Updated: December 20, 2015
On Friday, December 18, 2015, Congress passed an enormous legislative package that included a $1.1 trillion “Omnibus” Spending bill and a $633 million “Tax Extenders” package.
The “Extenders” package contained a long list of tax provisions for individuals and businesses.
What is a “Tax Extender”?
“Tax Extenders” are carve-outs in the tax code that give special treatment to certain activities. They have typically been authorized for only one year and had to be “extended” every year. This annual exercise creates uncertainty for those impacted by the provisions — and a boon to lobbyists whose job it is to make sure their clients’ extensions made it into the bill each year.
If you are a lobbyist, this history represents scalps on your belt (and client fees in your pocket). If you are a member of Congress, it is the gift that keeps on giving—countless Washington reps and their clients attending endless fundraisers, all filling your campaign coffers, election after election. – Howard Gleckman, contributor to Forbes
The near-automatic exercise of extending these provisions each year makes “getting into the extenders package” a goal for those who champion one-off provisions that benefit a narrow group. From the Research and Development (R&D) credit to encourage business innovation; the production tax credit (wind energy) and the solar tax credit that were enacted to encourage alternative energy; “bonus depreciation” for business capital expenditures, a $250 deduction for teachers who spend money out of pocket for classroom materials, low income and new market tax credits to encourage development of affordable housing and in underserved areas, and many many many more.
Over time, as new temporary provisions have been routinely extended and hence added to this package, the number of provisions that might be considered “tax extenders” has grown.” — Congressional Research Service)
Each extender has its champion and its constituency. The “package” practice brings strange bedfellows together in an “I won’t cut yours if you won’t cut mine” pact within the committees of jurisdiction.
Extenders and the quest for Tax Reform
While those committees — Ways and Means in the House and the Finance Committee in the Senate — undoubtedly benefit from the attention and lobbying scramble of the tax extenders dance, it drives their members and staffers crazy. Decades of committee meetings chronicle the complaints and laments of a ridiculous system. Chairmen of both parties, including now-Speaker Paul Ryan, have worked on tax reform packages that would have eliminated the Extenders for good as a part of larger reforms.
The quest for the great Tax Reform victory has played at least some part in thwarting many less ambitious plans over the years to rein in Extenders (a story that is familiar to those who watch the Immigration issue closely and its tension between those who advocate incremental-vs.-comprehensive efforts.)
The “Pay-Go” Challenge
The related challenge that has perpetuated the Extenders debacle is “PAY-GO.”
For several years, Congress has loosely abided by “pay-go” rules, meaning you can’t spend money without finding a way to pay for it. While not a straight appropriation, a tax break is still technically “spending” money in the world of the federal budget. Even a small tax break starts to look huge when you look at cost over many years. (Most legislative budget estimates are in ten-year chunks.) To avoid that big number (and the need to find a big “pay-for”), Congressional tax writers have consistently passed this long list of tax provisions for just one year at a time.
The strange status of these tax breaks is a testament to budget gamesmanship. Lawmakers say they want at least some of the provisions to be a permanent part of the code. But Congress’ budgeting rules require lawmakers to consider the 10-year cost of any new provision—and viewed through that lens, these breaks suddenly seem too costly for many lawmakers to pass. So they approve them as one- or two-year “extenders,” slashing the apparent price tag, and they slide right through. — Meet the Tax Extenders Politico
So what just happened in Congress?
On December 18, Congress passed a $680 million tax extenders package that “split the baby,” in legislative terms: making some provisions permanent, extending some until 2019, and others for two years, until the end of 2016.*
* Things were especially hairy this year because no extenders package was passed at the end of 2014. So, Congress had extenders apply retroactively to the 2015 tax year. That may seem strange given that many of these are intended to be “incentives” rather than rewards for actions already taken. Those who benefit from the extenders say that Congress has been doing this so consistently for so long that the extenders are already baked into many business and capital planning assumptions.
Here’s what was in the 2015 Tax Extenders package, the “Protecting Americans from Tax Hikes (PATH) Act of 2015”:
Permanent Extenders:
Personal
Child Tax Credit, American opportunity tax credit (tuition and related expenses for two years of post-secondary education), earned income tax credit, teacher’s out of pocket expense deduction $250/yr), mass transit benefits excluded from income (same as parking benefits), state and local sales tax deduction (for people who don’t pay state income tax).
Charitable
Conservation easements, tax-free IRA contributions to charity for people over age 70, deduction for donation of food inventory.
Business
Research and Development (R&D) credit, wage credit for employers of active duty military, 15-year straight-line cost recovery for qualified leasehold improvements (restaurant and retail), section 179 property expensing, 100% exclusion for gains on small business stock, low-income housing tax credit (LIHTC).
Real Estate
9% minimum credit rate for low-income housing tax credit, exclusion of military basic housing allowances for income determination for the low-income housing tax credit.
Extensions through 2019
New market tax credits; work opportunity tax credit; bonus depreciation (the most expensive tax extender, allowing half of business capital expenditures to be deducted immediately, see CRS report); look-through treatment for payments of dividends, interest, rents, and royalties between related controlled foreign corporations.
Extensions through 2016
(Expect these to show up next year as the “new” extenders package)
Individuals
Excluding “discharge of qualified principal residence indebtedness” from gross income (if, for example, an underwater mortgage sells at below fair market value, the difference is not treated as “income”); mortgage insurance premiums treated as qualified residence interest, above-the-line deduction for qualified tuition and related expenses.
Business
Indian employment tax credit, railroad track maintenance credit, mine rescue team training credit, qualified zone academy bonds, classifying certain race horses as 3-year property, 7-year recovery period for motorsports entertainment, accelerated depreciation for business property on an Indian reservation, election to expense mine safety equipment, Extension of special expensing rules for certain film and television (and — new this year — live theatre productions), eligibility of domestic gross receipts from Puerto Rico for the domestic production deduction, empowerment zone tax incentives, increase in limit on cover over of rum excise taxes to Puerto Rico and the Virgin Islands, American Samoa economic development credit, moratorium on medical device excise tax.
Energy
Credit for nonbusiness energy property (30% of costs up to $1,500 for improvements such as residential exterior doors and windows, insulation, heat pumps, furnaces, central air conditioners, and water heaters), credit for alternative fuel vehicle refueling property, $2,500 credit for 2-wheeled plug-in electric vehicles, second generation biofuel producer credit, biodiesel and renewable diesel incentives, credit for Indian coal facilities, production tax credit for certain renewable sources of electricity (including wind energy), credit for energy-efficient new homes, 50-percent bonus depreciation for cellulosic biofuel facilities, energy efficient commercial buildings deduction, 50 cents per gallon alternative fuel tax credit and alternative fuel mixture tax credit, credit for purchases of new qualified fuel cell motor vehicles.
In addition to these Extenders provisions, Congress passed several other tax provisions in the Omnibus Spending bill (passed at the same time), including:
- Repeal of the “Cadillac Tax” on high-cost health plans
- Moratorium on the annual fee on health insurers
- Delay of the Medical Device Tax
- Extension of election to treat qualified facilities as energy property
- Extension and phaseout of solar energy credit
- Extension and phaseout of credits with respect to qualified solar electric property and qualified solar water heating property
How much will this cost?
CRFB provides an excellent chart of the major provisions and costs, based on the work of the nonpartisan Joint-Tax Committee.
How will this affect you?
You knew this was coming… ask your tax professional. 🙂 In many ways, it may feel as if nothing has changed, since many of these provisions have been in place for many years.
