August 1996

General Business Provisions

Small Business Job Protection Act of 1996

Expired Provisions

The Act reinstates and extends several expired tax provisions, including two provisions that have the broadest support, the research and experimentation tax credit and the exclusion for employer-provided educational assistance.

• Research and Experimentation Tax Credit: The Act reinstates and extends the research and experimentation tax credit that expired June 30, 1995, but only for the period July 1, 1996, through May 31, 1997. The Act also provides for an alternative incremental research credit regime, expands the definition of "start-up firms" that receive a three-tiered fixed base percentage, and provides for a special rule that treats 75% of payments made to certain non-profit research consortia as qualified research expenses. These modifications apply for taxable years beginning after June 30, 1996.
  
• Employer-Provided Educational Assistance: The Act extends the exclusion for employer-provided educational assistance from the end of 1994 through May 31, 1997. The exclusion for graduate courses applies in 1995, but in 1996, the exclusion for graduate courses does not apply to courses beginning after June 30, 1996.
  
  The IRS is required to establish expedited procedures for the refund of any overpayment of taxes paid on excludable educational assistance provided in 1995 and 1996. No interest or penalties will be imposed if an employer failed to withhold income and employment taxes on excludable educational assistance or failed to report such educational assistance.

• Work Opportunity Tax Credit: The Act replaces the targeted jobs tax credit, which expired at the end of 1994, with a ''work opportunity tax credit.'' The credit generally is equal to 35% of qualified wages paid to individuals from one of 8 classes of disadvantaged groups.

Effective date: The credit is effective for wages paid or incurred to a qualified individual who begins work after Sept. 30, 1996.

• Orphan Drug Tax Credit: The Act reinstates the orphan drug tax credit that expired at the end of 1994, for the period July 1, 1996, through May 31, 1997. The Act allows taxpayers to carry back unused credits to three years preceding the year the credit is earned and to carry forward unused credits to 15 years following the year the credit is earned.

Effective date: The carryback and carryforward of unused credits are effective for taxable years ending after June 30, 1996; however, no carryback is available for a taxable year ending on or before that date.

• Deduction for Appreciated Stock Contribution: The fair market value deduction for gifts of qualified appreciated stock to a private foundation is reinstated for contributions made from July 1, 1996, through May 31, 1997.
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• Binding Contract Date For Synthetic Fuels: Under current law, certain fuels produced from "nonconventional sources" and sold to unrelated parties are eligible for an income tax credit equal to $3 per barrel. For facilities producing gas from biomass and synthetic fuel from coal, the general expiration date (Jan. 1, 1993) is extended if the facility producing the fuel is placed in service before Jan. 1, 1997, pursuant to a binding contract entered into before Jan. 1, 1996. In the case of biomass gas and synthetic fuel facilities eligible for the extension period, the credit may be claimed for fuels produced and sold before Jan. 1, 2008.

  The Act extends the synthetic fuels tax credit to synthetic fuels from coal, and gas from biomass, produced from a facility placed in service before July 1, 1998, pursuant to a binding contract entered into before Jan. 1, 1997. The tax credit is available for fuel produced before Jan. 1, 2008.

Effective date: The provision is effective on the date of enactment.

Electronic Funds Transfer Delayed

The Act delays until July 1, 1997, the requirement that all employers who made tax deposits of more than $50,000 in 1995 must begin using the Electronic Federal Tax Payment System for deposit of their FICA taxes, excise taxes, and corporate income tax estimated payments. The requirement was to take effect on Jan. 1, 1997.

Effective date: The provision is effective on the date of enactment.

Business Exclusion for Energy Subsidies Removed

The Act repeals the partial exclusion from income tax of any subsidy provided by a utility for the purchase or installation of nonresidential energy conservation measures.

Effective date: The provision applies to subsidies received after 1996, unless received pursuant to a binding written contract in effect on Sept. 13, 1995, and at all times thereafter.

Financial Asset Securitization Investment Trust (FASIT)

The Act creates a new type of statutory entity called a financial asset securitization investment trust (FASIT) that facilitates the securitization of debt obligations such as credit card receivables, home equity loans, and auto loans. A FASIT generally will not be taxable. The FASIT’s taxable income or net loss will flow through to the owner of the FASIT. The ownership of a FASIT generally will be required to be held entirely by a single C corporation. The Act provides a special transition rule for existing entities (e.g., a trust whose interests are taxed like a partnership) that elect to be a FASIT.

Effective date: The provision is effective Sept. 1, 1997, with the expectation that the Treasury will issue guidance on how the ownership rules would apply to cases in which the entity that owns the FASIT joins in filing a consolidated return.

Payroll Tax Tip Credit

The Act clarifies that the credit for employer Federal Insurance Contribution Act ("FICA") payroll taxes paid on tips is (1) available regardless of whether the employee reported the tips on which the employer paid FICA taxes, and (2) effective for taxes paid after 1993, regardless of when the services were performed. The FICA credit also will apply to tips received from customers for the provision of food or beverages, regardless of whether the food or beverages are for consumption on the premises of the establishment.

Effective date: The clarifications relating to the effective date and nonreported tips are effective as if they had been included in the Omnibus Budget Reconciliation Act of 1993. The provision expanding the tip credit to the provision of food or beverages not for consumption on the premises is effective for FICA taxes paid on tips received for services performed after 1996.

Permanent FUTA Exemption For Alien Agricultural Workers

The Act extends permanently the exclusion from the Federal Unemployment Tax (FUTA) for labor performed by certain aliens legally admitted to the United States to perform agricultural labor.

Effective date: The provision is effective for labor performed on or after Dec. 31, 1994.

Income Forecast Method Depreciation

The Act provides that income taken into account under the income forecast method of depreciation includes all estimated income generated by a property, including income from syndication and other releases. Taxpayers generally do not need to take into account income expected to be generated after the close of the tenth taxable year after the property was placed in service. The Act also requires taxpayers that claim depreciation deductions under the income forecast method to pay (or receive) interest based on a retrospective recalculation of depreciation.

Effective date: The provision is effective for property placed in service after Sept. 13, 1995, unless placed in service pursuant to a binding written contract in effect on such date and all times thereafter.

Contributions In Aid Of Construction For Water Utilities

The proposal restores the contributions in aid of construction rules that were repealed by the 1986 Act for regulated public utilities that provide water or sewage disposal services.

Effective date: The provision is effective for amounts received after June 12, 1996.

Involuntary Conversions

Under current law, gain realized by a taxpayer from certain involuntary conversions of property (e.g., condemnations, casualties, and theft) is tax-deferred to the extent the taxpayer purchases property similar to the converted property within a specified replacement period.

The Act provides that if the taxpayer satisfies the replacement requirement by acquiring stock in a corporation, 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 corporation’s adjusted basis in its assets will not be reduced, in the aggregate, below the taxpayer’s basis in its stock (determined after the appropriate basis adjustment for the stock). The basis of any individual asset will not be reduced below zero.

The basis reduction first is applied to (1) property that is similar or related in service or use to the converted property, then (2) to other depreciable property, then (3) to other property.

Effective date: The provision applies to involuntary conversions occurring after the date of enactment of this Act.

Student Loan Financing Corporations

The Act allows a nonprofit student loan funding corporation to elect to cease its status as a nontaxable qualified scholarship funding corporation. If the corporation meets certain requirements, the election will not cause any bond outstanding as of the date of the issuer’s election or any bond issued to refund such a bond to fail to be a qualified student loan bond. Once made, an election could be revoked only with the consent of the Treasury Secretary. After making the election, the issuer would not be authorized to issue any new bonds.

Effective date: The provision is effective on the date of enactment.

Tax-Exempt Bond Rule for Furnishers of Electricity or Gas

The Act allows persons that have received tax-exempt financing of facilities that qualify before Jan. 1, 1997, as used to furnish electricity or gas locally to elect to terminate their qualifications for this tax-exempt financing. This election will permit them to expand their service areas without incurring the present-law loss of interest deductions and loss of tax-exemption penalties if they meet the following conditions:

• No additional bonds are issued for facilities of the person making the election after the date of the provision’s enactment.
• The expansion of the person’s service area is not financed with any tax-exempt bond proceeds; and
• All outstanding tax-exempt bonds of the person making the election are redeemed no later than six months after the earliest date on which redemption is not prohibited under the terms of the bonds.

Effective date: The provision is effective on the date of enactment.

Treatment of Certain Charitable Risk Pools

The Act provides tax-exempt status to not-for-profit risk pools whose members are exclusively tax-exempt charitable organizations. The Act provides an exception to the general law that an organization may be exempt from tax only if no substantial part of its activities consists of providing commercial-type insurance. The Act defines a qualified charitable risk pool as an entity organized and operated solely to pool insurable risks of its members (other than medical malpractice risks) and to provide information to its members on control and risk management.

Effective date: The provision applies to taxable years beginning after the date of enactment.

Financial Institutions and Products

• Repeal of Bad Debt Reserve Method: The Act repeals the reserve method of accounting for bad debts for thrift institutions. Thrift institutions that would be treated as "small banks" are allowed to use the experience method while large banks are required to use the specific charge off method. Thus the percentage of taxable income method of accounting for bad debts is no longer available for any institution.

Effective date: The provision is effective for taxable years beginning after 1995.

• Bank Trust Fund Transfer To Mutual Fund: The Act allows a bank common trust fund to transfer substantially all of its assets to one or more regulated investment companies (mutual funds) without gain or loss being recognized by the trust fund or its participants.

Effective date: The provision is effective for transfers after Dec. 31, 1995.

• Repeal Interest Exclusion for ESOPs: The Act repeals the 50-percent interest exclusion applicable to interest received on an Employee Stock Ownership Plan (ESOP) loan by a bank, insurance company, regulated investment company, or a corporation actively engaged in the business of lending money.

Effective date: The provision is effective for loans made after the date of enactment, other than loans made pursuant to a written binding contract in effect before June 10, 1996, and at all times thereafter before such a loan is made.

The repeal of the 50-percent interest exclusion generally does not apply to straight refinancing of an ESOP loan originally made on or before the date of enactment, or pursuant to a binding contract in effect before June 10, 1996.

• Treatment of Certain Insurance On Retired Lives: The Act extends the life insurance company income tax rules that apply to variable life insurance and annuities to certain contracts that fund group term life or group accident and health insurance on retired lives.

Effective date: Applies to taxable years beginning after Dec. 31, 1995.

• Modified Guaranteed Contracts: The Act applies a mark-to-market regime to assets held as part of a segregated account under a modified guaranteed contract issued by a life insurance company. Accordingly, gain or loss on such assets held as of the close of a taxable year are to be taken into account for that year (even though the assets have not been sold or exchanged), and are treated as ordinary income.
  
  The new rule does not apply to any portion of a contract that is accounted for as a variable contract. Additionally, the rules for computing tax reserves for a modified guaranteed contract are modified to allow recognition of market value adjustments.
  
  These changes are to be viewed as changes in methods of accounting and as such the net gains will be included as ordinary income in the first taxable year beginning after Dec. 31, 1995. If, however, there is a net loss resulting from the changes, it will be allowed as a deduction that will be spread ratably over a seven-year period beginning with the first taxable year beginning after Dec. 31, 1995.

Effective date: Taxable years beginning after
Dec. 31, 1995.

The Health Coverage Availability
and Affordability Act of 1996

Financial Institutions And Products

• Accelerated Death Benefits: The Act expands the income tax exclusion for life insurance contract death benefits to include (1) qualified accelerated death benefits received under a life insurance contract and (2) amounts received for the sale or assignment of a life insurance contract to a viatical settlement provider. The insured under the life insurance contract must be terminally or chronically ill. Any amount received by a chronically ill individual must be received under a contract or rider that is a new statutory definition of a long-term care contract.

Effective date: This provision is effective for amounts received after 1996.

• Corporate-Owned Life Insurance Policy Loans: Under the Act, no deduction would be allowed for interest paid or accrued on any indebtedness arising from one or more life insurance policies or annuity or endowment contracts owned by the taxpayer covering any individual who is either (1) an officer or employee of, or (2) financially interested in any trade or business carried on by the taxpayer, regardless of the aggregate amount of debt from policies or contracts covering the individual. There is one exception: interest on indebtedness for life insurance policies covering the greater of five key persons or 5% of total officers and employees (up to 20 individuals) still is deductible, as under current law. Under the Act, interest on policy loans that could otherwise be deducted is limited to an amount calculated using the average Moody’s corporate bond yield.

Effective date: The proposal generally is effective for interest paid or accrued after 1995, subject to two transition rules. First, interest on pre-June 20, 1986, contracts remains deductible. Second, on post-June 20, 1986, contracts, interest deductions are phased out during 1996 through 1998.

• Health Insurance Organizations Eligible for Special Tax Treatment: Under current law, certain Blue Cross and Blue Shield organizations are eligible for a special tax treatment: they can take a deduction equal to the excess 25% of the claims and expenses incurred during the year over their adjusted surplus at the beginning of the year, and may deduct their full unearned premium reserves.
  
  The Act applies these special rules to not-for-profit health insurance or health service organizations that are not health maintenance organizations, health insurance, or service organizations that (1) are not Blue Cross or Blue Shield organizations existing on August 16, 1986, and (2) otherwise meet the requirements of the special tax treatment rules (including the requirement of no material change in operations or structure since August 16, 1986).

Effective date: The provision is effective for taxable years ending after 1996.

Tax Exemption for Certain State Insurance Organizations: The Act provides tax-exempt status to qualified membership organizations established by a state exclusively to provide coverage for medical care on a nonprofit basis to certain high-risk individuals. The organization could provide coverage for medical care either by issuing insurance itself or by entering into an arrangement with a health maintenance organization.

In addition, the Act provides tax-exempt status to qualified state-sponsored workers’ compensation reinsurance organizations that operate on a non-profit, membership basis.

Effective date: The provision applies to taxable years beginning after 1996.