This is the time of year when Washington considers last-minute tax legislation. Other realities in Washington and the world often distract from this activity and this year is no different. The conflicts in the Middle East, the 2016 political campaign and the leadership changes in Congress all weigh on the ability to approve legislation the president may sign into enactment.
For years there has been discussion of comprehensive tax reform but differing opinions of what tax reform means and the stalemate in Washington haven’t created a positive environment for progress.
Meanwhile, inversions, base erosion and profit shifting and other tax developments have garnered the headlines with respect to the tax landscape. Also, an economic slowdown in China, a strong U.S. dollar and other economic factors have negatively impacted U.S. manufacturers that export products around the world. The Federal Reserve Board is trying to determine when and by how much to raise interest rates.
All of this uncertainty breeds more uncertainty. This includes the uncertainty around the renewal of expired tax provisions. The result of all this tax uncertainty may impact business decisions.
The current mode of operation in Washington is to renew many expiring tax provisions nearly a year after they expire. This can’t be helpful when some business decisions are impacted by how the Tax Code will treat an item.
For example, several favorable depreciation provisions expired at midnight as we entered the New Year Jan. 1. This includes the bonus depreciation for qualified personal property additions. This enhanced depreciation allows a 50 percent first-year deduction for the cost of certain assets. This provision has been in the Tax Code for a number of years and has been renewed in the past. The logic behind it was, in part, to be an economic incentive for businesses to purchase new property and equipment.
This particular tax provision expired nearly 10 months ago, and one can wonder if the desired economic benefit of the provision is realized in the manner intended.
Other depreciation provisions also are impacted by expiration of provisions that benefit certain targeted groups of business taxpayers. This includes favorable depreciation provisions for certain qualified leasehold improvements, qualified restaurant buildings and improvements, and qualified retail improvements. This provision allows such improvements to be depreciated over a tax life of 15 years. For small business, the special expensing of certain qualified asset purchases is also up for renewal. In some cases, this expensing provision includes qualified fixed-asset additions of up to $500,000 in a tax year. Many businesses are awaiting the status of these depreciation provisions.
The other large item that expired is the research credit. While other foreign countries are enacting patent box and research and development incentives, the U.S. currently has no research credit incentive in effect. On the surface, having no credit and higher corporate income tax rates positions the U.S. as not appearing to be very competitive with respect to research incentives and corporate tax rates.
The renewal of the research tax credit literally has become an annual or bi-annual tradition in Washington. But does it need to be done this way?
There is much political rhetoric on creating and maintaining high-value jobs and on how the U.S. can keep its technological edge. At the same time, the federal tax incentives (such as the research credit) for keeping those high-value jobs in the U.S. doesn’t seem to be aligned. Many other credits have been permanently included in the Tax Code, but the research credit isn’t one of them. The research tax credit doesn’t benefit only large pharma or tech companies. It also benefits research taking place in small and medium-sized companies. The credit can apply to product research as well as manufacturing process improvements.
There are many other expiring tax provisions on the list. The Joint Committee on Taxation report provides a list of expiring tax provisions not only for the most recent year but also upcoming years. For those who actually look at the list, a few of the items may surprise them and may seem obscure. Many of the tax provisions have been around for many years yet only seem to get a one- or two-year extension each time they come up for renewal.
There is the possibility that some of these expiring tax provisions may be permanently included in the Tax Code. The fiscal cliff debate in late 2012 led to the permanent addition of the qualified dividend rate to the Tax Code. This came with a cost for maintaining the preferential tax benefits The result was an increase in the maximum long-term capital gains tax rate and the ordinary income tax rate. History may repeat itself in 2015.
In order to pay for the extension of the expiring or expired tax provisions, some fiscal engineering may be needed. Whether this will happen this time around, no one knows with any certainty. There is also the need for an increase of the debt ceiling and approving a federal budget, in addition to other items on the legislative agenda. These items all may be opportunities to move ahead with renewal of the tax provisions.
Many of the expiring tax provisions have been approved for renewal in committee in Congress, but having full legislative approval and a signature by the president still needs to be worked out. Perhaps the upcoming holidays will bring a package of renewed tax provisions.
Bill Roth is a tax partner with the local office of BDO USA LLP. The views expressed are those of the author and not necessarily of BDO. The comments are general in nature and not to be considered specific tax or accounting advice and cannot be relied upon for the purposes of avoiding penalties. Readers are advised to consult their professional advisers before acting on any items discussed herein.