As summer arrives in Washington, so does the usual slowdown in legislative activity and 2012 appears to be no exception. Lawmakers have a full plate of tax-related bills on their agenda but progress is slow at best as both parties prepare for the November elections. Among the pending tax bills are proposals to extend bonus depreciation, enact small business tax incentives, renew many expired extenders, and more.
Bonus depreciation. In 2010, the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act provided for temporary 100 percent bonus depreciation. Generally, 100 percent bonus depreciation was available for qualifying property placed in service after September 8, 2010 and before January 1, 2012 (or before January 1, 2013 in the case of property with a longer production period and certain noncommercial aircraft).
One hundred percent bonus depreciation is one of the few tax incentives on which Democrats and Republicans have found common ground. President Obama has indicated his support for extending 100 percent bonus depreciation one additional year. House Democrats introduced the Invest in America Now Act, which would extend 100 bonus depreciation through 2012 (through 2013 in the case of property with a longer production period and certain noncommercial aircraft). The cost of repeal would be offset by denying the Code Sec. 199 domestic production activities deduction to oil and gas producers.
Reminder. The 2010 Tax Relief Act also provided for 50 percent bonus depreciation for qualifying property placed in service before January 1, 2013 (or before January 1, 2014 in the case of property with a longer production period and certain noncommercial aircraft).
Small businesses. Democrats and Republicans have unveiled competing small business tax bills. The House approved a GOP-written bill, the Small Business Tax Cut Bill (HR 9). Under the House bill, small businesses with fewer than 500 employees could claim a 20 percent deduction on qualified income in 2012. The deduction would be capped at 50 percent of qualified wages.
Meanwhile, Senate Democrats proposed their Small Business Jobs and Tax Relief Act of 2012 (Sen. 2237). The bill would generally provide a 10 percent income tax credit on new payroll added by a qualified small employer in 2012. The credit would be capped at $500,000. The Senate has not yet voted on the Democratic bill.
Tax incentives for small businesses have enjoyed bipartisan support in the past. The GOP bill passed the House with Democratic support. However, the GOP bill is not expected to be approved by the Senate if the bill comes up for a vote.
Bush-era tax cuts. House Speaker John Boehner, R-Ohio, said in May that the House will vote on an extension of the Bush-era tax cuts before the November elections. No legislation has been introduced and no vote scheduled. It is unclear if House Republicans will propose extending the Bush-era tax cuts after 2012 without any offsets or if their bill will carry some revenue raisers. House Republicans may also link an extension of the Bush-era tax cuts to spending cuts and budget reforms. The Budget Control Act of 2011 mandates across-the-board spending cuts in 2013 and beyond. In May, the House passed the Budget Sequestration Bill (HR 5652). The bill provides a substitute for the Budget Control Act. The Senate is not expected to take up the Budget Sequestration Bill.
President Obama has reiterated his opposition to extending the Bush-era tax cuts for higher income taxpayers. The White House generally defines higher income taxpayers as individuals with incomes over $200,000 and families with incomes over $250,000. Recently, some Democrats have spoken of higher thresholds, in the neighborhood of $1 million. Lawmakers have also voiced the idea of a six-month or one-year extension of the Bush-era tax cuts.
Tax extenders. It appears that lawmakers may not automatically renew all of the expired extenders as they have routinely done in past years. In June, the chair of the Senate Finance Committee, Sen. Max Baucus, D-Montana, said that lawmakers should look at each extender and decide whether to eliminate it or make it permanent. Baucus did not indicate which extenders should be made permanent and which should be jettisoned from the Tax Code. Among the likely candidates for being made permanent are the research tax credit, the higher education tuition deduction and the teachers’ classroom expense deduction. All of these extenders have enjoyed bipartisan support.
Often included among the extenders is the so-called alternative minimum tax (AMT) patch. The patch provides higher exemption amounts so the AMT does not encroach on middle income taxpayers. The latest patch expired after 2011. Proposals to extend the patch for 2012 have stalled, again over cost. Lawmakers could leave the fate of the patch until after the 2012 elections. However, late enactment of a patch would likely delay the start of the 2013 filing season because the IRS would need to reprogram its processing systems.
Pension funding. Democrats and Republicans agree that the reduced interest rates on federal student loans should be extended one more year but disagree on how to pay for the estimated $6 billion cost of a one-year extension. Changes to pension funding rules have been discussed as one way to pay for an extension of reduced federal student loan interest rates.
IRS budget. The House and Senate are preparing for a showdown over the IRS’ fiscal year (2013) budget. The House approved an $11.8 billion FY 2013 budget for the IRS budget. The Senate is expected to approve a $12.5 billion FY 2013 budget. Both amounts are, however, less than the funding levels requested by President Obama. IRS Commissioner Douglas Shulman has warned Congress that reduced funding will negatively impact enforcement and customer service. In FY 2012, Congress cut the IRS budget by $305 million and the agency responded by offering buyouts and early retirements to approximately 4,000 employees.
Transportation. Agreement on a comprehensive transportation funding bill with tax offsets has eluded lawmakers. The Senate passed the Moving Ahead for Progress in the 21st Century Act (MAP-21)(Sen. 1813). MAP-21 would provide parity among transit benefits, which had expired after 2011; allow Treasury to take a variety of measures against foreign financial institutions that engage in money laundering; and deny passports to individuals with seriously delinquent tax debt. House Republicans have a transportation bill but have not been able to pass it. Lawmakers are reportedly preparing another temporary extension of current funding.
Energy. A number of energy tax incentives expired after 2011 and progress to renew them has stalled. They include popular incentives for wind energy production and biomass fuels. President Obama proposed to repeal oil and gas tax preferences to pay for an extension of some of the energy incentives but lawmakers have shown little interest.
More proposals. Many other tax bills are pending, including legislation to:
- Extend or make permanent the American Opportunity Tax Credit
- Repeal the excise tax on medical devices
- Revise health flexible spending arrangement rules for over-the-counter medications
- Extend the enhanced Work Opportunity Tax Credit for veterans
- Provide for tax rate parity among tobacco products
- Repeal the federal estate tax
- Enhance tax-exempt bonds
- And more
If you have any questions about pending tax legislation, please contact our office for more details (908) 725-4414.