Home
Up
Page 1
Page 2
Page 3
Page 4
Page 5
Page 6
Page 7
Page 8
Page 9
Page 10
Page 11
Page 12
Page 13
Page 14
|
A.
Repeal of Extraterritorial Income Regime (sec. 101
of the House bill, sec. 101 of the Senate amendment,
and secs. 114 and 941 through 943 of the Code)
Present
Law
Like many other countries, the
United States
has long provided export-related benefits under its
tax law. In the
United States
, for most of the last two decades, these benefits
were provided under the foreign sales corporation
("FSC") regime. In 2000, the European
Union succeeded in having the FSC regime declared a
prohibited export subsidy by the World Trade
Organization ("WTO"). In response to this
WTO finding, the United States repealed the FSC
rules and enacted a new regime, under the FSC Repeal
and Extraterritorial Income Exclusion Act of 2000.1
The European Union immediately challenged the
extraterritorial income ("ETI") regime in
the WTO, and in January of 2002 the WTO Appellate
Body held that the ETI regime also constituted a
prohibited export subsidy under the relevant trade
agreements.
Under the ETI regime, an exclusion from gross income
applies with respect to "extraterritorial
income," which is a taxpayer's gross income
attributable to "foreign trading gross
receipts." This income is eligible for the
exclusion to the extent that it is "qualifying
foreign trade income." Qualifying foreign trade
income is the amount of gross income that, if
excluded, would result in a reduction of taxable
income by the greatest of: (1) 1.2 percent of the
foreign trading gross receipts derived by the
taxpayer from the transaction; (2) 15 percent of the
"foreign trade income" derived by the
taxpayer from the transaction;2
or (3) 30 percent of the "foreign sale and
leasing income" derived by the taxpayer from
the transaction.3
Foreign trading gross receipts are gross receipts
derived from certain activities in connection with
"qualifying foreign trade property" with
respect to which certain economic processes take
place outside of the
United States
. Specifically, the gross receipts must be: (1) from
the sale, exchange, or other disposition of
qualifying foreign trade property; (2) from the
lease or rental of qualifying foreign trade property
for use by the lessee outside the United States; (3)
for services which are related and subsidiary to the
sale, exchange, disposition, lease, or rental of
qualifying foreign trade property (as described
above); (4) for engineering or architectural
services for construction projects located outside
the United States; or (5) for the performance of
certain managerial services for unrelated persons. A
taxpayer may elect to treat gross receipts from a
transaction as not foreign trading gross receipts.
As a result of such an election, a taxpayer may use
any related foreign tax credits in lieu of the
exclusion.
Qualifying foreign trade property generally is
property manufactured, produced, grown, or extracted
within or outside the
United States
that is held primarily for sale, lease, or rental in
the ordinary course of a trade or business for
direct use, consumption, or disposition outside the
United States
. No more than 50 percent of the fair market value
of such property can be attributable to the sum of:
(1) the fair market value of articles manufactured
outside the
United States
; and (2) the direct costs of labor performed
outside the
United States
. With respect to property that is manufactured
outside the
United States
, certain rules are provided to ensure consistent
U.S.
tax treatment with respect to manufacturers.
House
Bill
The provision repeals the ETI exclusion. For
transactions prior to 2005, taxpayers retain 100
percent of their ETI benefits. For transactions
after 2004, the provision provides taxpayers with 80
percent of their otherwise-applicable ETI benefits
for transactions during 2005 and 60 percent of their
otherwise-applicable ETI benefits for transactions
during 2006. However, the provision provides that
the ETI exclusion provisions remain in effect for
transactions in the ordinary course of a trade or
business if such transactions are pursuant to a
binding contract4
between the taxpayer and an unrelated person and
such contract is in effect on
January 14, 2002
, and at all times thereafter.
In addition, foreign corporations that elected to be
treated for all Federal tax purposes as domestic
corporations in order to facilitate the claiming of
ETI benefits are allowed to revoke such elections
within one year of the date of enactment of the
provision without recognition of gain or loss,
subject to anti-abuse rules.
Effective date. --The provision is effective
for transactions after
December 31, 2004
.
Senate
Amendment
The provision repeals the exclusion for
extraterritorial income. However, the provision
provides that the extraterritorial income exclusion
provisions remain in effect for transactions in the
ordinary course of a trade or business if such
transactions are pursuant to a binding contract
between the taxpayer and an unrelated person and
such contract is in effect on September 17, 2003,
and at all times thereafter.
The provision permits foreign corporations that have
elected to be treated as
U.S.
corporations pursuant to the extraterritorial income
exclusion provisions to revoke their elections. Such
revocations are effective on the date of enactment
of this provision. A corporation revoking its
election is treated as a
U.S.
corporation that transfers all of its property to a
foreign corporation in connection with an exchange
described in section 354 of the Code. In general,
the corporation shall not recognize any gain or loss
on such deemed transfer. However, a revoking
corporation shall recognize any gain on any asset
held by the corporation if: (1) the basis of such
asset is determined (in whole or in part) by
reference to the basis of such asset in the hands of
the person from whom the corporation acquired such
asset; (2) the asset was acquired by an actual
transfer (rather than as a result of the U.S.
corporation election by the corporation) occurring
on or after the first day on which the U.S.
corporation election by the corporation was
effective; and (3) a principal purpose of the
acquisition was the reduction or avoidance of tax.
The provision also provides a deduction for taxable
years of certain corporations ending after the date
of enactment of the provision and beginning before
January 1, 2007.5
The amount of the deduction for each such taxable
year is equal to a specified percentage of the
amount that, for the taxable year of a corporation
beginning in 2002, was excludable from the gross
income of the corporation under the extraterritorial
income exclusion provisions or was treated by the
corporation as exempt foreign trade income of
related FSCs from property acquired by the FSCs from
the corporation.6
However, this aggregate amount does not include any
amount attributable to a transaction involving a
lease by the corporation unless the corporation
manufactured or produced (in whole or in part) the
leased property.
The specified percentage to be used in determining
the deduction is: 80 percent for calendar years 2004
and 2005; 60 percent for calendar year 2006; and 0
percent for calendar years 2007 and thereafter. For
calendar year 2003, the specified percentage is the
amount that bears the same ratio to 100 percent as
the number of days after the date of enactment of
this provision bears to 365. In the case of a
corporation with a taxable year that is not the
calendar year (i.e., a fiscal year corporation), a
special rule is provided for determining a weighted
average specified percentage based upon the calendar
years that are included in the taxable year.
The deduction for a taxable year generally is
reduced by the specified percentage of exempted FSC
income and excluded extraterritorial income of the
corporation for the taxable year from transactions
pursuant to a binding contract.
Effective date. --The provision is effective
for transactions occurring after the date of
enactment.
Conference
Agreement
The conference agreement follows the House bill,
except that under the conference agreement the ETI
exclusion provisions remain in effect for
transactions in the ordinary course of a trade or
business if such transactions are pursuant to a
binding contract7
between the taxpayer and an unrelated person and
such contract is in effect on
September 17, 2003
, and at all times thereafter.
Effective date. --The effective date is the
same as the House bill.
B.
Deduction Relating to Income Attributable to
United States
Production Activities (sec. 102 of the House bill,
secs. 102 and 103 of the Senate amendment, and sec.
11 of the Code)
Present
Law
A corporation's regular income tax liability is
determined by applying the following tax rate
schedule to its taxable income.
Table
1. --Marginal Federal Corporate Income Tax Rates for
2004
Taxable income: Income tax rate:
$0 - $50,000 .....................15 percent of taxable income
$50,001 - $75,000 ................25 percent of taxable income
$75,001 - $10,000,000 ............34 percent of taxable income
Over $10,000,000..................35 percent of taxable income
The benefit of the first two graduated rates
described above is phased out by a fivepercent
surcharge for corporations with taxable income
between $100,000 and $335,000. Also, the benefit of
the 34-percent rate is phased out by a three-percent
surcharge for corporations with taxable income
between $15 million and $18,333,333; a corporation
with taxable income of $18,333,333 or more
effectively is subject to a flat rate of 35 percent.
Under present law, there is no provision that
reduces the corporate income tax for taxable income
attributable to domestic production activities.
House
Bill
In general
The House bill provides that the corporate tax rate
applicable to qualified production activities income
may not exceed 32 percent (34 percent for taxable
years beginning before 2007) of the qualified
production activities income.
Qualified production activities income
"Qualified production activities income"
is the income attributable to domestic production
gross receipts, reduced by the sum of: (1) the costs
of goods sold that are allocable to such receipts;
(2) other deductions, expenses, or losses that are
directly allocable to such receipts; and (3) a
proper share of other deductions, expenses, and
losses that are not directly allocable to such
receipts or another class of income.8
Domestic production gross receipts
Under the House bill, "domestic production
gross receipts" generally are gross receipts of
a corporation that are derived from: (1) any sale,
exchange or other disposition, or any lease, rental
or license, of qualifying production property that
was manufactured, produced, grown or extracted (in
whole or in significant part) by the corporation
within the United States;9
(2) any sale, exchange or other disposition, or any
lease, rental or license, of qualified film produced
by the taxpayer; or (3) construction, engineering or
architectural services performed in the United
States for construction projects located in the
United States. However, domestic production gross
receipts do not include any gross receipts of the
taxpayer derived from property that is leased,
licensed or rented by the taxpayer for use by any
related person.10
"Qualifying production property" under the
House bill generally is any tangible personal
property, computer software, or property described
in section 168(f)(4) of the Code. "Qualified
film" is any property described in section
168(f)(3) of the Code (other than certain sexually
explicit productions) if 50 percent or more of the
total compensation relating to the production of
such film (other than compensation in the form of
residuals and participations) constitutes
compensation for services performed in the United
States by actors, production personnel, directors,
and producers.
Under the House bill, an election under section
631(a) made by a corporate taxpayer for a taxable
year ending on or before the date of enactment to
treat the cutting of timber as a sale or exchange,
may be revoked by the taxpayer without the consent
of the
IRS
for any taxable year ending after that date. The
prior election (and revocation) is disregarded for
purposes of making a subsequent election.
Effective date. --The House bill provision is
effective for taxable years beginning after December
31, 2004.
Senate
Amendment
In general
The Senate amendment provides a deduction equal to a
portion of the taxpayer's qualified production
activities income. For taxable years beginning after
2008, the Senate amendment deduction is nine percent
of such income. For taxable years beginning in 2004,
2005, 2006, 2007 and 2008, the deduction is five,
five, five, six, and seven percent of income,
respectively. However, the deduction for a taxable
year is limited to 50 percent of the wages paid by
the taxpayer during such taxable year.11
In the case of corporate taxpayers that are members
of certain affiliated groups, the deduction is
determined by treating all members of such groups as
a single taxpayer.
Qualified production activities income
In general, "qualified production activities
income" under the Senate amendment is the
modified taxable income12
of a taxpayer that is attributable to domestic
production activities. Income attributable to
domestic production activities generally is equal to
domestic production gross receipts, reduced by the
sum of: (1) the costs of goods sold that are
allocable to such receipts;13
(2) other deductions, expenses, or losses that are
directly allocable to such receipts; and (3) a
proper share of other deductions, expenses, and
losses that are not directly allocable to such
receipts or another class of income.14
For taxable years beginning before 2013, the Senate
amendment provides that qualified production
activities income is reduced by virtue of a fraction
(not to exceed one), the numerator of which is the
value of the domestic production of the taxpayer and
the denominator of which is the value of the
worldwide production of the taxpayer (the
"domestic/worldwide fraction").15
For taxable years beginning in 2010, 2011, and 2012,
the reduction in qualified production activities
income by virtue of this fraction is reduced by 25,
50, and 75 percent, respectively. For taxable years
beginning after 2012, there is no reduction in
qualified production activities income by virtue of
this fraction.
Domestic production gross receipts
Under the Senate amendment, "domestic
production gross receipts" are gross receipts
of a taxpayer that are derived in the actual conduct
of a trade or business from any sale, exchange or
other disposition, or any lease, rental or license,
of qualifying production property that was
manufactured, produced, grown or extracted (in whole
or in significant part) by the taxpayer within the
United States or any possession of the United
States.16
Such term also includes a percentage of gross
receipts derived from engineering or architectural
services performed in the United States for
construction projects in the United States.17
Finally, such term includes gross receipts derived
by the taxpayer from the use of film and videotape
property produced in whole or in significant part by
the taxpayer within the
United States
. "Qualifying production property"
generally is any tangible personal property,
computer software, or property described in section
168(f)(3) or (4) of the Code.18
However, qualifying production property does not
include: (1) consumable property that is sold,
leased or licensed as an integral part of the
provision of services; (2) oil or gas (other than
certain primary products thereof);19
(3) electricity; (4) water supplied by pipeline to
the consumer; (5) utility services; and (6) any
film, tape, recording, book, magazine, newspaper or
similar property the market for which is primarily
topical or otherwise essentially transitory in
nature.20
Other rules
Qualified production activities income of
passthrough entities (other than cooperatives)
With respect to domestic production activities of an
S corporation, partnership, estate, trust or other
passthrough entity (other than an agricultural or
horticultural cooperative), the deduction under the
Senate amendment generally is determined at the
shareholder, partner or similar level by taking into
account at such level the proportionate share of
qualified production activities income of the
entity.21
The Senate amendment directs the Secretary to
prescribe rules for the application of the deduction
to passthrough entities, including reporting
requirements and rules relating to restrictions on
the allocation of the deduction to taxpayers at the
partner or similar level.
Qualified production activities income of
agricultural and horticultural cooperatives
With regard to member-owned agricultural and
horticultural cooperatives formed under Subchapter T
of the Code, the Senate amendment provides the same
treatment of qualified production activities income
derived from products marketed through cooperatives
as it provides for qualified production activities
income of other taxpayers (i.e., the cooperative may
claim a deduction from qualified production
activities income). In addition, the Senate
amendment provides that the amount of any patronage
dividends or per-unit retain allocations paid to a
member of an agricultural or horticultural
cooperative (to which Part I of Subchapter T
applies), which is allocable to the portion of
qualified production activities income of the
cooperative that is deductible under the Senate
amendment, is excludible from the gross income of
the member. In order to qualify, such amount must be
designated by the organization as allocable to the
deductible portion of qualified production
activities income in a written notice mailed to its
patrons not later than the payment period described
in section 1382(d). The cooperative cannot reduce
its income under section 1382 (e.g., cannot claim a
dividends-paid deduction) for such amounts.
Separate application to films and videotape
Under the Senate amendment, the deduction provided
by this provision with respect to films and
videotape is determined separately with respect to
qualified production activities income of the
taxpayer allocable to each of three markets:
theatrical, broadcast television, and home video.
The Senate amendment provides rules for making a
separate determination of qualified production
activities allocable to each market.
Alternative minimum tax
The deduction provided by the Senate amendment is
allowed for purposes of the alternative minimum tax
(including adjusted current earnings). The deduction
is determined by reference to modified alternative
minimum taxable income.
Coordination with ETI repeal
For purposes of the Senate amendment, domestic
production gross receipts does not include gross
receipts from any transaction that produces excluded
extraterritorial income pursuant to the binding
contract exception to the ETI repeal provisions of
the Senate amendment.
Qualified production activities income is determined
without regard to any deduction provided by the ETI
repeal provisions of the Senate amendment.
Effective date. --The Senate amendment
provision is effective for taxable years ending
after the date of enactment.
Conference
Agreement
In general
The conference agreement provides a deduction from
taxable income (or, in the case of an individual,
adjusted gross income) that is equal to a portion of
the taxpayer's qualified production activities
income. For taxable years beginning after 2009, the
deduction is equal to nine percent of the lesser of
(1) the qualified production activities income of
the taxpayer for the taxable year, or (2) taxable
income (determined without regard to this provision)
for the taxable year. For taxable years beginning in
2005 and 2006, the deduction is three percent of
income and, for taxable years beginning in 2007,
2008 and 2009, the deduction is six percent of
income. However, the deduction for a taxable year is
limited to 50 percent of the wages paid by the
taxpayer during the calendar year that ends in such
taxable year.22
In the case of corporate taxpayers that are members
of certain affiliated groups, the deduction is
determined by treating all members of such groups as
a single taxpayer and the deduction is allocated
among such members in proportion to each member's
respective amount (if any) of qualified production
activities income.
Qualified production activities income
In general, "qualified production activities
income" is equal to domestic production gross
receipts, reduced by the sum of: (1) the costs of
goods sold that are allocable to such receipts;23
(2) other deductions, expenses, or losses that are
directly allocable to such receipts; and (3) a
proper share of other deductions, expenses, and
losses that are not directly allocable to such
receipts or another class of income.24
Domestic production gross receipts
"Domestic production gross receipts"
generally are gross receipts of a taxpayer that are
derived from: (1) any sale, exchange or other
disposition, or any lease, rental or license, of
qualifying production property that was
manufactured, produced, grown or extracted by the
taxpayer in whole or in significant part within the
United States;25
(2) any sale, exchange or other disposition, or any
lease, rental or license, of qualified film produced
by the taxpayer; (3) any sale, exchange or other
disposition electricity, natural gas, or potable
water produced by the taxpayer in the United States;
(4) construction activities performed in the United
States;26
or (5) engineering or architectural services
performed in the United States for construction
projects located in the United States.
However, domestic production gross receipts do not
include any gross receipts of the taxpayer that are
derived from (1) the sale of food or beverages
prepared by the taxpayer at a retail establishment,27
or (2) the transmission or distribution of
electricity, natural gas, or potable water.28
In addition, domestic production gross receipts do
not include any gross receipts of the taxpayer
derived from property that is leased, licensed or
rented by the taxpayer for use by any related
person.29
"Qualifying production property" generally
includes any tangible personal property, computer
software, or sound recordings. "Qualified
film" includes any motion picture film or
videotape30
(including live or delayed television programming,
but not including certain sexually explicit
productions) if 50 percent or more of the total
compensation relating to the production of such film
(including compensation in the form of residuals and
participations31
) constitutes compensation for services performed in
the United States by actors, production personnel,
directors, and producers.32
Other rules
Qualified production activities income of
passthrough entities (other than cooperatives)
With respect to domestic production activities of an
S corporation, partnership, estate, trust or other
passthrough entity (other than an agricultural or
horticultural cooperative), although the wage
limitation is applied first at the entity level, the
deduction under the conference agreement generally
is determined at the shareholder, partner or similar
level by taking into account at such level the
proportionate share of qualified production
activities income of the entity. The Secretary is
directed to prescribe rules for the application of
the conference agreement to passthrough entities,
including reporting requirements and rules relating
to restrictions on the allocation of the deduction
to taxpayers at the partner or similar level.
For purposes of applying the wage limitation at the
level of a shareholder, partner, or similar person,
each person who is allocated qualified production
activities income from a passthrough entity also is
treated as having been allocated wages from such
entity in an amount that is equal to the lesser of:
(1) such person's allocable share of wages, as
determined under regulations prescribed by the
Secretary; or (2) twice the appropriate deductible
percentage of qualified production activities income
that actually is allocated to such person for the
taxable year.
Qualified production activities income of
agricultural and horticultural cooperatives
With regard to member-owned agricultural and
horticultural cooperatives formed under Subchapter T
of the Code, the conference agreement provides the
same treatment of qualified production activities
income derived from agricultural or horticultural
products that are manufactured, produced, grown, or
extracted by cooperatives,33
or that are marketed through cooperatives, as it
provides for qualified production activities income
of other taxpayers (i.e., the cooperative may claim
a deduction from qualified production activities
income).
In addition, the conference agreement provides that
the amount of any patronage dividends or per-unit
retain allocations paid to a member of an
agricultural or horticultural cooperative (to which
Part I of Subchapter T applies), which is allocable
to the portion of qualified production activities
income of the cooperative that is deductible under
the conference agreement, is deductible from the
gross income of the member. In order to qualify,
such amount must be designated by the organization
as allocable to the deductible portion of qualified
production activities income in a written notice
mailed to its patrons not later than the payment
period described in section 1382(d). The cooperative
cannot reduce its income under section 1382 (e.g.,
cannot claim a dividends-paid deduction) for such
amounts.
Alternative minimum tax
The deduction provided by the conference agreement
is allowed for purposes of computing alternative
minimum taxable income (including adjusted current
earnings). The deduction in computing alternative
minimum taxable income is determined by reference to
the lesser of the qualified production activities
income (as determined for the regular tax) or the
alternative minimum taxable income (in the case of
an individual, adjusted gross income as determined
for the regular tax) without regard to this
deduction.
Timber cutting
Under the conference agreement, an election made for
a taxable year ending on or before the date of
enactment, to treat the cutting of timber as a sale
or exchange, may be revoked by the taxpayer without
the consent of the
IRS
for any taxable year ending after that date. The
prior election (and revocation) is disregarded for
purposes of making a subsequent election.
Exploration of fundamental tax reform
The conferees acknowledge that Congress has not
reduced the statutory corporate income tax rate
since 1986. According to the Organisation of
Economic Cooperation and Development
("OECD"), the combined corporate income
tax rate, as defined by the OECD, in most instances
is lower than the U.S. corporate income tax rate.34
Higher corporate tax rates factor into the
United States
' ability to attract and retain economically vibrant
industries, which create good jobs and contribute to
overall economic growth.
This legislation was crafted to repeal an export tax
benefit that was deemed inconsistent with
obligations of the
United States
under the Agreement on Subsidies and Countervailing
Measures and other international trade agreements.
This legislation replaces the benefit with tax
relief specifically designed to be economically
equivalent to a 3-percentage point reduction in
U.S.-based manufacturing.
The conferees recognize that manufacturers are a
segment of the economy that has faced significant
challenges during the nation's recent economic
slowdown. The conferees recognize that trading
partners of the
United States
retain subsidies for domestic manufacturers and
exports through their indirect tax systems. The
conferees are concerned about the adverse
competitive impact of these subsidies on
U.S.
manufacturers.
These concerns should be considered in the context
of the benefits of a unified top tax rate for all
corporate taxpayers, including manufacturing, in
terms of efficiency and fairness. The conferees also
expect that the tax-writing committees will explore
a unified top corporate tax rate in the context of
fundamental tax reform.
Effective date. --The conference agreement is
effective for taxable years beginning after December
31, 2004.
C.
Reduced Corporate Income Tax Rate for Small
Corporations (sec. 103 of the House bill and sec. 11
of the Code)
Present
Law
A corporation's regular income tax liability is
determined by applying the following tax rate
schedule to its taxable income.
Table
1. --Marginal Federal Corporate Income Tax Rates for
2004
Taxable income: Income tax rate:
$0 - $50,000 .....................15 percent of taxable income
$50,001 - $75,000 ................25 percent of taxable income
$75,001 - $10,000,000 ............34 percent of taxable income
Over $10,000,000..................35 percent of taxable income
The benefit of the first two graduated rates
described above is phased out by a five-percent
surcharge for corporations with taxable income
between $100,000 and $335,000. Also, the benefit of
the 34-percent rate is phased out by a three-percent
surcharge for corporations with taxable income
between $15 million and $18,333,333; a corporation
with taxable income of $18,333,333 or more
effectively is subject to a flat rate of 35 percent.
House
Bill
Under the House bill, a corporation's regular income
tax liability is determined by applying the
following tax rate schedules to its taxable income.
Table
2. --Marginal Federal Corporate Income Tax Rates for
2013 and thereafter
Taxable income: Income tax rate:
$0 - $50,000 .....................15 percent of taxable income
$50,001 - $75,000 ................25 percent of taxable income
$75,001 - $20,000,000 ............32 percent of taxable income
Over $20,000,000..................35 percent of taxable income
The benefit of the graduated rates described above
is phased out by a three-percent surcharge for
corporations with taxable income between $20 million
and $40,341,667; a corporation with taxable income
of $40,341,667 or more effectively is subject to a
flat rate of 35 percent.
Table
3. --Marginal Federal Corporate Income Tax Rates for
2011-2012
Taxable income: Income tax rate:
$0 - $50,000 .....................15 percent of taxable income
$50,001 - $75,000 ................25 percent of taxable income
$75,001 - $5,000,000 .............32 percent of taxable income
$5,000,001 - $10,000,000 .........34 percent of taxable income
Over $10,000,000..................35 percent of taxable income
The benefit of the first three graduated rates
described above is phased out by a fivepercent
surcharge for corporations with taxable income
between $5,000,000 and $7,205,000. Also, the benefit
of the 34-percent rate is phased out by a
three-percent surcharge for corporations with
taxable income between $15 million and $18,333,333;
a corporation with taxable income of $18,333,333 or
more effectively is subject to a flat rate of 35
percent.
Table
4. --Marginal Federal Corporate Income Tax Rates for
2008-2010
Taxable income: Income tax rate:
$0 - $50,000 .....................15 percent of taxable income
$50,001 - $75,000 ................25 percent of taxable income
$75,001 - $1,000,000 .............32 percent of taxable income
$1,000,001 - $10,000,000 .........34 percent of taxable income
Over $10,000,000..................35 percent of taxable income
The benefit of the first three graduated rates
described above is phased out by a fivepercent
surcharge for corporations with taxable income
between $1,000,000 and $1,605,000. Also, the benefit
of the 34-percent rate is phased out by a
three-percent surcharge for corporations with
taxable income between $15 million and $18,333,333;
a corporation with taxable income of $18,333,333 or
more effectively is subject to a flat rate of 35
percent.
Table
5. --Marginal Federal Corporate Income Tax Rates for
2005-2007
Taxable income: Income tax rate:
$0 - $50,000 .....................15 percent of taxable income
$50,001 - $75,000 ................25 percent of taxable income
$75,001 - $1,000,000 .............33 percent of taxable income
$1,000,001 - $10,000,000 .........34 percent of taxable income
Over $10,000,000..................35 percent of taxable income
The benefit of the first three graduated rates
described above is phased out by a fivepercent
surcharge for corporations with taxable income
between $1,000,000 and $1,420,000. Also, the benefit
of the 34-percent rate is phased out by a
three-percent surcharge for corporations with
taxable income between $15 million and $18,333,333;
a corporation with taxable income of $18,333,333 or
more effectively is subject to a flat rate of 35
percent.
Effective date. --The provision applies to
taxable years beginning after
December 31, 2004
.
Senate
Amendment
No provision.
Conference
Agreement
The conference agreement does not include the House
bill provision.
TITLE
II --PROVISIONS RELATING TO
JOB
CREATION TAX INCENTIVES FOR MANUFACTURERS, SMALL
BUSINESSES,
AND
FARMERS
A.
Section 179 Expensing (sec. 201 of the House bill,
sec. 309 of the Senate amendment and sec. 179 of the
Code)
Present
Law
Present law provides that, in lieu of depreciation,
a taxpayer with a sufficiently small amount of
annual investment may elect to deduct such costs.
The Jobs and Growth Tax Relief Reconciliation Act (JGTRRA)
of 200335
increased the amount a taxpayer may deduct, for
taxable years beginning in 2003 through 2005, to
$100,000 of the cost of qualifying property placed
in service for the taxable year.36
In general, qualifying property is defined as
depreciable tangible personal property (and certain
computer software) that is purchased for use in the
active conduct of a trade or business. The $100,000
amount is reduced (but not below zero) by the amount
by which the cost of qualifying property placed in
service during the taxable year exceeds $400,000.
The $100,000 and $400,000 amounts are indexed for
inflation.
Prior to the enactment of JGTRRA (and for taxable
years beginning in 2006 and thereafter) a taxpayer
with a sufficiently small amount of annual
investment could elect to deduct up to $25,000 of
the cost of qualifying property placed in service
for the taxable year. The $25,000 amount was reduced
(but not below zero) by the amount by which the cost
of qualifying property placed in service during the
taxable year exceeds $200,000. In general,
qualifying property is defined as depreciable
tangible personal property that is purchased for use
in the active conduct of a trade or business.
The amount eligible to be expensed for a taxable
year may not exceed the taxable income for a taxable
year that is derived from the active conduct of a
trade or business (determined without regard to this
provision). Any amount that is not allowed as a
deduction because of the taxable income limitation
may be carried forward to succeeding taxable years
(subject to similar limitations). No general
business credit under section 38 is allowed with
respect to any amount for which a deduction is
allowed under section 179.
Under present law, an expensing election is made
under rules prescribed by the Secretary.37
Applicable Treasury regulations provide that an
expensing election generally is made on the
taxpayer's original return for the taxable year to
which the election relates.38
Prior to the enactment of JGTRRA (and for taxable
years beginning in 2006 and thereafter), an
expensing election may be revoked only with consent
of the Commissioner.39
JGTRRA permits taxpayers to revoke expensing
elections on amended returns without the consent of
the Commissioner with respect to a taxable year
beginning after 2002 and before 2006.40
House
Bill
The provision extends the increased amount that a
taxpayer may deduct, and other changes that were
made by JGTRRA, for an additional two years. Thus,
the provision provides that the maximum dollar
amount that may be deducted under section 179 is
$100,000 for property placed in service in taxable
years beginning before 2008 ($25,000 for taxable
years beginning in 2008 and thereafter). In
addition, the $400,000 amount applies for property
placed in service in taxable years beginning before
2008 ($200,000 for taxable years beginning in 2008
and thereafter). The provision extends, through 2007
(from 2005), the indexing for inflation of both the
maximum dollar amount that may be deducted and the
$400,000 amount. The provision also includes
off-the-shelf computer software placed in service in
taxable years beginning before 2008 as qualifying
property. The provision permits taxpayers to revoke
expensing elections on amended returns without the
consent of the Commissioner with respect to a
taxable year beginning before 2008. The Committee
expects that the Secretary will prescribe
regulations to permit a taxpayer to make an
expensing election on an amended return without the
consent of the Commissioner.
Effective date. --The provision is effective
on the date of enactment.
Senate
Amendment
The provision provides that the $100,000 amount
($25,000 for taxable years beginning in 2006 and
thereafter) is reduced (but not below zero) by only
one half of the amount by which the cost of
qualifying property placed in service during the
taxable year exceeds $400,000 ($200,000 for taxable
years beginning 2006 and thereafter).41
For example, under the provision, if in 2004 an
eligible taxpayer places in service qualifying
property costing $500,000, the $100,000 amount is
reduced by $50,000 (i.e., one half the amount by
which the $500,000 cost of qualifying property
placed in service during the taxable year exceeds
$400,000). Thus, the maximum amount eligible for
section 179 expensing by this taxpayer for 2004 is
$50,000.
Effective date. --The provision is effective
for taxable years beginning after
December 31, 2002
.
Conference
Agreement
The conference agreement follows the House bill.
B.
Depreciation
1. Recovery period for depreciation of certain
leasehold improvements (sec. 211 of the House bill
and sec. 168 of the Code)
Present
Law
In general
A taxpayer generally must capitalize the cost of
property used in a trade or business and recover
such cost over time through annual deductions for
depreciation or amortization. Tangible property
generally is depreciated under the modified
accelerated cost recovery system ("MACRS"),
which determines depreciation by applying specific
recovery periods, placed-inservice conventions, and
depreciation methods to the cost of various types of
depreciable property (sec. 168). The cost of
nonresidential real property is recovered using the
straight-line method of depreciation and a recovery
period of 39 years. Nonresidential real property is
subject to the mid-month placed-in-service
convention. Under the mid-month convention, the
depreciation allowance for the first year property
is placed in service is based on the number of
months the property was in service, and property
placed in service at any time during a month is
treated as having been placed in service in the
middle of the month.
Depreciation of leasehold improvements
Depreciation allowances for improvements made on
leased property are determined under MACRS, even if
the MACRS recovery period assigned to the property
is longer than the term of the lease.42
This rule applies regardless of whether the lessor
or the lessee places the leasehold improvements in
service.43
If a leasehold improvement constitutes an addition
or improvement to nonresidential real property
already placed in service, the improvement is
depreciated using the straight-line method over a
39-year recovery period, beginning in the month the
addition or improvement was placed in service.44
Qualified leasehold improvement property
The Job Creation and Worker Assistance Act of 200245
("JCWAA"), as amended by JGTRRA, generally
provides an additional first-year depreciation
deduction equal to either 30 percent or 50 percent
of the adjusted basis of qualified property placed
in service before January 1, 2005. Qualified
property includes qualified leasehold improvement
property. For this purpose, qualified leasehold
improvement property is any improvement to an
interior portion of a building that is
nonresidential real property, provided certain
requirements are met. The improvement must be made
under or pursuant to a lease either by the lessee
(or sublessee), or by the lessor, of that portion of
the building to be occupied exclusively by the
lessee (or sublessee). The improvement must be
placed in service more than three years after the
date the building was first placed in service.
Qualified leasehold improvement property does not
include any improvement for which the expenditure is
attributable to the enlargement of the building, any
elevator or escalator, any structural component
benefiting a common area, or the internal structural
framework of the building.
Treatment of dispositions of leasehold
improvements
A lessor of leased property that disposes of a
leasehold improvement that was made by the lessor
for the lessee of the property may take the adjusted
basis of the improvement into account for purposes
of determining gain or loss if the improvement is
irrevocably disposed of or abandoned by the lessor
at the termination of the lease. This rule conforms
the treatment of lessors and lessees with respect to
leasehold improvements disposed of at the end of a
term of lease.
House
Bill
The House bill provides a statutory 15-year recovery
period for qualified leasehold improvement property
placed in service before January 1, 2006.46
The provision requires that qualified leasehold
improvement property be recovered using the
straight-line method.
Qualified leasehold improvement property is defined
as under present law for purposes of the additional
first-year depreciation deduction,47
with the following modification. If a lessor makes
an improvement that qualifies as qualified leasehold
improvement property, such improvement does not
qualify as qualified leasehold improvement property
to any subsequent owner of such improvement. An
exception to the rule applies in the case of death
and certain transfers of property that qualify for
non-recognition treatment.
Effective date. --The House bill provision is
effective for property placed in service after the
date of enactment.
Senate
Amendment
No provision.
Conference
Agreement
The conference agreement follows the House bill.
2. Recovery period for depreciation of certain
restaurant improvements (sec. 211 of the House bill
and sec. 168 of the Code)
Present
Law
A taxpayer generally must capitalize the cost of
property used in a trade or business and recover
such cost over time through annual deductions for
depreciation or amortization. Tangible property
generally is depreciated under the modified
accelerated cost recovery system ("MACRS"),
which determines depreciation by applying specific
recovery periods, placed-inservice conventions, and
depreciation methods to the cost of various types of
depreciable property (sec. 168). The cost of
nonresidential real property is recovered using the
straight-line method of depreciation and a recovery
period of 39 years. Nonresidential real property is
subject to the mid-month placed-in-service
convention. Under the mid-month convention, the
depreciation allowance for the first year property
is placed in service is based on the number of
months the property was in service, and property
placed in service at any time during a month is
treated as having been placed in service in the
middle of the month.
House
Bill
The House bill provides a statutory 15-year recovery
period for qualified restaurant property placed in
service before
January 1, 2006
.48
For purposes of the provision, qualified restaurant
property means any improvement to a building if such
improvement is placed in service more than three
years after the date such building was first placed
in service and more than 50 percent of the
building's square footage is devoted to the
preparation of, and seating for, on-premises
consumption of prepared meals. The provision
requires that qualified restaurant property be
recovered using the straight-line method.
Effective date. --The House bill provision is
effective for property placed in service after the
date of enactment.
Senate
Amendment
No provision.
Conference
Agreement
The conference agreement follows the House bill.
3. Extended placed in service date for bonus
depreciation for certain aircraft (excluding
aircraft used in the transportation industry) (sec.
212 of the House bill, sec. 622 of the Senate
amendment, and sec. 168 of the Code)
Present
Law
In general
A taxpayer is allowed to recover, through annual
depreciation deductions, the cost of certain
property used in a trade or business or for the
production of income. The amount of the depreciation
deduction allowed with respect to tangible property
for a taxable year is determined under the modified
accelerated cost recovery system ("MACRS").
Under MACRS, different types of property generally
are assigned applicable recovery periods and
depreciation methods. The recovery periods
applicable to most tangible personal property range
from three to 25 years. The depreciation methods
generally applicable to tangible personal property
are the 200-percent and 150-percent declining
balance methods, switching to the straight-line
method for the taxable year in which the
depreciation deduction would be maximized.
Thirty-percent additional first year
depreciation deduction
JCWAA allows an additional first-year depreciation
deduction equal to 30 percent of the adjusted basis
of qualified property.49
The amount of the additional first-year depreciation
deduction is not affected by a short taxable year.
The additional first-year depreciation deduction is
allowed for both regular tax and alternative minimum
tax purposes for the taxable year in which the
property is placed in service.50
The basis of the property and the depreciation
allowances in the placed-in-service year and later
years are appropriately adjusted to reflect the
additional first-year depreciation deduction. In
addition, there are generally no adjustments to the
allowable amount of depreciation for purposes of
computing a taxpayer's alternative minimum taxable
income with respect to property to which the
provision applies. A taxpayer is allowed to elect
out of the additional first-year depreciation for
any class of property for any taxable year.51
In order for property to qualify for the additional
first-year depreciation deduction, it must meet all
of the following requirements. First, the property
must be (1) property to which MACRS applies with an
applicable recovery period of 20 years or less, (2)
water utility property (as defined in section
168(e)(5)), (3) computer software other than
computer software covered by section 197, or (4)
qualified leasehold improvement property (as defined
in section 168(k)(3)).52
Second, the original use53
of the property must commence with the taxpayer on
or after September 11, 2001. Third, the taxpayer
must acquire the property within the applicable time
period. Finally, the property must be placed in
service before January 1, 2005.
An extension of the placed-in-service date of one
year (i.e., January 1, 2006) is provided for certain
property with a recovery period of ten years or
longer and certain transportation property.54
Transportation property is defined as tangible
personal property used in the trade or business of
transporting persons or property.
The applicable time period for acquired property is
(1) after September 10, 2001 and before January 1,
2005, but only if no binding written contract for
the acquisition is in effect before September 11,
2001, or (2) pursuant to a binding written contract
which was entered into after September 10, 2001, and
before January 1, 2005.55
With respect to property that is manufactured,
constructed, or produced by the taxpayer for use by
the taxpayer, the taxpayer must begin the
manufacture, construction, or production of the
property after September 10, 2001. For property
eligible for the extended placed-in-service date, a
special rule limits the amount of costs eligible for
the additional first year depreciation. With respect
to such property, only the portion of the basis that
is properly attributable to the costs incurred
before January 1, 2005 ("progress
expenditures") is eligible for the additional
first-year depreciation.56
Fifty-percent additional first year
depreciation
JGTRRA provides an additional first-year
depreciation deduction equal to 50 percent of the
adjusted basis of qualified property. Qualified
property is defined in the same manner as for
purposes of the 30-percent additional first-year
depreciation deduction provided by the JCWAA except
that the applicable time period for acquisition (or
self construction) of the property is modified.
Property eligible for the 50-percent additional
first-year depreciation deduction is not eligible
for the 30-percent additional first-year
depreciation deduction.
In order to qualify, the property must be acquired
after May 5, 2003 and before January 1, 2005, and no
binding written contract for the acquisition can be
in effect before May 6, 2003.57
With respect to property that is manufactured,
constructed, or produced by the taxpayer for use by
the taxpayer, the taxpayer must begin the
manufacture, construction, or production of the
property after May 5, 2003. For property eligible
for the extended placed-in-service date (i.e.,
certain property with a recovery period of ten years
or longer and certain transportation property), a
special rule limits the amount of costs eligible for
the additional first-year depreciation. With respect
to such property, only progress expenditures
properly attributable to the costs incurred before
January 1, 2005 are eligible for the additional
first-year depreciation.58
House
Bill
Due to the extended production period, the House
bill provides criteria under which certain
non-commercial aircraft can qualify for the extended
placed-in-service date. Qualifying aircraft are
eligible for the additional first-year depreciation
deduction if placed in service before
January 1, 2006
. In order to qualify, the aircraft must:
(1) be acquired by the taxpayer during the
applicable time period as under present law;
(2) meet the appropriate placed-in-service date
requirements;
(3) not be tangible personal property used in the
trade or business of transporting persons or
property (except for agricultural or firefighting
purposes);
(4) be purchased59
by a purchaser who, at the time of the contract for
purchase, has made a nonrefundable deposit of the
lesser of ten percent of the cost or $100,000; and
(5) have an estimated production period exceeding
four months and a cost exceeding $200,000.
Effective date. --The House bill provision is
effective as if included in the amendments made by
section 101 of JCWAA, which applies to property
placed in service after
September 10, 2001
. However, because the property described by the
provision qualifies for the additional first-year
depreciation deduction under present law if placed
in service prior to
January 1, 2005
, the provision will modify the treatment only of
property placed in service during calendar year
2005.
Senate
Amendment
The Senate amendment is the same as the House bill,
except for the effective date.
Effective date. --The Senate amendment is
effective for taxable years beginning after the date
of enactment.
Conference
Agreement
The conference agreement follows the House bill.
4. Special placed in service rule for bonus
depreciation for certain property subject to
syndication (sec. 213 of the House bill, sec. 621 of
the Senate amendment, and sec. 168 of the Code)
Present
Law
Section 101 of JCWAA provides generally for
30-percent additional first-year depreciation, and
provides a binding contract rule in determining
property that qualifies for it. The requirements
that must be satisfied in order for property to
qualify include that (1) the original use of the
property must commence with the taxpayer on or after
September 11, 2001, and (2) the taxpayer must
acquire the property (i) after September 10, 2001
and before January 1, 2005, but only if no binding
written contract for the acquisition is in effect
before September 11, 2001, or (ii) pursuant to a
binding contract which was entered into after
September 10, 2001, and before January 1, 2005. In
addition, JCWAA provides a special rule in the case
of certain leased property. In the case of any
property that is originally placed in service by a
person and that is sold to the taxpayer and leased
back to such person by the taxpayer within three
months after the date that the property was placed
in service, the property is treated as originally
placed in service by the taxpayer not earlier than
the date that the property is used under the
leaseback. JCWAA did not specifically address the
syndication of a lease by the lessor.
The Working Families Tax Relief Act of 2004
("H.R. 1308") included a technical
correction regarding the syndication of a lease by
the lessor. The technical correction provides that
if property is originally placed in service by a
lessor (including by operation of the special rule
for self-constructed property), such property is
sold within three months after the date that the
property was placed in service, and the user of such
property does not change, then the property is
treated as originally placed in service by the
taxpayer not earlier than the date of such sale.
JGTRRA provides an additional first-year
depreciation deduction equal to 50 percent of the
adjusted basis of qualified property. Qualified
property is defined in the same manner as for
purposes of the 30-percent additional first-year
depreciation deduction provided by the JCWAA except
that the applicable time period for acquisition (or
self construction) of the property is modified.
Property with respect to which the 50-percent
additional first-year depreciation deduction is
claimed is not also eligible for the 30-percent
additional first-year depreciation deduction. In
order to qualify, the property must be acquired
after May 5, 2003 and before January 1, 2005, and no
binding written contract for the acquisition can be
in effect before May 6, 2003. With respect to
property that is manufactured, constructed, or
produced by the taxpayer for use by the taxpayer,
the taxpayer must begin the manufacture,
construction, or production of the property after
May 5, 2003.
House
Bill60
The House bill provides that if property is
originally placed in service by a lessor (including
by operation of the special rule for
self-constructed property), such property is sold
within three months after the date that the property
was placed in service, and the user of such property
does not change, then the property is treated as
originally placed in service by the taxpayer not
earlier than the date of such sale. The provision
also provides a special rule in the case of multiple
units of property subject to the same lease. In such
cases, property will qualify as placed in service on
the date of sale if it is sold within three months
after the final unit is placed in service, so long
as the period between the time the first and last
units are placed in service does not exceed 12
months.
Effective date. --The House bill provision is
generally effective as if included in the amendments
made by section 101 of JCWAA (i.e., generally for
property placed in service after
September 10, 2001
, in taxable years ending after that date). However,
the special rule in the case of multiple units of
property subject to the same lease applies to
property sold after
June 4, 2004
.
Senate
Amendment61
The Senate amendment is the same as the House bill,
except for the effective date.
Effective date. --The Senate amendment is
effective for sales occurring after the date of
enactment.
Conference
Agreement
The conference agreement follows the House bill with
the following modification. The clauses that were
duplicative of the provisions enacted as part of
H.R. 1308 were removed. Thus, the conference
agreement provision provides only for the special
rule in the case of multiple units of property
subject to the same lease.
C.
S Corporation Reform and Simplification (secs.
221-231 of the House bill, sec. 654 of the Senate
amendment and secs. 1361-1379 and 4975 of the Code)
In general, an S corporation is not subject to
corporate-level income tax on its items of income
and loss. Instead, an S corporation passes through
its items of income and loss to its shareholders.
The shareholders take into account separately their
shares of these items on their individual income tax
returns. To prevent double taxation of these items
when the stock is later disposed of, each
shareholder's basis in the stock of the S
corporation is increased by the amount included in
income (including tax-exempt income) and is
decreased by the amount of any losses (including
nondeductible losses) taken into account. A
shareholder's loss may be deducted only to the
extent of his or her basis in the stock or debt of
the S corporation. To the extent a loss is not
allowed due to this limitation, the loss generally
is carried forward with respect to the shareholder.
1. Members of family treated as one shareholder
Present
Law
A small business corporation may elect to be an S
corporation with the consent of all its
shareholders, and may terminate its election with
the consent of shareholders holding more than 50
percent of the stock. A "small business
corporation" is defined as a domestic
corporation which is not an ineligible corporation
and which has (1) no more than 75 shareholders, all
of whom are individuals (and certain trusts,
estates, charities, and qualified retirement plans)62
who are citizens or residents of the United States,
and (2) only one class of stock. For purposes of the
75-shareholder limitation, a husband and wife are
treated as one shareholder. An "ineligible
corporation" means a corporation that is a
financial institution using the reserve method of
accounting for bad debts, an insurance company, a
corporation electing the benefits of the
Puerto Rico
and possessions tax credit, or a Domestic
International Sales Corporation ("DISC")
or former DISC.
House
Bill
The bill provides an election to allow all members
of a family be treated as one shareholder in
determining the number of shareholders in the
corporation (for purposes of section 1361(b)(1)(A)).
A family is defined as the common ancestor and all
lineal descendants of the common ancestor, as well
as the spouses, or former spouses, of these
individuals. An individual shall not be a common
ancestor if, as of the later of the time of the
election or the effective date of this provision,
the individual is more than three generations
removed from the youngest generation of shareholders
who would (but for this rule) be members of the
family. For purposes of this rule, a spouse or
former spouse is treated as in the same generation
as the person to whom the individual is (or was)
married.
Except as provided by Treasury regulations, the
election for a family may be made by any family
member and remains in effect until terminated.
Effective date. --The provision applies to
taxable years beginning after
December 31, 2004
.
Senate
Amendment
No provision.
Conference
Agreement
The conference agreement includes the provision in
the House bill, except that the number of
generations is increased from three to six.
The conferees wish to clarify that members of a
family may be treated as one shareholder, for the
purpose of determining the number of shareholders,
whether a family member holds stock directly or is
treated as a shareholder (under section
1361(c)(2)(B)) by reason being a beneficiary of an
electing small business trust or qualified
subchapter S trust.
2. Increase in number of eligible shareholders to
100
Present
Law
A small business corporation may elect to be an S
corporation with the consent of all its
shareholders, and may terminate its election with
the consent of shareholders holding more than 50
percent of the stock. A "small business
corporation" is defined as a domestic
corporation which is not an ineligible corporation
and which has (1) no more than 75 shareholders, all
of whom are individuals (and certain trusts,
estates, charities, and qualified retirement plans)63
who are citizens or residents of the United States,
and (2) only one class of stock. For purposes of the
75-shareholder limitation, a husband and wife are
treated as one shareholder. An "ineligible
corporation" means a corporation that is a
financial institution using the reserve method of
accounting for bad debts, an insurance company, a
corporation electing the benefits of the
Puerto Rico
and possessions tax credit, or a Domestic
International Sales Corporation ("DISC")
or former DISC.
House
Bill
The bill increases the maximum number of eligible
shareholders from 75 to 100.
Effective date. --The provision applies to
taxable years beginning after
December 31, 2004
.
Senate
Amendment
No provision.
Conference
Agreement
The conference agreement includes the provision in
the House bill.
3. Expansion of bank S corporation eligible
shareholders to include IRAs
Present
Law
An individual retirement account ("IRA")
is a trust or account established for the exclusive
benefit of an individual and his or her
beneficiaries. There are two general types of IRAs:
traditional IRAs, to which both deductible and
nondeductible contributions may be made, and Roth
IRAs, contributions to which are not deductible.
Amounts held in a traditional IRA are includible in
income when withdrawn (except to the extent the
withdrawal is a return of nondeductible
contributions). Amounts held in a Roth IRA that are
withdrawn as a qualified distribution are not
includible in income; distributions from a Roth IRA
that are not qualified distributions are includible
in income to the extent attributable to earnings. A
qualified distribution is a distribution that (1) is
made after the five-taxable year period beginning
with the first taxable year for which the individual
made a contribution to a Roth IRA, and (2) is made
after attainment of age 59-1/2, on account of death
or disability, or is made for first-time homebuyer
expenses of up to $10,000.
Under present law, an IRA cannot be a shareholder of
an S corporation.
Certain transactions are prohibited between an IRA
and the individual for whose benefit the IRA is
established, including a sale of property by the IRA
to the individual. If a prohibited transaction
occurs between an IRA and the IRA beneficiary, the
account ceases to be an IRA, and an amount equal to
the fair market value of the assets held in the IRA
is deemed distributed to the beneficiary.
House
Bill
The bill allows an IRA (including a Roth IRA) to be
a shareholder of a bank that is an S corporation,
but only to the extent of bank stock held by the IRA
on the date of enactment of the provision.64
The bill also provides an exemption from prohibited
transaction treatment for the sale by an IRA to the
IRA beneficiary of bank stock held by the IRA on the
date of enactment of the provision. Under the bill,
a sale is not a prohibited transaction if: (1) the
sale is pursuant to an S corporation election by the
bank; (2) the sale is for fair market value (as
established by an independent appraiser) and is on
terms at least as favorable to the IRA as the terms
would be on a sale to an unrelated party; (3) the
IRA incurs no commissions, costs, or other expenses
in connection with the sale; and (4) the stock is
sold in a single transaction for cash not later than
120 days after the S corporation election is made.
Effective date. --The provision takes effect
on date of enactment.
Senate
Amendment
No provision.
Conference
Agreement
The conference agreement includes the provision in
the House bill.
4. Disregard of unexercised powers of appointment
in determining potential current beneficiaries of
ESBT
Present
Law
An electing small business trust ("ESBT")
holding stock in an S corporation is taxed at the
maximum individual tax rate on its ratable share of
items of income, deduction, gain, or loss passing
through from the S corporation. An ESBT generally is
an electing trust all of whose beneficiaries are
eligible S corporation shareholders. For purposes of
determining the maximum number of shareholders, each
person who is entitled to receive a distribution
from the trust ("potential current
beneficiary") is treated as a shareholder
during the period the person may receive a
distribution from the trust.
An ESBT has 60 days to dispose of the S corporation
stock after an ineligible shareholder becomes a
potential current beneficiary to avoid
disqualification.
House
Bill
Under the bill, powers of appointment to the extent
not exercised are disregarded in determining the
potential current beneficiaries of an electing small
business trust.
The bill increases the period during which an ESBT
can dispose of S corporation stock, after an
ineligible shareholder becomes a potential current
beneficiary, from 60 days to one year.
Effective date. --The provision applies to
taxable years beginning after
December 31, 2004
.
Senate
Amendment
No provision.
Conference
Agreement
The conference agreement includes the provision in
the House bill.
5. Transfers of suspended losses incident to
divorce, etc.
Present
Law
Under present law, any loss or deduction that is not
allowed to a shareholder of an S corporation,
because the loss exceeds the shareholder's basis in
stock and debt of the corporation, is treated as
incurred by the S corporation with respect to that
shareholder in the subsequent taxable year.
House
Bill
Under the bill, if a shareholder's stock in an S
corporation is transferred to a spouse, or to a
former spouse incident to a divorce, any suspended
loss or deduction with respect to that stock is
treated as incurred by the corporation with respect
to the transferee in the subsequent taxable year.
Effective date. --The provision applies to
transfers after
December 31, 2004
.
Senate
Amendment
No provision.
Conference
Agreement
The conference agreement includes the provision in
the House bill.
6. Use of passive activity loss and at-risk
amounts by qualified subchapter S trust income
beneficiaries
Present
Law
Under present law, the share of income of an S
corporation whose stock is held by a qualified
subchapter S trust ("QSST"), with respect
to which the beneficiary makes an election, is taxed
to the beneficiary. However, the trust, and not the
beneficiary, is treated as the owner of the S
corporation stock for purposes of determining the
tax consequences of the disposition of the S
corporation stock by the trust. A QSST generally is
a trust with one individual income beneficiary for
the life of the beneficiary.
House
Bill
Under the bill, the beneficiary of a qualified
subchapter S trust is generally allowed to deduct
suspended losses under the at-risk rules and the
passive loss rules when the trust disposes of the S
corporation stock.
Effective date. --The provision applies to
taxable years beginning after
December 31, 2004
.
Senate
Amendment
No provision.
Conference
Agreement
The conference agreement includes the provision in
the House bill.
7. Exclusion of investment securities income from
passive investment income test for bank S
corporations
Present
Law
An S corporation is subject to corporate-level tax,
at the highest corporate tax rate, on its excess net
passive income if the corporation has (1)
accumulated earnings and profits at the close of the
taxable year and (2) gross receipts more than 25
percent of which are passive investment income.
Excess net passive income is the net passive income
for a taxable year multiplied by a fraction, the
numerator of which is the amount of passive
investment income in excess of 25 percent of gross
receipts and the denominator of which is the passive
investment income for the year. Net passive income
is defined as passive investment income reduced by
the allowable deductions that are directly connected
with the production of that income. Passive
investment income generally means gross receipts
derived from royalties, rents, dividends, interest,
annuities, and sales or exchanges of stock or
securities (to the extent of gains). Passive
investment income generally does not include
interest on accounts receivable, gross receipts that
are derived directly from the active and regular
conduct of a lending or finance business, gross
receipts from certain liquidations, or gain or loss
from any section 1256 contract (or related property)
of an options or commodities dealer.65
In addition, an S corporation election is terminated
whenever the S corporation has accumulated earnings
and profits at the close of each of three
consecutive taxable years and has gross receipts for
each of those years more than 25 percent of which
are passive investment income.
House
Bill
The bill provides that, in the case of a bank (as
defined in section 581), a bank holding company (as
defined in section 2(a) of the Bank Holding Company
Act of 1956), or a financial holding company (as
defined in section 2(p) of that Act), interest
income and dividends on assets required to be held
by the bank or holding company are not treated as
passive investment income for purposes of the S
corporation passive investment income rules.
Effective date. --The provision applies to
taxable years beginning after
December 31, 2004
.
Senate
Amendment
No provision.
Conference
Agreement
The conference agreement includes the provision in
the House bill.
8. Treatment of bank director shares
Present
Law
An S corporation may have no more than 75
shareholders and may have only one outstanding class
of stock.66
An S corporation has one class of stock if all
outstanding shares of stock confer identical rights
to distribution and liquidation proceeds.
Differences in voting rights are disregarded.67
National banking law requires that a director of a
national bank own stock in the bank and that a bank
have at least five directors.68
A number of States have similar requirements for
State-chartered banks. Apparently, it is common
practice for a bank director to enter into an
agreement under which the bank (or a holding
company) will reacquire the stock upon the
director's ceasing to hold the office of director,
at the price paid by the director for the stock.69
House
Bill
Under the bill, restricted bank director stock is
not taken into account as outstanding stock in
applying the provisions of subchapter S. Thus, the
stock is not treated as a second class of stock; a
director is not treated as a shareholder of the S
corporation by reason of the stock; the stock is
disregarded in allocating items of income, loss,
etc. among the shareholders; and the stock is not
treated as outstanding for purposes of determining
whether an S corporation holds 100 percent of the
stock of a qualified subchapter S subsidiary.
Restricted bank director stock is stock in a bank
(as defined in section 581), a bank holding company
(within the meaning of section 2(a) of the Bank
Holding Company Act of 1956), or a financial holding
company (as defined in section 2(p) of that Act),
registered with the Federal Reserve System, if the
stock is required to be held by an individual under
applicable Federal or State law in order to permit
the individual to serve as a director of the bank or
holding company and which is subject to an agreement
with the bank or holding company (or corporation in
control of the bank or company) pursuant to which
the holder is required to sell the stock back upon
ceasing to be a director at the same price the
individual acquired the stock.
A distribution (other than a payment in exchange for
the stock) with respect to the restricted stock is
includible in the gross income of the director and
is deductible by the S corporation for the taxable
year that includes the last day of the director's
taxable year in which the distribution is included
in income.
Effective date. --The provision applies to
taxable years beginning after
December 31, 2004
.
Senate
Amendment
No provision.
Conference
Agreement
The conference agreement does not include the
provision in the House bill.
9. Relief from inadvertently invalid qualified
subchapter S subsidiary elections and terminations
Present
Law
Under present law, inadvertent invalid subchapter S
elections and terminations may be waived.
House
Bill
The bill allows inadvertent invalid qualified
subchapter S subsidiary elections and terminations
to be waived by the
IRS
.
Effective date. --The provision applies to
taxable years beginning after
December 31, 2004
.
Senate
Amendment
No provision.
Conference
Agreement
The conference agreement includes the provision in
the House bill, effective for elections and
terminations after
December 31, 2004
.
10. Information returns for qualified subchapter
S subsidiaries
Present
Law
Under present law, a corporation all of whose stock
is held by an S corporation is treated as a
qualified subchapter S subsidiary if the S
corporation so elects. The assets, liabilities, and
items of income, deduction, and credit of the
subsidiary are treated as assets, liabilities, and
items of the parent S corporation.
House
Bill
The bill provides authority to the Secretary to
provide guidance regarding information returns of
qualified subchapter S subsidiaries.
Effective date. --The provision applies to
taxable years beginning after
December 31, 2004
.
Senate
Amendment
No provision.
Conference
Agreement
The conference agreement includes the provision in
the House bill.
11. Repayment of loans for qualifying employer
securities
Present
Law
An employee stock ownership plan (an
"ESOP") is a defined contribution plan
that is designated as an ESOP and is designed to
invest primarily in qualifying employer securities.
For purposes of ESOP investments, a "qualifying
employer security" is defined as: (1) publicly
traded common stock of the employer or a member of
the same controlled group; (2) if there is no such
publicly traded common stock, common stock of the
employer (or member of the same controlled group)
that has both voting power and dividend rights at
least as great as any other class of common stock;
or (3) noncallable preferred stock that is
convertible into common stock described in (1) or
(2) and that meets certain requirements. In some
cases, an employer may design a class of preferred
stock that meets these requirements and that is held
only by the ESOP. Special rules apply to ESOPs that
do not apply to other types of qualified retirement
plans, including a special exemption from the
prohibited transaction rules.
Certain transactions between an employee benefit
plan and a disqualified person, including the
employer maintaining the plan, are prohibited
transactions that result in the imposition of an
excise tax.70
Prohibited transactions include, among other
transactions, (1) the sale, exchange or leasing of
property between a plan and a disqualified person,
(2) the lending of money or other extension of
credit between a plan and a disqualified person, and
(3) the transfer to, or use by or for the benefit
of, a disqualified person of the income or assets of
the plan. However, certain transactions are exempt
from prohibited transaction treatment, including
certain loans to enable an ESOP to purchase
qualifying employer securities.71
In such a case, the employer securities purchased
with the loan proceeds are generally pledged as
security for the loan. Contributions to the ESOP and
dividends paid on employer securities held by the
ESOP are used to repay the loan. The employer
securities are held in a suspense account and
released for allocation to participants' accounts as
the loan is repaid.
A loan to an ESOP is exempt from prohibited
transaction treatment if the loan is primarily for
the benefit of the participants and their
beneficiaries, the loan is at a reasonable rate of
interest, and the collateral given to a disqualified
person consists of only qualifying employer
securities. No person entitled to payments under the
loan can have the right to any assets of the ESOP
other than (1) collateral given for the loan, (2)
contributions made to the ESOP to meet its
obligations on the loan, and (3) earnings
attributable to the collateral and the investment of
contributions described in (2).72
In addition, the payments made on the loan by the
ESOP during a plan year cannot exceed the sum of
those contributions and earnings during the current
and prior years, less loan payments made in prior
years.
An ESOP of a C corporation is not treated as
violating the qualification requirements of the Code
or as engaging in a prohibited transaction merely
because, in accordance with plan provisions, a
dividend paid with respect to qualifying employer
securities held by the ESOP is used to make payments
on a loan (including payments of interest as well as
principal) that was used to acquire the employer
securities (whether or not allocated to
participants).73
In the case of a dividend paid with respect to any
employer security that is allocated to a
participant, this relief does not apply unless the
plan provides that employer securities with a fair
market value of not less than the amount of the
dividend is allocated to the participant for the
year which the dividend would have been allocated to
the participant.74
Effective for taxable years beginning after December
31, 1997, a qualified retirement plan (including an
ESOP) may be a shareholder of an S corporation.75
As a result, an S corporation may maintain an ESOP.
House
Bill
Under the provision, an ESOP maintained by an S
corporation is not treated as violating the
qualification requirements of the Code or as
engaging in a prohibited transaction merely because,
in accordance with plan provisions, a distribution
made with respect to S corporation stock that
constitutes qualifying employer securities held by
the ESOP is used to make payments on a loan that was
used to acquire the securities (whether or not
allocated to participants). This relief does not
apply in the case of a distribution with respect to
S corporation stock that is allocated to a
participant unless the plan provides that stock with
a fair market value of not less than the amount of
such distribution is allocated to the participant
for the year which the distribution would have been
allocated to the participant.
Effective date. --The provision is effective
for distributions made with respect to S corporation
stock after
December 31, 2004
.
Senate
Amendment
The Senate amendment is the same as House bill
(other than the effective date).
Effective date. --The provision is effective
on
January 1, 1998
.
Conference
Agreement
The conference agreement contains the provision in
the House bill and Senate amendment, with a
modification of the effective date. Thus, an ESOP
maintained by an S corporation is not treated as
violating the qualification requirements of the Code
or as engaging in a prohibited transaction merely
because, in accordance with plan provisions, a
distribution made with respect to S corporation
stock that constitutes qualifying employer
securities held by the ESOP is used to make payments
on a loan (including payments of interest as well as
principal) that was used to acquire the securities
(whether or not allocated to participants). This
relief does not apply in the case of a distribution
with respect to S corporation stock that is
allocated to a participant unless the plan provides
that stock with a fair market value of not less than
the amount of such distribution is allocated to the
participant for the year which the distribution
would have been allocated to the participant.
Effective date. --The provision is effective
for distributions made with respect to S corporation
stock after
December 31, 1997
.
D.
Alternative Minimum Tax Relief
1. Repeal limitation on use of foreign tax credit
(sec. 241 of the House bill, sec. 203 of the Senate
amendment, and sec. 59 of the Code)
Present
Law
In general
Under present law, taxpayers are subject to an
alternative minimum tax ("
AMT
"), which is payable, in addition to all other
tax liabilities, to the extent that it exceeds the
taxpayer's regular income tax liability. The tax is
imposed at a flat rate of 20 percent, in the case of
corporate taxpayers, on alternative minimum taxable
income ("AMTI") in excess of an exemption
amount that phases out. AMTI is the taxpayer's
taxable income increased for certain tax preferences
and adjusted by determining the tax treatment of
certain items in a manner that limits the tax
benefits resulting from the regular tax treatment of
such items.
Foreign tax credit
Taxpayers are permitted to reduce their
AMT
liability by an
AMT
foreign tax credit. The
AMT
foreign tax credit for a taxable year is determined
under principles similar to those used in computing
the regular tax foreign tax credit, except that (1)
the numerator of the
AMT
foreign tax credit limitation fraction is foreign
source AMTI and (2) the denominator of that fraction
is total AMTI. Taxpayers may elect to use as their
AMT
foreign tax credit limitation fraction the ratio of
foreign source regular taxable income to total AMTI.
The
AMT
foreign tax credit for any taxable year generally
may not offset a taxpayer's entire pre-credit
AMT
. Rather, the
AMT
foreign tax credit is limited to 90 percent of
AMT
computed without any
AMT
net operating loss deduction and the
AMT
foreign tax credit. For example, assume that a
corporation has $10 million of AMTI, has no
AMT
net operating loss deduction, and has no regular tax
liability. In the absence of the
AMT
foreign tax credit, the corporation's tax liability
would be $2 million. Accordingly, the
AMT
foreign tax credit cannot be applied to reduce the
taxpayer's tax liability below $200,000. Any unused
AMT
foreign tax credit may be carried back two years and
carried forward five years for use against
AMT
in those years under the principles of the foreign
tax credit carryback and carryover rules set forth
in section 904(c).
House
Bill
The House bill repeals the 90-percent limitation on
the utilization of the
AMT
foreign tax credit.
Effective date. --The provision applies to
taxable years beginning after
December 31, 2004
.
Senate
Amendment
Same as House bill.
Conference
Agreement
The conference agreement includes the provision in
the House bill and Senate amendment.
2. Expansion of exemption from alternative
minimum tax for small corporations (sec. 242 of the
House bill and sec. 55 of the Code)
Present
Law
Corporations with average gross receipts of less
than $7.5 million for the prior three taxable years
are exempt from the corporate
AMT
. The $7.5 million threshold is reduced to $5
million for the corporation's first 3-taxable year
period.
House
Bill
The House bill increases the amount of average gross
receipts that an exempt corporation may receive from
$7.5 million to $20 million.
Effective date. --The provision applies to
taxable years beginning after
December 31, 2005
.
Senate
Amendment
No provision.
Conference
Agreement
The conference agreement does not include the
provision in the House bill.
3. Coordinate farmer and fisherman income
averaging and the alternative minimum tax (sec. 243
of the House bill and secs. 55 and 1301 of the Code)
Present
Law
An individual taxpayer engaged in a farming business
(as defined by section 263A(e)(4)) may elect to
compute his or her current year regular tax
liability by averaging, over the prior three-year
period, all or portion of his or her taxable income
from the trade or business of farming. Because
farmer income averaging reduces the regular tax
liability, the
AMT
may be increased. Thus, the benefits of farmer
income averaging may be reduced or eliminated for
farmers subject to the
AMT
.
House
Bill
The House bill provides that, in computing
AMT
, a farmer's regular tax liability is determined
without regard to farmer income averaging. Thus, a
farmer receives the full benefit of income averaging
because averaging reduces the regular tax while the
AMT
(if any) remains unchanged.
Effective date. --The provision applies to
taxable years applies to taxable years beginning
after
December 31, 2003
.
Senate
Amendment
No provision.
Conference
Agreement
The conference agreement extends the benefits of
income averaging to fishermen. The provision also
includes the provision in the House bill relating to
the
AMT
, applicable to both farmers and fishermen.
Effective date. --Taxable years beginning
after
December 31, 2003
.
E.
Restructuring of Incentives for Alcohol Fuels, Etc.
1. Incentives for alcohol and biodiesel fuels (secs.
251 and 252 of the House bill, sec. 861 of the
Senate amendment, and secs. 4041, 4081, 4091, 6427,
9503 and new section 6426 of the Code)
Present
Law
Alcohol fuels income tax credit
The alcohol fuels credit is the sum of three
credits: the alcohol mixture credit, the alcohol
credit, and the small ethanol producer credit.
Generally, the alcohol fuels credit expires after
December 31, 2007.76
A taxpayer (generally a petroleum refiner,
distributor, or marketer) who mixes ethanol with
gasoline (or a special fuel77
) is an "ethanol blender." Ethanol
blenders are eligible for an income tax credit of 52
cents per gallon of ethanol used in the production
of a qualified mixture (the "alcohol mixture
credit"). A qualified mixture means a mixture
of alcohol and gasoline (or of alcohol and a special
fuel) sold by the blender as fuel or used as fuel by
the blender in producing the mixture. The term
alcohol includes methanol and ethanol but does not
include (1) alcohol produced from petroleum, natural
gas, or coal (including peat), or (2) alcohol with a
proof of less than 150. Businesses also may reduce
their income taxes by 52 cents for each gallon of
ethanol (not mixed with gasoline or other special
fuel) that they sell at the retail level as vehicle
fuel or use themselves as a fuel in their trade or
business ("the alcohol credit"). The
52-cents-per-gallon income tax credit rate is
scheduled to decline to 51 cents per gallon during
the period 2005 through 2007. For blenders using an
alcohol other than ethanol, the rate is 60 cents per
gallon.78
A separate income tax credit is available for small
ethanol producers (the "small ethanol producer
credit"). A small ethanol producer is defined
as a person whose ethanol production capacity does
not exceed 30 million gallons per year. The small
ethanol producer credit is 10 cents per gallon of
ethanol produced during the taxable year for up to a
maximum of 15 million gallons.
The credits that comprise the alcohol fuels tax
credit are includible in income. The credit may not
be used to offset alternative minimum tax liability.
The credit is treated as a general business credit,
subject to the ordering rules and carryforward/carryback
rules that apply to business credits generally.
Excise tax reductions for alcohol mixture
fuels
In general
Generally, motor fuels tax rates are as follows:79
____________________________________________________________________
Gasoline 18.3 cents per gallon
____________________________________________________________________
Diesel fuel and kerosene 24.3 cents per gallon
____________________________________________________________________
Special motor fuels 18.3 cents per gallon generally
____________________________________________________________________
Alcohol-blended fuels are subject to a reduced rate
of tax. The benefits provided by the alcohol fuels
income tax credit and the excise tax reduction are
integrated such that the alcohol fuels credit is
reduced to take into account the benefit of any
excise tax reduction.
Gasohol
Registered ethanol blenders may forgo the full
income tax credit and instead pay reduced rates of
excise tax on gasoline that they purchase for
blending with ethanol. Most of the benefit of the
alcohol fuels credit is claimed through the excise
tax system.
The reduced excise tax rates apply to gasohol upon
its removal or entry. Gasohol is defined as a
gasoline/ethanol blend that contains 5.7 percent
ethanol, 7.7 percent ethanol, or 10 percent ethanol.
For the calendar year 2004, the following reduced
rates apply to gasohol:80
____________________________________________________________________
5.7 percent ethanol 15.436 cents per gallon
____________________________________________________________________
7.7 percent ethanol 14.396 cents per gallon
____________________________________________________________________
10.0 percent ethanol 13.200 cents per gallon
____________________________________________________________________
Reduced excise tax rates also apply when gasoline is
purchased for the production of "gasohol."
When gasoline is purchased for blending into
gasohol, the rates above are multiplied by a
fraction (e.g., 10/9 for 10-percent gasohol) so that
the increased volume of motor fuel will be subject
to tax. The reduced tax rates apply if the person
liable for the tax is registered with the
IRS
and (1) produces gasohol with gasoline within 24
hours of removing or entering the gasoline or (2)
gasoline is sold upon its removal or entry and such
person has an unexpired certificate from the buyer
and has no reason to believe the certificate is
false.81
Qualified methanol and ethanol fuels
Qualified methanol or ethanol fuel is any liquid
that contains at least 85 percent methanol or
ethanol or other alcohol produced from a substance
other than petroleum or natural gas. These fuels are
taxed at reduced rates.82
The rate of tax on qualified methanol is 12.35 cents
per gallon. The rate on qualified ethanol in 2004 is
13.15 cents. From January 1, 2005, through September
30, 2007, the rate of tax on qualified ethanol is
13.25 cents.
Alcohol produced from natural gas
A mixture of methanol, ethanol, or other alcohol
produced from natural gas that consists of at least
85 percent alcohol is also taxed at reduced rates.83
For mixtures not containing ethanol, the applicable
rate of tax is 9.25 cents per gallon before October
1, 2005. In all other cases, the rate is 11.4 cents
per gallon. After September 30, 2005, the rate is
reduced to 2.15 cents per gallon when the mixture
does not contain ethanol and 4.3 cents per gallon in
all other cases.
Blends of alcohol and diesel fuel or special
motor fuels
A reduced rate of tax applies to diesel fuel or
kerosene that is combined with alcohol as long as at
least 10 percent of the finished mixture is alcohol.
If none of the alcohol in the mixture is ethanol,
the rate of tax is 18.4 cents per gallon. For
alcohol mixtures containing ethanol, the rate of tax
in 2004 is 19.2 cents per gallon and 19.3 cents per
gallon for 2005 through September 30, 2007. Fuel
removed or entered for use in producing a 10 percent
diesel-alcohol fuel mixture (without ethanol), is
subject to a tax of 20.44 cents per gallon. The rate
of tax for fuel removed or entered for use to
produce a 10 percent diesel-ethanol fuel mixture is
21.333 cents per gallon for 2004 and 21.444 cents
per gallon for the period January 1, 2005, through
September 30, 2007.84
Special motor fuel (nongasoline) mixtures with
alcohol also are taxed at reduced rates.
Aviation fuel
Noncommercial aviation fuel is subject to a tax of
21.9 cents per gallon.85
Fuel mixtures containing at least 10 percent alcohol
are taxed at lower rates.86
In the case of 10 percent ethanol mixtures, for any
sale or use during 2004, the 21.9 cents is reduced
by 13.2 cents (for a tax of 8.7 cents per gallon),
for 2005, 2006, and 2007 the reduction is 13.1 cents
(for a tax of 8.8 cents per gallon) and is reduced
by 13.4 cents in the case of any sale during 2008 or
thereafter. For mixtures not containing ethanol, the
21.9 cents is reduced by 14 cents for a tax of 7.9
cents. These reduced rates expire after September
30, 2007.87
When aviation fuel is purchased for blending with
alcohol, the rates above are multiplied by a
fraction (10/9) so that the increased volume of
aviation fuel will be subject to tax.
Refunds and payments
If fully taxed gasoline (or other taxable fuel) is
used to produce a qualified alcohol mixture, the
Code permits the blender to file a claim for a quick
excise tax refund. The refund is equal to the
difference between the gasoline (or other taxable
fuel) excise tax that was paid and the tax that
would have been paid by a registered blender on the
alcohol fuel mixture being produced. Generally, the
IRS
pays these quick refunds within 20 days. Interest
accrues if the refund is paid more than 20 days
after filing. A claim may be filed by any person
with respect to gasoline, diesel fuel, or kerosene
used to produce a qualified alcohol fuel mixture for
any period for which $200 or more is payable and
which is not less than one week.
Ethyl tertiary butyl ether (ETBE)
Ethyl tertiary butyl ether ("ETBE") is an
ether that is manufactured using ethanol. Unlike
ethanol, ETBE can be blended with gasoline before
the gasoline enters a pipeline because ETBE does not
result in contamination of fuel with water while in
transport. Treasury regulations provide that gasohol
blenders may claim the income tax credit and excise
tax rate reductions for ethanol used in the
production of ETBE. The regulations also provide a
special election allowing refiners to claim the
benefit of the excise tax rate reduction even though
the fuel being removed from terminals does not
contain the requisite percentages of ethanol for
claiming the excise tax rate reduction.
Highway Trust Fund
With certain exceptions, the taxes imposed by
section 4041 (relating to retail taxes on diesel
fuels and special motor fuels) and section 4081
(relating to tax on gasoline, diesel fuel and
kerosene) are credited to the Highway Trust Fund. In
the case of alcohol fuels, 2.5 cents per gallon of
the tax imposed is retained in the General Fund.88
In the case of a taxable fuel taxed at a reduced
rate upon removal or entry prior to mixing with
alcohol, 2.8 cents of the reduced rate is retained
in the General Fund.89
Biodiesel
If biodiesel is used in the production of blended
taxable fuel, the Code imposes tax on the removal or
sale of the blended taxable fuel.90
In addition, the Code imposes tax on any liquid
other than gasoline sold for use or used as a fuel
in a diesel-powered highway vehicle or dieselpowered
train unless tax was previously imposed and not
refunded or credited.91
If biodiesel that was not previously taxed or exempt
is sold for use or used as a fuel in a
diesel-powered highway vehicle or a diesel-powered
train, tax is imposed.92
There are no reduced excise tax rates for biodiesel.
Taxes from gasoline and special motor fuels
used in motorboats and gasoline used in the
nonbusiness use of small-engine outdoor power
equipment
The Aquatic Resources Trust Fund is funded by a
portion of the receipts from the excise tax imposed
on motorboat gasoline and special motor fuels, as
well as small-engine fuel taxes, that are first
deposited into the Highway Trust Fund. As a result,
transfers to the Aquatic Resources Trust Fund are
governed in part by Highway Trust Fund provisions.93
A total tax rate of 18.4 cents per gallon is imposed
on gasoline and special motor fuels used in
motorboats. Of this rate, 0.1 cent per gallon is
dedicated to the Leaking Underground Storage Tank
Trust Fund. Of the remaining 18.3 cents per gallon,
the Code currently transfers 13.5 cents per gallon
from the Highway Trust Fund to the Aquatics
Resources Trust Fund and Land and Water Conservation
Fund. The remainder, 4.8 cents per gallon, is
retained in the General Fund. In addition, the Sport
Fish Restoration Account of the Aquatics Resources
Trust Fund receives 13.5 cents per gallon of the
revenues from the tax imposed on gasoline used as a
fuel in the nonbusiness use of small-engine outdoor
power equipment. The balance of 4.8 cents per gallon
is retained in the General Fund.94
House
Bill
Overview
The provision eliminates reduced rates of excise tax
for alcohol-blended fuels and imposes the full rate
of excise tax on alcohol-blended fuels (18.4 cents
per gallon on gasoline blends and 24.4 cents per
gallon of diesel blended fuel). In place of reduced
rates, the provision permits the section 40 alcohol
mixture credit, with certain modifications, to be
applied against excise tax liability. The credit may
be taken against the tax imposed on taxable fuels
(by section 4081). To the extent a person does not
have section 4081 liability, the provision allows
taxpayers to file a claim for payment equal to the
amount of the credit for the alcohol used to produce
an eligible mixture. Under certain circumstances, a
tax is imposed if an alcohol fuel mixture credit is
claimed with respect to alcohol used in the
production of any alcohol mixture, which is
subsequently used for a purpose for which the credit
is not allowed or changed into a substance that does
not qualify for the credit. The provision eliminates
the General Fund retention of certain taxes on
alcohol fuels, and credits these taxes to the
Highway Trust Fund.
Alcohol fuel mixture excise tax credit and
payment provisions
Alcohol fuel mixture excise tax credit
The provision eliminates the reduced rates of excise
tax for alcohol-blended fuels and taxable fuels used
to produce an alcohol fuel mixture. Under the
provision, the full rate of tax for taxable fuels is
imposed on both alcohol fuel mixtures and the
taxable fuel used to produce an alcohol fuel
mixture.
In lieu of the reduced excise tax rates, the
provision provides that the alcohol mixture credit
provided under section 40 may be applied against
section 4081 excise tax liability (hereinafter
referred to as "the alcohol fuel mixture
credit"). The credit is treated as a payment of
the taxpayer's tax liability received at the time of
the taxable event. The alcohol fuel mixture credit
is 52 cents for each gallon of alcohol used by a
person in producing an alcohol fuel mixture for sale
or use in a trade or business of the taxpayer. The
credit declines to 51 cents per gallon after
calendar year 2004. For mixtures not containing
ethanol (renewable source methanol), the credit is
60 cents per gallon. As discussed further below, the
excise tax credit is refundable in order to provide
a benefit equivalent to the reduced tax rates, which
are being repealed under the provision.
For purposes of the alcohol fuel mixture credit, an
"alcohol fuel mixture" is a mixture of
alcohol and gasoline or alcohol and a special fuel
which is sold for use or used as a fuel by the
taxpayer producing the mixture. Alcohol for this
purpose includes methanol, ethanol, and alcohol
gallon equivalents of ETBE or other ethers produced
from such alcohol. It does not include alcohol
produced from petroleum, natural gas, or coal
(including peat), or alcohol with a proof of less
than 190 (determined without regard to any added
denaturants). Special fuel is any liquid fuel (other
than gasoline) which is suitable for use in an
internal combustion engine. The benefit obtained
from the excise tax credit is coordinated with the
alcohol fuels income tax credit. For refiners making
an alcohol fuel mixture with ETBE, the mixture is
treated as sold to another person for use as a fuel
only upon removal from the refinery. The excise tax
credit is available through December 31, 2010.
Payments with respect to qualified alcohol
fuel mixtures
To the extent the alcohol fuel mixture credit
exceeds any section 4081 liability of a person, the
Secretary is to pay such person an amount equal to
the alcohol fuel mixture credit with respect to such
mixture. These payments are intended to provide an
equivalent benefit to replace the partial exemption
for fuels to be blended with alcohol and alcohol
fuels being repealed by the provision. If claims for
payment are not paid within 45 days, the claim is to
be paid with interest. The provision also provides
that in the case of an electronic claim, if such
claim is not paid within 20 days, the claim is to be
paid with interest. If claims are filed
electronically, the claimant may make a claim for
less than $200.
The provision does not apply with respect to alcohol
fuel mixtures sold after December 31, 2010.
Alcohol fuel subsidies borne by General Fund
The provision eliminates the requirement that 2.5
and 2.8 cents per gallon of excise taxes be retained
in the General Fund with the result that the full
amount of tax on alcohol fuels is credited to the
Highway Trust Fund. The provision also authorizes
the full amount of fuel taxes to be appropriated to
the Highway Trust Fund without reduction for amounts
equivalent to the excise tax credits allowed for
alcohol fuel mixtures, and the Trust Fund is not
required to reimburse any payments with respect to
qualified alcohol fuel mixtures.
Motorboat and small engine fuel taxes
The provision eliminates the General Fund retention
of the 4.8 cents per gallon of the taxes imposed on
gasoline and special motor fuels used in motorboats
and gasoline used as a fuel in the nonbusiness use
of small-engine outdoor power equipment.
Effective dates
The provisions generally are effective for fuel sold
or used after September 30, 2004. The repeal of the
General Fund retention of the 2.5/2.8 cents per
gallon of tax regarding alcohol fuels is effective
for taxes imposed after September 30, 2003. The
repeal of the 4.8 cents per gallon General Fund
retention of the taxes imposed on fuels used in
motorboats and small engine equipment is effective
for taxes imposed after September 30, 2006. The
provision regarding the crediting of the full amount
of tax to the Highway Trust Fund without regard to
credits and payments is effective for taxes received
after September 30, 2004, and payments made after
September 30, 2004.
Senate
Amendment
Alcohol fuels
The Senate amendment is similar to the House bill
with respect to alcohol fuels, except that it also
provides that outlay payments are available for neat
alcohol used as fuel. In addition, the Senate
amendment also extends the alcohol fuels income tax
credit (sec. 40) through December 31, 2010. The
Senate amendment requires importers and producers of
alcohol to be registered with the Secretary.
Finally, the provision extends the temporary
additional duty on ethanol through January 1, 2011.
Biodiesel fuels
The Senate amendment creates a refundable excise tax
credit for biodiesel fuel mixtures similar to that
created for alcohol fuel mixtures. The excise tax
credit for biodiesel mixtures is 50 cents for each
gallon of biodiesel used by the taxpayer in
producing a qualified biodiesel mixture for sale or
use in a trade or business of the taxpayer. A
qualified biodiesel mixture is a mixture of
biodiesel and diesel fuel (determined without regard
to any use of kerosene) that is (1) sold for use or
used by the taxpayer producing such mixture as a
fuel, or (2) removed from the refinery by a person
producing the mixture. In the case of agri-biodiesel,
the credit is $1.00 per gallon. No credit is allowed
unless the taxpayer obtains a certification (in such
form and manner as prescribed by the Secretary) from
the producer of the biodiesel that identifies the
product produced and the percentage of biodiesel and
agri-biodiesel in the product. The Senate amendment
also provides for outlay payments for biodiesel, not
in a mixture, used as a fuel.
The credit is not available for any sale or use for
any period after December 31, 2006. Credits and
outlay payments are paid out of the General Fund,
rather than the Highway Trust Fund. The excise tax
credit is coordinated with the income tax credit for
biodiesel such that credit for the same biodiesel
cannot be claimed for both income and excise tax
purposes.
The Senate amendment requires importers and
producers of biodiesel to be registered with the
Secretary.
Motorboat and small engine fuel taxes
The Senate amendment does not change the General
Fund's retention of the 4.8 cents per gallon imposed
on motorboat and small engine fuel.
Effective date
The provisions generally are effective for fuel sold
or used after September 30, 2004. The repeal of the
General Fund retention of the 2.5/2.8 cents per
gallon regarding alcohol fuels is effective for fuel
sold or used after September 30, 2003. The Secretary
is to provide electronic filing instructions by
September 30, 2004. The extension of the section 40
alcohol fuels credit is effective on the date of
enactment. The requirement that producers and
importers of alcohol and biodiesel be registered is
effective April 1, 2005.
Conference
Agreement
Overview
The conference agreement generally follows the
Senate amendment. The conference agreement does not
include outlay payments for neat alcohol and 100
percent biodiesel fuels. The conference agreement
does not change the temporary duty on ethanol. In
addition, the conference agreement does not change
the General Fund's retention of the 4.8 cents per
gallon imposed on motorboat and small engine fuel.
The conference agreement eliminates reduced rates of
excise tax for most alcohol-blended fuels and
imposes the full rate of excise tax on most
alcohol-blended fuels (18.3 cents per gallon on
gasoline blends and 24.3 cents per gallon of diesel
blended fuel). In place of reduced rates, the
conference agreement creates two new excise tax
credits: the alcohol fuel mixture credit and the
biodiesel mixture credit. The sum of these credits
may be taken against the tax imposed on taxable
fuels (by section 4081). The conference agreement
allows taxpayers to file a claim for payment equal
to the amount of these credits for biodiesel or
alcohol used to produce an eligible mixture.
Under certain circumstances, a tax is imposed if an
alcohol fuel mixture credit or biodiesel fuel
mixture credit is claimed with respect to alcohol or
biodiesel used in the production of any alcohol or
biodiesel mixture, which is subsequently used for a
purpose for which the credit is not allowed or
changed into a substance that does not qualify for
the credit.
The conference agreement eliminates the General Fund
retention of certain taxes on alcohol fuels, and
credits these taxes to the Highway Trust Fund. The
Highway Trust Fund is credited with the full amount
of tax imposed on alcohol and biodiesel fuel
mixtures.
The conference agreement also extends the
present-law alcohol fuels income tax credit through
December 31, 2010.
Alcohol fuel mixture excise tax credit
The provision eliminates the reduced rates of excise
tax for most alcohol-blended fuels.95
Under the provision, the full rate of tax for
taxable fuels is imposed on both alcohol fuel
mixtures and the taxable fuel used to produce an
alcohol fuel mixture.
In lieu of the reduced excise tax rates, the
provision provides for an excise tax credit, the
alcohol fuel mixture credit. The alcohol fuel
mixture credit is 51 cents for each gallon of
alcohol used by a person in producing an alcohol
fuel mixture for sale or use in a trade or business
of the taxpayer. For mixtures not containing ethanol
(renewable source methanol), the credit is 60 cents
per gallon.
For purposes of the alcohol fuel mixture credit, an
"alcohol fuel mixture" is a mixture of
alcohol and a taxable fuel that (1) is sold by the
taxpayer producing such mixture to any person for
use as a fuel or (2) is used as a fuel by the
taxpayer producing the mixture. Alcohol for this
purpose includes methanol, ethanol, and alcohol
gallon equivalents of ETBE or other ethers produced
from such alcohol. It does not include alcohol
produced from petroleum, natural gas, or coal
(including peat), or alcohol with a proof of less
than 190 (determined without regard to any added
denaturants). Taxable fuel is gasoline, diesel, and
kerosene.96
A mixture that includes ETBE or other ethers
produced from alcohol produced by any person at a
refinery prior to a taxable event is treated as sold
at the time of its removal from the refinery (and
only at such time) to another person for use as a
fuel.
The excise tax credit is coordinated with the
alcohol fuels income tax credit and is available
through December 31, 2010.
Biodiesel mixture excise tax credit
The provision provides an excise tax credit for
biodiesel mixtures.97
The credit is 50 cents for each gallon of biodiesel
used by the taxpayer in producing a qualified
biodiesel mixture for sale or use in a trade or
business of the taxpayer. A qualified biodiesel
mixture is a mixture of biodiesel and diesel fuel
that (1) is sold by the taxpayer producing such
mixture to any person for use as a fuel, or (2) is
used as a fuel by the taxpayer producing such
mixture. In the case of agri-biodiesel, the credit
is $1.00 per gallon. No credit is allowed unless the
taxpayer obtains a certification (in such form and
manner as prescribed by the Secretary) from the
producer of the biodiesel that identifies the
product produced and the percentage of biodiesel and
agri-biodiesel in the product.
The credit is not available for any sale or use for
any period after December 31, 2006. This excise tax
credit is coordinated with the income tax credit for
biodiesel such that credit for the same biodiesel
cannot be claimed for both income and excise tax
purposes.
Payments with respect to qualified alcohol and
biodiesel fuel mixtures
To the extent the alcohol fuel mixture credit
exceeds any section 4081 liability of a person, the
Secretary is to pay such person an amount equal to
the alcohol fuel mixture credit with respect to such
mixture. Thus, if the person has no section 4081
liability, the credit is totally refundable. These
payments are intended to provide an equivalent
benefit to replace the partial exemption for fuels
to be blended with alcohol and alcohol fuels being
repealed by the provision. Similar rules apply to
the biodiesel fuel mixture credit.
If claims for payment are not paid within 45 days,
the claim is to be paid with interest. The provision
also provides that in the case of an electronic
claim, if such claim is not paid within 20 days, the
claim is to be paid with interest. If claims are
filed electronically, the claimant may make a claim
for less than $200. The Secretary is to describe the
electronic format for filing claims by December 31,
2004.
The payment provision does not apply with respect to
alcohol fuel mixtures sold after December 31, 2010,
and biodiesel fuel mixtures sold after December 31,
2006.
Alcohol and biodiesel fuel subsidies borne by
General Fund
The provision eliminates the requirement that 2.5
and 2.8 cents per gallon of excise taxes be retained
in the General Fund with the result that the full
amount of tax on alcohol fuels is credited to the
Highway Trust Fund. The provision also authorizes
the full amount of fuel taxes to be appropriated to
the Highway Trust Fund without reduction for amounts
equivalent to the excise tax credits allowed for
alcohol or biodiesel fuel mixtures and the Highway
Trust Fund is not required to reimburse the General
Fund for any credits or payments taken or made with
respect to qualified alcohol fuel mixtures or
biodiesel fuel mixtures.
Registration requirement
Every person producing or importing biodiesel or
alcohol is required to register with the Secretary.
Alcohol fuels income tax credit
The provision extends the alcohol fuels credit (sec.
40) through December 31, 2010.
Effective dates
The provisions generally are effective for fuel sold
or used after December 31, 2004. The repeal of the
General Fund retention of the 2.5/2.8 cents per
gallon regarding alcohol fuels is effective for fuel
sold or used after September 30, 2004. The Secretary
is to provide electronic filing instructions by
December 31, 2004. The registration requirement is
effective April 1, 2005.
|
