Senate Approves 18-Month Extension of R&D Tax Credit

Friday, October 29, 1999

Deloitte & Touche OnLine

The Senate October 29 unanimously approved a bill (H.R. 1792) extending a series of expired tax measures, most notably a provision stretching out the research and development tax credit for 18 more months. The bill also contains $8.8 billion in tax increases that offset its cost.

The House now probably will pass the version of the bill (H.R. 2923) approved by the Ways and Means Committee, and ultimately request a conference with the Senate to resolve the differences between the two versions. The House could simply accept the Senate version, but this is not expected to occur.

The House Ways and Means Committee bill would provide a five-year extension of the R&D tax credit, which is shorter than the Senate’s extension. The House version also contains only one tax hike, changing the estimated tax safe harbor, unlike the Senate version, which contains almost 20 revenue-raising provisions.

The Senate version also contains, but the House Ways and Means version does not, the politically significant provision that would extend and modify the tax credit for electricity produced by wind and closed-loop biomass facilities under Section 45. The extension would ensure that chicken waste is covered by the credit. Senate Finance Committee Chairman Bill Roth, R-Del., wants the provision in the bill as part of his effort to win re-election in 2000.

Final action on the extenders bill will have to occur in the next couple of weeks, or be postponed until next year. The main piece of work left for Congress this year is to pass the appropriations bills. A stopgap measure to fund those portions of the government not funded in the ordinary spending bills that have already been passed is set to expire November 5, so the legislative year could end on that date.

It is possible that the final language on the extenders bill will be added to one of the spending bills that Congress will pass in the final days of the legislative year, rather than the bill moving as a stand-alone bill.

All the revenue offsets in the Senate bill were previously accepted by Congress, although one, which would prevent duplication of loss through assumption of certain liabilities under Section 357(b), was so overhauled from its previous version that the effective date was reset. The provision now would be effective for assumptions of liabilities on or after October 19, 1999.

The other tax increases would --

• prohibit allocation of stock in an ESOP of a subchapter S corporation,
• increase the individual estimated tax safe harbor to 112 percent by 2004,
• modify the foreign tax credit,
• clarify the tax treatment of derivatives,
• add to the list of taxable vaccines,
• require information reporting on cancellation of indebtedness,
• impose a limit on pre-funding of certain employee benefits,
• increase the optional withholding rate for non-periodic payments from deferred compensation plans,
• prevent the conversion of ordinary income or short-term capital gain into long-term capital gain,
• allow employees to transfer excess defined benefit plan assets to a special account for the health benefits of retirees,
• repeal the installment method for accrual-basis taxpayers,
• limit the use of the non-accrual experience method, and
• deny a deduction and impose an excise tax with respect to charitable split-dollar life insurance arrangements.

The proposal also –

• would impose basis reduction when a partnership distributes to a corporate partner stock in another corporation,
• modify the estimated tax rules for closely owned real estate investment trust dividends,
• modify the treatment of closely-held REITs, and
• require consistent treatment and provide basis allocation rules for transfers of intangibles in certain non-recognition transactions.

Details of the Ways and Means Committee Bill

The bill approved by the House tax panel would extend until June 30, 2004, the research and development tax credit with a one percentage point increase in the alternative incremental research credit. The R&D credit cannot be claimed until after September 30, 2000, however, as part of an effort to pay for the bill in the first year.

Other items in the bill include an extension of the exception under subpart F for active financing income until June 30, 2004, and the work opportunity tax credit and the welfare to work tax credit through December 31, 2001. Another item in the bill would suspend the net income limitation on percentage depletion from marginal oil and gas wells until December 31, 2004. The measure also would make permanent the provision enabling alternative minimum taxpayers to qualify for non-refundable tax credits.

The sole tax hike in the bill would accelerate the phase-in of the increase in the amount taxpayers would have to set aside to qualify for the individual estimated tax safe harbor. Beginning in 2000, the safe harbor for an individual with an adjusted gross income of more than $150,000 would be modified to be 108.5 percent, instead of 106 percent, of last year’s liability safe harbor.

The Senate leaders were unable to cut off debate October 29 on the Africa Trade bill (H.R. 434), which contains numerous tax hikes that Congress previously approved.

Sixty senators would have had to vote to stop the debate, but only 45 voted to end discussions. Procedural issues regarding the ability of Democrats to offer amendments to the bill, rather than the bill’s merits, played a key role in the vote. Another vote to cut off debate on the trade bill is set for November 2.

Roth wants to incorporate into the Africa trade bill three other trade measure along with revenue-raising provisions that would prevent the conversion of ordinary income or short-term income into income eligible for long-term capital gains rates, and would require consistent treatment and provide basis allocation rules for transfer of intangibles in certain non-recognition transactions.

The other revenue offsets currently in the Roth language –

• would limit the use of the non-accrual experience method of accounting to amounts to be received for the performance of qualified professional services,
• would limit the use of pre-funding of certain employee benefits,
• would increase the elective withholding rate for non-periodic distributions from deferred compensation plans, and
• would repeal the installment method of accounting for most accrual-basis taxpayers.
  
  
  

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