Uncertain Future for Expired Tax Provisions and Limited Time Remaining for Lame Duck Action

November 25, 2014

By Catherine Murray

With only a few days remaining on Congress's 2014 legislative calendar, there is still no clear answer for whether and how Congress will deal with the nearly 60 "extender" tax provisions—the temporary provisions that have been routinely extended on a one- or two-year basis but were allowed to expire at the end of 2013.

Many, if not all, of the provisions listed below were most recently extended by the 2012 Taxpayer Relief Act (passed very early in 2013). At that time, the majority of the provisions had expired at the end of 2011 and were revived and retroactively extended by the Act through 2013.

In this respect, some of the justifications underlying the provisions—such as to encourage certain types of behavior during the tax year—were weaker given the retroactive passage and amounted more to good fortune to those who had happened to engage in such behavior during the 2012 year. Both then and now, the delay hasn't just affected taxpayers' ability to engage in forward-looking tax planning, but has almost certainly influenced actual taxpayer behavior and had economic spillover effects.

Expired provisions. 

Below are the actual extender provisions in question, arranged by subject matter.

The expired individual extender provisions include:

•    Deduction for state and local sales taxes (Code Sec. 164(b)(5));
•    $250 above-the-line deduction for certain expenses of teachers (Code Sec. 62(a)(2)(D));
•    Above-the-line deduction for qualified tuition and related expenses (Code Sec. 222);
•    Deduction for mortgage insurance premiums treated as qualified interest (Code Sec. 163);
•    Parity for exclusion for employer-provided mass transit and parking benefits (CSec. 132(f));
•    Exclusion of up to $2 million ($1 million if married filing separately) of discharged principal residence indebtedness from gross income; (Code Sec. 108); and
•    Credit for certain health insurance costs (Code Sec. 35(a)).

The expired business provisions include:

•    Research and experimentation credit (Code Sec. 41);
•    Work opportunity tax credit (Code Sec. 51, Code Sec. 52);
•    increase in expensing to $500,000 and in investment based phaseout amount to $2,000,000 and expanded definition of Section 179 property (Code Sec. 179);
•    50 percent bonus depreciation (Code Sec. 168(k));
•    Exceptions under Subpart F for active financing income (Code Sec. 953, Code Sec. 954);
•    Look-through treatment of payments between controlled foreign corporations (954(c)(6));
•    Special treatment of certain dividends of regulated investment companies (RICs) (871(k));
•    Employer wage credit for activated military reservists (Code Sec. 45P);
•    Special expensing rules for film and television production (Code Sec. 181(f));
•    Special 100 percent gain exclusion for qualified small business stock (Code Sec. 1202);
•    Reduction in S corporation recognition period for built-in gains tax (Code Sec. 1374);
•    Election to accelerate alternative minimum tax (AMT) credits in lieu of additional first-year depreciation (Code Sec. 168(k));
•    Low-income housing 9 percent credit rate freeze (extended for allocations made before Jan. 1, 2016) (Code Sec. 42);
•    Treatment of military basic housing allowances under low-income housing credit (42,142);
•    15-year straight line cost recovery for qualified leasehold property, qualified restaurant property, and qualified retail improvements (Code Sec. 168(e)(3)(E));
•    Deduction allowable with respect to income attributable to domestic production activities in Puerto Rico (Code Sec. 199);
•    Modification of tax treatment of certain payments to controlling exempt organizations (512);
•    Accelerated depreciation for business property on Indian reservations (Code Sec. 168(j)); and
•    Indian employment credit (Code Sec. 45A).

The expired charitable provisions include:

•    Enhanced charitable deduction for contributions of food inventory (Code Sec. 170);
•    Tax-free distributions for charitable purposes from individual retirement account (IRA) accounts of taxpayers age 70 1/2 or older (Code Sec. 408(d)(8));
•    Basis adjustment to stock of S corporations for charitable contributions of property (1367); 
•    Special rules for contributions of capital gain real property for conservation purposes (Code Sec. 170(b)(1)(E), Code Sec. 170(b)(2)(B)).

The expired energy provisions include:

•    Credit for construction of energy efficient new homes (Code Sec. 45L);
•    Energy efficient commercial building deduction (Code Sec. 179D(h));
•    Construction date for eligible facilities to claim production tax credit or wind credit (45(d));
•    Credit for energy efficient appliances (Code Sec. 45M(b));
•    Credit for nonbusiness energy property (Code Sec. 25C);
•    Alternative fuel vehicle refueling property (Code Sec. 30C);
•    Incentives for alternative fuel and alternative fuel mixtures (Code Sec. 6426);
•    Incentives for biodiesel and renewable diesel (Code Sec. 40A, Code Sec. 6426);
•    Placed-in-service date for partial expensing of certain refinery property (179C(c)(1));
•    Credit for electric drive motorcycles and three-wheeled vehicles (Code Sec. 30D).

Potential Courses of Action
In general, a main point of contention regarding extenders has been whether they should simply be re-extended on a cumulative basis to give taxpayers greater certainty, and then given a closer look on an individual basis as part of comprehensive tax reform, or whether each provision should be evaluated on its merits prior to any extension.

While most parties seem to agree on the ideological merits of addressing them as part of greater reform efforts, the fact that there has been little to no action taken on substantive tax reform over the last year—combined with the growing difficulty in finding political consensus—may undermine this approach.

In addition, there has been significant disagreement over certain provisions as of late (such as the wind credit) that may preclude passage of a cumulative extenders bill. Specifically, there have been reports that some House Republicans would decline to pass any extenders bill that contains provisions they find objectionable and instead take up the fate of extenders in January, when Republicans will also control the Senate.

Earlier this year, the Expiring Provisions Improvement Reform and Efficiency (EXPIRE) Act had some momentum, but ultimately stalled in the Senate when Sen. Harry Reid, D-Nev., engaged in a procedural move that blocked senators from offering amendments to the bill. The bill, which was bipartisan but generally reflected what is viewed as the Democrats' approach to extenders, would have extended the above expired provisions for an additional two years. There has been some indication that the EXPIRE Act could serve as the basis of whatever agreement is potentially forged during the lame duck session.

There have also been a series of bills introduced throughout the year to extend or make permanent one, or several, of the extender provisions, including the research credit and bonus depreciation. These bills generally reflect the Republicans' approach to extenders—i.e., to make a select number of provisions permanent rather than a short-term extension of all of the provisions as a package. It is possible that these bills could also re-surface in the coming weeks.

The President had indicated at the time his intention to veto these bills on the basis that it made provisions permanent without budget offsets. (At this late stage in the game, however, the lack of an offset for extending provisions or even making some permanent might not be an impediment to passage.)

Potential Consequences of Inaction
IRS Commissioner John Koskinen, in a now annually expected warning, said that stalled extender legislation could result in a late start to the upcoming filing season. Further, he said that if Congress doesn't pass extender legislation until 2015, this could cause significant service disruptions and the need for millions of taxpayers to file amended returns. It could also delay refunds, which could in turn have a negative impact on the economy.

Additionally, numerous businesses and business organizations have spoken out about how they would be affected by inaction. In a letter sent to members of Congress, over 500 business groups stated that extenders are "critically important to U.S. jobs and the broader economy" and characterized the failure to extend them as a "tax increase" that would "inject instability and uncertainty into the economy and weaken confidence in the employment marketplace."