On Dec. 16,
2014, Congress passed the "Tax Increase Prevention Act of 2014"
(TIPA, or "the Act"), which the President is expected to sign into
law. As explained in this Special Study, the Act extends a host of tax breaks
for businesses, including the research credit, the new markets tax credit, the
employer wage credit for activated reservists, enhanced charitable deductions
for contributions of food inventory, and empowerment zone tax incentives.
The research
credit equals the sum of: (1) 20% of the excess (if any) of the qualified
research expenses for the tax year over a base amount (unless the taxpayer
elected an alternative simplified research credit); (2) the university basic
research credit (i.e., 20% of the basic research payments); (3) 20% of the
taxpayer's expenditures on qualified energy research undertaken by an energy
research consortium.
The base
amount is a fixed-base percentage of the taxpayer's average annual gross
receipts from a U.S. trade or business, net of returns and allowances, for the
4 tax years before the credit year, and can't be less than 50% of the year's
qualified research expenses. The fixed base percentage for a non-startup
company is the percentage (not exceeding 16%) that taxpayer's total qualified
research expenses are of total gross receipts for tax years beginning after '83
and before '89. A 3% fixed-base percentage applies for each of the first 5 tax
years in which a "startup company" (one with fewer than 3 tax years
with both gross receipts and qualified research expenses) has qualified
research expenses.
A taxpayer can
elect an alternative simplified research credit equal to 14% of the excess of
the qualified research expenses for the tax year over 50% of the average qualified
research expenses for the three tax years preceding the tax year for which the
credit is being determined. If a taxpayer has no qualified research expenses in
any one of the three preceding tax years, the alternative simplified research
credit is 6% of the qualified research expenses for the tax year for which the
credit is being determined.
Under pre-Act
law, the research credit didn't apply for amounts paid or accrued after Dec.
31, 2013.
New law. TIPA retroactively extends the research credit for one year to
apply to amounts paid or accrued before Jan. 1, 2015. ( Code Sec.
41(h)(1) , as amended by Act Sec.
111(a))
The work
opportunity tax credit (WOTC) allows employers who hire members of certain
targeted groups to get a credit against income tax of a percentage of
first-year wages up to $6,000 per employee ($3,000 for qualified summer youth
employees). Where the employee is a long-term family assistance (LTFA)
recipient, the WOTC is a percentage of first and second year wages, up to
$10,000 per employee. Generally, the percentage of qualifying wages is 40% of
first-year wages; it's 25% for employees who have completed at least 120 hours,
but less than 400 hours of service for the employer. For LTFA recipients, it
includes an additional 50% of qualified second-year wages.
The maximum
WOTC for hiring a qualifying veteran generally is $6,000. However, it can be as
high as $12,000, $14,000, or $24,000, depending on factors such as whether the
veteran has a service-connected disability, the period of his or her
unemployment before being hired, and when that period of unemployment occurred
relative to the WOTC-eligible hiring date.
Under pre-Act
law, wages for purposes of the WOTC didn't include any amount paid or incurred
to: veterans or non-veterans who began work after Dec. 31, 2013.
New law. TIPA retroactively extends the WOTC so that it applies to
eligible veterans and non veterans who begin work for the employer before Jan.
1, 2015
The Indian
employment credit is 20% of the excess, if any, of the sum of qualified wages
and qualified employee health insurance costs (not in excess of $20,000 per
employee) paid or incurred (other than paid under salary reduction
arrangements) to qualified employees (enrolled Indian tribe members and their
spouses who meet certain requirements) during the tax year, over the sum of
these same costs paid or incurred in calendar year '93.
Under pre-Act
law, the credit didn't apply for any tax year beginning after Dec. 31, 2013.
New law. TIPA retroactively extends the Indian employment credit for one
year to tax years beginning before Jan. 1, 2015.
A new markets
tax credit applies for qualified equity investments to acquire stock in a
community development entity (CDE). The credit is: (1) 5% for the year in which
the equity interest is purchased from the CDE and for the first two anniversary
dates after the purchase (for a total credit of 15%), plus (2) 6% on each
anniversary date thereafter for the following four years (for a total of 24%).
Under pre-Act
law, there was a $3.5 billion cap on the maximum annual amount of qualifying
equity investments for 2010, 2011, 2012 and 2013. However, a carryover was
allowed where the credit limitation for a calendar year exceeded the aggregate
amount allocated for the year, but no amount could be carried over to any
calendar year after 2018.
New law. TIPA retroactively extends the new markets tax credit for one
year, through 2014.
Eligible small
business employers that pay differential wages-payments to employees for
periods that they are called to active duty with the U.S. uniformed services
(for more than 30 days) that represent all or part of the wages that they would
have otherwise received from the employer-can claim a credit. This differential
wage payment credit is equal to 20% of up to $20,000 of differential pay made
to an employee during the tax year. An eligible small business employer is one
that: (1) employed on average less than 50 employees on business days during
the tax year; and (2) under a written plan, provides eligible differential wage
payments to each of its qualified employees. A qualified employee is one who
has been an employee for the 91-day period immediately preceding the period for
which any differential wage payment is made.
Under pre-Act
law, the credit was not available for differential wages paid after Dec. 31,
2013.
New law. TIPA retroactively extends the credit for one year to
differential wages paid before Jan. 1, 2015.
Enhanced
Deduction for Food Inventory Extended
A taxpayer
engaged in a trade or business is eligible to claim an enhanced deduction for
donations of food inventory. A C corporation's deduction equals the lesser of
(a) basis plus half of the property's appreciation, or (b) twice the property's
basis, for contributions of food inventory that was apparently wholesome
food-i.e., meant for human consumption and meeting certain quality and labeling
standards. For a taxpayer other than a C corporation, the aggregate amount of
contributions of apparently wholesome food that may be taken into account for
the tax year can't exceed 10% of the taxpayer's aggregate net income for that
tax year from all trades or businesses from which those contributions were made
for that tax year.
Under pre-Act
law, this enhanced charitable deduction didn't apply for contributions after
Dec. 31, 2013.
New law. TIPA retroactively extends the apparently wholesome food
contribution rules for one year to contributions made before Jan. 1, 2015.
Under the domestic
production activities deduction, a taxpayer is allowed a deduction from taxable
income (or adjusted gross income, in the case of an individual) that is equal
to 9% of the lesser of the taxpayer's qualified production activities income
(QPAI) or taxable income for the tax year. QPAI is generally domestic
production gross receipts (DPGR) reduced by the sum of: (1) the costs of goods
sold that are allocable to those receipts; and (2) other expenses, losses, or
deductions which are properly allocable to those receipts. The amount of the
deduction for a tax year is limited to 50% of the wages paid by the taxpayer,
and properly allocable to DPGR, during the calendar year that ends in the tax
year. Wages paid to bona fide residents of Puerto Rico generally are not
included in wages for purposes of computing the wage limitation amount.
A taxpayer has DPGR from: (1) any sale,
exchange or other disposition, or any lease, rental or license, of qualifying
production property manufactured, produced, grown or extracted by the taxpayer
in whole or in significant part within the U.S.; (2) any sale, exchange, etc.,
of qualified films produced by the taxpayer; (3) any sale, exchange or other
disposition of electricity, natural gas, or potable water produced by the
taxpayer in the U.S.; (4) construction activities performed in the U.S.; or (5)
engineering or architectural services performed in the U.S. for construction
projects located in the U.S.
Under pre-Act
law, for the first eight years of a taxpayer beginning after Dec. 31, 2005 and
before Jan. 1, 2014, Puerto Rico was included in the term "U.S." in
determining DPGR, but only if all of the taxpayer's Puerto Rico-sourced gross
receipts were taxable under the federal income tax for individuals or
corporations. In computing the 50% wage limitation, the taxpayer was allowed to
take into account wages paid to bona fide residents of Puerto Rico for services
performed in Puerto Rico.
New law. TIPA extends the special domestic production activities rules
for Puerto Rico for one year through 2014. Under the Act, these special rules
for Puerto Rico apply for the first nine tax years of a taxpayer beginning
after Dec. 31, 2005 and before Jan. 1, 2015
The U.S.
parent of a foreign subsidiary engaged in a banking, financing, or similar
business is eligible for deferral of tax on that subsidiary's earnings if the
subsidiary is predominantly engaged in that business and conducts substantial
activity with respect to the business. The subsidiary also has to pass an
entity level income test to demonstrate that the income is active income and
not passive income. Thus, this income from the active conduct of a banking,
financing or similar business, or from the conduct of an insurance business
(collectively referred to as "active financing income") is excluded
from the definition of Subpart F income.
Under pre-Act
law, this exception applied for tax years of foreign corporations beginning
after Dec. 31, '98 and before Jan. 1, 2014, and tax years of U.S. shareholders
with or within which such tax years of the foreign corporations end.
New law. TIPA retroactively extends the exclusions for active financing
income for one year to tax years of a foreign corporation beginning after Dec.
31, 2013 and before Jan. 1, 2015, and tax years of U.S. shareholders with or
within which such tax years of foreign corporations ended.
Look-Through
Rule for Payments Between Related CFCs under Foreign Personal Holding Company
Income Rules Extended
For tax years
beginning before Jan. 1, 2014, dividends, interest, rents, and royalties
received by one controlled foreign corporation (CFC) from a related CFC are not
treated as foreign personal holding company income (FPHCI) to the extent
attributable or properly allocable to non-subpart-F income, or income that was
not effectively connected with the conduct of a U.S. trade or business of the
payor (look-through treatment).
Under pre-Act
law, this look-thru rule applied to tax years of foreign corporations beginning
after Dec. 31, 2005 and before Jan. 1, 2014, and to tax years of U.S.
shareholders with or within which such tax years of foreign corporations ended.
New law. TIPA retroactively extends look-through treatment for related
CFCs for one year, to tax years of a foreign corporation before Jan. 1, 2015,
and tax years of U.S. shareholders with or within which such tax years of
foreign corporations end
An S
corporation generally is not subject to tax, but instead passes through its
income to its shareholders, who pay tax on their pro-rata shares of the S
corporation's income. Where a corporation that was formed as a C corporation
elects to become an S corporation (or where an S corporation receives property
from a C corporation in a nontaxable carryover basis transfer), the S
corporation is taxed at the highest corporate rate (currently 35%) on all gains
that were built-in at the time of the election if the gain is recognized during
a recognition period.
Under pre-Act
law, for S corporation tax years beginning in 2012 and 2013, the recognition
period was five years (instead of the generally applicable ten year period).
Thus, the recognition period was the five-year period beginning with the first
day of the first tax year for which the corporation was an S corporation (or
beginning with the date of acquisition of assets if the rules applicable to
assets acquired from a C corporation applied). If an S corporation disposed of
such assets in a tax year beginning in 2012 or 2013 and the disposition
occurred more than five years after the first day of the relevant recognition
period, gain or loss on the disposition wasn't taken into account in
determining the net recognized built-in gain.
New law. TIPA provides that for determining the net recognized built-in
gain for tax years beginning in 2014, the recognition period is a 5-year
period-the same rule that applied to tax years beginning in 2012 and 2013
A taxpayer may
exclude all of the gain on the disposition of qualified small business stock
acquired after Sept. 27, 2010 and before Jan. 1, 2014. None of the excluded
gain is subject to the alternative minimum tax.
Under pre-Act
law, the exclusion was to be limited to 50% of gain for stock acquired after
Dec. 31, 2013, and 7% of the excluded gain was to be an alternative minimum tax
preference.
New law. The Act extends the 100% exclusion and the exception from
minimum tax preference treatment for one year (i.e., for stock acquired before
Jan. 1, 2015).
Before the
Pension Protection Act of 2006 (PPA), if an S corporation contributed money or
other property to a charity, each shareholder took into account his pro rata
share of the fair market value of the contributed property in determining his
own income tax liability. The shareholder reduced his basis in his S stock by
the amount of the charitable contribution that flowed through to him. The PPA
amended this rule to provide that the amount of a shareholder's basis reduction
in S stock by reason of a charitable contribution made by the corporation is
equal to his pro rata share of the adjusted basis of the contributed property.
Under pre-Act
law, the PPA rule did not apply for contributions made in tax years beginning
after Dec. 31, 2013.
New law. TIPA retroactively extends the PPA rule for one year so that it
applies for contributions made in tax years beginning before Jan. 1, 2015
For 2006-2013,
interest, rent, royalties, and annuities paid to a tax-exempt organization from
a controlled entity are excluded from the unrelated business taxable income
(UBTI) of the tax-exempt organization, to the extent the payment reduced the
net unrelated income (or increased any net unrelated loss) of the controlled
entity.
For payments
made pursuant to a binding written contract in effect on Aug. 17, 2006 (or
renewal of such a contract on substantially similar terms), the above rule
applies only to the portion of payments received or accrued in a tax year that
exceeds the amount of the payment that would have been paid or accrued if the
amount of such payment had been determined under the principles of Code Sec. 482 (i.e., at arm's length). A 20% penalty applies to
that excess.
Under pre-Act
law, these rules didn't apply to payments received or accrued after Dec. 31,
2013.
New law. TIPA retroactively extends these rules for one year, so that
they apply for payments received or accrued by a tax-exempt organization
through Dec. 31, 2014
Qualified zone
academy bonds are qualified tax credit bonds designed to allow low-income
populations to save on interest costs associated with public financing school
renovations, repairs, and teacher training. A taxpayer holding a qualified zone
academy bond on the "credit allowance date" is entitled to a credit.
Under pre-Act
law, except for carryovers of unused issuance limitations, the national bond
volume limitation was $400 million for 2011, 2012, and 2013.
New law. TIPA provides that the national bond volume limitation is $400
million per year for 2011 through 2014. (
Under pre-Act
law, a regulated investment company (RIC) may designate and pay (1)
interest-related dividends out of interest that would generally not be taxable
when received directly by a nonresident alien individual or foreign corporation
and (2) short-term capital gains dividends out of short-term capital gains. RIC
dividends designated as interest-related dividends and short-term capital gains
dividends are generally not taxable when received by a nonresident alien
individual or foreign corporation and aren't subject to the withholding tax
imposed on nonresident alien individuals and foreign corporations.
Under pre-Act
law, these provisions didn't apply to dividends with respect to any tax year of
a RIC beginning after Dec. 31, 2013.
New law. TIPA retroactively extends the rules exempting from gross basis
tax and withholding tax the interest-related dividends and short-term capital
gain dividends received from a RIC, for dividends with respect to tax years of
a RIC beginning before Jan. 1, 2015.
Gain from the
disposition of a U.S. real property interest (USRPI) by a foreign person is
treated as income effectively connected with a U.S. trade or business and is
subject to tax and to Code Sec. 1445 withholding under the Foreign Investment in Real
Property Tax Act (FIRPTA) provisions. A USRPI does not include an interest in a
domestically controlled "qualified investment entity."
Under pre-Act
law, before Jan. 1, 2014, a RIC that met certain requirements could be treated
as a "qualified investment entity."
New law. TIPA retroactively extends the inclusion of a RIC within the
definition of a "qualified investment entity" for one year, through
Dec. 31, 2014.
