Tax Relief And Health Care Act of 2006 Summary
(Source: BNA)
The House, in December 8 approved, by a 367-45 vote, a $45 billion package (H.R. 6111) which includes an extension of certain expiring tax provisions, energy tax provisions, health savings account modifications, and other tax breaks. The Act also expands the jurisdiction of the Tax Court to include “stand alone” petitions for innocent spouse relief. The Senate, on December 9, passed the Act by a vote of 79-9. At press time, the President had not yet signed the Act, but was expected to do so on December 20.
The primary tax-related provisions of the Act are summarized below.
DIVISION A–EXTENSION AND EXPANSION OF CERTAIN TAX RELIEF PROVISIONS, AND OTHER TAX PROVISIONS
TITLE I–EXTENSION AND MODIFICATION OF CERTAIN PROVISIONS
Deduction for Qualified Tuition and
Related Expenses
The Act extends the above-the-line tuition deduction for two years, through December 31, 2007. Effective for taxable years beginning after December 31, 2005.
Extension and Modification of New Markets
Tax Credit
The Act extends the new markets tax credit through 2008, permitting up to $3.5 billion in qualified equity investments for that calendar year. The Act also requires that the Secretary of the Treasury prescribe regulations to ensure that non-metropolitan counties receive a proportional allocation of qualified equity investments. Effective on the date of enactment.
Election to Deduct State and Local
General Sales Taxes
The Act allows taxpayers to elect to deduct state and local sales taxes in lieu of state and local income taxes for an additional two years (through December 31, 2007). Effective for taxable years beginning after December 31, 2005.
Extension and Modification of Research Credit
The Act extends the research credit two years (for amounts paid or incurred after December 31, 2005, and before January 1, 2008).
The Act also makes modifications to the research credit for one year (for amounts paid or incurred after December 31, 2006, and before January 1, 2008). The Act increases the rates of the alternative incremental credit: (1) a credit rate of 3% (rather than 2.65%) applies to the extent that a taxpayer’s current-year research expenses exceed a base amount computed by using a fixed-base percentage of 1% (i.e., the base amount equals 1% of the taxpayer’s average gross receipts for the four preceding years) but do not exceed a base amount computed by using a fixed-base percentage of 1.5%; (2) a credit rate of 4% (rather than 3.2%) applies to the extent that a taxpayer’s current-year research expenses exceed a base amount computed by using a fixed-base percentage of 1.5% but do not exceed a base amount computed by using a fixed-base percentage of 2%; and (3) a credit rate of 5% (rather than 3.75%) applies to the extent that a taxpayer’s current-year research expenses exceed a base amount computed by using a fixed-base percentage of 2%.
The Act also creates, at the election of the taxpayer, an alternative simplified credit for qualified research expenses. The alternative simplified research is equal to 12% of qualified research expenses that exceed 50% of the average qualified research expenses for the three preceding taxable years. The rate is reduced to 6% if a taxpayer has no qualified research expenses in any one of the three preceding taxable years. An election to use the alternative simplified credit applies to all succeeding taxable years unless revoked with the consent of the Secretary.
An election to use the alternative simplified credit may not be made for any taxable year for which an election to use the alternative incremental credit is in effect. A special transition rule applies which permits a taxpayer to elect to use the alternative simplified credit in lieu of the alternative incremental credit if such election is made during the taxable year which includes the date of enactment of the provision. The transition rule only applies to the taxable year which includes the date of enactment.
The extension of the research credit is effective to amounts paid or incurred after December 31, 2005. The modification of the alternative incremental credit and the creation of the alternative simplified credit is effective for amounts paid or incurred after December 31, 2006.
Work Opportunity Tax Credit and
Welfare-to-Work Credit
The Act extends the work opportunity tax credit and welfare-to-work tax credit for one year without modification, respectively (for qualified individuals who begin work for an employer after December 31, 2005, and before January 1, 2007).
For qualified individuals who begin work for an employer after December 31, 2006, and before January 1, 2008, the Act combines and extends the two credits for a second year.
The combined credit (to be known as the work opportunity credit as the welfare-to-work credit is repealed) is available on an elective basis for employers hiring individuals from one or more of nine targeted groups. The nine targeted groups are the present-law eight groups under the work opportunity credit with the addition of the long-term family assistance recipient under the former welfare-to-work credit as the ninth targeted group. The Act repeals the requirement that a qualified ex-felon be an individual certified as a member of an economically disadvantaged family. The Act raises the age limit for the food stamp recipient category to include individuals aged 18 but not aged 40 on the hiring date.
Qualified first-year wages for the eight work opportunity tax credit categories remain capped at $6,000 ($3,000 for qualified summer youth employees). No credit is allowed for second-year wages. In the case of long-term family assistance recipients, the cap is $10,000 for both qualified first-year wages and qualified second-year wages. The combined credit follows the work opportunity tax credit definition of wages which does not include amounts paid by the employer for: (1) educational assistance excludible under a §127 program (or that is excludible but for the expiration of §127); (2) health plan coverage for the employee, but not more than the applicable premium defined under §4980B(f)(4); and (3) dependent care assistance excludible under §129. For all targeted groups, the employer’s deduction for wages is reduced by the amount of the credit.
For purposes of calculating the credit for first-year wages, the Act provides that for the eight work opportunity tax credit categories, the credit equals 40% (25% for employment of 400 hours or less) of qualified first-year wages. In the case of second-year wages for long-term family assistance recipients the maximum credit is $5,000 (50% of the first $10,000 of qualified second-year wages).
The Act denies a credit if the employee works less than 120 hours in the first year of employment.
The extension of the credits is effective for wages paid or incurred to a qualified individual who begins work for an employer after December 31, 2005, and before January 1, 2008. The consolidation of the credits and other modifications are effective for wages paid or incurred to a qualified individual who begins work for an employer after December 31, 2006, and before January 1, 2008.
Election to Include Combat Pay as Earned Income for Purposes of Earned Income Credit
The Act extends for one year (through December 31, 2007) the availability of the election to treat combat pay that is otherwise excluded from gross income under §112 as earned income for purposes of the earned income credit. Effective in taxable years beginning after December 31, 2006.
Extension and Modification of Qualified Zone Academy Bonds
The Act extends the present-law QZAB provision for two years (through December 31, 2007). In addition, the Act imposes the arbitrage requirements of §148 that apply to interest-bearing tax-exempt bonds to qualified zone academy bonds. The Act also imposes new spending requirements for qualified zone academy bonds. In addition, issuers of qualified zone academy bonds are required to report issuance to the IRS in a manner similar to the information returns required for tax-exempt bonds.
The extension of issuance authority is effective for bonds issued after December 31, 2005. The imposition of arbitrage restrictions, reporting requirements, and spending requirements apply to bonds issued after the date of enactment with respect to allocations of the annual aggregate bond cap for calendar years after 2005.
Above-the-Line Deduction for Certain Expenses of Elementary and Secondary School Teachers
The Act extends the above-the-line teachers’ deduction for two years, through December 31, 2007. Effective for expenses paid or incurred in taxable years beginning after December 31, 2005.
Extension and Expansion of Expensing of Brownfields Remediation Costs
The Act extends for two years the present-law provisions relating to environmental remediation expenditures (through December 31, 2007). In addition, the Act expands the definition of hazardous substance to include petroleum products (as defined by reference to §4612(a)(3), and thus include crude oil, crude oil condensates and natural gasoline). Effective for expenditures paid or incurred after December 31, 2005, and before January 1, 2008.
Tax Incentives for Investment in the
District of Columbia
[Act §110; Code §§1400, 1400A, 1400B, 1400C]
The Act extends the designation of the D.C. Zone for two years (through December 31, 2007). This, in turn, extends the wage credit and §179 expensing for two years. The Act extends the tax-exempt financing authority for two years, applying to bonds issued during the period beginning on January 1, 1998, and ending on December 31, 2007. The Act also extends the zero-percent capital gains rate applicable to capital gains from the sale of certain qualified D.C. Zone assets for two years. In addition, the Act extends the first-time homebuyer credit for two years, through December 31, 2007. Effective for periods beginning after, bonds issued after, acquisitions after, and property purchased after December 31, 2005.
The Act extends for two years the present-law employment credit provision (through taxable years beginning on or before December 31, 2007). Effective for taxable years beginning after December 31, 2005.
Accelerated Depreciation for Business Property on Indian Reservations
The Act extends for two years the present-law incentive relating to depreciation of qualified Indian reservation property (to apply to property placed in service through December 31, 2007). Effective for property placed in service after December 31, 2005.
Fifteen-Year Straight-Line Cost Recovery for Qualified Leasehold Improvements and Qualified
Restaurant Property
The Act extends for two years (through December 31, 2007) the MACRS recovery period for qualified leasehold improvement property and qualified restaurant property. Effective for property placed in service after December 31, 2005.
Cover Over of Tax on Distilled Spirits
The Act temporarily suspends the $10.50 per proof gallon limitation on the amount of excise taxes on rum covered over to Puerto Rico and the Virgin Islands. Under the Act, the cover over amount of $13.25 per proof gallon is extended for rum brought into the United States after December 31, 2005, and before January 1, 2008. After December 31, 2007, the cover over amount reverts to $10.50 per proof gallon. Effective for articles brought into the United States after December 31, 2005.
Parity in Application of Certain Limits to Mental Health Benefits
The Act extends the present-law Code excise tax for failure to comply with the mental health parity requirements through December 31, 2007. It also extends the ERISA and PHSA requirements through December 31, 2007. Effective on the date of enactment.
Corporate Donations of Scientific Property Used for Research and of Computer Technology Equipment
The Act extends the present-law provision relating to the enhanced deduction for computer technology and equipment for two years to apply to contributions made during any taxable year beginning after December 31, 2005, and before January 1, 2008. Under the Act, property assembled by the taxpayer, in addition to property constructed by the taxpayer, is eligible for either the enhanced deduction relating to computer technology and equipment or to scientific property used for research. It is not intended that old or used components assembled by the taxpayer into scientific property or computer technology or equipment are eligible for the enhanced deduction. Effective for taxable years beginning after December 31, 2005.
Availability of Medical Savings Accounts
The Act extends the present-law Archer MSA provisions through December 31, 2007. The report required by Archer MSA trustees is treated as timely filed if made before the close of the 90-day period beginning on the date of enactment. Effective on the date of enactment.
Taxable Income Limit on Percentage Depletion for Oil and Natural Gas Produced from Marginal Properties
The Act extends for two years the present-law taxable income limitation suspension provision for marginal production (through taxable years beginning on or before December 31, 2007). Effective for taxable years beginning after December 31, 2005.
American Samoa Economic Development Credit
[Act §119; related to Code §§30A, 936]
The Act provides that a domestic corporation that is an existing credit claimant with respect to American Samoa and that elected the application of §936 for its last taxable year beginning before January 1, 2006, is allowed, for two taxable years, a credit using modified rules of §30A. The amount of the credit allowed to a qualifying domestic corporation under the Act is equal to the sum of the amounts used in computing the corporation’s economic activity-based limitation (as defined in §30A) with respect to American Samoa, except that no credit is allowed for the amount of any American Samoa income taxes. Thus, for any qualifying corporation the amount of the credit equals the sum of: (1) 60% of the corporation’s qualified American Samoa wages and allocable employee fringe benefit expenses; and (2) 15% of the corporation’s depreciation allowances with respect to shortlife qualified American Samoa tangible property, plus 40% of the corporation’s depreciation allowances with respect to medium-life qualified American Samoa tangible property, plus 65% of the corporation’s depreciation allowances with respect to long-life qualified American Samoa tangible property.
Under the Act, the §936(c) rule denying a credit or deduction for any possessions or foreign tax paid with respect to taxable income taken into account in computing the credit under §936 does not apply with respect to the credit allowed by the provision.
Effective for the first two taxable years of a corporation which begin after December 31, 2005, and before January 1, 2008.
Extension of Bonus Depreciation for Certain Qualified Gulf Opportunity Zone Property
The Act extends the placed-in-service deadline for specified Gulf Opportunity Zone extension property to qualify for the additional first-year depreciation deduction. Specified Gulf Opportunity Zone extension property is defined as property substantially all the use of which is in one or more specified portions of the Gulf Opportunity Zone and which is either: (1) nonresidential real property or residential rental property which is placed in service by the taxpayer on or before December 31, 2010; or (2) in the case of a taxpayer who places in service a building described in (1), above, property described in §168(k)(2)(A)(i) if substantially all the use of such property is in such building and such property is placed in service within 90 days of the date the building is placed in service. The specified portions of the Gulf Opportunity Zone are those portions of the Gulf Opportunity Zone which are in a county or parish which is identified by the Secretary of the Treasury (or his delegate) as being a county or parish in which hurricanes occurring in 2005 damaged (in the aggregate) more than 60% of the housing units in such county or parish which were occupied (determined according to the 2000 Census). However, in the case of nonresidential real property or residential rental property, only the adjusted basis of such property attributable to manufacture, construction, or production before January 1, 2010 (“progress expenditures”) is eligible for the additional first-year depreciation.
Effective as if included in §101 of the Gulf Opportunity Zone Act of 2005, P.L. 109-73 (property placed in service on or after August 28, 2005, in taxable years ending on or after such date).
Authority for Undercover Operations
The Act extends the authority of the IRS to conduct undercover operations until 2008.
Disclosures of Certain Tax Return Information
The Act: (1) extends the authority of the IRS to make disclosures to state tax officials and state and local law enforcement authorities through 2007 (§6013(d)(5)(B)); (2) extends the authority of the IRS to make disclosures relating to terrorist activities through 2007 (§6103(i)(3)(C)(iv) and (i)(7)(E)); and (3) extends the authority of the IRS to make disclosures to the Secretary of Education in connection with student loans through 2007 (§6013(l)(13)(D)).
Special Rule for Elections Under Expired Provisions
The Act provides that, in the case of any taxable year which ends after December 31, 2005 and before the date of enactment of the Act, an election under §41(c)(4), §280C(c)(3)(C), or any other expired provision of the Code which is extended by the Act is treated as timely if made not later than April 15, 2007, or such other time as the Secretary or his designee provide. The election must be made in the manner prescribed by the Secretary or his designee.
Effective on the date of enactment.
TITLE II–ENERGY TAX PROVISIONS
Credit for Electricity Produced from Certain Renewable Sources
The Act extends the renewable energy credit to apply to qualified facilities placed in service before January 1, 2009.
Credit to Holders of Clean Renewable Energy Bonds
The Act extends the clean renewable energy bonds credit to include bonds issued before January 1, 2009. It also raises the caps on the amount of bonds that may be issued and the amount that may be used to finance projects of governmental bodies.
This provision applies to bonds issued after December 31, 2006, or to allocations or reallocations after that date.
Performance Standards for Sulfur Dioxide Removal in Advanced Coal-Based Generation Technology Units Designed to Use Subbituminous Coal
The Act adds a performance standard for sulfur dioxide removal in electric generation units designed to use subbituminous coal.
This provision applies with respect to §46A(d)(2) applications for certification submitted after October 2, 2006.
Deduction for Energy Efficient Commercial Buildings
The Act extends the deduction for energy efficient commercial buildings for one year, to include property placed in service before January 1, 2009.
Effective for property placed in service after December 31, 2007.
Credit for New Energy Efficient Homes
The Act extends the credit for new energy efficient homes for one year, for homes acquired by December 31, 2008.
Effective for qualified new energy efficient homes acquired after December 31, 2007.
Credit for Residential Energy Efficient Property
The Act extends the credit for residential energy efficient property for one year, through December 31, 2008. The Act also clarifies the term “qualified photovoltaic property expenditures” by replacing it with “qualified solar electric property expenditures,” but does not change the definition of the term.
Credit extension effective for property placed in service after December 31, 2007; clarification effective for property placed in service after December 31, 2005, in tax years ending after that date.
The Act extends for one year, through December 31, 2008, the energy credit for: (1) equipment that uses solar energy to generate electricity, to heat or cool a structure, or to provide solar process heat, (2) equipment that uses solar energy to illuminate the inside of a structure using fiber-optic distributed sunlight, (3) qualified fuel cell property, and (4) qualified microturbine property.
Special Rule for Qualified Methanol or Ethanol Fuel
The Act extends through December 31, 2008: (1) the reduced excise tax rate on qualified methanol or ethanol fuel sold for use in, or used in, a motor vehicle or motorboat; and (2) the special applicable blender rate for purposes of that reduced excise tax rate. Thus, for purposes of that reduced excise tax rate, the applicable blender rate for sales or uses during calendar years 2001 through 2008 is one-tenth of the blender amount applicable under the alcohol fuels credit for ethanol blenders.
Special Depreciation Allowance for Cellulosic Biomass Ethanol Plant Property
The Act provides an additional first-year depreciation allowance for depreciable property used in the United States solely to produce cellulosic biomass ethanol, provided that the property’s original use begins with the taxpayer after the date of enactment, the taxpayer acquires it by purchase after the date of the enactment, and it is placed in service by the taxpayer before 2013. This additional allowance, in the amount of 50% of the property’s adjusted basis, is allowed for the taxable year in which the property is placed in service. The property’s adjusted basis is reduced by the deduction amount before computing the otherwise allowable depreciation deduction for that taxable year and later taxable years. The allowance does not apply to alternative depreciation property or to tax-exempt bond financed property. Taxpayers may elect out of the additional allowance with respect to any class of property for any taxable year. For purposes of determining alternative minimum taxable income, the additional depreciation allowance is allowed in full.
Effective for property placed in service after the date of the enactment in taxable years ending after that date.
Expenditures Permitted from the Leaking Underground Storage Tank Trust Fund
The Act authorizes the 0.1 cent per-gallon Leaking Underground Storage Tank (“LUST”) Trust Fund tax amounts to be used to carry out the following provisions of the Solid Waste Disposal Act (as in effect on January 10, 2006):
• §9003(i) (relating to measures to protect ground water);
• §9003(j) (relating to compliance of government-owned tanks);
• §9004(f) (relating to 80 percent distribution requirement for State enforcement efforts);
• §9005(c) (relating to inspection of underground storage tanks);
• §9010 (relating to operator training);
• §9011 (relating to funds for release prevention and compliance);
• §9012 (relating to the delivery prohibition for ineligible tanks/guidance/compliance); and
• §9013 (relating to strategy for addressing tanks on tribal lands).
The Code continues to authorize the use of amounts in the LUST Trust Fund to carry out the purposes of §9003(h) of the Solid Waste Disposal Act (as in effect on January 10, 2006, the date of enactment of P.L. 109-168).
Effective on the date of enactment.
Treatment of Coke and Coke Gas
The Act provides that the phaseout provision of §45K (the nonconventional fuel source credit) is inapplicable to facilities producing coke or coke gas. Further, the Act carves out facilities producing coke or coke gas from petroleum based products from the definition of qualifying facilities. Effective as if included in the 2005 Energy Policy Act, P.L. 109-58, §1321.
Repeal of Annual Deductible Limitation on HSA Contributions
The Act modifies the limit on the annual deductible contributions that can be made to an HSA so that the maximum deductible contribution is not limited to the annual deductible under the high deductible health plan.
Effective for taxable years beginning after December 31, 2006.
Modification of Cost-of-Living Adjustment
Under the Act, in the case of adjustments made for any taxable year beginning after 2007, the Consumer Price Index for a calendar year is determined as of the close of the 12-month period ending on March 31 of the calendar year (rather than August 31) for the purpose of making cost-of-living adjustments for the HSA dollar amounts that are indexed for inflation (i.e., the contribution limits and the high deductible health plan requirements). The Act also requires the Secretary of Treasury to publish the adjusted amounts for a year no later than June 1 of the preceding calendar year.
Effective for adjustments made for taxable years beginning after 2007.
Title III: Health Savings Accounts (see the entry about this topic)
See more about this Act under the entry tax relief for healthcare workers.
See more about this Act under the entry Tax Relief and Health Care Act of 2006.
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