Tax Extenders Act of 2009 Extends a Variety of Pork Barrel Provisions

Every year Congress enacts a one-year extension for a variety of politically popular provisions for which it has to scramble to pay. Unfortunately, it is getting harder to pay for these extensions (many of which are unnecessary). Moreover, the way the extensions are funded is questionable. For example, to help pay for the 49 “extenders” Congress is requiring certain large corporations to pay 159.75% of their 2014 tax early so it falls in an earlier fiscal year causing federal receipts for that year to look better. However, this provision is the equivalent of “robbing Peter to pay Paul” because those corporations will then reduce their future payments by the overpayment. This is so incredibly stupid (not to mention complex), that you have to wonder if the tax writers have not completely lost their minds! Little wonder that we are so cynical of Congress.

It is important to understand that the general provisions permitting 50% bonus depreciation and higher section 179 expensing are NOT included in the Tax Extenders Act of 2009. That means that most businesses will be paying higher taxes next year as their tax depreciation turns around. Moreover, the Act does NOT include any relief for the alternative minimum tax. As a result, for tax years beginning after 2009, the AMT exemption will be $33,750 for unmarried individuals who are not surviving spouses, reduced by 25% of the amount by which AMTI exceeds $112,500; $45,000 for married couples filing jointly and surviving spouses, reduced by 25% of the amount by which AMTI exceeds $150,000; and $22,500 for marrieds filing separately, reduced by 25% of the amount by which AMTI exceeds $75,000 and increased as provided by the “25% lesser-of add-back” rule. Thus, unless Congress enacts another “stopgap” provision to “patch” the individual AMT, in 2010, we’re all going to be paying a lot more tax.

One final question before we look at the details: does an incentive actually motivate people to act in a certain way if it is always available or would it be more effective if it actually expired (as it was intended to do)?

TRADITIONAL TAX EXTENDERS

 Individual Provisions

• Extension of the deduction of State and local general sales taxes.
• Extend for one year (through 2010) the election to take an itemized deduction for State and local general sales taxes in lieu of the itemized deduction permitted for State and local income taxes.
• Extend for one year (through 2010) the additional standard deduction for State and local real property taxes.
• Extend for one year (through 2010) the above-the-line tax deduction for qualified education expenses.
• Extend for one year (through 2010) the $250 above-the-line tax deduction for teachers and other school professionals for expenses paid or incurred for books, supplies (other than non-athletic supplies for courses of instruction in health or physical education), computer equipment (including related software and service), other equipment, and supplementary materials used by the educator in the classroom.

Business Provisions

• Extend for one year (through 2010) the research credit. In November, the General Accounting Office released a report on how the research tax credit could be redesigned and administered to increase its effectiveness. In that report the GAO recommended that Congress should consider eliminating the regular credit option and adding a minimum base to the alternative simplified credit. In addition the Secretary of Treasury should clarify the definition of qualified research expenses and organize working groups to develop standards for documentation. 
  Note: IRS agents generally do not understand how the research credit works and we’ve had recent experience where the IRS has given taxpayers a copy of outdated (and superseded) regulations at the start of their audit. In other words, the IRS itself doesn’t even know what regulations apply.
• Extend for one year (through 2010) the active financing exception from Subpart F of the tax code.
• Extend for one year (through 2010) the current law look-through treatment of payments between related controlled foreign corporations.
• Extend for one year (through 2010) the special 15-year cost recovery period for certain leasehold improvements, restaurant buildings and improvements, and retail improvements. This proposal is a big favorite of the National Retail Federation because it allows for more rapid write off of retail and restaurant remodeling costs.
• Extend for one year (through 2010) the special 7-year cost recovery period for property used for land improvement and support facilities at motorsports entertainment complexes.
• Extend for one year (through 2010) the railroad track maintenance credit. No doubt this is a benefit to Warren Buffet.
• Extend for one year (through 2010) the provision that allows film and television producers to expense the first $15 million of production costs incurred in the United States ($20 million if the costs are incurred in economically depressed areas in the United States).
• Extension of expensing of “brownfields” environmental remediation costs. Extend for one year (through 2010) the provision that allows for the expensing of costs associated with cleaning up hazardous (“brownfield”) sites.
• Extend for one year (through 2010) the credit for training mine rescue team members.
• Extend for one year (through 2010) the provision that provides businesses with fifty percent (50%) bonus depreciation for certain qualified underground mine safety equipment.
• Extend for one year (through 2010) the provision that provides eligible small business employers with a credit against the taxpayer’s income tax liability for a taxable year in an amount equal to twenty percent (20%) of the sum of differential wage payments to activated military reservists.
• Extend for one year (through 2010) the provision that provides a five-year recovery period for certain machinery and equipment which is used in a farming business.
• Extend for one year (through 2010) the tax treatment of interest-related dividends, short-term capital gain dividends, and other special rules applicable to foreign shareholders that invest in regulated investment companies.
• Extend for one year (through 2010) the suspension on the taxable income limit for purposes of depleting a marginal oil or gas well.

Charitable Provisions

• Extend for one year (through 2010) the increased contribution limits and carryforward period for contributions of appreciated real property (including partial interests in real property) for conservation purposes.
  Our experience is that you should be very careful if you plan to use this provision since the IRS does not like noncash contributions and believes that there is widespread cheating in this area. As a result, you should plan on the IRS vigorously challenging any deduction you claim.
• Extend for one year (through 2010) the provision allowing businesses to claim an enhanced deduction for the contribution of food inventory.
• Extend for one year (through 2010) the provision allowing C corporations to claim an enhanced deduction for contributions of book inventory to public schools (kindergarten through grade 12).
• Extend for one year (through 2010) the provision that encourages businesses to contribute computer equipment and software to elementary, secondary, and post-secondary schools by allowing an enhanced deduction for such contributions.
• Extend for one year (through 2010) the provision that permits tax-free distributions to charity from an Individual Retirement Account (IRA) of up to $100,000 per taxpayer, per taxable year.
  Our experience has been the IRS is still requiring some taxpayers to “prove” after the fact that the contributions were made to the charity even though the distribution was made directly from the IRA and follows all of the prescribed procedures.
• Extend for one year (through 2010) the special rules for interest, rents, royalties and annuities received by a tax exempt entity from a controlled entity.
• Extend for one year (through 2010) the provision that excludes any gain or loss from the qualified sale, exchange, or other disposition of any qualified brownfield property from unrelated business taxable income.
• Extend for one year (through 2010) the provision allowing S corporation shareholders to take into account their pro rata share of charitable deductions even if such deductions would exceed such shareholder’s adjusted basis in the S corporation.

Miscellaneous Provisions

• Extend for one year (through 2010) the business tax credit for employers of qualified employees that work and live on or near an Indian reservation. The credit is for wages and health insurance costs paid to qualified employees (up to $20,000) in the current year over the amount paid in 1993.
• Extend for one year (through 2010) the placed-in-service date for the special depreciation recovery period for qualified Indian reservation property. In general, qualified Indian reservation property is property used predominantly in the active conduct of a trade or business within an Indian reservation, which is not used outside the reservation on a regular basis and was not acquired from a related person.
• Extend for one year (through 2010) the provision extending the section 199 domestic production activities deduction to activities in Puerto Rico.
• Extend for one year (through 2010) the provision providing for payment of $13.25 per gallon to cover over a $13.50 per proof gallon excise tax on distilled spirits produced in or imported into the United States.
• Extend for one year (through 2010) the American Samoa economic development credit. In general, this credit provides certain domestic corporations operating in American Samoa with a possessions tax credit to offset their U.S. tax liability on income earned in American Samoa from active business operations, sales of assets used in a business, or certain investments in American Samoa.

Expiring Community Assistance Programs

• Extend for one year (through 2010) the designation of certain economically depressed census tracts as Empowerment Zones. Businesses and individual residents within Empowerment Zones are eligible for special tax incentives.
• Extend for one year (through 2010) the designation of certain economically depressed census tracts as Renewal Communities. Businesses and individual residents within Renewal Communities are eligible for special tax incentives.
• Extend for one year (through 2011) the new markets tax credit, permitting a maximum annual amount of qualified equity investments of $5 billion.
• Extend for one year (through 2010) the designation of certain economically depressed census tracts within the District of Columbia as the District of Columbia Enterprise Zone. Businesses and individual residents within this enterprise zone are eligible for special tax incentives.
• Extend for one year (through 2010) the $5,000 first-time homebuyer credit for the District of Columbia.
• Extend for one year (through 2010) the special depreciation allowance for certain real property within the New York Liberty Zone and the time for issuing New York Liberty Zone bonds.
  Extend for one year (through August 28, 2010) the work opportunity tax credit for certain employers hiring in the Hurricane Katrina core disaster area.
• Extend for one year (through 2010) the increased rehabilitation credit for qualified expenditures in the Gulf Opportunity Zone. The Gulf Opportunity Zone Act of 2005 increased the rehabilitation credit from 10 percent to 13 percent of qualified expenditures for any qualified rehabilitated building other than a certified historic structure, and from 20 percent to 26 percent of qualified expenditures for any certified historic structure.
• Extend for one year (through 2010) the program that was enacted as part of the American Recovery and Reinvestment Act of 2009 that allows state housing agencies to elect to receive a payment in lieu of a portion of the State’s allocation of low-income housing tax credits.

Expiring General Disaster Tax Relief Provisions

• Extend for one year (through 2010) the provision that allows taxpayers who have suffered loss as a result of a Federally-declared disaster to claim a deduction for casualty losses (i.e., both itemizers and non-itemizers) and would allow these taxpayers to calculate their casualty loss deduction without regard to their adjusted gross income. The bill would also extend for one year (through 2010) the current law $500 per loss threshold.
• Extend for one year (through 2010) the provision that allows businesses that have been affected by a Federally-declared disaster to currently deduct demolition, repair, clean-up, and environmental remediation expenses (“Qualified Disaster Expenses”).
• Extend for one year (through 2010) the provision that allows businesses to carry back to the previous five years the following losses: (1) casualty losses that are attributable to a Federally-declared disaster; and (2) Qualified Disaster Expenses.
• Extend for one year (through 2010) the provision that allows states waive certain rules that limit their ability to use tax-exempt housing bonds to provide loans to taxpayers that wish to acquire residences in Federally-declared disaster areas. The bill would also extend for one year (through 2010) the provision that allows states to use their tax-exempt housing bonds to provide loans to repair or reconstruct homes and rental housing units that have been rendered unsafe for use as a residence by reason of a Federally-declared disaster or have been demolished or relocated by reason of government order on account of a Federally-declared disaster. Such loans are limited to the lower of (1) the actual cost of the repair or reconstruction or (2) $150,000.
• Extend for one year (through 2010) the provision that permits businesses that suffered damage as a result of a Federally-declared disaster to claim an additional first-year depreciation deduction equal to 50 percent of the cost of new real and personal property investments made in the Presidentially-declared disaster area.
• Extend for one year (through 2010) the provision that increases by $100,000 (or the cost of qualified property, if less) the amount of expensing available for qualifying expenditures made in a Federally-declared disaster area. The bill would also extend for one year (through 2010) the provision that increases by $600,000 (or the cost of qualified property, if less) the level of investment at which the small business expensing benefits phaseout.

Expiring Energy Tax Provisions

• Extend for one year (through 2010) the $1.00 per gallon production tax credit for biodiesel and the small agri¬biodiesel producer credit of 10 cents per gallon. The bill would also extend for one year (through 2010) the $1.00 per gallon production tax credit for diesel fuel created from biomass.
• Extend for one year (through 2010) the alternative motor vehicle credit for so-called heavy hybrids (i.e., hybrid motor vehicles that are not passenger automobiles or light trucks).
• Extend for one year (through 2010) the $0.50 per gallon production tax credit for natural gas and propane used as a transportation fuel. The bill would not extend this credit for propane used to power forklifts.
• Extend for one year (for sales prior to January 1, 2011) the present law deferral of gain on sales of transmission property by vertically integrated electric utilities to FERC-approved independent transmission companies. Rather than recognizing the full amount of gain in the year of sale, this provision would allow gain on such sales to be recognized ratably over an eight-year period.