The 1998 Tax Provisions:
Internet Tax Freeze, Expiring Provisions,
Technical Corrections, and Other Tax Provisions
1. Extension of Expiring Provisions
1. Extension of Expiring Provisions
The legislation reinstates and extends several tax provisions that expired in 1998, generally only through June 1999, and it extends two trade provisions. Some conservative members of Congress who wanted a larger tax cut this year opposed even these temporary extensions because they believed passage would decrease pressure on Congress to pass additional tax relief in 1999. Because the extensions are temporary, Congress will have to find additional revenue offsets to extend these provisions in the future, or decide to use the budget surplus to fund the extensions.
Research and Experimentation Tax Credit
The measure reinstates and extends the research and experimentation tax credit that expired June 30, 1998, for 12 months.
The conference agreement also includes language on the "discovery test" and internal-use software sought by the R&D community in the wake of the U.S. Tax Court's Norwest decision. The language clarifies that the credit is targeted to research undertaken to discover information that is technological in nature and whose application is intended to be useful in the development of a new or improved business component of the taxpayer. Eligibility for the credit does not require that the research be successful. The report language makes clear that research intended to improve functionality, performance, reliability, or quality is eligible for the credit.
Finally, the conferees "observe the lack of clarity in the interpretation of the distinction between internal-use software, the costs of which may be eligible for the credit if additional tests are met, and other software. The conferees emphasize that application of the definition of internal-use software should fully reflect congressional intent."
Effective date. The extension of the research credit is effective for qualified research expenditures paid or incurred during the period July 1, 1998, through June 30, 1999.
Work Opportunity Tax Credit
The legislation extends the work opportunity tax credit for 12 months, through June 30, 1999.
Effective date. The provision is effective for wages paid or incurred to a qualified individual who begins work for an employer on or after July 1, 1998, and before July 1, 1999.
Welfare-to-Work Credit
The provision extends the welfare-to-work credit for an additional two months, through June 30, 1999.
Effective date. The provision is effective for wages paid or incurred to a qualified individual who begins work for an employer on or after May 1, 1999, and before July 1, 1999.
Deduction for Contributions of Appreciated Stock to Private Foundations
The provision reinstates and extends permanently the fair-market-value deduction for qualified appreciated stock contributed to a private foundation. The deduction had expired on June 30, 1998.
In a related provision, the legislation makes private foundations subject to the public inspection requirements that currently apply to public charities and all other tax-exempt organizations that file annual information returns.
Effective date. The deduction provision is effective for contributions of qualified appreciated stock to private foundations made on or after July 1, 1998.
Exceptions under Subpart F Rules for Certain Active Financing Income
Background. Under the subpart F rules of the tax code, certain U.S. shareholders of a controlled foreign corporation (CFC) are subject to U.S. tax currently on certain income earned by a CFC, whether or not such income is distributed to the shareholders. The income subject to current inclusion under these rules includes foreign personal holding company income and insurance income. The U.S. 10-percent shareholders of a CFC also are subject to current inclusion with respect to their shares of the CFC's foreign base company services income.
Temporary exceptions from foreign personal holding company income and foreign base company services income apply for subpart F purposes for certain income that is derived in the active conduct of a banking, financing, insurance, or similar business. These exceptions are applicable only for taxable years beginning in 1998.
New Provision in General. The new legislation extends and modifies the temporary exceptions from subpart F income that is derived in the active conduct of a banking, financing, or similar business or in the conduct of an insurance business. These exceptions, as modified, are applicable only for taxable years beginning in 1999.
Banking, Financing, or Similar Business. In the case of income derived in the active conduct of a banking, financing, or similar business, the new provisions differ from the prior-law temporary exceptions in the following eight significant respects.
- The legislation requires a CFC to conduct substantial activity with respect to its business in order to qualify for the exceptions.
- Income derived by a CFC or by a qualified business
unit (QBU) from transactions with customers would be eligible for the exceptions if, among
other things,
(a) substantially all of the activities in connection with a CFC or a QBU's transactions with customers are conducted directly by the CFC or QBU in its home country, and,
(b) such income is treated as earned by the CFC or QBU in its home country for purposes of such country's tax laws. - The legislation modifies the tests for determining whether a CFC is predominantly engaged in the active conduct of a banking, financing, or similar business, including modifications for income derived from a lending or finance business.
- The legislation provides that a CFC is predominantly engaged in the active conduct of a banking, financing, or similar business if it is engaged in the active conduct of a securities business and is registered with the SEC or as a government securities broker or dealer.
- The measure extends the exceptions to income derived from certain cross-border transactions, provided that certain requirements are met.
- The determination of where a customer is treated as located would be made under rules prescribed by the Treasury secretary.
- The look-through rule that was included in the prior-law provision for purposes of determining the income eligible for the exceptions is eliminated.
- The legislation includes numerous anti-abuse provisions.
Insurance. With respect to insurance, the legislation differs from present law in the following significant ways:
- In addition to the exceptions for certain income of a qualifying insurance company with respect to risks located within the CFC's country of creation or organization, the legislation provides temporary exceptions from insurance income and from foreign personal holding company income for certain income of a qualifying branch or a qualifying insurance company with respect to risks located within the home country of the branch, provided certain requirements are met under each of the exceptions.
- The legislation adds additional temporary exceptions from insurance income and from foreign personal holding company income for certain income of certain CFCs or branches with respect to risks located in any country other than the United States, provided that the requirements for these exceptions are met.
- The legislation includes numerous anti-abuse provisions.
Effective date. The provision applies only to taxable years of foreign corporations beginning in 1999, and to taxable years of U.S. shareholders with or within which such taxable years of foreign corporations end.
Extension of the Generalized System of Preferences
The new law reauthorizes the Generalized System of Preferences duty-free import program and extends it through June 30, 1999. Refunds would be authorized, upon request of the importer, for duties paid between July 1, 1998, and the date of enactment.
Effective date. The provision is effective for duties paid on or after July 1, 1998, and before July 1, 1999.
Extension of Trade Adjustment Assistance Programs
The legislation reauthorizes three trade adjustment assistance (TAA) programs through June 30, 1999. The programs were created for the purpose of providing assistance to individual workers and firms that are adversely affected by the reduction of barriers to foreign trade.
Effective date. The provision is effective on the date of enactment.
