Ways & Means Considers Extending Business Tax Breaks
The House and Senate appear to be taking different approaches to the "tax extenders" which expired at the end of 2013. Whereas the Senate Finance Committee passed a two-year extension of nearly all the expired tax breaks, the House Ways and Means Committee is honing in on some of the breaks it sees as important to economic growth and aiming to extend them permanently, creating greater certainty for businesses.
This Tuesday, the Ways and Means Committees will consider whether to permanently extend and in some cases expand six tax breaks – the research and experimentation credits, Section 179 expensing for small businesses, an active financing exception and look-through rules for multinational corporations, and two other tax breaks for S corporations. Although this approach is quite different from the Senate's, the two approaches have one thing in common – neither offset the costs with other tax or spending changes. As a result, the six extensions will cost a combined $310 billion over the next decade, or almost $380 billion including interest. Including interest costs, this is about $80 billion more than simply making the provisions permanent in their current form. The Senate Finance Committee, on the other hand, extended over 50 of the provisions for two years, costing $85 billion.
Roughly half of the cost would come from making permanent the research & experimentation tax credit while increasing it from 14 to 20 percent and making some minor reforms. This expansion roughly doubles the cost of the credit relative to a permanent extension of the current credit. By contrast, Chairman Camp's tax reform discussion draft would have increased the credit to only 15 percent while repealing two related research credits and making other reforms that would have, in total, cost half the amount of the current credit. (A portion of this lower cost may be due to interactions with other aspects of tax reform.) Notably absent from the markup of tax extenders affecting businesses is a proposal to extend “bonus depreciation” – a provision designed to encourage investment during the economic downturn but continued for two years in the Senate bill.
|Costs of Tax Provisions Considered By the Ways and Means Committee
|Research and Experimentation Credit*
|Small Business Expensing (Section 179)
|Active Financing Exception
|Controlled Foreign Corporation Look-through
|Two S Corporation Provisions
|Subtotal, Cost of Six Business Tax Provisions
|Grand Total, Addition to the Debt
|Memorandum: Permanently extending these six provisions at 2013 levels, with interest
*The expansion for the research and experimentation credit would more than
double the $77 billion cost of extending the current credit permanently.
Source: JCT, CBO
Although some credit should be given for Chairman Camp's decision to carefully review each tax extender in place of a blanket extension, any long-term extensions should ideally be addressed in the context of fiscally responsible and comprehensive tax reform. This is exactly the approach Chairman Camp took in the Tax Reform Act of 2014, a tax reform package that would have reformed and extended fewer than ten tax extenders and let expire three times that amount.
Importantly, that package paid for these extensions; it was revenue-neutral so as not to add to the deficit. Any short- or long-term extension outside of tax reform should take that same approach, abiding by pay-as-you-go rules to offset the cost of any tax cuts with reduced spending or increased revenue elsewhere in the budget.
Appendix: Explanation of Select Extenders
Below is a quick summary of what each provision would do: (adapted from our Tax Break-Down which explains many more of the tax extenders)
Research and Experimentation Credits - The R&E credit is one of the longest lasting tax extenders, having been extended at least 15 times since 1981. Currently, there are four separate credits. The main credit allows companies to claim a 14 percent credit for research expenses that are more than half of their three-year average, or 6 percent if the company had no research expenses for the past three years. The idea behind comparing a company's research spending with previous years is to only subsidize incremental research that would not already be undertaken by the company. This credit would be made permanent and increased from 14 to 20 percent (10 percent if the company had no research expenses for the last three years). The Ways and Means bill would also repeal one of the other credits that was based on the change in a company's research spending compared to the 1980s.
Small Business Expensing (Section 179) - Generally, companies that make large capital purchases must deduct the cost over several years according to a set of depreciation schedules. Section 179 allows small business owners to immediately write off most depreciable assets, up to a certain limit. Section 179 has been allowed since 1958, but the limit has changed over time. In 2013, small businesses could write off up to $500,000 of purchases, an amount that phased out when total purchases exceeded $2.5 million. Now that this provision has expired, total deductible expenses dropped to $25,000, phasing out after $200,000 of purchases. The bill would permanently reinstate the 2013 levels.
Active Financing Income Exception - Normally, business income earned overseas is not taxed until it is repatriated to the United States, but "passive" income that is not connected to a specific business activity (like rent, interest, and dividends) is taxed immediately. The active financing exemption, in place since 1999, allows banks and financial institutions to treat the interest and dividends they receive as business income and not pay tax until they bring the money back to the United States. This exception would be made permanent.
Controlled Foreign Corporation Look-Through - This exception, created in 2005, allows multinational corporations to transfer money between international subsidiaries without paying tax. Otherwise, companies might be subject to U.S. tax when transferring money from high-tax countries to low-tax countries. This provision would be made permanent.
S Corporation Provisions - The Ways and Means Committee would permanently extend two provisions dealing with S Corporations, adjusting the treatment of charitable donations and companies that convert from C corporations to S corporations.