Tax Extenders Passed by Senate Finance Committee
Just before Congress recessed for its August break, a package of tax extenders was approved by the Senate Finance Committee (SFC). The House and Senate both struggled to find ways to pay for a multi-year federal highway and transportation spending bill, and disagreed over the extent of cuts to the IRS's fiscal year (FY) 2015 budget. Congress did not, however, take action on proposals to allow small businesses to reimburse employees for health insurance costs.
Unless renewed, many tax incentives available in 2014 will not be available in 2015. The list of these popular but temporary tax breaks is long, numbering more than 50, and impacting all types of taxpayers. For individuals, the extenders include the state and local sales tax deduction, higher education tuition deduction, teachers' classroom expense deduction, transit benefits parity, and more. For businesses, the expired extenders include the research tax credit, Code Sec. 179 small business expensing, Work Opportunity Tax Credit (WOTC), special expensing rules for television and film productions, Production Tax Credit, and others.
In July, the SFC voted to extend the expired tax provisions for two years: retroactive to January 1, 2015 and forward through 2016. That way, taxpayers can take advantage of the incentives in 2015 and 2016.
The SFC also enhanced some of the extenders. The SFC voted to increase the Code Sec. 179 expensing maximum amount and phase-out threshold in 2015 and 2016 to $500,000 and $2 million respectively, indexed for inflation beginning after 2014. The proposal would also extend the definition of Code Sec. 179 property to include computer software and $250,000 of the cost of qualified leasehold improvement property, qualified restaurant property, and qualified retail improvement property for two years.
The SFC did not leave out another popular business incentive: bonus depreciation. The SFC package would extend 50 percent bonus depreciation to qualified property purchased and placed in service before January 1, 2017, (before January 1, 2018, for certain longer-lived and transportation assets).
Although the extenders have moved through the SFC, their passage in the full Senate is uncertain. Many lawmakers want the cost of the extenders (estimated at $95 billion over 10 years) to be offset by revenue raisers. The SFC bill includes three revenue raisers, two related to energy and a proposal to modify mortgage information reporting requirements for lenders. Like past years, the fate of the extenders will likely be decided late in the year. Our office will keep you posted of developments.
At press time, Congress was still seeking a path to pass a multi-year federal highway and transportation spending bill. A temporary highway funding bill is scheduled to expire after July 31, 2015. As with the extenders, much of the debate is on how to pay for highway and transportation projects.
Senate Majority Leader Mitch McConnell, R-Ky., proposed a six-year highway bill partially paid for with extensions of current funding provisions and tax compliance measures. The bill is funded for three years with revenue for the remaining three years to be determined at a future date. McConnell proposed to pay for his bill, among other revenue raisers, by modifications to mortgage information reporting, revoking or denying a U.S. passport to individuals with delinquent tax obligations, and allowing employers to transfer excess defined-benefit-plan assets to retiree medical accounts and group-term life insurance.
Meanwhile, the House approved a short-term highway patch. The House bill includes a provision similar to the Senate's mortgage information reporting proposal. House Democrats have reproposed the GROW AMERICA Act, which would pay for highway and transportation spending by limiting tax-motivated corporate inversions.
In June, the House Appropriations Committee voted to fund the IRS at $10.1 billion for FY 2016, which represents a cut of some $838 million compared to FY 2015. The full House did not take up the bill before the August recess. The Senate Appropriations Committee also approved a cut to the IRS's budget, but not at the same amount. The Senate bill would reduce the IRS's FY 2016 budget by $470 million.
The Affordable Care Act imposes a number of market reforms. One consequence of these reforms has been to limit the use of health reimbursement arrangements (HRAs) for small businesses to reimburse employees for health insurance costs. Reform legislation has been introduced in the House and Senate.
The Small Business Healthcare Relief Act would allow many small businesses to use pre-tax dollars to give employees a defined contribution; and permit employees to use these funds as an HRA to purchase health coverage on the individual market, as well as for qualified out-of-pocket medical expenses. The bill has bipartisan support and could come up for a vote after the August recess.