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House Tax Panel Approves Small Business Tax Bill

Tuesday, May 14, 1996

OnLine

The House Ways and Means Committee May 14 approved, 33-3, small business reform legislation expanding expensing limitations for small businesses and offsetting the revenue loss largely by phasing out the possessions tax credit. The possessions tax credit gave a tax break to American companies that set up manufacturing facilities in U.S. possessions, such as Puerto Rico.

The bill now goes to the House where it will be merged with a proposed increase in the minimum wage and changes to the Fair Labor Standards Act for a vote.

If Senate negotiations now underway on a legislative agenda prove fruitful, the House bill could see action in the Senate shortly after Memorial Day. Senate Democratic Leader Tom Daschle, D-S.D., today said he did not anticipate Democrats would object to the measure, which was approved by the committee on a bipartisan vote.

The committee approved a revised proposal by House Ways and Means Committee Chairman Bill Archer, R-Texas, that would increase the small business expensing limitation each year for the next seven years to:

• $18,500 for 1996.
• $19,000 for 1997.
• $20,000 for 1998.
• $21,000 for 1999.
• $22,000 for 2000.
• $23,000 for 2001.
• $23,500 for 2002.
• $25,000 for 2003 and thereafter.

During debate on the bill Tuesday, the committee first agreed, then rescinded its vote to approve an amendment by Rep. Sander Levin, D-Mich., to apply the reinstated Section 127 exclusion for employer-provided tuition assistance through December 31 to graduate school studies. Section 127 allowed employers to pay tuition and other educational expenses for employees, without employees having to pay income taxes on the amount of the aid. The bill as proposed by Archer and that was ultimately approved by the committee limits the non-taxable educational assistance to undergraduate studies.

To offset the cost of expanding the Section 127 provision, the Levin amendment would have created a new statutory entity that facilitates the securitization of debt obligations such as credit card receivables, home equity loans, and automobile loans. A FASIT generally would not be taxable because its income, or net loss, will flow through to its owner.

The amendment also would have changed the treatment of basis adjustments under the involuntary conversion provisions of Section 1033.

The bill as approved by the committee also would make available until June 30, 1997, a reformulated targeted jobs tax credit, provide a Federal Income Contribution Act (FICA) tip credit for off-premises employees, and permanently extend the Federal Unemployment Tax Act's (FUTA) exemption for alien agricultural workers.

Another change Archer made to the bill would repeal the excessive passive assets provision under Section 956A, a corporate tax break. Archer also proposed, and the committee agreed, to a modification to the home office deduction that would allow home offices to contain certain storage facilities. The Archer amendment also would change Section 179, the election to expense certain depreciable business assets to provide unfavorable treatment for air conditioning or heating units and horses.

Other revenue losers in the package include provisions reforming laws for Subchapter S corporations and simplifying pension rules. These provisions are the same as those included in the Balanced Budget Act of 1995, vetoed by President Clinton last year.

As an offset, the possessions tax credit would be repealed as follows:

• For wage credit companies, present law applies for six years, followed by a four-year phase-out.
• For income companies, present law applies for two years, followed by a eight-year phase-out.
• For qualified possessions source investment income, the tax break would be repealed effective January 1, 1996.

Other offsets include: repealing the 50 percent interest income exclusion for financial institution loans to employee-owned stock ownership plans; modifying the exclusion for damages received on account of personal injury or sickness, reforming the income forecast accounting method for corporations, applying the look-through rule for characterizing certain Subpart F insurance income as unrelated business income (UBIT), and repealing advance refunds of the diesel fuel tax for cars and light trucks.

The committee defeated by voice vote a move by Rep. Charles Rangel, D-N.Y., to strike from the bill the foreign UBIT provision, which Rangel proposed to offset with the failure-to-pay penalties now in the Taxpayer Bill of Rights bill passed by the House earlier.

Also contained in the package are a clarification to the FICA tip credit rules and a package of technical corrections to the luxury excise tax and other tax code provisions. Additional technical corrections invalidate an Internal Revenue Service guidance on the interplay between passive activity and earnings stripping; and declare the passive foreign investment corporation rules do not apply to Foreign Sales Corporations (FISCs).