U.S. GOVERNMENT PUBLISHING OFFICE

WASHINGTON : 

1 

49–010 

" ! SENATE 

114TH CONGRESS

1st Session 

REPORT

2015

114–118 

Calendar No. 198 

TAX RELIEF EXTENSION ACT OF 2015 

R E P O R T 

[TO ACCOMPANY S. 1946]

TO AMEND THE INTERNAL REVENUE CODE OF 1986 TO EXTEND 

CERTAIN EXPIRING PROVISIONS, AND FOR OTHER PURPOSES 

COMMITTEE ON FINANCE 

UNITED STATES SENATE 

AUGUST 5, 2015.—Ordered to be printed 


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C O N T E N T S 

Page 

I. LEGISLATIVE BACKGROUND ..................................................................... 1 

II. EXPLANATION OF THE BILL ...................................................................... 1 

A. Sense of the Senate (sec. 2 of the bill) ................................................ 1 

TITLE I—PROVISIONS THAT EXPIRED IN 2014 ............................................. 2 

A. Individual Tax Extenders .................................................................... 2 

1. Extension and modification of deduction for certain expenses 

of elementary and secondary school teachers (sec. 101 of 

the bill and sec. 62(a)(2)(D) of the Code) .................................. 2 

2. Extension and modification of exclusion from gross income 

of discharges of acquisition indebtedness on principal residences (sec. 102 of the bill and sec. 108 of the Code) .............. 3 

3. Extension of parity for employer-provided mass transit and 

parking benefits and modification of exclusion for bicycle 

commuting reimbursements (sec. 103 of the bill and 132(f) 

of the Code) .................................................................................. 5 

4. Extension of mortgage insurance premiums treated as qualified residence interest (sec. 104 of the bill and sec. 163 

of the Code) .................................................................................. 7 

5. Extension of deduction for State and local general sales taxes 

(sec. 105 of the bill and sec. 164 of the Code) ........................... 9 

6. Extension of special rule for contributions of capital gain real 

property made for conservation purposes (sec. 106 of the 

bill and sec. 170(b) of the Code) ................................................. 10 

7. Extension of deduction for qualified tuition and related expenses (sec. 107 of the bill and sec. 222 of the Code) .............. 13 

8. Extension of tax-free distributions from individual retirement 

plans for charitable purposes (sec. 108 of the bill and sec. 

408(d)(8) of the Code) ................................................................. 15 

B. Business Tax Extenders ....................................................................... 19 

1. Extension and modification of research credit (sec. 111 of 

the bill and secs. 38 and 41 and new sec. 3111(f) of the 

Code) ............................................................................................ 19 

2. Extension and modification of temporary minimum low-income 

housing tax credit rate for non-Federally subsidized buildings (sec. 112 of the bill and sec. 42 of the Code) ..................... 25 

3. Extension of military housing allowance exclusion for determining area median gross income (sec. 113 of the bill and 

secs. 42 and 142 of the Code) ..................................................... 27 

4. Extension of Indian employment tax credit (sec. 114 of the 

bill and sec. 45A of the Code) .................................................... 28 

5. Extension and modification of new markets tax credit (sec. 

115 of the bill and sec. 45D of the Code) .................................. 29 

6. Extension and modification of railroad track maintenance 

credit (sec. 116 of the bill and sec. 45G of the Code) ............... 32 


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IV 

TITLE I—PROVISIONS THAT EXPIRED IN 2014 —Continued 

7. Extension of mine rescue team training credit (sec. 117 of 

the bill and sec. 45N of the Code) .............................................. 33 

8. Extension and modification of employer wage credit for employees who are active duty members of the uniformed services (sec. 118 of the bill and sec. 45P of the Code) ................... 34 

9. Extension and modification of work opportunity tax credit 

(sec. 119 of the bill and secs. 51 and 52 of the Code) .............. 35 

10. Extension and modification of qualified zone academy bonds 

(sec. 120 of the bill and secs. 54E and 6431 of the Code) ........ 42 

11. Extension of classification of certain race horses as threeyear property (sec. 121 of the bill and sec. 168 of the Code) ... 44 

12. Extension of 15-year straight-line cost recovery for qualified 

leasehold improvements, qualified restaurant buildings and 

improvements, and qualified retail improvements (sec. 122 

of the bill and sec. 168 of the Code) .......................................... 45 

13. Extension of seven-year recovery period for motorsports entertainment complexes (sec. 123 of the bill and sec. 168 

of the Code) .................................................................................. 48 

14. Extension and modification of accelerated depreciation for 

business property on an Indian reservation (sec. 124 of the 

bill and sec. 168(j) of the Code) .................................................. 49 

15. Extension of bonus depreciation (sec. 125 of the bill and 

sec. 168(k) of the Code) ............................................................... 51 

16. Extension of enhanced charitable deduction for contributions 

of food inventory (sec. 126 of the bill and sec. 170 of the 

Code) ............................................................................................ 55 

17. Extension and modification of increased expensing limitations and treatment of certain real property as section 179 

property (sec. 127 of the bill and sec. 179 of the Code) ........... 57 

18. Extension of election to expense mine safety equipment (sec. 

128 of the bill and sec. 179E of the Code) ................................ 59 

19. Extension of special expensing rules for certain film and 

television productions; special expensing for live theatrical 

productions (sec. 129 of the bill and sec. 181 of the Code) ...... 60 

20. Extension of deduction allowable with respect to income attributable to domestic production activities in Puerto Rico 

(sec. 130 of the bill and sec. 199 of the Code) ........................... 62 

21. Extension of modification of tax treatment of certain payments to controlling exempt organizations (sec. 131 of the 

bill and sec. 512 of the Code) ..................................................... 64 

22. Extension of treatment of certain dividends of regulated investment companies (sec. 132 of the bill and sec. 871(k) 

of the Code) .................................................................................. 65 

23. Extension of RIC qualified investment entity treatment 

under FIRPTA (sec. 133 of the bill and secs. 897 and 1445 

of the Code) .................................................................................. 66 

24. Extension of subpart F exception for active financing income 

(sec. 134 of the bill and secs. 953 and 954 of the Code) .......... 67 

25. Extension of look-thru treatment of payments between related controlled foreign corporations under foreign personal 

holding company rules (sec. 135 of the bill and sec. 954(c)(6) 

of the Code) .................................................................................. 70 


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V 

TITLE I—PROVISIONS THAT EXPIRED IN 2014 —Continued 

26. Extension of exclusion of 100 percent of gain on certain 

small business stock (sec. 136 of the bill and sec. 1202 of 

the Code) ...................................................................................... 71 

27. Extension of basis adjustment to stock of S corporations 

making charitable contributions of property (sec. 137 of the 

bill and sec. 1367 of the Code) ................................................... 72 

28. Extension of reduction in S corporation recognition period 

for built-in gains tax (sec. 138 of the bill and sec. 1374 

of the Code) .................................................................................. 73 

29. Extension and modification of empowerment zone tax incentives (sec. 139 of the bill and secs. 1391 and 1394 of the 

Code) ............................................................................................ 75 

30. Extension of temporary increase in limit on cover over of 

rum excise taxes to Puerto Rico and the Virgin Islands (sec. 

140 of the bill and sec. 7652(f) of the Code) .............................. 81 

31. Extension of American Samoa Economic Development Credit 

(sec. 141 of the bill and sec. 119 of Pub. L. No. 109–432) ....... 82 

C. Energy Tax Extenders .......................................................................... 84 

1. Extension and modification of credit for nonbusiness energy 

property (sec.151 of the bill and sec. 25C of the Code) ............ 84 

2. Extension of credit for fuel cell motor vehicles (sec. 152 of 

the bill and sec. 30B of the Code) .............................................. 87 

3. Extension of credit for alternative fuel vehicle refueling property (sec. 153 of the bill and section 30C of the Code) ............. 87 

4. Extension of second generation biofuel producer credit (sec. 

154 of the bill and sec. 40 of the Code) ..................................... 88 

5. Extension and modification of incentives for biodiesel and 

renewable diesel (sec. 155 of the bill and sec. 40A, 6426 

and 6427(e) of the Code) ............................................................. 89 

6. Extension of credit for the production of Indian coal facilities 

placed in service before 2009 (sec. 156 of the bill and sec. 

45 of the Code) ............................................................................ 94 

7. Extension of credits with respect to facilities producing energy 

from certain renewable resources (sec. 157 of the bill and 

sec. 45 of the Code) ..................................................................... 95 

8. Extension of credit for energy-efficient new homes (sec. 158 

of the bill and sec. 45L of the Code) .......................................... 96 

9. Extension of special allowance for second generation biofuel 

plant property (sec. 159 of the bill and sec. 168(l) of the 

Code) ............................................................................................ 97 

10. Extension and modification of energy efficient commercial 

buildings deduction (sec. 160 of the bill and sec. 179D of 

the Code) ...................................................................................... 99 

11. Extension of special rule for sales or dispositions to implement FERC or State electric restructuring policy for qualified electric utilities (sec. 161 of the bill and sec. 451(i) 

of the Code) .................................................................................. 102 

12. Extension of excise tax credits and payment provisions relating to alternative fuel (sec. 162 of the bill and secs. 6426 

and 6427 of the Code) ................................................................. 103 

TITLE II—PROVISION THAT EXPIRED IN 2013 .............................................. 105 

A. Extension of Credit for Electric Motorcycles (sec. 201 of the bill 

and sec. 30D of the Code) .................................................................. 105 

TITLE III—REVENUE RAISING PROVISIONS ................................................. 106 


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VI 

TITLE III—REVENUE RAISING PROVISIONS —Continued 

1. Exclusion from gross income of certain clean coal power grants 

to non-corporate taxpayers (sec. 301 of the bill) ....................... 106 

2. Treatment of certain persons as employers with respect to 

motion picture projects (sec. 302 of the bill and new sec. 

3512 of the Code) ........................................................................ 107 

3. Equalization of Excise Tax and Credits for Liquefied Natural 

Gas and Liquefied Petroleum Gas (sec. 303 of the bill and 

sec. 4041 of the Code) ................................................................. 110 

4. Additional information on returns relating to mortgage interest (sec. 304 of the bill and sec. 6050H of the Code) ................ 112 

III. BUDGET EFFECTS OF THE BILL ............................................................... 113 

A. Committee Estimates ........................................................................... 113 

B. Budget Authority and Tax Expenditures ........................................... 121 

C. Consultation with Congressional Budget Office ................................ 121 

IV. VOTES OF THE COMMITTEE ...................................................................... 128 

V. REGULATORY IMPACT AND OTHER MATTERS ..................................... 128 

A. Regulatory Impact ................................................................................ 128 

B. Unfunded Mandates Statement .......................................................... 128 

C. Tax Complexity Analysis ..................................................................... 129 

VI. CHANGES IN EXISTING LAW MADE BY THE BILL, AS REPORTED 136 


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Calendar No. 198 

114TH CONGRESS REPORT " ! SENATE 1st Session 114–118 

TAX RELIEF EXTENSION ACT OF 2015 

AUGUST 5, 2015.—Ordered to be printed 

Mr. HATCH, from the Committee on Finance, 

submitted the following 

R E P O R T 

[To accompany S. 1946] 

The Committee on Finance, having considered an original bill, S. 

1946, to amend the Internal Revenue Code of 1986 to extend certain expiring provisions, and for other purposes, reports favorably 

thereon without amendment and recommends that the bill do pass. 

I. LEGISLATIVE BACKGROUND 

On July 21, 2015, the Senate Committee on Finance marked up 

original legislation to amend the Internal Revenue Code of 1986 to 

extend certain expired tax provisions. With a majority and quorum 

present, the Committee ordered the bill favorably reported, with 

two amendments. This report describes the provisions of the bill. 

II. EXPLANATION OF THE BILL 

A. SENSE OF THE SENATE

(Sec. 2 of the bill) 

The bill expresses the sense of the Senate that Congress should 

pursue comprehensive tax reform that eliminates temporary provisions from the tax code, thus making permanent those provisions 

that merit such treatment and allowing others to expire, and that 

a major focus of tax reform should be fostering economic growth 

and lowering tax rates by broadening the tax base. 


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1Sec. 62(a)(2)(D). Except where otherwise provided, all section references are to the Internal 

Revenue Code of 1986, as amended (the ‘‘Code’’). 

TITLE I—PROVISIONS THAT EXPIRED IN 2014 

A. INDIVIDUAL TAX EXTENDERS

1. Extension and modification of deduction for certain expenses of 

elementary and secondary school teachers (sec. 101 of the bill 

and sec. 62(a)(2)(D) of the Code) 

PRESENT LAW

In general, ordinary and necessary business expenses are deductible. However, unreimbursed employee business expenses generally 

are deductible only as an itemized deduction and only to the extent 

that the individual’s total miscellaneous deductions (including employee business expenses) exceed two percent of adjusted gross income. An individual’s otherwise allowable itemized deductions may 

be further limited by the overall limitation on itemized deductions, 

which reduces itemized deductions for taxpayers with adjusted 

gross income in excess of a threshold amount. In addition, miscellaneous itemized deductions are not allowable under the alternative 

minimum tax. 

Certain expenses of eligible educators are allowed as an abovethe-line deduction. Specifically, for taxable years beginning prior to 

January 1, 2015, an above-the-line deduction is allowed for up to 

$250 annually of expenses paid or incurred by an eligible educator 

for books, supplies (other than nonathletic supplies for courses of 

instruction in health or physical education), computer equipment 

(including related software and services) and other equipment, and 

supplementary materials used by the eligible educator in the classroom.1 To be eligible for this deduction, the expenses must be otherwise deductible under section 162 as a trade or business expense. 

A deduction is allowed only to the extent the amount of expenses 

exceeds the amount excludable from income under section 135 (relating to education savings bonds), section 529(c)(1) (relating to 

qualified tuition programs), and section 530(d)(2) (relating to 

Coverdell education savings accounts). 

An eligible educator is a kindergarten through grade twelve 

teacher, instructor, counselor, principal, or aide in a school for at 

least 900 hours during a school year. A school means any school 

that provides elementary education or secondary education (kindergarten through grade 12), as determined under State law. 

The above-the-line deduction for eligible educators is not allowed 

for taxable years beginning after December 31, 2014. 

REASONS FOR CHANGE

The Committee recognizes that many elementary and secondary 

school teachers provide substantial classroom resources at their 

own expense and believes that it is appropriate to extend the 

present law deduction for such expenses in order to continue to 

partially offset the substantial costs such educators incur for the 

benefit of their students. Additionally, the Committee recognizes 

that teachers must often incur out-of-pocket expenses for professional development, and believes that it is appropriate to include 


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2Secs. 61(a)(12) and 108. A debt cancellation which constitutes a gift or bequest is not treated 

as income to the donee debtor (sec. 102). 3Sec. 1017. 

these amounts as expenses eligible for the deduction. Finally, the 

Committee believes that it is appropriate to index the $250 maximum deduction amount for inflation, so as to prevent the value of 

the deduction from eroding over time. 

EXPLANATION OF PROVISION

The provision extends the deduction for eligible educator expenses for two years, through December 31, 2016. The provision indexes the $250 maximum deduction amount for inflation, and provides that expenses for professional development shall also be considered eligible expenses for purposes of the deduction. 

EFFECTIVE DATE

The provision applies to taxable years beginning after December 

31, 2014. 

2. Extension and modification of exclusion from gross income of discharges of acquisition indebtedness on principal residences (sec. 

102 of the bill and sec. 108 of the Code) 

PRESENT LAW

In general 

Gross income includes income that is realized by a debtor from 

the discharge of indebtedness, subject to certain exceptions for 

debtors in Title 11 bankruptcy cases, insolvent debtors, certain student loans, certain farm indebtedness, and certain real property 

business indebtedness.2 In cases involving discharges of indebtedness that are excluded from gross income under the exceptions to 

the general rule, taxpayers generally reduce certain tax attributes, 

including basis in property, by the amount of the discharge of indebtedness. 

The amount of discharge of indebtedness excluded from income 

by an insolvent debtor not in a Title 11 bankruptcy case cannot exceed the amount by which the debtor is insolvent. In the case of 

a discharge in bankruptcy or where the debtor is insolvent, any reduction in basis may not exceed the excess of the aggregate bases 

of properties held by the taxpayer immediately after the discharge 

over the aggregate of the liabilities of the taxpayer immediately 

after the discharge.3

For all taxpayers, the amount of discharge of indebtedness generally is equal to the difference between the adjusted issue price of 

the debt being cancelled and the amount used to satisfy the debt. 

These rules generally apply to the exchange of an old obligation for 

a new obligation, including a modification of indebtedness that is 

treated as an exchange (a debt-for-debt exchange). 

Qualified principal residence indebtedness 

An exclusion from gross income is provided for any discharge of 

indebtedness income by reason of a discharge (in whole or in part) 

of qualified principal residence indebtedness. Qualified principal 

residence indebtedness means acquisition indebtedness (within the 


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meaning of section 163(h)(3)(B), except that the dollar limitation is 

$2 million) with respect to the taxpayer’s principal residence. Acquisition indebtedness with respect to a principal residence generally means indebtedness which is incurred in the acquisition, 

construction, or substantial improvement of the principal residence 

of the individual and is secured by the residence. It also includes 

refinancing of such indebtedness to the extent the amount of the 

indebtedness resulting from such refinancing does not exceed the 

amount of the refinanced indebtedness. For these purposes, the 

term ‘‘principal residence’’ has the same meaning as under section 

121. 

If, immediately before the discharge, only a portion of a discharged indebtedness is qualified principal residence indebtedness, 

the exclusion applies only to so much of the amount discharged as 

exceeds the portion of the debt which is not qualified principal residence indebtedness. Thus, assume that a principal residence is secured by an indebtedness of $1 million, of which $800,000 is qualified principal residence indebtedness. If the residence is sold for 

$700,000 and $300,000 of debt is discharged, then only $100,000 of 

the amount discharged may be excluded from gross income under 

the qualified principal residence indebtedness exclusion. 

The basis of the individual’s principal residence is reduced by the 

amount excluded from income under the provision. 

The qualified principal residence indebtedness exclusion does not 

apply to a taxpayer in a Title 11 case; instead the general exclusion 

rules apply. In the case of an insolvent taxpayer not in a Title 11 

case, the qualified principal residence indebtedness exclusion applies unless the taxpayer elects to have the general exclusion rules 

apply instead. 

The exclusion does not apply to the discharge of a loan if the discharge is on account of services performed for the lender or any 

other factor not directly related to a decline in the value of the residence or to the financial condition of the taxpayer. 

The exclusion for qualified principal residence indebtedness is effective for discharges of indebtedness before January 1, 2015. 

REASONS FOR CHANGE

The Committee believes the provision should be extended because taxpayers restructuring their acquisition debt on a principal 

residence or losing their principal residence in a foreclosure are 

also likely, due to their economic circumstances, to lack the necessary liquidity to pay taxes on the resulting discharged debt were 

it to be included in gross income. Additionally, the Committee also 

believes it is appropriate to provide relief to taxpayers who may 

have entered into a binding arrangement for the discharge of indebtedness prior to the expiration of the provision, but for whom 

the indebtedness was not actually discharged until the following 

taxable year. 

EXPLANATION OF PROVISION

The provision extends for two additional years (through December 31, 2016) the exclusion from gross income for discharges of 

qualified principal residence indebtedness. The provision also provides for an exclusion from gross income in the case of those taxVerDate Sep 11 2014 05:21 Aug 08, 2015 Jkt 049010 PO 00000 Frm 00010 Fmt 6659 Sfmt 6602 E:\HR\OC\SR118.XXX SR118

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4Secs. 132(a)(5) and (f), 3121(a)(20), 3231(e)(5), 3306(b)(16) and 3401(a)(19). 

5Parity was provided originally by the American Recovery and Reinvestment Act of 2009 

(‘‘ARRA’’), Pub. L. No. 111–5, effective for months beginning on or after February 17, 2009, the 

date of enactment of ARRA. 

payers’ whose qualified principal residence indebtedness was discharged on or after January 1, 2017, if the discharge was pursuant 

to a binding written agreement entered into prior to January 1, 

2017. 

EFFECTIVE DATE

The provision applies to discharges of indebtedness after December 31, 2014. 

3. Extension of parity for employer-provided mass transit and parking benefits and modification of exclusion for bicycle commuting 

reimbursements (sec. 103 of the bill and 132(f) of the Code) 

PRESENT LAW

Qualified transportation fringes 

Qualified transportation fringe benefits provided by an employer 

are excluded from an employee’s gross income for income tax purposes and from an employee’s wages for employment tax purposes.4

Qualified transportation fringe benefits include parking, transit 

passes, vanpool benefits, and qualified bicycle commuting reimbursements. 

No amount is includible in the income of an employee merely because the employer offers the employee a choice between cash and 

qualified transportation fringe benefits (other than a qualified bicycle commuting reimbursement). 

Qualified transportation fringe benefits also include a cash reimbursement (under a bona fide reimbursement arrangement) by an 

employer to an employee for parking, transit passes, or vanpooling. 

In the case of transit passes, however, in general, a cash reimbursement is considered a qualified transportation fringe benefit 

only if a voucher or similar item that may be exchanged only for 

a transit pass is not readily available for direct distribution by the 

employer to the employee. 

Mass transit parity 

Before February 17, 2009, the amount that could be excluded as 

qualified transportation fringe benefits was limited to $100 per 

month in combined transit pass and vanpool benefits and $175 per 

month in qualified parking benefits. These limits are adjusted annually for inflation, using 1998 as the base year; for 2015, the limits are $130 and $250, respectively. Effective for months beginning 

on or after February 17, 2009,5 and before January 1, 2015, parity 

in qualified transportation fringe benefits is provided by temporarily increasing the monthly exclusion for combined employer-provided transit pass and vanpool benefits to the same level as the exclusion for employer-provided parking. 

Effective January 1, 2015, the amount that can be excluded as 

qualified transportation fringe benefits is limited to $130 per 

month in combined transit pass and vanpool benefits and $250 per 

month in qualified parking benefits. 


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Qualified bicycle commuting reimbursements 

Qualified bicycle commuting reimbursements with respect to a 

calendar year are limited to employer reimbursements during the 

15 month period beginning on the first day of the calendar year for 

expenses incurred during the calendar year for the purchase of a 

bicycle and bicycle improvements, repairs and storage, by an employee who regularly uses the bicycle for commuting. For this purpose, commuting means to use the bicycle for a substantial portion 

of the travel between the employee’s residence and place of employment. In the case of qualified bicycle commuting reimbursements, 

the amount that can be excluded for a taxable year is limited to 

$20 multiplied by the number of months during the year that the 

employee regularly uses the bicycle for commuting and does not receive another qualified transportation fringe benefit. 

REASONS FOR CHANGE

Maintaining parity between parking and mass transit benefits 

provides employees with an incentive to use public transportation 

and vanpools for their commute rather than driving to work in 

their personal vehicles, thus potentially easing traffic congestion 

and pollution. 

Some employees who regularly commute to work by bicycle do 

not use their own bicycles but use bicycles available through a bicycle-share program. The Committee believes that reimbursement 

from employers for an employee’s use of a bicycle-share program 

for commuting to work should be accorded the same tax treatment 

as reimbursement for the cost of purchase and maintenance by an 

employee of his or her own bicycle used for commuting. 

EXPLANATION OF PROVISION

Mass transit parity 

The provision extends parity in the exclusion for combined employer-provided transit pass and vanpool benefits and for employerprovided parking benefits for two years, that is, through December 

31, 2016. Thus, for 2015, the monthly limit on the exclusion for 

combined transit pass and vanpool benefits is $250, the same as 

the monthly limit on the exclusion for qualified parking benefits. 

Similarly, for 2016, the same monthly limit will apply on the exclusion for combined transit pass and vanpool benefits and the exclusion for qualified parking benefits. 

In order for the extension to be effective retroactive to January 

1, 2015, expenses incurred for months beginning after December 

31, 2014, and before enactment of the provision, by an employee for 

employer-provided vanpool and transit benefits may be reimbursed 

(under a bona fide reimbursement arrangement) by employers on 

a tax-free basis to the extent they exceed $130 per month and are 

no more than $250 per month. The Committee intends that the 

rule that an employer reimbursement is excludible only if vouchers 

are not available to provide the benefit continues to apply, except 

in the case of reimbursements for vanpool or transit benefits between $130 and $250 for months beginning after December 31, 

2014, and before enactment of the provision. Further, the Committee intends that reimbursements for expenses incurred for 

months beginning after December 31, 2014, and before enactment 


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6Sec. 163(h). 

of the provision, may be made in addition to the provision of benefits or reimbursements of up to $250 per month for expenses incurred for months beginning during 2015 and after enactment of 

the provision. 

Qualified bicycle commuting reimbursements 

Under the provision, an employer reimbursement of the expense 

of a bicycle-share program for an employee who regularly uses the 

program for commuting qualifies for exclusion from gross income 

(and wages for employment tax purposes) as a qualified bicycle 

commuting reimbursement, subject to the $20–per-month limit on 

this exclusion and provided the employee does not receive another 

qualified transportation fringe benefit for the month. This provision 

applies to reimbursements for taxable years beginning before January 1, 2017. 

EFFECTIVE DATE

The provision relating to parity in the exclusion for combined 

employer-provided transit pass and vanpool benefits and for employer-provided parking benefits applies to months after December 

31, 2014. The provision related to qualified bicycle commuting reimbursements is effective for taxable years beginning after December 31, 2014. 

4. Extension of mortgage insurance premiums treated as qualified 

residence interest (sec. 104 of the bill and sec. 163 of the Code) 

PRESENT LAW

In general 

Present law provides that qualified residence interest is deductible notwithstanding the general rule that personal interest is nondeductible.6

Acquisition indebtedness and home equity indebtedness 

Qualified residence interest is interest on acquisition indebtedness and home equity indebtedness with respect to a principal and 

a second residence of the taxpayer. The maximum amount of home 

equity indebtedness is $100,000. The maximum amount of acquisition indebtedness is $1 million. Acquisition indebtedness means 

debt that is incurred in acquiring, constructing, or substantially 

improving a qualified residence of the taxpayer, and that is secured 

by the residence. Home equity indebtedness is debt (other than acquisition indebtedness) that is secured by the taxpayer’s principal 

or second residence, to the extent the aggregate amount of such 

debt does not exceed the difference between the total acquisition indebtedness with respect to the residence, and the fair market value 

of the residence. 

Qualified mortgage insurance 

Certain premiums paid or accrued for qualified mortgage insurance by a taxpayer during the taxable year in connection with acquisition indebtedness on a qualified residence of the taxpayer are 

treated as interest that is qualified residence interest and thus deVerDate Sep 11 2014 05:21 Aug 08, 2015 Jkt 049010 PO 00000 Frm 00013 Fmt 6659 Sfmt 6602 E:\HR\OC\SR118.XXX SR118

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ductible. The amount allowable as a deduction is phased out ratably by 10 percent for each $1,000 (or fraction thereof) by which 

the taxpayer’s adjusted gross income exceeds $100,000 ($500 and 

$50,000, respectively, in the case of a married individual filing a 

separate return). Thus, the deduction is not allowed if the taxpayer’s adjusted gross income exceeds $109,000 ($54,500 in the 

case of married individual filing a separate return). 

For this purpose, qualified mortgage insurance means mortgage 

insurance provided by the Department of Veterans Affairs, the Federal Housing Administration, or the Rural Housing Service, and 

private mortgage insurance (defined in section two of the Homeowners Protection Act of 1998 as in effect on the date of enactment 

of the provision). 

Amounts paid for qualified mortgage insurance that are properly 

allocable to periods after the close of the taxable year are treated 

as paid in the period to which they are allocated. No deduction is 

allowed for the unamortized balance if the mortgage is paid before 

its term (except in the case of qualified mortgage insurance provided by the Department of Veterans Affairs or Rural Housing 

Service). 

The provision does not apply with respect to any mortgage insurance contract issued before January 1, 2007. The provision terminates for any amount paid or accrued after December 31, 2014, or 

properly allocable to any period after that date. 

Reporting rules apply under the provision. 

REASONS FOR CHANGE

The Committee believes it is appropriate to extend the presentlaw temporary provision. The Committee understands that the purpose of the provisions permitting deduction of home mortgage interest is to encourage home ownership while limiting significant 

disincentives to saving. The Committee believes that it would be 

consistent with the purpose of the provisions permitting deduction 

of home mortgage interest to permit the deduction of mortgage insurance premiums. While these premiums are not in the nature of 

interest, the Committee notes that purchase of such insurance is 

often demanded by lenders in order for home buyers to obtain financing (depending on the size of the buyer’s down payment). The 

Committee believes that permitting deductibility of premiums for 

this type of insurance connected with home purchases will foster 

home ownership. In the case of higher income taxpayers who may 

not purchase mortgage insurance, however, the Committee believes 

the incentive of deductibility becomes unnecessary, and a phase-out 

is appropriate. It is not intended that prepayments be currently deductible, but rather, that they be deductible only in the period to 

which they relate. Reporting of payments is generally necessary to 

administer the provision. 

EXPLANATION OF PROVISION

The provision extends the deduction for private mortgage insurance premiums for two years (with respect to contracts entered into 

after December 31, 2006). Thus, the provision applies to amounts 

paid or accrued in 2015 and 2016 (and not properly allocable to any 

period after 2016). 


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7Sec. 164(b)(5)(B). 

EFFECTIVE DATE

The provision applies to amounts paid or accrued after December 

31, 2014. 

5. Extension of deduction for State and local general sales taxes 

(sec. 105 of the bill and sec. 164 of the Code) 

PRESENT LAW

For purposes of determining regular tax liability, an itemized deduction is permitted for certain State and local taxes paid, including individual income taxes, real property taxes, and personal property taxes. The itemized deduction is not permitted for purposes of 

determining a taxpayer’s alternative minimum taxable income. For 

taxable years beginning before 2015, at the election of the taxpayer, an itemized deduction may be taken for State and local general sales taxes in lieu of the itemized deduction provided under 

present law for State and local income taxes. As is the case for 

State and local income taxes, the itemized deduction for State and 

local general sales taxes is not permitted for purposes of determining a taxpayer’s alternative minimum taxable income. Taxpayers have two options with respect to the determination of the 

sales tax deduction amount. Taxpayers may deduct the total 

amount of general State and local sales taxes paid by accumulating 

receipts showing general sales taxes paid. Alternatively, taxpayers 

may use tables created by the Secretary that show the allowable 

deduction. The tables are based on average consumption by taxpayers on a State-by-State basis taking into account number of dependents, modified adjusted gross income and rates of State and 

local general sales taxation. Taxpayers who live in more than one 

jurisdiction during the tax year are required to pro-rate the table 

amounts based on the time they live in each jurisdiction. Taxpayers 

who use the tables created by the Secretary may, in addition to the 

table amounts, deduct eligible general sales taxes paid with respect 

to the purchase of motor vehicles, boats, and other items specified 

by the Secretary. Sales taxes for items that may be added to the 

tables are not reflected in the tables themselves. 

A general sales tax is a tax imposed at one rate with respect to 

the sale at retail of a broad range of classes of items.7 No deduction 

is allowed for any general sales tax imposed with respect to an 

item at a rate other than the general rate of tax. However, in the 

case of food, clothing, medical supplies, and motor vehicles, the 

above rules are relaxed in two ways. First, if the tax does not apply 

with respect to some or all of such items, a tax that applies to other 

such items can still be considered a general sales tax. Second, the 

rate of tax applicable with respect to some or all of these items 

may be lower than the general rate. However, in the case of motor 

vehicles, if the rate of tax exceeds the general rate, such excess is 

disregarded and the general rate is treated as the rate of tax. 

A compensating use tax with respect to an item is treated as a 

general sales tax, provided such tax is complementary to a general 

sales tax and a deduction for sales taxes is allowable with respect 

to items sold at retail in the taxing jurisdiction that are similar to 

such item. 


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8Secs. 170, 2055, and 2522, respectively. 

REASONS FOR CHANGE

The Committee believes an extension of the option to deduct 

State and local sales taxes in lieu of deducting State and local income taxes is appropriate to continue to provide similar Federal 

tax treatment to residents of States that rely on sales taxes, rather 

than income taxes, to fund State and local governmental functions. 

EXPLANATION OF PROVISION

The provision extends the provision allowing taxpayers to elect 

to deduct State and local sales taxes in lieu of State and local income taxes for two years, through 2016. 

EFFECTIVE DATE

The provision applies to taxable years beginning after December 

31, 2014. 

6. Extension of special rule for contributions of capital gain real 

property made for conservation purposes (sec. 106 of the bill and 

sec. 170(b) of the Code) 

PRESENT LAW

Charitable contributions generally 

In general, a deduction is permitted for charitable contributions, 

subject to certain limitations that depend on the type of taxpayer, 

the property contributed, and the donee organization. The amount 

of deduction generally equals the fair market value of the contributed property on the date of the contribution. Charitable deductions are provided for income, estate, and gift tax purposes.8

In general, in any taxable year, charitable contributions by a corporation are not deductible to the extent the aggregate contributions exceed 10 percent of the corporation’s taxable income computed without regard to net operating or capital loss carrybacks. 

Total deductible contributions of an individual taxpayer to public 

charities, private operating foundations, and certain types of private nonoperating foundations generally may not exceed 50 percent 

of the taxpayer’s contribution base, which is the taxpayer’s adjusted gross income for a taxable year (disregarding any net operating loss carryback). To the extent a taxpayer has not exceeded 

the 50-percent limitation, (1) contributions of capital gain property 

to public charities generally may be deducted up to 30 percent of 

the taxpayer’s contribution base, (2) contributions of cash to most 

private nonoperating foundations and certain other charitable organizations generally may be deducted up to 30 percent of the taxpayer’s contribution base, and (3) contributions of capital gain 

property to private foundations and certain other charitable organizations generally may be deducted up to 20 percent of the taxpayer’s contribution base. 

Contributions in excess of the applicable percentage limits generally may be carried over and deducted over the next five taxable 

years, subject to the relevant percentage limitations on the deduction in each of those years. 


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9Secs. 170(f)(3)(B)(iii) and 170(h). 

Capital gain property 

Capital gain property means any capital asset or property used 

in the taxpayer’s trade or business the sale of which at its fair market value, at the time of contribution, would have resulted in gain 

that would have been long-term capital gain. Contributions of capital gain property to a qualified charity are deductible at fair market value within certain limitations. Contributions of capital gain 

property to charitable organizations described in section 

170(b)(1)(A) (e.g., public charities, private foundations other than 

private non-operating foundations, and certain governmental units) 

generally are deductible up to 30 percent of the taxpayer’s contribution base. An individual may elect, however, to bring all these 

contributions of capital gain property for a taxable year within the 

50-percent limitation category by reducing the amount of the contribution deduction by the amount of the appreciation in the capital 

gain property. Contributions of capital gain property to charitable 

organizations described in section 170(b)(1)(B) (e.g., private non-operating foundations) are deductible up to 20 percent of the taxpayer’s contribution base. 

For purposes of determining whether a taxpayer’s aggregate 

charitable contributions in a taxable year exceed the applicable 

percentage limitation, contributions of capital gain property are 

taken into account after other charitable contributions. 

Qualified conservation contributions 

Qualified conservation contributions are one exception to the 

‘‘partial interest’’ rule, which generally bars deductions for charitable contributions of partial interests in property.9 A qualified conservation contribution is a contribution of a qualified real property 

interest to a qualified organization exclusively for conservation purposes. A qualified real property interest is defined as: (1) the entire 

interest of the donor other than a qualified mineral interest; (2) a 

remainder interest; or (3) a restriction (granted in perpetuity) on 

the use that may be made of the real property. Qualified organizations include certain governmental units, public charities that meet 

certain public support tests, and certain supporting organizations. 

Conservation purposes include: (1) the preservation of land areas 

for outdoor recreation by, or for the education of, the general public; (2) the protection of a relatively natural habitat of fish, wildlife, 

or plants, or similar ecosystem; (3) the preservation of open space 

(including farmland and forest land) where such preservation will 

yield a significant public benefit and is either for the scenic enjoyment of the general public or pursuant to a clearly delineated Federal, State, or local governmental conservation policy; and (4) the 

preservation of an historically important land area or a certified 

historic structure. 

Qualified conservation contributions of capital gain property are 

subject to the same limitations and carryover rules as other charitable contributions of capital gain property. 


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10Sec. 170(b)(1)(E). 11Sec. 170(b)(2)(B). 

Temporary rules regarding contributions of capital gain real property for conservation purposes 

In general 

Under a temporary provision 10 the 30-percent contribution base 

limitation on contributions of capital gain property by individuals 

does not apply to qualified conservation contributions (as defined 

under present law). Instead, individuals may deduct the fair market value of any qualified conservation contribution to the extent 

of the excess of 50 percent of the contribution base over the amount 

of all other allowable charitable contributions. These contributions 

are not taken into account in determining the amount of other allowable charitable contributions. 

Individuals are allowed to carry over any qualified conservation 

contributions that exceed the 50-percent limitation for up to 15 

years. 

For example, assume an individual with a contribution base of 

$100 makes a qualified conservation contribution of property with 

a fair market value of $80 and makes other charitable contributions subject to the 50-percent limitation of $60. The individual is 

allowed a deduction of $50 in the current taxable year for the nonconservation contributions (50 percent of the $100 contribution 

base) and is allowed to carry over the excess $10 for up to 5 years. 

No current deduction is allowed for the qualified conservation contribution, but the entire $80 qualified conservation contribution 

may be carried forward for up to 15 years. 

Farmers and ranchers 

In the case of an individual who is a qualified farmer or rancher 

for the taxable year in which the contribution is made, a qualified 

conservation contribution is allowable up to 100 percent of the excess of the taxpayer’s contribution base over the amount of all 

other allowable charitable contributions. 

In the above example, if the individual is a qualified farmer or 

rancher, in addition to the $50 deduction for non-conservation contributions, an additional $50 for the qualified conservation contribution is allowed and $30 may be carried forward for up to 15 

years as a contribution subject to the 100-percent limitation. 

In the case of a corporation (other than a publicly traded corporation) that is a qualified farmer or rancher for the taxable year in 

which the contribution is made, any qualified conservation contribution is allowable up to 100 percent of the excess of the corporation’s taxable income (as computed under section 170(b)(2)) 

over the amount of all other allowable charitable contributions. 

Any excess may be carried forward for up to 15 years as a contribution subject to the 100-percent limitation.11

As an additional condition of eligibility for the 100 percent limitation, with respect to any contribution of property in agriculture 

or livestock production, or that is available for such production, by 

a qualified farmer or rancher, the qualified real property interest 

must include a restriction that the property remain generally available for such production. (There is no requirement as to any speVerDate Sep 11 2014 05:21 Aug 08, 2015 Jkt 049010 PO 00000 Frm 00018 Fmt 6659 Sfmt 6602 E:\HR\OC\SR118.XXX SR118

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12Secs. 170(b)(1)(E)(vi) and 170(b)(2)(B)(iii). 13Sec. 222. 14The deduction generally is not available for expenses with respect to a course or education 

involving sports, games, or hobbies, and is not available for student activity fees, athletic fees, 

insurance expenses, or other expenses unrelated to an individual’s academic course of instruction. 

cific use in agriculture or farming, or necessarily that the property 

be used for such purposes, merely that the property remain available for such purposes.) 

A qualified farmer or rancher means a taxpayer whose gross income from the trade or business of farming (within the meaning of 

section 2032A(e)(5)) is greater than 50 percent of the taxpayer’s 

gross income for the taxable year. 

Termination 

The temporary rules regarding contributions of capital gain real 

property for conservation purposes do not apply to contributions 

made in taxable years beginning after December 31, 2014.12

REASONS FOR CHANGE

The Committee believes that the special rule that provides an increased incentive to make charitable contributions of partial interests in real property for conservation purposes is an important way 

of encouraging conservation and preservation, and should be extended for two additional years. 

EXPLANATION OF PROVISION

The provision extends the increased percentage limits and extended carryforward period for contributions of capital gain real 

property for conservation purposes for two years, i.e., for contributions made in taxable years beginning before January 1, 2017. 

EFFECTIVE DATE

The provision is effective for contributions made in taxable years 

beginning after December 31, 2014. 

7. Extension of deduction for qualified tuition and related expenses 

(sec. 107 of the bill and sec. 222 of the Code) 

PRESENT LAW

An individual is allowed a deduction for qualified tuition and related expenses for higher education paid by the individual during 

the taxable year.13 The deduction is allowed in computing adjusted 

gross income. The term qualified tuition and related expenses is defined in the same manner as for the Hope and Lifetime Learning 

credits, and includes tuition and fees required for the enrollment 

or attendance of the taxpayer, the taxpayer’s spouse, or any dependent of the taxpayer with respect to whom the taxpayer may 

claim a personal exemption, at an eligible institution of higher education for courses of instruction of such individual at such institution.14 The expenses must be in connection with enrollment at an 

institution of higher education during the taxable year, or with an 

academic period beginning during the taxable year or during the 

first three months of the next taxable year. The deduction is not 


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15Secs. 222(d)(1) and 25A(g)(2). 16Sec. 222(c). These reductions are the same as those that apply to the Hope and Lifetime 

Learning credits. 

available for tuition and related expenses paid for elementary or 

secondary education. 

The maximum deduction is $4,000 for an individual whose adjusted gross income for the taxable year does not exceed $65,000 

($130,000 in the case of a joint return), or $2,000 for other individuals whose adjusted gross income does not exceed $80,000 

($160,000 in the case of a joint return). No deduction is allowed for 

an individual whose adjusted gross income exceeds the relevant adjusted gross income limitations, for a married individual who does 

not file a joint return, or for an individual with respect to whom 

a personal exemption deduction may be claimed by another taxpayer for the taxable year. The deduction is not available for taxable years beginning after December 31, 2014. 

The amount of qualified tuition and related expenses must be reduced by certain scholarships, educational assistance allowances, 

and other amounts paid for the benefit of such individual,15 and by 

the amount of such expenses taken into account for purposes of determining any exclusion from gross income of: (1) income from certain U.S. savings bonds used to pay higher education tuition and 

fees; and (2) income from a Coverdell education savings account.16

Additionally, such expenses must be reduced by the earnings portion (but not the return of principal) of distributions from a qualified tuition program if an exclusion under section 529 is claimed 

with respect to expenses eligible for the qualified tuition deduction. 

No deduction is allowed for any expense for which a deduction is 

otherwise allowed or with respect to an individual for whom a 

Hope or Lifetime Learning credit is elected for such taxable year. 

REASONS FOR CHANGE

The Committee observes that the cost of a college education continues to rise, and thus believes that the extension of the qualified 

tuition deduction is appropriate to mitigate the impact of rising tuition costs on students and their families. The Committee further 

believes that the tuition deduction provides an important financial 

incentive for individuals to pursue higher education. 

EXPLANATION OF PROVISION

The provision extends the qualified tuition deduction for two 

years, through 2016. 

EFFECTIVE DATE

The provision applies to taxable years beginning after December 

31, 2014. 


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17Secs. 170(c)(3)–(5). 18Sec. 170(c)(1). 19Secs. 170(b) and (e). 20Sec. 170(a). 21Sec. 170(f)(8). For any contribution of a cash, check, or other monetary gift, no deduction 

is allowed unless the donor maintains as a record of such contribution a bank record or written 

communication from the donee charity showing the name of the donee organization, the date 

of the contribution, and the amount of the contribution. Sec. 170(f)(17). 

8. Extension of tax-free distributions from individual retirement 

plans for charitable purposes (sec. 108 of the bill and sec. 

408(d)(8) of the Code) 

PRESENT LAW

In general 

If an amount withdrawn from a traditional individual retirement 

arrangement (‘‘IRA’’) or a Roth IRA is donated to a charitable organization, the rules relating to the tax treatment of withdrawals 

from IRAs apply to the amount withdrawn and the charitable contribution is subject to the normally applicable limitations on deductibility of such contributions. An exception applies in the case 

of a qualified charitable distribution. 

Charitable contributions 

In computing taxable income, an individual taxpayer who 

itemizes deductions generally is allowed to deduct the amount of 

cash and up to the fair market value of property contributed to the 

following entities: (1) a charity described in section 170(c)(2); (2) 

certain veterans’ organizations, fraternal societies, and cemetery 

companies;17 and (3) a Federal, State, or local governmental entity, 

but only if the contribution is made for exclusively public purposes.18 The deduction also is allowed for purposes of calculating 

alternative minimum taxable income. 

The amount of the deduction allowable for a taxable year with 

respect to a charitable contribution of property may be reduced depending on the type of property contributed, the type of charitable 

organization to which the property is contributed, and the income 

of the taxpayer.19

A taxpayer who takes the standard deduction (who does not 

itemize deductions) may not take a separate deduction for charitable contributions.20

A payment to a charity (regardless of whether it is termed a 

‘‘contribution’’) in exchange for which the donor receives an economic benefit is not deductible, except to the extent that the donor 

can demonstrate, among other things, that the payment exceeds 

the fair market value of the benefit received from the charity. To 

facilitate distinguishing charitable contributions from purchases of 

goods or services from charities, present law provides that no charitable contribution deduction is allowed for a separate contribution 

of $250 or more unless the donor obtains a contemporaneous written acknowledgement of the contribution from the charity indicating whether the charity provided any good or service (and an estimate of the value of any such good or service provided) to the taxpayer in consideration for the contribution.21 In addition, present 

law requires that any charity that receives a contribution exceeding 

$75 made partly as a gift and partly as consideration for goods or 

services furnished by the charity (a ‘‘quid pro quo’’ contribution) is 


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22Sec. 6115. 23Secs. 170(f), 2055(e)(2), and 2522(c)(2). 24Sec. 170(f)(2). 

required to inform the contributor in writing of an estimate of the 

value of the goods or services furnished by the charity and that 

only the portion exceeding the value of the goods or services may 

be deductible as a charitable contribution.22

Under present law, total deductible contributions of an individual 

taxpayer to public charities, private operating foundations, and certain types of private nonoperating foundations generally may not 

exceed 50 percent of the taxpayer’s contribution base, which is the 

taxpayer’s adjusted gross income for a taxable year (disregarding 

any net operating loss carryback). To the extent a taxpayer has not 

exceeded the 50-percent limitation, (1) contributions of capital gain 

property to public charities generally may be deducted up to 30 

percent of the taxpayer’s contribution base, (2) contributions of 

cash to most private nonoperating foundations and certain other 

charitable organizations generally may be deducted up to 30 percent of the taxpayer’s contribution base, and (3) contributions of 

capital gain property to private foundations and certain other charitable organizations generally may be deducted up to 20 percent of 

the taxpayer’s contribution base. 

Contributions by individuals in excess of the 50-percent, 30-percent, and 20-percent limits generally may be carried over and deducted over the next five taxable years, subject to the relevant percentage limitations on the deduction in each of those years. 

In general, a charitable deduction is not allowed for income, estate, or gift tax purposes if the donor transfers an interest in property to a charity (e.g., a remainder) while also either retaining an 

interest in that property (e.g., an income interest) or transferring 

an interest in that property to a noncharity for less than full and 

adequate consideration.23 Exceptions to this general rule are provided for, among other interests, remainder interests in charitable 

remainder annuity trusts, charitable remainder unitrusts, and 

pooled income funds, and present interests in the form of a guaranteed annuity or a fixed percentage of the annual value of the property.24 For such interests, a charitable deduction is allowed to the 

extent of the present value of the interest designated for a charitable organization. 

IRA rules 

Within limits, individuals may make deductible and nondeductible contributions to a traditional IRA. Amounts in a traditional 

IRA are includible in income when withdrawn (except to the extent 

the withdrawal represents a return of nondeductible contributions). 

Certain individuals also may make nondeductible contributions to 

a Roth IRA (deductible contributions cannot be made to Roth 

IRAs). Qualified withdrawals from a Roth IRA are excludable from 

gross income. Withdrawals from a Roth IRA that are not qualified 

withdrawals are includible in gross income to the extent attributable to earnings. Includible amounts withdrawn from a traditional IRA or a Roth IRA before attainment of age 591⁄2 are subject 

to an additional 10-percent early withdrawal tax, unless an exception applies. Under present law, minimum distributions are required to be made from tax-favored retirement arrangements, inVerDate Sep 11 2014 05:21 Aug 08, 2015 Jkt 049010 PO 00000 Frm 00022 Fmt 6659 Sfmt 6602 E:\HR\OC\SR118.XXX SR118

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25Minimum distribution rules also apply in the case of distributions after the death of a traditional or Roth IRA owner. 26 Conversion contributions refer to conversions of amounts in a traditional IRA to a Roth IRA 

and rollovers of nonRoth amounts from an employer-sponsored plan to a Roth IRA. 27Sec. 3405. 28Sec. 408(d)(8). The exclusion does not apply to distributions from employer-sponsored retirement plans, including SIMPLE IRAs and simplified employee pensions (‘‘SEPs’’). 

cluding IRAs. Minimum required distributions from a traditional 

IRA must generally begin by April 1 of the calendar year following 

the year in which the IRA owner attains age 701⁄2.25

If an individual has made nondeductible contributions to a traditional IRA, a portion of each distribution from an IRA is nontaxable until the total amount of nondeductible contributions has 

been received. In general, the amount of a distribution that is nontaxable is determined by multiplying the amount of the distribution by the ratio of the IRA’s nondeductible contributions to the 

IRA’s account balance. In making the calculation, all traditional 

IRAs of an individual are treated as a single IRA, all distributions 

during any taxable year are treated as a single distribution, and, 

in general, the value of the account, income on the account, and investment in the contract (basis) are computed as of the close of the 

calendar year. 

In the case of a distribution from a Roth IRA that is not a qualified distribution, in determining the portion of the distribution attributable to earnings, contributions and distributions are deemed 

to be distributed in the following order: (1) regular Roth IRA contributions; (2) taxable conversion contributions;26 (3) nontaxable 

conversion contributions; and (4) earnings. In determining the 

amount of taxable distributions from a Roth IRA, all Roth IRA distributions in the same taxable year are treated as a single distribution, all regular Roth IRA contributions for a year are treated as 

a single contribution, and all conversion contributions during the 

year are treated as a single contribution. 

Taxable distributions from an IRA are generally subject to withholding unless the individual elects not to have withholding 

apply.27 Elections not to have withholding apply are to be made in 

the time and manner prescribed by the Secretary. 

Qualified charitable distributions 

Otherwise taxable IRA distributions from a traditional or Roth 

IRA are excluded from gross income to the extent they are qualified 

charitable distributions.28 The amount excluded may not exceed 

$100,000 per taxpayer per taxable year. Special rules apply in determining the amount of an IRA distribution that is otherwise taxable. The otherwise applicable rules regarding taxation of IRA distributions and the deduction of charitable contributions continue to 

apply to distributions from an IRA that are not qualified charitable 

distributions. A qualified charitable distribution is taken into account for purposes of the minimum distribution rules applicable to 

traditional IRAs to the same extent the distribution would have 

been taken into account under such rules had the distribution not 

been directly distributed under the qualified charitable distribution 

provision. An IRA does not fail to qualify as an IRA as a result of 

qualified charitable distributions being made from the IRA. 

A qualified charitable distribution is any distribution from an 

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tion 170(b)(1)(A) (other than an organization described in section 

509(a)(3) or a donor advised fund (as defined in section 4966(d)(2)). 

Distributions are eligible for the exclusion only if made on or after 

the date the IRA owner attains age 701⁄2 and only to the extent the 

distribution would be includible in gross income (without regard to 

this provision). 

The exclusion applies only if a charitable contribution deduction 

for the entire distribution otherwise would be allowable (under 

present law), determined without regard to the generally applicable 

percentage limitations. Thus, for example, if the deductible amount 

is reduced because of a benefit received in exchange, or if a deduction is not allowable because the donor did not obtain sufficient 

substantiation, the exclusion is not available with respect to any 

part of the IRA distribution. 

If the IRA owner has any IRA that includes nondeductible contributions, a special rule applies in determining the portion of a 

distribution that is includible in gross income (but for the qualified 

charitable distribution provision) and thus is eligible for qualified 

charitable distribution treatment. Under the special rule, the distribution is treated as consisting of income first, up to the aggregate amount that would be includible in gross income (but for the 

qualified charitable distribution provision) if the aggregate balance 

of all IRAs having the same owner were distributed during the 

same year. In determining the amount of subsequent IRA distributions includible in income, proper adjustments are to be made to 

reflect the amount treated as a qualified charitable distribution 

under the special rule. 

Distributions that are excluded from gross income by reason of 

the qualified charitable distribution provision are not taken into account in determining the deduction for charitable contributions 

under section 170. 

Under present law, the exclusion does not apply to distributions 

made in taxable years beginning after December 31, 2014. 

REASONS FOR CHANGE

The Committee believes that facilitating charitable contributions 

from IRAs will increase giving to charitable organizations. Therefore, the Committee believes that the exclusion for qualified charitable distributions should be extended for two years. 

EXPLANATION OF PROVISION

The provision extends the exclusion from gross income for qualified charitable distributions from an IRA for two years, i.e., for distributions made in taxable years beginning before January 1, 2017. 

EFFECTIVE DATE

The provision is effective for distributions made in taxable years 

beginning after December 31, 2014. 


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29Sec. 41(a)(1). Except where otherwise specified, all section references are to the Internal 

Revenue Code of 1986, as amended (the ‘‘Code’’). 30Sec. 41(c)(5). 31Sec. 41(a)(2) and (e). The base period for the basic research credit generally extends from 

1981 through 1983. 32Sec. 41(a)(3). 33Sec. 41(h). 

B. BUSINESS TAX EXTENDERS

1. Extension and modification of research credit (sec. 111 of the bill 

and secs. 38 and 41 and new sec. 3111(f) of the Code) 

PRESENT LAW

Research credit 

General rule 

For general research expenditures, a taxpayer may claim a research credit equal to 20 percent of the amount by which the taxpayer’s qualified research expenses for a taxable year exceed its 

base amount for that year.29 Thus, the research credit is generally 

available with respect to incremental increases in qualified research. An alternative simplified credit (with a 14-percent rate and 

a different base amount) may be claimed in lieu of this credit.30

A 20-percent research tax credit also is available with respect to 

the excess of (1) 100 percent of corporate cash expenses (including 

grants or contributions) paid for basic research conducted by universities (and certain nonprofit scientific research organizations) 

over (2) the sum of (a) the greater of two minimum basic research 

floors plus (b) an amount reflecting any decrease in nonresearch 

giving to universities by the corporation as compared to such giving 

during a fixed-base period, as adjusted for inflation.31 This separate credit computation commonly is referred to as the basic research credit. 

Finally, a research credit is available for a taxpayer’s expenditures on research undertaken by an energy research consortium.32

This separate credit computation commonly is referred to as the 

energy research credit. Unlike the other research credits, the energy research credit applies to all qualified expenditures, not just 

those in excess of a base amount. 

The research credit, including the basic research credit and the 

energy research credit, expires for amounts paid or incurred after 

December 31, 2014.33

Computation of general research credit 

The general research tax credit applies only to the extent that 

the taxpayer’s qualified research expenses for the current taxable 

year exceed its base amount. The base amount for the current year 

generally is computed by multiplying the taxpayer’s fixed-base percentage by the average amount of the taxpayer’s gross receipts for 

the four preceding years. If a taxpayer both incurred qualified research expenses and had gross receipts during each of at least 

three years from 1984 through 1988, then its fixed-base percentage 

is the ratio that its total qualified research expenses for the 1984– 

1988 period bears to its total gross receipts for that period (subject 

to a maximum fixed-base percentage of 16 percent). Special rules 


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34The Small Business Job Protection Act of 1996 expanded the definition of start-up firms 

under section 41(c)(3)(B)(i) to include any firm if the first taxable year in which such firm had 

both gross receipts and qualified research expenses began after 1983. A special rule (enacted 

in 1993) is designed to gradually recompute a start-up firm’s fixed-base percentage based on its 

actual research experience. Under this special rule, a start-up firm is assigned a fixed-base percentage of three percent for each of its first five taxable years after 1993 in which it incurs 

qualified research expenses. A start-up firm’s fixed-base percentage for its sixth through tenth 

taxable years after 1993 in which it incurs qualified research expenses is a phased-in ratio 

based on the firm’s actual research experience. For all subsequent taxable years, the taxpayer’s 

fixed-base percentage is its actual ratio of qualified research expenses to gross receipts for any 

five years selected by the taxpayer from its fifth through tenth taxable years after 1993. Sec. 

41(c)(3)(B). 35Sec. 41(c)(5)(A). 36Sec. 41(c)(5)(B). 37Sec. 41(c)(5)(C). 38 Under a special rule, 75 percent of amounts paid to a research consortium for qualified research are treated as qualified research expenses eligible for the research credit (rather than 

65 percent under the general rule under section 41(b)(3) governing contract research expenses) 

if (1) such research consortium is a tax-exempt organization that is described in section 501(c)(3) 

(other than a private foundation) or section 501(c)(6) and is organized and operated primarily 

to conduct scientific research, and (2) such qualified research is conducted by the consortium 

on behalf of the taxpayer and one or more persons not related to the taxpayer. Sec. 41(b)(3)(C). 39Sec. 41(d)(3). 

apply to all other taxpayers (so called start-up firms).34 In computing the research credit, a taxpayer’s base amount cannot be less 

than 50 percent of its current-year qualified research expenses. 

Alternative simplified credit 

The alternative simplified credit is equal to 14 percent of qualified research expenses that exceed 50 percent of the average qualified research expenses for the three preceding taxable years.35 The 

rate is reduced to 6 percent if a taxpayer has no qualified research 

expenses in any one of the three preceding taxable years.36 An election to use the alternative simplified credit applies to all succeeding taxable years unless revoked with the consent of the Secretary.37

Eligible expenses 

Qualified research expenses eligible for the research tax credit 

consist of: (1) in-house expenses of the taxpayer for wages and supplies attributable to qualified research; (2) certain time-sharing 

costs for computer use in qualified research; and (3) 65 percent of 

amounts paid or incurred by the taxpayer to certain other persons 

for qualified research conducted on the taxpayer’s behalf (so-called 

contract research expenses).38 Notwithstanding the limitation for 

contract research expenses, qualified research expenses include 100 

percent of amounts paid or incurred by the taxpayer to an eligible 

small business, university, or Federal laboratory for qualified energy research. 

To be eligible for the credit, the research not only has to satisfy 

the requirements of section 174, but also must be undertaken for 

the purpose of discovering information that is technological in nature, the application of which is intended to be useful in the development of a new or improved business component of the taxpayer, 

and substantially all of the activities of which constitute elements 

of a process of experimentation for functional aspects, performance, 

reliability, or quality of a business component. Research does not 

qualify for the credit if substantially all of the activities relate to 

style, taste, cosmetic, or seasonal design factors.39 In addition, research does not qualify for the credit if: (1) conducted after the beginning of commercial production of the business component; (2) reVerDate Sep 11 2014 05:21 Aug 08, 2015 Jkt 049010 PO 00000 Frm 00026 Fmt 6659 Sfmt 6602 E:\HR\OC\SR118.XXX SR118

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40Sec. 41(d)(4). 41Sec. 280C(c). For example, assume that a taxpayer makes credit-eligible research expenditures of $1 million during the year and that the base amount is $600,000. Under the standard 

credit calculation (i.e., where a taxpayer may claim a research credit equal to 20 percent of the 

amount by which its qualified expenses for the year exceed its base period amount), the taxpayer is allowed a credit equal to 20 percent of the $400,000 increase in research expenditures, 

or $80,000 (($1 million ¥ $600,000) * 20% = $80,000). To avoid a double benefit, the amount 

of the taxpayer’s deduction under section 174 is reduced by $80,000 (the amount of the research 

credit), leaving a deduction of $920,000 ($1 million ¥ $80,000). 42Sec. 280C(c)(3). Taxpayers making this election reduce the allowable research credit by the 

maximum corporate tax rate (currently 35 percent). Continuing with the example from the prior 

footnote, an electing taxpayer would have its credit reduced to $52,000 ($80,000 ¥ ($80,000 * 

0.35%)), but would retain its $1 million deduction for research expenses. For example, this option might be desirable for a taxpayer who cannot claim the full amount of the research credit 

otherwise allowable due to the limitation imposed by the alternative minimum tax. 43Secs. 3101–3128. 44For taxable years beginning after 2012, the employee portion of the HI tax under FICA (not 

the employer portion) is increased by an additional tax of 0.9 percent on wages received in excess of a threshold amount. The threshold amount is $250,000 in the case of a joint return, 

$125,000 in the case of a married individual filing a separate return, and $200,000 in any other 

case. 

lated to the adaptation of an existing business component to a particular customer’s requirements; (3) related to the duplication of an 

existing business component from a physical examination of the 

component itself or certain other information; (4) related to certain 

efficiency surveys, management function or technique, market research, market testing, or market development, routine data collection or routine quality control; (5) related to software developed primarily for internal use by the taxpayer; (6) conducted outside the 

United States, Puerto Rico, or any U.S. possession; (7) in the social 

sciences, arts, or humanities; or (8) funded by any grant, contract, 

or otherwise by another person (or government entity).40

Relation to deduction 

Deductions allowed to a taxpayer under section 174 (or any other 

section) are reduced by an amount equal to 100 percent of the taxpayer’s research tax credit determined for the taxable year.41 Taxpayers may alternatively elect to claim a reduced research tax 

credit amount under section 41 in lieu of reducing deductions otherwise allowed.42

FICA taxes 

The Federal Insurance Contributions Act (‘‘FICA’’) imposes tax 

on employers and employees based on the amount of wages (as defined for FICA purposes) paid to an employee during the year, 

often referred to as ‘‘payroll’’ taxes.43 The tax imposed on the employer and on the employee is each composed of two parts: (1) the 

Social Security or old age, survivors, and disability insurance 

(‘‘OASDI’’) tax equal to 6.2 percent of covered wages up to the taxable wage base ($118,500 for 2015); and (2) the Medicare or hospital insurance (‘‘HI’’) tax equal to 1.45 percent of all covered 

wages.44 The employee portion of the FICA tax generally must be 

withheld and remitted to the Federal government by the employer. 

An employer generally files quarterly employment tax returns 

showing its liability for FICA taxes with respect to its employees’ 

wages for the quarter, as well as the employee FICA taxes and income taxes withheld from the employees’ wages. 


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45The term ‘‘net income tax’’ means the sum of the regular tax liability and the alternative 

minimum tax, reduced by the credits allowable under sections 21 through 30D. Sec. 38(c)(1). 46The term ‘‘net regular tax liability’’ means the regular tax liability reduced by the sum of 

certain nonrefundable personal and other credits. Sec. 38(c)(1). 47Sec. 38(c)(1). 48Sec. 39(a)(1). 49See sec. 55(b). For example, assume a taxpayer has a regular tax of $80,000, a tentative minimum tax of $100,000, and a research credit determined under section 41 of $90,000 for a 

taxable year (and no other credits). Under present law, the taxpayer’s research credit is limited 

to the excess of $100,000 over the greater of (1) $100,000 or (2) $13,750 (25% of the excess of 

$80,000 over $25,000). Accordingly, no research credit may be claimed ($100,000¥$100,000 = 

$0) for the taxable year and the taxpayer’s net tax liability is $100,000. The $90,000 research 

credit may be carried back or forward under the rules applicable to the general business credit. 50Sec. 55(e). 51See section 38(c)(4)(B) for the list of specified credits, which does not presently include the 

research credit determined under section 41. 52Sec. 38(c)(5)(B). 53Sec. 38(c)(5)(C). 54Sec. 38(c)(5)(D). 

Specified credits allowed against alternative minimum tax 

For any taxable year, the general business credit (which is the 

sum of the various business credits) generally may not exceed the 

excess of the taxpayer’s net income tax 45 over the greater of (1) the 

taxpayer’s tentative minimum tax or (2) 25 percent of so much of 

the taxpayer’s net regular tax liability 46 as exceeds $25,000.47 Any 

general business credit in excess of this limitation may be carried 

back one year and forward up to 20 years.48 The tentative minimum tax is an amount equal to specified rates of tax imposed on 

the excess of the alternative minimum taxable income over an exemption amount.49 Generally, the tentative minimum tax of a C corporation with average annual gross receipts of less than $7.5 

million for prior three-year periods is zero.50

In applying the tax liability limitation to a list of ‘‘specified credits’’ that are part of the general business credit, the tentative minimum tax is treated as being zero.51 Thus, the specified credits 

generally may offset both regular tax and alternative minimum tax 

(‘‘AMT’’) liabilities. 

For taxable years beginning in 2010, an eligible small business 

was allowed to offset both the regular and AMT liability with the 

general business credits determined for the taxable year (‘‘eligible 

small business credits’’).52 For this purpose, an eligible small business was, with respect to any taxable year, a corporation, the stock 

of which was not publicly traded, a partnership, or a sole proprietor, if the average annual gross receipts did not exceed $50 million.53 Credits determined with respect to a partnership or S corporation were not treated as eligible small business credits by a 

partner or shareholder unless the partner or shareholder met the 

gross receipts test for the taxable year in which the credits were 

treated as current year business credits.54

REASONS FOR CHANGE

The Committee acknowledges that research is important to the 

economy. Research is the basis of new products, new services, new 

industries, and new jobs. There can be cases where an individual 

business may not find it profitable to invest in research as much 

as it otherwise might because it is difficult to capture the full benefits from the research and prevent such benefits from being used 

by competitors. At the same time, research may create great benefits that spill over to society at large. To encourage activities that 


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55The credit does not apply against its employer HI liability or against the employee portion 

of FICA taxes the employer is required to withhold and remit to the government. 56Thus, taxpayers are either denied a section 174 deduction in the amount of the credit or 

may elect a reduced research credit amount. The election is not taken into account for purposes 

of determining any amount allowable as a payroll tax deduction. 57For this purpose, gross receipts are determined under the rules of section 448(c)(3), without 

regard to subparagraph (A) thereof. 

will result in these spillover benefits to society at large, the government acts to promote research in a variety of ways, including 

granting patents and direct funding of research. Another way for 

the government to promote research is through tax incentives such 

as the research credit. The Committee therefore believes it is appropriate to extend the present-law research credit. 

In addition, the Committee wants to help small businesses have 

better access to and be able to benefit from the research credit. In 

some cases, a small business may not have sufficient income tax 

liability for a particular year against which to apply the credit. In 

that case, the Committee believes it is appropriate to allow a limited amount of a taxpayer’s research credit to be claimed against 

its payroll tax liability. The Committee also believes that in the 

case of small businesses, it is appropriate to allow the research 

credit to be claimed against the AMT. 

EXPLANATION OF PROVISION

Research credit 

The provision extends the present law credit for two years, for 

qualified research expenses paid or incurred before January 1, 

2017. 

Payroll tax credit 

In general 

Under the provision, a qualified small business may elect for any 

taxable year to claim a certain amount of its research credit as a 

payroll tax credit against its employer OASDI liability, rather than 

against its income tax liability.55 If a taxpayer makes an election 

under this provision, the amount so elected is treated as a research 

credit for purposes of section 280C.56

A qualified small business is defined, with respect to any taxable 

year, as a corporation (including an S corporation) or partnership 

(1) with gross receipts of less than $5 million for the taxable year,57

and (2) that did not have gross receipts for any taxable year before 

the five taxable year period ending with the taxable year. An individual carrying on one or more trades or businesses also may be 

considered a qualified small business if the individual meets the 

conditions set forth in (1) and (2), taking into account its aggregate 

gross receipts received with respect to all trades or businesses. A 

qualified small business does not include an organization exempt 

from income tax under section 501. 

The payroll tax credit portion is the least of (1) an amount specified by the taxpayer that does not exceed $250,000, (2) the research 

credit determined for the taxable year, or (3) in the case of a qualified small business other than a partnership or S corporation, the 

amount of the business credit carryforward under section 39 from 

the taxable year (determined before the application of this provision to the taxable year). 


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58For this purpose, all persons or entities treated as a single taxpayer under section 41(f)(1) 

are treated as a single person. 59 In the case of a qualified small business that is a partnership, this is the return required 

to be filed under section 6031. In the case of a qualified small business that is an S corporation, 

this is the return required to be filed under section 6037. In the case of any other qualified small 

business, this is the return of tax for the taxable year. 

For purposes of this provision, all members of the same controlled group or group under common control are treated as a single taxpayer.58 The $250,000 amount is allocated among the members in proportion to each member’s qualified research expenses. 

Each member may separately elect the payroll tax credit, but not 

in excess of its allocated dollar amount. 

A taxpayer may make an annual election under this section, specifying the amount of its research credit not to exceed $250,000 

that may be used as a payroll tax credit, on or before the due date 

(including extensions) of its originally filed return.59 A taxpayer 

may not make an election for a taxable year if it has made such 

an election for five or more preceding taxable years. An election to 

apply the research credit against OASDI liability may not be revoked without the consent of the Secretary of the Treasury (‘‘Secretary’’). In the case of a partnership or S corporation, an election 

to apply the credit against its OASDI liability is made at the entity 

level. 

Application of credit against OASDI tax liability 

The payroll tax portion of the research credit is allowed as a 

credit against the qualified small business’s OASDI tax liability for 

the first calendar quarter beginning after the date on which the 

qualified small business files its income tax or information return 

for the taxable year. The credit may not exceed the OASDI tax liability for a calendar quarter on the wages paid with respect to all 

employees of the qualified small business. 

If the payroll tax portion of the credit exceeds the qualified small 

business’s OASDI tax liability for a calendar quarter, the excess is 

allowed as a credit against the OASDI liability for the following 

calendar quarter. Any amount not credited for the following calendar quarter is allowed as a credit against the qualified small 

business’s OASDI tax liability in succeeding calendar quarters 

until the entire credit amount is used. 

Other rules 

The Secretary is directed to prescribe such regulations as are 

necessary to carry out the purposes of the provision, including (1) 

to prevent the avoidance of the purposes of the limitations and aggregation rules through the use of successor companies or other 

means, (2) to minimize compliance and record-keeping burdens, 

and (3) for recapture of the credit amount applied against OASDI 

taxes in the case of an adjustment to the payroll tax portion of the 

research credit, including requiring amended returns in such a 

case. 

Specified credits allowed against alternative minimum tax 

The provision also provides that, in the case of an eligible small 

business (as defined in section 38(c)(5)(C)), the research credit determined under section 41 for taxable years beginning after December 31, 2014 is a specified credit. Thus, these research credits of 


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60 Using the above example, under this provision, the limitation would be the excess of $80,000 over the greater of (1) $0 or (2) $13,750. Since $13,750 is greater than $0, the $80,000 

would be reduced by $13,750 such that the research credit limitation would be $66,250. Hence, 

the taxpayer would be able to claim a research credit of $66,250 against its net income tax liability, as well as its AMT liability, which would result in $33,750 of total tax owed ($100,000 

¥ $66,250). The remaining $23,750 of its research credit ($90,000 ¥ $66,250) may be carried 

back or forward, as applicable. 

an eligible small business may offset both regular tax and AMT liabilities.60

EFFECTIVE DATE

The provision to extend the research credit for two years is effective for amounts paid or incurred after December 31, 2014. The 

provision to allow the research credit against employer OASDI tax 

is effective for credits determined for taxable years beginning after 

December 31, 2014. The provision to allow the research credit 

against AMT is effective for research credits of eligible small businesses determined for taxable years beginning after December 31, 

2014, and to carrybacks of such credits. 

2. Extension and modification of temporary minimum low-income 

housing tax credit rate for non-Federally subsidized buildings 

(sec. 112 of the bill and sec. 42 of the Code) 

PRESENT LAW

In general 

The low-income housing credit may be claimed over a 10-year 

credit period after each low-income building is placed in service. 

The amount of the credit for any taxable year in the credit period 

is the applicable percentage of the qualified basis of each qualified 

low-income building. 

Present value credit 

The calculation of the applicable percentage is designed to 

produce a credit equal to: (1) 70 percent of the present value of the 

building’s qualified basis in the case of newly constructed or substantially rehabilitated housing that is not Federally subsidized 

(the ‘‘70-percent credit’’); or (2) 30 percent of the present value of 

the building’s qualified basis in the case of newly constructed or 

substantially rehabilitated housing that is Federally subsidized and 

existing housing that is substantially rehabilitated (the ‘‘30-percent 

credit’’). Where existing housing is substantially rehabilitated, the 

existing housing is eligible for the 30-percent credit and the qualified rehabilitation expenses (if not Federally subsidized) are eligible for the 70-percent credit. 

Calculation of the applicable percentage 

In general 

The credit percentage for a low-income building is set for the earlier of: (1) the month the building is placed in service; or (2) at the 

election of the taxpayer, (a) the month the taxpayer and the housing credit agency enter into a binding agreement with respect to 

such building for a credit allocation, or (b) in the case of a tax-exempt bond-financed project for which no credit allocation is required, the month in which the tax-exempt bonds are issued. 


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These credit percentages (used for the 70-percent credit and 30- 

percent credit) are adjusted monthly by the IRS on a discounted 

after-tax basis (assuming a 28-percent tax rate) based on the average of the Applicable Federal Rates for mid-term and long-term obligations for the month the building is placed in service. The discounting formula assumes that each credit is received on the last 

day of each year and that the present value is computed on the last 

day of the first year. In a project consisting of two or more buildings placed in service in different months, a separate credit percentage may apply to each building. 

Special rule 

Under this rule the applicable percentage is set at a minimum 

of nine percent for newly constructed non-Federally subsidized 

buildings placed in service after July 30, 2008, and before January 

1, 2015. 

REASONS FOR CHANGE

There is a critical shortage of affordable housing. Historically low 

Federal interest rates result in lower credit amounts for low-income housing tax credit properties. To reduce uncertainty and financial risk in the adjustable rate, the Committee believes that an 

extension of the temporary minimum percentage for newly constructed non-Federally subsidized buildings is warranted. Similarly, the Committee believes establishing a temporary minimum 

percentage for existing non-Federally subsidized buildings also is 

appropriate to increase the financial feasibility for the renovation 

and preservation of older properties. 

EXPLANATION OF PROVISION

The provision extends the temporary minimum applicable percentage of nine percent for newly constructed non-Federally subsidized buildings with respect to which credit allocations are made 

before January 1, 2017. The provision also establishes a four-percent minimum credit rate for acquisition of existing housing that 

is not Federally subsidized. Any existing housing that is also financed with tax-exempt bonds is considered Federally subsidized 

for this purpose and therefore is not eligible for the four-percent 

minimum credit rate. This minimum credit rate only applies to the 

acquisition of existing buildings that receive housing credit dollar 

allocations which are subject to caps from State housing credit 

agencies. The four-percent minimum credit rate applies to buildings placed in service after the date of enactment with respect to 

which credit allocations are made before January 1, 2017. 

EFFECTIVE DATE

The provision is effective on January 1, 2015. 


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3. Extension of military housing allowance exclusion for determining area median gross income (sec. 113 of the bill and secs. 

42 and 142 of the Code) 

PRESENT LAW

In general 

In order to be eligible for the low-income housing credit, a qualified low-income building must be part of a qualified low-income 

housing project. In general, a qualified low-income housing project 

is defined as a project that satisfies one of two tests at the election 

of the taxpayer. The first test is met if 20 percent or more of the 

residential units in the project are both rent-restricted, and occupied by individuals whose income is 50 percent or less of area median gross income (the ‘‘20–50 test’’). The second test is met if 40 

percent or more of the residential units in such project are both 

rent-restricted, and occupied by individuals whose income is 60 

percent or less of area median gross income (the ‘‘40–60 test’’). 

These income figures are adjusted for family size. 

Rule for income determinations before July 30, 2008 and on or after 

January 1, 2015 

The recipients of the military basic housing allowance must include these amounts for purposes of low-income credit eligibility income test, as described above. 

Special rule for income determination before January 1, 2015 

Under a temporary provision, the basic housing allowance (i.e., 

payments under 37 U.S.C. sec. 403) is not included in income for 

the low-income credit income eligibility rules. The provision is limited in application to qualified buildings. A qualified building is defined as any building located: 

1. any county which contains a qualified military installation 

to which the number of members of the Armed Forces assigned 

to units based out of such qualified military installation has increased by 20 percent or more as of June 1, 2008, over the personnel level on December 31, 2005; and 

2. any counties adjacent to a county described in (1), above. 

For these purposes, a qualified military installation is any military installation or facility with at least 1000 members of the 

Armed Forces assigned to it. 

The provision applies to income determinations: (1) made after 

July 30, 2008, and before January 1, 2015, in the case of qualified 

buildings which received credit allocations on or before July 30, 

2008, or qualified buildings placed in service on or before July 30, 

2008, to the extent a credit allocation was not required with respect to such building by reason of section 42(h)(4) (i.e., such qualified building was at least 50 percent tax-exempt bond financed 

with bonds subject to the private activity bond volume cap) but 

only with respect to bonds issued before July 30, 2008; and (2) 

made after July 30, 2008, in the case of qualified buildings which 

received credit allocations after July 30, 2008 and before January 

1, 2015, or qualified buildings placed in service after July 30, 2008, 

and before January 1, 2015, to the extent a credit allocation was 

not required with respect to such qualified building by reason of 


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61Sec. 45A. 62Pub. L. No. 93–262. 63Pub. L. No. 95–608. 

42(h)(4) (i.e., such qualified building was at least 50 percent taxexempt bond financed with bonds subject to the private activity 

bond volume cap) but only with respect to bonds issued after July 

30, 2008, and before January 1, 2015. 

REASONS FOR CHANGE

The Committee believes that encouraging owners of low-income 

housing credit properties to rent such subsidized units to military 

families is appropriate. 

EXPLANATION OF PROVISION

The provision extends the special rule two additional years 

(through December 31, 2016). 

EFFECTIVE DATE

The provision is effective as if included in the enactment of section 3005 of the Housing Assistance Tax Act of 2008. 

4. Extension of Indian employment tax credit (sec. 114 of the bill 

and sec. 45A of the Code) 

PRESENT LAW

In general, a credit against income tax liability is allowed to employers for the first $20,000 of qualified wages and qualified employee health insurance costs paid or incurred by the employer 

with respect to certain employees.61 The credit is equal to 20 percent of the excess of eligible employee qualified wages and health 

insurance costs during the current year over the amount of such 

wages and costs incurred by the employer during 1993. The credit 

is an incremental credit, such that an employer’s current-year 

qualified wages and qualified employee health insurance costs (up 

to $20,000 per employee) are eligible for the credit only to the extent that the sum of such costs exceeds the sum of comparable 

costs paid during 1993. No deduction is allowed for the portion of 

the wages equal to the amount of the credit. 

Qualified wages means wages paid or incurred by an employer 

for services performed by a qualified employee. A qualified employee means any employee who is an enrolled member of an Indian tribe or the spouse of an enrolled member of an Indian tribe, 

who performs substantially all of the services within an Indian reservation, and whose principal place of abode while performing such 

services is on or near the reservation in which the services are performed. An ‘‘Indian reservation’’ is a reservation as defined in section 3(d) of the Indian Financing Act of 1974 62 or section 4(10) of 

the Indian Child Welfare Act of 1978.63 For purposes of the preceding sentence, section 3(d) is applied by treating ‘‘former Indian 

reservations in Oklahoma’’ as including only lands that are (1) 

within the jurisdictional area of an Oklahoma Indian tribe as determined by the Secretary of the Interior, and (2) recognized by 

such Secretary as an area eligible for trust land status under 25 

C.F.R. Part 151 (as in effect on August 5, 1997). 


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64See Instructions for Form 8845, Indian Employment Credit (2014). 65Section 45D was added by section 121(a) of the Community Renewal Tax Relief Act of 2000, 

Pub. L. No. 106–554. 66Sec. 45D(a)(2). 

An employee is not treated as a qualified employee for any taxable year of the employer if the total amount of wages paid or incurred by the employer with respect to such employee during the 

taxable year exceeds an amount determined at an annual rate of 

$30,000 (which after adjustment for inflation is $45,000 for 2014).64

In addition, an employee will not be treated as a qualified employee under certain specific circumstances, such as where the employee is related to the employer (in the case of an individual employer) or to one of the employer’s shareholders, partners, or 

grantors. Similarly, an employee will not be treated as a qualified 

employee where the employee has more than a five percent ownership interest in the employer. Finally, an employee will not be considered a qualified employee to the extent the employee’s services 

relate to gaming activities or are performed in a building housing 

such activities. 

The wage credit is available for wages paid or incurred in taxable 

years beginning on or before December 31, 2014. 

REASONS FOR CHANGE

To further encourage employment on Indian reservations, the 

Committee believes it is appropriate to extend the Indian employment credit an additional two years. 

EXPLANATION OF PROVISION

The provision extends for two years the present-law Indian employment credit (through taxable years beginning on or before December 31, 2016). 

EFFECTIVE DATE

The provision is effective for taxable years beginning after December 31, 2014. 

5. Extension and modification of new markets tax credit (sec. 115 

of the bill and sec. 45D of the Code) 

PRESENT LAW

Section 45D provides a new markets tax credit for qualified equity investments made to acquire stock in a corporation, or a capital interest in a partnership, that is a qualified community development entity (‘‘CDE’’).65 The amount of the credit allowable to the 

investor (either the original purchaser or a subsequent holder) is 

(1) a five-percent credit for the year in which the equity interest 

is purchased from the CDE and for each of the following two years, 

and (2) a six-percent credit for each of the following four years.66

The credit is determined by applying the applicable percentage 

(five or six percent) to the amount paid to the CDE for the investment at its original issue, and is available to the taxpayer who 

holds the qualified equity investment on the date of the initial investment or on the respective anniversary date that occurs during 


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67Sec. 45D(a)(3). 68Sec. 45D(g). 69Sec. 45D(c). 70Sec. 45D(b). 71Sec. 45D(d). 72Sec. 45D(e). 73Sec. 45D(e)(2). 74Pub. L. No. 103–325. 

the taxable year.67 The credit is recaptured if at any time during 

the seven-year period that begins on the date of the original issue 

of the investment the entity (1) ceases to be a qualified CDE, (2) 

the proceeds of the investment cease to be used as required, or (3) 

the equity investment is redeemed.68

A qualified CDE is any domestic corporation or partnership: (1) 

whose primary mission is serving or providing investment capital 

for low-income communities or low-income persons; (2) that maintains accountability to residents of low-income communities by 

their representation on any governing board of or any advisory 

board to the CDE; and (3) that is certified by the Secretary as 

being a qualified CDE.69 A qualified equity investment means stock 

(other than nonqualified preferred stock) in a corporation or a capital interest in a partnership that is acquired at its original issue 

directly (or through an underwriter) from a CDE for cash, and includes an investment of a subsequent purchaser if such investment 

was a qualified equity investment in the hands of the prior holder.70 Substantially all of the investment proceeds must be used by 

the CDE to make qualified low-income community investments and 

the investment must be designated as a qualified equity investment by the CDE. For this purpose, qualified low-income community investments include: (1) capital or equity investments in, or 

loans to, qualified active low-income community businesses; (2) certain financial counseling and other services to businesses and residents in low-income communities; (3) the purchase from another 

CDE of any loan made by such entity that is a qualified low-income 

community investment; or (4) an equity investment in, or loan to, 

another CDE.71

A ‘‘low-income community’’ is a population census tract with either (1) a poverty rate of at least 20 percent or (2) median family 

income which does not exceed 80 percent of the greater of metropolitan area median family income or statewide median family income (for a non-metropolitan census tract, does not exceed 80 percent of statewide median family income). In the case of a population census tract located within a high migration rural county, 

low-income is defined by reference to 85 percent (as opposed to 80 

percent) of statewide median family income.72 For this purpose, a 

high migration rural county is any county that, during the 20-year 

period ending with the year in which the most recent census was 

conducted, has a net out-migration of inhabitants from the county 

of at least 10 percent of the population of the county at the beginning of such period. 

The Secretary is authorized to designate ‘‘targeted populations’’ 

as low-income communities for purposes of the new markets tax 

credit.73 For this purpose, a ‘‘targeted population’’ is defined by reference to section 103(20) of the Riegle Community Development 

and Regulatory Improvement Act of 1994 74 (the ‘‘Act’’) to mean individuals, or an identifiable group of individuals, including an InVerDate Sep 11 2014 05:21 Aug 08, 2015 Jkt 049010 PO 00000 Frm 00036 Fmt 6659 Sfmt 6602 E:\HR\OC\SR118.XXX SR118

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75Pub. L. No. 103–325. 76Sec. 45D(d)(2). 

dian tribe, who are low-income persons or otherwise lack adequate 

access to loans or equity investments. Section 103(17) of the Act 

provides that ‘‘low-income’’ means (1) for a targeted population 

within a metropolitan area, less than 80 percent of the area median family income; and (2) for a targeted population within a nonmetropolitan area, less than the greater of—80 percent of the area 

median family income, or 80 percent of the statewide non-metropolitan area median family income.75 A targeted population is not 

required to be within any census tract. In addition, a population 

census tract with a population of less than 2,000 is treated as a 

low-income community for purposes of the credit if such tract is 

within an empowerment zone, the designation of which is in effect 

under section 1391 of the Code, and is contiguous to one or more 

low-income communities. 

A qualified active low-income community business is defined as 

a business that satisfies, with respect to a taxable year, the following requirements: (1) at least 50 percent of the total gross income of the business is derived from the active conduct of trade or 

business activities in any low-income community; (2) a substantial 

portion of the tangible property of the business is used in a lowincome community; (3) a substantial portion of the services performed for the business by its employees is performed in a low-income community; and (4) less than five percent of the average of 

the aggregate unadjusted bases of the property of the business is 

attributable to certain financial property or to certain collectibles.76

The maximum annual amount of qualified equity investments was $3.5 billion for calendar years 2010, 2011, 2012, 2013, and 

2014. The new markets tax credit expired on December 31, 2014. 

No amount of unused allocation limitation may be carried to any 

calendar year after 2019. 

REASONS FOR CHANGE

The Committee believes that the new markets tax credit has 

proven to be an effective means of providing equity and other investments to benefit businesses in low income communities, and 

that it is appropriate to provide for the allocation of additional tax 

credit authority for another two calendar years. The Committee 

also believes that it is appropriate to provide for a one-time adjustment to the credit limitation (by the rate of inflation from 2008 

through 2014) in order to partially offset allocation erosion due to 

inflation. 

EXPLANATION OF PROVISION

The provision extends the new markets tax credit for two years, 

through 2016, permitting up to $3.94 billion in qualified equity investments for each of the 2015 and 2016 calendar years. The provision also extends for two years, through 2021, the carryover period 

for unused new markets tax credits. 

EFFECTIVE DATE

The provision applies to calendar years beginning after December 

31, 2014. 


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77Sec. 45G(a) and (f). 78Sec. 45G(b)(1). 79Sec. 38(c)(4). 80Sec. 45G(e)(3). 81Sec. 45G(d). 82Sec. 45G(c). 83Sec. 45G(e)(1). 

6. Extension and modification of railroad track maintenance credit 

(sec. 116 of the bill and sec. 45G of the Code) 

PRESENT LAW

Present law provides a 50-percent business tax credit for qualified railroad track maintenance expenditures paid or incurred by 

an eligible taxpayer during taxable years beginning before January 

1, 2015.77 The credit is limited to the product of $3,500 times the 

number of miles of railroad track (1) owned or leased by an eligible 

taxpayer as of the close of its taxable year, and (2) assigned to the 

eligible taxpayer by a Class II or Class III railroad that owns or 

leases such track at the close of the taxable year.78 Each mile of 

railroad track may be taken into account only once, either by the 

owner of such mile or by the owner’s assignee, in computing the 

per-mile limitation. The credit also may reduce a taxpayer’s tax liability below its tentative minimum tax.79 Basis of the railroad 

track must be reduced (but not below zero) by an amount equal to 

100 percent of the taxpayer’s qualified railroad track maintenance 

tax credit determined for the taxable year.80

Qualified railroad track maintenance expenditures are defined as 

gross expenditures (whether or not otherwise chargeable to capital 

account) for maintaining railroad track (including roadbed, bridges, 

and related track structures) owned or leased as of January 1, 

2005, by a Class II or Class III railroad (determined without regard 

to any consideration for such expenditure given by the Class II or 

Class III railroad which made the assignment of such track).81

An eligible taxpayer means any Class II or Class III railroad, 

and any person who transports property using the rail facilities of 

a Class II or Class III railroad or who furnishes railroad-related 

property or services to a Class II or Class III railroad, but only 

with respect to miles of railroad track assigned to such person by 

such railroad under the provision.82

The terms Class II or Class III railroad have the meanings given 

by the Surface Transportation Board.83

REASONS FOR CHANGE

The Committee believes that Class II and Class III railroads are 

an important part of the nation’s railway system. Therefore, the 

Committee believes that this incentive for railroad track maintenance expenditures should be extended and expanded prospectively 

to apply to qualified railroad track owned or leased by January 1, 

2015. 

EXPLANATION OF PROVISION

The provision extends the present law credit for two years, for 

qualified railroad track maintenance expenditures paid or incurred 

in taxable years beginning after December 31, 2014, and before 

January 1, 2017. 


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84Sec. 45N(a). 85Sec. 45N(b). 86Sec. 45N(c). 87Section 3306(b) defines wages for purposes of Federal Unemployment Tax. 88Sec. 45N(d). 89Sec. 280C(e). 90Sec. 45N(e). 91Sec. 38(c). 

The provision also provides that qualified railroad track maintenance expenditures are defined as gross expenditures (whether or 

not otherwise chargeable to capital account) for maintaining railroad track (including roadbed, bridges, and related track structures) owned or leased as of January 1, 2015, by a Class II or Class 

III railroad (determined without regard to any consideration for 

such expenditure given by the Class II or Class III railroad which 

made the assignment of such track). 

EFFECTIVE DATE

The provision is effective for expenditures paid or incurred in 

taxable years beginning after December 31, 2014. 

7. Extension of mine rescue team training credit (sec. 117 of the 

bill and sec. 45N of the Code) 

PRESENT LAW

An eligible employer may claim a general business credit against 

income tax with respect to each qualified mine rescue team employee equal to the lesser of: (1) 20 percent of the amount paid or 

incurred by the taxpayer during the taxable year with respect to 

the training program costs of the qualified mine rescue team employee (including the wages of the employee while attending the 

program); or (2) $10,000.84 A qualified mine rescue team employee 

is any full-time employee of the taxpayer who is a miner eligible 

for more than six months of a taxable year to serve as a mine rescue team member by virtue of either having completed the initial 

20 hour course of instruction prescribed by the Mine Safety and 

Health Administration’s Office of Educational Policy and Development, or receiving at least 40 hours of refresher training in such 

instruction.85

An eligible employer is any taxpayer which employs individuals 

as miners in underground mines in the United States.86 The term 

‘‘wages’’ has the meaning given to such term by section 3306(b) 87

(determined without regard to any dollar limitation contained in 

that section).88

No deduction is allowed for the portion of the expenses otherwise 

deductible that is equal to the amount of the credit.89 The credit 

does not apply to taxable years beginning after December 31, 

2014.90 Additionally, the credit is not allowable for purposes of 

computing the alternative minimum tax.91

REASONS FOR CHANGE

The Committee believes that training mine rescue team employees will help ensure a positive outcome for individuals operating in 

and around a mine in the event of an accident. Therefore, the Committee believes that this incentive for costs incurred to train mine 

rescue teams should be extended. 


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92Sec. 162(a)(1). 93Sec. 414(b), (c), (m) and (o). 94 Chapter 43 of Title 38 of the United States Code deals with these rights. 95Sec. 3401(h)(2). 

EXPLANATION OF PROVISION

The provision extends the credit for two years through taxable 

years beginning on or before December 31, 2016. 

EFFECTIVE DATE

The provision is effective for taxable years beginning after December 31, 2014. 

8. Extension and modification of employer wage credit for employees who are active duty members of the uniformed services (sec. 

118 of the bill and sec. 45P of the Code) 

PRESENT LAW

Differential pay 

In general, compensation paid by an employer to an employee is 

deductible by the employer unless the expense must be capitalized.92 In the case of an employee who is called to active duty with 

respect to the armed forces of the United States, some employers 

voluntarily pay the employee the difference between the compensation that the employer would have paid to the employee during the 

period of military service less the amount of pay received by the 

employee from the military. This payment by the employer is often 

referred to as ‘‘differential pay.’’ 

Wage credit for differential pay 

If an employer qualifies as an eligible small business employer, 

the employer is allowed a credit against its income tax liability for 

a taxable year in an amount equal to 20 percent of the sum of the 

eligible differential wage payments for each of the employer’s qualified employees during the year. 

An eligible small business employer means, with respect to a taxable year, an employer that: (1) employed on average less than 50 

employees on business days during the taxable year; and (2) under 

a written plan of the taxpayer, provides eligible differential wage 

payments to every qualified employee. For this purpose, members 

of controlled groups, groups under common control, and affiliated 

service groups are treated as a single employer.93 The credit is not 

available with respect to an employer that has failed to comply 

with the employment and reemployment rights of members of the 

uniformed services.94

Differential wage payment means any payment that: (1) is made 

by an employer to an individual with respect to any period during 

which the individual is performing service in the uniformed services of the United States while on active duty for a period of more 

than 30 days, and (2) represents all or a portion of the wages that 

the individual would have received from the employer if the individual were performing services for the employer.95 Eligible differential wage payments are so much of the differential wage payments paid to a qualified employee as does not exceed $20,000. A 

qualified employee is an individual who has been an employee of 


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96Sec. 280C(a). 97Sec. 52(c), (d), (e). 98The credit was originally provided by the Heroes Earnings Assistance and Relief Tax Act 

of 2008 (‘‘HEART Act’’), Pub. L. No. 110–245, effective for amounts paid after June 17, 2008, 

the date of enactment of the HEART Act. 

the employer for the 91-day period immediately preceding the period for which any differential wage payment is made. 

No deduction may be taken for that portion of compensation that 

is equal to the credit.96 In addition, the amount of any other income tax credit otherwise allowable with respect to compensation 

paid to an employee must be reduced by the differential wage payment credit allowed with respect to the employee. The credit is not 

allowable against a taxpayer’s alternative minimum tax liability. 

Certain rules applicable to the work opportunity tax credit in the 

case of tax-exempt organizations, estates and trusts, regulated investment companies, real estate investment trusts and certain cooperatives apply also to the differential wage payment credit.97

The credit is available with respect to amounts paid after June 

17, 2008, 98 and before January 1, 2015. 

REASONS FOR CHANGE

The credit for differential wage payments serves to encourage 

employers to make differential wage payments to employees who 

are serving on active duty in the military. Besides continuing the 

current incentive by extending the credit, the Committee wishes to 

expand its incentive effect by making the credit available to all employers, regardless of size, and to increase the credit rate. 

EXPLANATION OF PROVISION

The provision extends the availability of the differential wage 

payment credit for two years, that is, to amounts paid before January 1, 2017. 

The provision also modifies the credit by making it available to 

an employer of any size, rather than only to eligible small business 

employers, and by increasing the credit rate to 100 percent of eligible differential wage payments (that is, differential wage payments 

up to $20,000). 

EFFECTIVE DATE

The provision applies to payments made after December 31, 

2014. 

9. Extension and modification of work opportunity tax credit (sec. 

119 of the bill and secs. 51 and 52 of the Code) 

PRESENT LAW

In general 

The work opportunity tax credit is available on an elective basis 

for employers hiring individuals from one or more of nine targeted 

groups. The amount of the credit available to an employer is determined by the amount of qualified wages paid by the employer. Generally, qualified wages consist of wages attributable to service rendered by a member of a targeted group during the one-year period 

beginning with the day the individual begins work for the employer 


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99Pub. L. No. 112–56 (Nov. 21, 2011). 100For these purposes, a qualified veteran must be certified by the designated local agency 

as a member of a family receiving assistance under a supplemental nutrition assistance program 

under the Food and Nutrition Act of 2008 for a period of at least three months, part of which 

is during the 12-month period ending on the hiring date. For these purposes, members of a family are defined to include only those individuals taken into account for purposes of determining 

eligibility for a supplemental nutrition assistance program under the Food and Nutrition Act 

of 2008. 101The qualified veteran must be certified as entitled to compensation for a service-connected 

disability and (1) have a hiring date which is not more than one year after having been discharged or released from active duty in the Armed Forces of the United States; or (2) have been 

unemployed for six months or more (whether or not consecutive) during the one-year period ending on the date of hiring. For these purposes, being entitled to compensation for a service-connected disability is defined with reference to section 101 of Title 38, U.S. Code, which means 

having a disability rating of 10 percent or higher for service connected injuries. 

(two years in the case of an individual in the long-term family assistance recipient category). 

Targeted groups eligible for the credit 

Generally, an employer is eligible for the credit only for qualified 

wages paid to members of a targeted group. 

(1) Families receiving TANF 

An eligible recipient is an individual certified by a designated 

local employment agency (e.g., a State employment agency) as 

being a member of a family eligible to receive benefits under the 

Temporary Assistance for Needy Families Program (‘‘TANF’’) for a 

period of at least nine months part of which is during the 18-month 

period ending on the hiring date. For these purposes, members of 

the family are defined to include only those individuals taken into 

account for purposes of determining eligibility for the TANF. 

(2) Qualified veteran 

Prior to enactment of the ‘‘VOW to Hire Heroes Act of 2011’’ (the 

‘‘VOW Act’’),99 there were two subcategories of qualified veterans to 

whom wages paid by an employer were eligible for the credit. Employers who hired veterans who were eligible to receive assistance 

under a supplemental nutritional assistance program were entitled 

to a maximum credit of 40 percent of $6,000 of qualified first-year 

wages paid to such individual.100 Employers who hired veterans 

who were entitled to compensation for a service-connected disability were entitled to a maximum wage credit of 40 percent of 

$12,000 of qualified first-year wages paid to such individual.101

The VOW Act modified the work opportunity credit with respect 

to qualified veterans, by adding additional subcategories. There are 

now five subcategories of qualified veterans: (1) in the case of veterans who were eligible to receive assistance under a supplemental 

nutritional assistance program (for at least a three month period 

during the year prior to the hiring date) the employer is entitled 

to a maximum credit of 40 percent of $6,000 of qualified first-year 

wages; (2) in the case of a qualified veteran who is entitled to compensation for a service-connected disability, who is hired within one 

year of discharge, the employer is entitled to a maximum credit of 

40 percent of $12,000 of qualified first-year wages; (3) in the case 

of a qualified veteran who is entitled to compensation for a serviceconnected disability, and who has been unemployed for an aggregate of at least six months during the one year period ending on 

the hiring date, the employer is entitled to a maximum credit of 


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40 percent of $24,000 of qualified first-year wages; (4) in the case 

of a qualified veteran unemployed for at least four weeks but less 

than six months (whether or not consecutive) during the one-year 

period ending on the date of hiring, the maximum credit equals 40 

percent of $6,000 of qualified first-year wages; and (5) in the case 

of a qualified veteran unemployed for at least six months (whether 

or not consecutive) during the one-year period ending on the date 

of hiring, the maximum credit equals 40 percent of $14,000 of 

qualified first-year wages. 

A veteran is an individual who has served on active duty (other 

than for training) in the Armed Forces for more than 180 days or 

who has been discharged or released from active duty in the Armed 

Forces for a service-connected disability. However, any individual 

who has served for a period of more than 90 days during which the 

individual was on active duty (other than for training) is not a 

qualified veteran if any of this active duty occurred during the 60- 

day period ending on the date the individual was hired by the employer. This latter rule is intended to prevent employers who hire 

current members of the armed services (or those departed from 

service within the last 60 days) from receiving the credit. 

(3) Qualified ex-felon 

A qualified ex-felon is an individual certified as: (1) having been 

convicted of a felony under any State or Federal law; and (2) having a hiring date within one year of release from prison or the date 

of conviction. 

(4) Designated community resident 

A designated community resident is an individual certified as 

being at least age 18 but not yet age 40 on the hiring date and as 

having a principal place of abode within an empowerment zone, enterprise community, renewal community or a rural renewal community. For these purposes, a rural renewal county is a county outside a metropolitan statistical area (as defined by the Office of 

Management and Budget) which had a net population loss during 

the five-year periods 1990–1994 and 1995–1999. Qualified wages do 

not include wages paid or incurred for services performed after the 

individual moves outside an empowerment zone, enterprise community, renewal community or rural renewal community. 

(5) Vocational rehabilitation referral 

A vocational rehabilitation referral is an individual who is certified by a designated local agency as an individual who has a 

physical or mental disability that constitutes a substantial handicap to employment and who has been referred to the employer 

while receiving, or after completing: (a) vocational rehabilitation 

services under an individualized, written plan for employment 

under a State plan approved under the Rehabilitation Act of 1973; 

(b) under a rehabilitation plan for veterans carried out under 

Chapter 31 of Title 38, U.S. Code; or (c) an individual work plan 

developed and implemented by an employment network pursuant 

to subsection (g) of section 1148 of the Social Security Act. Certification will be provided by the designated local employment agency 

upon assurances from the vocational rehabilitation agency that the 

employee has met the above conditions. 


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(6) Qualified summer youth employee 

A qualified summer youth employee is an individual: (1) who performs services during any 90-day period between May 1 and September 15; (2) who is certified by the designated local agency as 

being 16 or 17 years of age on the hiring date; (3) who has not been 

an employee of that employer before; and (4) who is certified by the 

designated local agency as having a principal place of abode within 

an empowerment zone, enterprise community, or renewal community. As with designated community residents, no credit is available on wages paid or incurred for service performed after the 

qualified summer youth moves outside of an empowerment zone, 

enterprise community, or renewal community. If, after the end of 

the 90-day period, the employer continues to employ a youth who 

was certified during the 90-day period as a member of another targeted group, the limit on qualified first-year wages will take into 

account wages paid to the youth while a qualified summer youth 

employee. 

(7) Qualified supplemental nutrition assistance program benefits recipient 

A qualified supplemental nutrition assistance program benefits 

recipient is an individual at least age 18 but not yet age 40 certified by a designated local employment agency as being a member 

of a family receiving assistance under a food and nutrition program 

under the Food and Nutrition Act of 2008 for a period of at least 

six months ending on the hiring date. In the case of families that 

cease to be eligible for food and nutrition assistance under section 

6(o) of the Food and Nutrition Act of 2008, the six-month requirement is replaced with a requirement that the family has been receiving food and nutrition assistance for at least three of the five 

months ending on the date of hire. For these purposes, members 

of the family are defined to include only those individuals taken 

into account for purposes of determining eligibility for a food and 

nutrition assistance program under the Food and Nutrition Act of 

2008. 

(8) Qualified SSI recipient 

A qualified SSI recipient is an individual designated by a local 

agency as receiving supplemental security income (‘‘SSI’’) benefits 

under Title XVI of the Social Security Act for any month ending 

within the 60-day period ending on the hiring date. 

(9) Long-term family assistance recipient 

A qualified long-term family assistance recipient is an individual 

certified by a designated local agency as being: (1) a member of a 

family that has received family assistance for at least 18 consecutive months ending on the hiring date; (2) a member of a family 

that has received such family assistance for a total of at least 18 

months (whether or not consecutive) after August 5, 1997 (the date 

of enactment of the welfare-to-work tax credit) if the individual is 

hired within two years after the date that the 18-month total is 

reached; or (3) a member of a family who is no longer eligible for 

family assistance because of either Federal or State time limits, if 

the individual is hired within two years after the Federal or State 

time limits made the family ineligible for family assistance. 


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Qualified wages 

Generally, qualified wages are defined as cash wages paid by the 

employer to a member of a targeted group. The employer’s deduction for wages is reduced by the amount of the credit. 

For purposes of the credit, generally, wages are defined by reference to the FUTA definition of wages contained in section 3306(b) 

(without regard to the dollar limitation therein contained). Special 

rules apply in the case of certain agricultural labor and certain 

railroad labor. 

Calculation of the credit 

The credit available to an employer for qualified wages paid to 

members of all targeted groups except for long-term family assistance recipients equals 40 percent (25 percent for employment of 

400 hours or less) of qualified first-year wages. Generally, qualified 

first-year wages are qualified wages (not in excess of $6,000) attributable to service rendered by a member of a targeted group during 

the one-year period beginning with the day the individual began 

work for the employer. Therefore, the maximum credit per employee is $2,400 (40 percent of the first $6,000 of qualified firstyear wages). With respect to qualified summer youth employees, 

the maximum credit is $1,200 (40 percent of the first $3,000 of 

qualified first-year wages). Except for long-term family assistance 

recipients, no credit is allowed for second-year wages. 

In the case of long-term family assistance recipients, the credit 

equals 40 percent (25 percent for employment of 400 hours or less) 

of $10,000 for qualified first-year wages and 50 percent of the first 

$10,000 of qualified second-year wages. Generally, qualified secondyear wages are qualified wages (not in excess of $10,000) attributable to service rendered by a member of the long-term family assistance category during the one-year period beginning on the day 

after the one-year period beginning with the day the individual 

began work for the employer. Therefore, the maximum credit per 

employee is $9,000 (40 percent of the first $10,000 of qualified firstyear wages plus 50 percent of the first $10,000 of qualified secondyear wages). 

For calculation of the credit with respect to qualified veterans, 

see the description of ‘‘qualified veteran’’ above. 

Certification rules 

Generally, an individual is not treated as a member of a targeted 

group unless: (1) on or before the day on which an individual begins work for an employer, the employer has received a certification from a designated local agency that such individual is a 

member of a targeted group; or (2) on or before the day an individual is offered employment with the employer, a pre-screening 

notice is completed by the employer with respect to such individual, 

and not later than the 28th day after the individual begins work 

for the employer, the employer submits such notice, signed by the 

employer and the individual under penalties of perjury, to the designated local agency as part of a written request for certification. 

For these purposes, a pre-screening notice is a document (in such 

form as the Secretary may prescribe) which contains information 

provided by the individual on the basis of which the employer believes that the individual is a member of a targeted group. 


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An otherwise qualified unemployed veteran is treated as certified 

by the designated local agency as having aggregate periods of unemployment (whichever is applicable under the qualified veterans 

rules described above) if such veteran is certified by such agency 

as being in receipt of unemployment compensation under a State 

or Federal law for such applicable periods. The Secretary of the 

Treasury is authorized to provide alternative methods of certification for unemployed veterans. 

Minimum employment period 

No credit is allowed for qualified wages paid to employees who 

work less than 120 hours in the first year of employment. 

Qualified tax-exempt organizations employing qualified veterans 

The credit is not available to qualified tax-exempt organizations 

other than those employing qualified veterans. The special rules, 

described below, were enacted in the VOW Act. 

If a qualified tax-exempt organization employs a qualified veteran (as described above), a tax credit against the FICA taxes of 

the organization is allowed on the wages of the qualified veteran 

which are paid for the veteran’s services in furtherance of the activities related to the function or purpose constituting the basis of 

the organization’s exemption under section 501. 

The credit available to such tax-exempt employer for qualified 

wages paid to a qualified veteran equals 26 percent (16.25 percent 

for employment of 400 hours or less) of qualified first-year wages. 

The amount of qualified first-year wages eligible for the credit is 

the same as those for non-tax-exempt employers (i.e., $6,000, 

$12,000, $14,000 or $24,000, depending on the category of qualified 

veteran). 

A qualified tax-exempt organization means an employer that is 

described in section 501(c) and exempt from tax under section 

501(a). 

The Social Security Trust Funds are held harmless from the effects of this provision by a transfer from the Treasury General 

Fund. 

Treatment of possessions 

The VOW Act provided a reimbursement mechanism for the U.S. 

possessions (American Samoa, Guam, the Commonwealth of the 

Northern Mariana Islands, the Commonwealth of Puerto Rico, and 

the United States Virgin Islands). The Treasury Secretary is to pay 

to each mirror code possession (Guam, the Commonwealth of the 

Northern Mariana Islands, and the United States Virgin Islands) 

an amount equal to the loss to that possession as a result of the 

VOW Act changes to the qualified veterans rules. Similarly, the 

Treasury Secretary is to pay to each non-mirror Code possession 

(American Samoa and the Commonwealth of Puerto Rico) the 

amount that the Secretary estimates as being equal to the loss to 

that possession that would have occurred as a result of the VOW 

Act changes if a mirror code tax system had been in effect in that 

possession. The Secretary will make this payment to a non-mirror 

Code possession only if that possession establishes to the satisfaction of the Secretary that the possession has implemented (or, at 

the discretion of the Secretary, will implement) an income tax benVerDate Sep 11 2014 05:21 Aug 08, 2015 Jkt 049010 PO 00000 Frm 00046 Fmt 6659 Sfmt 6602 E:\HR\OC\SR118.XXX SR118

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efit that is substantially equivalent to the qualified veterans credit 

allowed under the VOW Act modifications. 

An employer that is allowed a credit against U.S. tax under the 

VOW Act with respect to a qualified veteran must reduce the 

amount of the credit claimed by the amount of any credit (or, in 

the case of a non-mirror Code possession, another tax benefit) that 

the employer claims against its possession income tax. 

Other rules 

The work opportunity tax credit is not allowed for wages paid to 

a relative or dependent of the taxpayer. No credit is allowed for 

wages paid to an individual who is a more than fifty-percent owner 

of the entity. Similarly, wages paid to replacement workers during 

a strike or lockout are not eligible for the work opportunity tax 

credit. Wages paid to any employee during any period for which the 

employer received on-the-job training program payments with respect to that employee are not eligible for the work opportunity tax 

credit. The work opportunity tax credit generally is not allowed for 

wages paid to individuals who had previously been employed by the 

employer. In addition, many other technical rules apply. 

Expiration 

The work opportunity tax credit is not available for individuals 

who begin work for an employer after December 31, 2014. 

REASONS FOR CHANGE

Given the level of unemployment and general economic conditions, the Committee believes that the credit should be extended 

and expanded. By expanding the credit to long-term unemployed 

individuals, the Committee believes it is providing an incentive for 

employers to hire individuals who have suffered particularly acute 

harm during the economic downturn. 

EXPLANATION OF PROVISION

The provision extends for two years the present-law employment 

credit provision (for qualified wages paid to individuals who begin 

work prior to January 1, 2017). Additionally, the provision expands 

the work opportunity tax credit to employers who hire individuals 

who are qualified long-term unemployment recipients. For purposes 

of the provision, such persons are individuals who have been certified by the designated local agency as being in a period of unemployment of 27 weeks or more, which includes a period in which 

the individual was receiving unemployment compensation under 

State or Federal law. With respect to wages paid to such individuals, employers would be eligible for a 40 percent credit on the first 

$6,000 of wages paid to such individual, for a maximum credit of 

$2,400 per eligible employee. 

EFFECTIVE DATE

The provision is effective for individuals who begin work for the 

employer after December 31, 2014. 


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102Sec. 103. 103Sec. 149(e). 104Sec. 103(a) and (b)(2). 105Sec. 148. 106See secs. 54E and 1397E. 107Sec. 54A. 

10. Extension and modification of qualified zone academy bonds 

(sec. 120 of the bill and secs. 54E and 6431 of the Code) 

PRESENT LAW

Tax-exempt bonds 

Interest on State and local governmental bonds generally is excluded from gross income for Federal income tax purposes if the 

proceeds of the bonds are used to finance direct activities of these 

governmental units or if the bonds are repaid with revenues of the 

governmental units. These can include tax-exempt bonds which finance public schools.102 An issuer must file with the Internal Revenue Service certain information about the bonds issued in order 

for that bond issue to be tax-exempt.103 Generally, this information 

return is required to be filed no later the 15th day of the second 

month after the close of the calendar quarter in which the bonds 

were issued. 

The tax exemption for State and local bonds does not apply to 

any arbitrage bond.104 An arbitrage bond is defined as any bond 

that is part of an issue if any proceeds of the issue are reasonably 

expected to be used (or intentionally are used) to acquire higher 

yielding investments or to replace funds that are used to acquire 

higher yielding investments.105 In general, arbitrage profits may be 

earned only during specified periods (e.g., defined ‘‘temporary periods’’) before funds are needed for the purpose of the borrowing or 

on specified types of investments (e.g., ‘‘reasonably required reserve 

or replacement funds’’). Subject to limited exceptions, investment 

profits that are earned during these periods or on such investments 

must be rebated to the Federal Government. 

Qualified zone academy bonds 

As an alternative to traditional tax-exempt bonds, State and 

local governments were given the authority to issue ‘‘qualified zone 

academy bonds.’’ 106 A total of $400 million of qualified zone academy bonds is authorized to be issued annually in calendar years 

1998 through 2008, $1,400 million in 2009 and 2010, and $400 million in 2011, 2012, 2013 and 2014. Each calendar year’s bond limitation is allocated to the States according to their respective populations of individuals below the poverty line. Each State, in turn, 

allocates the bond authority to qualified zone academies within 

such State. 

A taxpayer holding a qualified zone academy bond on the credit 

allowance date is entitled to a credit. The credit is includible in 

gross income (as if it were a taxable interest payment on the bond), 

and may be claimed against regular income tax and alternative 

minimum tax liability. 

Qualified zone academy bonds are a type of qualified tax credit 

bond and subject to the general rules applicable to qualified tax 

credit bonds.107 The Treasury Department sets the credit rate at 

a rate estimated to allow issuance of qualified zone academy bonds 


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108Given the differences in credit quality and other characteristics of individual issuers, the 

Secretary cannot set credit rates in a manner that will allow each issuer to issue tax credit 

bonds at par. 

without discount and without interest cost to the issuer.108 The 

Secretary determines credit rates for tax credit bonds based on 

general assumptions about credit quality of the class of potential 

eligible issuers and such other factors as the Secretary deems appropriate. The Secretary may determine credit rates based on general credit market yield indexes and credit ratings. The maximum 

term of the bond is determined by the Treasury Department, so 

that the present value of the obligation to repay the principal on 

the bond is 50 percent of the face value of the bond. 

‘‘Qualified zone academy bonds’’ are defined as any bond issued 

by a State or local government, provided that (1) 100 percent of the 

available project proceeds are used for the purpose of renovating, 

providing equipment to, developing course materials for use at, or 

training teachers and other school personnel in a ‘‘qualified zone 

academy’’ and (2) private entities have promised to contribute to 

the qualified zone academy certain equipment, technical assistance 

or training, employee services, or other property or services with a 

value equal to at least 10 percent of the bond proceeds. 

A school is a ‘‘qualified zone academy’’ if (1) the school is a public 

school that provides education and training below the college level, 

(2) the school operates a special academic program in cooperation 

with businesses to enhance the academic curriculum and increase 

graduation and employment rates, and (3) either (a) the school is 

located in an empowerment zone or enterprise community designated under the Code, or (b) it is reasonably expected that at 

least 35 percent of the students at the school will be eligible for 

free or reduced-cost lunches under the school lunch program established under the National School Lunch Act. 

Under section 6431, an issuer of specified tax credit bonds, may 

elect to receive a payment in lieu of a credit being allowed to the 

holder of the bond (‘‘direct-pay bonds’’). Section 6431 is not available for qualified zone academy bond allocations from the national 

limitation for years after 2010 or any carry forward of those allocations. 

REASONS FOR CHANGE

The Committee believes there is a continuing need to finance 

school renovations and therefore extension of the qualified zone 

academy bond program is warranted. Further, the Committee believes that the inability to attract sufficient private contributions to 

meet the current 10 percent private contribution requirement may 

hinder the ability of some school districts to fully utilize the qualified zone academy bond program. Therefore, the Committee believes it is appropriate to lower the required match to five percent 

to make the requirement more manageable for school districts to 

meet. 

EXPLANATION OF PROVISION

The provision extends the qualified zone academy bond program 

for two years. The provision authorizes issuance of up to $400 million of qualified zone academy bonds for 2015 and $400 million for 


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109See secs. 263(a) and 167. 110The applicable recovery period for an asset is determined in part by statute and in part 

by historic Treasury guidance. Exercising authority granted by Congress, the Secretary issued 

Revenue Procedure 87–56 (1987–2 C.B. 674), laying out the framework of recovery periods for 

enumerated classes of assets. The Secretary clarified and modified the list of asset classes in 

Revenue Procedure 88–22 (1988–1 C.B. 785). In November 1988, Congress revoked the Secretary’s authority to modify the class lives of depreciable property. Revenue Procedure 87–56, 

as modified, remains in effect except to the extent that the Congress has, since 1988, statutorily 

modified the recovery period for certain depreciable assets, effectively superseding any administrative guidance with regard to such property. 111Sec. 168. 112Sec. 168(e)(3)(A)(i)(I), as in effect after amendment by the Food, Conservation and Energy 

Act of 2008, Pub. L. No. 110–246, sec. 15344(b). 113Sec. 168(e)(3)(A)(i)(II). A horse is more than two years old after the day that is 24 months 

after its actual birthdate. Rev. Proc. 87–56, 1987–2 C.B. 674, as clarified and modified by Rev. 

Proc. 88–22, 1988–1 C.B. 785. 114 Rev. Proc. 87–56, 1987–2 C.B. 674, asset class 01.225. 

2016. The option to issue direct-pay bonds is not available. The provision also reduces the private business contribution requirement 

from 10 percent to five percent. 

EFFECTIVE DATE

The provision applies to obligations issued after December 31, 

2014. 

11. Extension of classification of certain race horses as three-year 

property (sec. 121 of the bill and sec. 168 of the Code) 

PRESENT LAW

A taxpayer generally must capitalize the cost of property used in 

a trade or business and recover such cost over time through annual 

deductions for depreciation or amortization.109 Tangible property 

generally is depreciated under the modified accelerated cost recovery system (‘‘MACRS’’), which determines depreciation by applying 

specific recovery periods,110 placed-in-service conventions, and depreciation methods to the cost of various types of depreciable property.111 In particular, the statute assigns a three-year recovery period for any race horse (1) that is placed in service after December 

31, 2008 and before January 1, 2015 112 and (2) that is placed in 

service after December 31, 2014 and that is more than two years 

old at such time it is placed in service by the purchaser.113 A 

seven-year recovery period is assigned to any race horse that is 

placed in service after December 31, 2014 and that is two years old 

or younger at the time it is placed in service.114

REASONS FOR CHANGE

The Committee believes that the horse industry is important to 

a number of State and local economies. Therefore, the Committee 

believes that this incentive for race horses should be extended. 

EXPLANATION OF PROVISION

The provision extends the present-law three-year recovery period 

for race horses for two years to apply to any race horse (regardless 

of age when placed in service) which is placed in service before 

January 1, 2017. Subsequently, the three-year recovery period for 

race horses will only apply to those which are more than two years 

old when placed in service by the purchaser after December 31, 

2016. 


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115Sec. 168. 116Sec. 168(e)(6). 

EFFECTIVE DATE

The provision applies to property placed in service after December 31, 2014. 

12. Extension of 15-year straight-line cost recovery for qualified 

leasehold improvements, qualified restaurant buildings and improvements, and qualified retail improvements (sec. 122 of the 

bill and sec. 168 of the Code) 

PRESENT LAW

In general 

A taxpayer generally must capitalize the cost of property used in 

a trade or business and recover such cost over time through annual 

deductions for depreciation or amortization. Tangible property generally is depreciated under the modified accelerated cost recovery 

system (‘‘MACRS’’), which determines depreciation by applying specific recovery periods, placed-in-service conventions, and depreciation methods to the cost of various types of depreciable property.115

The cost of nonresidential real property is recovered using the 

straight-line method of depreciation and a recovery period of 39- 

years. Nonresidential real property is subject to the mid-month 

placed-in-service convention. Under the mid-month convention, the 

depreciation allowance for the first year in which property is placed 

in service is based on the number of months the property was in 

service, and property placed in service at any time during a month 

is treated as having been placed in service in the middle of the 

month. 

Depreciation of leasehold improvements 

Generally, depreciation allowances for improvements made on 

leased property are determined under MACRS, even if the MACRS 

recovery period assigned to the property is longer than the term of 

the lease. This rule applies regardless of whether the lessor or the 

lessee places the leasehold improvements in service. If a leasehold 

improvement constitutes an addition or improvement to nonresidential real property already placed in service, the improvement 

generally is depreciated using the straight-line method over a 39- 

year recovery period, beginning in the month the addition or improvement was placed in service. However, exceptions exist for certain qualified leasehold improvements, qualified restaurant property, and qualified retail improvement property. 

Qualified leasehold improvement property 

Section 168(e)(3)(E)(iv) provides a statutory 15-year recovery period for qualified leasehold improvement property placed in service 

before January 1, 2015. Qualified leasehold improvement property 

is any improvement to an interior portion of a building that is nonresidential real property, provided certain requirements are met.116

The improvement must be made under or pursuant to a lease either by the lessee (or sublessee), or by the lessor, of that portion 

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117Sec. 168(e)(6) and (k)(3). 118Sec. 168(e)(6)(A). 119Sec. 168(e)(6)(B). 120Sec. 168(b)(3)(G) and (d). 121Sec. 168(e)(7). 122Sec. 168(b)(3)(H) and (d). 123Sec. 168(e)(7)(B). 124 Improvements to portions of a building not open to the general public (e.g., stock room in 

back of retail space) do not qualify under the provision. 125Sec. 168(e)(8). 126Sec. 168(e)(8)(C). 

see). The improvement must be placed in service more than three 

years after the date the building was first placed in service. Qualified leasehold improvement property does not include any improvement for which the expenditure is attributable to the enlargement 

of the building, any elevator or escalator, any structural component 

benefiting a common area, or the internal structural framework of 

the building.117 If a lessor makes an improvement that qualifies as 

qualified leasehold improvement property, such improvement does 

not qualify as qualified leasehold improvement property to any subsequent owner of such improvement.118 An exception to the rule 

applies in the case of death and certain transfers of property that 

qualify for non-recognition treatment.119

Qualified leasehold improvement property is generally recovered 

using the straight-line method and a half-year convention.120

Qualified leasehold improvement property placed in service after 

December 31, 2014 is subject to the general rules described above. 

Qualified restaurant property 

Section 168(e)(3)(E)(v) provides a statutory 15-year recovery period for qualified restaurant property placed in service before January 1, 2015. Qualified restaurant property is any section 1250 property that is a building or an improvement to a building, if more 

than 50 percent of the building’s square footage is devoted to the 

preparation of, and seating for on-premises consumption of, prepared meals.121 Qualified restaurant property is recovered using 

the straight-line method and a half-year convention.122 Additionally, qualified restaurant property is not eligible for bonus depreciation unless it also satisfies the definition of qualified leasehold 

improvement property.123 Qualified restaurant property placed in 

service after December 31, 2014 is subject to the general rules described above. 

Qualified retail improvement property 

Section 168(e)(3)(E)(ix) provides a statutory 15-year recovery period for qualified retail improvement property placed in service before January 1, 2015. Qualified retail improvement property is any 

improvement to an interior portion of a building which is nonresidential real property if such portion is open to the general public 124 and is used in the retail trade or business of selling tangible 

personal property to the general public, and such improvement is 

placed in service more than three years after the date the building 

was first placed in service.125 Qualified retail improvement property does not include any improvement for which the expenditure 

is attributable to the enlargement of the building, any elevator or 

escalator, any structural component benefiting a common area, or 

the internal structural framework of the building.126 In the case of 


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127Sec. 168(e)(8)(B). 128Sec. 168(b)(3)(I) and (d). 129Sec. 168(e)(8)(D). 

an improvement made by the owner of such improvement, the improvement is a qualified retail improvement only so long as the improvement is held by such owner.127

Retail establishments that qualify for the 15-year recovery period 

include those primarily engaged in the sale of goods. Examples of 

these retail establishments include, but are not limited to, grocery 

stores, clothing stores, hardware stores, and convenience stores. Establishments primarily engaged in providing services, such as professional services, financial services, personal services, health services, and entertainment, do not qualify. Generally, it is intended 

that businesses defined as a store retailer under the current North 

American Industry Classification System (industry sub-sectors 441 

through 453) qualify while those in other industry classes do not 

qualify. 

Qualified retail improvement property is recovered using the 

straight-line method and a half-year convention.128 Additionally, 

qualified retail improvement property is not eligible for bonus depreciation unless it also satisfies the definition of qualified leasehold improvement property.129 Qualified retail improvement property placed in service after December 31, 2014 is subject to the general rules described above. 

REASONS FOR CHANGE

The Committee believes that taxpayers should not be required to 

recover the costs of certain leasehold improvements beyond the 

useful life of the investment. The 39-year recovery period for leasehold improvements for property placed in service after December 

31, 2014, extends beyond the useful life of many such investments. 

Although lease terms differ, the Committee believes that lease 

terms for commercial real estate are also typically shorter than the 

39-year recovery period. In the interests of simplicity and administrability, a uniform period for the recovery of leasehold improvements is desirable. Therefore, the provision extends the 15-year recovery period for leasehold improvements. 

The Committee also believes that unlike other commercial buildings, restaurant buildings generally are more specialized structures. Restaurants also experience considerably more traffic and remain open longer than most commercial properties. This daily use 

causes rapid deterioration of restaurant properties and forces restaurateurs to constantly repair and upgrade their facilities. As 

such, restaurant facilities generally have a shorter life span than 

other commercial establishments. The provision extends the 15- 

year recovery period for improvements made to restaurant buildings and continues to apply the 15-year recovery period to new restaurants, to more accurately reflect the true economic life of such 

properties. 

The Committee believes that taxpayers should not be required to 

recover the costs of certain improvements beyond the useful life of 

the investment. The 39-year recovery period for improvements to 

owner-occupied (i.e., not leased) retail property extends beyond the 

useful life of many such investments. Additionally, the Committee 

believes that retailers should not be treated differently based on 


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130See secs. 263(a) and 167. 131The applicable recovery period for an asset is determined in part by statute and in part 

by historic Treasury guidance. Exercising authority granted by Congress, the Secretary issued 

Revenue Procedure 87–56 (1987–2 C.B. 674), laying out the framework of recovery periods for 

enumerated classes of assets. The Secretary clarified and modified the list of asset classes in 

Revenue Procedure 88–22 (1988–1 C.B. 785). In November 1988, Congress revoked the Secretary’s authority to modify the class lives of depreciable property. Revenue Procedure 87–56, 

as modified, remains in effect except to the extent that the Congress has, since 1988, statutorily 

modified the recovery period for certain depreciable assets, effectively superseding any administrative guidance with regard to such property. 132Sec. 168. 133Sec. 168(b)(3)(A) and (c). 134Sec. 168(d)(2)(A) and (d)(4)(B). 135Sec. 168(d)(1) and (d)(4)(A). However, if substantial property is placed in service during the 

last three months of a taxable year, a special rule requires use of the mid-quarter convention, 

which treats all property placed in service (or disposed of) during any quarter as placed in service (or disposed of) on the mid-point of such quarter. Sec. 168(d)(3) and (d)(4)(C). 136Sec. 168(b)(2)(A) and asset class 00.3 of Rev. Proc. 87–56, 1987–2 C.B. 674. Under the 150- 

percent declining balance method, the depreciation rate is determined by dividing 150 percent 

by the appropriate recovery period, switching to the straight-line method for the first taxable 

whether the building in which they operate is owned or leased. As 

many small business retailers own the building in which they operate their business, the Committee believes this provision will provide relief to small businesses. Therefore, the provision extends the 

15-year recovery period for qualified retail improvements. 

EXPLANATION OF PROVISION

The provision extends the present-law provisions for qualified 

leasehold improvement property, qualified restaurant property, and 

qualified retail improvement property for two years to apply to 

property placed in service before January 1, 2017. 

EFFECTIVE DATE

The provision is effective for property placed in service after December 31, 2014. 

13. Extension of seven-year recovery period for motorsports entertainment complexes (sec. 123 of the bill and sec. 168 of the Code) 

PRESENT LAW

A taxpayer generally must capitalize the cost of property used in 

a trade or business and recover such cost over time through annual 

deductions for depreciation or amortization.130 Tangible property 

generally is depreciated under the modified accelerated cost recovery system (‘‘MACRS’’), which determines depreciation by applying 

specific recovery periods,131 placed-in-service conventions, and depreciation methods to the cost of various types of depreciable property.132 The cost of nonresidential real property is recovered using 

the straight-line method of depreciation and a recovery period of 39 

years.133 Nonresidential real property is subject to the mid-month 

convention, which treats all property placed in service during any 

month (or disposed of during any month) as placed in service (or 

disposed of) on the mid-point of such month.134 All other property 

generally is subject to the half-year convention, which treats all 

property placed in service during any taxable year (or disposed of 

during any taxable year) as placed in service (or disposed of) on the 

mid-point of such taxable year.135 Land improvements (such as 

roads and fences) are recovered using the 150-percent declining 

balance method and a recovery period of 15 years.136 An exception 


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year where using the straight-line method with respect to the adjusted basis as of the beginning 

of that year will yield a larger depreciation allowance. Sec. 168(b)(2) and (b)(1)(B). 137 Asset class 80.0 of Rev. Proc. 87–56, 1987–2 C.B. 674. 138Sec. 168(e)(3)(C)(ii). 139Sec. 168(i)(15). 140Section 168(j)(2) does not provide shorter recovery periods for water utility property, residential rental property, or railroad grading and tunnel bores. 

exists for the theme and amusement park industry, whose assets 

are assigned a recovery period of seven years.137 Additionally, a 

motorsports entertainment complex placed in service on or before 

December 31, 2014 is assigned a recovery period of seven years.138

For these purposes, a motorsports entertainment complex means a 

racing track facility which is permanently situated on land and 

which during the 36-month period following its placed-in-service 

date hosts a racing event.139 The term motorsports entertainment 

complex also includes ancillary facilities, land improvements (e.g., 

parking lots, sidewalks, fences), support facilities (e.g., food and 

beverage retailing, souvenir vending), and appurtenances associated with such facilities (e.g., ticket booths, grandstands). 

REASONS FOR CHANGE

The Committee believes that extending the depreciation incentive for the motorsports industry will encourage State and local 

economic development. Thus, the provision extends the seven-year 

recovery period for motorsports entertainment complex property. 

EXPLANATION OF PROVISION

The provision extends the present-law seven-year recovery period 

for motorsports entertainment complexes for two years to apply to 

property placed in service on or before December 31, 2016. 

EFFECTIVE DATE

The provision is effective for property placed in service after December 31, 2014. 

14. Extension and modification of accelerated depreciation for business property on an Indian reservation (sec. 124 of the bill and 

sec. 168(j) of the Code) 

PRESENT LAW

With respect to certain property used in connection with the conduct of a trade or business within an Indian reservation, depreciation deductions under section 168(j) are determined using the following recovery periods: 

3-year property—2 years 

5-year property—3 years 

7-year property—4 years 

10-year property—6 years 

15-year property—9 years 

20-year property—12 years 

Nonresidential real property—22 years 140

‘‘Qualified Indian reservation property’’ eligible for accelerated 

depreciation includes property described in the table above which 

is: (1) used by the taxpayer predominantly in the active conduct of 

a trade or business within an Indian reservation; (2) not used or 


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141For these purposes, the term ‘‘related persons’’ is defined in section 465(b)(3)(C). 142Sec. 168(j)(4)(A). 143Sec. 168(j)(4)(C). 144Pub. L. No. 93–262. 145Pub. L. No. 95–608. 146Sec. 168(j)(6). 147Sec. 168(j)(3). 148Sec. 168(j)(8). 149See, e.g., sec. 168(g)(7), (k)(2)(D)(iii), (l)(3)(D), (m)(2)(B)(iii), and (n)(2)(B)(v). 

located outside the reservation on a regular basis; (3) not acquired 

(directly or indirectly) by the taxpayer from a person who is related 

to the taxpayer; 141 and (4) is not property placed in service for purposes of conducting gaming activities.142 Certain ‘‘qualified infrastructure property’’ may be eligible for the accelerated depreciation 

even if located outside an Indian reservation, provided that the 

purpose of such property is to connect with qualified infrastructure 

property located within the reservation (e.g., roads, power lines, 

water systems, railroad spurs, and communications facilities).143

An ‘‘Indian reservation’’ means a reservation as defined in section 3(d) of the Indian Financing Act of 1974 (25 U.S.C. 1452(d)) 144

or section 4(10) of the Indian Child Welfare Act of 1978 (25 U.S.C. 

1903(10)).145 For purposes of the preceding sentence, section 3(d) is 

applied by treating ‘‘former Indian reservations in Oklahoma’’ as 

including only lands that are (1) within the jurisdictional area of 

an Oklahoma Indian tribe as determined by the Secretary of the 

Interior, and (2) recognized by such Secretary as an area eligible 

for trust land status under 25 C.F.R. Part 151 (as in effect on August 5, 1997).146

The depreciation deduction allowed for regular tax purposes is 

also allowed for purposes of the alternative minimum tax.147 The 

accelerated depreciation for qualified Indian reservation property is 

available with respect to property placed in service on or before December 31, 2014.148

REASONS FOR CHANGE

The Committee believes that extending this depreciation incentive will encourage economic development within Indian reservations and expand employment opportunities on such reservations. 

In addition, the Committee believes that allowing taxpayers to 

elect out of accelerated recovery periods for qualified Indian reservation property for a taxable year will make the provision more 

consistent with the electability of other accelerated depreciation 

provisions.149

EXPLANATION OF PROVISION

The provision extends for two years the present-law accelerated 

depreciation for qualified Indian reservation property to apply to 

property placed in service on or before December 31, 2016. 

The provision also provides that a taxpayer may annually elect 

out of section 168(j) on a class-by-class basis for qualified Indian 

reservation property placed in service after December 31, 2014 and 

before January 1, 2017. 

EFFECTIVE DATE

The provision is effective for property placed in service after December 31, 2014. 


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150Sec. 168(k). The additional first-year depreciation deduction is subject to the general rules 

regarding whether an item must be capitalized under section 263A. 151Sec. 168(k)(2)(G). See also Treas. Reg. sec. 1.168(k)–1(d). 152Treas. Reg. sec. 1.168(k)–1(f)(7). 153Sec. 168(k)(1)(B). 154 Ibid. 155Sec. 168(k)(2)(D)(iii). See Treas. Reg. sec. 1.168(k)–1(e)(2) for the definition of a class of 

property. 156 Assume that the cost of the property is not eligible for expensing under section 179 or 

Treas. Reg. sec. 1.263(a)–1(f). 157The $1,000 depreciation deduction results from the application of the half-year convention and the 200 percent declining balance method to the remaining $5,000. 158 Requirements relating to actions taken before 2008 are not described herein since they 

have little (if any) remaining effect. 159The additional first-year depreciation deduction is not available for any property that is 

required to be depreciated under the alternative depreciation system of MACRS. Sec. 

168(k)(2)(D)(i). The additional first-year depreciation deduction also is not available for qualified 

New York Liberty Zone leasehold improvement property as defined in section 1400L(c)(2). Sec. 

168(k)(2)(D)(ii). 

15. Extension of bonus depreciation (sec. 125 of the bill and sec. 

168(k) of the Code) 

PRESENT LAW

In general 

An additional first-year depreciation deduction is allowed equal 

to 50 percent of the adjusted basis of qualified property acquired 

and placed in service before January 1, 2015 (January 1, 2016 for 

certain longer-lived and transportation property).150

The additional first-year depreciation deduction is allowed for 

both the regular tax and the alternative minimum tax (‘‘AMT’’),151

but is not allowed in computing earnings and profits.152 The basis 

of the property and the depreciation allowances in the year of purchase and later years are appropriately adjusted to reflect the additional first-year depreciation deduction.153 The amount of the additional first-year depreciation deduction is not affected by a short 

taxable year.154 The taxpayer may elect out of additional first-year 

depreciation for any class of property for any taxable year.155

The interaction of the additional first-year depreciation allowance with the otherwise applicable depreciation allowance may be 

illustrated as follows. Assume that in 2014, a taxpayer purchased 

new depreciable property and placed it in service.156 The property’s 

cost is $10,000, and it is five-year property subject to the 200 percent declining balance method and half-year convention. The 

amount of additional first-year depreciation allowed is $5,000. The 

remaining $5,000 of the cost of the property is depreciable under 

the rules applicable to five-year property. Thus, $1,000 157 also is 

allowed as a depreciation deduction in 2014. The total depreciation 

deduction with respect to the property for 2014 is $6,000. The remaining $4,000 adjusted basis of the property generally is recovered through otherwise applicable depreciation rules. 

Property qualifying for the additional first-year depreciation deduction must meet all of the following requirements.158 First, the 

property must be (1) property to which the modified accelerated 

cost recovery system (‘‘MACRS’’) applies with an applicable recovery period of 20 years or less; (2) water utility property (as defined 

in section 168(e)(5)); (3) computer software other than computer 

software covered by section 197; or (4) qualified leasehold improvement property (as defined in section 168(k)(3)).159 Second, the origiVerDate Sep 11 2014 05:21 Aug 08, 2015 Jkt 049010 PO 00000 Frm 00057 Fmt 6659 Sfmt 6602 E:\HR\OC\SR118.XXX SR118

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160The term ‘‘original use’’ means the first use to which the property is put, whether or not 

such use corresponds to the use of such property by the taxpayer. If in the normal course of 

its business a taxpayer sells fractional interests in property to unrelated third parties, then the 

original use of such property begins with the first user of each fractional interest (i.e., each fractional owner is considered the original user of its proportionate share of the property). Treas. 

Reg. sec. 1.168(k)–1(b)(3). 161 A special rule applies in the case of certain leased property. In the case of any property 

that is originally placed in service by a person and that is sold to the taxpayer and leased back 

to such person by the taxpayer within three months after the date that the property was placed 

in service, the property would be treated as originally placed in service by the taxpayer not earlier than the date that the property is used under the leaseback. If property is originally placed 

in service by a lessor, such property is sold within three months after the date that the property 

was placed in service, and the user of such property does not change, then the property is treated as originally placed in service by the taxpayer not earlier than the date of such sale. Sec. 

168(k)(2)(E)(ii). 162Property qualifying for the extended placed-in-service date must have an estimated produc- tion period exceeding one year and a cost exceeding $1 million. Transportation property generally is defined as tangible personal property used in the trade or business of transporting persons or property. Certain aircraft which is not transportation property, other than for agricultural or firefighting uses, also qualifies for the extended placed-in-service-date, if at the time 

of the contract for purchase, the purchaser made a nonrefundable deposit of the lesser of 10 

percent of the cost or $100,000, and which has an estimated production period exceeding four 

months and a cost exceeding $200,000. 163Sec. 168(k)(2)(E)(i). 164Treas. Reg. sec. 1.168(k)–1(b)(4)(iii). 165Sec. 168(k)(2)(B)(ii). For purposes of determining the amount of eligible progress expenditures, rules similar to section 46(d)(3), as in effect prior to the Tax Reform Act of 1986, apply. 166Sec. 168(k)(2)(F). 167See sec. 460. 

nal use 160 of the property must commence with the taxpayer.161

Third, the taxpayer must acquire the property within the applicable time period (as described below). Finally, the property must be 

placed in service before January 1, 2015. An extension of the 

placed-in-service date of one year (i.e., before January 1, 2016) is 

provided for certain property with a recovery period of 10 years or 

longer and certain transportation property.162

To qualify, property must be acquired (1) before January 1, 2015, 

or (2) pursuant to a binding written contract which was entered before January 1, 2015. With respect to property that is manufactured, constructed, or produced by the taxpayer for use by the taxpayer, the taxpayer must begin the manufacture, construction, or 

production of the property before January 1, 2015.163 Property that 

is manufactured, constructed, or produced for the taxpayer by another person under a contract that is entered into prior to the manufacture, construction, or production of the property is considered 

to be manufactured, constructed, or produced by the taxpayer.164

For property eligible for the extended placed-in-service date, a special rule limits the amount of costs eligible for the additional firstyear depreciation. With respect to such property, only the portion 

of the basis that is properly attributable to the costs incurred before January 1, 2015 (‘‘progress expenditures’’) is eligible for the additional first-year depreciation deduction.165

The limitation under section 280F on the amount of depreciation 

deductions allowed with respect to certain passenger automobiles is 

increased in the first year by $8,000 for automobiles that qualify 

(and for which the taxpayer does not elect out of the additional 

first-year deduction).166 The $8,000 amount is not indexed for inflation. 

Special rule for long-term contracts 

In general, in the case of a long-term contract, the taxable income from the contract is determined under the percentage-of-completion method.167 Solely for purposes of determining the percentVerDate Sep 11 2014 05:21 Aug 08, 2015 Jkt 049010 PO 00000 Frm 00058 Fmt 6659 Sfmt 6602 E:\HR\OC\SR118.XXX SR118

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168Sec. 460(c)(6). Other dates involving prior years are not described herein. 169Sec. 168(k)(4). Eligible qualified property means qualified property eligible for bonus depreciation with minor effective date differences having little (if any) remaining significance. 170Sec. 168(k)(4)(A). 171Sec. 168(k)(4)(H), (I), (J), and (K). 172Sec. 168(k)(4)(B)(ii). 173Sec. 168(k)(4)(F). 174For this purpose, bonus depreciation is the difference between (i) the aggregate amount 

of depreciation determined if section 168(k)(1) applied to all eligible qualified property placed 

in service during the taxable year, and (ii) the amount of depreciation that would be so determined if section 168(k)(1) did not so apply. This determination is made using the most accelerated depreciation method and the shortest life otherwise allowable for each property. Sec. 

168(k)(4)(C). 175Sec. 168(k)(4)(C)(iii). 176Sec. 168(k)(4)(C)(iv). 

age of completion under section 460(b)(1)(A), the cost of qualified 

property with a MACRS recovery period of seven years or less is 

taken into account as a cost allocated to the contract as if bonus 

depreciation had not been enacted for property placed in service before January 1, 2015 (January 1, 2016 in the case of certain longerlived and transportation property).168

Election to accelerate AMT credits in lieu of bonus depreciation 

A corporation otherwise eligible for additional first-year depreciation may elect to claim additional AMT credits in lieu of claiming 

additional depreciation with respect to ‘‘eligible qualified property.’’ 169 In the case of a corporation making this election, the 

straight line method is used for the regular tax and the AMT with 

respect to eligible qualified property.170

Generally, an election under this provision for a taxable year applies to subsequent taxable years. However, each time the provision 

has been extended, a corporation which has previously made an 

election has been allowed to elect not to claim additional minimum 

tax credits, or, if no election had previously been made, to make 

an election to claim additional credits with respect to property subject to the extension.171

A corporation making an election increases the tax liability limitation under section 53(c) on the use of minimum tax credits by the 

bonus depreciation amount.172 The aggregate increase in credits allowable by reason of the increased limitation is treated as refundable.173

The bonus depreciation amount generally is equal to 20 percent 

of bonus depreciation 174 for eligible qualified property that could 

be claimed as a deduction absent an election under this provision. 

As originally enacted, the bonus depreciation amount for all taxable years was limited to the lesser of (1) $30 million, or (2) six percent of the minimum tax credits allocable to the adjusted net minimum tax imposed for taxable years beginning before January 1, 

2006.175 However, extensions of this provision have provided that 

this limitation applies separately to property subject to each extension. 

All corporations treated as a single employer under section 52(a) 

are treated as one taxpayer for purposes of the limitation, as well 

as for electing the application of this provision.176

In the case of a corporation making an election which is a partner in a partnership, for purposes of determining the electing partner’s distributive share of partnership items, bonus depreciation 


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177Sec. 168(k)(4)(G)(ii). 178 An election with respect to round 5 extension property is binding for all property that is 

eligible qualified property solely by reason of the extension of the 50-percent additional firstyear depreciation deduction. 179 In computing the maximum amount, the maximum increase amount for round 5 extension 

property is reduced by bonus depreciation amounts for preceding taxable years only with respect 

to round 5 extension property. 

does not apply to any eligible qualified property and the straight 

line method is used with respect to that property.177

REASONS FOR CHANGE

The Committee believes that allowing additional first-year depreciation will accelerate purchases of equipment and other assets, 

and promote capital investment, modernization, and growth. 

EXPLANATION OF PROVISION

The provision extends the 50-percent additional first-year depreciation deduction for two years, generally through 2016 (through 

2017 for certain longer-lived and transportation property). 

The provision provides that solely for purposes of determining 

the percentage of completion under section 460(b)(1)(A), the cost of 

qualified property with a MACRS recovery period of seven years or 

less which is placed in service before January 1, 2017 (January 1, 

2018, in the case of certain longer-lived and transportation property) is taken into account as a cost allocated to the contract as if 

bonus depreciation had not been enacted. 

The provision also extends the election to increase the AMT credit limitation in lieu of bonus depreciation for two years to property 

placed in service before January 1, 2017 (January 1, 2018, in the 

case of certain longer-lived property and transportation property). 

A bonus depreciation amount, maximum amount, and maximum 

increase amount is computed separately with respect to property to 

which the extension of additional first-year depreciation applies 

(‘‘round 5 extension property’’).178

Under the provision, a corporation that has an election in effect 

with respect to round 4 extension property to claim minimum tax 

credits in lieu of bonus depreciation is treated as having an election 

in effect for round 5 extension property, unless the corporation 

elects otherwise. The provision also allows a corporation that does 

not have an election in effect with respect to round 4 extension 

property to elect to claim minimum tax credits in lieu of bonus depreciation for round 5 extension property. A separate bonus depreciation amount, maximum amount, and maximum increase amount 

is computed and applied to round 5 extension property.179

EFFECTIVE DATE

The provision is effective for property placed in service after December 31, 2014, in taxable years ending after such date. 


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180Sec. 170. 181Sec. 170(e)(3). 182Sec. 170(b)(2). 183Sec. 170(e)(3)(A)(i)–(iii). 184Sec. 170(e)(3)(A)(iv). 

16. Extension of enhanced charitable deduction for contributions of 

food inventory (sec. 126 of the bill and sec. 170 of the Code) 

PRESENT LAW

Charitable contributions in general 

In general, an income tax deduction is permitted for charitable 

contributions, subject to certain limitations that depend on the type 

of taxpayer, the property contributed, and the donee organization.180

Charitable contributions of cash are deductible in the amount 

contributed. In general, contributions of capital gain property are 

deductible at fair market value with certain exceptions. Capital 

gain property means any capital asset or property used in the taxpayer’s trade or business the sale of which at its fair market value, 

at the time of contribution, would have resulted in gain that would 

have been long-term capital gain. Contributions of other appreciated property generally are deductible at the donor’s basis in the 

property. Contributions of depreciated property generally are deductible at the fair market value of the property. 

General rules regarding contributions of inventory 

Under present law, a taxpayer’s deduction for charitable contributions of inventory generally is limited to the taxpayer’s basis 

(typically, cost) in the inventory, or if less the fair market value of 

the inventory. 

For certain contributions of inventory, C corporations may claim 

an enhanced deduction equal to the lesser of (1) basis plus one-half 

of the item’s appreciation (i.e., basis plus one-half of fair market 

value in excess of basis) or (2) two times basis.181 In general, a C 

corporation’s charitable contribution deductions for a year may not 

exceed 10 percent of the corporation’s taxable income.182 To be eligible for the enhanced deduction, the contributed property generally must be inventory of the taxpayer and must be contributed 

to a charitable organization described in section 501(c)(3) (except 

for private nonoperating foundations), and the donee must (1) use 

the property consistent with the donee’s exempt purpose solely for 

the care of the ill, the needy, or infants; (2) not transfer the property in exchange for money, other property, or services; and (3) provide the taxpayer a written statement that the donee’s use of the 

property will be consistent with such requirements.183 In the case 

of contributed property subject to the Federal Food, Drug, and Cosmetic Act, as amended, the property must satisfy the applicable requirements of such Act on the date of transfer and for 180 days 

prior to the transfer.184

A donor making a charitable contribution of inventory must 

make a corresponding adjustment to the cost of goods sold by decreasing the cost of goods sold by the lesser of the fair market 


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185Treas. Reg. sec. 1.170A–4A(c)(3). 186Lucky Stores Inc. v. Commissioner, 105 T.C. 420 (1995) (holding that the value of surplus 

bread inventory donated to charity was the full retail price of the bread rather than half the 

retail price, as the IRS asserted). 187Sec. 170(e)(3)(C). 188The 10 percent limitation does not affect the application of the generally applicable percentage limitations. For example, if 10 percent of a sole proprietor’s net income from the proprietor’s trade or business was greater than 50 percent of the proprietor’s contribution base, the 

available deduction for the taxable year (with respect to contributions to public charities) would 

be 50 percent of the proprietor’s contribution base. Consistent with present law, such contributions may be carried forward because they exceed the 50 percent limitation. Contributions of 

food inventory by a taxpayer that is not a C corporation that exceed the 10 percent limitation 

but not the 50 percent limitation could not be carried forward. 

value of the property or the donor’s basis with respect to the inventory.185

To use the enhanced deduction, the taxpayer must establish that 

the fair market value of the donated item exceeds basis. The valuation of food inventory has been the subject of disputes between 

taxpayers and the IRS.186

Temporary rule expanding and modifying the enhanced deduction 

for contributions of food inventory 

Under a temporary provision, any taxpayer engaged in a trade 

or business, whether or not a C corporation, is eligible to claim the 

enhanced deduction for donations of food inventory.187 For taxpayers other than C corporations, the total deduction for donations 

of food inventory in a taxable year generally may not exceed 10 

percent of the taxpayer’s net income for such taxable year from all 

sole proprietorships, S corporations, or partnerships (or other non 

C corporations) from which contributions of apparently wholesome 

food are made. For example, if a taxpayer is a sole proprietor, a 

shareholder in an S corporation, and a partner in a partnership, 

and each business makes charitable contributions of food inventory, 

the taxpayer’s deduction for donations of food inventory is limited 

to 10 percent of the taxpayer’s net income from the sole proprietorship and the taxpayer’s interests in the S corporation and partnership. However, if only the sole proprietorship and the S corporation 

made charitable contributions of food inventory, the taxpayer’s deduction would be limited to 10 percent of the net income from the 

trade or business of the sole proprietorship and the taxpayer’s interest in the S corporation, but not the taxpayer’s interest in the 

partnership.188

Under the temporary provision, the enhanced deduction for food 

is available only for food that qualifies as ‘‘apparently wholesome 

food.’’ Apparently wholesome food is defined as food intended for 

human consumption that meets all quality and labeling standards 

imposed by Federal, State, and local laws and regulations even 

though the food may not be readily marketable due to appearance, 

age, freshness, grade, size, surplus, or other conditions. 

The provision does not apply to contributions made after December 31, 2014. 

REASONS FOR CHANGE

The Committee believes that charitable organizations benefit 

from charitable contributions of food inventory by non C corporations and that the enhanced deduction is a useful incentive for the 

making of such contributions. Accordingly, the Committee believes 


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189For the years 2003 through 2006, the relevant dollar amount is $100,000 (indexed for infla- tion); in 2007, the dollar limitation is $125,000; for the 2008 and 2009 years, the relevant dollar 

amount is $250,000; and for the years 2010 through 2013, the relevant dollar limitation is 

$500,000. Sec. 179(b)(1). 190For the years 2003 through 2006, the relevant dollar amount is $400,000 (indexed for infla- tion); in 2007, the dollar limitation is $500,000; for the 2008 and 2009 years, the relevant dollar 

amount is $800,000; and for the years 2010 through 2013, the relevant dollar limitation is 

$2,000,000. Sec. 179(b)(2). 191Passenger automobiles subject to the section 280F limitation are eligible for section 179 

expensing only to the extent of the dollar limitations in section 280F. For sport utility vehicles 

above the 6,000 pound weight rating, which are not subject to the limitation under section 280F, 

the maximum cost that may be expensed for any taxable year under section 179 is $25,000. Sec. 

179(b)(5). 192Sec. 179(d)(1) flush language. 193Sec. 179(d)(1)(A)(ii) and (f). 194Sec. 179(f)(3). 

it is appropriate to extend the special rule for charitable contributions of food inventory for two years. 

EXPLANATION OF PROVISION

The provision extends the special rule for charitable contributions of food inventory for two years to contributions made before 

January 1, 2017. 

EFFECTIVE DATE

The provision is effective for contributions made after December 

31, 2014. 

17. Extension and modification of increased expensing limitations 

and treatment of certain real property as section 179 property 

(sec. 127 of the bill and sec. 179 of the Code) 

PRESENT LAW

A taxpayer may elect under section 179 to deduct (or ‘‘expense’’) 

the cost of qualifying property, rather than to recover such costs 

through depreciation deductions, subject to limitation. For taxable 

years beginning in 2014, the maximum amount a taxpayer may expense is $500,000 of the cost of qualifying property placed in service for the taxable year.189 The $500,000 amount is reduced (but 

not below zero) by the amount by which the cost of qualifying property placed in service during the taxable year exceeds 

$2,000,000.190 The $500,000 and $2,000,000 amounts are not indexed for inflation. In general, qualifying property is defined as depreciable tangible personal property that is purchased for use in 

the active conduct of a trade or business.191 Qualifying property excludes investments in air conditioning and heating units.192 For 

taxable years beginning before 2015, qualifying property also includes off-the-shelf computer software and qualified real property 

(i.e., qualified leasehold improvement property, qualified restaurant 

property, and qualified retail improvement property).193 Of the 

$500,000 expense amount available under section 179, the maximum amount available with respect to qualified real property is 

$250,000 for each taxable year.194

For taxable years beginning in 2015 and thereafter, a taxpayer 

may elect to deduct up to $25,000 of the cost of qualifying property 

placed in service for the taxable year, subject to limitation. The 

$25,000 amount is reduced (but not below zero) by the amount by 

which the cost of qualifying property placed in service during the 


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195Sec. 179(b)(3). 196Section 179(f)(4) details the special rules that apply to disallowed amounts with respect 

to qualified real property. 197For example, assume that during 2013, a company’s only asset purchases are section 179- eligible equipment costing $100,000 and qualifying leasehold improvements costing $200,000. 

Assume the company has no other asset purchases during 2013, and has a taxable income limitation of $150,000. The maximum section 179 deduction the company can claim for 2013 is 

$150,000, which is allocated pro rata between the properties, such that the carryover to 2014 

is allocated $100,000 to the qualified leasehold improvements and $50,000 to the equipment. 

Assume further that in 2014, the company had no asset purchases and had no taxable income. The $100,000 carryover from 2013 attributable to qualified leasehold improvements is treated 

as placed in service as of the first day of the company’s 2014 taxable year under section 

179(f)(4)(C). The $50,000 carryover allocated to equipment is carried over to 2014 under section 

179(b)(3)(B). 198Sec. 179(d)(9). 199Sec. 312(k)(3)(B). 200Sec. 179(c)(1). 201Sec. 179(c)(2). 

taxable year exceeds $200,000. The $25,000 and $200,000 amounts 

are not indexed for inflation. In general, qualifying property is defined as depreciable tangible personal property (not including offthe-shelf computer software, qualified real property, or air conditioning and heating units) that is purchased for use in the active 

conduct of a trade or business. 

The amount eligible to be expensed for a taxable year may not 

exceed the taxable income for such taxable year that is derived 

from the active conduct of a trade or business (determined without 

regard to this provision).195 Any amount that is not allowed as a 

deduction because of the taxable income limitation may be carried 

forward to succeeding taxable years (subject to limitations). However, amounts attributable to qualified real property that are disallowed under the trade or business income limitation may only be 

carried over to taxable years in which the definition of eligible section 179 property includes qualified real property.196 Thus, if a taxpayer’s section 179 deduction for 2013 with respect to qualified real 

property is limited by the taxpayer’s active trade or business income, such disallowed amount may be carried over to 2014. Any 

such carryover amounts that are not used in 2014 are treated as 

property placed in service in 2014 for purposes of computing depreciation. That is, the unused carryover amount from 2013 is considered placed in service on the first day of the 2014 taxable year.197

No general business credit under section 38 is allowed with respect to any amount for which a deduction is allowed under section 

179.198 If a corporation makes an election under section 179 to deduct expenditures, the full amount of the deduction does not reduce 

earnings and profits. Rather, the expenditures that are deducted 

reduce corporate earnings and profits ratably over a five-year period.199

An expensing election is made under rules prescribed by the Secretary.200 In general, any election or specification made with respect to any property may not be revoked except with the consent 

of the Commissioner. However, an election or specification under 

section 179 may be revoked by the taxpayer without consent of the 

Commissioner for taxable years beginning after 2002 and before 

2015.201 Such revocation, once made, is irrevocable. 

REASONS FOR CHANGE

The Committee believes that section 179 expensing provides two 

important benefits for small businesses. First, it lowers the cost of 


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capital for tangible property used in a trade or business. With a 

lower cost of capital, the Committee believes small businesses will 

invest in more equipment and employ more workers. Second, it 

eliminates depreciation recordkeeping requirements with respect to 

expensed property. In order to increase the value of these benefits 

and to increase the number of taxpayers eligible, the provision increases the amount allowed to be expensed under section 179 and 

increases the amount of the phase-out threshold. In addition, in 

order to counteract the negative impact of inflation on the limit 

and phase-out threshold of this provision for small businesses, the 

provision indexes such amounts for inflation. 

The Committee also believes that qualified real property (i.e., qualified leasehold improvement property, qualified restaurant 

property, and qualified retail improvement property) should continue to be included in the section 179 expensing provision to encourage small businesses to invest in these types of real property. 

Further, the Committee believes that purchased computer software 

should continue to be included in the section 179 expensing provision so that it is not disadvantaged relative to developed software. 

In addition, the Committee believes that the process of making and 

revoking section 179 elections should continue to be simpler and 

more efficient for taxpayers by eliminating the requirement of the 

consent of the Commissioner. 

EXPLANATION OF PROVISION

The provision provides that the maximum amount a taxpayer 

may expense, for taxable years beginning in 2015 and 2016, is 

$500,000 of the cost of qualifying property placed in service for the 

taxable year. The $500,000 amount is reduced (but not below zero) 

by the amount by which the cost of qualifying property placed in 

service during the taxable year exceeds $2,000,000. The $500,000 

and $2,000,000 amounts are indexed for inflation for taxable years 

beginning after 2014. 

In addition, the provision extends, for taxable years beginning in 

2015 and 2016, the treatment of off-the-shelf computer software as 

qualifying property. The provision also extends the treatment of 

qualified real property as eligible section 179 property for taxable 

years beginning in 2015 and 2016, including the limitation on 

carryovers and the maximum amount available with respect to 

qualified real property of $250,000 for each taxable year. For taxable years beginning in 2015 and 2016, the provision continues to 

allow a taxpayer to revoke an election, or any specification contained therein, made under section 179 without the consent of the 

Commissioner. 

EFFECTIVE DATE

The provision applies to taxable years beginning after December 

31, 2014. 

18. Extension of election to expense mine safety equipment (sec. 

128 of the bill and sec. 179E of the Code) 

PRESENT LAW

A taxpayer may elect to treat 50 percent of the cost of any qualified advanced mine safety equipment property as an expense in the 


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202Sec. 179E(a). 203Sec. 179E(c) and (g). 204Sec. 179E(d). 205See Treas. Reg. section 1.181–2 for rules on making an election under this section. 206For this purpose, a production is treated as commencing on the first date of principal photography. 207Sec. 181(a)(2)(A). 

taxable year in which the equipment is placed in service.202 ‘‘Qualified advanced mine safety equipment property’’ means any advanced mine safety equipment property for use in any underground 

mine located in the United States the original use of which commences with the taxpayer and which is placed in service after December 20, 2006, and before January 1, 2015.203

Advanced mine safety equipment property means any of the following: (1) emergency communication technology or devices used to 

allow a miner to maintain constant communication with an individual who is not in the mine; (2) electronic identification and location devices that allow individuals not in the mine to track at all 

times the movements and location of miners working in or at the 

mine; (3) emergency oxygen-generating, self-rescue devices that 

provide oxygen for at least 90 minutes; (4) pre-positioned supplies 

of oxygen providing each miner on a shift the ability to survive for 

at least 48 hours; and (5) comprehensive atmospheric monitoring 

systems that monitor the levels of carbon monoxide, methane, and 

oxygen that are present in all areas of the mine and that can detect smoke in the case of a fire in a mine.204

REASONS FOR CHANGE

The Committee believes that mine safety equipment is vital to 

ensuring a safe workplace for the nation’s underground mine workforce. Therefore, the Committee believes that this incentive for 

mine safety equipment property should be extended. 

EXPLANATION OF PROVISION

The provision extends for two years (through December 31, 2016) 

the present-law placed-in-service date allowing a taxpayer to expense 50 percent of the cost of any qualified advanced mine safety 

equipment property. 

EFFECTIVE DATE

The provision applies to property placed in service after December 31, 2014. 

19. Extension of special expensing rules for certain film and television productions; special expensing for live theatrical productions (sec. 129 of the bill and sec. 181 of the Code) 

PRESENT LAW

Under section 181, a taxpayer may elect 205 to deduct the cost of 

any qualifying film and television production, commencing prior to 

January 1, 2015, in the year the expenditure is incurred in lieu of 

capitalizing the cost and recovering it through depreciation allowances.206 A taxpayer may elect to deduct up to $15 million of the 

aggregate cost of the film or television production under this section.207 The threshold is increased to $20 million if a significant 


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208Sec. 181(a)(2)(B). 209Sec. 181(d)(3)(A). 210Sec. 181(d)(3)(B). 211Sec. 181(d)(2)(B). 212Sec. 181(d)(2)(C). 213Sec. 1245(a)(2)(C). 

amount of the production expenditures are incurred in areas eligible for designation as a low-income community or eligible for designation by the Delta Regional Authority as a distressed county or 

isolated area of distress.208

A qualified film or television production means any production of 

a motion picture (whether released theatrically or directly to video 

cassette or any other format) or television program if at least 75 

percent of the total compensation expended on the production is for 

services performed in the United States by actors, directors, producers, and other relevant production personnel.209 The term ‘‘compensation’’ does not include participations and residuals (as defined 

in section 167(g)(7)(B)).210 Each episode of a television series is 

treated as a separate production, and only the first 44 episodes of 

a particular series qualify under the provision.211 Qualified productions do not include sexually explicit productions as referenced by 

section 2257 of title 18 of the U.S. Code.212

For purposes of recapture under section 1245, any deduction allowed under section 181 is treated as if it were a deduction allowable for amortization.213

REASONS FOR CHANGE

The Committee believes that section 181 encourages domestic 

film and television productions and that the provision should be extended. The issue of runaway production (i.e., the production of 

American film and television projects abroad) affects all productions, regardless of cost, and therefore the Committee believes that 

it is appropriate to continue to treat as an expense the first $15 

million ($20 million in certain cases) of production costs of otherwise qualified film and television productions. 

The Committee also believes that section 181 should be expanded 

to include some types of live theatrical productions in order to encourage investment in and financing of these types of commercial 

stage productions, thereby resulting in more live theatre jobs and 

shows. Therefore, the provision allows certain live theatrical productions to qualify for section 181. 

EXPLANATION OF PROVISION

The provision extends the special treatment for film and television productions under section 181 for two years to qualified film 

and television productions commencing prior to January 1, 2017. 

The provision also expands section 181 to include any qualified 

live theatrical production. A qualified live theatrical production is 

defined as a live staged production of a play (with or without 

music) which is derived from a written book or script and is produced or presented by a commercial entity in any venue which has 

an audience capacity of not more than 3,000, or a series of venues 

the majority of which have an audience capacity of not more than 

3,000. In addition, qualified live theatrical productions include any 

live staged production which is produced or presented by a taxable 


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214Qualifying production property generally includes any tangible personal property, computer 

software, and sound recordings. 215Qualified film includes any motion picture film or videotape (including live or delayed television programming, but not including certain sexually explicit productions) if 50 percent or 

more of the total compensation relating to the production of the film (including compensation 

in the form of residuals and participations) constitutes compensation for services performed in 

the United States by actors, production personnel, directors, and producers. 

entity no more than 10 weeks in a taxable year in any venue which 

has an audience capacity of not more than 6,500. An annualization 

rule applies in the case of a short taxable year for purposes of determining the number of weeks for which a production is produced 

or presented. In general, in the case of multiple live-staged productions, each such live-staged production is treated as a separate production. Similar to the exclusion for sexually explicit productions 

from the present-law definition of qualified productions, qualified 

live theatrical productions do not include stage performances that 

would be excluded by section 2257(h)(1) of title 18 of the U.S. Code, 

if such provision were extended to live stage performances. 

EFFECTIVE DATE

The provision applies to productions commencing after December 

31, 2014. For purposes of this provision, the date on which a qualified live theatrical production commences is the date of the first 

public performance of such production for a paying audience. 

20. Extension of deduction allowable with respect to income attributable to domestic production activities in Puerto Rico (sec. 130 

of the bill and sec. 199 of the Code) 

PRESENT LAW

General 

Present law generally provides a deduction from taxable income 

(or, in the case of an individual, adjusted gross income) that is 

equal to nine percent of the lesser of the taxpayer’s qualified production activities income or taxable income for the taxable year. 

For taxpayers subject to the 35-percent corporate income tax rate, 

the nine-percent deduction effectively reduces the corporate income 

tax rate to slightly less than 32 percent on qualified production activities income. 

In general, qualified production activities income is equal to domestic production gross receipts 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. 

Domestic production gross receipts generally are gross receipts of 

a taxpayer that are derived from: (1) any sale, exchange, or other 

disposition, or any lease, rental, or license, of qualifying production 

property 214 that was manufactured, produced, grown or extracted 

by the taxpayer in whole or in significant part within the United 

States; (2) any sale, exchange, or other disposition, or any lease, 

rental, or license, of qualified film 215 produced by the taxpayer; (3) 

any lease, rental, license, sale, exchange, or other disposition of 

electricity, natural gas, or potable water produced by the taxpayer 

in the United States; (4) construction of real property performed in 

the United States by a taxpayer in the ordinary course of a conVerDate Sep 11 2014 05:21 Aug 08, 2015 Jkt 049010 PO 00000 Frm 00068 Fmt 6659 Sfmt 6602 E:\HR\OC\SR118.XXX SR118

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216For purposes of the provision, ‘‘wages’’ include the sum of the amounts of wages as defined 

in section 3401(a) and elective deferrals that the taxpayer properly reports to the Social Security 

Administration with respect to the employment of employees of the taxpayer during the calendar year ending during the taxpayer’s taxable year. 217Section 3401(a)(8)(C) excludes wages paid to United States citizens who are bona fide residents of Puerto Rico from the term wages for purposes of income tax withholding. 218Sec. 7701(a)(9). 219Sec. 199(d)(8)(A). 220Sec. 199(d)(8)(B). 

struction trade or business; or (5) engineering or architectural services performed in the United States for the construction of real 

property located in the United States. 

The amount of the deduction for a taxable year is limited to 50 

percent of the wages paid by the taxpayer, and properly allocable 

to domestic production gross receipts, during the calendar year that 

ends in such taxable year.216 Wages paid to bona fide residents of 

Puerto Rico generally are not included in the definition of wages 

for purposes of computing the wage limitation amount.217

Rules for Puerto Rico 

When used in the Code in a geographical sense, the term ‘‘United 

States’’ generally includes only the States and the District of Columbia.218 A special rule for determining domestic production gross 

receipts, however, provides that in the case of any taxpayer with 

gross receipts from sources within the Commonwealth of Puerto 

Rico, the term ‘‘United States’’ includes the Commonwealth of 

Puerto Rico, but only if all of the taxpayer’s Puerto Rico-sourced 

gross receipts are taxable under the Federal income tax for individuals or corporations.219 In computing the 50-percent wage limitation, the taxpayer is permitted to take into account wages paid to 

bona fide residents of Puerto Rico for services performed in Puerto 

Rico.220

The special rules for Puerto Rico apply only with respect to the 

first nine taxable years of a taxpayer beginning after December 31, 

2005 and before January 1, 2015. 

REASONS FOR CHANGE

The Committee believes that, notwithstanding expiration of the 

Puerto Rico and possession tax credit and the Puerto Rico economic 

activity credit for taxable years beginning after 2005, the Code 

should grant a tax benefit for production in Puerto Rico. Consequently, the Committee believes that it is appropriate to treat 

Puerto Rico as part of the United States for purposes of the domestic production activities deduction. 

DESCRIPTION OF PROVISION

The provision extends the special domestic production activities 

rules for Puerto Rico to apply for the first eleven taxable years of 

a taxpayer beginning after December 31, 2005 and before January 

1, 2017. 

EFFECTIVE DATE

The provision is effective for taxable years beginning after December 31, 2014. 


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221Sec. 511. 222Sec. 512(b). 223Sec. 512(b)(13)(E). 

21. Extension of modification of tax treatment of certain payments 

to controlling exempt organizations (sec. 131 of the bill and sec. 

512 of the Code) 

PRESENT LAW

In general, organizations exempt from Federal income tax are 

subject to the unrelated business income tax on income derived 

from a trade or business regularly carried on by the organization 

that is not substantially related to the performance of the organization’s tax-exempt functions.221 In general, interest, rents, royalties, 

and annuities are excluded from the unrelated business income of 

tax-exempt organizations.222

Section 512(b)(13) provides rules regarding income derived by an 

exempt organization from a controlled subsidiary. In general, section 512(b)(13) treats otherwise excluded rent, royalty, annuity, 

and interest income as unrelated business taxable income if such 

income is received from a taxable or tax-exempt subsidiary that is 

50-percent controlled by the parent tax-exempt organization to the 

extent the payment reduces the net unrelated income (or increases 

any net unrelated loss) of the controlled entity (determined as if 

the entity were tax exempt). 

In the case of a stock subsidiary, ‘‘control’’ means ownership by 

vote or value of more than 50 percent of the stock. In the case of 

a partnership or other entity, ‘‘control’’ means ownership of more 

than 50 percent of the profits, capital, or beneficial interests. In addition, present law applies the constructive ownership rules of section 318 for purposes of section 512(b)(13). Thus, a parent exempt 

organization is deemed to control any subsidiary in which it holds 

more than 50 percent of the voting power or value, directly (as in 

the case of a first-tier subsidiary) or indirectly (as in the case of 

a second-tier subsidiary). 

For payments made pursuant to a binding written contract in effect on August 17, 2006 (or renewal of such a contract on substantially similar terms), the general rule of section 512(b)(13) applies 

only to the portion of payments received or accrued in a taxable 

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 section 482 (i.e., at arm’s length).223

A 20-percent penalty is imposed on the larger of such excess determined without regard to any amendment or supplement to a return 

of tax, or such excess determined with regard to all such amendments and supplements. This special rule does not apply to payments received or accrued after December 31, 2014. 

REASONS FOR CHANGE

For certain qualifying payments of rent, royalties, annuities, or 

interest by a controlled subsidiary to its exempt parent pursuant 

to a binding written contract in effect on August 17, 2006 (or renewal of such a contract on substantially similar terms), the Committee believes that it is appropriate to include in the parent’s unrelated business taxable income only the portion of such payment 


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that exceeds the amount that would have been paid in an arm’slength transaction. The Committee therefore believes it is desirable 

to extend the special rule for an additional two years. 

EXPLANATION OF PROVISION

The provision extends the special rule for two years to payments 

received or accrued before January 1, 2017. Accordingly, under the 

provision, payments of rent, royalties, annuities, or interest by a 

controlled organization to a controlling organization pursuant to a 

binding written contract in effect on August 17, 2006 (or renewal 

of such a contract on substantially similar terms), may be includible in the unrelated business taxable income of the controlling organization only to the extent the payment exceeds the amount of 

the payment determined under the principles of section 482 (i.e., at 

arm’s length). Any such excess is subject to a 20-percent penalty 

on the larger of such excess determined without regard to any 

amendment or supplement to a return of tax, or such excess determined with regard to all such amendments and supplements. 

EFFECTIVE DATE

The provision is effective for payments received or accrued after 

December 31, 2014. 

22. Extension of treatment of certain dividends of regulated investment companies (sec. 132 of the bill and sec. 871(k) of the Code) 

PRESENT LAW

In general 

A regulated investment company (‘‘RIC’’) is an entity that meets 

certain requirements (including a requirement that its income generally be derived from passive investments such as dividends and 

interest and a requirement that it distribute at least 90 percent of 

its income) and that elects to be taxed under a special tax regime. 

Unlike an ordinary corporation, an entity that is taxed as a RIC 

can deduct amounts paid to its shareholders as dividends. In this 

manner, tax on RIC income is generally not paid by the RIC but 

rather by its shareholders. Income of a RIC distributed to shareholders as dividends is generally treated as an ordinary income 

dividend by those shareholders, unless other special rules apply. 

Dividends received by foreign persons from a RIC are generally 

subject to gross-basis tax under sections 871(a) or 881, and the RIC 

payor of such dividends is obligated to withhold such tax under sections 1441 and 1442. 

Under a temporary provision of prior law, a RIC that earned certain interest income that generally would not be subject to U.S. tax 

if earned by a foreign person directly could, to the extent of such 

net interest income, designate a dividend it paid as derived from 

such interest income for purposes of the treatment of a foreign RIC 

shareholder. A foreign person who is a shareholder in the RIC generally could treat such a designated dividend as exempt from grossbasis U.S. tax. Also, subject to certain requirements, the RIC was 

exempt from withholding the gross-basis tax on such dividends. 

Similar rules applied with respect to the designation of certain 

short-term capital gain dividends. However, these provisions relatVerDate Sep 11 2014 05:21 Aug 08, 2015 Jkt 049010 PO 00000 Frm 00071 Fmt 6659 Sfmt 6602 E:\HR\OC\SR118.XXX SR118

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224Secs. 871(k), 881(e), 1441(c)(12), 1441(a), and 1442. 

ing to dividends with respect to interest income and short-term 

capital gain of the RIC have expired, and therefore do not apply to 

dividends with respect to any taxable year of a RIC beginning after 

December 31, 2014.224

REASONS FOR CHANGE

The Committee believes it is appropriate to extend for two years 

the provision that allows certain interest income and short-term 

capital gain of RICs to be designated as not subject to gross-basis 

tax, or to withholding of such tax, with respect to foreign investors 

in the RIC. The Committee believes the extension will promote 

greater certainty for foreign investors in RICs. 

EXPLANATION OF PROVISION

The provision extends the rules exempting from gross-basis tax 

and from withholding of such tax the interest-related dividends and 

short-term capital gain dividends received from a RIC, to dividends 

with respect to taxable years of a RIC beginning before January 1, 

2017. 

EFFECTIVE DATE

The provision applies to dividends paid with respect to any taxable year of a RIC beginning after December 31, 2014. 

23. Extension of RIC qualified investment entity treatment under 

FIRPTA (sec. 133 of the bill and secs. 897 and 1445 of the Code) 

PRESENT LAW

Special U.S. tax rules apply to capital gains of foreign persons 

that are attributable to dispositions of interests in U.S. real property. In general, although a foreign person (a foreign corporation or 

a nonresident alien individual) is not generally taxed on U.S. 

source capital gains unless certain personal presence or active business requirements are met, a foreign person who sells a U.S. real 

property interest (‘‘USRPI’’) is subject to tax at the same rates as 

a U.S. person, under the Foreign Investment in Real Property Tax 

Act (‘‘FIRPTA’’) provisions codified in section 897 of the Code. 

Withholding tax is also imposed under section 1445. 

A USRPI includes stock or a beneficial interest in any domestic 

corporation unless such corporation has not been a U.S. real property holding corporation (as defined) during the testing period. A 

USRPI does not include an interest in a domestically controlled 

‘‘qualified investment entity.’’ A distribution from a ‘‘qualified investment entity’’ that is attributable to the sale of a USRPI is also 

subject to tax under FIRPTA unless the distribution is with respect 

to an interest that is regularly traded on an established securities 

market located in the United States and the recipient foreign corporation or nonresident alien individual did not hold more than 

five percent of that class of stock or beneficial interest within the 


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225Sections 857(b)(3)(F), 852(b)(3)(E), and 871(k)(2)(E) require dividend treatment, rather 

than capital gain treatment, for certain distributions to which FIRPTA does not apply by reason 

of this exception. See also section 881(e)(2). 226Section 897(h). 227Secs. 951–964. 

one-year period ending on the date of distribution.225 Special rules 

apply to situations involving tiers of qualified investment entities. 

The term ‘‘qualified investment entity’’ includes a real estate investment trust (‘‘REIT’’) and also includes a regulated investment 

company (‘‘RIC’’) that meets certain requirements, although the inclusion of a RIC in that definition does not apply for certain purposes after December 31, 2014.226

REASONS FOR CHANGE

The Committee believes it is appropriate to extend the qualified 

investment entity treatment of RICs under FIRPTA for two years. 

The Committee believes the extension will promote greater certainty for foreign investors in RICs. 

EXPLANATION OF PROVISION

The provision extends the inclusion of a RIC within the definition of a ‘‘qualified investment entity’’ under section 897 through 

December 31, 2016, for those situations in which that inclusion 

would otherwise have expired after December 31, 2014. 

EFFECTIVE DATE

The provision is generally effective on January 1, 2015. 

The provision does not apply with respect to the withholding requirement under section 1445 for any payment made before the 

date of enactment, but a RIC that withheld and remitted tax under 

section 1445 on distributions made after December 31, 2014 and 

before the date of enactment is not liable to the distributee with 

respect to such withheld and remitted amounts. 

24. Extension of subpart F exception for active financing income 

(sec. 134 of the bill and secs. 953 and 954 of the Code) 

PRESENT LAW

Under the subpart F rules,227 10-percent-or-greater U.S. shareholders of a controlled foreign corporation (‘‘CFC’’) are subject to 

U.S. tax currently on certain income earned by the CFC, whether 

or not such income is distributed to the shareholders. The income 

subject to current inclusion under the subpart F rules includes, 

among other things, insurance income and foreign base company 

income. Foreign base company income includes, among other 

things, foreign personal holding company income and foreign base 

company services income (i.e., income derived from services performed for or on behalf of a related person outside the country in 

which the CFC is organized). 

Foreign personal holding company income generally consists of 

the following: (1) dividends, interest, royalties, rents, and annuities; (2) net gains from the sale or exchange of (a) property that 

gives rise to the preceding types of income, (b) property that does 

not give rise to income, and (c) interests in trusts, partnerships, 

and real estate mortgage investment conduits (‘‘REMICs’’); (3) net 


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228Prop. Treas. Reg. sec. 1.953–1(a). 

gains from commodities transactions; (4) net gains from certain foreign currency transactions; (5) income that is equivalent to interest; (6) income from notional principal contracts; (7) payments in 

lieu of dividends; and (8) amounts received under personal service 

contracts. 

Insurance income subject to current inclusion under the subpart 

F rules includes any income of a CFC attributable to the issuing 

or reinsuring of any insurance or annuity contract in connection 

with risks located in a country other than the CFC’s country of organization. Subpart F insurance income also includes income attributable to an insurance contract in connection with risks located 

within the CFC’s country of organization, as the result of an arrangement under which another corporation receives a substantially equal amount of consideration for insurance of other country 

risks. Investment income of a CFC that is allocable to any insurance or annuity contract related to risks located outside the CFC’s 

country of organization is taxable as subpart F insurance income.228

Temporary exceptions from foreign personal holding company income, foreign base company services income, and insurance income 

apply for subpart F purposes for certain income that is derived in 

the active conduct of a banking, financing, or similar business, as 

a securities dealer, or in the conduct of an insurance business (socalled ‘‘active financing income’’). 

With respect to income derived in the active conduct of a banking, financing, or similar business, a CFC is required to be predominantly engaged in such business and to conduct substantial 

activity with respect to such business to qualify for the active financing exceptions. In addition, certain nexus requirements apply, 

which provide that income derived by a CFC or a qualified business 

unit (‘‘QBU’’) of a CFC from transactions with customers is eligible 

for the exceptions if, among other things, substantially all of the 

activities in connection with such transactions are conducted directly by the CFC or QBU in its home country, and such income 

is treated as earned by the CFC or QBU in its home country for 

purposes of such country’s tax laws. Moreover, the exceptions apply 

to income derived from certain cross border transactions, provided 

that certain requirements are met. Additional exceptions from foreign personal holding company income apply for certain income derived by a securities dealer within the meaning of section 475 and 

for gain from the sale of active financing assets. 

In the case of a securities dealer, the temporary exception from 

foreign personal holding company income applies to certain income. 

The income covered by the exception is any interest or dividend (or 

certain equivalent amounts) from any transaction, including a 

hedging transaction or a transaction consisting of a deposit of collateral or margin, entered into in the ordinary course of the dealer’s trade or business as a dealer in securities within the meaning 

of section 475. In the case of a QBU of the dealer, the income is 

required to be attributable to activities of the QBU in the country 

of incorporation, or to a QBU in the country in which the QBU 

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erally takes precedence over the exception for income of a banking, 

financing or similar business, in the case of a securities dealer. 

In the case of insurance, a temporary exception from foreign personal holding company income applies for certain income of a qualifying insurance company with respect to risks located within the 

CFC’s country of creation or organization. In the case of insurance, 

temporary exceptions from insurance income and from foreign personal holding company income also apply for certain income of a 

qualifying branch of a qualifying insurance company with respect 

to risks located within the home country of the branch, provided 

certain requirements are met under each of the exceptions. Further, additional temporary exceptions from insurance income and 

from foreign personal holding company income apply for certain income of certain CFCs or branches with respect to risks located in 

a country other than the United States, provided that the requirements for these exceptions are met. In the case of a life insurance 

or annuity contract, reserves for such contracts are determined 

under rules specific to the temporary exceptions. Present law also 

permits a taxpayer in certain circumstances, subject to approval by 

the IRS through the ruling process or in published guidance, to establish that the reserve of a life insurance company for life insurance and annuity contracts is the amount taken into account in determining the foreign statement reserve for the contract (reduced 

by catastrophe, equalization, or deficiency reserve or any similar 

reserve). IRS approval is to be based on whether the method, the 

interest rate, the mortality and morbidity assumptions, and any 

other factors taken into account in determining foreign statement 

reserves (taken together or separately) provide an appropriate 

means of measuring income for Federal income tax purposes. 

The temporary exceptions apply for taxable years of foreign corporations beginning after December 31, 1998 and before January 1, 

2015, and for taxable years of U.S. shareholders with or within 

which such taxable years of such foreign corporations end. 

REASONS FOR CHANGE

The Committee believes that it is appropriate to extend the temporary provision for an additional two years to provide certainty 

and to allow for business planning. 

EXPLANATION OF PROVISION

The provision extends for two years (for taxable years beginning 

before January 1, 2017) the temporary exceptions from subpart F 

foreign personal holding company income, foreign base company 

services income, and insurance income for certain income that is 

derived in the active conduct of a banking, financing, or similar 

business, as a securities dealer, or in the conduct of an insurance 

business. 

EFFECTIVE DATE

The provision is effective for taxable years of foreign corporations 

beginning after December 31, 2014, and for taxable years of U.S. 

shareholders with or within which such taxable years of such foreign corporations end. 


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229Secs. 951–964. 

25. Extension of look-thru treatment of payments between related 

controlled foreign corporations under foreign personal holding 

company rules (sec. 135 of the bill and sec. 954(c)(6) of the Code) 

PRESENT LAW

IN GENERAL

The rules of subpart F 229 require U.S. shareholders with a 10- 

percent or greater interest in a controlled foreign corporation 

(‘‘CFC’’) to include certain income of the CFC (referred to as ‘‘subpart F income’’) on a current basis for U.S. tax purposes, regardless 

of whether the income is distributed to the shareholders. 

Subpart F income includes foreign base company income. One 

category of foreign base company income is foreign personal holding company income. For subpart F purposes, foreign personal 

holding company income generally includes dividends, interest, 

rents, and royalties, among other types of income. There are several exceptions to these rules. For example, foreign personal holding company income does not include dividends and interest received by a CFC from a related corporation organized and operating in the same foreign country in which the CFC is organized, 

or rents and royalties received by a CFC from a related corporation 

for the use of property within the country in which the CFC is organized. Interest, rent, and royalty payments do not qualify for this 

exclusion to the extent that such payments reduce the subpart F 

income of the payor. In addition, subpart F income of a CFC does 

not include any item of income from sources within the United 

States that is effectively connected with the conduct by such CFC 

of a trade or business within the United States (‘‘ECI’’) unless such 

item is exempt from taxation (or is subject to a reduced rate of tax) 

pursuant to a tax treaty. 

The ‘‘look-thru rule’’ 

Under the ‘‘look-thru rule’’ (sec. 954(c)(6)), dividends, interest (including factoring income that is treated as equivalent to interest 

under section 954(c)(1)(E)), rents, and royalties received or accrued 

by one CFC from a related CFC are not treated as foreign personal 

holding company income to the extent attributable or properly allocable to income of the payor that is neither subpart F income nor 

treated as ECI. For this purpose, a related CFC is a CFC that controls or is controlled by the other CFC, or a CFC that is controlled 

by the same person or persons that control the other CFC. Ownership of more than 50 percent of the CFC’s stock (by vote or value) 

constitutes control for these purposes. 

The Secretary is authorized to prescribe regulations that are necessary or appropriate to carry out the look-thru rule, including 

such regulations as are necessary or appropriate to prevent the 

abuse of the purposes of such rule. 

The look-thru rule applies to taxable years of foreign corporations beginning after December 31, 2005 and before January 1, 

2015, and to taxable years of U.S. shareholders with or within 

which such taxable years of foreign corporations end. 


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230Sec. 1202. 231Sec. 1(h). 232Sec. 57(a)(7). 

REASONS FOR CHANGE

The Committee believes that it is appropriate to extend the lookthru rule for two years to help U.S. companies with overseas operations compete more effectively with foreign firms. 

DESCRIPTION OF PROVISION

The provision extends for two years the application of the lookthru rule, to taxable years of foreign corporations beginning before 

January 1, 2017, and to taxable years of U.S. shareholders with or 

within which such taxable years of foreign corporations end. 

EFFECTIVE DATE

The provision is effective for taxable years of foreign corporations 

beginning after December 31, 2014, and for taxable years of U.S. 

shareholders with or within which such taxable years of foreign 

corporations end. 

26. Extension of exclusion of 100 percent of gain on certain small 

business stock (sec. 136 of the bill and sec. 1202 of the Code) 

PRESENT LAW

In general 

A taxpayer other than a corporation may exclude 50 percent (60 

percent for certain empowerment zone businesses) of the gain from 

the sale of certain small business stock acquired at original issue 

and held for at least five years.230 The amount of gain eligible for 

the exclusion by an individual with respect to the stock of any corporation is the greater of (1) ten times the taxpayer’s basis in the 

stock or (2) $10 million (reduced by the amount of gain eligible for 

exclusion in prior years). To qualify as a small business, when the 

stock is issued, the aggregate gross assets (i.e., cash plus aggregate 

adjusted basis of other property) held by the corporation may not 

exceed $50 million. The corporation also must meet certain active 

trade or business requirements. 

The portion of the gain includible in taxable income is taxed at 

a maximum rate of 28 percent under the regular tax.231 Seven percent of the excluded gain is an alternative minimum tax preference.232

Special rules for stock acquired after February 17, 2009, and before 

January 1, 2015 

For stock acquired after February 17, 2009, and before September 28, 2010, the percentage exclusion for qualified small business stock sold by an individual is increased to 75 percent. 

For stock acquired after September 27, 2010, and before January 

1, 2015, the percentage exclusion for qualified small business stock 

sold by an individual is increased to 100 percent and the minimum 

tax preference does not apply. 


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233Sec. 1366(a)(1)(A). 234Sec. 1367(a)(2)(B). 

REASONS FOR CHANGE

The Committee believes that extending the increased exclusion 

and the elimination of the minimum tax preference will encourage 

and reward investment in qualified small business stock. 

DESCRIPTION OF PROVISION

The provision extends the 100-percent exclusion and the exception from minimum tax preference treatment for two years (for 

stock acquired before January 1, 2017). 

EFFECTIVE DATE

The provision is effective for stock acquired after December 31, 

2014. 

27. Extension of basis adjustment to stock of S corporations making 

charitable contributions of property (sec. 137 of the bill and sec. 

1367 of the Code) 

PRESENT LAW

Under present law, if an S corporation contributes money or 

other property to a charity, each shareholder takes into account the 

shareholder’s pro rata share of the contribution in determining its 

own income tax liability.233 A shareholder of an S corporation reduces the basis in the stock of the S corporation by the amount of 

the charitable contribution that flows through to the shareholder.234

In the case of charitable contributions made in taxable years beginning before January 1, 2015, the amount of a shareholder’s 

basis reduction in the stock of an S corporation by reason of a charitable contribution made by the corporation is equal to the shareholder’s pro rata share of the adjusted basis of the contributed 

property. For contributions made in taxable years beginning after 

December 31, 2014, the amount of the reduction is the shareholder’s pro rata share of the fair market value of the contributed 

property. 

REASONS FOR CHANGE

The Committee believes that the treatment of contributions of 

property by S corporations made in certain taxable years beginning 

before January 1, 2015, is appropriate and should be extended. 

EXPLANATION OF PROVISION

The provision extends the rule relating to the basis reduction on 

account of charitable contributions of property for two years to contributions made in taxable years beginning before January 1, 2017. 

EFFECTIVE DATE

The provision applies to charitable contributions made in taxable 

years beginning after December 31, 2014. 


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235Sec. 1366. 236 Certain built-in income items are treated as recognized built-in gain for this purpose. Sec. 

1374(d)(5). 237Sec. 1374(d)(7)(A). The 10-year period refers to ten calendar years from the first day of the 

first taxable year for which the corporation was an S corporation. Treas. Reg. sec. 1.1374–1(d). 

A regulated investment company (RIC) or a real estate investment trust (REIT) that was formerly a C corporation (or that acquired assets from a C corporation) generally is subject to the 

rules of section 1374 as if the RIC or REIT were an S corporation, unless the relevant C corporation elects ‘‘deemed sale’’ treatment. Treas. Reg. secs. 1.337(d)-7(b)(1) and (c)(1). 238Sec. 1374(d)(2). 239Treas. Reg. sec. 1.1374–4(h). 240Sec. 1374(d)(8). 241Sec. 1374(d)(8)(B). 

28. Extension of reduction in S corporation recognition period for 

built-in gains tax (sec. 138 of the bill and sec. 1374 of the Code) 

PRESENT LAW

In general 

A ‘‘small business corporation’’ (as defined in section 1361(b)) 

may elect to be treated as an S corporation. Unlike C corporations, 

S corporations generally pay no corporate-level tax. Instead, items 

of income and loss of an S corporation pass through to its shareholders. Each shareholder takes into account separately its share 

of these items on its own income tax return.235

Under section 1374, a corporate level built-in gains tax, at the 

highest marginal rate applicable to corporations (currently 35 percent), is imposed on an S corporation’s net recognized built-in 

gain 236 that arose prior to the conversion of the C corporation to 

an S corporation and is recognized by the S corporation during the 

recognition period, i.e., the 10-year period beginning with the first 

day of the first taxable year for which the S election is in effect.237

If the taxable income of the S corporation is less than the amount 

of net recognized built-in gain in the year such built-in gain is recognized (for example, because of post-conversion losses), no tax 

under section 1374 is imposed on the excess of such built-in gain 

over taxable income for that year. However, the untaxed excess of 

net recognized built-in gain over taxable income for that year is 

treated as recognized built-in gain in the succeeding taxable 

year.238 Treasury regulations provide that if a corporation sells an 

asset before or during the recognition period and reports the income from the sale using the installment method under section 453 

during or after the recognition period, that income is subject to tax 

under section 1374.239

The built-in gains tax also applies to net recognized built-in gain 

attributable to any asset received by an S corporation from a C corporation in a transaction in which the S corporation’s basis in the 

asset is determined (in whole or in part) by reference to the basis 

of such asset (or other property) in the hands of the C corporation.240 In the case of such a transaction, the recognition period for 

any asset transferred by the C corporation starts on the date the 

asset was acquired by the S corporation in lieu of the beginning of 

the first taxable year for which the corporation was an S corporation.241


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242Sec. 1366(f)(2). Shareholders continue to take into account all items of gain and loss under 

section 1366. 243Sec. 1374(d)(7)(B). 244Sec. 1374(d)(7)(C). 

The amount of the built-in gains tax under section 1374 is treated as a loss by each of the S corporation shareholders in computing 

its own income tax.242

Special rules for 2009, 2010, and 2011 

For any taxable year beginning in 2009 and 2010, no tax was imposed on the net recognized built-in gain of an S corporation under 

section 1374 if the seventh taxable year in the corporation’s recognition period preceded such taxable year.243 Thus, with respect 

to gain that arose prior to the conversion of a C corporation to an 

S corporation, no tax was imposed under section 1374 if the seventh taxable year that the S corporation election was in effect preceded the taxable year beginning in 2009 or 2010. 

For any taxable year beginning in 2011, no tax was imposed on 

the net recognized built-in gain of an S corporation under section 

1374 if the fifth year in the corporation’s recognition period preceded such taxable year.244 Thus, with respect to gain that arose 

prior to the conversion of a C corporation to an S corporation, no 

tax was imposed under section 1374 if the S corporation election 

was in effect for five years preceding the taxable year beginning in 

2011. 

Special rules for 2012, 2013 and 2014 

For taxable years beginning in 2012, 2013, and 2014, the term 

‘‘recognition period’’ in section 1374, for purposes of determining 

the net recognized built-in gain, is applied by substituting a fiveyear period for the otherwise applicable 10-year period. Thus, for 

such taxable years, the recognition period is the five-year period 

beginning with the first day of the first taxable 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 apply). If an S corporation with assets subject to section 1374 disposes of such assets in a taxable year beginning in 

2012, 2013, or 2014 and the disposition occurs more than five years 

after the first day of the relevant recognition period, gain or loss 

on the disposition will not be taken into account in determining the 

net recognized built-in gain. 

The rule requiring the excess of net recognized built-in gain over 

taxable income for a taxable year to be carried over and treated as 

recognized built-in gain in the succeeding taxable year applies only 

to gain recognized within the recognition period. 

If an S corporation subject to section 1374 sells a built-in gain 

asset and reports the income from the sale using the installment 

method under section 453, the treatment of all payments received 

will be governed by the provisions of section 1374(d)(7) applicable 

to the taxable year in which the sale was made. 

REASONS FOR CHANGE

The Committee believes it is appropriate to extend the 5-year 

recognition period provision for two years, to promote business certainty. 


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245Pub. L. No. 103–66. 246The targeted areas are those that have pervasive poverty, high unemployment, and general 

economic distress, and that satisfy certain eligibility criteria, including specified poverty rates 

and population and geographic size limitations. 247Pub. L. No. 105–34. 248Pub. L. No. 106–554. 249The urban part of the program is administered by HUD and the rural part of the program 

is administered by the USDA. The eight Round I urban empowerment zones are Atlanta, GA; 

Baltimore, MD; Chicago, IL; Cleveland, OH; Detroit, MI; Los Angeles, CA; New York, NY; and 

Philadelphia, PA/Camden, NJ. Atlanta relinquished its empowerment zone designation in Round 

III. The three Round I rural empowerment zones are Kentucky Highlands, KY; Mid-Delta, MI; 

and Rio Grande Valley, TX. The 15 Round II urban empowerment zones are Boston, MA; Cincinnati, OH; Columbia, SC; Columbus, OH; Cumberland County, NJ; El Paso, TX; Gary/Hammond/East Chicago, IN; Ironton, OH/Huntington, WV; Knoxville, TN; Miami/Dade County, FL; 

Minneapolis, MN; New Haven, CT; Norfolk/Portsmouth, VA; Santa Ana, CA; and St. Louis, Missouri/East St. Louis, IL. The five Round II rural empowerment zones are Desert Communities, 

CA; Griggs-Steele, ND; Oglala Sioux Tribe, SD; Southernmost Illinois Delta, IL; and Southwest 

Georgia United, GA. The eight Round III urban empowerment zones are Fresno, CA; Jacksonville, FL; Oklahoma City, OK; Pulaski County, AR; San Antonio, TX; Syracuse, NY; Tucson, AZ; 

and Yonkers, NY. The two Round III rural empowerment zones are Aroostook County, ME; and 

Futuro, TX. 250 If an empowerment zone designation were terminated prior to December 31, 2009, the tax 

incentives would cease to be available as of the termination date. 

EXPLANATION OF PROVISION

The provision extends for two years, to taxable years beginning 

in 2015 and 2016, the special rules that applied to taxable years 

beginning in 2012, 2013, and 2014. 

EFFECTIVE DATE

The provision is effective for taxable years beginning after December 31, 2014. 

29. Extension and modification of empowerment zone tax 

incentives (sec. 139 of the bill and secs. 1391 and 1394 of the Code) 

PRESENT LAW

The Omnibus Budget Reconciliation Act of 1993 (‘‘OBRA 93’’) 245

authorized the designation of nine empowerment zones (‘‘Round I 

empowerment zones’’) to provide tax incentives for businesses to locate within certain targeted areas 246 designated by the Secretaries 

of the Department of Housing and Urban Development (‘‘HUD’’) 

and the U.S. Department of Agriculture (‘‘USDA’’). The first empowerment zones were established in large rural areas and large 

cities. OBRA 93 also authorized the designation of 95 enterprise 

communities, which were located in smaller rural areas and cities. 

For tax purposes, the areas designated as enterprise communities 

continued as such for the ten-year period starting in the beginning 

of 1995 and ending at the end of 2004. 

The Taxpayer Relief Act of 1997 247 authorized the designation of 

two additional Round I urban empowerment zones, and 20 additional empowerment zones (‘‘Round II empowerment zones’’). The 

Community Renewal Tax Relief Act of 2000 (‘‘2000 Community Renewal Act’’) 248 authorized a total of 10 new empowerment zones 

(‘‘Round III empowerment zones’’), bringing the total number of authorized empowerment zones to 40.249 In addition, the 2000 Community Renewal Act conformed the tax incentives that are available to businesses in the Round I, Round II, and Round III empowerment zones, and extended the empowerment zone incentives 

through December 31, 2009.250 The Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 


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251Pub. L. No. 111–312, sec. 753 (2010). In the case of a designation of an empowerment zone 

the nomination for which included a termination date which is December 31, 2009, termination 

shall not apply with respect to such designation if the entity which made such nomination 

amends the nomination to provide for a new termination date in such manner as the Secretary 

may provide. 252Pub. L. No. 112–240, sec. 327 (2013). 253Pub. L. No. 113–295, sec. 139 (2014). 254Sec. 1396. The $15,000 limit is annual, not cumulative such that the limit is the first 

$15,000 of wages paid in a calendar year which ends with or within the taxable year. 255Secs. 1397C(b) and 1397C(c). However, under section 1396, the wage credit is not available 

for wages paid in connection with certain business activities described in section 144(c)(6)(B), 

including a golf course, country club, massage parlor, hot tub facility, suntan facility, racetrack 

or other facility used for gambling, or liquor store. In addition, wages are not eligible for the 

wage credit if paid to: (1) employees of farms whose assets exceed $500,000, (2) certain temporary employees (employed for less than 90 days), (3) a person who owns more than five percent of the stock (or capital or profits interests) of the employer, (4) certain relatives of the employer, or (5) if the employer is a corporation or partnership, certain relatives of a person who 

owns more than 50 percent of the business. 256Sec. 280C(a). 257Secs. 1396(c)(3)(A) and 51A(d)(2). 

(‘‘TRUIRJCA’’) extended for two years, through December 31, 2011, 

the period for which the designation of an empowerment zone was 

in effect, thus extending for two years the empowerment zone tax 

incentives discussed below.251 The American Taxpayer Relief Act of 

2012 (‘‘ATRA’’) extended the designation period and tax incentives 

for two additional years, through December 31, 2013.252 The Tax 

Increase Prevention Act of 2014 extended the designation period 

and tax incentives for one year, through December 31, 2014.253

The tax incentives available within the designated empowerment 

zones include a Federal income tax credit for employers who hire 

qualifying employees (the ‘‘wage credit’’), increased expensing of 

qualifying depreciable property, tax-exempt bond financing, deferral of capital gains tax on the sale of qualified assets sold and replaced, and partial exclusion of capital gains tax on certain sales 

of qualified small business stock. 

The following is a description of the tax incentives. 

Wage credit 

A 20-percent wage credit is available to employers for the first $15,000 of qualified wages paid to each employee (i.e., a maximum 

credit of $3,000 with respect to each qualified employee) who (1) is 

a resident of the empowerment zone, and (2) performs substantially 

all employment services within the empowerment zone in a trade 

or business of the employer.254

The wage credit rate applies to qualifying wages paid before January 1, 2015. Wages paid to a qualified employee who earns more 

than $15,000 are eligible for the wage credit (although only the 

first $15,000 of wages is eligible for the credit). The wage credit is 

available with respect to a qualified full-time or part-time employee 

(employed for at least 90 days), regardless of the number of other 

employees who work for the employer. In general, any taxable business carrying out activities in the empowerment zone may claim 

the wage credit, regardless of whether the employer meets the definition of an ‘‘enterprise zone business.’’ 255

An employer’s deduction otherwise allowed for wages paid is reduced by the amount of wage credit claimed for that taxable 

year.256 Wages are not to be taken into account for purposes of the 

wage credit if taken into account in determining the employer’s 

work opportunity tax credit under section 51 or the welfare-to-work 

credit under section 51A.257 In addition, the $15,000 cap is reduced 


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258Secs. 1396(c)(3)(B) and 51A(d)(2). 259Sec. 38(c)(2). 260Secs. 1397A, 1397D, and 179(b)(1)(B). The additional section 179 expensing equals the less- er of $35,000 or the cost of section 179 property that is qualified zone property placed in service 

during the taxable year. 261Secs. 1397A(a)(2) and 179(b)(2). For taxable years beginning after 2014, the limit is $200,000. 262Sec. 1397D. Note, however, only depreciable tangible personal property is generally eligible 

for section 179 expensing. For taxable years beginning before 2015, property qualifying for section 179 expensing also includes off-the-shelf computer software and qualified real property (i.e., 

qualified leasehold improvement property, qualified restaurant property, and qualified retail improvement property). Sec. 179(d)(1)(A)(ii) and (f). 263Sec. 1397C(b). 

by any wages taken into account in computing the work opportunity tax credit or the welfare-to-work credit.258 The wage credit 

may be used to offset up to 25 percent of alternative minimum tax 

liability.259

Increased section 179 expensing limitation 

An enterprise zone business is allowed up to an additional 

$35,000 of section 179 expensing (for a total of up to $535,000 in 

2014) for qualified zone property placed in service before January 

1, 2015.260 For taxable years beginning after 2009 and before 2015, 

the section 179 expensing allowed to a taxpayer is phased out by 

the amount by which the cost of qualifying property placed in service during the taxable year exceeds $2,000,000. However, only 50 

percent of the cost of qualified zone property placed in service during the year by the taxpayer is taken into account in determining 

the limitation amount.261 The term ‘‘qualified zone property’’ is defined as depreciable tangible property (including buildings) provided that (i) the property is acquired by the taxpayer (from an unrelated party) after the designation took effect, (ii) the original use 

of the property in an empowerment zone commences with the taxpayer, and (iii) substantially all of the use of the property is in an 

empowerment zone in the active conduct of a trade or business by 

the taxpayer.262 Special rules are provided in the case of property 

that is substantially renovated by the taxpayer. 

An enterprise zone business means any qualified business entity 

and any qualified proprietorship. A qualified business entity means 

any corporation or partnership if for such year: (1) every trade or 

business of such entity is the active conduct of a qualified business 

within an empowerment zone; (2) at least 50 percent of the total 

gross income of such entity is derived from the active conduct of 

such business; (3) a substantial portion of the use of the tangible 

property of such entity (whether owned or leased) is within an empowerment zone; (4) a substantial portion of the intangible property of such entity is used in the active conduct of any such business; (5) a substantial portion of the services performed for such 

entity by its employees are performed in an empowerment zone; (6) 

at least 35 percent of its employees are residents of an empowerment zone; (7) less than five percent of the average of the aggregate unadjusted bases of the property of such entity is attributable 

to collectibles other than collectibles that are held primarily for 

sale to customers in the ordinary course of such business; and (8) 

less than five percent of the average of the aggregate unadjusted 

bases of the property of such entity is attributable to nonqualified 

financial property.263


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264Sec. 1397C(c). 265Sec. 1397C(d). Excluded businesses include a farm with assets exceeding $500,000, any private or commercial golf course, country club, massage parlor, hot tub facility, sun tan facility, 

racetrack or other facility used for gambling, or any store the principal business of which is the 

sale of alcoholic beverages for off-premises consumption. Secs. 1397C(d)(5) and 144(c)(6)(B). 266Sec. 1394. 

A qualified proprietorship is any qualified business carried on by 

an individual as a proprietorship if for such year: (1) at least 50 

percent of the total gross income of such individual from such business is derived from the active conduct of such business in an empowerment zone; (2) a substantial portion of the use of the tangible 

property of such individual in such business (whether owned or 

leased) is within an empowerment zone; (3) a substantial portion 

of the intangible property of such business is used in the active 

conduct of such business; (4) a substantial portion of the services 

performed for such individual in such business by employees of 

such business are performed in an empowerment zone; (5) at least 

35 percent of such employees are residents of an empowerment 

zone; (6) less than five percent of the average of the aggregate 

unadjusted bases of the property of such individual which is used 

in such business is attributable to collectibles other than collectibles that are held primarily for sale to customers in the ordinary 

course of such business; and (7) less than five percent of the average of the aggregate unadjusted bases of the property of such individual which is used in such business is attributable to nonqualified financial property.264

A qualified business is defined as any trade or business other 

than a trade or business that consists predominantly of the development or holding of intangibles for sale or license or any business 

prohibited in connection with the employment credit.265 In addition, the leasing of real property that is located within the empowerment zone is treated as a qualified business only if (1) the 

leased property is not residential property, and (2) at least 50 percent of the gross rental income from the real property is from enterprise zone businesses. The rental of tangible personal property 

is not a qualified business unless at least 50 percent of the rental 

of such property is by enterprise zone businesses or by residents 

of an empowerment zone. 

Expanded tax-exempt financing for certain zone facilities 

States or local governments can issue enterprise zone facility 

bonds to raise funds to provide an enterprise zone business with 

qualified zone property.266 These bonds can be used in areas designated enterprise communities as well as areas designated empowerment zones. To qualify, 95 percent (or more) of the net proceeds from the bond issue must be used to finance: (1) qualified 

zone property whose principal user is an enterprise zone business, 

and (2) certain land functionally related and subordinate to such 

property. 

The term enterprise zone business is the same as that used for 

purposes of the increased section 179 deduction limitation (discussed above) with certain modifications for start-up businesses. 

First, a business will be treated as an enterprise zone business 

during a start-up period if (1) at the beginning of the period, it is 

reasonable to expect the business to be an enterprise zone business 

by the end of the start-up period, and (2) the business makes bona 


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267Sec. 1394(b)(3). 268The term ‘‘qualified empowerment zone asset’’ means any property which would be a qualified community asset (as defined in section 1400F, relating to certain tax benefits for renewal 

communities) if in section 1400F: (i) references to empowerment zones were substituted for references to renewal communities, (ii) references to enterprise zone businesses (as defined in section 1397C) were substituted for references to renewal community businesses, and (iii) the date 

of the enactment of this paragraph were substituted for ‘‘December 31, 2001’’ each place it appears. Sec. 1397B(b)(1)(A). 

A ‘‘qualified community asset’’ includes: (1) qualified community stock (meaning original-issue 

stock purchased for cash in an enterprise zone business), (2) a qualified community partnership 

interest (meaning a partnership interest acquired for cash in an enterprise zone business), and 

(3) qualified community business property (meaning tangible property originally used in a enterprise zone business by the taxpayer) that is purchased or substantially improved after the date 

of the enactment of this paragraph. 269Sec. 1397B. 270Sec. 1202. 271 As discussed above, section 136 of the Tax Relief Extension Act of 2015 extends the 100- 

percent exclusion to small business stock acquired during 2015 and 2016. 

fide efforts to be an enterprise zone business. The start-up period 

is the period that ends with the start of the first tax year beginning 

more than two years after the later of (1) the issue date of the bond 

issue financing the qualified zone property, and (2) the date this 

property is first placed in service (or, if earlier, the date that is 

three years after the issue date).267

Second, a business that qualifies as an enterprise zone business 

at the end of the start-up period must continue to qualify during 

a testing period that ends three tax years after the start-up period 

ends. After the three-year testing period, a business will continue 

to be treated as an enterprise zone business as long as 35 percent 

of its employees are residents of an empowerment zone or enterprise community. 

The face amount of the bonds may not exceed $60 million for an 

empowerment zone in a rural area, $130 million for an empowerment zone in an urban area with zone population of less than 

100,000, and $230 million for an empowerment zone in an urban 

area with zone population of at least 100,000. 

Elective rollover of capital gain from the sale or exchange of any 

qualified empowerment zone asset 

Taxpayers can elect to defer recognition of gain on the sale of a 

qualified empowerment zone asset 268 held for more than one year 

and replaced within 60 days by another qualified empowerment 

zone asset in the same zone.269 The deferral is accomplished by reducing the basis of the replacement asset by the amount of the 

gain recognized on the sale of the asset. 

Partial exclusion of capital gains on certain small business stock 

Generally, individuals may exclude a percentage of gain from the 

sale of certain small business stock acquired at original issue and 

held at least five years.270 For stock acquired prior to February 18, 

2009, or after December 31, 2014, the percentage is generally 50 

percent, except that for empowerment zone stock the percentage is 

60 percent for gain attributable to periods before January 1, 2019. 

For stock acquired after February 17, 2009, and before January 1, 

2015, a higher percentage (either 75-percent or 100-percent) applies to all small business stock with no additional percentage for 

empowerment zone stock.271


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Other tax incentives 

Other incentives not specific to empowerment zones but beneficial to these areas include the work opportunity tax credit for employers based on the first year of employment of certain targeted 

groups, including empowerment zone residents (up to $2,400 per 

employee), and qualified zone academy bonds for certain public 

schools located in an empowerment zone or expected (as of the date 

of bond issuance) to have at least 35 percent of its students receiving free or reduced lunches. 

REASONS FOR CHANGE

The Committee believes that it continues to be important to provide tax incentives to individuals and businesses in empowerment 

zones and that it is appropriate to extend such incentives for an 

additional two years. In addition, the Committee believes that for 

purposes of the tax-exempt enterprise zone facility bonds, expanding the requirements to allow businesses to hire employees from 

distressed Census tracts within the city in which the empowerment 

zone is located will encourage growth because more taxpayers will 

use these bonds to invest in the country’s hardest-hit cities. 

EXPLANATION OF PROVISION

Extension 

The provision extends for two years, through December 31, 2016, 

the period for which the designation of an empowerment zone is in 

effect, thus extending for two years the empowerment zone tax incentives, including the wage credit, increased section 179 expensing 

for qualifying property, tax-exempt bond financing, and deferral of 

capital gains tax on sale of qualified assets replaced with other 

qualified assets. In the case of a designation of an empowerment 

zone the nomination for which included a termination date which 

is December 31, 2014, termination shall not apply with respect to 

such designation if the entity which made such nomination amends 

the nomination to provide for a new termination date in such manner as the Secretary may provide. 

Modification of enterprise zone facility bond employment requirement 

The provision also amends the requirements for tax-exempt enterprise zone facility bonds to treat an employee as a resident of 

an empowerment zone for purposes of the 35 percent in-zone employment requirement if they are a resident of an empowerment 

zone, an enterprise community, or a qualified low-income community within an applicable nominating jurisdiction. The applicable 

nominating jurisdiction means, with respect to any empowerment 

zone or enterprise community, any local government that nominated such community for designation under section 1391. The definition of a qualified low-income community is similar to the definition of a low-income community provided in section 45D(e) (concerning eligibility for the new markets tax credit). A ‘‘qualified lowincome community’’ is a population census tract with either (1) a 

poverty rate of at least 20 percent, or (2) median family income 

which does not exceed 80 percent of the greater of metropolitan 

area median family income or statewide median family income (for 


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272 A proof gallon is a liquid gallon consisting of 50 percent alcohol. See sec. 5002(a)(10) and 

(11). 273Sec. 5001(a)(1). 274Secs. 5214(a)(1)(A), 5002(a)(15), 7653(b) and (c). 275Secs. 7652(a)(3), (b)(3), and (e)(1). One percent of the amount of excise tax collected from 

imports into the United States of articles produced in the Virgin Islands is retained by the 

United States under section 7652(b)(3). 

a non-metropolitan census tract, does not exceed 80 percent of 

statewide median family income). In the case of a population census tract located within a high migration rural county, low-income 

is defined by reference to 85 percent (as opposed to 80 percent) of 

statewide median family income. For this purpose, a high migration rural county is any county that, during the 20-year period ending with the year in which the most recent census was conducted, 

has a net out-migration of inhabitants from the county of at least 

10 percent of the population of the county at the beginning of such 

period. 

The Secretary is authorized to designate ‘‘targeted populations’’ 

as qualified low-income communities. For this purpose, a ‘‘targeted 

population’’ is defined by reference to section 103(20) of the Riegle 

Community Development and Regulatory Improvement Act of 1994 

(the ‘‘Act’’) to mean individuals, or an identifiable group of individuals, including an Indian tribe, who are low-income persons or otherwise lack adequate access to loans or equity investments. Section 

103(17) of the Act provides that ‘‘low-income’’ means (1) for a targeted population within a metropolitan area, less than 80 percent 

of the area median family income; and (2) for a targeted population 

within a non-metropolitan area, less than the greater of (a) 80 percent of the area median family income, or (b) 80 percent of the 

statewide non-metropolitan area median family income. 

EFFECTIVE DATE

The provision generally applies to periods after December 31, 

2014. The provision regarding the special rule for the employee residence test in the context of tax-exempt enterprise zone facility 

bonds applies to bonds issued before, on, or after the date of enactment and not redeemed before the date of enactment. 

30. Extension of temporary increase in limit on cover over of rum 

excise taxes to Puerto Rico and the Virgin Islands (sec. 140 of the 

bill and sec. 7652(f) of the Code) 

PRESENT LAW

A $13.50 per proof gallon 272 excise tax is imposed on distilled 

spirits produced in or imported into the United States.273 The excise tax does not apply to distilled spirits that are exported from 

the United States, including exports to U.S. possessions (e.g., Puerto Rico and the Virgin Islands).274

The Code provides for cover over (payment) to Puerto Rico and 

the Virgin Islands of the excise tax imposed on rum imported (or 

brought) into the United States, without regard to the country of 

origin.275 The amount of the cover over is limited under Code section 7652(f) to $10.50 per proof gallon ($13.25 per proof gallon before January 1, 2015). 

Tax amounts attributable to shipments to the United States of 

rum produced in Puerto Rico are covered over to Puerto Rico. Tax 


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276Sec. 7652(e)(2). 277Secs. 7652(a)(3), (b)(3), and (e)(1). 278For taxable years beginning before January 1, 2006, certain domestic corporations with 

business operations in the U.S. possessions were eligible for the possession tax credit. Secs. 

27(b), 936. This credit offset the U.S. tax imposed on certain income related to operations in 

the U.S. possessions. Subject to certain limitations, the amount of the possession tax credit allowed to any domestic corporation equaled the portion of that corporation’s U.S. tax that was 

attributable to the corporation’s non-U.S. source taxable income from (1) the active conduct of 

a trade or business within a U.S. possession, (2) the sale or exchange of substantially all of the 

assets that were used in such a trade or business, or (3) certain possessions investment. No deduction or foreign tax credit was allowed for any possessions or foreign tax paid or accrued with 

amounts attributable to shipments to the United States of rum produced in the Virgin Islands are covered over to the Virgin Islands. 

Tax amounts attributable to shipments to the United States of rum 

produced in neither Puerto Rico nor the Virgin Islands are divided 

and covered over to the two possessions under a formula.276Amounts covered over to Puerto Rico and the Virgin Islands are deposited into the treasuries of the two possessions for 

use as those possessions determine.277 All of the amounts covered 

over are subject to the limitation. 

REASONS FOR CHANGE

The Committee believes that the needs of Puerto Rico and the 

Virgin islands justify the extension of the cover over amount of 

$13.25 per gallon. 

EXPLANATION OF PROVISION

The provision suspends for two years 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 provision, the cover 

over limitation of $13.25 per proof gallon is extended for rum 

brought into the United States after December 31, 2014 and before 

January 1, 2017. After December 31, 2016, the cover over amount 

reverts to $10.50 per proof gallon. 

EFFECTIVE DATE

The provision is effective for articles brought into the United 

States after December 31, 2014. 

31. Extension of American Samoa Economic Development Credit 

(sec. 141 of the bill and sec. 119 of Pub. L. No. 109–432) 

PRESENT LAW

A domestic corporation that was an existing credit claimant with 

respect to American Samoa and that elected the application of section 936 for its last taxable year beginning before January 1, 2006 

is allowed a credit based on the corporation’s economic activitybased limitation with respect to American Samoa. The credit is not 

part of the Code but is computed based on the rules of sections 30A 

and 936. The credit is allowed for the first nine taxable years of 

a corporation that begin after December 31, 2005, and before January 1, 2015. 

A corporation was an existing credit claimant with respect to a 

American Samoa if (1) the corporation was engaged in the active 

conduct of a trade or business within American Samoa on October 

13, 1995, and (2) the corporation elected the benefits of the possession tax credit 278 in an election in effect for its taxable year that 


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respect to taxable income that was taken into account in computing the credit under section 

936. Under the economic activity-based limit, the amount of the credit could not exceed an 

amount equal to the sum of (1) 60 percent of the taxpayer’s qualified possession wages and allocable employee fringe benefit expenses, (2) 15 percent of depreciation allowances with respect 

to short-life qualified tangible property, plus 40 percent of depreciation allowances with respect 

to medium-life qualified tangible property, plus 65 percent of depreciation allowances with respect to long-life qualified tangible property, and (3) in certain cases, a portion of the taxpayer’s 

possession income taxes. A taxpayer could elect, instead of the economic activity-based limit, a 

limit equal to the applicable percentage of the credit that otherwise would have been allowable 

with respect to possession business income, beginning in 1998, the applicable percentage was 

40 percent. 

To qualify for the possession tax credit for a taxable year, a domestic corporation was required 

to satisfy two conditions. First, the corporation was required to derive at least 80 percent of its 

gross income for the three-year period immediately preceding the close of the taxable year from 

sources within a possession. Second, the corporation was required to derive at least 75 percent 

of its gross income for that same period from the active conduct of a possession business. Sec. 

936(a)(2). The section 936 credit generally expired for taxable years beginning after December 

31, 2005. 279 A corporation will qualify as an existing credit claimant if it acquired all the assets of a 

trade or business of a corporation that (1) actively conducted that trade or business in a possession on October 13, 1995, and (2) had elected the benefits of the possession tax credit in an election in effect for the taxable year that included October 13, 1995. 

included October 13, 1995.279 A corporation that added a substantial new line of business (other than in a qualifying acquisition of 

all the assets of a trade or business of an existing credit claimant) 

ceased to be an existing credit claimant as of the close of the taxable year ending before the date on which that new line of business 

was added. 

The amount of the credit allowed to a qualifying domestic corporation under the provision is equal to the sum of the amounts 

used in computing the corporation’s economic activity-based limitation 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 percent of the corporation’s qualified American 

Samoa wages and allocable employee fringe benefit expenses and 

(2) 15 percent of the corporation’s depreciation allowances with respect to short-life qualified American Samoa tangible property, plus 

40 percent of the corporation’s depreciation allowances with respect 

to medium-life qualified American Samoa tangible property, plus 

65 percent of the corporation’s depreciation allowances with respect 

to long-life qualified American Samoa tangible property. 

The section 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 section 936 does not 

apply with respect to the credit allowed by the provision. 

For taxable years beginning after December 31, 2011 the credit 

rules are modified in two ways. First, domestic corporations with 

operations in American Samoa are allowed the credit even if those 

corporations are not existing credit claimants. Second, the credit is 

available to a domestic corporation (either an existing credit claimant or a new credit claimant) only if, in addition to satisfying all 

the present law requirements for claiming the credit, the corporation also has qualified production activities income (as defined in 

section 199(c) by substituting ‘‘American Samoa’’ for ‘‘the United 

States’’ in each place that latter term appears). 

In the case of a corporation that is an existing credit claimant 

with respect to American Samoa and that elected the application 

of section 936 for its last taxable year beginning before January 1, 

2006, the credit applies to the first nine taxable years of the corporation which begin after December 31, 2005, and before January 


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280Sec. 25C. 281Pub. L. No. 111–5, February 17, 2009. 

1, 2015. For any other corporation, the credit applies to the first 

three taxable years of that corporation which begin after December 

31, 2011 and before January 1, 2015. 

REASONS FOR CHANGE

The Committee believes that, notwithstanding expiration of the 

possession tax credit for taxable years beginning after 2005, the 

U.S. Federal tax law should encourage economic activity in American Samoa. Consequently, the Committee believes it is appropriate 

to extend the American Samoa economic development credit. 

DESCRIPTION OF PROVISION

The provision extends the credit for two years to apply (a) in the 

case of a corporation that is an existing credit claimant with respect to American Samoa and that elected the application of section 

936 for its last taxable year beginning before January 1, 2006, to 

the first eleven taxable years of the corporation which begin after 

December 31, 2005, and before January 1, 2017, and (b) in the case 

of any other corporation, to the first five taxable years of the corporation which begin after December 31, 2011 and before January 

1, 2017. 

EFFECTIVE DATE

The provision applies to taxable years beginning after December 

31, 2014. 

C. ENERGY TAX EXTENDERS

1. Extension and modification of credit for nonbusiness energy 

property (sec.151 of the bill and sec. 25C of the Code) 

PRESENT LAW

Present law provides a 10-percent credit for the purchase of 

qualified energy efficiency improvements to existing homes.280 A 

qualified energy efficiency improvement is any energy efficiency 

building envelope component (1) that meets or exceeds the prescriptive criteria for such a component established by the 2009 

International Energy Conservation Code as such Code (including 

supplements) is in effect on the date of the enactment of the American Recovery and Reinvestment Tax Act of 2009 281 (or, in the case 

of windows, skylights and doors, and metal roofs with appropriate 

pigmented coatings or asphalt roofs with appropriate cooling granules, meets the Energy Star program requirements); (2) that is installed in or on a dwelling located in the United States and owned 

and used by the taxpayer as the taxpayer’s principal residence; (3) 

the original use of which commences with the taxpayer; and (4) 

that reasonably can be expected to remain in use for at least five 

years. The credit is nonrefundable. 

Building envelope components are: (1) insulation materials or 

systems which are specifically and primarily designed to reduce the 

heat loss or gain for a dwelling and which meet the prescriptive 

criteria for such material or system established by the 2009 InterVerDate Sep 11 2014 05:21 Aug 08, 2015 Jkt 049010 PO 00000 Frm 00090 Fmt 6659 Sfmt 6602 E:\HR\OC\SR118.XXX SR118

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282 Ibid. 283These standards are a seasonal energy efficiency ratio (‘‘SEER’’) greater than or equal to 

15, an energy efficiency ratio (‘‘EER’’) greater than or equal to 12.5, and heating seasonal performance factor (‘‘HSPF’’) greater than or equal to 8.5 for split heat pumps, and SEER greater 

than or equal to 14, EER greater than or equal to 12, and HSPF greater than or equal to 8.0 

for packaged heat pumps. 284These standards are a SEER greater than or equal to 16 and EER greater than or equal 

to 13 for split systems, and SEER greater than or equal to 14 and EER greater than or equal 

to 12 for packaged systems. 

national Energy Conservation Code, as such Code (including supplements) is in effect on the date of the enactment of the American 

Recovery and Reinvestment Tax Act of 2009;282 (2) exterior windows (including skylights) and doors; and (3) metal or asphalt roofs 

with appropriate pigmented coatings or cooling granules that are 

specifically and primarily designed to reduce the heat gain for a 

dwelling. 

Additionally, present law provides specified credits for the purchase of specific energy efficient property originally placed in service by the taxpayer during the taxable year. The allowable credit 

for the purchase of certain property is (1) $50 for each advanced 

main air circulating fan, (2) $150 for each qualified natural gas, 

propane, or oil furnace or hot water boiler, and (3) $300 for each 

item of energy efficient building property. 

An advanced main air circulating fan is a fan used in a natural 

gas, propane, or oil furnace and which has an annual electricity use 

of no more than two percent of the total annual energy use of the 

furnace (as determined in the standard Department of Energy test 

procedures). 

A qualified natural gas, propane, or oil furnace or hot water boiler is a natural gas, propane, or oil furnace or hot water boiler with 

an annual fuel utilization efficiency rate of at least 95. 

Energy-efficient building property is: (1) an electric heat pump 

water heater which yields an energy factor of at least 2.0 in the 

standard Department of Energy test procedure, (2) an electric heat 

pump which achieves the highest efficiency tier established by the 

Consortium for Energy Efficiency, as in effect on January 1, 

2009,283 (3) a central air conditioner which achieves the highest efficiency tier established by the Consortium for Energy Efficiency as 

in effect on January 1, 2009,284 (4) a natural gas, propane, or oil 

water heater which has an energy factor of at least 0.82 or thermal 

efficiency of at least 90 percent, and (5) biomass fuel property. 

Biomass fuel property is a stove that burns biomass fuel to heat 

a dwelling unit located in the United States and used as a principal residence by the taxpayer, or to heat water for such dwelling 

unit, and that has a thermal efficiency rating of at least 75 percent. 

Biomass fuel is any plant-derived fuel available on a renewable or 

recurring basis, including agricultural crops and trees, wood and 

wood waste and residues (including wood pellets), plants (including 

aquatic plants), grasses, residues, and fibers. 

The credit is available for property placed in service prior to January 1, 2015. The maximum credit for a taxpayer for all taxable 

years is $500, and no more than $200 of such credit may be attributable to expenditures on windows. 

The taxpayer’s basis in the property is reduced by the amount of 

the credit. Special proration rules apply in the case of jointly owned 

property, condominiums, and tenant-stockholders in cooperative 

housing corporations. If less than 80 percent of the property is used 


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for nonbusiness purposes, only that portion of expenditures that is 

used for nonbusiness purposes is taken into account. 

For purposes of determining the amount of expenditures made by 

any individual with respect to any dwelling unit, expenditures 

which are made from subsidized energy financing are not taken 

into account. The term ‘‘subsidized energy financing’’ means financing provided under a Federal, State, or local program a principal 

purpose of which is to provide subsidized financing for projects designed to conserve or produce energy. 

REASONS FOR CHANGE

The Committee recognizes that residential energy use for heating 

and cooling represents a large share of national energy consumption, and accordingly believes that measures to reduce heating and 

cooling energy demands have the potential to substantially reduce 

national energy consumption. The Committee further recognizes 

that many existing homes continue to be inadequately insulated 

and have inefficient heating, ventilation, and cooling equipment. 

Therefore, the Committee believes that a two year extension of 

the nonbusiness energy efficient property credit is an appropriate 

measure to continue to encourage upgrades to the energy efficiency 

of existing housing stock. The Committee further believes that adjustments of certain efficiency standards for qualifying property are 

necessary to ensure that the efficiency goals are achievable, but 

that significant energy savings above the norm are necessary in 

order to qualify for any credit. 

EXPLANATION OF PROVISION

The provision extends the credit for two years, through December 

31, 2016. 

The provision expands qualifying property to include all roof and 

roof products that meet Energy Star program guidelines. The provision modifies certain efficiency standards for qualifying property, 

as follows: 

(1) Windows, skylights, and doors must meet Energy Star version 

6.0 standards. 

(2) Natural gas, propane, or oil tankless water heaters must have 

an energy factor of at least 0.9 or a thermal efficiency of at least 

90 percent. Natural gas, propane, or oil storage water heaters must 

have an energy factor of at least 0.8 or a thermal efficiency of at 

least 90 percent. Storage water heaters must have storage capacity 

of greater than 20 gallons but less than or equal to 55 gallons to 

claim the credit. 

(3) Biomass fuel stoves must have thermal efficiency of 75 percent evaluated at the higher heating value and tested in accordance with Canadian Standards Administration B415.1 test protocol. 

(4) Oil hot water boilers must have an annual fuel utilization efficiency not less than 90. 

EFFECTIVE DATE

The provision is effective for property placed in service after December 31, 2014. 


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285Sec. 30C. 

2. Extension of credit for fuel cell motor vehicles (sec. 152 of the 

bill and sec. 30B of the Code) 

PRESENT LAW

A credit is available through 2014 for vehicles propelled by 

chemically combining oxygen with hydrogen and creating electricity. The base credit is $4,000 for vehicles weighing 8,500 pounds 

or less. Heavier vehicles can get up to a $40,000 credit, depending 

on their weight. An additional $1,000 to $4,000 credit is available 

to cars and light trucks to the extent their fuel economy exceeds 

the 2002 base fuel economy set forth in the Code. 

REASONS FOR CHANGE

The Committee believes that further investments in advanced 

technology vehicles are necessary to transform automotive transportation in the United States to be cleaner, more fuel efficient, 

and less reliant on petroleum fuels. For this reason, the Committee 

believes the credit for fuel cell vehicles should be extended. 

EXPLANATION OF PROVISION

The provision extends the fuel cell vehicle credit for two years, 

through December 31, 2016. 

EFFECTIVE DATE

The provision is effective for vehicles placed in service after December 31, 2014. 

3. Extension of credit for alternative fuel vehicle refueling property 

(sec. 153 of the bill and section 30C of the Code) 

PRESENT LAW

Taxpayers may claim a 30-percent credit for the cost of installing 

qualified clean-fuel vehicle refueling property to be used in a trade 

or business of the taxpayer or installed at the principal residence 

of the taxpayer.285 The credit may not exceed $30,000 per taxable 

year per location, in the case of qualified refueling property used 

in a trade or business and $1,000 per taxable year per location, in 

the case of qualified refueling property installed on property which 

is used as a principal residence. 

Qualified refueling property is property (not including a building 

or its structural components) for the storage or dispensing of a 

clean-burning fuel or electricity into the fuel tank or battery of a 

motor vehicle propelled by such fuel or electricity, but only if the 

storage or dispensing of the fuel or electricity is at the point of delivery into the fuel tank or battery of the motor vehicle. The original use of such property must begin with the taxpayer. 

Clean-burning fuels are any fuel at least 85 percent of the volume of which consists of ethanol, natural gas, compressed natural 

gas, liquefied natural gas, liquefied petroleum gas, or hydrogen. In 

addition, any mixture of biodiesel and diesel fuel, determined without regard to any use of kerosene and containing at least 20 percent biodiesel, qualifies as a clean fuel. 


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286 In addition, for fuels derived from algae, cyanobacterial or lemna, a special rule provides 

that qualified second generation biofuel includes fuel that is sold by the taxpayer to another 

Credits for qualified refueling property used in a trade or business are part of the general business credit and may be carried 

back for one year and forward for 20 years. Credits for residential 

qualified refueling property cannot exceed for any taxable year the 

difference between the taxpayer’s regular tax (reduced by certain 

other credits) and the taxpayer’s tentative minimum tax. Generally, in the case of qualified refueling property sold to a tax-exempt entity, the taxpayer selling the property may claim the credit. 

A taxpayer’s basis in qualified refueling property is reduced by 

the amount of the credit. In addition, no credit is available for 

property used outside the United States or for which an election to 

expense has been made under section 179. 

The credit is available for property placed in service before January 1, 2015. 

REASONS FOR CHANGE

The Committee believes that further investments in advanced 

technology vehicles and related infrastructure are necessary to 

transform automotive transportation in the United States to be 

cleaner, more fuel efficient, and less reliant on petroleum fuels. For 

this reason, the Committee believes the credit for alternative fuel 

refueling property should be extended. 

EXPLANATION OF PROVISION

The provision extends for two years the 30-percent credit for alternative fuel refueling property, through December 31, 2016. 

EFFECTIVE DATE

The provision is effective for property placed in service after December 31, 2014. 

4. Extension of second generation biofuel producer credit (sec. 154 

of the bill and sec. 40 of the Code) 

PRESENT LAW

The second generation biofuel producer credit is a nonrefundable 

income tax credit for each gallon of qualified second generation 

biofuel fuel production of the producer for the taxable year. The 

amount of the credit per gallon is $1.01. The provision does not 

apply to qualified second generation biofuel production after December 31, 2014. 

‘‘Qualified second generation biofuel production’’ is any second 

generation biofuel which is produced by the taxpayer and which, 

during the taxable year, is: (1) sold by the taxpayer to another person (a) for use by such other person in the production of a qualified 

second generation biofuel mixture in such person’s trade or business (other than casual off-farm production), (b) for use by such 

other person as a fuel in a trade or business, or (c) who sells such 

second generation biofuel at retail to another person and places 

such cellulosic biofuel in the fuel tank of such other person; or (2) 

used by the producer for any purpose described in (1)(a), (b), or 

(c).286 Special rules apply for fuel derived from algae. 


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person for refining by such other person into a fuel that meets the registration requirements 

for fuels and fuel additives under section 211 of the Clean Air Act. ’ 287Sec. 40A. 

‘‘Second generation biofuel’’ means any liquid fuel that (1) is produced in the United States and used as fuel in the United States, 

(2) is derived by or from qualified feedstocks and (3) meets the registration requirements for fuels and fuel additives established by 

the Environmental Protection Agency (‘‘EPA’’) under section 211 of 

the Clean Air Act. ‘‘Qualified feedstock’’ means any lignocellulosic 

or hemicellulosic matter that is available on a renewable or recurring basis, and any cultivated algae, cyanobacteria or lemna. Second generation biofuel does not include fuels that (1) are more than 

four percent (determined by weight) water and sediment in any 

combination, (2) have an ash content of more than one percent (determined by weight), or (3) have an acid number greater than 25 

(‘‘unprocessed or excluded fuels’’). It also does not include any alcohol with a proof of less than 150. 

The second generation biofuel producer credit cannot be claimed 

unless the taxpayer is registered by the Internal Revenue Service 

(‘‘IRS’’) as a producer of second generation biofuel. Second generation biofuel eligible for the section 40 credit is precluded from 

qualifying as biodiesel, renewable diesel, or alternative fuel for purposes of the applicable income tax credit, excise tax credit, or payment provisions relating to those fuels. 

Because it is a credit under section 40(a), the second generation 

biofuel producer credit is part of the general business credits in 

section 38. However, the credit can only be carried forward three 

taxable years after the termination of the credit. The credit is also 

allowable against the alternative minimum tax. Under section 87, 

the credit is included in gross income. 

REASONS FOR CHANGE

The Committee believes that extending this production credit 

will encourage the industry to continue development of these fuels 

and allow time for business planning. 

EXPLANATION OF PROVISION

The provision extends the credit two years, through December 

31, 2016. 

EFFECTIVE DATE

The provision is effective for qualified second generation biofuel 

production after December 31, 2014. 

5. Extension and modification of incentives for biodiesel and renewable diesel (sec. 155 of the bill and sec. 40A, 6426 and 6427(e) 

of the Code) 

PRESENT LAW

Biodiesel 

Present law provides an income tax credit for biodiesel fuels (the 

‘‘biodiesel fuels credit’’).287 The biodiesel fuels credit is the sum of 

three credits: (1) the biodiesel mixture credit, (2) the biodiesel credit, and (3) the small agri-biodiesel producer credit. The biodiesel 


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288 Notice 2005–62, I.R.B. 2005–35, 443 (2005). ‘‘A biodiesel mixture is a mixture of biodiesel 

and diesel fuel containing at least 0.1 percent (by volume) of diesel fuel. Thus, for example, a 

mixture of 999 gallons of biodiesel and 1 gallon of diesel fuel is a biodiesel mixture.’ 

fuels credit is treated as a general business credit. The amount of 

the biodiesel fuels credit is includible in gross income. The biodiesel 

fuels credit is coordinated to take into account benefits from the 

biodiesel excise tax credit and payment provisions discussed below. 

The credit does not apply to fuel sold or used after December 31, 

2014. 

Biodiesel is monoalkyl esters of long chain fatty acids derived 

from plant or animal matter that meet (1) the registration requirements established by the EPA under section 211 of the Clean Air 

Act (42 U.S.C. sec. 7545) and (2) the requirements of the American 

Society of Testing and Materials (‘‘ASTM’’) D6751. Agri-biodiesel is 

biodiesel derived solely from virgin oils including oils from corn, 

soybeans, sunflower seeds, cottonseeds, canola, crambe, rapeseeds, 

safflowers, flaxseeds, rice bran, mustard seeds, camelina, or animal 

fats. 

Biodiesel may be taken into account for purposes of the credit 

only if the taxpayer obtains a certification (in such form and manner as prescribed by the Secretary) from the producer or importer 

of the biodiesel that identifies the product produced and the percentage of biodiesel and agri-biodiesel in the product. 

Biodiesel mixture credit 

The biodiesel mixture credit is $1.00 for each gallon of biodiesel 

(including agri-biodiesel) used by the taxpayer in the production of 

a qualified biodiesel mixture. A qualified biodiesel mixture is a 

mixture of biodiesel and diesel fuel that is (1) sold by the taxpayer 

producing such mixture to any person for use as a fuel, or (2) used 

as a fuel by the taxpayer producing such mixture. The sale or use 

must be in the trade or business of the taxpayer and is to be taken 

into account for the taxable year in which such sale or use occurs. 

No credit is allowed with respect to any casual off-farm production 

of a qualified biodiesel mixture. 

Per IRS guidance a mixture need only contain 1/10th of one percent of diesel fuel to be a qualified mixture.288 Thus, a qualified 

biodiesel mixture can contain 99.9 percent biodiesel and 0.1 percent 

diesel fuel. 

Biodiesel credit (B–100) 

The biodiesel credit is $1.00 for each gallon of biodiesel that is 

not in a mixture with diesel fuel (100 percent biodiesel or B–100) 

and which during the taxable year is (1) used by the taxpayer as 

a fuel in a trade or business or (2) sold by the taxpayer at retail 

to a person and placed in the fuel tank of such person’s vehicle. 

Small agri-biodiesel producer credit 

The Code provides a small agri-biodiesel producer income tax 

credit, in addition to the biodiesel and biodiesel mixture credits. 

The credit is 10 cents per gallon for up to 15 million gallons of agribiodiesel produced by small producers, defined generally as persons 

whose agri-biodiesel production capacity does not exceed 60 million 

gallons per year. The agri-biodiesel must (1) be sold by such producer to another person (a) for use by such other person in the proVerDate Sep 11 2014 05:21 Aug 08, 2015 Jkt 049010 PO 00000 Frm 00096 Fmt 6659 Sfmt 6602 E:\HR\OC\SR118.XXX SR118

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289Sec. 6426(c). 290Sec. 6426(c)(4). 291Sec. 6427(e). 

duction of a qualified biodiesel mixture in such person’s trade or 

business (other than casual off-farm production), (b) for use by such 

other person as a fuel in a trade or business, or, (c) who sells such 

agri-biodiesel at retail to another person and places such agri-biodiesel in the fuel tank of such other person; or (2) used by the producer for any purpose described in (a), (b), or (c). 

Biodiesel mixture excise tax credit 

The Code also provides an excise tax credit for biodiesel mixtures.289 The credit is $1.00 for each gallon of biodiesel used by the 

taxpayer in producing a biodiesel mixture for sale or use in a trade 

or business of the taxpayer. A biodiesel mixture is a mixture of biodiesel and diesel fuel that (1) is sold by the taxpayer producing 

such mixture to any person for use as a fuel or (2) is used as a fuel 

by the taxpayer producing such mixture. No credit is allowed unless the taxpayer obtains a certification (in such form and manner 

as prescribed by the Secretary) from the producer of the biodiesel 

that identifies the product produced and the percentage of biodiesel 

and agri-biodiesel in the product.290

The credit is not available for any sale or use for any period after 

December 31, 2014. This excise tax credit is coordinated with the 

income tax credit for biodiesel such that credit for the same biodiesel cannot be claimed for both income and excise tax purposes. 

Payments with respect to biodiesel fuel mixtures 

If any person produces a biodiesel fuel mixture in such person’s 

trade or business, the Secretary is to pay such person an amount 

equal to the biodiesel mixture credit.291 The biodiesel fuel mixture 

credit must first be taken against tax liability for taxable fuels. To 

the extent the biodiesel fuel mixture credit exceeds such tax liability, the excess may be received as a payment. Thus, if the person 

has no section 4081 liability, the credit is refundable. The Secretary is not required to make payments with respect to biodiesel 

fuel mixtures sold or used after December 31, 2014. 

Renewable diesel 

‘‘Renewable diesel’’ is liquid fuel that (1) is derived from biomass 

(as defined in section 45K(c)(3)), (2) meets the registration requirements for fuels and fuel additives established by the EPA under 

section 211 of the Clean Air Act, and (3) meets the requirements 

of the ASTM D975 or D396, or equivalent standard established by 

the Secretary. ASTM D975 provides standards for diesel fuel suitable for use in diesel engines. ASTM D396 provides standards for 

fuel oil intended for use in fuel-oil burning equipment, such as furnaces. Renewable diesel also includes fuel derived from biomass 

that meets the requirements of a Department of Defense specification for military jet fuel or an ASTM specification for aviation turbine fuel. 

For purposes of the Code, renewable diesel is generally treated 

the same as biodiesel. In the case of renewable diesel that is aviation fuel, kerosene is treated as though it were diesel fuel for purposes of a qualified renewable diesel mixture. Like biodiesel, the inVerDate Sep 11 2014 05:21 Aug 08, 2015 Jkt 049010 PO 00000 Frm 00097 Fmt 6659 Sfmt 6602 E:\HR\OC\SR118.XXX SR118

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292Secs. 40A(f), 6426(c), and 6427(e). 293Sec. 4081(a)(1). 294Treas. Reg. section 48.4081–1(c)(2)(i) and 48.4081–1(c)(2)(ii). 

centive may be taken as an income tax credit, an excise tax credit, 

or as a payment from the Secretary.292 The incentive for renewable 

diesel is $1.00 per gallon. There is no small producer credit for renewable diesel. The incentives for renewable diesel expired after 

December 31, 2014. 

Excise tax treatment of biodiesel 

Section 4081(a)(1) imposes tax on certain removals, entries, and 

sales of taxable fuel. Section 4083 defines taxable fuel as diesel 

fuel, gasoline, and kerosene. The Code imposes tax on gasoline, diesel fuel, and kerosene upon removal from a refinery or on importation, unless the fuel is transferred in bulk by registered pipeline or 

barge to a registered terminal facility.293 Treasury regulations define diesel fuel as any liquid that, without further processing or 

blending, is suitable for use as a fuel in a diesel-powered highway 

vehicle or diesel-powered train, however diesel fuel does not include 

‘‘excluded liquid.’’ 294 The definition of excluded liquid includes any 

liquid that contains less than four percent normal paraffins. Biodiesel, although suitable for use as a fuel in a diesel-powered highway vehicle or diesel-powered train, contains less than four percent 

normal paraffins and, therefore, is excluded liquid for purposes of 

the definition of diesel fuel. 

Section 4081(b)(1) imposes tax on taxable fuel removed or sold by 

the blender thereof. Section 4082 provides exemptions from this 

tax. Blended taxable fuel generally means any taxable fuel that is 

produced outside the bulk transfer/terminal system by mixing taxable fuel with respect to which tax has been imposed under section 

4081(a) and any other liquid on which tax has not been imposed 

under section 4081. If biodiesel is used in the production of blended 

taxable fuel, tax is imposed by section 4081(b)(1) on the removal or 

sale of the blended taxable fuel. 

Section 4041(a)(1) imposes tax on any liquid other than gasoline 

sold for use or used as a fuel in a diesel-powered highway vehicle 

or diesel-powered train unless tax was imposed on the liquid by 

section 4081 and not credited or refunded. If biodiesel is sold for 

use or used as a fuel in a diesel-powered highway vehicle or a diesel-powered train, tax is imposed by section 4041(a)(1). 

REASONS FOR CHANGE

The Committee believes it is important to encourage the creation 

of American jobs by encouraging the domestic production of biodiesel fuel. The Committee believes that changing the credit to a 

producer credit and having that same person be responsible for the 

excise tax on the fuel will improve tax administration and compliance. 

EXPLANATION OF PROVISION

Extension of present law and special rule for claim submission for 

2015 

The provision extends the present law income tax credit, excise 

tax credit and payment provisions for biodiesel and renewable dieVerDate Sep 11 2014 05:21 Aug 08, 2015 Jkt 049010 PO 00000 Frm 00098 Fmt 6659 Sfmt 6602 E:\HR\OC\SR118.XXX SR118

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295This guidance is provided by Notice 2015–3, 2015–6 I.R.B 583. 

sel through December 31, 2015. As it relates to fuel sold or used 

in 2015, the provision creates a special rule to address claims regarding excise credits and claims for payment associated with periods occurring during 2015. In particular the provision directs the 

Secretary to issue guidance within 30 days of the date of enactment. Such guidance is to provide for a one-time submission of 

claims covering periods occurring during 2015. The guidance is to 

provide for a 180–day period for the submission of such claims (in 

such manner as prescribed by the Secretary) to begin no later than 

30 days after such guidance is issued.295 Such claims shall be paid 

by the Secretary of the Treasury not later than 60 days after receipt. If the claim is not paid within 60 days of the date of the filing, the claim shall be paid with interest from such date determined by using the overpayment rate and method under section 

6621 of the Code. 

Conversion of incentives to a producer incentive for 2016 

The provision coverts the incentives for biodiesel and renewable 

diesel into an incentive for producers of such fuel in the United 

States. Under the provision, a limited class of blenders of biodiesel 

and diesel fuel (those who blended at least 10 million gallons of 

biodiesel in the previous year) would be treated as producers. The 

general delivery mechanism and coordination of the incentives (income tax credit, excise tax credit and payment) remain. 

Income tax credit 

For eligible taxpayers, the provision provides an a credit of $1 

per gallon of biodiesel (1) sold by the producer of the biodiesel (A) 

to another person for use by such other person’s trade or business 

as a fuel or in the production of a biodiesel mixture (other than casual off-farm production); or (B) to another person who sells such 

biodiesel at retail to another person and places such biodiesel in 

the fuel tank of such other person; or (2) used by the producer of 

such biodiesel for any of the purposes previously described. 

There is an additional 10 cents per gallon for eligible small producers for the first 15 million gallons of biodiesel produced during 

the taxable year. The small producer credit is not available for producers of renewable diesel. 

An ‘‘eligible taxpayer’’ with respect to any gallon of biodiesel is 

the producer of such gallon if such producer has paid the tax imposed by section 4081 on such biodiesel (discussed below). An eligible discretionary blender is any person registered with the IRS as 

a blender of qualified biodiesel mixtures and has used 10 million 

gallons or more of biodiesel in the production of qualified biodiesel 

mixtures in the preceding taxable year. For this purpose an eligible 

discretionary blender is treated as producing a gallon of biodiesel 

in the taxable year in which the sale or use of the qualified biodiesel mixture occurs. A ‘‘qualified biodiesel mixture ‘‘ is a mixture 

of biodiesel and diesel fuel (determined without regard to any use 

of kerosene) which is sold by the eligible discretionary blender producing such mixture to any person for use as a fuel, or is used as 

a fuel by the eligible discretionary blender. All sales or uses will 


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only be taken into account if in the trade or business of the taxpayer. 

An ‘‘eligible discretionary blender’’ will be treated as the producer 

of a gallon of biodiesel for purposes of claiming the credit if the producer of such biodiesel (determined without regard to eligible discretionary blender rule) did not pay the tax imposed by section 

4081 with respect to such gallon, and assigns the credit to the discretionary blender (in such form and manner as provided by the 

Secretary) and the eligible discretionary blender pays the tax imposed under section 4081 with respect to such gallon. Eligible discretionary blenders are required to register with the IRS as such. 

Excise tax credits and payments 

The provisions affords a $1-per-gallon excise tax credit to producers of biodiesel to be used against section 4081 liability under 

rules similar to the income tax credit, except there is no additional 

10 cents per gallon for small producers. The excise tax credit may 

be taken as a payment to the extent it exceeds tax liability. 

Treatment of biodiesel as a taxable fuel 

The provision treats biodiesel as a taxable fuel. For this purpose, 

facilities used to produce biodiesel and biodiesel blending facilities 

are treated as refineries for purposes of the imposition of tax. A 

biodiesel blending facility is any facility operated by an eligible discretionary blender. Thus, the removal of biodiesel from a biodiesel 

production or blending facility will be subject to a tax of 24.4 cents 

per gallon. An exception is provided for transfers from such facilities to registered terminals. For biodiesel, the bulk transfer between registered facilities does not have to be by registered pipeline or barge. However, the transfer of biodiesel to an unregistered 

person (other than as part of the direct bulk transfer of the biodiesel to a registered facility) will result in the imposition of tax 

on the biodiesel. The same exemptions for nontaxable use are applicable to biodiesel (e.g. if indelibly dyed and other requirements 

are met). 

EFFECTIVE DATE

The extension of present law is effective for fuel sold or used 

after December 31, 2014. The conversion of the incentives into producer-level credits and payments, and the treatment of biodiesel as 

a taxable fuel, is effective for fuel sold or used after December 31, 

2015. 

6. Extension of credit for the production of Indian coal facilities 

placed in service before 2009 (sec. 156 of the bill and sec. 45 of 

the Code) 

PRESENT LAW

A credit is available for the production of Indian coal sold to an 

unrelated third party from a qualified facility for a nine-year period 

beginning January 1, 2006, and ending December 31, 2014. The 

amount of the credit is $2.00 per ton (adjusted for inflation; $2.317 

for 2014). A qualified Indian coal facility is a facility placed in service before January 1, 2009, that produces coal from reserves that 

on June 14, 2005, were owned by a Federally recognized tribe of 


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296Sec. 38(b)(8). 297Sec. 45. In addition to the renewable electricity production credit, section 45 also provides 

income tax credits for the production of Indian coal and refined coal at qualified facilities. 

Indians or were held in trust by the United States for a tribe or 

its members. 

The credit is a component of the general business credit,296 allowing excess credits to be carried back one year and forward up 

to 20 years. The credit is not permitted against the alternative 

minimum tax. 

REASONS FOR CHANGE

The Committee believes that supporting the development of energy resources on Indian lands encourages both national energy 

independence and economic growth in traditionally disadvantaged 

areas. For this reason the Committee believes the credit for Indian 

coal should be extended. 

EXPLANATION OF PROVISION

The provision extends the credit for the production of Indian coal 

for two years (through December 31, 2016). 

EFFECTIVE DATE

The provision is effective for Indian coal produced after December 31, 2014. 

7. Extension of credits with respect to facilities producing energy 

from certain renewable resources (sec. 157 of the bill and sec. 45 

of the Code) 

PRESENT LAW

Renewable electricity production credit 

An income tax credit is allowed for the production of electricity 

from qualified energy resources at qualified facilities (the ‘‘renewable electricity production credit’’).297 Qualified energy resources 

comprise wind, closed-loop biomass, open-loop biomass, geothermal 

energy, solar energy, small irrigation power, municipal solid waste, 

qualified hydropower production, and marine and hydrokinetic renewable energy. Qualified facilities are, generally, facilities that 

generate electricity using qualified energy resources. To be eligible 

for the credit, electricity produced from qualified energy resources 

at qualified facilities must be sold by the taxpayer to an unrelated 

person. 

Summary of Credit for Electricity Produced from Certain Renewable Resources 

Eligible electricity production activity (sec. 45) Credit amount for 2015 1

(cents per kilowatt-hour) Expiration 2

Wind 2.3 December 31, 2014 

Closed-loop biomass 2.3 December 31, 2014 

Open-loop biomass (including agricultural livestock waste nutrient facilities) 1.2 December 31, 2014 

Geothermal 2.3 December 31, 2014 

Small irrigation power 1.2 December 31, 2014 

Municipal solid waste (including landfill gas facilities and trash combustion facilities) 1.2 December 31, 2014 

Qualified hydropower 1.2 December 31, 2014 


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Summary of Credit for Electricity Produced from Certain Renewable Resources—Continued 

Eligible electricity production activity (sec. 45) Credit amount for 2015 1

(cents per kilowatt-hour) Expiration 2

Marine and hydrokinetic 1.1 December 31, 2014 

1 In general, the credit is available for electricity produced during the first 10 years after a facility has been placed in service. 2 Expires for property the construction of which begins after this date. 

Election to claim energy credit in lieu of renewable electricity production credit 

A taxpayer may make an irrevocable election to have certain 

property which is part of a qualified renewable electricity production facility be treated as energy property eligible for a 30 percent 

investment credit under section 48. For this purpose, qualified facilities are facilities otherwise eligible for the renewable electricity 

production credit with respect to which no credit under section 45 

has been allowed. A taxpayer electing to treat a facility as energy 

property may not claim the renewable electricity production credit. 

The eligible basis for the investment credit for taxpayers making 

this election is the basis of the depreciable (or amortizable) property that is part of a facility capable of generating electricity eligible for the renewable electricity production credit. 

REASONS FOR CHANGE

The Committee believes that additional incentives for the production of electricity from renewable resources will help limit the environmental consequences of continued reliance on power generated 

using fossil fuels. 

EXPLANATION OF PROVISION

The provision extends for two years the renewable electricity production credit and the election to claim the energy credit in lieu of 

the electricity production credit, through December 31, 2016. 

EFFECTIVE DATE

The provision is effective for facilities the construction of which 

begins after December 31, 2014. 

8. Extension of credit for energy-efficient new homes (sec. 158 of 

the bill and sec. 45L of the Code) 

PRESENT LAW

Present law provides a credit to an eligible contractor for each 

qualified new energy-efficient home that is constructed by the eligible contractor and acquired by a person from such eligible contractor for use as a residence during the taxable year. To qualify 

as a new energy-efficient home, the home must be: (1) a dwelling 

located in the United States, (2) substantially completed after August 8, 2005, and (3) certified in accordance with guidance prescribed by the Secretary to have a projected level of annual heating 

and cooling energy consumption that meets the standards for either a 30-percent or 50-percent reduction in energy usage, compared to a comparable dwelling constructed in accordance with the 

standards of chapter 4 of the 2006 International Energy Conservation Code as in effect (including supplements) on January 1, 2006, 


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298Sec. 168(l). 

and any applicable Federal minimum efficiency standards for 

equipment. With respect to homes that meet the 30-percent standard, one-third of such 30-percent savings must come from the 

building envelope, and with respect to homes that meet the 50-percent standard, one-fifth of such 50-percent savings must come from 

the building envelope. 

Manufactured homes that conform to Federal manufactured 

home construction and safety standards are eligible for the credit 

provided all the criteria for the credit are met. The eligible contractor is the person who constructed the home, or in the case of 

a manufactured home, the producer of such home. 

The credit equals $1,000 in the case of a new home that meets 

the 30-percent standard and $2,000 in the case of a new home that 

meets the 50-percent standard. Only manufactured homes are eligible for the $1,000 credit. 

In lieu of meeting the standards of chapter 4 of the 2006 International Energy Conservation Code, manufactured homes certified 

by a method prescribed by the Administrator of the Environmental 

Protection Agency under the Energy Star Labeled Homes program 

are eligible for the $1,000 credit provided criteria (1) and (2), above, 

are met. 

The credit applies to homes that are purchased prior to January 

1, 2015. The credit is part of the general business credit. 

REASONS FOR CHANGE

The Committee recognizes that residential energy use for heating 

and cooling represents a large share of national energy consumption, and accordingly believes that measures to reduce heating and 

cooling energy requirements have the potential to substantially reduce national energy consumption. The Committee further recognizes that the most cost-effective time to achieve home energy efficiency is when the home is under construction. Accordingly, the 

Committee believes that a two year extension of the energy efficient new homes credit is a cost effective incentive to reduce national energy consumption. 

EXPLANATION OF PROVISION

The provision extends the credit to homes that are acquired prior 

to January 1, 2017. 

EFFECTIVE DATE

The provision is effective for homes acquired after December 31, 

2014. 

9. Extension of special allowance for second generation biofuel 

plant property (sec. 159 of the bill and sec. 168(l) of the Code) 

PRESENT LAW

Present law 298 allows an additional first-year depreciation deduction equal to 50 percent of the adjusted basis of qualified second 


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299Sec. 168(l)(2)(D). 300Secs. 168(l)(2)(A) and 40(b)(6)(E). 301For example, lignocellulosic or hemicellulosic matter that is available on a renewable or 

recurring basis includes bagasse (from sugar cane), corn stalks, and switchgrass. 302Sec. 40(b)(6)(F). 303Sec. 40(b)(6)(E)(ii) and (iii). 304Sec. 40(b)(6)(E)(iii). 305Sec. 168(l)(5). 306Sec. 168(l)(1)(B). 307Sec. 168(l)(5) and (k)(2)(G). 308Sec. 168(l)(3)(D). 309Sec. 168(l)(2). Requirements relating to actions taken before 2007 are not described herein 

since they have little (if any) remaining effect. 310Sec. 168(l)(4) and (k)(2)(E). 

generation biofuel plant property. In order to qualify, the property 

generally must be placed in service before January 1, 2015.299

Qualified second generation biofuel plant property means depreciable property used in the U.S. solely to produce any liquid fuel 

that (1) is derived from qualified feedstocks, and (2) meets the registration requirements for fuels and fuel additives established by 

the Environmental Protection Agency (‘‘EPA’’) under section 211 of 

the Clean Air Act.300 Qualified feedstocks means any lignocellulosic 

or hemicellulosic matter that is available on a renewable or recurring basis 301 and any cultivated algae, cyanobacteria, or lemna.302

Second generation biofuel does not include any alcohol with a proof 

of less than 150 or certain unprocessed fuel.303 Unprocessed fuels 

are fuels that (1) are more than four percent (determined by 

weight) water and sediment in any combination, (2) have an ash 

content of more than one percent (determined by weight), or (3) 

have an acid number greater than 25.304

The additional first-year depreciation deduction is allowed for 

both regular tax and alternative minimum tax purposes for the 

taxable year in which the property is placed in service.305 The additional first-year depreciation deduction is subject to the general 

rules regarding whether an item is subject to capitalization under 

section 263A. The basis of the property and the depreciation allowances in the year of purchase and later years are appropriately adjusted to reflect the additional first-year depreciation deduction.306

In addition, there is no adjustment to the allowable amount of depreciation for purposes of computing a taxpayer’s alternative minimum taxable income with respect to property to which the provision applies.307 A taxpayer is allowed to elect out of the additional 

first-year depreciation for any class of property for any taxable 

year.308

In order for property to qualify for the additional first-year depreciation deduction, it must meet the following requirements: (1) 

the original use of the property must commence with the taxpayer; 

and (2) the property must be (i) acquired by purchase (as defined 

under section 179(d)) by the taxpayer, and (ii) placed in service before January 1, 2015.309 Property that is manufactured, constructed, or produced by the taxpayer for use by the taxpayer qualifies if the taxpayer begins the manufacture, construction, or production of the property before January 1, 2015 (and all other requirements are met).310 Property that is manufactured, constructed, or produced for the taxpayer by another person under a 

contract that is entered into prior to the manufacture, construction, 

or production of the property is considered to be manufactured, 

constructed, or produced by the taxpayer. 


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311Sec. 168(l)(3)(C). 312Sec. 168(l)(6). 313Sec. 168(l)(7). 

Property any portion of which is financed with the proceeds of a 

tax-exempt obligation under section 103 is not eligible for the additional first-year depreciation deduction.311 Recapture rules apply if 

the property ceases to be qualified second generation biofuel plant 

property.312

Property with respect to which the taxpayer has elected 50 percent expensing under section 179C is not eligible for the additional 

first-year depreciation deduction.313

REASONS FOR CHANGE

The Committee acknowledges that encouraging the manufacturing of biofuels (including algae-based fuels) in the United States 

is important for fostering innovative new technology, encouraging 

energy independence, supporting the commercial production of 

these fuels, and creating manufacturing jobs in the United States. 

The Committee also believes that this provision helps to spur new 

investment in the production of chemicals using biomass as a feedstock, thereby reducing the use of petroleum in chemical production. 

EXPLANATION OF PROVISION

The provision extends the present law special depreciation allowance for two years, to qualified second generation biofuel plant 

property placed in service prior to January 1, 2017. 

EFFECTIVE DATE

The provision applies to property placed in service after December 31, 2014. 

10. Extension and modification of energy efficient commercial 

buildings deduction (sec. 160 of the bill and sec. 179D of the Code) 

PRESENT LAW

In general 

Code section 179D provides an election under which a taxpayer 

may take an immediate deduction equal to energy-efficient commercial building property expenditures made by the taxpayer. Energy-efficient commercial building property is defined as property 

(1) which is installed on or in any building located in the United 

States that is within the scope of Standard 90.1–2001 of the American Society of Heating, Refrigerating, and Air Conditioning Engineers and the Illuminating Engineering Society of North America 

(‘‘ASHRAE/IESNA’’), (2) which is installed as part of (i) the interior 

lighting systems, (ii) the heating, cooling, ventilation, and hot 

water systems, or (iii) the building envelope, and (3) which is certified as being installed as part of a plan designed to reduce the 

total annual energy and power costs with respect to the interior 

lighting systems, heating, cooling, ventilation, and hot water systems of the building by 50 percent or more in comparison to a reference building which meets the minimum requirements of Standard 90.1–2001 (as in effect on April 2, 2003). The deduction is limVerDate Sep 11 2014 05:21 Aug 08, 2015 Jkt 049010 PO 00000 Frm 00105 Fmt 6659 Sfmt 6602 E:\HR\OC\SR118.XXX SR118

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314See IRS Notice 2006–52, 2006–1 C.B. 1175, June 2, 2006; IRS 2008–40, 2008–14 I.R.B. 725 

March 11, 2008. 315 IRS Notice 2008–40, Supra, set a target of a 10-percent reduction in total energy and 

power costs with respect to the building envelope, and 20 percent each with respect to the interior lighting system and the heating, cooling, ventilation and hot water systems. IRS Notice 

2012–26 (2012–17 I.R.B. 847 April 23, 2012) established new targets of 10-percent reduction in 

ited to an amount equal to $1.80 per square foot of the property 

for which such expenditures are made. The deduction is allowed in 

the year in which the property is placed in service. 

Certain certification requirements must be met in order to qualify for the deduction. The Secretary, in consultation with the Secretary of Energy, will promulgate regulations that describe methods of calculating and verifying energy and power costs using qualified computer software based on the provisions of the 2005 California Nonresidential Alternative Calculation Method Approval 

Manual or, in the case of residential property, the 2005 California 

Residential Alternative Calculation Method Approval Manual. 

The Secretary is granted authority to prescribe procedures for 

the inspection and testing for compliance of buildings that are comparable, given the difference between commercial and residential 

buildings, to the requirements in the Mortgage Industry National 

Accreditation Procedures for Home Energy Rating Systems.314 Individuals qualified to determine compliance shall only be those recognized by one or more organizations certified by the Secretary for 

such purposes. 

For energy-efficient commercial building property expenditures 

made by a public entity, such as public schools, the deduction may 

be allocated to the person primarily responsible for designing the 

property in lieu of the public entity. 

If a deduction is allowed under this section, the basis of the property is reduced by the amount of the deduction. 

The deduction is effective for property placed in service prior to 

January 1, 2015. 

Partial allowance of deduction 

System-specific deductions 

In the case of a building that does not meet the overall building 

requirement of 50-percent energy savings, a partial deduction is allowed with respect to each separate building system that comprises 

energy efficient property and which is certified by a qualified professional as meeting or exceeding the applicable system-specific 

savings targets established by the Secretary. The applicable system-specific savings targets to be established by the Secretary are 

those that would result in a total annual energy savings with respect to the whole building of 50 percent, if each of the separate 

systems met the system specific target. The separate building systems are (1) the interior lighting system, (2) the heating, cooling, 

ventilation and hot water systems, and (3) the building envelope. 

The maximum allowable deduction is $0.60 per square foot for each 

separate system. 

Interim rules for lighting systems 

In general, in the case of system-specific partial deductions, no 

deduction is allowed until the Secretary establishes system-specific 

targets.315 However, in the case of lighting system retrofits, until 


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total energy and power costs with respect to the building envelope, 25 percent with respect to 

the interior lighting system and 15 percent with respect to the heating, cooling, ventilation and 

hot water systems, effective beginning March 12, 2012. The targets from Notice 2008–40 may 

be used until December 31, 2013, but the targets of Notice 2012–26 apply thereafter. 

such time as the Secretary issues final regulations, the system-specific energy savings target for the lighting system is deemed to be 

met by a reduction in lighting power density of 40 percent (50 percent in the case of a warehouse) of the minimum requirements in 

Table 9.3.1.1 or Table 9.3.1.2 of ASHRAE/IESNA Standard 90.1– 

2001. Also, in the case of a lighting system that reduces lighting 

power density by 25 percent, a partial deduction of 30 cents per 

square foot is allowed. A pro-rated partial deduction is allowed in 

the case of a lighting system that reduces lighting power density 

between 25 percent and 40 percent. Certain lighting level and 

lighting control requirements must also be met in order to qualify 

for the partial lighting deductions under the interim rule. 

REASONS FOR CHANGE

The Committee recognizes that commercial buildings consume a 

significant amount of energy resources and that reductions in commercial energy use have the potential to significantly reduce national energy consumption. The Committee believes that a two year 

extension of this provision will continue to encourage construction 

of buildings that are significantly more energy efficient than the 

norm, thereby contributing to decreased energy consumption. For 

the purpose of achieving parity with other government entities, the 

Committee believes that tribal governments should be allowed to 

allocate the deduction to the person primarily responsible for designing the property, in the same manner as is currently allowed 

for other public property. In order to extend the reach of this provision and further reduce energy consumption, the Committee also 

believes that it is appropriate to allow non-profits (as defined in 

section 501(c)(3)) to allocate the deduction in this manner. Finally, 

given that nine years have passed since the adoption of the energy 

efficient commercial building deduction, the Committee believes it 

is necessary to update the efficiency standards that must be met 

in order to qualify for the deduction. 

EXPLANATION OF PROVISION

The provision extends the deduction for two years, through December 31, 2016. Additionally, the provision permits tribal governments and non-profits (as defined in section 501(c)(3)) to allocate 

the deduction to the person primarily responsible for designing the 

property, in the same manner as is allowed for public property. Finally, the provision increases the efficiency standards for property 

placed in service after December 31, 2015, such that qualifying 

buildings are determined relative to the ASHRAE/IESNA 90.1– 

2007 standards. 

EFFECTIVE DATE

The provision applies to property placed in service after December 31, 2014. 


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316See sec. 1001. 317See secs. 61 and 451. 318See, e.g., secs. 453, 1031 and 1033. 319The applicable period for a taxpayer to reinvest the proceeds is four years after the close 

of the taxable year in which the qualifying electric transmission transaction occurs. 320Sec. 451(i). 321Sec. 451(i)(3). 322Sec. 3(23), 16 U.S.C. sec. 796, defines ‘‘transmitting utility’’ as any electric utility, qualifying cogeneration facility, qualifying small power production facility, or Federal power marketing agency that owns or operates electric power transmission facilities that are used for the 

sale of electric energy at wholesale. 323Sec. 3(22), 16 U.S.C. sec. 796, defines ‘‘electric utility’’ as any person or State agency (including any municipality) that sells electric energy; such term includes the Tennessee Valley 

Authority, but does not include any Federal power marketing agency. 324Sec. 451(i)(6). 325For example, a regional transmission organization, an independent system operator, or an 

independent transmission company. 326 16 U.S.C. sec. 824b. 

11. Extension of special rule for sales or dispositions to implement 

FERC or State electric restructuring policy for qualified electric 

utilities (sec. 161 of the bill and sec. 451(i) of the Code) 

PRESENT LAW

A taxpayer selling property generally realizes gain to the extent 

the sales price (and any other consideration received) exceeds the 

taxpayer’s basis in the property.316 The realized gain is subject to 

current income tax 317 unless the recognition of the gain is deferred 

or excluded from income under a special tax provision.318

One such special tax provision permits taxpayers to elect to recognize gain from qualifying electric transmission transactions ratably over an eight-year period beginning in the year of sale if the 

amount realized from such sale is used to purchase exempt utility 

property within the applicable period 319 (the ‘‘reinvestment property’’).320 If the amount realized exceeds the amount used to purchase reinvestment property, any realized gain is recognized to the 

extent of such excess in the year of the qualifying electric transmission transaction. 

A qualifying electric transmission transaction is the sale or other 

disposition of property used by a qualified electric utility to an 

independent transmission company prior to January 1, 2015.321 A 

qualified electric utility is defined as an electric utility, which as 

of the date of the qualifying electric transmission transaction, is 

vertically integrated in that it is both (1) a transmitting utility (as 

defined in the Federal Power Act 322) with respect to the transmission facilities to which the election applies, and (2) an electric 

utility (as defined in the Federal Power Act 323).324

In general, an independent transmission company is defined as: 

(1) an independent transmission provider 325 approved by the Federal Energy Regulatory Commission (‘‘FERC’’); (2) a person (i) who 

the FERC determines under section 203 of the Federal Power 

Act 326 (or by declaratory order) is not a ‘‘market participant’’ and 

(ii) whose transmission facilities are placed under the operational 

control of a FERC-approved independent transmission provider no 

later than four years after the close of the taxable year in which 

the transaction occurs; or (3) in the case of facilities subject to the 

jurisdiction of the Public Utility Commission of Texas, (i) a person 

which is approved by that Commission as consistent with Texas 

State law regarding an independent transmission organization, or 

(ii) a political subdivision, or affiliate thereof, whose transmission 


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327Sec. 451(i)(4). 328Sec. 451(i)(5). 329Sec. 451(i)(5)(C). 330Sec. 451(i)(7). 

facilities are under the operational control of an organization described in (i).327

Exempt utility property is defined as: (1) property used in the 

trade or business of (i) generating, transmitting, distributing, or 

selling electricity or (ii) producing, transmitting, distributing, or 

selling natural gas; or (2) stock in a controlled corporation whose 

principal trade or business consists of the activities described in 

(1).328 Exempt utility property does not include any property that 

is located outside of the United States.329

If a taxpayer is a member of an affiliated group of corporations 

filing a consolidated return, the reinvestment property may be purchased by any member of the affiliated group (in lieu of the taxpayer).330

REASONS FOR CHANGE

The Committee believes that the ‘‘unbundling’’ of electric transmission assets held by vertically integrated utilities, with the 

transmission assets ultimately placed under the ownership or control of independent transmission providers (or other similarly-approved operators), continues to be an important policy. To continue 

facilitating the implementation of this policy, the Committee believes it is appropriate to continue to assist taxpayers in moving 

forward with industry restructuring by continuing to provide a tax 

deferral for gain associated with certain dispositions of electric 

transmission assets. The Committee believes this provision will encourage the sale of transmission property from electric utilities to 

independent transmission companies to improve transmission management and facilitate competitive transmission markets. 

EXPLANATION OF PROVISION

The provision extends for two years the treatment under the 

present-law deferral provision to sales or dispositions by a qualified 

electric utility that occur prior to January 1, 2017. 

EFFECTIVE DATE

The provision applies to dispositions after December 31, 2014. 

12. Extension of excise tax credits and payment provisions relating 

to alternative fuel (sec. 162 of the bill and secs. 6426 and 6427 

of the Code) 

PRESENT LAW

Fuel excise taxes 

Fuel excise taxes are imposed on taxable fuel (gasoline, diesel 

fuel or kerosene) under section 4081. In general, these fuels are 

taxed when removed from a refinery, terminal rack, upon entry 

into the United States, or upon sale to an unregistered person. A 

back-up tax under section 4041 is imposed on previously untaxed 

fuel and alternative fuel used or sold for use as fuel in a motor vehicle or motorboat to the supply tank of a highway vehicle. In genVerDate Sep 11 2014 05:21 Aug 08, 2015 Jkt 049010 PO 00000 Frm 00109 Fmt 6659 Sfmt 6602 E:\HR\OC\SR118.XXX SR118

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331 ‘‘Gasoline gallon equivalent’’ means, with respect to any nonliquid alternative fuel (for example, compressed natural gas), the amount of such fuel having a Btu (British thermal unit) 

content of 124,800 (higher heating value). 

eral, the rates of tax are 18.3 cents per gallon (or in the case of 

compressed natural gas 18.3 cents per gasoline gallon equivalent), 

and in the case of liquefied natural gas, and liquid fuel derived 

from coal or biomass, 24.3 cents per gallon. 

Alternative fuel and alternative fuel mixture credits and payments 

The Code provides two per-gallon excise tax credits with respect 

to alternative fuel: the alternative fuel credit, and the alternative 

fuel mixture credit. For this purpose, the term ‘‘alternative fuel’’ 

means liquefied petroleum gas, P Series fuels (as defined by the 

Secretary of Energy under 42 U.S.C. sec. 13211(2)), compressed or 

liquefied natural gas, liquefied hydrogen, liquid fuel derived from 

coal through the Fischer-Tropsch process (‘‘coal-to-liquids’’), compressed or liquefied gas derived from biomass, or liquid fuel derived 

from biomass. Such term does not include ethanol, methanol, or 

biodiesel. 

For coal-to-liquids produced after December 30, 2009, the fuel 

must be certified as having been derived from coal produced at a 

gasification facility that separates and sequesters 75 percent of 

such facility’s total carbon dioxide emissions. 

The alternative fuel credit is allowed against section 4041 liability, and the alternative fuel mixture credit is allowed against section 4081 liability. Neither credit is allowed unless the taxpayer is 

registered with the Secretary. The alternative fuel credit is 50 

cents per gallon of alternative fuel or gasoline gallon equivalents 331 of nonliquid alternative fuel sold by the taxpayer for use 

as a motor fuel in a motor vehicle or motorboat, sold for use in 

aviation or so used by the taxpayer. 

The alternative fuel mixture credit is 50 cents per gallon of alternative fuel used in producing an alternative fuel mixture for sale 

or use in a trade or business of the taxpayer. An ‘‘alternative fuel 

mixture’’ is a mixture of alternative fuel and taxable fuel (gasoline, 

diesel fuel or kerosene) that contains at least 1/10 of one percent 

taxable fuel. The mixture must be sold by the taxpayer producing 

such mixture to any person for use as a fuel, or used by the taxpayer producing the mixture as a fuel. The credits expired after 

December 31, 2014. 

A person may file a claim for payment equal to the amount of 

the alternative fuel credit (but not the alternative fuel mixture 

credit). The alternative fuel credit must first be applied to the applicable excise tax liability under section 4041 or 4081, and any excess credit may be taken as a payment. These payment provisions 

generally also expire after December 31, 2014. 

For purposes of the alternative fuel credit, alternative fuel mixture credit and related payment provisions, ‘‘alternative fuel’’ does 

not include fuel (including lignin, wood residues, or spent pulping 

liquors) derived from the production of paper or pulp. 

REASONS FOR CHANGE

The Committee believes it is appropriate to extend the incentives 

for alternative fuel to provide certainty to the industry and allow 

for business planning. 


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332This guidance is provided by Notice 2015–3, 2015–6 I.R.B. 583. 333Sec. 30D(g). 

EXPLANATION OF PROVISION

In general 

The provision extends the alternative fuel credit and related payment provisions, and the alternative fuel mixture credit through 

December 31, 2016. 

In light of the retroactive nature of the provision, as it relates 

to alternative fuel sold or used in 2015, the provision creates a special rule to address claims regarding excise credits and claims for 

payment associated with periods occurring during 2015. In particular the provision directs the Secretary to issue guidance within 

30 days of the date of enactment. Such guidance is to provide for 

a one-time submission of claims covering periods occurring during 

2015. The guidance is to provide for a 180-day period for the submission of such claims (in such manner as prescribed by the Secretary) to begin no later than 30 days after such guidance is 

issued.332 Such claims shall be paid by the Secretary of the Treasury not later than 60 days after receipt. If the claim is not paid 

within 60 days of the date of the filing, the claim shall be paid with 

interest from such date determined by using the overpayment rate 

and method under section 6621 of such Code. 

Liquefied petroleum gas and liquefied natural gas 

Under section 303 of the bill, the alternative fuel excise tax credits and outlay payment provisions related to liquefied natural gas 

and liquefied petroleum gas also are converted to the same energy 

equivalent basis used for the purpose of the tax. For LNG, the 

credit is 50 cents per energy equivalent of diesel fuel (approximately 29 cents per gallon of LNG) and for liquefied petroleum gas 

the credit is 50 cents per energy equivalent of gasoline (approximately 36 cents per gallon). 

EFFECTIVE DATE

The provision is generally effective for fuel sold or used after December 31, 2014. 

TITLE II—PROVISION THAT EXPIRED IN 2013 

A. Extension of Credit for Electric Motorcycles (sec. 201 of the bill 

and sec. 30D of the Code) 

PRESENT LAW

For vehicles acquired before 2014, a 10-percent credit was available for qualifying plug-in electric motorcycles and three-wheeled 

vehicles.333 Qualifying two- or three-wheeled vehicles needed to 

have a battery capacity of at least 2.5 kilowatt-hours, be manufactured primarily for use on public streets, roads, and highways, and 

be capable of achieving speeds of at least 45 miles per hours. The 

maximum credit for any qualifying vehicle was $2,500. 


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REASONS FOR CHANGE

The Committee believes that further investments in advanced 

technology vehicles are necessary to transform automotive transportation in the United States to be cleaner, more fuel efficient, 

and less reliant on petroleum fuels. For this reason, the Committee 

believes the credit for electric motorcycles should be extended. 

EXPLANATION OF PROVISION

The provision reauthorizes the credit for electric motorcycles acquired in 2015 and 2016 (but not 2014). The credit for electric 

three-wheeled vehicles is not extended. 

EFFECTIVE DATE

The provision is effective for vehicles acquired after December 

31, 2014. 

TITLE III—REVENUE RAISING PROVISIONS 

1. Exclusion from gross income of certain clean coal power grants 

to non-corporate taxpayers (sec. 301 of the bill) 

PRESENT LAW

Section 402 of the Energy Policy Act of 2005 provides criteria for 

Federal financial assistance under the Clean Coal Power Initiative. 

To the extent this financial assistance comes in the form of a grant, 

award, or allowance, it must generally be included in income under 

section 61 of the Internal Revenue Code (the ‘‘Code’’). 

Corporate taxpayers may be eligible to exclude such financial assistance from gross income as a contribution of capital under section 118 of the Code. The basis of any property acquired by reason 

of such a contribution of capital must be reduced by the amount 

of the contribution. This exclusion is not available to non-corporate 

taxpayers. 

REASONS FOR CHANGE

The Committee believes that Federal financial assistance under 

the Clean Coal Power Initiative should be excludable from the income of investors in order to make such assistance as effective as 

possible in encouraging clean coal power. In addition, the Committee believes that a corresponding basis reduction is necessary in 

all cases to prevent any unintended double benefit under the incentive. 

EXPLANATION OF PROVISION

With respect to eligible non-corporate recipients, the provision 

excludes from gross income and alternative minimum taxable income any grant, award, or allowance made pursuant to section 402 

of the Energy Policy Act of 2005. The provision requires that, to the 

extent the grant, award or allowance is related to depreciable property, the adjusted basis is reduced by the amount excluded from income under the provision. The provision requires eligible non-corporate recipients to pay an upfront payment to the Federal government equal to 1.18-percent of the value of the grant, award, or allowance. 


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334Secs. 3101–3128. 335For taxable years beginning after 2012, the employee portion of the HI tax under FICA 

(not the employer portion) is increased by an additional tax of 0.9 percent on wages received 

in excess of a threshold amount. The threshold amount is $250,000 in the case of a joint return, 

$125,000 in the case of a married individual filing a separate return, and $200,000 in any other 

case. 336Secs. 3301–3311. FICA taxes, FUTA taxes, taxes under the Railroad Retirement Tax Act 

or ‘‘RRTA’’ (secs. 3201–3241) and income tax withholding (secs. 3401–3404) are commonly referred to collectively as employment taxes. Sections 3501–3511 provide additional employment 

tax rules. 

Under the provision, eligible non-corporate recipients are defined 

as (1) any recipient (other than a corporation) of any grant, award, 

or allowance made pursuant to Section 402 of the Energy Policy 

Act of 2005 that (2) makes the upfront 1.18-percent payment, 

where (3) the grant, award, or allowance would have been excludable from income by reason of Code section 118 if the taxpayer had 

been a corporation. In the case of a partnership, the eligible noncorporate recipients are the partners. 

EFFECTIVE DATE

The provision is effective for payments received in taxable years 

beginning after December 31, 2011. 

2. Treatment of certain persons as employers with respect to motion picture projects (sec. 302 of the bill and new sec. 3512 of the 

Code) 

PRESENT LAW

FICA and FUTA taxes 

The Federal Insurance Contributions Act (‘‘FICA’’) imposes tax 

on employers and employees based on the amount of wages (as defined for FICA purposes) paid to an employee during the year.334

The tax imposed on the employer and on the employee is each composed of two parts: (1) the Social Security or old age, survivors, and 

disability insurance (‘‘OASDI’’) tax equal to 6.2 percent of covered 

wages up to the OASDI wage base ($118,500 for 2015); and (2) the 

Medicare or hospital insurance (‘‘HI’’) tax equal to 1.45 percent of 

all covered wages.335 The employee portion of the FICA tax generally must be withheld and remitted to the Federal government 

by the employer. 

The Federal Unemployment Tax Act (‘‘FUTA’’) imposes a tax on 

employers of six percent of wages up to the FUTA wage base of 

$7,000.336 An employer may take a credit against its FUTA tax liability for its contributions to a State unemployment fund and, in 

certain cases, an additional credit for contributions that would 

have been required if the employer had been subject to a higher 

contribution rate under State law. For purposes of the credit, the 

term ‘‘contributions’’ means payments required by State law to be 

made by an employer into an unemployment fund, to the extent the 

payments are made by the employer without being deducted or deductible from employees’ remuneration. 

Responsibility for employment tax compliance 

FICA and FUTA tax responsibility generally rests with the person who is the employer of an employee under a common-law test 


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337Treas. Reg. secs. 31.3121(d)-1(c)(1) and 31.3306(i)-1(a). 338Sec. 3401(d)(1) (for purposes of income tax withholding, if the employer does not have control of the payment of wages, the person having control of the payment of such wages is treated 

as the employer); Otte v. United States, 419 U.S. 43 (1974) (the person who has the control of 

the payment of wages is treated as the employer for purposes of withholding the employee’s 

share of FICA taxes from wages); In re Armadillo Corporation, 561 F.2d 1382 (10th Cir. 1977), 

and In re The Laub Baking Company v. United States, 642 F.2d 196 (6th Cir. 1981) (the person 

who has control of the payment of wages is the employer for purposes of the employer’s share 

of FICA taxes and FUTA tax). The mere fact that wages are paid by a person other than the 

employer does not necessarily mean that the payor has control of the payment of the wages. 

Rather, control depends on the facts and circumstances. See, for example, Consolidated Flooring 

Services v. United States, 38 Fed. Cl. 450 (1997), and Winstead v. United States, 109 F. 2d 989 

(4th Cir. 1997). 339 An employee is subject to OASDI tax only with respect to remuneration up to the applicable wage base for a year, regardless of whether the employee works for only one employer or 

for more than one employer during the year. If, as a result of working for more than one employer, OASDI tax is withheld with respect to remuneration above the applicable wage base, 

the employee is allowed a credit under section 31(b). 340 Cencast Services, L.P. v. United States, 729 F.3d 1352 (Fed. Cir. 2013). 

that has been incorporated into Treasury regulations.337 Under the 

regulations, an employer-employee relationship generally exists if 

the person for whom services are performed has the right to control 

and direct the individual who performs the services, not only as to 

the result to be accomplished by the work, but also as to the details 

and means by which that result is accomplished. That is, an employee is subject to the will and control of the employer, not only 

as to what is to be done, but also as to how it is to be done. It is 

not necessary that the employer actually control the manner in 

which the services are performed, rather it is sufficient that the 

employer have a right to control. Whether the requisite control exists is determined on the basis of all the relevant facts and circumstances. The test of whether an employer-employee relationship exists often arises in determining whether a worker is an employee or an independent contractor. However, the same test applies in determining whether a worker is an employee of one person or another. 

In some cases, a person other than the common-law employer (a 

‘‘third party’’) may be liable for employment taxes. In particular, if 

wages are paid to an employee by a third party and the third 

party, rather than the employer, has control of the payment of the 

wages, the third party is the ‘‘statutory’’ employer responsible for 

complying with applicable employment tax requirements.338

As indicated above, remuneration with respect to employment 

with a particular employer for a year is excepted from OASDI or 

FUTA taxes to the extent it exceeds the applicable OASDI or 

FUTA wage base.339 In contrast, if an employee works for multiple 

employers during a year, a separate wage base generally applies in 

determining the employer share of OASDI tax and FUTA tax with 

respect to remuneration for employment with each employer, even 

if the wages earned with all the employers are paid by the same 

third party.340

REASONS FOR CHANGE

In the motion picture industry, payroll and various other administrative services are commonly handled by a company that specializes in such services (referred to as a motion picture payroll service 

company or ‘‘MPPSC’’), rather than by the entity created for each 

motion picture project. In many cases, even if an employee works 

on various motion picture projects over the course of a year, all of 


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341For purposes of the proposal, ‘‘affiliate’’ and ‘‘affiliated’’ status are based on the aggregation 

rules applicable for retirement plan purposes under section 414(b) and (c). 342For purposes of the provision, a motion picture project generally means a project for the 

production of a motion picture film or video tape as described in section 168(f)(3). 

the employee’s wages are paid by the same MPPSC. Although not 

a common law employer, an MPPSC generally has control of the 

payment of employee wages and is thus the statutory employer responsible for employment tax compliance. The Committee believes 

that the use of MPPSCs furthers employment tax compliance and 

considers it appropriate to treat an MPPSC as the employer for 

purposes of applying the OASDI and FUTA wage bases. 

EXPLANATION OF PROVISION

Under the provision, for purposes of the OASDI and FUTA wage 

bases, remuneration paid by a ‘‘motion picture project employer’’ 

during a calendar year to a ‘‘motion picture project worker’’ is 

treated as remuneration paid with respect to employment of the 

motion picture project worker by the motion picture project employer. As a result, all remuneration paid by the motion picture 

project employer to a motion picture project worker during a calendar year is subject to a single OASDI wage base and a single 

FUTA wage base, without regard to the worker’s status as a common law employee of multiple clients of the motion picture project 

employer during the year. 

A person must meet several criteria to be treated as a motion 

picture project employer. The person (directly or through an affiliate 341 ) must (1) be a party to a written contract covering the services of motion picture project workers with respect to motion picture projects 342 in the course of the trade or business of a client 

of the motion picture project employer, (2) be contractually obligated to pay remuneration to the motion picture project workers 

without regard to payment or reimbursement by any other person, 

(3) control the payment (within the meaning of the Code) of remuneration to the motion picture project workers and pay the remuneration from its own account or accounts, (4) be a signatory to one 

or more collective bargaining agreements with a labor organization 

that represents motion picture project workers, and (5) have treated substantially all motion picture project workers whom the person pays as employees (and not as independent contractors) during 

the calendar year for purposes of determining FICA, FUTA and 

other employment taxes. In addition, at least 80 percent of all 

FICA remuneration paid by the person in the calendar year must 

be paid to motion picture project workers. 

A motion picture project worker means any individual who provides services on motion picture projects for clients of a motion picture project employer that are not affiliated with the motion picture project employer. 

EFFECTIVE DATE

The provision applies to remuneration paid after December 31, 

2015. 


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343 After the provision was considered by the Committee, a significant portion of the provision, 

as it relates to the changes in the section 4041 tax, was included in H.R. 3236, the ‘‘Surface 

Transportation and Veterans Health Care Choice Improvement Act of 2015,’’ which was passed 

by the House of Representatives on July 29, 2015, and the Senate on July 30, 2015, and signed 

into law on July 31, 2015. 344These fuels are subject to an additional 0.1-cent-per-gallon excise tax to fund the Leaking 

Underground Storage Tank (‘‘LUST’’) Trust Fund (secs. 4041(d) and 4081(a)(2)(B)). That tax is 

imposed as an ‘‘add-on’’ to other existing taxes. 345Diesel-water emulsions are taxed at 19.7 cents per gallon (sec. 4081(a)(2)(D)). 346The rate of tax is 24.3 cents per gallon in the case of liquefied natural gas, any liquid fuel 

(other than ethanol or methanol) derived from coal, and liquid hydrocarbons derived from biomass. Other alternative fuels sold or used as motor fuel are generally taxed at 18.3 cents per 

gallon. ‘‘Alternative fuel’’ also includes compressed natural gas. The rate for compressed natural 

gas is 18.3 cents per energy equivalent of a gallon of gasoline. See sec. 4041(a)(2) and (3). 347Sec. 4081(a)(1). 

3. Equalization of Excise Tax and Credits for Liquefied Natural 

Gas and Liquefied Petroleum Gas (sec. 303 of the bill and sec. 

4041 of the Code) 343

PRESENT LAW

Excise Taxes 

The Code imposes an excise tax on gasoline, diesel fuel, kerosene, 

and certain alternative fuels at the following rates: 344

Gasoline 18.3 cents per gallon 

Diesel fuel and kerosene 24.3 cents per gallon 345

Alternative fuels 24.3 and 18.3 cents per gallon 346

The Code imposes tax on gasoline, diesel fuel, and kerosene upon 

removal from a refinery or on importation, unless the fuel is transferred in bulk by registered pipeline or barge to a registered terminal facility.347 The imposition of tax on alternative fuels generally occurs at retail when the fuel is sold to an owner, lessee or 

other operator of a motor vehicle or motorboat for use as a fuel in 

such motor vehicle or motorboat. 

Liquefied natural gas (‘‘LNG’’) and liquefied petroleum gas (also 

known as propane) are classified as alternative fuels. LNG is taxed 

at the same per gallon rate as diesel, 24.3 cents per gallon. According to the Oak Ridge National Laboratory, diesel fuel has an energy content of 128,700 Btu per gallon (lower heating value) and 

LNG has an energy content of 74,700 Btu per gallon (lower heating 

value). Therefore, a gallon of LNG produces approximately 58 percent of the energy produced by a gallon of diesel fuel. 

Liquefied petroleum gas is taxed at the same per gallon rate as 

gasoline, 18.3 cents per gallon. According to the Oak Ridge National Laboratory, gasoline has an energy content of 115,400 Btu 

per gallon (lower heating value), and liquefied petroleum gas has 

an energy content of 83,500 Btu per gallon (lower heating value). 

Therefore, a gallon of liquefied petroleum gas produces approximately 72 percent of the energy produced by a gallon of gasoline. 

Alternative fuel credits and outlay payments 

The Code provides two per-gallon excise tax credits with respect 

to alternative fuel: the alternative fuel credit, and the alternative 

fuel mixture credit. For this purpose, the term ‘‘alternative fuel’’ 

means liquefied petroleum gas, P Series fuels (as defined by the 

Secretary of Energy under 42 U.S.C. sec. 13211(2)), compressed or 

liquefied natural gas, liquefied hydrogen, liquid fuel derived from 


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348 ‘‘Gasoline gallon equivalent’’ means, with respect to any nonliquid alternative fuel (for example, compressed natural gas), the amount of such fuel having a Btu (British thermal unit) 

content of 124,800 (higher heating value). 

coal through the Fischer-Tropsch process (‘‘coal-to-liquids’’), compressed or liquefied gas derived from biomass, or liquid fuel derived 

from biomass. 

The alternative fuel credit is allowed against section 4041 liability, and the alternative fuel mixture credit is allowed against section 4081 liability. Neither credit is allowed unless the taxpayer is 

registered with the Secretary. The alternative fuel credit is 50 

cents per gallon of alternative fuel or gasoline gallon equivalents 348 of nonliquid alternative fuel sold by the taxpayer for use 

as a motor fuel in a motor vehicle or motorboat, sold for use in 

aviation or so used by the taxpayer. 

The alternative fuel mixture credit is 50 cents per gallon of alternative fuel used in producing an alternative fuel mixture for sale 

or use in a trade or business of the taxpayer. An ‘‘alternative fuel 

mixture’’ is a mixture of alternative fuel and taxable fuel (gasoline, 

diesel fuel or kerosene) that contains at least 1/10 of one percent 

taxable fuel. The mixture must be sold by the taxpayer producing 

such mixture to any person for use as a fuel, or used by the taxpayer producing the mixture as a fuel. 

A person may file a claim for payment equal to the amount of 

the alternative fuel credit (but not the alternative fuel mixture 

credit). The alternative fuel credit must first be applied to the applicable excise tax liability under section 4041 or 4081, and any excess credit may be taken as a payment. 

REASONS FOR CHANGE

LNG is a transportation fuel source used for large trucks and 

some marine and rail vessels. Currently, the excise tax rate for 

both LNG and diesel fuel is set at 24.3 cents per gallon. However, 

LNG produces less energy per gallon than diesel fuel. It takes approximately 1.7 gallons of LNG to equal the energy in one gallon 

of diesel fuel, resulting in LNG being taxed at approximately 170 

percent of the rate of diesel fuel on an energy equivalent basis. The 

current tax system can result in thousands of dollars of additional 

cost for companies choosing to utilize LNG. Similarly, liquefied petroleum gas and gasoline are both taxed at 18.3 cents per gallon. 

However, a gallon of liquefied petroleum gas has only 72 percent 

of the energy content of a gallon of gasoline but is taxed at 138 percent of the rate of gasoline on an energy equivalent basis. Therefore, the Committee believes it is appropriate to lower the tax rate 

of both liquefied petroleum gas and LNG, basing the tax rate on 

the energy content of those fuels as compared with gasoline and 

diesel, respectively. 

EXPLANATION OF PROVISION

Excise taxes 

The provision changes the tax rate of LNG to a rate based on its 

energy equivalent of a gallon of diesel (approximately 14.1 cents 

per gallon) and changes the tax rate of liquefied petroleum gas to 

a rate based on its energy equivalent of a gallon of gasoline (approximately 13.2 cents per gallon). 


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349 A similar provision was included in H.R.3236, Surface Transportation and Veterans Health 

Care Choice Improvement Act of 2015, which was passed by the House of Representatives on 

July 29, 2015 and the Senate on July 30, 2015, and signed into law on July 31, 2015. 350Sec. 6050H. 351Government Accountability Office, Report to the Joint Committee on Taxation, Home Mortgage Interest Deduction: Despite Challenges Presented by Complex Tax Rules, IRS Could Enhance Enforcement and Guidance, (GAO–09–769), July 29, 2009 (report found that expanding 

information reporting on taxpayers’ mortgages to include property addresses, debt balances, and 

an indicator of loan refinancing would allow the IRS to identify taxpayers reporting mortgage 

interest exceeding the acquisition debt limit). 

Specifically, the provision provides that liquefied petroleum gas 

is taxed at 18.3 cents per energy equivalent of a gallon of gasoline. 

For this purpose, ‘‘energy equivalent of a gallon of gasoline’’ means, 

with respect to liquefied petroleum gas, the amount of such fuel 

having a Btu content of 115,400 (lower heating value). LNG is 

taxed at 24.3 cents per energy equivalent of a gallon of diesel fuel. 

For this purpose, ‘‘energy equivalent of a gallon of diesel’’ means, 

with respect to a liquefied natural gas fuel, the amount of such fuel 

having a Btu content of 128,700 (lower heating value). 

Excise tax credit and outlay payments 

The alternative fuel excise tax credits and outlay payment provisions related to liquefied natural gas and liquefied petroleum gas 

also are converted to the same energy equivalent basis used for the 

purpose of the tax. For LNG, the credit is 50 cents per energy 

equivalent of diesel fuel (approximately 29 cents per gallon of LNG) 

and for liquefied petroleum gas the credit is 50 cents per energy 

equivalent of gasoline (approximately 36 cents per gallon). 

EFFECTIVE DATE

The provision is effective for fuel sold or used after December 31, 

2014. 

4. Additional information on returns relating to mortgage interest 

(sec. 304 of the bill and sec. 6050H of the Code) 349

PRESENT LAW

Any person who, in the course of a trade or business during a 

calendar year, received from an individual $600 or more of interest 

during a calendar year on an obligation secured by real property 

(such as mortgage interest) must file an information return with 

the IRS and must provide a copy of that return to the payor.350

The information return generally must include the name, address, 

and taxpayer identification number of the individual from whom 

the interest was received, and the amount of the interest and 

points received for the calendar year. 

REASONS FOR CHANGE

The Committee believes that the reporting of certain additional 

information with respect to a debt secured by real property will 

help to further improve taxpayer compliance in this area.351 The 

Committee also believes that the expansion of these information reporting requirements does not impose a substantial tax compliance 

burden on mortgage servicers and their vendors. 


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EXPLANATION OF PROVISION

Under the provision, the following additional information is required to be included in information returns filed with the IRS and 

statements furnished to the payor with respect to a debt secured 

by real property: (i) the amount of outstanding principal on the 

mortgage as of the beginning of the calendar year, (ii) the address 

of the property securing the mortgage, and (iii) the loan origination 

date. 

EFFECTIVE DATE

The provision applies to returns and statements due after December 31, 2016. 

III. BUDGET EFFECTS OF THE BILL 

A. COMMITTEE ESTIMATES

1. Budgetary revenue estimate 

In compliance with paragraph 11(a) of Rule XXVI of the Standing Rules of the Senate, the following statement is made concerning the estimated budget effects of the revenue provisions of S. 

lll, a bill to amend the Internal Revenue Code of 1986 to extend certain expired tax provisions, as reported. 


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352 Congressional Budget Office, The Budget and Economic Outlook: Fiscal Years 2015–2025, 

January 26, 2015. 

2. Macroeconomic effects 

Pursuant to the Concurrent Resolution on the Budget for Fiscal 

Year 2016, section 3112, the staff of the Joint Committee on Taxation (‘‘Joint Committee staff’’) has estimated the budgetary effects 

of changes in economic output, employment, and capital stock resulting from the ‘‘Tax Relief Extension Act of 2015.’’ The estimate 

of the macroeconomic revenue feedback effects of this legislation 

and the following supplementary analysis were produced using the 

Joint Committee staff’s Macroeconomic Equilibrium Growth model 

to simulate the macroeconomic effects of the bill. 

Overview 

The following discussion analyzes the macroeconomic effects of 

the bill. This analysis is presented relative to the 2015 economic 

and receipts baseline (‘‘present law’’), published by the Congressional Budget Office (‘‘CBO’’) in January, 2015.352

The bill provides for the temporary extension of a number of provisions in the Internal Revenue Code that provide favorable tax 

treatment for certain activities of businesses and individuals. The 

provisions in the bill affecting taxation of personal income are relatively small and projected to have little effect on incentives to supply labor to the economy. The provisions affecting businesses, especially the extension of 50 percent expensing, are expected to have 

a more significant, although temporary, impact on the after-tax 

cost of capital. Thus, the primary effect of the bill on the economy 

is expected to be an initial increase in the stock of business capital 

of about 0.3 percent in the first half of the budget period, resulting 

in an increase in production, output, and receipts by about 0.1 percent during that period. After the expiration of these provisions, 

the growth of capital is expected to decrease gradually, reversing 

these effects. These changes in investment are projected to be mirrored by small changes in hours worked and wages. The gradual 

decline in investment in the later period is primarily caused by the 

loss of the tax incentives, and partially by the effects of the increase in the deficit on costs of private sector borrowing. Because 

the size of these effects depends on how strongly investors respond 

to the incentives, and to a lesser extent for this proposal, on the 

actions of the Federal Reserve Board, the exact magnitude of these 

effects is subject to some uncertainty. 

Fiscal Years 2016–2025 

The growth generated by the increase in capital stock at the beginning of the budget period is projected to increase revenues relative to present law by about $17.2 billion over the 2016–2025 

budget period. By the end of this period, as the capital stock returns to pre-policy levels, this revenue feedback effect is diminished. At the same time, a small increase in interest rates generated by the increase in Federal debt is expected to increase the 

cost of Federal debt service by about $6.8 billion over the budget 

window. Because the bill is projected to have a negligible effect on 

employment and consumption, it is projected to have a negligible 

effect on other outlays. Overall, the budgetary effects of changes in 


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353 A detailed description of the MEG model and its behavioral parameters may be found in: 

Joint Committee on Taxation, Macroeconomic Analysis of Various Proposals to Provide $500 Billion in Tax Relief, (JCX–4–05), March 1, 2005, and Joint Committee on Taxation, Overview of 

the Work of the Staff of the Joint Committee on Taxation to Model the Macroeconomic Effects 

of Proposed Tax Legislation to Comply with House Rule XIII.3(h)(2), (JCX–105–03), December 

22, 2003. 

economic growth are projected to reduce the deficit by $10.4 billion 

during the budget window. Details of the estimate appear on Table 

1, below. 

Second and Third Decade Effects 

In the second and third decade after enactment, because the bill 

is expected to result in an increase in Federal debt, it is expected 

to make private borrowing more expensive, thus slightly lowering 

the capital stock relative to present law and reducing economic 

growth and associated revenues relative to present law. The expected increase in debt generated by the proposal is quite small relative to the overall size of the economy; therefore the long run effect is expected to be small. 

Data, models, and assumptions used in the analysis 

The Joint Committee staff analyzed the proposal using the staff’s 

Macroeconomic Equilibrium Growth Model (‘‘MEG’’).353 While the 

model is based on economic data from the National Income and 

Product Accounts, taxable income is adjusted to reflect taxable income as measured by reporting on tax returns. The MEG model is 

based on the standard, neoclassical assumption that the amount of 

output is determined by the availability of labor and capital, and 

in the long run demand for labor and capital equals the amount 

supplied by households. Individuals are assumed to make decisions 

based on observed characteristics of the economy, including wages, 

prices, interest rates, tax rates, and government spending levels. 

Individuals in the MEG model do not anticipate future changes in 

the economy or government finances; thus, this type of model is 

often referred to as a ‘‘myopic’’ behavior model. 

Monetary policy conducted by the Federal Reserve Board is explicitly modeled, with lagged price adjustments allowing for the 

economy to be temporarily out of equilibrium in response to fiscal 

and monetary policy changes. Under an ‘‘Aggressive Fed’’ policy, it 

is assumed that the Federal Reserve Board would work to counteract any demand incentives resulting from fiscal policy. ‘‘Neutral 

Fed’’ simulations assume that the Federal Reserve Board targets a 

fixed monetary growth rate, and does not try to counteract fiscal 

policy. The policy is only in effect during 2015 and 2016, a period 

in which the Federal Reserve Board is not expected to counteract 

expansionary fiscal policy; thus the macroeconomic revenue effects 

provided in the estimate were generated using the ‘‘Neutral Fed’’ 

simulation. 

Labor supply decisions are modeled separately for four groups: 

low income primary earners, low income secondary earners, other 

primary earners, and other secondary earners. Firms make investment decisions based on an expected after-tax rate of return. The 

simulation used for this estimate includes the high substitution 

elasticity parameters for labor supply. 

Information about the effects of the proposal on individual and 

business average and effective marginal tax rates, and on after-tax 


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354Descriptions of the Joint Committee staff conventional estimating models may be found in 

JCX–46–11, Testimony of the Staff of the Joint Committee on Taxation before the House Committee on Ways and Means Regarding Economic Modeling, September 21, 2011, JCX–75–15, Estimating Changes in the Federal Individual Income tax: Description of the Individual Tax Model, 

April 24, 2015, and other documents at www.jct.gov under ‘‘Estimating Methodology.’’ 

returns to capital and labor is obtained from various Joint Committee staff tax models 354 (used in the production of conventional 

revenue estimates) to characterize the effects of the bill within the 

MEG model. Changes in deductions, credits and exclusions can impact effective marginal tax rates as well as average tax rates. The 

table below provides a summary of key behavioral parameters in 

the MEG model. 

KEY PARAMETER ASSUMPTIONS IN THE MEG MODEL 

Labor supply elasticities in disaggregated labor supply Income High Elasticity 

Substitution 

Low Elasticity 

Substitution 

Low income primary .......................................................................................... ¥0.1 0 .2 0 .15 

Other primary .................................................................................................... ¥0.1 0 .1 0 .1 

Low income secondary ...................................................................................... ¥0.3 0 .8 0 .4 

Other secondary ................................................................................................ ¥0.2 0 .6 0 .3 

Wage-weighted population average with baseline rates ................................. ¥0.1 0 .2 0 .1 

Savings/consumption parameters 

Rate of time preference .................................................................................... 0 .015 

Intertemporal elasticity of substitution ............................................................ 0 .35 

Derived long-run savings elasticity to the after tax rate of return on capital 0 .25 

B. BUDGET AUTHORITY AND TAX EXPENDITURES

Budget authority 

In compliance with section 308(a)(1) of the Budget Act, the Committee states that no provisions of the bill as reported involve new 

or increased budget authority. 

Tax expenditures 

In compliance with section 308(a)(2) of the Budget Act, the Committee states that the revenue-reducing provision of the bill involves increased tax expenditures (see revenue table in Part A, 

above). 

C. CONSULTATION WITH CONGRESSIONAL BUDGET OFFICE

In accordance with section 403 of the Budget Act, the Committee 

advises that the Congressional Budget Office has not submitted a 

statement on the bill. The letter from the Congressional Budget Office will be provided separately. 

U.S. CONGRESS, CONGRESSIONAL BUDGET OFFICE, Washington, DC, August 4, 2015. 

Hon. ORRIN G. HATCH, 

Chairman, Committee on Finance, 

U.S. Senate, Washington, DC. 

DEAR MR. CHAIRMAN: The Congressional Budget Office has prepared the enclosed cost estimate for the Tax Relief Extension Act 

of 2015. 


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1For more details, see Joint Committee on Taxation, A Report to the Congressional Budget 

Office of the Macroeconomic Effects of the ‘‘Tax Relief Extension Act of 2015,’’ as Ordered to be 

Reported by the Senate Committee on Finance (JCX–107–15), August 4, 2015. 

If you wish further details on this estimate, we will be pleased 

to provide them. The CBO staff contact is Pamela Greene. 

Sincerely, 

ROBERT A. SUNSHINE

(For Keith Hall). 

Enclosure. 

Tax Relief Extension Act of 2015 

Summary: The Tax Relief Extension Act of 2015 would reinstate 

and extend certain expired tax provisions through December 31, 

2016; almost all of the provisions expired on December 31, 2014, 

and those provisions would be retroactively reinstated, extended, 

and in a few cases amended. The bill also would make a few additional changes to tax law. 

Because of the magnitude of its budgetary effects, this bill is 

‘‘major legislation,’’ as defined in section 3112 of S. Con. Res. 11, 

the Concurrent Resolution on the Budget for Fiscal Year 2016. 

Hence, the cost estimate prepared by CBO and the staff of the 

Joint Committee on Taxation (JCT) incorporates the federal budgetary effects of changes in economic output and other macroeconomic variables that would result from enacting the legislation. 

Specifically, JCT estimates that enacting the bill would increase 

deficits by about $87 billion over the 2015–2025 period. That estimate includes two components. First, excluding macroeconomic 

feedback effects, JCT estimates that the bill would increase deficits 

by about $97 billion over the 2015–2025 period. In addition, the 

macroeconomic feedback would reduce deficits by about $10 billion 

over that period, JCT estimates.1 Most of the effects on deficits 

would result from changes in revenues. 

Enacting the legislation would affect direct spending and revenues; therefore, pay-as-you-go procedures apply. 

JCT has determined that the bill contains no intergovernmental 

or private-sector mandates as defined in the Unfunded Mandates 

Reform Act (UMRA). 

Estimated cost to the Federal Government: The estimated budgetary impacts of the bill are shown in Table 1. 

TABLE 1. SUMMARY OF ESTIMATED EFFECTS ON DIRECT SPENDING AND REVENUES OF THE TAX 

RELIEF EXTENSION ACT OF 2015 

By fiscal year, in billions of dollars— 

2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2015– 

2020 

2015– 

2025 

ESTIMATED CHANGES WITHOUT MACROECONOMIC FEEDBACK 

Effects on 

Outlays .. * * 0 0 0 0 0 0 0 0 * * 

Effects on 

Revenues ¥153 ¥17 34 21 14 7 1 * ¥2 ¥2 ¥100 ¥97 

Effects on 

the Deficit a ....... 154 17 ¥34 ¥21 ¥14 ¥7 ¥1 * 2 2 101 97 


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TABLE 1. SUMMARY OF ESTIMATED EFFECTS ON DIRECT SPENDING AND REVENUES OF THE TAX 

RELIEF EXTENSION ACT OF 2015—Continued 

By fiscal year, in billions of dollars— 

2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2015– 

2020 

2015– 

2025 

ESTIMATED BUDGETARY IMPACT OF MACROECONOMIC FEEDBACK 

Effects on 

Outlays .. 2 1 1 1 1 * * * * * 6 7 

Effects on 

Revenues 2 2 2 2 2 2 2 2 1 1 10 17 

Effects on 

the Deficit a ....... * ¥1 ¥1 ¥1 ¥1 ¥1 ¥1 ¥1 ¥1 ¥1 ¥4 ¥10 

TOTAL ESTIMATED CHANGES, INCLUDING MACROECONOMIC FEEDBACK 

Effects on 

Outlays .. 2 1 1 1 1 * * * * * 6 7 

Effects on 

Revenues ¥152 ¥14 37 23 16 8 3 1 ¥1 ¥1 ¥91 ¥79 

Effects on 

the Deficit a ....... 154 16 ¥36 ¥22 ¥15 ¥8 ¥3 ¥1 1 1 97 87 

Sources: Congressional Budget Office; staff of the Joint Committee on Taxation. 

Note: * = between ¥$0.5 billion and $0.5 billion. a Positive numbers indicate increases in the deficit, and negative numbers indicate reductions in the deficit. 

Because the estimate of macroeconomic effects incorporates the 

impact of all of the bill’s provisions taken together, the estimates 

of the bill’s effects by type of provision do not reflect the macroeconomic feedback effects. Those estimates are shown in Table 2. 


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TABLE 2. ESTIMATE OF DIRECT SPENDING AND REVENUE EFFECTS OF THE TAX RELIEF EXTENSION ACT OF 2015 

By fiscal year, in billions of dollars— 

2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2015– 2020 2015– 2025 

ESTIMATED CHANGES WITHOUT MACROECONOMIC FEEDBACK 

Changes in Revenues: 

Individual Tax Extensions .......................................................................................... ¥9.8 ¥6.8 ¥0.3 ¥0.1 ¥0.1 ¥0.1 ¥0.1 ¥0.1 ¥0.1 ¥0.1 ¥17.1 ¥17.6 

Business Tax Extensions ........................................................................................... ¥138.4 ¥8.3 35.1 21.9 15.2 8.1 2.9 1.1 ¥0.2 ¥0.1 ¥74.4 ¥62.6 

Energy Tax Extensions ............................................................................................... ¥5.2 ¥1.4 ¥0.4 ¥0.9 ¥1.1 ¥1.3 ¥1.4 ¥1.5 ¥1.6 ¥1.7 ¥9.0 ¥16.6 

Other Provisions ........................................................................................................ * * * * 0.1 * * * * * 0.1 0.2 

Total Revenues ................................................................................................. ¥153.4 ¥16.6 34.4 21.1 14.1 6.7 1.4 ¥0.5 ¥1.9 ¥1.9 ¥100.5 ¥96.6 

On-budget ................................................................................................ ¥153.4 ¥16.5 34.4 21.1 14.1 6.7 1.4 ¥0.5 ¥1.9 ¥1.9 ¥100.4 ¥96.5 

Off-budget ............................................................................................... ¥0.1 * 0 0 0 0 0 0 0 0 ¥0.1 ¥0.1 

Changes in Direct Spending: 

Rum Excise Tax Payments: 

Estimated Budget Authority ............................................................................. 0.3 * 0 0 0 0 0 0 0 0 0.3 0.3 Estimated Outlays ............................................................................................ 0.3 * 0 0 0 0 0 0 0 0 0.3 0.3 

Net Increase or Decrease (¥) in the Deficit from Changes in Direct Spending and 

Revenues Without Macroeconomic Feedback: 

Effects on Deficits ..................................................................................................... 153.7 16.6 ¥34.4 ¥21.1 ¥14.1 ¥6.7 ¥1.4 0.5 1.9 1.9 100.8 96.9 

On-budget ......................................................................................................... 153.7 16.6 ¥34.4 ¥21.1 ¥14.1 ¥6.7 ¥1.4 0.5 1.9 1.9 100.7 96.9 

Off-budget ........................................................................................................ 0.1 * 0 0 0 0 0 0 0 0 0.1 0.1 

ESTIMATED BUDGETARY IMPACT OF MACROECONOMIC FEEDBACK 

Effects on Outlays .............................................................................................................. 1.8 1.4 1.0 0.7 0.6 0.4 0.3 0.2 0.1 0.1 5.6 6.8 Effects on Revenues ........................................................................................................... 1.7 2.3 2.2 1.8 1.7 1.7 1.7 1.6 1.4 1.2 9.6 17.2 Effects on the Deficit a ...................................................................................................... 0.1 ¥0.9 ¥1.2 ¥1.0 ¥1.1 ¥1.3 ¥1.4 ¥1.3 ¥1.2 ¥1.1 ¥4.1 ¥10.4 

TOTAL ESTIMATED CHANGES, INCLUDING MACROECONOMIC FEEDBACK 

Effects on Outlays .............................................................................................................. 2.1 1.4 1.0 0.7 0.6 0.4 0.3 0.2 0.1 0.1 5.9 7.1 Effects on Revenues ........................................................................................................... ¥151.7 ¥14.3 36.6 22.8 15.7 8.4 3.2 1.1 ¥0.5 ¥0.7 ¥90.8 ¥79.4 

Effects on the Deficit a ...................................................................................................... 153.9 15.7 ¥35.6 ¥22.1 ¥15.2 ¥8.0 ¥2.8 ¥0.8 0.7 0.8 96.7 86.6 

Sources: Congressional Budget Office; staff of the Joint Committee on Taxation. Notes: Details may not add to totals because of rounding; * = between ¥$50 million and $50 million. a Positive numbers indicate increases in the deficit, and negative numbers indicate reductions in the deficit. 


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Basis of Estimate: JCT provided the estimates of all provisions 

except one dealing with outlays of certain rum excise taxes. The estimates reflect an assumed enactment date of October 1, 2015. 

Estimates Excluding Macroeconomic Feedback 

JCT and CBO estimate that the Tax Relief Extension Act of 2015 

would increase deficits by about $97 billion over the 2015–2025 period, excluding the effects of macroeconomic feedback. The effects 

of the main provisions, excluding any macroeconomic feedback, are 

highlighted below. 

Extensions of Individual Tax Provisions. The individual income tax provisions would reduce revenues by $17.6 billion over 

the 2016–2025 period, JCT estimates. Those amounts include, 

among others, the effects of extending provisions that would allow: • Individuals to claim state and local sales taxes as an 

itemized deduction in lieu of state and local income taxes in calculating their individual income tax liability; JCT estimates that enacting this provision would reduce revenues by a total of $6.7 billion over the 2016–2018 period. • An exclusion from gross income for the discharge of indebtedness on a principal residence; JCT estimates that this provision 

would reduce revenues by $5.2 billion over fiscal years 2016 and 

2017. 

Extensions of Business Tax Provisions. The business tax 

provisions would reduce revenues by $62.6 billion over the 2016– 

2025 period, JCT estimates. In addition, CBO estimates that those 

provisions would increase outlays by $0.3 billion over the 2016– 

2025 period. Those amounts include, among others, the effects of 

provisions that would allow: • Businesses to qualify for both additional first-year depreciation of 50 percent of the basis for qualifying property and additional expensing (that is, immediate deduction from taxable income) for qualifying property under section 179 of the Internal Revenue Code. JCT estimates that those provisions would reduce revenues by $113.2 billion in 2016, and increase revenues by $106.7 billion over the 2017–2025 period, with the net effect of reducing revenues by $6.5 billion over the 2016–2025 period. 

• Businesses to claim the research tax credit, which JCT estimates would reduce revenues by $22.6 billion over the 2016–2025 

period. The provision would extend the credit in effect in 2014 in 

modified form. 

• Certain foreign subsidiaries that engage in banking, financial, and related businesses to defer taxation of certain income 

until it is repatriated to the U.S. parent corporation; JCT estimates 

that the provision would reduce revenues by $13.5 billion over fiscal years 2016 and 2017. 

• The Treasuries of Puerto Rico and the Virgin Islands to receive increased payments relating to excise taxes on rum manufactured in those places as well as rum imported from other countries. 

CBO estimates that those payments, which are recorded in the 

budget as outlays, would total $336 million over the 2016–2025 period. 

Extensions of Energy Tax Provisions. The extension of the 

energy tax provisions would lower revenues by about $16.6 billion 

over the 2016–2025 period, JCT estimates. The provision with the 


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largest effect on revenues—reducing them by an estimated $10.5 

billion over the 2017–2025 period—would extend, to the end of 

2016, the date by which construction must begin in order for renewable power facilities to be eligible for the electricity production 

credit or the investment credit in lieu of the production credit. 

Other Provisions. JCT estimates that the three other provi- sions in the bill would increase revenues by $0.2 billion over the 

2016–2025 period. The other provision with the largest effect would 

modify the tax credit for certain alternative fuels. 

Macroeconomic Feedback Effects 

JCT has separately provided a description of the macroeconomic 

feedback effects of the bill (see Joint Committee on Taxation, JCX– 

107–15). CBO has incorporated those effects into the estimates 

shown here. 

JCT estimates that the bill would increase the capital stock at 

the beginning of the budget period, increasing revenues by about 

$17 billion over the 2016–2025 period. At the same time, a small 

increase in interest rates from higher federal debt would increase 

the cost of federal debt service by about $7 billion over the 2016– 

2025 period. The net effect of the macroeconomic feedback would 

be to reduce deficits by about $10 billion over the 10-year period. 

Long-term impacts 

CBO and JCT estimate that enacting the legislation would not increase direct spending, revenues, or the deficit by at least $5 billion in any of the four consecutive 10-year periods beginning in 

2026. That estimate includes macroeconomic feedback. 

In the second and third decade after enactment, because the bill 

is expected to result in an increase in federal debt, JCT expects it 

to make private borrowing more expensive, thus slightly lowering 

the capital stock relative to present law and reducing economic 

growth and associated revenues relative to present law. The expected increase in debt generated by the proposal is quite small relative to the overall size of the economy; therefore the long-run effect is expected to be small. 

Pay-As-You-Go considerations: The Statutory Pay-As-You-Go Act 

of 2010 establishes budget-reporting and enforcement procedures 

for legislation affecting direct spending or revenues. The net 

changes in revenues and outlays that are subject to those pay-asyou-go procedures are shown in the following table and include 

macroeconomic feedback. Only on-budget changes to outlays or revenues are subject to pay-as-you-go procedures. 


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TABLE 3. CBO ESTIMATE OF PAY-AS-YOU-GO EFFECTS FOR THE TAX RELIEF EXTENSION ACT OF 2015, AS ORDERED REPORTED BY THE SENATE COMMITTEE ON 

FINANCE ON JULY 21, 2015 

By fiscal year, in millions of dollars 2015— 

2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2016-2020 2016-2025 

NET INCREASE OR DECREASE (¥) IN THE ON-BUDGET DEFICIT 

Statutory Pay-As-You-Go Effects ..................... 0 155,494 17,191 ¥35,118 ¥22,105 ¥15,217 ¥8,044 ¥2,878 ¥911 540 602 100,245 89,552 

Memorandum: 

Changes in Revenues ............................. 0 ¥153,347 ¥15,773 36,137 22,854 15,783 8,485 3,214 1,149 ¥393 ¥542 ¥94,345 ¥82,430 

Changes in Outlays ................................ 0 2,147 1,418 1,019 749 566 441 336 238 147 60 5,900 7,122 

Sources: Congressional Budget Office and staff of the Joint Committee on Taxation. 


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Intergovernmental and private-sector impact: JCT has determined that the bill contains no intergovernmental or private sector 

mandates as defined in UMRA. 

Estimate prepared by: Federal revenues: Pamela Greene and 

staff of the Joint Committee on Taxation; Federal spending: Matthew Pickford; Macroeconomic feedback: Staff of the Joint Committee on Taxation. 

Estimate approved by: Mark Booth, Unit Chief, Revenue Estimating. 

IV. VOTES OF THE COMMITTEE 

The Modification to the Chairman’s Mark was deemed incorporated into the Mark. 

Amendment #2, Grassley/Cantwell/Thune #2: Biodiesel Tax Incentive Reform Act—approved by voice vote. 

Amendment #68, Stabenow/Heller/Menendez/Isakson/Brown/ 

Casey/Cardin #4, as modified: Refinement to the Mortgage Forgiveness Tax Relief Act to Provide More Certainty to Struggling Homeowners—approved by voice vote. 

Final Passage of an Original Bill to Extend Certain Expiring Tax 

Provisions—approved by roll call vote of 23 ayes, 3 nays. 

Ayes: Hatch, Grassley, Crapo, Roberts, Cornyn (proxy), Thune 

(proxy), Burr, Isakson (proxy), Portman, Heller, Scott, Wyden, 

Schumer, Stabenow, Cantwell, Nelson (proxy), Menendez, Carper, 

Cardin, Brown (proxy), Bennet, Casey, Warner (proxy). 

Nays: Enzi, Toomey, Coats. 

V. REGULATORY IMPACT AND OTHER MATTERS 

A. REGULATORY IMPACT

Pursuant to paragraph 11(b) of Rule XXVI of the Standing Rules 

of the Senate, the Committee makes the following statement concerning the regulatory impact that might be incurred in carrying 

out the provisions of the bill as amended. 

Impact on individuals and businesses, personal privacy and paperwork 

The bill includes provisions to extend present-law tax benefits, 

expand eligibility for other benefits, and creates new tax incentives. 

The bill also includes provisions providing for the inflation indexing 

of section 179 expensing, permitting a qualified small business to 

elect to apply some or all of its research credit as does not exceed 

$250,000 against its employer OASDI liability rather than against 

its income tax liability, and expanding information reporting with 

respect to mortgages. 

The bill includes various other provisions that are not expected 

to impose additional administrative requirements or regulatory 

burdens on individuals or businesses. 

The provisions of the bill do not impact personal privacy. 

B. UNFUNDED MANDATES STATEMENT

This information is provided in accordance with section 423 of 

the Unfunded Mandates Reform Act of 1995 (Pub. L. No. 104–4). 


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355 A similar provision was included in H.R.3236, Surface Transportation and Veterans Health 

Care Choice Improvement Act of 2015, which was passed by the House of Representatives on 

July 29, 2015 and the Senate on July 30, 2015, and signed into law on July 31, 2015. 

The Committee has determined that the bill contains one private 

sector mandate: additional information on returns relating to mortgage interest.355 The costs required to comply with the Federal private sector mandate generally are no greater than the aggregate 

estimated budget effects of the provision. 

The Committee has determined that the bill does not impose a 

Federal intergovernmental mandate on State, local, or tribal governments. 

C. TAX COMPLEXITY ANALYSIS

Section 4022(b) of the Internal Revenue Service Restructuring 

and Reform Act of 1998 (the ‘‘IRS Reform Act’’) requires the staff 

of the Joint Committee on Taxation (in consultation with the Internal Revenue Service (‘‘IRS’’) and the Treasury Department) to provide a tax complexity analysis. The complexity analysis is required 

for all legislation reported by the Senate Committee on Finance, 

the House Committee on Ways and Means, or any committee of 

conference if the legislation includes a provision that directly or indirectly amends the Internal Revenue Code and has widespread applicability to individuals or small businesses. For each such provision identified by the staff of the Joint Committee on Taxation, a 

summary description of the provision is provided along with an estimate of the number and type of affected taxpayers, and a discussion regarding the relevant complexity and administrative issues. 

Following the analysis of the staff of the Joint Committee on 

Taxation are the comments of the IRS and Treasury regarding each 

of the provisions included in the complexity analysis. 

Extension of bonus depreciation 

Summary description of the provision 

The bill extends the 50-percent additional first-year depreciation 

deduction for two years, generally through 2016 (through 2017 for 

certain longer-lived and transportation property). 

The bill provides that solely for purposes of determining the percentage of completion under section 460(b)(1)(A), the cost of qualified property with a MACRS recovery period of 7 years or less 

which is placed in service before January 1, 2017 (January 1, 2018, 

in the case of certain longer-lived and transportation property) is 

taken into account as a cost allocated to the contract as if bonus 

depreciation had not been enacted. 

The bill also extends the election to increase the AMT credit limitation in lieu of bonus depreciation for two years to property placed 

in service before January 1, 2017 (January 1, 2018, in the case of 

certain longer-lived property and transportation property). A bonus 

depreciation amount, maximum amount, and maximum increase 

amount is computed separately with respect to property to which 

the extension of additional first-year depreciation applies (‘‘round 5 

extension property’’). 

Under the bill, a corporation that has an election in effect with 

respect to round 4 extension property to claim minimum tax credits 

in lieu of bonus depreciation is treated as having an election in efVerDate Sep 11 2014 05:21 Aug 08, 2015 Jkt 049010 PO 00000 Frm 00135 Fmt 6659 Sfmt 6602 E:\HR\OC\SR118.XXX SR118

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fect for round 5 extension property, unless the corporation elects 

otherwise. The bill also allows a corporation that does not have an 

election in effect with respect to round 4 extension property to elect 

to claim minimum tax credits in lieu of bonus depreciation for 

round 5 extension property. A separate bonus depreciation amount, 

maximum amount, and maximum increase amount is computed 

and applied to round 5 extension property. 

Number of affected taxpayers 

It is estimated that the provision will affect over 10 percent of 

small business tax returns. 

Discussion 

The reporting requirements are unchanged by this provision. 

Capital assets purchased during the tax year will still need to be 

reported on Form 4562, Depreciation and Amortization (Including 

Information on Listed Property); however, the current year tax deduction associated with such assets will increase. 

Extension and modification of increased expensing limitations and 

treatment of certain real property as section 179 property 

Summary description of the provision 

The bill provides that the maximum amount a taxpayer may expense, for taxable years beginning in 2015 and 2016, is $500,000 

of the cost of qualifying property placed in service for the taxable 

year. The $500,000 amount is reduced (but not below zero) by the 

amount by which the cost of qualifying property placed in service 

during the taxable year exceeds $2,000,000. The $500,000 and 

$2,000,000 amounts are indexed for inflation for taxable years beginning after 2014. 

In addition, the bill extends, for taxable years beginning in 2015 

and 2016, the treatment of off-the-shelf computer software as qualifying property. The bill also extends the treatment of qualified real 

property as eligible section 179 property for taxable years beginning in 2015 and 2016, including the limitation on carryovers and 

the maximum amount available with respect to qualified real property of $250,000 for each taxable year. For taxable years beginning 

in 2015 and 2016, the bill continues to allow a taxpayer to revoke 

an election, or any specification contained therein, made under section 179 without the consent of the Commissioner. 

Number of affected taxpayers 

It is estimated that the provision will affect over 10 percent of 

small business tax returns. 

Discussion 

While taxpayers purchasing section 179 property will still be required to complete and file Form 4562, Depreciation and Amortization (Including Information on Listed Property), significantly less 

detail is required to be included on such form. Accordingly, the 

compliance burden of many taxpayers will be reduced. 


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356 A similar provision was included in H.R. 3236, Surface Transportation and Veterans 

Health Care Choice Improvement Act of 2015, which was passed by the House of Representatives on July 29, 2015 and the Senate on July 30, 2015, and signed into law on July 31, 2015. 

Additional information on returns relating to mortgage interest 356

Summary description of the provision 

The bill expands information reporting with respect to an obligation secured by real property by requiring the following additional 

information to be included in information returns filed with the 

IRS and provided to the payor: (i) the amount of outstanding principal on the mortgage as of the beginning of the calendar year, (ii) 

the address of the property securing the mortgage, and (iii) the 

loan origination date. The provision applies to returns and statements due after December 31, 2016. 

Number of affected taxpayers 

It is estimated that the provision will affect over 10 percent of 

individual tax returns. 

Discussion 

The additional information reporting requirements imposed on 

those who, in the course of a trade or business, receive from any 

individual mortgage interest of $600 or more in a calendar year 

will result in additional information being provided to mortgage 

payors. The additional information received is not expected to result in additional complexity for individuals who receive the additional information. The additional information may make it easier 

for individuals who are payors of mortgage interest to identify deductible amounts with respect to each loan and each property that 

is mortgaged. For example, the additional information can assist 

taxpayers to distinguish among home mortgage, home equity, and 

investment interest payments with respect to mortgaged properties. Thus, these additional information reporting requirements 

could have a simplification benefit for individuals, rather than 

causing them additional complexity. 


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VI. CHANGES IN EXISTING LAW MADE BY THE BILL, AS 

REPORTED 

In the opinion of the Committee, it is necessary in order to expedite the business of the Senate, to dispense with the requirements 

of paragraph 12 of Rule XXVI of the Standing Rules of the Senate 

(relating to the showing of changes in existing law made by the bill 

as reported by the Committee). 

Æ 


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