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Finance Committee Approves Adoption Credit
and Modified Small Business Tax Bills

Wednesday , June 12, 1996

Deloitte & Touche OnLine

The Senate Finance Committee Wednesday added a package of amendments to the small business tax incentive bill and then approved the entire measure, as well as the adoption credit bill, by a voice vote.

The committee’s version of the small business incentive bill is larger than the House-passed version, largely because the bill extends certain expiring tax provisions.

Under the House and Senate bills, the expensing limit for small businesses would be expanded to $25,000 a year (from $17,500), and the possessions tax credit (a tax break for American companies that set up manufacturing facilities in U.S.-owned possessions, such as Puerto Rico) would be phased out.

No timetable has been set for floor consideration of the bill, which is coupled with the controversial proposal to increase the minimum wage. In an unusual procedural maneuver, the Senate will consider the House-passed version on the floor, and the Finance Committee’s bill then will be considered as an amendment

Included in the package of amendments are the following provisions:

• Modifying section 530 of the Revenue Act of 1978 relating to independent contractors (this amendment, which is intended to "codify the case law" independent contractors, is still incomplete, and details will be released later this month).
  
• Clarifying the tax-exempt status of pre-paid tuition plans.
  
• Allowing tax-exempt entities and pension plans to own subchapter S corporation stock.

Among the revenue offsets the committee approved is an amendment modifying the basis adjustment rules under Section 1033, which addresses certain involuntary corporate conversion transactions.

The new language provides that where the taxpayer, by acquiring stock in a corporation, satisfies Section 1033’s replacement property requirement, the corporation generally will reduce its adjusted basis in its assets by the amount by which the taxpayer reduces its basis in the stock.

The Finance Committee also wants to raise tax revenues from people who win at bingo or keno. In this provision, if someone wins more than $5,000 at bingo or keno, taxes will be withheld from their prize winnings.

Also on Wednesday the Senate Finance Committee approved the same adoption tax credit proposal passed by the House in early May (HR 3286), with one amendment, based on a request by Sen. John Chafee, R-R.I.

This bill gives taxpayers a $5,000 tax credit for each child they adopt. It also lets people exclude from their taxable adjusted gross income up to $5,000 in employer-provided adoption assistance.

Chafee’s amendment raises the tax credit (as well as the exclusion amount) to $6,000 if a taxpayer adopts a special needs child.

The $5,000 adoption credit begins phasing out for those with adjusted gross incomes above $75,000 and is fully phased out at $115,000 of modified AGI. The credit applies to adoption fees, court costs, attorney fees, and other expenses directly related to an adoption.

President Clinton stated May 6 that he supports the adoption credit bill.