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Senate Lifts Provisions from Vetoed Balanced Budget into Small Business Bill

Tuesday, June 11, 1996

Deloitte & Touche OnLine

The Senate Finance Committee added several provisions that had been contained in the vetoed Republican Balanced Budget Act of 1995 to their version of the small business tax incentive bill to be considered June 12.

The $14 billion Senate proposal is larger than the approximately $8 billion House-passed small business tax bill (HR 3448), chiefly because the Senate version extends many expiring provisions. Other differences include a more costly small business expensing provision in the Senate’s version, and a greater revenue offset from the Senate’s possessions.

Among the expiring tax provisions extended under the proposal is the extension of the special rule relating to contributions of qualified appreciated stock made to private foundations. The extension would cost $115 million over the fiscal 1996 through 2005 period.

The orphan drug credit also would be extended for the period July 1, 1996 through June 30, 1997, and a related carryback provision for unused credits would be made available. The provision would cost $28 million over the 10-year period.

Also extended is the Section 29 credit for producing fuel from a non-conventional source for fuels put in service before Jan. 1, 1998. The provision would cost $329 million over 10 years.

Other provisions extended:

• R&E Credit: The chairman’s mark also extends the research and experimentation tax credit from July 1, 1996, to June 30, 1997, by slightly modifying the language included in the balanced budget act. The provision would cost $1.9 billion over 10 years. The credit expired June 30, 1995.

  Under the proposal, the definition of startup firms under Section 41(c)(3)(B)(I) would be expanded to include any firm if the first taxable year in which such firm had both gross receipts and qualified research expenses began after 1983. The R&E proposal also would provide for a special rule for payments made to certain non-profit research consortia.

• FASIT Provision: The mark also includes the financial asset securitization investment trust (FASIT) provision that facilitates the securitization of debt obligations, such as credit card receivables, home equity loans, and other debt instruments. A FASIT would not be taxable, but the income or loss would flow through to the owner of the FASIT. The proposal raises a small amount of revenue.

Another provision effective for leaseholds disposed of after June 12 would conform the treatment of lessors and lessees with respect to leasehold improvements. The provision loses $105 million over the 10 years.

Under the proposal, a lessor of leased property that disposes of a leasehold improvement which was made by the lessor for the lessee of the property may take the adjusted basis improvement into account for purpose of determining gain or loss if the improvement is irrevocably disposed of or abandoned by the lessee at the termination of the lease.

A provision in the mark also would replace the present-law expatriation income tax rules with rules that generally subject certain individuals who relinquish their U.S. citizenship or long-term U.S. residency to avoid U.S. taxation to taxation on their net unrealized gains. The proposal would raise $1.5 billion over 10 years.

House Conferees Named On Health Care: House -- but not Senate -- conferees have been named to the health insurance reform bill (HR 3103).

Efforts to resolve the impasse on the health care reform measure center on the GOP plan that would allow small-business employees and the self-employed to have immediate access to health care. After three years, large businesses and individual employees could begin to use Medical Spending Accounts.

Though the House is moving ahead on the issue, and the White House indicated that the GOP plan is a constructive alternative, the Senate must also sign on and that might be difficult considering Sen. Edward Kennedy’s, D-Mass., objection to MSAs.

The House conferees are as follows: House Ways and Means Committee Chairman Bill Archer, R-Texas, and Michael Bilirakis, R-Fla., Reps. Thomas Bliley, R-Va., David Bonior, D-Mich., William Clay, D-Mo., John Conyers, D-Mich., John Dingell, D-Mich., Harris Fawell, R-Ill., Sam Gibbons, D-Fla., William Goodling, R-Pa.,. Dennis Hastert, R-Ill., Henry Hyde, R-Ill., Bill McCollum, R-Fla., Pete Stark, D-Calif., Bill Thomas, R-Calif., and Henry Waxman, D-Calif.

Treasury and IRS to Encourage Education Savings: The Treasury Department and the Internal Revenue Service plan to work with Congress to develop legislation that would give tax incentives to parents to save for their children’s education, Treasury announced June 11.

President Clinton’s fiscal 1997 budget already includes a provision that would allow individual retirement accounts to invest in state-sponsored prepaid tuition plans, and Treasury and the IRS are studying these plans.

At least 12 states sponsor plans designed to help residents save for the cost of higher education. Other states have passed or are considering legislation creating similar plans. Although the terms of the plans vary, the typical plan allows residents to purchase a contract to save for college. The contract can be redeemed for tuition or credits, or the payment on the contract can be linked to the change in the price of college. If the beneficiary of the contract does not attend a covered post-secondary institution, many of the plans return to the purchaser the initial purchase price of the contract.