Daily Tax Update - September 13, 2012: Senate Finance Reports Extenders Package

SENATE FINANCE REPORTS EXTENDERS PACKAGE:  Last night, the Senate Finance Committee reported a package of "tax extenders" for expired or expiring tax provisions (S. 3521, the Family and Business Tax Cut Certainty Act of 2012).  Today, Senate Majority Leader Harry Reid filed a cloture motion on the bill and called for a vote before the October recess.  Some sources indicate that the extenders bill may be attached to the continuing resolution, which is expected to be voted on next week.  The Senate is likely to recess on September 21st.  The Joint Committee on Taxation estimates that the Family and Business Tax Cut Certainty Act of 2012 will result in a net cost to the government of $205 billion.

The bill includes:

Individual Provisions

Extend AMT Relief to 2013 – The bill increases AMT exemptions for 2012 to $50,600 (individuals) and from $78,750 (married filing jointly).  The exemptions for 2013 would increase to $51,150 (individuals) and $79,850 (married filing jointly).  The bill also allows nonrefundable personal credits against the AMT in both 2012 and 2013.  The provision is effective for taxable years beginning after December 31, 2011.

Mortgage Debt Relief – The bill extends a provision which allows up to $2 million of forgiven debt is eligible to be excluded from income ($1 million if married filing separately) through tax year 2013.

Premiums for Mortgage Insurance Deductible for Qualified Personal Residence - The bill extends the ability to deduct the cost of mortgage insurance on a qualified personal residence.  The deduction is phased-out ratably by 10 percent for each $1,000 by which the taxpayer’s AGI exceeds $100,000.  Thus, the deduction is unavailable for a taxpayer with an AGI in excess of $110,000.  The bill extends this provision for two additional years, through 2013.

Business Provisions:

Tax Credit for Research and Experimentation Expenses - The bill extends for two years, through 2013, the research tax credit equal to 20 percent of the amount by which a taxpayer’s qualified research expenses for a taxable year exceed its base amount for that year and provides an alternative simplified credit of 14%.  The bill also modifies rules for taxpayers under common control and rules for computing the credit when a portion of a trade or business changes hands.

15-Year Straight-Line Cost Recovery for Certain Leasehold, Restaurant, and Retail Improvements - The bill extends for two years, through 2013, the temporary 15-year cost recovery period for certain leasehold, restaurant, and retail improvements, and new restaurant buildings, which are placed in service before January 1, 2014. The extension is effective for qualified property placed in service after December 31, 2011.

Temporarily Extend Increase in the Maximum Amount and Phase-Out Threshold Under Section 179 - Currently, a taxpayer with a sufficiently small amount of annual investment may elect to deduct the cost of certain property placed in service for the year rather than depreciate those costs over time.  The bill increases the maximum dollar amount that may be deducted and phase-out threshold in 2012 and 2013 to the levels in effect in 2010 and 2011 ($500,000 and $2 million, respectively).  Within those thresholds, the bill also allows a taxpayer to expense up to $250,000 of the cost of qualified leasehold improvement property, qualified restaurant property, and qualified retail improvement property.  This provision expires at the end of 2013.

Exceptions Under Subpart F for Active Financing Income - The bill extends for two years, through the end of 2013, the provision which allows the US parent of a foreign subsidiary deferral of tax on the subsidiary’s earnings if (1) the subsidiary is engaged in a banking, financing, or similar business; (2) the subsidiary is predominantly engaged in such business and conducts substantial activity with respect to such business; and (3) the subsidiary passes an entity-level income test to demonstrate that the income is active income and not passive income. 

Look-Through Treatment of Payments Between Related Controlled Foreign Corporations Under the Foreign Personal Holding Company Rules – The bill extends the provision that allows deferral for certain payments (interest, dividends, rents and royalties) between commonly controlled foreign corporations (CFC).  This provision allows US taxpayers to deploy capital from one CFC to another without triggering US tax.  The proposal is effective for tax years beginning after December 31, 2011.

Special Rules for Qualified Small Business Stock - The bill extends the 100 percent exclusion of the gain from the sale of qualifying small business stock that is acquired before January 1, 2014 and held for more than five years.  The bill also clarifies that in the case of stock acquired after February 17, 2009, and before January 1, 2014, the date of acquisition for purposes of determining the percentage exclusion is the date the holding period for the stock begins.

Reduction in S Corporation Recognition Period for Built-In Gains Tax – A taxable corporation that converts to an S corporation must hold its assets for a certain period in order to avoid a tax on any built-in gains that existed at the time of the conversion.  The bill extends a reduced 5-year holding period to sales of assets occurring in 2012 and 2013.  In addition, this bill clarifies rules for carry forwards and installment sales.

Expressing the Sense of the Senate Regarding Tax Reform - This provision expresses the Senate’s sense that comprehensive tax reform is vital to economic growth and competitiveness and should begin in 2013, a major focus of tax reform should be broadening the base so as to lower tax rates, and whenever possible energy tax expenditures should be responsibly phased-out.

  • A summary of the bill can be accessed here.
  • The text of the bill can be accessed here.
  • The Committee report can be accessed here.

IRS PROPOSES REGULATIONS ON TREATMENT OF CORPORATE EQUITY REDUCTION TRANSACTIONS:  Today, the IRS released proposed regulations (REG-140668-07) under section 172(h) and section 1502 of the Internal Revenue Code. These proposed regulations provide guidance regarding the treatment of corporate equity reduction transactions (CERTs), including the treatment of multiple step plans for the acquisition of stock and CERTs involving members of a consolidated group. These proposed regulations also provide guidance regarding certain elections relating to the carryback of consolidated net operating losses (CNOLs) to separate return years. These proposed regulations will affect C corporations and corporations filing consolidated returns.

BAUCUS, CAMP ANNOUNCE JOINT HEARING ON TAX REFORM AND THE TAX TREATMENT OF CAPITAL GAINS:  On September 20, the Senate Finance and House Ways and Means Committees will hold a joint hearing entitled “Tax Reform and the Tax Treatment of Capital Gains” to review the tax treatment of capital gains in the context of comprehensive tax reform.  The hearing was rescheduled from June.

  • The hearing will focus on the taxation of capital gains in the context of comprehensive tax reform.  It will explore several tax reform policy issues relating to the treatment of capital gains, including background on capital gains taxation and its history, the impact of the capital gains tax rate on investor behavior, the effect of the differential tax treatment of capital gains and ordinary income on tax planning and tax avoidance, the revenue-maximizing rate on capital gains, the distribution of capital gains income across taxpayer income levels, and the types of assets eligible for capital gains treatment.
  • The hearing witnesses will be:
    • Mr. David H. Brockway, Partner, Bingham McCutchen LLP
    • Dr. Lawrence B. Lindsey, President and CEO, The Lindsey Group
    • Dr. Leonard E. Burman, Daniel Patrick Moynihan Professor of Public Affairs at the Maxwell School, Syracuse University
    • Mr. David L. Verrill, Founder and Managing Director, Hub Angels Investment Group LLC
    • Mr. William D. Stanfill, General Partner, Montegra Capital Income Fund

TAX BILLS INTRODUCED SEPTEMBER 12TH:

1. [112th] H.R.6384 : To amend the Internal Revenue Code of 1986 to increase, expand, and extend the credit for hydrogen-related alternative fuel vehicle refueling property and to increase the investment credit for more efficient fuel cells.
Sponsor: Rep Larson, John B. [CT-1] (introduced 9/12/2012)   Cosponsors (1)
Committees: House Ways and Means
Latest Major Action: 9/12/2012 Referred to House committee.
Status: Referred to the House Committee on Ways and Means.

2. [112th] S.3531 : A bill to amend the Internal Revenue Code of 1986 to increase, expand, and extend the credit for hydrogen-related alternative fuel vehicle refueling property and to increase the investment credit for more efficient fuel cells.
Sponsor: Sen Blumenthal, Richard [CT] (introduced 9/12/2012)   Cosponsors (None)
Committees: Senate Finance
Latest Major Action: 9/12/2012 Referred to Senate committee.
Status: Read twice and referred to the Committee on Finance.

3. [112th] S.3532 : Church Plan Clarification Act of 2012
Sponsor: Sen Hutchison, Kay Bailey [TX] (introduced 9/12/2012)   Cosponsors (1)
Committees: Senate Finance
Latest Major Action: 9/12/2012 Referred to Senate committee.
Status: Read twice and referred to the Committee on Finance.

4. [112th] S.3536 : A bill to amend the Internal Revenue Code of 1986 to extend the work opportunity credit for hiring veterans, and for other purposes.
Sponsor: Sen Blumenthal, Richard [CT] (introduced 9/12/2012)   Cosponsors (5)
Committees: Senate Finance
Latest Major Action: 9/12/2012 Referred to Senate committee.
Status: Read twice and referred to the Committee on Finance.

INTERNAL REVENUE SERVICE - CIRCULAR 230 DISCLOSURE: 
As provided for in Treasury regulations, advice (if any) relating to federal taxes that is contained in this communication (including attachments) is not intended or written to be used, and cannot be used, for the purpose of (1) avoiding penalties under the Internal Revenue Code or (2) promoting, marketing or recommending to another party any plan or arrangement addressed herein.

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