that spends at least 85 percent of its
adjusted net income or its minimum investment return, whichever is less,
directly for the active conduct of its exempt activities, (2) be publicly
supported for at least ten tax years, (3) have a governing body no more than 25
percent of whom are disqualified persons and that is broadly representative of
the general public, and (4) have no officers who are disqualified persons. A
disqualified person generally is any person in a position to exercise
substantial influence over the affairs of the organization (e.g., officers,
directors, or trustees).
Provision:
Under the provision, the excise tax rate on net investment income would be
reduced to 1 percent. The rules providing for a reduction in the excise tax rate
from 2 percent to 1 percent would be repealed. The provision also would repeal
the exception from the excise tax for exempt operating foundations. The
provision would be effective for tax years beginning after 2014.
JCT
estimate: According to JCT, the provision would reduce revenues by $1.6
billion over 2014-2023.
Sec. 5205. Repeal of exception for private operating foundation failure to distribute income.
Current
law: Under current law, private foundations generally are required to pay
out a minimum amount each year in distributions to accomplish one or more of the
organization's exempt purposes, including reasonable and necessary
administrative expenses. Failure to pay out the minimum amount results in an
initial excise tax on the foundation of 30 percent of the undistributed amount.
An additional tax of 100 percent of the undistributed amount applies if an
initial tax is imposed and the required distributions generally have not been
made within the following year. Private operating foundations are not subject to
the payout requirements. To qualify as a private operating foundation, the
organization must spend at least 85 percent of its adjusted net income or its
minimum investment return, whichever is less, directly for the active conduct of
its exempt activities.
Provision:
Under the provision, the special exclusion for private operating foundations
would be repealed. Thus, private operating foundations would be subject to the
excise tax for failure to distribute income like private foundations generally.
The provision would be effective for tax years beginning after 2014.
JCT
estimate: According to JCT, the provision would have negligible revenue
effect over 2014-2023.
Sec. 5206. Excise tax based on investment income of private colleges and universities.
Current
law: Under current law, private foundations and certain charitable trusts
are subject to a 2-percent excise tax on their net investment income. The excise
tax on net investment income does not apply to public charities, including
colleges and universities, even though some such organizations may have
substantial investment income similar to private foundations.
Provision:
Under the provision, certain private colleges and universities would be subject
to a 1-percent excise tax on net investment income. The provision would only
apply to private colleges and universities with assets (other than those used
directly in carrying out the institution's educational purposes) valued at the
close of the preceding tax year of at least $100,000 per full-time student.
State colleges and universities would not be subject to the provision. The
provision would be effective for tax years beginning after 2014.
JCT
estimate: According to JCT, the provision would increase revenues by $1.7
billion over 2014-2023.
Subtitle D - Requirements for Organizations Exempt from TaxSec. 5301. Repeal of tax-exempt status for professional sports leagues.
Current
law: Under current law, a professional football league is specifically
granted tax-exempt status as a 501(c)(6) organization, an exemption that
generally applies to trade or professional associations. The IRS has interpreted
the exemption for “professional football leagues” to include all professional
sports leagues.
Provision:
Under the provision, professional sports leagues would not be eligible for
tax-exempt status as a trade or professional association under Code section
501(c)(6). The provision would not apply to amateur sports leagues, which would
continue to qualify as tax-exempt entities. The provision would be effective for
tax years beginning after 2014.
JCT
estimate: According to JCT, the provision would increase revenues by $0.1
billion over 2014-2023.
Sec. 5302. Repeal of exemption from tax for certain insurance companies and co-op health insurance issuers.
Current
law: Under current law, a property and casualty insurance company generally
is exempt from tax if its gross receipts for the tax year do not exceed $600,000
and its premiums constitute more than 50 percent of gross receipts. A mutual
property and casualty insurance company is exempt from tax if its gross receipts
for the tax year do not exceed $150,000 and more than 35 percent of such gross
receipts consist of premiums. A qualified nonprofit health insurance issuer
under the Affordable Care Act (ACA), which has received a loan or grant under
the ACA's co-op program, also is exempt from tax.
Provision:
Under the provision, the exemption would be repealed for qualified property and
casualty insurance companies and for qualified health insurance issuers. The
provision would be effective for tax years beginning after 2014. Affected
companies would not be required to make an adjustment for a change in accounting
method for their first tax year beginning after December 31, 2014, and the basis
of any asset held on the first day of such tax year would be equal to its fair
market value on such day.
JCT
estimate: According to JCT, the provision would increase revenues by $0.7
billion over 2014-2023.
Sec. 5303. In-State requirement for workmen's compensation insurance organizations.
Current
law: Under current law, organizations created by, and organized and operated
under, State law exclusively to provide workmen's compensation insurance
required by State law (or if an employer faces significant disincentives for not
purchasing such insurance), or coverage incidental to such insurance, and
meeting other requirements related to such organizations having strong
connections to State governments are exempt from tax. Current law does not
preclude exempt workmen's compensation insurance organizations from providing
benefits to employees outside of the State under the laws of which it is
created, organized and operated.
Provision:
Under the provision, an exempt workmen's compensation insurance organization
would be exempt from tax only if it provides no insurance coverage other than
workmen's compensation insurance required by State law (or if an employer faces
significant disincentives for not purchasing such insurance), or coverage
incidental to such insurance. The provision would apply to insurance policies
issued, and renewals, after 2014.
JCT
estimate: According to JCT, the provision would increase revenues by less
than $50 million over 2014-2023.
Sec. 5304. Repeal of Type II and Type III supporting organizations.
Current
law: Under current law, organizations exempt from tax under Code section
501(c)(3) are classified either as public charities, if publicly supported, or
private foundations. Certain organizations that provide support to another
public charity may also be classified as public charities rather than private
foundations, even if not publicly supported. To qualify as a supporting
organization, an organization must meet all three of the following tests: (1)
the organizational-and-operational test, (2) the lack-of-outside-control test,
and (3) the relationship test. Under the relationship test, a supporting
organization must hold one of three relationships with the supported public
charity. The organization must be: (1) operated, supervised, or controlled by a
publicly supported organization (commonly referred to as a Type I supporting
organization); (2) supervised or controlled in connection with a publicly
supported organization (a Type II supporting organization); or (3) operated in
connection with a publicly supported organization (a Type III supporting
organization). In effect, the classification of a supporting organization
depends on how close its relationship is to the supported organization, with
Type I supporting organizations having the closest relationship (akin to a
parent-subsidiary relationship).
Provision:
Under the provision, Type II and Type III supporting organizations would be
repealed. Thus, organizations that support public charities would need to
qualify as a supporting organization that is operated, supervised, or controlled
by a publicly supported organization (i.e., a Type I supporting organization),
or they would be treated as private foundations. The provision would generally
be effective for entities organized after the date of enactment. Type II and III
supporting organizations existing on the date of enactment would have until the
end of 2015, to qualify as a public charity or a supporting organization
(previously a Type I supporting organization) or be treated as a private
foundation.
JCT
estimate: According to JCT, the provision would increase revenues by $1.4
billion over 2014-2023.
Title VI - Tax Administration and ComplianceSubtitle A - IRS Investigation-Related Reforms
Considerations
for Subtitle A:
Sec. 6001. Organizations required to notify Secretary of intent to operate as 501(c)(4).
Current
law: Under current law, social welfare organizations described in Code
section 501(c)(4) are not required to obtain a determination of their exempt
status from the IRS before commencing operations. Rather, such organizations are
exempt if they are not organized for profit but operated exclusively for the
promotion of social welfare, and if no part of the net earnings of which inures
to the benefit of any private shareholder or individual. However, such
organizations may request a formal determination of exempt status by filing Form
1024, Application for Recognition of Exemption under Section 501(a). An
organization typically files a Form 1024 to be recognized formally as a
tax-exempt organization and to obtain certain benefits such as exemption from
certain State taxes and nonprofit mailing privileges. Once a social welfare
organization commences operations (whether or not it applies or is formally
approved for exempt status), the organization is required to file an annual
information return, Form 990, Return of Organization Exempt from Income Tax.
Recent
investigations of the IRS' handling of applications for exemption by section
501(c)(4) organizations have raised concerns about the extent of human resources
the IRS dedicates to processing elective Form 1024 applications for exemption
and the vulnerabilities for abuse in the current approval process.
Provision:
Under the provision, any organization seeking to be recognized as exempt under
Code section 501(c)(4) would be required, within 60 days of formation, to notify
the IRS that it has commenced operations as a social welfare organization.
Within 60 days of receiving the notification, the IRS would be required to issue
an acknowledgement of the organization's intent to operate as such an exempt
organization. A social welfare organization that fails to file the required
notification of commencement of operations by the deadline would be subject to a
penalty of $20 per day up to $5,000 and a manager-level penalty if the
organization fails to file after a request from the IRS. With its first Form 990
information return, the organization would be required to provide such
information as the IRS may require supporting the organization's qualification
for exempt status. It is anticipated that this information would be similar to
the information provided currently on Form 1024. If an organization wishes to
receive a formal determination of exempt status, it would be able to request a
ruling from the IRS.
The
provision would apply to section 501(c)(4) organizations that are organized
after 2014. Current organizations that have not filed a Form 1024 or a Form 990
would be required within 180 days of the date of enactment to meet the new
notification requirement and provide the required information supporting the
organization's qualification for exempt status with the Form 990 for the tax
year in which the notice is filed.
JCT
estimate: According to JCT, the provision would increase revenues by less
than $50 million over 2014-2023.
Sec. 6002. Declaratory judgments for 501(c)(4) organizations.
Current
law: Under current law, an organization that has qualified for tax exemption
under Code section 501(c)(3) or section 521, or has applied for such status, may
seek judicial relief if the IRS challenges the organization's initial or
continuing qualification for tax exemption. Such declaratory judgment relief may
be granted by the U.S. Tax Court, U.S. Court of Federal Claims, or the U.S.
District Court for the District of Columbia. However, similar relief is not
available for a section 501(c)(4) social welfare organization.
Provision:
Under the provision, declaratory judgment relief would be extended to
controversies involving the initial or continuing qualification of section
501(c)(4) social-welfare organizations. The provision would be effective for
pleadings filed after the date of enactment.
JCT
estimate: According to JCT, the provision would reduce revenues by less than
$50 million over 2014-2023.
Sec. 6003. Restriction on donation reporting for certain 501(c)(4) organizations.
Current
law: Under current law, organizations exempt from tax under Code section
501(c) generally are required to file an annual information return, Form 990,
Return of Organization Exempt from Income Tax, with the IRS reflecting
contributions, income, expenses and other information. Certain organizations,
including social welfare organizations exempt under Code section 501(c)(4), must
include Schedule B, Schedule of Contributors, listing any donor who contributes
$5,000 or more (in money or property) during the year. The IRS is required to
make information returns filed by exempt organizations available to the public.
However, Schedule B is excluded from disclosure to protect donor personal
information required by the schedule. Recent investigations of the IRS' handling
of applications for exemption by section 501(c)(4) organizations have raised
concerns about improper disclosure of Schedule B donor information to the
public.
Provision:
Under the provision, a social welfare organization exempt under Code section
501(c)(4) would be required to include on Schedule B only information concerning
a donor who both (1) contributes $5,000 or more (in money or property) during
the current tax year and (2) is either an officer or director of the
organization or one of the five highest compensated employees of the
organization for the current or any preceding tax year. Schedule B would
continue to be excluded from the public disclosure requirement for information
returns filed by exempt organizations. The provision would be effective for
returns for tax years beginning after 2013.
JCT
estimate: According to JCT, the provision would reduce revenues by less than
$50 million over 2014-2023.
Sec. 6004. Mandatory electronic filing for annual returns of exempt organizations.
Current
law: Under current law, a tax-exempt organization generally must file its
annual tax return (i.e., Form 990) electronically only if the organization files
at least 250 returns (e.g., Form W-2 for employees, Form 1099 for certain
service providers) during the calendar year. Organizations that are not required
to file a Form 990 or Form 990-EZ, generally because their gross receipts are
normally less than $50,000 annually, must file an annual notice (Form 990-N) in
electronic format. Certain tax-exempt organizations with unrelated business
taxable income must report such income and associated tax on Form 990-T, which
currently cannot be filed electronically. Current law limits the authority of
the Treasury Department to require electronic filing of returns. As a result,
only very small and very large tax-exempt organizations are required to file
electronically.
Current
law also requires the IRS to make available to the public information from the
annual returns filed by tax-exempt organizations. Certain information relating
to donors to such organizations is excluded. The IRS currently makes the
required data available only in a restricted format that limits the usefulness
of the data to the public.
Provision:
Under the provision, all tax-exempt organizations that file Form 990 series
returns would be required to file electronically. The provision also would
require the IRS to make the electronically filed Form 990 returns data publicly
available in a machine readable format in a timely manner, after ensuring that
any donor or other taxpayer information is redacted. The provision would be
effective for tax years beginning after the date of enactment, with transition
relief for smaller organizations that are not currently required to file
electronically.
JCT
estimate: According to JCT, the provision would have no revenue effect over
2014-2023.
Sec. 6005. Duty to ensure that IRS employees are familiar with and act in accord with certain taxpayer rights.
Current
law: Under current law, the Commissioner of Internal Revenue has such duties
and powers as the Treasury Secretary prescribes, including the power to
administer, manage, conduct, direct, and supervise the execution and application
of the tax laws and related statutes.
Provision:
Under the provision, the Commissioner's duties would be expanded to include
ensuring that IRS employees are familiar with and act in accordance with
taxpayer rights under the tax laws, including the right to be informed, the
right to be assisted, the right to be heard, the right to pay no more than the
correct amount of tax, the right of appeal, the right to certainty, the right to
privacy, the right to confidentiality, the right to representation, and the
right to a fair and just tax system. The provision would be effective on the
date of enactment.
JCT
estimate: According to JCT, the provision would have no revenue effect over
2014-2023.
Sec. 6006. Termination of employment of IRS employees for taking official actions for political purposes.
Current
law: Under current law, there are ten enumerated acts or omissions that, if
committed by an IRS employee, will result in mandatory termination of the
employee (also known as the “ten deadly sins”). These acts or omissions include
threatening to audit a taxpayer for the purpose of extracting personal gain or
benefit.
Provision:
Under the provision, the enumerated acts or omissions that result in mandatory
termination of an IRS employee would be expanded to include performing,
delaying, or failing to perform (or threatening to perform, delay, or fail to
perform) any official action or audit with respect to a taxpayer for the purpose
of extracting personal gain or benefit or for political purposes. The provision
would be effective on the date of enactment.
JCT
estimate: According to JCT, the provision would have no revenue effect over
2014-2023.
Sec. 6007. Release of information regarding the status of certain investigations.
Current
law: Under current law, it is unlawful for Federal employees to disclose
certain taxpayer information or inspect taxpayer returns or records without
authorization. Current law also limits the lawful disclosure of taxpayer
information by employees of the Treasury Department (including the IRS and the
Treasury Inspector General for Tax Administration) to certain enumerated
circumstances. Because of these restrictions, in cases in which a taxpayer makes
a complaint regarding unlawful disclosure of information, current law does not
permit the Treasury Department to provide the affected taxpayer with information
concerning the status or resolution of the complaint.
Provision:
Under the provision, the enumerated circumstances in which taxpayer information
may be lawfully disclosed by the Treasury Department would be expanded to
include disclosure to certain complainants (or their representatives) of
information regarding the status and results of any investigation initiated by
their complaint. The provision would be effective on the date of enactment.
JCT
estimate: According to JCT, the provision would have no revenue effect over
2014-2023.
Sec. 6008. Review of IRS examination selection procedures.
Current
law: Under current law, the IRS' four operating divisions (wage and
investment, small business/self-employed, large business and international, and
tax-exempt and government entities) have discretion to develop and implement
criteria for selection of cases for enforcement action. Concerns have been
raised regarding the impartiality and appropriateness of such enforcement
actions, especially with respect to certain tax-exempt organizations.
Provision:
Under the provision, the Comptroller General would be directed to undertake an
initial review of each IRS operating division to assess the processes used to
determine how enforcement cases are selected and worked, and would be directed
to report to Congress and the Treasury Secretary the results of the initial
review and any recommendations to improve the case selection and case work
processes for each division. The Comptroller General also would be directed to
conduct a follow-up review to determine whether the recommendations included in
the initial report have been implemented. Following the initial and follow-up
reviews, the Comptroller General would be directed to conduct further reviews of
each IRS division every four years, and would be directed to report to Congress
and the Treasury Secretary the results of these reviews. The provision would be
effective on the date of enactment.
JCT
estimate: According to JCT, the provision would have no revenue effect over
2014-2023.
Sec. 6009. IRS employees prohibited from using personal email accounts for official business.
Current
law: Under current law, there is no statutory prohibition against the use of
personal email accounts by IRS employees to conduct official agency business.
The Internal Revenue Manual restricts IRS employees from sending emails that
contain “sensitive but unclassified” data outside the IRS network, unless
approved by senior agency management, but the manual does not specifically
reference the use of personal email accounts.
Provision:
Under the provision, IRS employees would be prohibited by statute from using any
personal email account to conduct official agency business. The provision would
be effective on the date of enactment.
JCT
estimate: According to JCT, the provision would have no revenue effect over
2014-2023.
Sec. 6010. Moratorium on IRS conferences.
Current
law: Under current law, the IRS has discretion to hold conferences relating
to employee training and other management purposes, and to incur travel expenses
relating to such conferences. On May 31, 2013, the Treasury Inspector General
for Tax Administration (TIGTA) issued a report titled, “Review of the August
2010 Small Business/Self-Employed Division's Conference in Anaheim, California,”
which identified excessive spending on IRS conferences and other deficiencies in
management procedures.
Provision:
Under the provision, the IRS would be precluded from holding any conference
until TIGTA submits a report to Congress certifying that the IRS has implemented
all of the recommendations included in TIGTA's May 31, 2013 report. The
provision would be effective on the date of enactment.
JCT
estimate: According to JCT, the provision would have no revenue effect over
2014-2023.
Sec. 6011. Applicable standard for determinations of whether an organization is operated exclusively for the promotion of social welfare.
Current
law: Under current law, Code section 501(c)(4) provides a tax exemption for
organizations not organized for profit but operated exclusively for the
promotion of social welfare. Treasury regulations provide that an organization
is operated exclusively for the promotion of social welfare if it is engaged
primarily in promoting in some way the common good and general welfare of the
people of a community. Social welfare organizations are permitted to engage in
“direct or indirect participation or intervention in political campaigns on
behalf of or in opposition to any candidate for public office” (“political
campaign intervention”) so long as the organization is primarily engaged in
activities that promote social welfare.
Under
current Treasury regulations, whether an activity constitutes political campaign
intervention (and thus does not promote social welfare), and the measurement of
the organization's social welfare activities relative to its total activities,
depends on all the facts and circumstances of the particular case. The rules
concerning political campaign intervention apply only to activities involving
candidates for elective public office; the rules do not apply to activities
involving officials who are selected or appointed, such as executive branch
officials and judges. The lobbying and advocacy activities of a section
501(c)(4) organization generally are not limited, provided the activities are in
furtherance of the organization's exempt purpose.
On
November 29, 2013, the Department of the Treasury and the IRS published proposed
regulations regarding the political campaign activities of section 501(c)(4)
organizations. The proposed regulations, once finalized, would replace the
present-law facts-and-circumstances test used in determining whether a section
501(c)(4) organization has engaged in political campaign intervention with an
enumerated list of activities that constitute political campaign activities (and
which therefore do not promote social welfare).
Provision:
The provision would require the IRS to apply the standards and definitions in
effect on January 1, 2010, to determine whether an organization is operated
exclusively for the promotion of social welfare for purposes of Code section
501(c)(4). The provision also would prohibit the Secretary or his delegate from
issuing, revising, or finalizing any regulation (including the proposed
regulations issued on November 29, 2013), revenue ruling, or other guidance that
is not limited to a particular taxpayer relating to the standards or definitions
used to determining whether an organization is operated exclusively for the
promotion of social welfare for purposes of Code section 501(c)(4). The
provision would be effective on the date of enactment and expire one year after
such date.
JCT
estimate: According to JCT, the provision would have negligible revenue
effect over 2014-2023.
Subtitle B - Taxpayer Protection and Service ReformsSec. 6101. Extension of IRS authority to require truncated Social Security numbers on Form W-2.
Current
law: Under current law, employers are required to furnish annual written
statements to their employees containing certain information regarding wages and
benefits (i.e., Form W-2). Current law requires that the statement include the
employee's Social Security number (SSN). Other statements provided to taxpayers
(e.g., Forms 1099) are subject to more general rules that require the filer to
include the taxpayer's “identifying number” on the form. For some statements,
the Treasury Department and IRS have regulatory authority to require or permit
filers to use a number other than the taxpayer's SSN. Concerns have been raised
that a taxpayer's SSN could be stolen from a Form W-2 or other paper payee
statement and used to file false or fraudulent tax returns.
Provision:
Under the provision, employers would be required to include an “identifying
number” for each employee, rather than an employee's SSN, on Form W-2. Thus, the
Treasury Department and the IRS would have the regulatory authority to require
or permit a truncated SSN on Form W-2 as well as Form 1099 to reduce the
potential for identity theft and the filing of false or fraudulent tax returns.
The provision would be effective on the date of enactment.
JCT
estimate: According to JCT, the provision would have negligible revenue
effect over 2014-2023.
Sec. 6102. Free electronic filing.
Current
law: Under current law, the IRS has entered into arrangements with
commercial return preparation service providers (known as the Free File
Alliance) to provide free tax preparation and electronic filing services to
eligible low-income or elderly taxpayers. This arrangement is commonly known as
the Free File Program. Taxpayers generally must select a designated service
provider through the IRS' website to access commercial online software provided
by Free File Alliance companies to prepare and file their tax returns. To
qualify, taxpayers must have adjusted gross income (AGI) of $58,000 or less (for
2013 returns). Each participating company sets its own eligibility requirements
and not all taxpayers will qualify to use the software of all companies. There
is no fee for taxpayers using the Free File Program, and Free File Alliance
companies also do not pay any fee to the IRS to participate in the program.
Provision:
Under the provision, the IRS would be directed to continue working cooperatively
with the private-sector technology industry to maintain a program that provides
free individual income tax preparation and individual income tax electronic
filing services to lower-income and elderly taxpayers. (The current Free File
Program would satisfy this requirement.) The IRS would be required to provide
regulations or other guidance with respect to the program, including (1) the
qualifications, selection process, terms of participation, and any other
procedures with respect to businesses seeking to participate in the program; (2)
a process for periodic review of participants approved for the program; and (3)
a procedure for removal of any participant that no longer qualifies for the
program or has failed to comply with the program's rules and procedures. The
provision would be effective on the date of enactment.
JCT
estimate: According to JCT, the provision would have negligible revenue
effect over 2014-2023.
Sec. 6103. Pre-populated returns prohibited.
Current
law: Under current law, a taxpayer generally has responsibility for
preparing and filing a tax return if the taxpayer has taxable gross income for a
tax year. Certain taxpayers may elect to have the IRS prepare the return based
on information provided by the taxpayer. Similarly, under the substitute for
return program, the IRS may make a return based on information available to or
obtained by the IRS for a taxpayer who fails to prepare and file a return by the
required due date or for a taxpayer who makes, willfully or otherwise, a false
or fraudulent return. The IRS has an obligation under current law to make
reasonable efforts to verify any third-party information upon which the agency
relies under the substitute for return program or bear the burden of proof if
such information is subject to judicial review. If the IRS ultimately determines
that a non-filing taxpayer had no filing requirement, any tax, penalty, and
interest assessed generally is abated.
Provision:
Under the provision, the IRS would be prohibited from instituting any program
under which it prepares or otherwise provides taxpayers with proposed or final
returns or statements intended to be used by the taxpayer to satisfy his
reporting obligation under the Code. Thus, the IRS would not have authority to
implement a broad-based program under which it pre-populates a return with
third-party information supplied to the agency (e.g., Form W-2 wage statements,
Form 1099s for interest, dividends or capital gains) and provides such return to
a taxpayer for filing. The provision would be effective on the date of
enactment.
JCT
estimate: According to JCT, the provision would have no revenue effect over
2014-2023.
Sec. 6104. Form 1040SR for seniors.
Current
law: Under current law, a taxpayer generally is responsible for preparing
and filing a tax return if the taxpayer has taxable gross income for a tax year.
The IRS has broad discretion under current law to provide all necessary forms to
enable taxpayers to satisfy their return-filing obligations. Taxpayers with
relatively uncomplicated financial circumstances and modest income are generally
eligible to file their taxes using the simplest tax form - Form 1040EZ. However,
individuals who are age 65 or older are expressly prohibited from using Form
1040EZ, thereby requiring them to use other more complicated forms.
Provision:
Under the provision, the IRS would be required to develop a simple tax return to
be known as Form 1040SR, which would be as similar as practicable to the current
Form 1040EZ. The new form would be available for use by individuals over the age
of 65 who receive common types of retirement income. The provision would be
effective for tax years beginning after 2014.
Consideration:
Under current IRS rules, taxpayers with relatively uncomplicated financial lives
are generally eligible to file their taxes using the simplest tax return - Form
1040EZ. However, no matter how simple and straightforward their returns, seniors
are expressly denied the opportunity to use the most convenient tax form simply
because they are over the age of 65. As a result, seniors must use other more
complicated forms, forcing them to struggle through the myriad pages of
instructions, worksheets, and schedules to file their taxes or spend their
retirement income on a professional tax preparer to do so. The provision would
correct this inequity and require the IRS to make available a simple tax form
specifically for seniors.
JCT
estimate: According to JCT, the provision would have no revenue effect over
2014-2023.
Sec. 6105. Increased refund and credit threshold for Joint Committee on Taxation review of C corporation return.
Current
law: Under current law, the IRS may not issue a refund or credit of any
income or certain other taxes in excess of $2 million until 30 days after the
IRS provides a report regarding the refund or credit to the Joint Committee on
Taxation (JCT). As a matter of administrative practice, JCT staff reviews the
facts surrounding the proposed refund or credit and communicates any concerns
back to the IRS, which can then modify the refund or credit at its
discretion.
Provision:
Under the provision, the threshold for JCT review of refunds or credits with
respect to returns filed by C corporations would be increased to $5 million. The
provision would be effective on the date of enactment, except with respect to
pending refund or credit reports that have been transmitted by the IRS to JCT
prior to such date.
JCT
estimate: According to JCT, the provision would have negligible revenue
effect over 2014-2023.
Subtitle C - Tax Return Due Date SimplificationSecs. 6201-6203. Due dates for returns of partnerships, S corporations, and C corporations; Modification of due dates by regulation; Corporations permitted statutory automatic 6-month extension of income tax returns.
Current
law: Under current law, taxpayers required to file income tax returns must
file such returns in the manner prescribed by the IRS and subject to the due
dates established in the Code (if any) or by regulations. Accordingly, a C
corporation or an S corporation is required to file its tax return by March 15
(or within two and a half months after the close of its tax year). A partnership
is required to file its returns by April 15 (or within three and a half months
after the close of its tax year), the same date that applies to individuals and
sole proprietors.
Current
law provides corporations with an automatic three-month extension of the filing
due date, with corporations permitted to apply for an additional three-month
extension (for a total of six months).
Provision:
Under the provision, the schedule for filing tax returns would be modified as
follows:
The
provision also would provide C corporations with an automatic six-month
extension of the applicable filing date. Similarly, the provision would codify
certain extensions currently provided by regulations.
The
provision generally would be effective for tax years beginning after 2014. For C
corporations with fiscal years ending on June 30, the new filing date would not
apply to any tax year beginning in 2022.
JCT
estimate: According to JCT, the provisions would increase revenues by $0.1
billion over 2014-2023.
Subtitle D - Compliance ReformsSec. 6301. Penalty for failure to file.
Current
law: Under current law, a taxpayer who fails to file a tax return within 60
days of the due date is subject to a minimum penalty equal to the lesser of $135
or 100 percent of the amount required to be shown on the return.
Provision:
Under the provision, the minimum penalty for failure to file a tax return would
be increased to $400. The provision would be effective for tax returns the due
date for the filing of which (including extensions) is after 2014.
JCT
estimate: According to JCT, the provision would increase revenues by $0.3
billion over 2014-2023.
Sec. 6302. Penalty for failure to file correct information returns and provide payee statements.
Current
law: Under current law, a multi-tier penalty structure applies to a taxpayer
that fails to file correct information returns (e.g., IRS Form 1099) with the
IRS. The penalties are based on the duration of the delinquency, the size of the
taxpayer, and the taxpayer's intent. A separate, but parallel, penalty regime
applies to taxpayers that fail to provide the payee with a correct copy of the
information return (e.g., IRS Form 1099) filed with the IRS. The current amount
for both penalty regimes is $100 for each information return not corrected
before August 1st following the filing due date, with a maximum for each penalty
of $1.5 million for any taxpayer in a calendar year. If the failure is corrected
within 30 days of the due date, the penalty is reduced to $30 per return, with a
maximum of $250,000 for each penalty. If the failure is corrected after 30 days
but before August 1st, the penalty is $60 per return with a maximum of $500,000
for each penalty. For taxpayers with gross receipts of not more than $5 million,
the maximum amount of the general penalty is $500,000, the maximum for corrected
returns within 30 days is $75,000, and the maximum for corrected returns after
30 days, but before August 1st, is $200,000. For taxpayers who intentionally
disregard the filing requirements, the penalty is $250 per return with no
maximum.
Provision:
Under the provision, the penalty for failure to file correct information returns
and the penalty for failure to furnish correct payee statements would be
adjusted as follows:
The
provisions would be effective for information returns and payee statements
required to be filed after 2014.
JCT
estimate: According to JCT, the provision would increase revenues by $0.1
billion over 2014-2023.
Sec. 6303. Clarification of 6-year statute of limitations in case of overstatement of basis.
Current
law: Under current law, taxes generally are required to be assessed within
three years after the date on which the taxpayer filed the return. However, if a
taxpayer omits substantial income on a return (i.e., in excess of 25 percent of
the amount of gross income that was stated in the return), any tax with respect
to that return generally may be assessed within six years of the date on which
the return was filed. The Supreme Court has ruled that the six-year statute of
limitations does not apply to a return on account of the taxpayer having
substantially overstated the adjusted basis of property, the sale or exchange of
which results in an understatement of gain.
Provision:
Under the provision, the six-year statute of limitations would apply to a return
on which the taxpayer claims an adjusted basis for any property that is more
than 125 percent of the correct adjusted basis. The provision would be effective
for returns filed after the date of enactment and for returns filed on or before
the date of enactment if the general statute of limitations has not expired.
JCT
estimate: According to JCT, the provision would increase revenues by $1.1
billion over 2014-2023.
Sec. 6304. Reform of rules related to qualified tax collection contracts.
Current
law: Under current law, the IRS has authority to enter into qualified tax
collection contracts with private debt collection companies to locate and
contact taxpayers owing outstanding tax liabilities of any type, and to arrange
payment of such taxes by the taxpayers. Qualified tax collection contracts are
subject to a number of administrative safeguards: (1) provisions of the Fair
Debt Collection Practices Act apply; (2) taxpayer protections that are
statutorily applicable to the IRS and its employees are applicable to the
private-sector debt collection companies and to their employees; and (3)
subcontractors of the private debt collection companies are subject to a number
of restrictions regarding their contact with taxpayers.
Provision:
Under the provision, the IRS would be required to use qualified tax collection
contracts to collect certain inactive tax receivables. These receivables would
include accounts removed from active inventory due to lack of IRS resources,
accounts for which more than a third of the statute of limitations has expired
without being assigned to an IRS employee for collection, and assigned accounts
that have gone more than 365 days without interaction between the IRS and the
taxpayer. However, certain receivables would not be assigned to private debt
collection companies, including accounts subject to a pending or active
offer-in-compromise or installment agreement, accounts relating to innocent
spouse cases and taxpayers in combat zones, accounts of minors, deceased
taxpayers or victims of identity theft, and accounts under examination,
litigation, criminal investigation, levy, or subject to a right of appeal. The
provision also would permit taxpayers in a presidentially declared disaster area
to request that the private debt collector suspend collections and return the
account to the IRS. The provision would be effective for tax receivables
identified by the IRS after the date of enactment.
Considerations:
JCT
estimate: According to JCT, the provision would increase revenues by $4.4
billion over 2014-2023, and increase outlays by $2.2 billion over 2014-2023.
Sec. 6305. 100 percent continuous levy on payments to Medicare providers and suppliers.
Current
law: Under current law, the Treasury Department is authorized to
continuously levy up to 15 percent of a payment to a Medicare provider to
collect delinquent tax debt. Through the Federal Payment Levy Program, the
Treasury Department deducts (levies) a portion of a government payment to an
individual or business to collect unpaid taxes.
Provision:
Under the provision, the Treasury Department would be authorized to levy up to
100 percent of a payment to a Medicare provider to collect unpaid taxes. The
provision would be effective for levies issued after the date of enactment.
JCT
estimate: According to JCT, the provision would increase revenues by $0.7
billion over 2014-2023.
Sec. 6306. Treatment of refundable credits for purposes of certain penalties.
Current
law: Under current law, a 20-percent accuracy-related penalty applies to the
underpayment of tax. There is uncertainty as to the extent to which refundable
credits are taken into account when determining the amount of the underpayment
subject to the penalty. The Tax Court recently held that refundable credits
count toward the underpayment of tax but only to the extent that tax liability
is reduced to zero, but not to the extent that the credits produce a tax
refund.
A
separate 20-percent penalty applies when taxpayers make erroneous claims for
refunds or credits. This penalty does not apply under current law to the earned
income tax credit (EITC). The IRS may only assert either the penalty for
erroneous claims for refund or credit or the penalty for underpayment of tax
described above, but not both.
Provision:
Under the provision, the penalty for underpayment of tax would take into account
the full amount of refundable credits. The provision would be effective for
returns filed after February 26, 2014 and returns filed on or before such date
if the general statute of limitations has not expired.
The
provision also would amend the penalty for erroneous claims for refunds or
credits to apply to taxpayers who erroneously claim the new credit for
employment-related taxes (section 1103 of the discussion draft). The provision
would be effective for claims filed after February 26, 2014.
JCT
estimate: According to JCT, the provision would increase revenues by $0.1
billion over 2014-2023.
Title VII - Excise TaxesSec. 7001. Repeal of medical device excise tax.
Current
law: Under current law, the manufacturer, producer, or importer of any
taxable medical device must pay an excise tax equal to 2.3 percent of the sales
price of such device. The excise tax does not apply to eyeglasses, contact
lenses, hearing aids, and any other medical device determined by the Secretary
to be of a type that is generally purchased by the general public at retail for
individual use.
Provision:
Under the provision, the medical device excise tax would be repealed. The
provision would apply to sales after the date of enactment.
JCT
estimate: According to JCT, the provision would reduce revenues by $29.5
billion over 2014-2023.
Sec. 7002. Modifications relating to oil spill liability trust fund.
Current
law: Under current law, an excise tax is imposed on crude oil (including
crude oil condensates and natural gasoline) that is received at a U.S. refinery
and on petroleum products that are imported into the United States. These excise
tax revenues are deposited into the Oil Spill Liability Trust Fund. The excise
tax rate is 8 cents per barrel through 2016 and 9 cents per barrel for 2017, but
the tax expires after 2017. In 2011, the IRS issued administrative guidance
concluding that tar sands are not subject to the excise tax because tar sands
are not included in the definition of “crude oil” or “petroleum products” for
purposes of the excise tax.
Provision:
Under the provision, the excise tax would continue to be imposed at a rate of 9
cents per barrel for 2018 through 2023. In addition, the definitions of “crude
oil” and “petroleum products” to which the excise tax applies would be modified
to include crude oil condensates, natural gasoline, any bitumen or bituminous
mixture, any oil derived from a bitumen or bituminous mixture, shale oil, and
any oil derived from kerogen-bearing sources. The provision would be effective
for oil and petroleum products received at U.S. refineries or imported into the
United States during calendar quarters beginning more than 60 days after the
date of enactment.
JCT
estimate: According to JCT, the provision would increase revenues by $1.2
billion over 2014-2023.
Sec. 7003. Modification relating to inland waterways trust fund financing rate.
Current
law: Under current law, an excise tax of 20 cents per gallon is imposed on
fuel used in powering commercial cargo vessels on inland or intra-coastal
waterways. These excise tax revenues are deposited into the Inland Waterways
Trust Fund.
Provision:
Under the provision, the excise tax rate would be increased to 26 cents per
gallon. The provision would be effective for fuel used after 2014.
Consideration:
In a letter dated September 24, 2013, to the Ways and Means Committee, the
Waterways Council and a coalition of nearly 40 stakeholders expressed support
for increasing the excise tax that supports the Inland Waterways Trust Fund to
at least 26 cents per gallon, in conjunction with spending reforms included in
the Water Resources Reform and Development Act, which passed the House of
Representatives on October 23, 2013.
JCT
estimate: According to JCT, the provision would increase revenues by $0.2
billion over 2014-2023.
Sec. 7004. Excise tax on systemically important financial institutions.
Current
law: Under current law, sections 113 and 165 of the Dodd-Frank Wall Street
Reform and Consumer Protection Act define a systemically important financial
institution (SIFI) as (1) any bank holding company with at least $50 billion in
total consolidated assets, or (2) any non-bank financial institution designated
for SIFI treatment by the Financial Stability Oversight Council and thus subject
to oversight by the Federal Reserve. SIFI status subjects a financial
institution to more stringent prudential standards than apply to non-SIFIs, and
such status also requires regulators and the financial institution to agree on a
resolution plan to ensure an orderly process in the event that the financial
institution fails or suffers financial distress. The Federal Reserve and other
agencies conduct annual stress tests on SIFIs to ensure that the SIFIs have
adequate capital to absorb losses that result from economic downturns.
Currently,
there is no excise tax that applies to the assets of SIFIs.
Provision:
Under the provision, every SIFI would be required to pay a quarterly excise tax
of 0.035 percent of the SIFI's total consolidated assets (as reported to the
Federal Reserve) in excess of $500 billion. After calendar year 2015, the $500
billion threshold would be indexed for increases in the gross domestic product
(GDP). The provision would apply to calendar quarters beginning after 2014.
Considerations:
JCT
estimate: According to JCT, the provision would increase revenues by $86.4
billion over 2014-2023.
Sec. 7005. Clarification of orphan drug exception to annual fee on branded prescription pharmaceutical manufacturers and importers.
Current
law: Under current law, an annual tax is imposed on covered entities engaged
in the business of manufacturing or importing branded prescription drugs for
sale to any specified government program or pursuant to coverage under any such
program. Taxes collected are credited to the Medicare Part B trust fund. The
aggregate annual tax imposed on all covered entities is $2.5 billion for
calendar year 2011, $2.8 billion for calendar years 2012 and 2013, $3 billion
for calendar years 2014 through 2016, $4 billion for calendar year 2017, $4.1
billion for calendar year 2018, and $2.8 billion for calendar year 2019 and
thereafter. The aggregate tax is apportioned among the covered entities each
year based on their relative share of branded prescription drug sales taken into
account during the previous calendar year.
Branded
prescription drug sales do not include sales of any drug or biological product
with respect to which an orphan drug tax credit was allowed for any tax year
under Code section 45C. The exception for orphan drug sales does not apply to
any drug or biological product after such drug or biological product is approved
by the Food and Drug Administration (FDA) for marketing for any indication other
than the rare disease or condition with respect to which the section 45C credit
was allowed.
Provision:
Under the provision, eligibility for the orphan drug exemption would be expanded
to include any drug or biological product that is approved or licensed by the
FDA for marketing solely for one or more rare diseases or conditions, regardless
of whether the section 45C credit was ever allowed. A disease or condition would
be considered “rare” if either it affects less than 200,000 U.S. persons, or
there is no reasonable expectation that the cost of developing and making the
drug available will be recovered from sales. The provision would be effective
for calendar years after 2013.
JCT
estimate: According to JCT, the provision would have no revenue effect over
2014-2023.
Title VIII - Deadwood and Technical ProvisionsSubtitle A - Repeal of DeadwoodSecs. 8001-8084. Repeal of Deadwood.
Current
law: Under current law, there are numerous provisions that relate to past
tax years (and generally are no longer applied in computing taxes for open tax
years), involve situations that were narrowly defined and unlikely to recur, or
otherwise have outlived their usefulness. These types of provisions are often
referred to as “deadwood” provisions.
Provisions:
Under these provisions, current-law provisions that are deadwood would be
repealed. (Note that other provisions in other titles of the discussion draft
would repeal other current-law provisions that would become deadwood as a result
of those other provisions.) These provisions generally would be effective on the
date of enactment, although the tax treatment of any transaction occurring
before that date, of any property acquired before that date, or of any item
taken into account before that date, would not be affected by these
provisions.
JCT
estimate: According to JCT, the provisions would have no revenue effect over
2014-2023.
Subtitle B - Conforming Amendments Related to Multiple SectionsSec. 8101. Conforming amendments related to multiple sections.
Current
law: Under current law, there are numerous provisions that would be affected
by multiple provisions in the discussion draft and, therefore, require technical
changes to conform these current-law provisions to the provisions in the
discussion draft.
Provision:
Under the provision, several conforming changes that are common to various
provisions of the discussion draft would be made. The provision generally would
be effective for tax years beginning after 2014.
JCT
estimate: According to JCT, the provision would have no revenue effect over
2014-2023.
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