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                                                       Calendar No. 366

113th Congress  }                                          {     Report
                                 SENATE
 2d Session     }                                          {    113-154
_______________________________________________________________________




 EXPIRING PROVISIONS IMPROVEMENT REFORM AND EFFICIENCY (EXPIRE) ACT OF 
                                  2014

                               __________

                              R E P O R T

                         [To accompany S. 2260]

 TO AMEND THE INTERNAL REVENUE CODE OF 1986 TO EXTEND CERTAIN EXPIRING 
                   PROVISIONS, AND FOR OTHER PURPOSES

                               __________

                          COMMITTEE ON FINANCE

                          UNITED STATES SENATE

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]


                 April 28, 2014.--Ordered to be printed

                                _____

                  U.S. GOVERNMENT PRINTING OFFICE

39-010                    WASHINGTON : 2014











                            C O N T E N T S

                              ----------                              
                                                                   Page
I. LEGISLATIVE BACKGROUND........................................     1
II. EXPLANATION OF THE BILL......................................     5
    A. Sense of the Senate (sec. 2 of the bill)..................     5
TITLE I--PROVISIONS EXPIRING IN 2013.............................     5
    A. Subtitle A--Individual Tax Extenders......................     5
        1. Health coverage tax credit (sec. 101 of the bill and 
          sec. 35 of the Code)...................................     5
        2. Extension of deduction for certain expenses of 
          elementary and secondary school teachers (sec. 102 of 
          the bill and sec. 62(a)(2)(D) of the Code).............     7
        3. Extension of exclusion from gross income of discharges 
          of acquisition indebtedness on principal residences 
          (sec. 103 of the bill and sec. 108 of the Code)........     8
        4. Parity for exclusion from income for employer-provided 
          mass transit and parking benefits (sec. 104 of the bill 
          and 132(f) of the Code)................................     9
        5. Extension of mortgage insurance premiums treated as 
          qualified residence interest (sec. 105 of the bill and 
          sec. 163 of the Code)..................................    12
        6. Extension of deduction of State and local general 
          sales taxes (sec. 106 of the bill and sec. 164 of the 
          Code)..................................................    13
        7. Extension of special rule for contributions of capital 
          gain real property made for conservation purposes (sec. 
          107 of the bill and sec. 170(b) of the Code)...........    15
        8. Deduction for qualified tuition and related expenses 
          (sec. 108 of the bill and sec. 222 of the Code)........    18
        9. Extension of tax-free distributions from individual 
          retirement plans for charitable purposes (sec. 109 of 
          the bill and sec. 408(d)(8) of the Code)...............    19
    B. Subtitle B--Business Tax Extenders........................    23
        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)...................................    23
        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)...........................................    29
        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).................    31
        4. Extension of Indian employment tax credit (sec. 114 of 
          the bill and sec. 45A of the Code).....................    32
        5. Extension and modification of new markets tax credit 
          (sec. 115 of the bill and sec. 45D of the Code)........    33
        6. Extension of railroad track maintenance credit (sec. 
          116 of the bill and sec. 45G of the Code)..............    36
        7. Extension of mine rescue team training credit (sec. 
          117 of the bill and sec. 45N of the Code)..............    37
        8. 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)..............................    38
        9. Extension and modification of work opportunity tax 
          credit (sec. 119 of the bill and secs. 51 and 52 of the 
          Code)..................................................    40
        10. Extension of qualified zone academy bonds (sec. 120 
          of the bill and secs. 54E and 6431 of the Code)........    46
        11. Extension of classification of certain race horses as 
          three-year property (sec. 121 of the bill and sec. 168 
          of the Code)...........................................    48
        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)..................................................    49
        13. Extension of seven-year recovery period for 
          motorsports entertainment complexes (sec. 123 of the 
          bill and sec. 168 of the Code).........................    52
        14. Extension of accelerated depreciation for business 
          property on an Indian reservation (sec. 124 of the bill 
          and sec. 168(j) of the Code)...........................    54
        15. Extension of bonus depreciation (sec. 125 of the bill 
          and sec. 168(k) of the Code)...........................    55
        16. Extension of enhanced charitable deduction for 
          contributions of food inventory (sec. 126 of the bill 
          and sec. 170 of the Code)..............................    60
        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)...........................................    62
        18. Extension of election to expense mine safety 
          equipment (sec. 128 of the bill and sec. 179E of the 
          Code)..................................................    65
        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).......................................    65
        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)..............................................    67
        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)..................    69
        22. Extension of treatment of certain dividends of 
          regulated investment companies (sec. 132 of the bill 
          and sec. 871(k) of the Code)...........................    70
        23. Extension of RIC qualified investment entity 
          treatment under FIRPTA (sec. 133 of the bill and secs. 
          897 and 1445 of the Code)..............................    71
        24. Extension of subpart F exception for active financing 
          income (sec. 134 of the bill and secs. 953 and 954 of 
          the Code)..............................................    72
        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)........................    75
        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).................................    76
        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)..................................................    77
        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).................................    78
        29. Extension of empowerment zone tax incentives (sec. 
          139 of the bill and secs. 1391 and 1397B of the Code)..    80
        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)..................................................    86
        31. Extension of American Samoa economic development 
          credit (sec. 141 of the bill and sec. 119 of Pub. L. 
          No. 109-432)...........................................    87
    C. Subtitle C--Energy Tax Extenders..........................    89
        1. Extension and modification of credit for nonbusiness 
          energy property (sec.151 of the bill and sec. 25C of 
          the Code)..............................................    89
        2. Extension of credit for 2-wheeled plug-in electric 
          vehicles (sec. 152 of the bill and sec. 30D of the 
          Code)..................................................    91
        3. Extension of second generation biofuel producer credit 
          (sec. 153 of the bill and sec. 40(b)(6) of the Code)...    92
        4. Extension of incentives for biodiesel and renewable 
          diesel (secs. 154 and 311(a) and (e) of the bill and 
          secs. 40A, 6426 and 6427(e) of the Code)...............    93
        5. Extension and modification of credit for the 
          production of Indian coal (sec. 155 of the bill and 
          sec. 45(e)(10) of the Code)............................    96
        6. Extension of credits with respect to facilities 
          producing energy from certain renewable resources (sec. 
          156 of the bill and secs. 45 and 48 of the Code).......    97
        7. Extension of credit for energy-efficient new homes 
          (sec. 157 of the bill and sec. 45L of the Code)........    98
        8. Extension of special allowance for second generation 
          biofuel plant property (sec. 158 of the bill and sec. 
          168(l) of the Code)....................................    99
        9. Extension and modification of energy efficient 
          commercial buildings deduction (sec. 159 of the bill 
          and sec. 179D of the Code).............................   101
        10. Extension of special rule for sales or dispositions 
          to implement FERC or State electric restructuring 
          policy for qualified electric utilities (sec. 160 of 
          the bill and sec. 451(i) of the Code)..................   103
        11. Extension of excise tax credits relating to certain 
          fuels (alternative fuel and alternative fuel mixtures 
          (including hydrogen)) (sec. 161 of the bill and sec. 
          6426 and 6427(e) of the Code)..........................   105
TITLE II--PROVISIONS EXPIRING IN 2014............................   107
    A. Subtitle A--Energy Tax Extenders..........................   107
        1. Extension of credit for new qualified fuel cell motor 
          vehicles (sec. 201 of the bill and sec. 30B of the 
          Code)..................................................   107
        2. Extension of alternative fuel vehicle refueling 
          property (sec. 202 of the bill and sec. 30C of the 
          Code)..................................................   108
    B. Subtitle B--Extenders Relating to Multiemployer Defined 
      Benefit Pension Plans......................................   109
        1. Multiemployer defined benefit plans (secs. 251-252 of 
          the bill and sec. 221(c) of the Pension Protection Act 
          of 2006, secs. 431-432 of the Code, and secs. 304-305 
          of ERISA)..............................................   109
TITLE III--REVENUE PROVISIONS....................................   116
        1. Penalty for failure to meet the due diligence 
          requirements for the child tax credit (sec. 301 of the 
          bill and sec. 6695 of the Code)........................   116
        2. 100 percent continuous levy authority on payments to 
          Medicare providers and suppliers (sec. 302 of the bill 
          and sec. 6331 of the Code).............................   118
        3. Exclusion from gross income of certain clean coal 
          power grants (sec. 303 of the bill)....................   120
        4. Reform of rules related to qualified tax collection 
          contracts, and special compliance personnel program 
          (secs. 304 and 305 of the bill and sec. 6306 and new 
          sec. 6307 of the Code).................................   121
        5. Exclusion of dividends from controlled foreign 
          corporations from the definition of personal holding 
          company income for purposes of the personal holding 
          company rules (sec. 306 of the bill and sec. 543 of the 
          Code)..................................................   124
        6. Inflation adjustment for certain civil penalties under 
          the Internal Revenue Code (sec. 307 of the bill and 
          secs. 6651, 6652(c), 6695, 6698, 6699, 6721, and 6722 
          of the Code)...........................................   126
III. BUDGET EFFECTS OF THE BILL..................................   127
    A. Committee Estimates.......................................   127
    B. Budget Authority and Tax Expenditures.....................   133
    C. Consultation with Congressional Budget Office.............   133
IV. VOTES OF THE COMMITTEE.......................................   133
V. REGULATORY IMPACT AND OTHER MATTERS...........................   134
    A. Regulatory Impact.........................................   134
    B. Unfunded Mandates Statement...............................   134
    C. Tax Complexity Analysis...................................   134
VI. CHANGES IN EXISTING LAW MADE BY THE BILL, AS REPORTED........   138




                                                       Calendar No. 366
113th Congress   }                                         {      Report
                                 SENATE
 2d Session      }                                         {    113-154

======================================================================
 
 EXPIRING PROVISIONS IMPROVEMENT REFORM AND EFFICIENCY (EXPIRE) ACT OF 
                                  2014

                                _______
                                

                 April 28, 2014.--Ordered to be printed

                                _______
                                

               Mr. Wyden, from the Committee on Finance, 
                        submitted the following

                              R E P O R T

                         [To accompany S. 2260]

    The Committee on Finance, having considered an original 
bill, S. 2260, to amend the Internal Revenue Code of 1986 to 
extend certain expiring provisions, and for other purposes, 
having considered the same, reports favorably thereon and 
recommends that the bill do pass.

                       I. LEGISLATIVE BACKGROUND

    The Committee on Finance, having considered S. ___, the 
``Expiring Provisions Improvement Reform and Efficiency 
(EXPIRE) Act of 2014,'' to amend the Internal Revenue Code of 
1986 to extend certain expiring provisions for the last time 
and provide taxpayers two years of certainty about their tax 
bills while building a bridge to tax reform, reports favorably 
thereon and recommends that the bill do pass.

Background and need for legislative action

    In the late 1970s and early 1980s, Congress began the 
practice of enacting temporary tax incentives, either because 
they were unproven and it was appropriate to establish a 
schedule to review their effectiveness, or because the 
incentives were intended only to provide a ``jump start'' for a 
new industry. For example, in 1981, Congress first enacted the 
research and development tax credit and set it to expire at the 
end of 1985. Similarly, in 1978, Congress created credits for 
the installation of residential renewable energy equipment set 
to expire at the end of 1985.
    As time went on, the practice of enacting temporary tax 
provisions became more common. Under budgetary ``scorekeeping'' 
conventions, temporary provisions lost less revenue than 
permanent provisions. As a result, temporary provisions became 
an attractive way to enact changes to the tax laws while 
masquerading the actual revenue loss of the change. The number 
of expiring provisions that had to be extended rose 
dramatically. After the Tax Reform Act of 1986 was enacted, 
there were 14 tax provisions that were scheduled to expire. By 
2012, there were 142. As a result, the Committees on Finance 
and Ways and Means have devoted an increasing share of their 
time and attention to legislation extending most or all of the 
expired and expiring provisions.
    Along with the growth of the number of extenders the 
understanding of the adverse impact of temporary provisions has 
also grown. There are at least three perceived problems. First, 
the extension of tax provisions for short periods creates 
uncertainty because taxpayers cannot plan their affairs with a 
clear understanding of whether relevant tax provisions will be 
maintained. Second, the consideration of extenders bills had 
become an ``all-or-nothing'' process, with the extenders being 
considered as a single package, effectively foreclosing any 
analysis of the individual provisions' effectiveness or whether 
they merit continuation. Third, the multi-decade practice of 
renewing these provisions for short periods, often without 
offsets, implies permanent policy while masking the prohibitive 
cost of permanence. Making the provisions that expired in 2013 
or are schedule to expire over the next decade permanent is 
projected to cost nearly $1 trillion though 2024.\1\
---------------------------------------------------------------------------
    \1\Congressional Budget Office, ``The Budget and Economic Outlook 
2014 to 2024,'' Table 1-5.
---------------------------------------------------------------------------
    Something had to change.--In 2012, faced with many expired 
or soon to expire provisions there was a strong member 
consensus that each extender should be reviewed with some level 
of individual attention rather than extended as a single 
package. To this end, in 2011-12, the Finance and Ways and 
Means Committees each held hearings to review the expired and 
expiring provisions. In speeches Chairmen Baucus and Camp each 
said that extenders should be reviewed based on the merits. On 
August 2, 2012, the Committee on Finance favorably reported an 
extenders bill that actually allowed a number of provisions to 
expire. A similar set of provisions was later enacted in Titles 
II, III, and IV of the American Taxpayer Relief Act of 2012.
    The need for tax reform spurred the Finance Committee to 
hold an extensive series of hearings from 2010 through 2012. 
The Finance Committee also published tax reform options papers 
in spring and summer of 2013. The Majority Staff published 
several tax reform discussion drafts in the fall of 2013. On a 
parallel track, Chairman Camp of the House Ways and Means 
Committee released a comprehensive tax reform draft on February 
26, 2014. Finally, Chairman Wyden stated that based on the 
years he spent developing a bipartisan federal income tax 
reform plan, he believes the Senate can settle the extenders 
question on a bipartisan basis and then pursue tax reform.
    In early 2014, Finance Committee Members acknowledged that 
a bipartisan plan on comprehensive tax reform legislation would 
still take time to reach. In the meantime, temporary provisions 
of the tax law continue to expire, leaving jobs, innovation and 
research, and people's homes in limbo. Instead, Finance 
Committee members agreed on the need to deliver two years of 
tax certainty and predictability in support of businesses and 
job creation, veterans, families, homeowners, and students by 
favorably reporting an extenders bill. Chairman Wyden intended 
that this fifteenth congressional effort at renewing the 
extenders be the final one, saying that ``I want to be 
straightforward on one point--this will be the last tax 
extenders bill the committee takes up as long as I'm chairman. 
That's why the bill is called the EXPIRE Act. It is meant to 
expire.'' During the Committee's business meeting, several 
members of the Committee expressed similar views that the 
EXPIRE Act should be the last extenders bill.
    Overview.--The EXPIRE Act of 2014 is intended to be a 
bridge to tax reform. As a result, the focus is on temporarily 
extending provisions that enjoyed broad bipartisan support as-
is while improving other provisions that lawmakers felt had 
merit but required updating to continue functioning as 
productive economic incentives. The focus was decidedly not on 
reconsidering the merits of each individual temporary 
provision, a job that will be undertaken in comprehensive tax 
reform. The scope of the business meeting was limited to 
extending provisions in the tax code that expired in 2013 or 
will expire in 2014 through December 31, 2015, for a total of 
55 provisions.
    At the conclusion of the business meeting, with a majority 
and a quorum present, the Committee favorably reported the 
EXPIRE Act of 2014, as amended, by voice vote.
    Individuals and Families.--The EXPIRE Act of 2014 continues 
key provisions that provide tax relief to individuals and 
families. One such provision extends mortgage debt relief for 
families that have benefited from mortgage loan modifications 
by providing that any cancelled mortgage debt does not become 
includible in gross income. The EXPIRE Act of 2014 provides tax 
relief by extending the above-the-line deduction for qualified 
higher education expenses and the deduction for general state 
and local sales taxes. The EXPIRE Act also extends the above-
the-line deduction for teachers of up to $250 in qualified 
educational expenses. Finally, the bill extends the $250 
monthly exclusion for employer-provided transit and vanpool 
benefits, continuing important parity with the exclusion for 
employer-provided parking benefits and allows individuals to 
exclude up to $20 per month of expenses associated with the use 
of a bike-sharing program.
    Business Investment.--The EXPIRE Act of 2014 continues and 
expands tax incentives for research and experimentation to 
maintain U.S. global competitiveness, by extending the research 
and experimentation credit. The bill expands the R&E; credit to 
start-up businesses (companies less than five years old with 
less than $5 million in gross receipts) which will be able to 
claim up to $250,000 per year of the credit against their 
payroll tax liability (after first applying the credit to any 
income tax liability). The EXPIRE Act of 2014 allows the R&E; 
credit to count against AMT liability. Recognizing that 
continued business investment will help sustain the economic 
recovery, the bill extends the higher section 179 small 
business expensing limit and phase-out threshold ($500,000 and 
$2 million respectively) and indexes these amounts to inflation 
beginning in 2014. The bill also extends the first-year 50 
percent bonus depreciation to qualified property and the placed 
in service dates. Finally, the EXPIRE Act of 2014 extends the 
look-through treatment of payments between related controlled 
foreign corporations.
    Community Investment.--The EXPIRE Act of 2014 continues and 
modifies provisions designed to help certain communities and 
workers. For example, the Act extends the Health Coverage Tax 
Credit, which helps cover the cost of health care for 
dislocated individuals eligible for trade adjustment assistance 
or who are over 55 and receive pension benefits from the 
Pension Benefit Guaranty Corporation. The bill extends the Work 
Opportunity Tax Credit, which provides a wage credit to 
employers that hire veterans and recipients of Temporary 
Assistance for Needy Families, and expands the credit to 
individuals who have exhausted their 26 weeks of regular 
unemployment benefits. The employer wage credit for active 
military reservists, which helps defray the cost of wages paid 
to employees on active duty, is expanded to allow all 
businesses regardless of size to claim the credit, and the 
credit is boosted from 20% to 100% of up to $20,000 of 
differential pay. The EXPIRE Act of 2014 extends the Qualified 
Zone Academy Bond program that helps certain school districts 
finance the modernization of public school facilities, and 
increases the tax credit bond's potential utilization by 
reducing the private sector match requirement that has limited 
bond issuance. The bill extends Empowerment Zones, which offer 
an array of tax incentives to businesses to hire and invest in 
economically distressed communities. The bill adds a new 
category of allocations to the New Markets Tax Credit for 
manufacturing investments in communities that have experienced 
a major job loss event. Finally, a modification to the Low-
Income Housing Tax Credit Program establishes a 4% minimum 
credit rate for the acquisition of existing housing that is not 
federally subsidized.
    Energy Efficiency and Investment.--The EXPIRE Act of 2014 
extends, improves and expands a dozen tax incentives that 
promote energy efficiency or the production and use of 
renewable or alternative energy. The goals of these provisions 
are to make the current incentives more effective, maintain 
renewable and alternative energy jobs, and further the U.S. 
global competitive position in the development of renewable and 
alternative energy technology. In particular, the bill extends 
the section 45 and 48 incentives for energy property used in 
the production of wind and other renewable sources of 
electricity. The bill modifies the section 179D deduction for 
energy efficient commercial building property, raising the 
qualifying efficiency standards and allowing tribal governments 
and non-profits to allocate the deduction to designers. The 
bill amends and expands the credit for energy efficient 
improvements to existing homes. The Act also extends incentives 
that promote the use of alternative fuels. The EXPIRE Act of 
2014 does not extend the section 45M credit for energy 
efficiency appliances as well as the placed-in-service date for 
partial expensing of certain refinery property.
    Offsets.--Revenue-raising provisions were included to fully 
offset modifications that increased the revenue loss of 
provisions relative to current policy. Such provisions include 
requiring the Secretary of the Treasury to employ third-party 
tax collectors to aid in tax collection, increasing levy 
authority on payments to Medicare providers with delinquent tax 
debts, and applying paid preparer Earned Income Tax Credit due 
diligence requirements to the child tax credit.

                      II. EXPLANATION OF THE BILL


                         A. Sense of the Senate


                          (Sec. 2 of the bill)

    The bill expresses the sense of the Senate that a process 
of comprehensive tax reform should commence in the 114th 
Congress and conclude before January 1, 2016; that Congress 
should endeavor, as part of such a tax reform process, to 
eliminate temporary provisions from the Internal Revenue Code 
of 1986 by making permanent those provisions that merit 
permanency and allowing others to expire; that a major focus of 
such tax reform process should be fostering economic growth and 
lowering tax rates by broadening the tax base; and that the 
Chairman and Ranking Member of the Committee on Finance of the 
Senate should consult with the Chairman and Ranking Member of 
the Committee on the Budget of the Senate to ensure that the 
appropriate baseline is used in determining the economic 
effects of, and rate adjustments under, tax reform.

                  TITLE I--PROVISIONS EXPIRING IN 2013


                A. Subtitle A--Individual Tax Extenders


1. Health coverage tax credit (sec. 101 of the bill and sec. 35 of the 
                                 Code)


                              PRESENT LAW

    In the case of an eligible individual, a refundable tax 
credit is provided for 72.5 percent of the individual's 
premiums for qualified health insurance of the individual and 
qualifying family members for each eligible coverage month 
beginning in the taxable year.\2\ The credit is commonly 
referred to as the health coverage tax credit (``HCTC''). The 
credit is available only with respect to amounts paid by the 
individual for the qualified health insurance.
---------------------------------------------------------------------------
    \2\Qualifying family members are the individual's spouse and any 
dependent for whom the individual is entitled to claim a dependency 
exemption. Any individual who has certain specified coverage is not a 
qualifying family member.
---------------------------------------------------------------------------
    Eligibility for the credit is determined on a monthly 
basis. In general, an eligible coverage month is any month if 
(1) the month begins before January 1, 2014, and (2) as of the 
first day of the month, the individual is an eligible 
individual, is covered by qualified health insurance, the 
premium for which is paid by the individual, does not have 
other specified coverage, and is not imprisoned under Federal, 
State, or local authority. In the case of a joint return, the 
eligibility requirements are met if at least one spouse 
satisfies the requirements.
    An eligible individual is an individual who is (1) an 
eligible Trade Adjustment Assistance (``TAA'') recipient, (2) 
an eligible alternative TAA recipient, or (3) an eligible 
Pension Benefit Guaranty Corporation (``PBGC'') pension 
recipient. In general, an individual is an eligible TAA 
recipient for a month if the individual (1) receives for any 
day of the month a trade readjustment allowance under the Trade 
Act of 1974 or would be eligible to receive such an allowance 
but for the requirement that the individual exhaust 
unemployment benefits before being eligible to receive an 
allowance and (2) with respect to such allowance, is covered 
under a required certification. An individual is an eligible 
alternative TAA recipient for a month if the individual 
participates in a certain program under the Trade Act of 1974 
and receives a related benefit for the month. Generally, an 
individual is an eligible PBGC pension recipient for any month 
if the individual (1) is age 55 or over as of the first day of 
the month and (2) receives a benefit for the month, any portion 
of which is paid by the PBGC. A person who may be claimed as a 
dependent on another person's tax return is not an eligible 
individual. In addition, an otherwise eligible individual is 
not eligible for the credit for a month if, as of the first day 
of the month, the individual has certain specified coverage, 
such as certain employer-provided coverage or coverage under 
certain governmental health programs.
    The credit is available on an advance payment basis by 
means of payments by the Department of the Treasury 
(``Treasury'') once a qualified health insurance costs credit 
eligibility certificate is in effect.\3\ In some cases, 
Treasury may also make retroactive payments on behalf of a 
certified individual for qualified health insurance coverage 
for eligible coverage months occurring before the first month 
for which an advance payment is otherwise made on behalf of the 
individual.
---------------------------------------------------------------------------
    \3\Sec. 7527.
---------------------------------------------------------------------------

                           REASONS FOR CHANGE

    The HCTC has played an important role in enabling 
individuals who receive a trade adjustment allowance, or whose 
pension is paid by the PBGC, to purchase health insurance 
coverage. The Committee wishes to continue providing this 
assistance to such individuals.

                        EXPLANATION OF PROVISION

    The provision amends the definition of eligible coverage 
month for HCTC purposes to include months beginning before 
January 1, 2016 (rather than only months beginning before 
January 1, 2014 under present law), if the requirements for an 
eligible coverage month are otherwise met.

                             EFFECTIVE DATE

    The provision is effective for coverage months beginning 
after December 31, 2013.

   2. Extension of deduction for certain expenses of elementary and 
secondary school teachers (sec. 102 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. For taxable years beginning 
after 2012, 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 
above-the-line deduction. Specifically, for taxable years 
beginning prior to January 1, 2014, 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.\4\ 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), 529(c)(1) (relating to 
qualified tuition programs), and section 530(d)(2) (relating to 
Coverdell education savings accounts).
---------------------------------------------------------------------------
    \4\Sec. 62(a)(2)(D).
---------------------------------------------------------------------------
    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, 2013.

                           REASONS FOR CHANGE

    The Committee recognizes that many elementary and secondary 
school teachers provide substantial classroom resources at 
their own expense, and believe 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.

                        EXPLANATION OF PROVISION

    The provision extends the deduction for eligible educator 
expenses for two years, through December 31, 2015.

                             EFFECTIVE DATE

    The provision applies to taxable years beginning after 
December 31, 2013.

     3. Extension of exclusion from gross income of discharges of 
acquisition indebtedness on principal residences (sec. 103 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 (secs. 61(a)(12) 
and 108).\5\ 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.
---------------------------------------------------------------------------
    \5\A debt cancellation which constitutes a gift or bequest is not 
treated as income to the donee debtor (sec. 102).
---------------------------------------------------------------------------
    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 
(sec. 1017).
    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 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 of the Code.
    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 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, 2014.

                           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.

                        EXPLANATION OF PROVISION

    The provision extends for two additional years (through 
December 31, 2015) the exclusion from gross income for 
discharges of qualified principal residence indebtedness.

                             EFFECTIVE DATE

    The provision applies to discharges of indebtedness on or 
after January 1, 2014.

4. Parity for exclusion from income for employer-provided mass transit 
   and parking benefits (sec. 104 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.\6\ 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, 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.
---------------------------------------------------------------------------
    \6\Secs. 132(a)(5) and (f), 3121(a)(20), 3231(e)(5), 3306(b)(16) 
and 3401(a)(19).
---------------------------------------------------------------------------

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 2014, the limits are $130 and $250, respectively. Effective 
for months beginning on or after February 17, 2009,\7\ and 
before January 1, 2014, 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.
---------------------------------------------------------------------------
    \7\Parity was originally provided 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.
---------------------------------------------------------------------------
    Effective January 1, 2014, 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.

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 
employer-provided parking benefits for two years through 
December 31, 2015. Thus, for 2014, 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.
    In order for the extension to be effective retroactive to 
January 1, 2014, expenses incurred for months beginning after 
December 31, 2013, 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, 2013, and before 
enactment of the provision. Further, the Committee intends that 
reimbursements for expenses incurred for months beginning after 
December 31, 2013, and before enactment 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 2014 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 
only applies to reimbursement for taxable years beginning 
before January 1, 2016.

                             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, 2013. The provision related to qualified 
bicycle commuting reimbursements is effective for taxable years 
beginning after December 31, 2013.

   5. Extension of mortgage insurance premiums treated as qualified 
   residence interest (sec. 105 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.\8\
---------------------------------------------------------------------------
    \8\Sec. 163(h).
---------------------------------------------------------------------------

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.

Private 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 deductible. The amount allowable as a 
deduction is phased out ratably by 10 percent for each $1,000 
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 
$110,000 ($55,000 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, 
2013, 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 
present-law 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 2014 and 2015 (and not 
properly allocable to any period after 2015).

                             EFFECTIVE DATE

    The provision applies to amounts paid or accrued after 
December 31, 2013.

6. Extension of deduction for State and local general sales taxes (sec. 
               106 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 2014, 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.\9\ 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.
---------------------------------------------------------------------------
    \9\Sec. 164(b)(5)(B).
---------------------------------------------------------------------------
    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.

                           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 2015.

                             EFFECTIVE DATE

    The provision applies to taxable years beginning after 
December 31, 2013.

  7. Extension of special rule for contributions of capital gain real 
property made for conservation purposes (sec. 107 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.\10\
---------------------------------------------------------------------------
    \10\Secs. 170, 2055, and 2522, respectively.
---------------------------------------------------------------------------
    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.

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.\11\ 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.
---------------------------------------------------------------------------
    \11\Secs. 170(f)(3)(B)(iii) and 170(h).
---------------------------------------------------------------------------
    Qualified conservation contributions of capital gain 
property are subject to the same limitations and carryover 
rules as other charitable contributions of capital gain 
property.

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

            In general
    Under a temporary provision\12\ 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.
---------------------------------------------------------------------------
    \12\Sec. 170(b)(1)(E).
---------------------------------------------------------------------------
    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 non-conservation 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.\13\
---------------------------------------------------------------------------
    \13\Sec. 170(b)(2)(B).
---------------------------------------------------------------------------
    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 specific 
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, 2013.\14\
---------------------------------------------------------------------------
    \14\Secs. 170(b)(1)(E)(vi) and 170(b)(2)(B)(iii).
---------------------------------------------------------------------------

                           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 additional 
years, i.e., for contributions made in taxable years beginning 
before January 1, 2016.

                             EFFECTIVE DATE

    The provision is effective for contributions made in 
taxable years beginning after December 31, 2013.

 8. Deduction for qualified tuition and related expenses (sec. 108 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.\15\ 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.\16\ 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 available for tuition and 
related expenses paid for elementary or secondary education.
---------------------------------------------------------------------------
    \15\Sec. 222.
    \16\The 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.
---------------------------------------------------------------------------
    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, 2013.
    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,\17\ 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.\18\ 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.
---------------------------------------------------------------------------
    \17\Secs. 222(d)(1) and 25A(g)(2).
    \18\Sec. 222(c). These reductions are the same as those that apply 
to the Hope and Lifetime Learning credits.
---------------------------------------------------------------------------

                           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 2015.

                             EFFECTIVE DATE

    The provision applies to taxable years beginning after 
December 31, 2013.

9. Extension of tax-free distributions from individual retirement plans 
for charitable purposes (sec. 109 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;\19\ and (3) a Federal, 
State, or local governmental entity, but only if the 
contribution is made for exclusively public purposes.\20\ The 
deduction also is allowed for purposes of calculating 
alternative minimum taxable income.
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    \19\Secs. 170(c)(3)-(5).
    \20\Sec. 170(c)(1).
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    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.\21\
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    \21\Secs. 170(b) and (e).
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    A taxpayer who takes the standard deduction (i.e., who does 
not itemize deductions) may not take a separate deduction for 
charitable contributions.\22\
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    \22\Sec. 170(a).
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    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.\23\ 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 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.\24\
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    \23\Sec. 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).
    \24\Sec. 6115.
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    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.\25\ 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.\26\ For such interests, a charitable deduction is 
allowed to the extent of the present value of the interest 
designated for a charitable organization.
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    \25\Secs. 170(f), 2055(e)(2), and 2522(c)(2).
    \26\Sec. 170(f)(2).
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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 59-\1/2\ 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, 
including 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 70-
\1/2\.\27\
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    \27\Minimum distribution rules also apply in the case of 
distributions after the death of a traditional or Roth IRA owner.
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    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 remaining 
nondeductible contributions to the 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 the value of the 
contract, income on the contract, and investment in the 
contract 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;\28\ (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.
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    \28\Conversion contributions refer to conversions of amounts in a 
traditional IRA to a Roth IRA.
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    Distributions from an IRA (other than a Roth IRA) are 
generally subject to withholding unless the individual elects 
not to have withholding apply.\29\ Elections not to have 
withholding apply are to be made in the time and manner 
prescribed by the Secretary.
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    \29\Sec. 3405.
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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.\30\ The exclusion 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.
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    \30\Sec. 408(d)(8). The exclusion does not apply to distributions 
from employer-sponsored retirement plans, including SIMPLE IRAs and 
simplified employee pensions (``SEPs'').
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    A qualified charitable distribution is any distribution 
from an IRA directly by the IRA trustee to an organization 
described in section 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 70-\1/2\ 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, 2013.

                           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 
additional years, i.e., for distributions made in taxable years 
beginning before January 1, 2016.

                             EFFECTIVE DATE

    The provision is effective for distributions made in 
taxable years beginning after December 31, 2013.

                 B. Subtitle 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.\31\ Thus, the research 
credit is generally available with respect to incremental 
increases in qualified research. An alternative simplified 
research credit (with a 14 percent rate and a different base 
amount) may be claimed in lieu of this credit.\32\
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    \31\Sec. 41(a)(1).
    \32\Sec. 41(c)(5).
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    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.\33\ This separate 
credit computation commonly is referred to as the basic 
research credit.\34\
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    \33\Sec. 41(a)(2). The base period for the basic research credit 
generally extends from 1981 through 1983.
    \34\Sec. 41(e).
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    Finally, a research credit is available for a taxpayer's 
expenditures on research undertaken by an energy research 
consortium.\35\ 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.
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    \35\Sec. 41(a)(3).
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    The research credit, including the basic research credit 
and the energy research credit, expires for amounts paid or 
incurred after December 31, 2013.\36\
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    \36\Sec. 41(h).
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            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. In general, 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 apply to all other taxpayers (so called start-up 
firms).\37\ In computing the research credit, a taxpayer's base 
amount cannot be less than 50 percent of its current-year 
qualified research expenses.
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    \37\The 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).
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            Alternative simplified credit
    The alternative simplified research 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.\38\ The rate is reduced to six percent 
if a taxpayer has no qualified research expenses in any one of 
the three preceding taxable years.\39\ An election to use the 
alternative simplified credit applies to all succeeding taxable 
years unless revoked with the consent of the Secretary.\40\
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    \38\Sec. 41(c)(5)(A).
    \39\Sec. 41(c)(5)(B).
    \40\Sec. 41(c)(5)(C).
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            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).\41\ 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.
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    \41\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).
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    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.\42\ In addition, research does not qualify for the 
credit if: (1) conducted after the beginning of commercial 
production of the business component; (2) related 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).\43\
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    \42\Sec. 41(d)(3).
    \43\Sec. 41(d)(4).
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            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.\44\ Taxpayers may alternatively elect to claim a reduced 
research tax credit amount under section 41 in lieu of reducing 
deductions otherwise allowed.\45\
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    \44\Sec. 280C(c).
    \45\Sec. 280C(c)(3).
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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.\46\ 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 ($117,000 for 2014); and (2) the 
Medicare or hospital insurance (``HI'') tax equal to 1.45 
percent of all covered wages.\47\ The employee portion of the 
FICA tax generally must be withheld and remitted to the Federal 
government by the employer.
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    \46\Secs. 3101-3128.
    \47\Beginning 2013, 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.
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    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.

General business credit

    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\48\ 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\49\ as exceeds $25,000.\50\ Any general business 
credit in excess of this limitation may be carried back one 
year and forward up to 20 years.\51\ 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.\52\
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    \48\The term ``net income tax'' means the sum of the regular tax 
liability and the tax imposed by section 55, reduced by the credits 
allowable under subparts A and B of this part. Sec. 38(c)(1).
    \49\The term ``net regular tax liability'' means the regular tax 
liability reduced by the sum of credits allowable under subparts A and 
B of this part. Sec. 38(c)(1).
    \50\Sec. 38(c)(1).
    \51\Sec. 39(a)(1).
    \52\See sec. 55(b).
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    In applying the tax liability limitation to certain credits 
(``specified credits'') that are part of the general business 
credit, the tentative minimum tax is treated as being zero.\53\ 
Thus, specified credits may offset both regular tax and 
alternative minimum tax (``AMT'') liabilities.
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    \53\See section 38(c)(4)(B) for the list of specified credits, 
which does not presently include the research credit determined under 
section 41.
---------------------------------------------------------------------------
    Eligible small businesses for 2010 were allowed to offset 
both regular tax and AMT liabilities with their eligible small 
business credits.\54\ For this purpose, eligible small business 
credits were defined as the sum of the general business credits 
determined for the taxable year with respect to an eligible 
small business.\55\ An eligible small business was, with 
respect to any taxable year, a corporation, the stock of which 
was not publicly traded, or a partnership, which met the gross 
receipts test of section 448(c), substituting $50 million for 
$5 million each place it appears.\56\ In the case of a sole 
proprietorship, the gross receipts test was applied as if it 
were a corporation. 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.\57\
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    \54\Sec. 38(c)(5).
    \55\Sec. 38(c)(5)(B).
    \56\Sec. 38(c)(5)(C).
    \57\Sec. 38(c)(5)(D).
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                           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 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.\58\
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    \58\See secs. 38 and 39. For example, assume a taxpayer is subject 
to AMT of $100,000 and regular tax of $80,000, and calculates a 
research credit of $90,000 for the taxable year at issue (assuming no 
other general business credits). Under present law, the taxpayer's 
research credit would be 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). As a result, the taxpayer would owe $100,000 
of tax and carry back or forward its $90,000 research credit, as 
applicable.
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                        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, 2016.

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.\59\ 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\60\ 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.
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    \59\The credit does not apply against its employer HI liability or 
against the employee's FICA taxes the employer is required to withhold 
and remit to the government.
    \60\For this purpose, gross receipts are determined under the rules 
of section 448(c)(3), without regard to subparagraph (A) thereof.
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    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).
    For purposes of this provision, all members of the same 
controlled group or group under common control are treated as a 
single taxpayer.\61\ The $250,000 amount is allocated among the 
members in proportion to each member's expenses on which the 
research credit is based. Each member may separately elect the 
payroll tax credit, but not in excess of its allocated dollar 
amount.
---------------------------------------------------------------------------
    \61\For this purpose, all persons or entities treated as a single 
taxpayer under section 41(f)(1) are treated as a single person for 
purposes of this section.
---------------------------------------------------------------------------
    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.\62\ 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.
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    \62\In the case of a qualified small business that is a 
partnership, the return required to be filed under section 6031. In the 
case of a qualified small business that is an S corporation, the return 
required to be filed under section 6037. In the case of any other 
qualified small business, the return of tax for the taxable year.
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            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.
            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.

General business credit

    In the case of an eligible small business (as defined in 
the provision relating to eligible small business credits for 
2010), the research credit determined under section 41 for 
taxable years beginning after December 31, 2013 is a specified 
credit. Thus, these research credits of an eligible small 
business may offset both regular tax and AMT liabilities.\63\
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    \63\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 $33,250 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.
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                             EFFECTIVE DATE

    The provision to extend the research credit for two years 
is effective for amounts paid or incurred after December 31, 
2013. The provision to allow the research credit against FICA 
taxes is effective for credits determined for taxable years 
beginning after December 31, 2013. 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, 2013, 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.
    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 9 percent for newly constructed non-Federally 
subsidized buildings placed in service after July 30, 2008, and 
before January 1, 2014.

                           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 9 percent for newly constructed non-Federally 
subsidized buildings with respect to which credit allocations 
are made before January 1, 2016. The provision also establishes 
a 4-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 4-percent minimum credit rate. The 4-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, 2016.

                             EFFECTIVE DATE

    The provision is effective on January 1, 2014.

 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, 2014

    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, 2014

    Under the 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, 2014, 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 
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, 2014, or qualified 
buildings placed in service after July 30, 2008, and before 
January 1, 2014, to the extent a credit allocation was not 
required with respect to such qualified building by reason of 
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 
after July 30, 2008, and before January 1, 2014.

                           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, 2015).

                             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.\64\ 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.
---------------------------------------------------------------------------
    \64\Sec. 45A.
---------------------------------------------------------------------------
    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\65\ or section 4(10) of the Indian Child Welfare 
Act of 1978.\66\ 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).
---------------------------------------------------------------------------
    \65\Pub. L. No. 93-262.
    \66\Pub. L. No. 95-608.
---------------------------------------------------------------------------
    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 adjusted for inflation is 
$45,000 for 2013). 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 that begin on or before December 31, 2013.

                           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 
employment credit provision (through taxable years beginning on 
or before December 31, 2015).

                             EFFECTIVE DATE

    The provision is effective for taxable years beginning 
after December 31, 2013.

 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'').\67\ 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.\68\ 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 the taxable year.\69\ 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.\70\
---------------------------------------------------------------------------
    \67\Section 45D was added by section 121(a) of the Community 
Renewal Tax Relief Act of 2000, Pub. L. No. 106-554.
    \68\Sec. 45D(a)(2).
    \69\Sec. 45D(a)(3).
    \70\Sec. 45D(g).
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    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.\71\ 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.\350\ 
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.\72\
---------------------------------------------------------------------------
    \71\Sec. 45D(c).
    \72\Sec. 45D(d).
---------------------------------------------------------------------------
    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.\73\ 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.
---------------------------------------------------------------------------
    \73\Sec. 45D(e).
---------------------------------------------------------------------------
    The Secretary is authorized to designate ``targeted 
populations'' as low-income communities for purposes of the new 
markets tax credit.\74\ 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\75\ (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--80 percent of the 
area median family income, or 80 percent of the statewide non-
metropolitan area median family income.\76\ 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.
---------------------------------------------------------------------------
    \74\Sec. 45D(e)(2).
    \75\Pub. L. No. 103-325.
    \76\Pub. L. No. 103-325.
---------------------------------------------------------------------------
    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 low-income 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.\77\
---------------------------------------------------------------------------
    \77\Sec. 45D(d)(2).
---------------------------------------------------------------------------
    The maximum annual amount of qualified equity investments 
was $3.5 billion for calendar years 2010, 2011, 2012, and 2013. 
The new markets tax credit expired on December 31, 2013. No 
amount of unused allocation limitation may be carried to any 
calendar year after 2018.

                           REASONS FOR CHANGE

    The Committee believes that the new markets tax credit has 
proved 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 providing for an allocation 
for certain areas impacted by declines in manufacturing would 
spur manufacturing investment to help create jobs and replace 
jobs that those communities lost.

                        EXPLANATION OF PROVISION

    The provision extends the new markets tax credit for two 
years, through 2015, permitting up to $3.5 billion in qualified 
equity investments for each of the 2014 and 2015 calendar 
years. The provision also extends for two years, through 2020, 
the carryover period for unused new markets tax credits.
    The provision also modifies the new markets tax credit to 
include allocations for certain areas impacted by declines in 
manufacturing. The provision allows unallocated amounts of the 
new markets tax credit to be carried forward after December 31, 
2018, but only if such amounts are made available for qualified 
community development entities a significant mission of which 
is providing investments and services to persons in the trade 
or business of manufacturing products in communities which have 
suffered major manufacturing job losses or a major 
manufacturing job loss event, as designated by the Secretary.

                             EFFECTIVE DATE

    The provision applies to calendar years beginning after 
December 31, 2013.

6. Extension 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, 2014.\78\ 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.\79\ 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.\80\ 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.\81\
---------------------------------------------------------------------------
    \78\Secs. 45G(a) and (f).
    \79\Sec. 45G(b)(1).
    \80\Sec. 38(c)(4).
    \81\Sec. 45G(e)(3).
---------------------------------------------------------------------------
    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).\82\
---------------------------------------------------------------------------
    \82\Sec. 45G(d).
---------------------------------------------------------------------------
    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.\83\
---------------------------------------------------------------------------
    \83\Sec. 45G(c).
---------------------------------------------------------------------------
    The terms Class II or Class III railroad have the meanings 
given by the Surface Transportation Board.\84\
---------------------------------------------------------------------------
    \84\Sec. 45G(e)(1).
---------------------------------------------------------------------------

                           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.

                        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 before January 1, 2016.

                             EFFECTIVE DATE

    The provision is effective for expenditures paid or 
incurred in taxable years beginning after December 31, 2013.

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.\85\ 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.\86\
---------------------------------------------------------------------------
    \85\Sec. 45N(a).
    \86\Sec. 45N(b).
---------------------------------------------------------------------------
    An eligible employer is any taxpayer which employs 
individuals as miners in underground mines in the United 
States.\87\ The term ``wages'' has the meaning given to such 
term by section 3306(b)\88\ (determined without regard to any 
dollar limitation contained in that section).\89\
---------------------------------------------------------------------------
    \87\Sec. 45N(c).
    \88\Section 3306(b) defines wages for purposes of Federal 
Unemployment Tax.
    \89\Sec. 45N(d).
---------------------------------------------------------------------------
    No deduction is allowed for the portion of the expenses 
otherwise deductible that is equal to the amount of the 
credit.\90\ The credit does not apply to taxable years 
beginning after December 31, 2013.\91\ Additionally, the credit 
is not allowable for purposes of computing the alternative 
minimum tax.\92\
---------------------------------------------------------------------------
    \90\Sec. 280C(e).
    \91\Sec. 45N(e).
    \92\Sec. 38(c).
---------------------------------------------------------------------------

                           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.

                        EXPLANATION OF PROVISION

    The provision extends the credit for two years through 
taxable years beginning on or before December 31, 2015.

                             EFFECTIVE DATE

    The provision is effective for taxable years beginning 
after December 31, 2013.

 8. 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.\93\ 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.''
---------------------------------------------------------------------------
    \93\Sec. 162(a)(1).
---------------------------------------------------------------------------

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.\94\ 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.\95\
---------------------------------------------------------------------------
    \94\Sec. 414(b), (c), (m) and (o).
    \95\Chapter 43 of Title 38 of the United States Code deals with 
these rights.
---------------------------------------------------------------------------
    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.\96\ 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 the employer for the 91-
day period immediately preceding the period for which any 
differential wage payment is made.
---------------------------------------------------------------------------
    \96\Sec. 3401(h)(2).
---------------------------------------------------------------------------
    No deduction may be taken for that portion of compensation 
that is equal to the credit.\97\ 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, and regulated investment 
companies, real estate investment trusts and certain 
cooperatives apply also to the differential wage payment 
credit.\98\
---------------------------------------------------------------------------
    \97\Sec. 280C(a).
    \98\Sec. 52(c), (d), (e).
---------------------------------------------------------------------------
    The credit is available with respect to amounts paid after 
June 17, 2008,\99\ and before January 1, 2014.
---------------------------------------------------------------------------
    \99\The 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.
---------------------------------------------------------------------------

                           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 to amounts paid before 
January 1, 2016.
    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, 
2013.

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 (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''),\100\ 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.\101\ 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.\102\
---------------------------------------------------------------------------
    \100\Pub. L. No. 112-56 (Nov. 21, 2011).
    \101\For 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.
    \102\The 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.
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    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 service connected 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 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 a 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.
            (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.

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 sec. 
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 first-year 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 second-year 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 first-year wages 
plus 50 percent of the first $10,000 of qualified second-year 
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.
    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 benefit 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, 
2013.

                           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 (through taxable years beginning on 
or before December 31, 2015). 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, 2013.

10. Extension 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.\103\ 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.\104\ 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.
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    \103\Sec. 103.
    \104\Sec. 149(e).
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    The tax exemption for State and local bonds does not apply 
to any arbitrage bond.\105\ 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.\106\ 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.
---------------------------------------------------------------------------
    \105\Sec. 103(a) and (b)(2).
    \106\Sec. 148.
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Qualified zone academy bonds

    As an alternative to traditional tax-exempt bonds, States 
and local governments were given the authority to issue 
``qualified zone academy bonds.''\107\ 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 and 2013. Each 
calendar years bond limitation is allocated to the States 
according to their respective populations of individuals below 
the poverty line. Each State, in turn, allocates the credit 
authority to qualified zone academies within such State.
---------------------------------------------------------------------------
    \107\See secs. 54E and 1397E.
---------------------------------------------------------------------------
    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.\108\ The Treasury Department sets 
the credit rate at a rate estimated to allow issuance of 
qualified zone academy bonds without discount and without 
interest cost to the issuer.\109\ 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.
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    \108\Sec. 54A.
    \109\Given 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.
---------------------------------------------------------------------------
    ``Qualified zone academy bonds'' are defined as any bond 
issued by a State or local government, provided that (1) at 
least 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 of the Code, 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''). The Code provides that section 6431 is not available 
for qualified zone academy bond allocations from the 2011 
national limitation or any carry forward of the 2011 
allocation.\110\
---------------------------------------------------------------------------
    \110\Sec. 6431(f)(3)(A)(iii). A technical correction may be needed 
to conform the Code to provide that section 6431 is not available for 
any allocations from national limitation or carryforward for years 2011 
and thereafter.
---------------------------------------------------------------------------

                           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 additional years. The provision authorizes 
issuance of up to $400 million of qualified zone academy bonds 
per year for 2014 and 2015. The option to issue direct-pay 
bonds is not available for the 2014 and 2015 bond limitation.
    The provision makes two additional changes with respect to 
qualified zone academy bonds. First, the provision makes a 
technical correction to conform the Code to Congressional 
intent that qualified zone academy bonds cannot be issued as 
direct-pay bonds using national limitation allocations or 
carryforwards from years after 2010. Second, the provision 
reduces the private business contribution requirement from 10 
percent to five percent.

                             EFFECTIVE DATE

    The provision generally applies to obligations issued after 
December 31, 2013. The technical correction is effective as if 
included in section 310 of American Taxpayer Relief Act of 
2012.

 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.\111\ Tangible property generally is depreciated 
under the modified accelerated cost recovery system 
(``MACRS''), which determines depreciation by applying specific 
recovery periods,\112\ placed-in-service conventions, and 
depreciation methods to the cost of various types of 
depreciable property.\113\ 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, 
2014\114\ and (2) that is placed in service after December 31, 
2013 and that is more than two years old at such time it is 
placed in service by the purchaser.\115\
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    \111\See secs. 263(a) and 167.
    \112\The 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.
    \113\Sec. 168.
    \114\Sec. 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).
    \115\Sec. 168(e)(3)(A)(i)(II). A horse is more than 2 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.
---------------------------------------------------------------------------

                           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) before January 1, 
2016.

                             EFFECTIVE DATE

    The provision applies to property placed in service after 
December 31, 2013.

  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.\116\ 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.
---------------------------------------------------------------------------
    \116\Sec. 168.
---------------------------------------------------------------------------

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, 2014. Qualified leasehold 
improvement property is any improvement to an interior portion 
of a building that is nonresidential real property, provided 
certain requirements are met.\117\ The improvement must be made 
under or pursuant to a lease either by the lessee (or 
sublessee), or by the lessor, of that portion of the building 
to be occupied exclusively by the lessee (or sublessee). 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.\118\ 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.\119\ An exception to the rule applies in the case 
of death and certain transfers of property that qualify for 
non-recognition treatment.\120\
---------------------------------------------------------------------------
    \117\Sec. 168(e)(6).
    \118\Secs. 168(e)(6) and (k)(3).
    \119\Sec. 168(e)(6)(A).
    \120\Sec. 168(e)(6)(B).
---------------------------------------------------------------------------
    Qualified leasehold improvement property is generally 
recovered using the straight-line method and a half-year 
convention.\121\ Qualified leasehold improvement property 
placed in service after December 31, 2013 is subject to the 
general rules described above.
---------------------------------------------------------------------------
    \121\Secs.168(b)(3)(G) and 168(d).
---------------------------------------------------------------------------

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, 2014. 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.\122\ 
Qualified restaurant property is recovered using the straight-
line method and a half-year convention.\123\ Additionally, 
qualified restaurant property is not eligible for bonus 
depreciation.\124\ Qualified restaurant property placed in 
service after December 31, 2013 is subject to the general rules 
described above.
---------------------------------------------------------------------------
    \122\Sec. 168(e)(7).
    \123\Secs. 168(b)(3)(H) and 168(d).
    \124\Sec. 168(e)(7)(B). Property that satisfies the definition of 
both qualified leasehold improvement property and qualified restaurant 
property is eligible for bonus depreciation. Sec. 3.03(3) of Rev. Proc. 
2011-26, 2011-16 I.R.B. 664, 2011.
---------------------------------------------------------------------------

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, 2014. 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\125\ 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.\126\ 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.\127\ In the case of 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.\128\
---------------------------------------------------------------------------
    \125\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.
    \126\Sec. 168(e)(8).
    \127\Sec. 168(e)(8)(C).
    \128\Sec. 168(e)(8)(B).
---------------------------------------------------------------------------
    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.\129\ 
Additionally, qualified retail improvement property is not 
eligible for bonus depreciation.\130\ Qualified retail 
improvement property placed in service after December 31, 2013 
is subject to the general rules described above.
---------------------------------------------------------------------------
    \129\Secs. 168(b)(3)(I) and 168(d).
    \130\Sec. 168(e)(8)(D). Property that satisfies the definition of 
both qualified leasehold improvement property and qualified retail 
improvement property is eligible for bonus depreciation. Sec. 3.03(3) 
of Rev. Proc. 2011-26, 2011-16 I.R.B. 664, 2011.
---------------------------------------------------------------------------

                           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, 2013, 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 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, 
2016.

                             EFFECTIVE DATE

    The provision is effective for property placed in service 
after December 31, 2013.

      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.\131\ Tangible property generally is depreciated 
under the modified accelerated cost recovery system 
(``MACRS''), which determines depreciation by applying specific 
recovery periods,\132\ placed-in-service conventions, and 
depreciation methods to the cost of various types of 
depreciable property.\133\ The cost of nonresidential real 
property is recovered using the straight-line method of 
depreciation and a recovery period of 39 years.\134\ 
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.\135\ 
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.\136\ Land improvements (such as roads and fences) 
are recovered using the 150-percent declining balance method 
and a recovery period of 15 years.\137\ An exception exists for 
the theme and amusement park industry, whose assets are 
assigned a recovery period of seven years.\138\ Additionally, a 
motorsports entertainment complex placed in service on or 
before December 31, 2013 is assigned a recovery period of seven 
years.\139\ 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.\140\ 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).
---------------------------------------------------------------------------
    \131\See secs. 263(a) and 167.
    \132\The 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.
    \133\Sec. 168.
    \134\Secs. 168(b)(3)(A) and 168(c).
    \135\Secs. 168(d)(2)(A) and (d)(4)(B).
    \136\Secs. 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. Secs. 168(d)(3) and (d)(4)(C).
    \137\Sec. 168(b)(2)(A) and asset class 00.3 of Rev. Proc. 87-56, 
1987-2 C.B. 674, 1987. 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 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. Secs. 168(b)(2) and (b)(1)(B).
    \138\Asset class 80.0 of Rev. Proc. 87-56, 1987-2 C.B. 674, 1987.
    \139\Sec. 168(e)(3)(C)(ii).
    \140\Sec. 168(i)(15).
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                           REASONS FOR CHANGE

    The Committee believes that extending the depreciation 
incentive 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, 
2015.

                             EFFECTIVE DATE

    The provision is effective for property placed in service 
after December 31, 2013.

 14. Extension 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\141\
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    \141\Section 168(j)(2) does not provide shorter recovery periods 
for water utility property, residential rental property, or railroad 
grading and tunnel bores.
---------------------------------------------------------------------------
    ``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 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;\142\ 
and (4) is not property placed in service for purposes of 
conducting gaming activities.\143\ 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).\144\
---------------------------------------------------------------------------
    \142\For these purposes, related persons is defined in section 
465(b)(3)(C).
    \143\Sec. 168(j)(4)(A).
    \144\Sec. 168(j)(4)(C).
---------------------------------------------------------------------------
    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))\145\ or section 4(10) of the Indian Child Welfare Act 
of 1978 (25 U.S.C. 1903(10)).\146\ 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).\147\
---------------------------------------------------------------------------
    \145\Pub. L. No. 93-262.
    \146\Pub. L. No. 95-608.
    \147\Sec. 168(j)(6).
---------------------------------------------------------------------------
    The depreciation deduction allowed for regular tax purposes 
is also allowed for purposes of the alternative minimum 
tax.\148\ The accelerated depreciation for qualified Indian 
reservation property is available with respect to property 
placed in service on or before December 31, 2013.\149\
---------------------------------------------------------------------------
    \148\Sec. 168(j)(3).
    \149\Sec. 168(j)(8).
---------------------------------------------------------------------------

                           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.

                        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, 2015.

                             EFFECTIVE DATE

    The provision is effective for property placed in service 
after December 31, 2013.

  15. Extension of bonus depreciation (sec. 125 of the bill and sec. 
                          168(k) of the Code)


                              PRESENT LAW

    An additional first-year depreciation deduction is allowed 
equal to 50 percent of the adjusted basis of qualified property 
placed in service acquired after December 31, 2007 and placed 
in service either before September 9, 2010 or after December 
31, 2011 and before January 1, 2014 (January 1, 2015 for 
certain longer-lived and transportation property).\150\ An 
additional first-year depreciation deduction is allowed equal 
to 100 percent of the adjusted basis of qualified property if 
it meets the requirements for the additional first-year 
depreciation and also meets the following requirements.\151\ 
First, the taxpayer must acquire the property after September 
8, 2010 and before January 1, 2012 (January 1, 2013 for certain 
longer-lived and transportation property).\152\ Second, the 
taxpayer must place the property in service after September 8, 
2010 and before January 1, 2012 (January 1, 2013 in the case of 
certain longer-lived and transportation property). Third, the 
original use of the property must commence with the taxpayer 
after September 8, 2010.\153\
---------------------------------------------------------------------------
    \150\Sec. 168(k). The additional first-year depreciation deduction 
is subject to the general rules regarding whether an item must be 
capitalized under section 263A.
    \151\Sec. 168(k)(5).
    \152\For a definition of ``acquire'' for this purpose, see section 
3.02(1)(a) of Rev. Proc. 2011-26, 2011-16 I.R.B. 664, 2011.
    \153\See sec. 3.02(1) of Rev. Proc. 2011-26, 2011-16 I.R.B. 664, 
2011.
---------------------------------------------------------------------------
    The additional first-year depreciation deduction is allowed 
for both regular tax and alternative minimum tax purposes,\154\ 
but is not allowed for purposes of computing earnings and 
profits.\155\ 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.\156\ In addition, there are no 
adjustments 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.\157\ The amount of the additional first-year 
depreciation deduction is not affected by a short taxable 
year.\158\ The taxpayer may elect out of additional first-year 
depreciation for any class of property for any taxable 
year.\159\
---------------------------------------------------------------------------
    \154\Sec. 168(k)(2)(G).
    \155\Treas. Reg. sec. 1.168(k)-1(f)(7).
    \156\Sec. 168(k)(1)(B).
    \157\Treas. Reg. sec. 1.168(k)-1(d).
    \158\Ibid.
    \159\Sec. 168(k)(2)(D)(iii).
---------------------------------------------------------------------------
    The interaction of the additional first-year depreciation 
allowance with the otherwise applicable depreciation allowance 
may be illustrated as follows. Assume that in 2013, a taxpayer 
purchased new depreciable property and placed it in 
service.\160\ The property's cost is $1,000, and it is five-
year property subject to the half-year convention. The amount 
of additional first-year depreciation allowed is $500. The 
remaining $500 of the cost of the property is depreciable under 
the rules applicable to five-year property. Thus, 20 percent, 
or $100, also is allowed as a depreciation deduction in 
2013.\161\ The total depreciation deduction with respect to the 
property for 2013 is $600. The remaining $400 adjusted basis of 
the property generally is recovered through otherwise 
applicable depreciation rules.
---------------------------------------------------------------------------
    \160\Assume that the cost of the property is not eligible for 
expensing under section 179.
    \161\This simplified example ignores the applicable convention 
(e.g., half-year).
---------------------------------------------------------------------------
    Property qualifying for the additional first-year 
depreciation deduction must meet all of the following 
requirements. First, the property must be (1) property to which 
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)).\162\ Second, the 
original use\163\ of the property must commence with the 
taxpayer after December 31, 2007.\164\ 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, 2014. An extension of the placed-in-
service date of one year (i.e., before January 1, 2015) is 
provided for certain property with a recovery period of 10 
years or longer and certain transportation property.\165\
---------------------------------------------------------------------------
    \162\The 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).
    \163\The 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).
    \164\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).
    \165\Property qualifying for the extended placed-in-service date 
must have an estimated production 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.
---------------------------------------------------------------------------
    To qualify, property must be acquired (1) after December 
31, 2007, and before January 1, 2014, but only if no binding 
written contract for the acquisition is in effect before 
January 1, 2008, or (2) pursuant to a binding written contract 
which was entered into after December 31, 2007, and before 
January 1, 2014.\166\ 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 after December 31, 
2007, and before January 1, 2014.\167\ 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.\168\ For property eligible for the extended placed-
in-service date, a special rule limits the amount of costs 
eligible for the additional first-year depreciation. With 
respect to such property, only the portion of the basis that is 
properly attributable to the costs incurred before January 1, 
2014 (``progress expenditures'') is eligible for the additional 
first-year depreciation deduction.\169\
---------------------------------------------------------------------------
    \166\Property does not fail to qualify for the additional first-
year depreciation merely because a binding written contract to acquire 
a component of the property is in effect prior to January 1, 2008.
    \167\Sec. 168(k)(2)(E)(i).
    \168\Treas. Reg. sec. 1.168(k)-1(b)(4)(iii).
    \169\Sec. 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.
---------------------------------------------------------------------------
    Property does not qualify for the additional first-year 
depreciation deduction when the user of such property (or a 
related party) would not have been eligible for the additional 
first-year depreciation deduction if the user (or a related 
party) were treated as the owner.\170\ For example, if a 
taxpayer sells to a related party property that was under 
construction prior to January 1, 2008, the property does not 
qualify for the additional first-year depreciation deduction. 
Similarly, if a taxpayer sells to a related party property that 
was subject to a binding written contract prior to January 1, 
2008, the property does not qualify for the additional first-
year depreciation deduction. As a further example, if a 
taxpayer (the lessee) sells property in a sale-leaseback 
arrangement, and the property otherwise would not have 
qualified for the additional first-year depreciation deduction 
if it were owned by the taxpayer-lessee, then the lessor is not 
entitled to the additional first-year depreciation deduction.
---------------------------------------------------------------------------
    \170\Sec. 168(k)(2)(E)(iv).
---------------------------------------------------------------------------
    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).\171\ The 
$8,000 increase is not indexed for inflation.
---------------------------------------------------------------------------
    \171\Sec. 168(k)(2)(F).
---------------------------------------------------------------------------

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. 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 is taken into account as a 
cost allocated to the contract as if bonus depreciation had not 
been enacted for property placed in service (1) after December 
31, 2009 and before January 1, 2011 (January 1, 2012 in the 
case of certain longer-lived and transportation property) or 
(2) after December 31, 2012 and before January 1, 2014 (January 
1, 2015 in the case of certain longer-lived and transportation 
property).\172\ Bonus depreciation generally is taken into 
account in determining taxable income under the percentage-of-
completion method for property placed in service after December 
31, 2010 and before January 1, 2013.
---------------------------------------------------------------------------
    \172\Sec. 460(c)(6).
---------------------------------------------------------------------------

Election to accelerate minimum tax credit in lieu of claiming bonus 
        depreciation

    A corporation otherwise eligible for additional first year 
depreciation under section 168(k) may elect to claim additional 
minimum tax credits in lieu of claiming depreciation under 
section 168(k) for ``eligible qualified property'' placed in 
service after December 31, 2010 and before January 1, 2014 
(January 1, 2015 in the case of certain longer-lived and 
transportation property).\173\ A corporation making the 
election increases the limitation under section 53(c) on the 
use of minimum tax credits in lieu of taking bonus depreciation 
deductions.\174\ The increases in the allowable credits under 
this provision are treated as refundable.\175\ The depreciation 
for eligible qualified property is calculated for both regular 
tax and alternative minimum tax purposes using the straight-
line method in place of the method that would otherwise be used 
absent the election under this provision.\176\
---------------------------------------------------------------------------
    \173\Sec. 168(k)(4). Eligible qualified property means qualified 
property eligible for bonus depreciation with minor effective date 
differences.
    \174\Sec. 168(k)(4)(B)(ii).
    \175\Sec. 168(k)(4)(F).
    \176\Sec. 168(k)(4)(A).
---------------------------------------------------------------------------
    The minimum tax credit limitation is increased by the bonus 
depreciation amount, which is equal to 20 percent of bonus 
depreciation\177\ for certain eligible qualified property that 
could be claimed as a deduction absent an election under this 
provision.
---------------------------------------------------------------------------
    \177\For this purpose, bonus depreciation is the difference between 
(i) the aggregate amount of depreciation for all eligible qualified 
property determined if section 168(k)(1) applied using the most 
accelerated depreciation method (determined without regard to this 
provision), and the shortest life allowable for each property, and (ii) 
the amount of depreciation that would be determined if section 
168(k)(1) did not apply using the same method and life for each 
property. Sec. 168(k)(4)(C).
---------------------------------------------------------------------------
    The bonus depreciation amount is limited to the lesser of 
(1) $30 million or (2) six-percent of the minimum tax credits 
allocable to the adjusted minimum tax imposed for, taxable 
years beginning before January 1, 2006.\178\ 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.\179\
---------------------------------------------------------------------------
    \178\Sec. 168(k)(4)(C)(iii).
    \179\Sec. 168(k)(4)(C)(iv).
---------------------------------------------------------------------------
    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, 
section 168(k)(1) does not apply to any eligible qualified 
property and the straight-line method is used with respect to 
such property.\180\
---------------------------------------------------------------------------
    \180\Sec. 168(k)(4)(G)(ii).
---------------------------------------------------------------------------
    Generally an election under this provision for a taxable 
year applies to subsequent taxable years.\181\
---------------------------------------------------------------------------
    \181\Special election rules apply as the result of prior extensions 
of this provision. See secs. 168(k)(4)(H), (I) and (J).
---------------------------------------------------------------------------

                           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 2015 
(through 2016 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 7 years or less which is placed in service 
after December 31, 2012 and before January 1, 2016 (January 1, 
2017, 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, 2016 (January 
1, 2017, 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 4 extension 
property'').\182\
---------------------------------------------------------------------------
    \182\An election with respect to round 4 extension property is 
binding for all property that is eligible qualified property solely by 
reason of the extension of the 50-percent additional first-year 
depreciation deduction.
---------------------------------------------------------------------------
    Under the provision, a corporation that has an election in 
effect with respect to round 3 extension property to claim 
minimum tax credits in lieu of bonus depreciation is treated as 
having an election in effect for round 4 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 3 extension property to elect to claim 
minimum tax credits in lieu of bonus depreciation for round 4 
extension property. A separate bonus depreciation amount, 
maximum amount, and maximum increase amount is computed and 
applied to round 4 extension property.\183\
---------------------------------------------------------------------------
    \183\In computing the maximum amount, the maximum increase amount 
for round 4 extension property is reduced by bonus depreciation amounts 
for preceding taxable years only with respect to round 4 extension 
property.
---------------------------------------------------------------------------
    The provision also includes a technical correction with 
respect to the taxable year for which an election under section 
168(k)(4) is made.

                             EFFECTIVE DATE

    Except as noted below, the provision is effective for 
property placed in service after December 31, 2013, in taxable 
years ending after such date.
    The technical correction to section 168(k)(4) is effective 
as if originally included in section 331 of the American 
Taxpayer Relief Act of 2012.\184\
---------------------------------------------------------------------------
    \184\Pub. L. No. 112-240.
---------------------------------------------------------------------------

  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.\185\
---------------------------------------------------------------------------
    \185\Sec. 170.
---------------------------------------------------------------------------
    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.\186\ In general, a C corporation's charitable 
contribution deductions for a year may not exceed 10 percent of 
the corporation's taxable income.\187\ 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.\188\ 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.\189\
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    \186\Sec. 170(e)(3).
    \187\Sec. 170(b)(2).
    \188\Sec. 170(e)(3)(A)(i)-(iii).
    \189\Sec. 170(e)(3)(A)(iv).
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    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 value of the property or the donor's basis with respect 
to the inventory.\190\
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    \190\Treas. Reg. sec. 1.170A-4A(c)(3).
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    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.\191\
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    \191\Lucky 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).
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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.\192\ 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.\193\
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    \192\Sec. 170(e)(3)(C).
    \193\The 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.
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    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, 2013.

                           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 it is appropriate to extend the special 
rule for charitable contributions of food inventory for two 
years.

                        EXPLANATION OF PROVISION

    The provision extends the expansion of, and modifications 
to, the enhanced deduction for charitable contributions of food 
inventory to contributions made before January 1, 2016.

                             EFFECTIVE DATE

    The provision is effective for contributions made after 
December 31, 2013.

 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.\194\ For taxable years beginning in 2013, the 
maximum amount a taxpayer may expense is $500,000 of the cost 
of qualifying property placed in service for the taxable 
year.\195\ 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.\196\ 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.\197\ For taxable years 
beginning before 2014, 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).\198\ 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.\199\
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    \194\Additional section 179 incentives have been provided with 
respect to qualified property meeting applicable requirements that is 
used by a business in an enterprise zone (sec. 1397A), a renewal 
community (sec. 1400J), the New York Liberty Zone (sec. 1400L(f)), or 
the Gulf Opportunity Zone (sec. 1400N(e)). In addition, section 179(e) 
provides for an enhanced section 179 deduction for qualified disaster 
assistance property.
    \195\For the years 2003 through 2006, the relevant dollar amount is 
$100,000 (indexed for inflation); in 2007, the dollar limitation is 
$125,000; for the 2008 and 2009 years, the relevant dollar amount is 
$250,000; and for 2010, 2011, and 2012, the relevant dollar limitation 
is $500,000. Sec. 179(b)(1).
    \196\For the years 2003 through 2006, the relevant dollar amount is 
$400,000 (indexed for inflation); in 2007, the dollar limitation is 
$500,000; for the 2008 and 2009 years, the relevant dollar amount is 
$800,000; and for 2010, 2011, and 2012, the relevant dollar limitation 
is $2,000,000. Sec. 179(b)(2).
    \197\Qualifying property does not include any property described in 
section 50(b), air conditioning units, or heating units. Sec. 
179(d)(1). Passenger 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).
    \198\Secs. 179(d)(1)(A)(ii) and (f).
    \199\Sec. 179(f)(3).
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    For taxable years beginning in 2014 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 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 off-the-
shelf computer software or qualified real property) 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).\200\ 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.\201\ Thus, if a 
taxpayer's section 179 deduction for 2012 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 2013. Any such carryover amounts that are not used in 
2013 are treated as property placed in service in 2013 for 
purposes of computing depreciation. That is, the unused 
carryover amount from 2012 is considered placed in service on 
the first day of the 2013 taxable year.\202\
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    \200\Sec. 179(b)(3).
    \201\Section 179(f)(4) details the special rules that apply to 
disallowed amounts.
    \202\For example, assume that during 2012, 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 2012, and has a taxable income 
limitation of $150,000. The maximum section 179 deduction the company 
can claim for 2012 is $150,000, which is allocated pro rata between the 
properties, such that the carryover to 2013 is allocated $100,000 to 
the qualified leasehold improvements and $50,000 to the equipment.
    Assume further that in 2013, the company had no asset purchases and 
had no taxable income. The $100,000 carryover from 2012 attributable to 
qualified leasehold improvements is treated as placed in service as of 
the first day of the company's 2013 taxable year. The $50,000 carryover 
allocated to equipment is carried over to 2013 under section 
179(b)(3)(B).
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    No general business credit under section 38 is allowed with 
respect to any amount for which a deduction is allowed under 
section 179.\203\ 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.\204\
---------------------------------------------------------------------------
    \203\Sec. 179(d)(9).
    \204\Sec. 312(k)(3)(B).
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    An expensing election is made under rules prescribed by the 
Secretary.\205\ 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 2014.\206\
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    \205\Sec. 179(c)(1).
    \206\Sec. 179(c)(2).
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                           REASONS FOR CHANGE

    The Committee believes that section 179 expensing provides 
two important benefits for small businesses. First, it lowers 
the cost of 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 2014 and 2015, 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 2013.
    In addition, the provision extends, for taxable years 
beginning in 2014 and 2015, 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 2014 and 
2015, 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 
2014 and 2015, the provision continues to permit a taxpayer to 
amend or irrevocably revoke an election for a taxable year 
under section 179 without the consent of the Commissioner.

                             EFFECTIVE DATE

    The provision applies to taxable years beginning after 
December 31, 2013.

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 taxable year in which the equipment is placed in 
service.\207\ ``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, 2014.\208\
---------------------------------------------------------------------------
    \207\Sec. 179E(a).
    \208\Secs. 179E(c) and (g).
---------------------------------------------------------------------------
    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.\209\
---------------------------------------------------------------------------
    \209\Sec. 179E(d).
---------------------------------------------------------------------------

                           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, 
2015) 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, 2013.

     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\210\ to deduct the 
cost of any qualifying film and television production, 
commencing prior to January 1, 2014, in the year the 
expenditure is incurred in lieu of capitalizing the cost and 
recovering it through depreciation allowances.\211\ A taxpayer 
may elect to deduct up to $15 million of the aggregate cost of 
the film or television production under this section.\212\ The 
threshold is increased to $20 million if a significant 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.\213\
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    \210\See Treas. Reg. section 1.181-2 for rules on making an 
election under this section.
    \211\For this purpose, a production is treated as commencing on the 
first date of principal photography.
    \212\Sec. 181(a)(2)(A).
    \213\Sec. 181(a)(2)(B).
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    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.\214\ The term 
``compensation'' does not include participations and residuals 
(as defined in section 167(g)(7)(B)).\215\ 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.\216\ Qualified productions do not include sexually 
explicit productions as referenced by section 2257 of title 18 
of the U.S. Code.\217\ It also generally does not include live 
theatrical productions.
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    \214\Sec. 181(d)(3)(A).
    \215\Sec. 181(d)(3)(B).
    \216\Sec. 181(d)(2)(B).
    \217\Sec. 181(d)(2)(C).
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    For purposes of recapture under section 1245, any deduction 
allowed under section 181 is treated as if it were a deduction 
allowable for amortization.\218\
---------------------------------------------------------------------------
    \218\Sec. 1245(a)(2)(C).
---------------------------------------------------------------------------

                           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, 2016.
    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. 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. In general, in the case of multiple live staged 
productions, each such live-staged production is treated as a 
separate production.

                             EFFECTIVE DATE

    The provision applies to productions commencing after 
December 31, 2013. 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\219\ 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\220\ 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 construction 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.
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    \219\Qualifying production property generally includes any tangible 
personal property, computer software, and sound recordings.
    \220\Qualified 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.
---------------------------------------------------------------------------
    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.\221\ 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.\222\
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    \221\For 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.
    \222\Section 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.
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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.\223\ 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.\224\ 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.\225\
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    \223\Sec. 7701(a)(9).
    \224\Sec. 199(d)(8)(A).
    \225\Sec. 199(d)(8)(B).
---------------------------------------------------------------------------
    The special rules for Puerto Rico apply only with respect 
to the first eight taxable years of a taxpayer beginning after 
December 31, 2005 and before January 1, 2014.

                           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.

                        EXPLANATION OF PROVISION

    The provision extends the special domestic production 
activities rules for Puerto Rico to apply for the first ten 
taxable years of a taxpayer beginning after December 31, 2005 
and before January 1, 2016.

                             EFFECTIVE DATE

    The provision is effective for taxable years beginning 
after December 31, 2013.

 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.\226\ In 
general, interest, rents, royalties, and annuities are excluded 
from the unrelated business income of tax-exempt 
organizations.\227\
---------------------------------------------------------------------------
    \226\Sec. 511.
    \227\Sec. 512(b).
---------------------------------------------------------------------------
    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).\228\ 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, 2013.
---------------------------------------------------------------------------
    \228\Sec. 512(b)(13)(E).
---------------------------------------------------------------------------

                           REASONS FOR CHANGE

    The Committee believes that, for certain qualifying 
payments of rent, royalties, annuities, or interest by a 
controlled subsidiary to its exempt parent, it is appropriate 
to include in the parent's unrelated business taxable income 
only the portion of such payment that exceeds the amount that 
would have been paid in an arm's-length 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, 2016. 
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, 2013.

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 dividend 
as exempt from gross-basis 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 relating 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, 2013.\229\
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    \229\Secs. 871(k), 881(e), 1441(c)(12), 1441(a), and 1442.
---------------------------------------------------------------------------

                           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, 2016.

                             EFFECTIVE DATE

    The provision applies to dividends paid with respect to any 
taxable year of a RIC beginning after December 31, 2013.

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 one-year period ending on the date of 
distribution.\230\ Special rules apply to situations involving 
tiers of qualified investment entities.
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    \230\Sections 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).
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    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, 2013.\231\
---------------------------------------------------------------------------
    \231\Section 897(h).
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                           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, 2015, for those situations in which 
that inclusion would otherwise have expired after December 31, 
2013.

                             EFFECTIVE DATE

    The provision is generally effective on January 1, 2014.
    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, 2013 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,\232\ 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).
---------------------------------------------------------------------------
    \232\Secs. 951-964.
---------------------------------------------------------------------------
    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 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.\233\
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    \233\Prop. Treas. Reg. sec. 1.953-1(a).
---------------------------------------------------------------------------
    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 (so-called ``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 both maintains its 
principal office and conducts substantial business activity. A 
coordination rule provides that this exception generally 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.

                           REASONS FOR CHANGE

    The Committee believes that it is appropriate to extend the 
temporary provisions 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, 2016) 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, 2013, and for taxable 
years of U.S. shareholders with or within which such taxable 
years of such foreign corporations end.

   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\234\ 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.
---------------------------------------------------------------------------
    \234\Secs. 951-964.
---------------------------------------------------------------------------
    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, 2014, and to taxable years of U.S. shareholders with 
or within which such taxable years of foreign corporations end.

                           REASONS FOR CHANGE

    The Committee believes that it is appropriate to extend the 
look-thru rule for two years to help U.S. companies with 
overseas operations compete more effectively with foreign 
firms.

                        EXPLANATION OF PROVISION

    The provision extends for two years the application of the 
look-thru rule, to taxable years of foreign corporations 
beginning before January 1, 2016, 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, 2013, 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.\235\ 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.
---------------------------------------------------------------------------
    \235\Sec. 1202.
---------------------------------------------------------------------------
    The portion of the gain includible in taxable income is 
taxed at a maximum rate of 28 percent under the regular 
tax.\236\ Seven percent of the excluded gain is an alternative 
minimum tax preference.\237\
---------------------------------------------------------------------------
    \236\Sec. 1(h).
    \237\Sec. 57(a)(7).
---------------------------------------------------------------------------

Special rules for stock acquired after February 17, 2009, and before 
        January 1, 2014

    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, 2014, 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.

                           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.

                        EXPLANATION 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, 2016).

                             EFFECTIVE DATE

    The provision is effective for stock acquired after 
December 31, 2013.

  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.\238\ 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.\239\
---------------------------------------------------------------------------
    \238\Sec. 1366(a)(1)(A).
    \239\Sec. 1367(a)(2)(B).
---------------------------------------------------------------------------
    In the case of charitable contributions made in taxable 
years beginning before January 1, 2014, 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, 2013, 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 that applied to contributions 
made in certain taxable years beginning before January 1, 2014, 
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, 2016.

                             EFFECTIVE DATE

    The provision applies to charitable contributions made in 
taxable years beginning after December 31, 2013.

  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.\240\
---------------------------------------------------------------------------
    \240\Sec. 1366.
---------------------------------------------------------------------------
    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\241\ 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.\242\ 
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.\243\ 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.\244\
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    \241\Certain built-in income items are treated as recognized built-
in gain for this purpose. Sec. 1374(d)(5).
    \242\Sec. 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).
    \243\Sec. 1374(d)(2).
    \244\Treas. Reg. sec. 1.1374-4(h).
---------------------------------------------------------------------------
    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.\245\ 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.\246\
---------------------------------------------------------------------------
    \245\Sec. 1374(d)(8).
    \246\Sec. 1374(d)(8)(B).
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    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.\247\
---------------------------------------------------------------------------
    \247\Sec. 1366(f)(2). Shareholders continue to take into account 
all items of gain and loss under section 1366.
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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.\248\ 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.
---------------------------------------------------------------------------
    \248\Sec. 1374(d)(7)(B).
---------------------------------------------------------------------------
    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.\249\ 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.
---------------------------------------------------------------------------
    \249\Sec. 1374(d)(7)(C).
---------------------------------------------------------------------------

Special rules for 2012 and 2013

    For taxable years beginning in 2012 and 2013, the term 
``recognition period'' in section 1374, for purposes of 
determining the net recognized built-in gain, is applied by 
substituting a five-year 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 or 2013 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. Thus, for example, built-in gain recognized 
in a taxable year beginning in 2013, from a disposition in that 
year that occurs beyond the end of the temporary 5-year 
recognition period, will not be carried forward under the 
income limitation rule and treated as recognized built-in gain 
in the taxable year beginning in 2014 (after the temporary 
provision has expired and the recognition period is again 10 
years).\250\
---------------------------------------------------------------------------
    \250\Sec. 1374(d)(2)(B).
---------------------------------------------------------------------------
    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. Thus, for example, if an S corporation sold a built-in 
gain asset in 2008 in a sale occurring before or during the 
recognition period in effect at that time, and reported the 
gain using the installment method under section 453, gain 
recognized under that method in 2012 or 2013 (including, for 
example, any gain under section 453B from a disposition of the 
installment obligation in those years)\251\ is subject to tax 
under section 1374. On the other hand, if a corporation sold an 
asset in a taxable year beginning in 2012 or 2013, and the sale 
occurred beyond the end of the then-effective 5-year 
recognition period (but not beyond the end of the otherwise 
applicable 10-year recognition period), then gain reported 
using the installment method under section 453 in a taxable 
year beginning in 2014 (after the temporary provision expires) 
is not subject to tax under section 1374, because the sale was 
made after the end of the recognition period applicable to that 
sale. As a third example, if an S corporation sold an asset in 
a taxable year beginning in 2011, and no tax would have been 
imposed on the net recognized built-in gain from the sale under 
section 1374(d)(7)(B)(ii) because the fifth taxable year in the 
recognition period preceded such taxable year, then gain from 
such sale reported using the installment method under section 
453 in a taxable year beginning in 2014 is not subject to tax 
under section 1374.\252\
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    \251\Section 453B requires gain or loss to be recognized on 
disposition of an installment obligation and treated as gain or loss 
resulting from the sale or exchange of the property in respect of which 
the installment obligation was received.
    \252\Report of the Senate Committee on Finance to Accompany S. 
3521, the Family and Business Tax Cut Certainty Act of 2012, S. Rep. 
112-208, August 28, 2012, pp 69-72.
---------------------------------------------------------------------------

                           REASONS FOR CHANGE

    The Committee believes it is appropriate to extend the 5-
year recognition period provision for two years, to promote 
business certainty.

                        EXPLANATION OF PROVISION

    The provision extends, for taxable years beginning in 2014 
and 2015, the special rules that applied to taxable years 
beginning in 2012 and 2013.

                             EFFECTIVE DATE

    The provision is effective for taxable years beginning 
after December 31, 2013.

29. Extension of empowerment zone tax incentives (sec. 139 of the bill 
                 and secs. 1391 and 1397B of the Code)


                              PRESENT LAW

    The Omnibus Budget Reconciliation Act of 1993 (``OBRA 
93'')\253\ authorized the designation of nine empowerment zones 
(``Round I empowerment zones'') to provide tax incentives for 
businesses to locate within certain targeted areas\254\ 
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.
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    \253\Pub. L. No. 103-66.
    \254\The 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.
---------------------------------------------------------------------------
    The Taxpayer Relief Act of 1997\255\ 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'')\256\ authorized a total of ten new 
empowerment zones (``Round III empowerment zones''), bringing 
the total number of authorized empowerment zones to 40.\257\ 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.\258\ The 
Tax Relief, Unemployment Insurance Reauthorization and Job 
Creation Act of 2010 (``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.\259\ 
TRUIRJCA also extended for two years, through December 31, 
2016, the exclusion of 60 percent of gain for qualified small 
business stock (of a corporation which is a qualified business 
entity) acquired on or before February 17, 2009. The American 
Taxpayer Relief Act of 2012 (``ATRA'') extended the designation 
period and tax incentives for two additional years, through 
December 31, 2013.\260\ ATRA also extended for two additional 
years, through December 31, 2018, the exclusion of 60 percent 
of gain for qualified small business stock (of a corporation 
which is a qualified business entity) acquired on or before 
February 17, 2009.
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    \255\Pub. L. No. 105-34.
    \256\Pub. L. No. 106-554.
    \257\The 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.
    \258\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.
    \259\Pub. 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.
    \260\Pub. L. No. 112-240, sec. 327 (2013).
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    The tax incentives available within the designated 
empowerment zones include a Federal income tax credit for 
employers who hire qualifying employees (the ``wage credit''), 
accelerated depreciation deductions on qualifying equipment, 
tax-exempt bond financing, deferral of capital gains tax on 
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.\261\
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    \261\Sec. 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.
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    The wage credit rate applies to qualifying wages paid 
before January 1, 2012. 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.''\262\
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    \262\Secs. 1397C(b) and 1397C(c). However, 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 
liquor store, or certain farming activities. In addition, wages are not 
eligible for the wage credit if paid to: (1) a person who owns more 
than five percent of the stock (or capital or profits interests) of the 
employer, (2) certain relatives of the employer, or (3) if the employer 
is a corporation or partnership, certain relatives of a person who owns 
more than 50 percent of the business.
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    An employer's deduction otherwise allowed for wages paid is 
reduced by the amount of wage credit claimed for that taxable 
year.\263\ 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.\264\ In addition, the 
$15,000 cap is reduced by any wages taken into account in 
computing the work opportunity tax credit or the welfare-to-
work credit.\265\ The wage credit may be used to offset up to 
25 percent of alternative minimum tax liability.\266\
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    \263\Sec. 280C(a).
    \264\Secs. 1396(c)(3)(A) and 51A(d)(2).
    \265\Secs. 1396(c)(3)(B) and 51A(d)(2).
    \266\Sec. 38(c)(2).
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Increased section 179 expensing limitation

    An enterprise zone business is allowed an additional 
$35,000 of section 179 expensing (for a total of up to $535,000 
in 2010 and 2011)\267\ for qualified zone property placed in 
service before January 1, 2012.\268\ The section 179 expensing 
allowed to a taxpayer is phased out by the amount by which 50 
percent of the cost of qualified zone property placed in 
service during the year by the taxpayer exceeds 
$2,000,000.\269\ 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. Special rules 
are provided in the case of property that is substantially 
renovated by the taxpayer.
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    \267\The Small Business Jobs Act of 2010, Pub. L. No. 111-240, sec. 
2021.
    \268\Secs. 1397A, 1397D.
    \269\Sec. 1397A(a)(2), 179(b)(2). For 2012 the limit is $500,000. 
For taxable years beginning after 2012, the limit is $200,000.
---------------------------------------------------------------------------
    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.\270\
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    \270\Sec. 1397C(b).
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    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.\271\
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    \271\Sec. 1397C(c).
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    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.\272\ 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.
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    \272\Sec. 1397C(d). Excluded businesses include 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. Sec. 144(c)(6).
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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.\273\ 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.
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    \273\Sec. 1394.
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    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 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).\274\
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    \274\Sec. 1394(b)(3).
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    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\275\ held for more 
than one year and replaced within 60 days by another qualified 
empowerment zone asset in the same zone.\276\ 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.
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    \275\The 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).
    \276\Sec. 1397B.
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    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.

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.\277\ For stock 
acquired prior to February 18, 2009, or after December 31, 
2013, 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, 2014, a 
higher percentage (either 75-percent or 100-percent) applies to 
all small business stock with no additional percentage for 
empowerment zone stock.\278\
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    \277\Sec. 1202.
    \278\Another provision extends the 100-percent exclusion to all 
small business stock acquired during 2014.
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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.

                        EXPLANATION OF PROVISION

    The provision extends for two years, through December 31, 
2015, 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 equipment, 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, 2013, 
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.

                             EFFECTIVE DATE

    The provision applies to periods after December 31, 2013.

   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\279\ excise tax is imposed on 
distilled spirits produced in or imported into the United 
States.\280\ 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).\281\
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    \279\A proof gallon is a liquid gallon consisting of 50 percent 
alcohol. See sec. 5002(a)(10) and (11).
    \280\Sec. 5001(a)(1).
    \281\Secs. 5214(a)(1)(A), 5002(a)(15), 7653(b) and (c).
---------------------------------------------------------------------------
    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.\282\ 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, 2014).
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    \282\Secs. 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).
---------------------------------------------------------------------------
    Tax amounts attributable to shipments to the United States 
of rum produced in Puerto Rico are covered over to Puerto Rico. 
Tax 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.\283\ Amounts covered over to 
Puerto Rico and the Virgin Islands are deposited into the 
treasuries of the two possessions for use as those possessions 
determine.\284\ All of the amounts covered over are subject to 
the limitation.
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    \283\Sec. 7652(e)(2).
    \284\Secs. 7652(a)(3), (b)(3), and (e)(1).
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                           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.

                        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, 2013 and before January 1, 2016. After December 
31, 2015, 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, 2013.

 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 activity-based 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 eight taxable years of a corporation that begin after 
December 31, 2005, and before January 1, 2014.
    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\285\ in an election in effect for 
its taxable year that included October 13, 1995.\286\ 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.
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    \285\For 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 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.
    \286\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.
---------------------------------------------------------------------------
    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 eight 
taxable years of the corporation which begin after December 31, 
2005, and before January 1, 2014. For any other corporation, 
the credit applies to the first two taxable years of that 
corporation which begin after December 31, 2011 and before 
January 1, 2014.

                           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.

                        EXPLANATION OF PROVISION

    The provision extends the credit 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 ten taxable years of the corporation 
which begin after December 31, 2005, and before January 1, 2016 
and (b) in the case of any other corporation, to the first four 
taxable years of the corporation which begin after December 31, 
2011 and before January 1, 2016.

                             EFFECTIVE DATE

    The provision applies to taxable years beginning after 
December 31, 2013.

                  C. Subtitle 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.\287\ 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\288\ (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.
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    \287\Sec. 25C.
    \288\Pub. L. No. 111-5, February 17, 2009.
---------------------------------------------------------------------------
    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 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;\289\ (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.
---------------------------------------------------------------------------
    \289\Ibid.
---------------------------------------------------------------------------
    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,\290\ (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,\291\ (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.
---------------------------------------------------------------------------
    \290\These 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.
    \291\These 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.
---------------------------------------------------------------------------
    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, 2014. 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 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, 2015.
    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, 2013.

 2. Extension of credit for 2-wheeled plug-in electric vehicles (sec. 
               152 of the bill and sec. 30D of the Code)


                              PRESENT LAW

    A 10-percent credit is available for qualifying plug-in 
electric motorcycles and three-wheeled vehicles.\292\ 
Qualifying two- or three-wheeled vehicles must 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 hour. 
The maximum credit for any qualifying vehicle is $2,500. The 
credit is part of the general business credit. The credit is 
available for vehicles acquired before January 1, 2014.
---------------------------------------------------------------------------
    \292\Sec. 30D(g).
---------------------------------------------------------------------------

                           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 extends the credit for electric motorcycles 
for two years, through December 31, 2015. The credit for 
electric three-wheeled vehicles is not extended.

                             EFFECTIVE DATE

    The provision is effective for vehicles acquired after 
December 31, 2013.

3. Extension of second generation biofuel producer credit (sec. 153 of 
                the bill and sec. 40(b)(6) 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 fuel sold or used after 
December 31, 2013.
    ``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).\293\ Special rules apply for fuel derived from algae.
---------------------------------------------------------------------------
    \293\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 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.
---------------------------------------------------------------------------
    ``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 for two years, through 
December 31, 2015.

                             EFFECTIVE DATE

    The provision is effective for qualified second generation 
biofuel production after December 31, 2013.

 4. Extension of incentives for biodiesel and renewable diesel (secs. 
 154 and 311(a) and (e) of the bill and secs. 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'').\294\ 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 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, 2013.
---------------------------------------------------------------------------
    \294\Sec. 40A.
---------------------------------------------------------------------------
    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.\295\ Thus, a 
qualified biodiesel mixture can contain 99.9 percent biodiesel 
and 0.1 percent diesel fuel.
---------------------------------------------------------------------------
    \295\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.''
---------------------------------------------------------------------------
            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 agri-biodiesel 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 production 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.\296\ 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.\297\
---------------------------------------------------------------------------
    \296\Sec. 6426(c).
    \297\Sec. 6426(c)(4).
---------------------------------------------------------------------------
    The credit is not available for any sale or use for any 
period after December 31, 2013. 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.\298\ 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, 2013.
---------------------------------------------------------------------------
    \298\Sec. 6427(e).
---------------------------------------------------------------------------

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 incentive may be taken as an 
income tax credit, an excise tax credit, or as a payment from 
the Secretary.\299\ 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, 2013.
---------------------------------------------------------------------------
    \299\Secs. 40A(f), 6426(c), and 6427(e).
---------------------------------------------------------------------------

                           REASONS FOR CHANGE

    The Committee believes that extending the biodiesel and 
renewable diesel incentives through 2015 will give the industry 
certainty and allow for business planning.

                        EXPLANATION OF PROVISION

    The provision extends the income tax credit, excise tax 
credit and payment provisions for biodiesel and renewable 
diesel for two years (through December 31, 2015).
    In light of the retroactive nature of the provision, as it 
relates to fuel sold or used in 2014, the provision creates a 
special rule to address claims regarding excise credits and 
claims for payment associated with periods occurring during 
2014. 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 2014. 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. 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.

                             EFFECTIVE DATE

    The provision is effective for sales and uses after 
December 31, 2013.

 5. Extension and modification of credit for the production of Indian 
       coal (sec. 155 of the bill and sec. 45(e)(10) 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 seven-year period beginning January 1, 2006, and ending 
December 31, 2013. The amount of the credit for Indian coal is 
$1.50 per ton for the first four years of the seven-year period 
and $2.00 per ton for the last three years of the seven-year 
period. Beginning in calendar years after 2006, the credit 
amounts are indexed annually for inflation using 2005 as the 
base year. The credit amount for 2014 is $2.317 per ton.
    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 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,\300\ allowing excess credits to be carried back one 
year and forward up to 20 years. The credit is also subject to 
the alternative minimum tax.
---------------------------------------------------------------------------
    \300\Sec. 38(b)(8).
---------------------------------------------------------------------------

                           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, 2015). The 
placed-in-service date for qualified facilities is not 
extended, but the provision clarifies that qualified Indian 
coal facilities that are leased or subleased after December 31, 
2008, do not lose their eligibility as a result of such lease 
or sublease.

                             EFFECTIVE DATE

    The provision is effective for Indian coal produced after 
December 31, 2013.

  6. Extension of credits with respect to facilities producing energy 
from certain renewable resources (sec. 156 of the bill and secs. 45 and 
                            48 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'').\301\ 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.
---------------------------------------------------------------------------
    \301\Sec. 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.

    SUMMARY OF CREDIT FOR ELECTRICITY PRODUCED FROM CERTAIN RENEWABLE
                                RESOURCES
------------------------------------------------------------------------
                                   Credit
                                 amount for
     Eligible electricity         2014\1\
 production activity (sec. 45)   (cents per         Expiration\2\
                                 kilowatt-
                                   hour)
------------------------------------------------------------------------
Wind..........................          2.3  December 31, 2013.
Closed-loop biomass...........          2.3  December 31, 2013.
Open-loop biomass (including            1.1  December 31, 2013.
 agricultural livestock waste
 nutrient facilities).
Geothermal....................          2.3  December 31, 2013.
Solar (pre-2006 facilities              2.3  December 31, 2005.
 only).
Small irrigation power........          1.1  December 31, 2013.
Municipal solid waste                   1.1  December 31, 2013.
 (including landfill gas
 facilities and trash
 combustion facilities).
Qualified hydropower..........          1.1  December 31, 2013.
Marine and hydrokinetic.......          1.1  December 31, 2013.
------------------------------------------------------------------------
\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 the renewable electricity production 
credit and the election to claim the energy credit in lieu of 
the electricity production credit for two years, through 
December 31, 2015.

                             EFFECTIVE DATE

    The provision is effective on January 1, 2014.

7. Extension of credit for energy-efficient new homes (sec. 157 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, 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, 2014. 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, 2016.

                             EFFECTIVE DATE

    The provision is effective for homes acquired after 
December 31, 2013.

 8. Extension of special allowance for second generation biofuel plant 
      property (sec. 158 of the bill and sec. 168(l) of the Code)


                              PRESENT LAW

    Present law\302\ allows an additional first-year 
depreciation deduction equal to 50 percent of the adjusted 
basis of qualified second generation biofuel plant property. In 
order to qualify, the property generally must be placed in 
service before January 1, 2014.\303\
---------------------------------------------------------------------------
    \302\Sec. 168(l).
    \303\Sec. 168(l)(2)(D).
---------------------------------------------------------------------------
    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.\304\ 
Qualified feedstocks means any lignocellulosic or 
hemicellulosic matter that is available on a renewable or 
recurring basis\305\ and any cultivated algae, cyanobacteria, 
or lemna.\306\ Second generation biofuel does not include any 
alcohol with a proof of less than 150 or certain unprocessed 
fuel.\307\ 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.\308\
---------------------------------------------------------------------------
    \304\Secs. 168(l)(2)(A) and 40(b)(6)(E).
    \305\For example, lignocellulosic or hemicellulosic matter that is 
available on a renewable or recurring basis includes bagasse (from 
sugar cane), corn stalks, and switchgrass.
    \306\Sec. 40(b)(6)(F).
    \307\Sec. 40(b)(6)(E)(ii) and (iii).
    \308\Sec. 40(b)(6)(E)(iii).
---------------------------------------------------------------------------
    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.\309\ 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.\310\ 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.\311\ A taxpayer is allowed to elect out of 
the additional first-year depreciation for any class of 
property for any taxable year.\312\
---------------------------------------------------------------------------
    \309\Sec. 168(l)(5).
    \310\Sec. 168(l)(1)(B).
    \311\Secs. 168(l)(5) and 168(k)(2)(G).
    \312\Sec. 168(l)(3)(D).
---------------------------------------------------------------------------
    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 on or after December 20, 2006; and 
(2) the property must be (i) acquired by purchase (as defined 
under section 179(d)) by the taxpayer after December 20, 2006, 
and (ii) placed in service before January 1, 2014.\313\ 
Property does not qualify if a binding written contract for the 
acquisition of such property was in effect on or before 
December 20, 2006.
---------------------------------------------------------------------------
    \313\Sec. 168(l)(2).
---------------------------------------------------------------------------
    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 after December 20, 2006, and the property is placed in 
service before January 1, 2014 (and all other requirements are 
met).\314\ 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.
---------------------------------------------------------------------------
    \314\Sec. 168(l)(4) and 168(k)(2)(E).
---------------------------------------------------------------------------
    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.\315\ 
Recapture rules apply if the property ceases to be qualified 
second generation biofuel plant property.\316\
---------------------------------------------------------------------------
    \315\Sec. 168(l)(3)(C).
    \316\Sec. 168(l)(6).
---------------------------------------------------------------------------
    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.\317\
---------------------------------------------------------------------------
    \317\Sec. 168(l)(7).
---------------------------------------------------------------------------

                           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, 2016.

                             EFFECTIVE DATE

    The provision applies to property placed in service after 
December 31, 2013.

9. Extension and modification of energy efficient commercial buildings 
       deduction (sec. 159 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 limited 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.\318\ Individuals qualified to determine 
compliance shall only be those recognized by one or more 
organizations certified by the Secretary for such purposes.
---------------------------------------------------------------------------
    \318\See IRS Notice 2006-52, 2006-1 C.B. 1175, June 2, 2006; IRS 
2008-40, 2008-14 I.R.B. 725 March 11, 2008.
---------------------------------------------------------------------------
    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, 2014.

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.\319\ However, in the case 
of lighting system retrofits, until 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.
---------------------------------------------------------------------------
    \319\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 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 continue to be used until 
December 31, 2013, but only the new targets of Notice 2012-26 will be 
available under any extension of section 179D beyond December 31, 2013.
---------------------------------------------------------------------------

                           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, 2015. 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, 2014, 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, 2013.

 10. Extension of special rule for sales or dispositions to implement 
  FERC or State electric restructuring policy for qualified electric 
      utilities (sec. 160 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.\320\ The realized 
gain is subject to current income tax\321\ unless the 
recognition of the gain is deferred or excluded from income 
under a special tax provision.\322\
---------------------------------------------------------------------------
    \320\See sec. 1001.
    \321\See secs. 61 and 451.
    \322\See, e.g., secs. 453, 1031 and 1033.
---------------------------------------------------------------------------
    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\323\ (the ``reinvestment property'').\324\ 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.
---------------------------------------------------------------------------
    \323\The 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.
    \324\Sec. 451(i).
---------------------------------------------------------------------------
    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, 2014.\325\ 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\326\) with respect to the transmission 
facilities to which the election applies, and (2) an electric 
utility (as defined in the Federal Power Act\327\).\328\
---------------------------------------------------------------------------
    \325\Sec. 451(i)(3).
    \326\Sec. 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.
    \327\Sec. 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.
    \328\Sec. 451(i)(6).
---------------------------------------------------------------------------
    In general, an independent transmission company is defined 
as: (1) an independent transmission provider\329\ approved by 
the Federal Energy Regulatory Commission (``FERC''); (2) a 
person (i) who the FERC determines under section 203 of the 
Federal Power Act\330\ (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 facilities are under the 
operational control of an organization described in (i).\331\
---------------------------------------------------------------------------
    \329\For example, a regional transmission organization, an 
independent system operator, or an independent transmission company.
    \330\16 U.S.C. sec. 824b.
    \331\Sec. 451(i)(4).
---------------------------------------------------------------------------
    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).\332\ 
Exempt utility property does not include any property that is 
located outside of the United States.\333\
---------------------------------------------------------------------------
    \332\Sec. 451(i)(5).
    \333\Sec. 451(i)(5)(C).
---------------------------------------------------------------------------
    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).\334\
---------------------------------------------------------------------------
    \334\Sec. 451(i)(7).
---------------------------------------------------------------------------

                           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, 2016.

                             EFFECTIVE DATE

    The provision applies to dispositions after December 31, 
2013.

     11. Extension of excise tax credits relating to certain fuels 
 (alternative fuel and alternative fuel mixtures (including hydrogen)) 
      (sec. 161 of the bill and sec. 6426 and 6427(e) 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 general, 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\335\ 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.
---------------------------------------------------------------------------
    \335\``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).
---------------------------------------------------------------------------
    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, 
2013 (September 30, 2014 for liquefied hydrogen).
    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, 2013. With respect to liquefied hydrogen, the payment 
provisions expire after September 30, 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.

                        EXPLANATION OF PROVISION

    The provision extends the alternative fuel credit and 
related payment provisions, and the alternative fuel mixture 
credit through December 31, 2015 (including those related to 
liquefied hydrogen).
    In light of the retroactive nature of the provision, as it 
relates to alternative fuel sold or used in 2014, the provision 
creates a special rule to address claims regarding excise 
credits and claims for payment associated with periods 
occurring during 2014. 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 2014. 
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. 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.
    The provision, as it relates to biodiesel and renewable 
diesel, is described above in connection with section 304 of 
the bill ``Incentives for Biodiesel and Renewable Diesel.''

                             EFFECTIVE DATE

    The provision is generally effective for fuel sold or used 
after December 31, 2013. As it relates to liquefied hydrogen, 
the provision is effective for fuels sold or used after 
September 30, 2014.

                 TITLE II--PROVISIONS EXPIRING IN 2014


                  A. Subtitle A--Energy Tax Extenders


1. Extension of credit for new qualified fuel cell motor vehicles (sec. 
               201 of the bill and sec. 30B of the Code)


                              PRESENT LAW

    A credit is available through 2014 for new 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. The credit is available to vehicles 
purchased before January 1, 2015.
    In general, the credit is allowed to the vehicle owner, 
including the lessor of a vehicle subject to a lease. In 
certain cases, where the vehicle is owned by a tax-exempt 
entity, government, or foreign person, and is not subject to 
lease, the credit may be claimed by the seller of the vehicle 
so long as the seller clearly discloses to the user in a 
document the amount that is allowable as a credit. A vehicle 
must be used predominantly in the United States to qualify for 
the credit.

                           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 the 
reasons, the Committee believes the credit for fuel cell 
vehicles should be extended.

                        EXPLANATION OF PROVISION

    The provision extends the provision for one year, for 
vehicles purchased before January 1, 2016.

                             EFFECTIVE DATE

    The provision is effective for vehicles purchased after 
December 31, 2014.

 2. Extension of alternative fuel vehicle refueling property (sec. 202 
                 of the bill and sec. 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.\336\ 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.
---------------------------------------------------------------------------
    \336\Sec. 30C.
---------------------------------------------------------------------------
    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.
    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 
after December 31, 2005, and (except in the case of hydrogen 
refueling property) before January 1, 2014. In the case of 
hydrogen refueling property, the property must be 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 the reasons, the Committee believes the credit for 
alternative fuel refueling property should be extended.

                        EXPLANATION OF PROVISION

    The provision extends the 30-percent credit for alternative 
fuel refueling property for two years (one year in the case of 
hydrogen refueling property, the credit which continues under 
present law through 2014), through December 31, 2015.

                             EFFECTIVE DATE

    The provision is effective for property placed in service 
after December 31, 2013.

  B. Subtitle B--Extenders Relating to Multiemployer Defined Benefit 
                             Pension Plans


 1. Multiemployer defined benefit plans (secs. 251-252 of the bill and 
sec. 221(c) of the Pension Protection Act of 2006, secs. 431-432 of the 
                   Code, and secs. 304-305 of ERISA)


                              PRESENT LAW

            Multiemployer plans
    A multiemployer plan is a plan to which more than one 
unrelated employer contributes, that is established pursuant to 
one or more collective bargaining agreements, and that meets 
other requirements as specified by the Secretary of Labor. 
Multiemployer plans are governed by a board of trustees 
consisting of an equal number of employer and employee 
representatives. In general, the level of contributions to a 
multiemployer plan is specified in the applicable collective 
bargaining agreements, and the level of plan benefits is 
established by the plan trustees.
    Multiemployer defined benefit plans are subject to minimum 
funding requirements under the Code and the Employee Retirement 
Income Security Act of 1974 (``ERISA'').\337\ Certain changes 
were made to the funding requirements for multiemployer plans 
by the Pension Protection Act of 2006 (``PPA'').\338\ Changes 
made by PPA are effective for plan years beginning after 2007.
---------------------------------------------------------------------------
    \337\Secs. 412 and 431-432 of the Code and secs. 302 and 304-305 of 
ERISA. Additional rules apply to multiemployer plans that are in 
reorganization status or insolvent under sections 418-418E of the Code 
and sections 4241-4245 of ERISA.
    \338\Pub. L. No. 109-280.
---------------------------------------------------------------------------

General funding requirements for multiemployer plans

            Minimum required contributions
    In connection with the funding requirements for a 
multiemployer plan, a notional account called a ``funding 
standard account'' is maintained, to which specific charges and 
credits (including plan contributions) are made for each plan 
year the multiemployer plan is maintained. The minimum required 
contribution for a plan year is the amount, if any, needed so 
that the accumulated credits to the funding standard account as 
of that plan year are not less than the accumulated charges 
(i.e., so the funding standard account does not have a negative 
balance). If, as of the close of a plan year, accumulated 
charges to the funding standard account exceed credits, the 
plan has an ``accumulated funding deficiency'' equal to the 
amount of the excess.\339\ For example, if, as of a plan year, 
the balance of charges to the funding standard account would be 
$200,000 without any contributions, then a minimum contribution 
equal to that amount is required to meet the minimum funding 
standard for the year (i.e., to prevent an accumulated funding 
deficiency). If credits to the funding standard account exceeds 
charges, a ``credit balance'' results. The amount of the credit 
balance, increased with interest, reduces future required 
contributions.
---------------------------------------------------------------------------
    \339\An excise tax under section 4971 may apply in the case of an 
accumulated funding deficiency.
---------------------------------------------------------------------------
            Funding method; charges and credits to the funding standard 
                    account
    In the case of a multiemployer plan, an acceptable 
actuarial cost method (referred to as a funding method) must be 
used to determine the elements included in its funding standard 
account for a year. Generally, a funding method breaks up the 
cost of benefits under the plan into annual charges to the 
funding standard account consisting of two elements for each 
plan year. These elements are referred to as: (1) normal cost; 
and (2) supplemental cost.
    The plan's normal cost for a plan year generally represents 
the cost of future benefits allocated to the year by the 
funding method used by the plan for current employees and, 
under some funding methods, for separated employees. 
Specifically, it is the amount actuarially determined that 
would be required as a contribution by the employer for the 
plan year in order to maintain the plan if the plan had been in 
effect from the beginning of service of the included employees 
and if the costs for prior years had been paid, and all 
assumptions (e.g., interest and mortality) had been fulfilled. 
A plan's normal cost for a plan year is charged to the funding 
standard account for that year.
    The supplemental cost for a plan year is the cost of future 
benefits that would not be met by future normal costs, future 
employee contributions, or plan assets. The most common 
supplemental cost is that attributable to past service 
liability, which represents the cost of future benefits under 
the plan: (1) on the date the plan is first effective; or (2) 
on the date a plan amendment increasing plan benefits is first 
effective. Other supplemental costs may be attributable to net 
experience losses (e.g., worse than expected investment returns 
or actuarial experience), losses from changes in actuarial 
assumptions, and amounts necessary to make up funding 
deficiencies for which a waiver was obtained. Supplemental 
costs are amortized (i.e., recognized for funding purposes) 
over a specified number of years (generally 15 years) by annual 
charges to the funding standard account over that period.
    Factors that result in a supplemental loss can 
alternatively result in a gain that is recognized by annual 
credits to the funding standard account over a 15-year 
amortization period (in addition to a credit for contributions 
made each the plan year). These include a reduction in plan 
liabilities as a result of a plan amendment decreasing plan 
benefits, net experience gains (e.g., better than expected 
investment returns or actuarial experience), and gains from 
changes in actuarial assumptions.
            Extensions of amortization periods
    Before and after PPA, the sponsor of a multiemployer plan 
(that is, the board of trustees) may obtain from the Secretary 
of the Treasury (``Secretary'') an extension of up to 10 years 
of the amortization periods applicable in determining charges 
to the funding standard account. The extension may be granted 
by the Secretary if the Secretary determines that (1) the 
extension would carry out the purposes of ERISA and would 
provide adequate protection for participants under the plan and 
(2) the failure to permit the extension would (a) result in a 
substantial risk to the voluntary continuation of the plan or a 
substantial curtailment of pension benefit levels or employee 
compensation and (b) be adverse to the interests of plan 
participants in the aggregate. The sponsor must also provide 
satisfactory evidence that notice of the request, including 
certain information, has been provided to plan participants and 
beneficiaries, any employee organization representing 
participants, and the Pension Benefit Guaranty Corporation 
(``PBGC'').
    Under PPA, in addition to an amortization extension 
described above, the sponsor of a multiemployer plan certified 
as meeting certain criteria may apply for an amortization 
extension of up to five years that is required to be approved 
by the Secretary (referred to as an automatic amortization 
extension). Included with the application must be a 
certification by the plan's actuary that (1) absent the 
extension, the plan would have an accumulated funding 
deficiency in the current plan year and any of the nine 
succeeding plan years, (2) the sponsor has adopted a plan to 
improve the plan's funding status, (3) taking into account the 
extension, the plan is projected to have sufficient assets to 
timely pay its expected benefit liabilities and other 
anticipated expenditures, and (4) the required notice described 
above has been provided. The period of any automatic 
amortization extension reduces the 10-year period for which an 
extension described above may be granted by the Secretary. The 
provision relating to automatic amortization extensions does 
not apply with respect to any application submitted after 
December 31, 2014.\340\
---------------------------------------------------------------------------
    \340\Sec. 431(d)(1)(C) of the Code and sec. 304(d)(1)(C) of ERISA.
---------------------------------------------------------------------------
            Shortfall funding method
    Certain plans may elect to determine the required charges 
to the funding standard account under the shortfall funding 
method. Under this method, the charges are computed on the 
basis of an estimated number of units of service or production 
for which a certain amount per unit is to be charged. The 
difference between the net amount charged under this method and 
the net amount that otherwise would have been charged for the 
same period is a shortfall loss or gain that is amortized over 
subsequent plan years.
    In general, the funding method used with respect to a 
multiemployer plan may be changed only with approval of the 
Secretary. However, under PPA, certain multiemployer plans may 
adopt, use or cease using the shortfall funding method and the 
adoption, use, or cessation of use is deemed approved by the 
Secretary.\341\ Plans are eligible if (1) the plan has not used 
the shortfall funding method during the five-year period ending 
on the day before the date the plan is to use the shortfall 
funding method; and (2) the plan is not operating under an 
amortization extension and did not operate under such an 
extension during the five-year period. In general, plan 
amendments increasing benefit liabilities of the plan cannot be 
adopted while the shortfall funding method is in use. Deemed 
approval of a multiemployer plan's adoption, use, or cessation 
of use of the shortfall funding method does not apply to plan 
years beginning after December 31, 2014.\342\
---------------------------------------------------------------------------
    \341\Sec. 201(b) of PPA.
    \342\Sec. 221(c) of PPA.
---------------------------------------------------------------------------

Additional requirements relating to endangered or critical status

            In general
    Under PPA, additional funding rules apply to a 
multiemployer defined benefit pension plan that is in 
endangered or critical status.\343\ In connection with these 
rules, not later than the 90th day of each plan year, the 
actuary for any multiemployer plan must certify to the 
Secretary and to the sponsor whether or not the plan is in 
endangered or critical status for the plan year. If a plan is 
certified to be in endangered or critical status, notice of the 
endangered or critical status must be provided within 30 days 
after the date of certification to plan participants and 
beneficiaries, the bargaining parties, the PBGC and the 
Secretary of Labor. Additional notice requirements apply in the 
case of a plan certified to be in critical status.
---------------------------------------------------------------------------
    \343\Sec. 432 of the Code as enacted by sec. 212 of PPA, and sec. 
305 of ERISA, as enacted by sec. 202 of PPA.
---------------------------------------------------------------------------
    A multiemployer plan is in endangered status if the plan is 
not in critical status and, as of the beginning of the plan 
year, (1) the plan's funded percentage for the plan year is 
less than 80 percent, or (2) the plan has an accumulated 
funding deficiency for the plan year or is projected to have an 
accumulated funding deficiency in any of the six succeeding 
plan years (taking into account amortization extensions). A 
plan's funded percentage is the percentage of plan assets over 
accrued liability of the plan. A plan that meets the 
requirements of both (1) and (2) is treated as in seriously 
endangered status.
    A multiemployer plan is in critical status for a plan year 
if as of the beginning of the plan year:
          1. The funded percentage of the plan is less than 65 
        percent and the sum of (A) the market value of plan 
        assets, plus (B) the present value of reasonably 
        anticipated employer and employee contributions for the 
        current plan year and each of the six succeeding plan 
        years (assuming that the terms of the collective 
        bargaining agreements continue in effect) is less than 
        the present value of all benefits projected to be 
        payable under the plan during the current plan year and 
        each of the six succeeding plan years (plus 
        administrative expenses),
          2. (A) The plan has an accumulated funding deficiency 
        for the current plan year, not taking into account any 
        amortization extension, or (B) the plan is projected to 
        have an accumulated funding deficiency for any of the 
        three succeeding plan years (four succeeding plan years 
        if the funded percentage of the plan is 65 percent or 
        less), not taking into account any amortization 
        extension,
          3. (A) The plan's normal cost for the current plan 
        year, plus interest for the current plan year on the 
        amount of unfunded benefit liabilities under the plan 
        as of the last day of the preceding year, exceeds the 
        present value of the reasonably anticipated employer 
        contributions for the current plan year, (B) the 
        present value of nonforfeitable benefits of inactive 
        participants is greater than the present value of 
        nonforfeitable benefits of active participants, and (C) 
        the plan has an accumulated funding deficiency for the 
        current plan year, or is projected to have an 
        accumulated funding deficiency for any of the four 
        succeeding plan years (not taking into account 
        amortization period extensions), or
          4. The sum of (A) the market value of plan assets, 
        plus (B) the present value of the reasonably 
        anticipated employer contributions for the current plan 
        year and each of the four succeeding plan years 
        (assuming that the terms of the collective bargaining 
        agreements continue in effect) is less than the present 
        value of all benefits projected to be payable under the 
        plan during the current plan year and each of the four 
        succeeding plan years (plus administrative expenses).
            Requirements during endangered or critical status
    Various requirements apply to a plan in endangered or 
critical status, including adoption of and compliance with (1) 
a funding improvement plan in the case of a multiemployer plan 
in endangered status, and (2) a rehabilitation plan in the case 
of a multiemployer plan in critical status. In addition, 
restrictions on certain plan amendments, benefit increases, and 
reductions in employer contributions apply during certain 
periods.
    In the case of a multiemployer plan in critical status, 
additional required contributions (referred to as employer 
surcharges) apply until the adoption of a collective bargaining 
that is consistent with the rehabilitation plan. In addition, 
employers are relieved of liability for minimum required 
contributions under the otherwise applicable funding rules (and 
the related excise tax), provided that a rehabilitation plan is 
adopted and followed.\344\ Moreover, subject to notice 
requirements, some benefits that would otherwise be protected 
from elimination or reduction may be eliminated or reduced in 
accordance with the rehabilitation plan.\345\
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    \344\Code sec. 4971(g)(1)(A).
    \345\The rules for multiemployer plans in critical status include 
the elimination or reduction of ``adjustable benefits,'' which include 
some benefits that would otherwise be protected from elimination or 
reduction under the anticutback rules under section 411(d)(6) of the 
Code and section 204(g) of ERISA.
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    A funding improvement plan is a plan consisting of actions, 
including options or a range of options, to be proposed to the 
bargaining parties, formulated to provide, based on reasonably 
anticipated experience and reasonable actuarial assumptions, 
for the attainment by the plan of certain requirements within a 
certain period (generally 10 years), referred to as the funding 
improvement period. The funding improvement plan must provide 
that, by the end of the funding improvement period, the plan 
will have a certain required increase in the funded percentage 
and no accumulated funding deficiency for any plan year during 
the funding improvement period.
    In general, a rehabilitation plan is a plan consisting of 
actions, including options or a range of options to be proposed 
to the bargaining parties, formulated, based on reasonable 
anticipated experience and reasonable actuarial assumptions, to 
enable the plan to cease to be in critical status within a 
certain period (generally 10 years), referred to as the 
rehabilitation period, and may include reductions in plan 
expenditures (including plan mergers and consolidations), 
reductions in future benefits accruals or increases in 
contributions, if agreed to by the bargaining parties, or any 
combination of such actions. A rehabilitation plan must provide 
annual standards for meeting the requirements of the 
rehabilitation. The plan must also include the schedules 
required to be provided to the bargaining parties.
    If the sponsor of a plan in critical status determines 
that, based on reasonable actuarial assumptions and upon 
exhaustion of all reasonable measures, the plan cannot 
reasonably be expected to emerge from critical status by the 
end of the rehabilitation period, the plan must include 
reasonable measures to emerge from critical status at a later 
time or to forestall possible insolvency. In such case, the 
plan must set forth alternatives considered, explain why the 
plan is not reasonably expected to emerge from critical status 
by the end of the rehabilitation period, and specify when, if 
ever, the plan is expected to emerge from critical status in 
accordance with the rehabilitation plan.
    The sponsor of the multiemployer plan must update the 
funding improvement or rehabilitation plan annually.
    In the case of a failure to meet the requirements 
applicable to a multiemployer plan in endangered or critical 
status, the plan actuary, plan sponsor, or employers required 
to contribute to the plan may be subject to an excise tax under 
the Code or a civil penalty under ERISA.\346\
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    \346\Code sec. 4971(g) and ERISA sec. 502(c)(8). In addition, 
certain failures are treated as a failure to file an annual report with 
respect to the multiemployer plan, subject to a civil penalty under 
ERISA.
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            Sunset of endangered and critical rules
    The rules relating to endangered and critical status 
generally do not apply to plan years beginning after December 
31, 2014.\347\ However, if a multiemployer plan is operating 
under a funding improvement or rehabilitation plan for its last 
plan year beginning before January 1, 2015, that is, for its 
2014 plan year, the multiemployer plan must continue to operate 
under the funding improvement or rehabilitation plan during any 
period after December 31, 2014, that the funding improvement or 
rehabilitation plan is in effect, and all of the Code and ERISA 
provisions relating to the operation of the funding improvement 
or rehabilitation plan continue in effect during that period.
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    \347\Sec. 221(c) of PPA.
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                           REASONS FOR CHANGE

    The endangered and critical rules under PPA were enacted in 
response to concerns that some multiemployer pension plans were 
facing current or near-term funding issues. The rules provide a 
structure for identifying troubled plans and require specific 
measures to be taken to address funding issues. For plans in 
critical status, the rules also provide a greater range of 
measures that may be taken to address these issues. Since the 
enactment of PPA, these rules have been used by a number of 
plans to begin addressing their funding issues. The Committee 
therefore considers it important to leave the endangered and 
critical rules in place. At the same time, the purpose of the 
PPA sunset was, in part, to provide an opportunity for the 
Congress to assess the efficacy of the rules and to consider 
whether changes are warranted. An extension of the sunset 
continues the availability of the endangered and critical 
rules, as well as providing additional time for congressional 
action.

                        EXPLANATION OF PROVISION

    Under the provision, the PPA provisions relating to 
automatic extensions of amortization periods, deemed approval 
of a multiemployer plan's adoption, use, or cessation of use of 
the shortfall funding method, and rules relating to endangered 
and critical status are extended for one year. Thus, the 
provision relating to automatic amortization extensions does 
not apply with respect to any application submitted after 
December 31, 2015. Deemed approval of a multiemployer plan's 
adoption, use, or cessation of use of the shortfall funding 
method, and the rules relating to endangered and critical 
status do not apply to plan years beginning after December 31, 
2015. However, if a multiemployer plan is operating under a 
funding improvement or rehabilitation plan for its last plan 
year beginning before January 1, 2016, that is, for its 2015 
plan year, the multiemployer plan must continue to operate 
under the funding improvement or rehabilitation plan during any 
period after December 31, 2015, that the funding improvement or 
rehabilitation plan is in effect, and all of the Code and ERISA 
provisions relating to the operation of the funding improvement 
or rehabilitation plan continue in effect during that period.

                             EFFECTIVE DATE

    The provision relating to automatic extensions of 
amortization periods applies to applications submitted to the 
Secretary after December 31, 2014. The provision relating to 
deemed approval of a multiemployer plan's adoption, use, or 
cessation of use of the shortfall funding method and the rules 
relating to endangered and critical status applies to plan 
years beginning after December 31, 2014.

                     TITLE III--REVENUE PROVISIONS


 1. Penalty for failure to meet the due diligence requirements for the 
   child tax credit (sec. 301 of the bill and sec. 6695 of the Code)


                              PRESENT LAW

Eligibility requirements for certain refundable credits

    Two refundable credits available to individuals use both 
income level and the presence and number of qualifying children 
as factors in determining eligibility for the credit: the child 
tax credit\348\ and the earned income credit (``EIC'').\349\ 
Eligibility for the EIC is based on earned income, adjusted 
gross income, investment income, filing status, number of 
children, and immigration and work status in the United States. 
The EIC generally equals a specified percentage of earned 
income up to a maximum dollar amount. The maximum amount 
applies over a certain income range and then diminishes to zero 
over a specified phaseout range. For taxpayers with earned 
income (or adjusted gross income (``AGI''), if greater) in 
excess of the beginning of the phaseout range, the maximum EIC 
amount is reduced by the phaseout rate multiplied by the amount 
of earned income (or AGI, if greater) in excess of the 
beginning of the phaseout range. For taxpayers with earned 
income (or AGI, if greater) in excess of the end of the 
phaseout range, no credit is allowed.
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    \348\Sec. 24.
    \349\Sec. 32.
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    An individual is not eligible for the EIC if the aggregate 
amount of disqualified income of the taxpayer for the taxable 
year exceeds $3,350 (for 2014). This threshold is indexed for 
inflation. Disqualified income is the sum of: (1) interest 
(both taxable and tax exempt); (2) dividends; (3) net rent and 
royalty income (if greater than zero); (4) capital gains net 
income; and (5) net passive income that is not self-employment 
income (if greater than zero).
    An individual may claim a child tax credit of $1,000 for 
each qualifying child under the age of 17,\350\ provided that 
the child is a citizen, national, or resident of the United 
States.\351\ The aggregate amount of child credits that may be 
claimed is phased out for individuals with income over certain 
threshold amounts. Specifically, the otherwise allowable child 
tax credit is reduced by $50 for each $1,000 (or fraction 
thereof) of modified adjusted gross income over $75,000 for 
single individuals or heads of households, $110,000 for married 
individuals filing joint returns, and $55,000 for married 
individuals filing separate returns. For purposes of this 
limitation, modified adjusted gross income includes certain 
otherwise excludable income earned by U.S. citizens or 
residents living abroad or in certain U.S. territories.\352\ If 
the resulting child credit exceeds the tax liability of the 
taxpayer, the taxpayer is eligible for a refundable credit 
(known as the additional child tax credit)\353\ equal to 15 
percent of earned income in excess of a threshold dollar amount 
(the ``earned income'' formula). Prior to 2009, the threshold 
dollar amount was $10,000 and was indexed for inflation. For 
taxable years beginning after 2009 and before January 1, 2018, 
the threshold amount is $3,000, and is not indexed for 
inflation. The $3,000 threshold is currently scheduled to 
expire for taxable years beginning after December 31, 2017, 
after which the threshold reverts to the indexed $10,000 
amount.
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    \350\Sec. 24(a).
    \351\Sec. 24(c).
    \352\Sec. 24(b).
    \353\Sec. 24(d).
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    Families with three or more children may determine the 
additional child tax credit using the ``alternative formula,'' 
if this results in a larger credit than determined under the 
earned income formula. Under the alternative formula, the 
additional child tax credit equals the amount by which the 
taxpayer's social security taxes exceed the taxpayer's EIC.

Diligence required by preparers' returns for EIC claimants

    Under Section 6695(g) of the Code, a penalty of $500 may be 
imposed on a person who, as a tax return preparer,\354\ 
prepares a tax return for a taxpayer claiming the EIC, unless 
the tax return preparer exercises due diligence with respect to 
that claim. The due diligence requirements extend to both the 
determination of eligibility for the credit and the amount of 
the credit, as prescribed by regulations, which also detail how 
to document one's compliance with those requirements.\355\ The 
position taken with respect to the EIC must be based on current 
and reasonable information that the paid preparer develops, 
either directly from the taxpayer or by other reasonable means. 
The preparer may not ignore implications of information 
provided by taxpayers, and is expected to make reasonable 
inquiries about incorrect, inconsistent or incomplete 
information.
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    \354\Sec. 7701(a)(36) provides a general definition of tax return 
preparer to include persons who are compensated to prepare all or a 
substantial portion of a return or claim for refund, with certain 
exceptions.
    \355\Treas. Reg. sec. 1.6695-2(b).
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    The conclusions about eligibility and computation, as well 
as the steps taken to develop those conclusions, must be 
documented, using Form 8867, ``Paid Preparer's Earned Income 
Credit Checklist,'' which is filed with the return.\356\ The 
basis for the computation of the credit must also be 
documented, either on a Computation Worksheet, or in an 
alternative record containing the requisite information. The 
preparer is required to maintain that documentation for three 
years.
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    \356\If the return preparer electronically files the return or 
claim for the taxpayer, the Form 8867 is filed electronically with the 
return. If the prepared return or claim is given to the taxpayer to 
file, the Form 8867 is provided to the taxpayer at the same time, to 
submit with the return or claim for refund.
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    The penalty may be waived with respect to a particular 
return or claim for refund on the basis of all facts and 
circumstances. The preparer must establish that he routinely 
follows reasonable office procedures to ensure compliance. The 
failure to comply with the requirements must be isolated and 
inadvertent.\357\ The enhanced duties of due diligence required 
with respect to the EIC do not extend to other refundable 
credits.
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    \357\Treas. Reg. sec. 1.6695-2(d).
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                           REASONS FOR CHANGE

    The Committee believes that more thorough efforts by return 
preparers are important to improving child tax credit 
compliance. Specifically, the Committee believes that imposing 
a due diligence requirement discourages preparers from advising 
or assisting taxpayers in claiming credits that cannot be 
sustained, thus reducing the incidence of erroneous claims.

                        EXPLANATION OF PROVISION

    The provision requires paid tax return preparers who 
prepare Federal income tax returns on which a child (or 
additional child) tax credit is claimed to meet due diligence 
requirements similar to those applicable to returns claiming an 
earned income tax credit. The provision anticipates that the 
EIC checklist currently required by regulations will be adapted 
by the IRS to address both the child tax credit and the EIC and 
to highlight differences between the two credits. In adapting 
the checklist, the IRS is to ensure that it imposes minimal 
additional burden on taxpayers and paid preparers.

                             EFFECTIVE DATE

    The provision is effective for tax years ending after 
December 31, 2014.

   2. 100 percent continuous levy authority on payments to Medicare 
  providers and suppliers (sec. 302 of the bill and sec. 6331 of the 
                                 Code)


                              PRESENT LAW

In general

    Levy is the administrative authority of the IRS to seize a 
taxpayer's property, or rights to property, to pay the 
taxpayer's tax liability.\358\ Generally, the IRS is entitled 
to seize a taxpayer's property by levy if a Federal tax lien 
has attached to such property,\359\ the property is not exempt 
from levy,\360\ and the IRS has provided both notice of 
intention to levy\361\ and notice of the right to an 
administrative hearing (the notice is referred to as a 
``collections due process notice'' or ``CDP notice'' and the 
hearing is referred to as the ``CDP hearing'')\362\ at least 30 
days before the levy is made. A levy on salary or wages 
generally is continuously in effect until released.\363\ A 
Federal tax lien arises automatically when: (1) a tax 
assessment has been made; (2) the taxpayer has been given 
notice of the assessment stating the amount and demanding 
payment; and (3) the taxpayer has failed to pay the amount 
assessed within 10 days after the notice and demand.\364\
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    \358\Sec. 6331(a). Levy specifically refers to the legal process by 
which the IRS orders a third party to turn over property in its 
possession that belongs to the delinquent taxpayer named in a notice of 
levy.
    \359\Ibid.
    \360\Sec. 6334.
    \361\Sec. 6331(d).
    \362\Sec. 6330. The notice and the hearing are referred to 
collectively as the CDP requirements.
    \363\Secs. 6331(e) and 6343.
    \364\Sec. 6321.
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    The notice of intent to levy is not required if the 
Secretary finds that collection would be jeopardized by delay. 
The standard for determining whether jeopardy exists is similar 
to the standard applicable when determining whether assessment 
of tax without following the normal deficiency procedures is 
permitted.\365\
---------------------------------------------------------------------------
    \365\Secs. 6331(d)(3), 6861.
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    The CDP notice (and pre-levy CDP hearing) is not required 
if: (1) the Secretary finds that collection would be 
jeopardized by delay; (2) the Secretary has served a levy on a 
State to collect a Federal tax liability from a State tax 
refund; (3) the taxpayer subject to the levy requested a CDP 
hearing with respect to unpaid employment taxes arising in the 
two-year period before the beginning of the taxable period with 
respect to which the employment tax levy is served; or (4) the 
Secretary has served a Federal contractor levy. In each of 
these four cases, however, the taxpayer is provided an 
opportunity for a hearing within a reasonable period of time 
after the levy.\366\
---------------------------------------------------------------------------
    \366\Sec. 6330(f).
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Federal payment levy program

    To help the IRS collect taxes more effectively, the 
Taxpayer Relief Act of 1997\367\ authorized the establishment 
of the Federal Payment Levy Program (``FPLP''), which allows 
the IRS to continuously levy up to 15 percent of certain 
``specified payments'' by the Federal government if the payees 
are delinquent on their tax obligations. With respect to 
payments to vendors of goods, services, or property sold or 
leased to the Federal government, the continuous levy may be up 
to 100 percent of each payment.\368\ The levy (either up to 15 
percent or up to 100 percent) generally continues in effect 
until the liability is paid or the IRS releases the levy.
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    \367\Pub. L. No. 105-34.
    \368\Sec. 6331(h)(3). The word ``property'' was added to ``goods or 
services'' in section 301 of the ``3% Withholding Repeal and Job 
Creation Act,'' Pub. L. No. 112-56.
---------------------------------------------------------------------------
    Under FPLP, the IRS matches its accounts receivable records 
with Federal payment records maintained by the Department of 
the Treasury's Financial Management Service (``FMS''), such as 
certain Social Security benefit and Federal wage records. When 
these records match, the delinquent taxpayer is provided both 
the notice of intention to levy and the CDP notice. If the 
taxpayer does not respond after 30 days, the IRS can instruct 
FMS to levy the taxpayer's Federal payments. Subsequent 
payments are continuously levied until such time that the tax 
debt is paid or the IRS releases the levy.

Payments to Medicare providers

    In 2008, the Government Accountability Office (``GAO'') 
found that over 27,000 Medicare providers (i.e., about six 
percent of all such providers) owed more than $2 billion of tax 
debt, consisting largely of individual income and payroll 
taxes.\369\ As of 2008, the Centers for Medicare & Medicaid 
Services (``CMS'') had not incorporated most of its Medicare 
payments into the continuous levy program, despite the IRS 
authority to continuously levy up to 15 percent of these 
payments. The GAO noted that CMS officials promised to 
incorporate about 60 percent of all Medicare fee-for-service 
payments into the levy program by October 2008 and the 
remaining 40 percent in the next several years. Following the 
GAO study, Congress directed CMS to participate in the FPLP and 
ensure that all Medicare provider and supplier payments are 
processed through it, in specified graduated percentages, by 
the end of fiscal year 2011.\370\ CMS has since incorporated 
its payments into the continuous levy program to ensure that it 
collects delinquent tax debts from Medicare providers as 
authorized.
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    \369\Government Accountability Office, Medicare: Thousands of 
Medicare Providers Abuse the Federal Tax System (GAO-08-618), June 13, 
2008.
    \370\Medicare Improvement for Patients and Providers Act of 2008, 
Pub. L. No. 110-275, sec. 189.
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                           REASONS FOR CHANGE

    It has been reported that many thousands of Medicare 
providers abuse the Federal tax system.\371\ Consequently, the 
Committee believes that is it appropriate to increase the 
permissible percentage of payments to a Medicare provider 
subject to levy to 100 percent.
---------------------------------------------------------------------------
    \371\Government Accountability Office, Medicare: Thousands of 
Medicare Providers Abuse the Federal Tax System (GAO-08-618), June 13, 
2008.
---------------------------------------------------------------------------

                        EXPLANATION OF PROVISION

    The provision allows the Secretary to levy up to 100 
percent of a payment to a Medicare provider to collect unpaid 
taxes.

                             EFFECTIVE DATE

    The provision is effective for payments made six months 
after the date of enactment.

3. Exclusion from gross income of certain clean coal power grants (sec. 
                            303 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.
    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 non-corporate recipients are the 
partners.

                             EFFECTIVE DATE

    The provision is effective for payments received in taxable 
years beginning after December 31, 2011.

 4. Reform of rules related to qualified tax collection contracts, and 
special compliance personnel program (secs. 304 and 305 of the bill and 
                sec. 6306 and new sec. 6307 of the Code)


                              PRESENT LAW

    Code section 6306 permits the IRS to use private debt 
collection companies to locate and contact taxpayers owing 
outstanding tax liabilities of any type\372\ and to arrange 
payment of those taxes by the taxpayers. There must be an 
assessment pursuant to section 6201 in order for there to be an 
outstanding tax liability. An assessment is the formal 
recording of the taxpayer's tax liability that fixes the amount 
payable. An assessment must be made before the IRS is permitted 
to commence enforcement actions to collect the amount payable. 
In general, an assessment is made at the conclusion of all 
examination and appeals processes within the IRS.\373\
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    \372\This provision generally applies to any type of tax imposed 
under the Internal Revenue Code.
    \373\An amount of tax reported as due on the taxpayer's tax return 
is considered to be self-assessed. If the IRS determines that the 
assessment or collection of tax will be jeopardized by delay, it has 
the authority to assess the amount immediately (sec. 6861), subject to 
several procedural safeguards.
---------------------------------------------------------------------------
    Several steps are involved in the deployment of private 
debt collection companies. First, the private debt collection 
company contacts the taxpayer by letter.\374\ If the taxpayer's 
last known address is incorrect, the private debt collection 
company searches for the correct address. Second, the private 
debt collection company telephones the taxpayer to request full 
payment.\375\ If the taxpayer cannot pay in full immediately, 
the private debt collection company offers the taxpayer an 
installment agreement providing for full payment of the taxes 
over a period of as long as five years. If the taxpayer is 
unable to pay the outstanding tax liability in full over a 
five-year period, the private debt collection company obtains 
financial information from the taxpayer and will provide this 
information to the IRS for further processing and action by the 
IRS.
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    \374\The provision requires that the IRS disclose confidential 
taxpayer information to the private debt collection company. Section 
6103(n) permits disclosure of returns and return information for ``the 
providing of other services . . . for purposes of tax administration.''
    \375\The private debt collection company is not permitted to accept 
payment directly. Payments are required to be processed by IRS 
employees.
---------------------------------------------------------------------------
    The Code specifies several procedural conditions under 
which the provision would operate. First, provisions of the 
Fair Debt Collection Practices Act apply to the private debt 
collection company. Second, taxpayer protections that are 
statutorily applicable to the IRS are also made statutorily 
applicable to the private sector debt collection companies. In 
addition, taxpayer protections that are statutorily applicable 
to IRS employees are made statutorily applicable to employees 
of private sector debt collection companies. Third, 
subcontractors are prohibited from having contact with 
taxpayers, providing quality assurance services, and composing 
debt collection notices; any other service provided by a 
subcontractor must receive prior approval from the IRS.
    The Code creates a revolving fund from the amounts 
collected by the private debt collection companies. The private 
debt collection companies will be paid out of this fund. The 
Code prohibits the payment of fees for all services in excess 
of 25 percent of the amount collected under a tax collection 
contract.
    The Code also provides that up to 25 percent of the amount 
collected may be used for IRS collection enforcement 
activities. The law also requires Treasury to provide a 
biennial report to the Committee on Finance and the Committee 
on Ways and Means. The report is to include, among other items, 
a cost benefit analysis, the impact of the debt collection 
contracts on collection enforcement staff levels in the IRS, 
and an evaluation of contractor performance.
    The Omnibus Appropriations Act of 2009 (the ``Act''), which 
made appropriations for the fiscal year ending September 30, 
2009, included a provision stating that none of the funds made 
available in the Act could be used to fund or administer 
section 6306.\376\ Around the same time, the IRS announced that 
the IRS would not renew its contracts with private debt 
collection agencies.\377\
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    \376\Pub. L. No. 111-8, March 11, 2009.
    \377\IR-2009-19, March 5, 2009.
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                           REASONS FOR CHANGE

    The Committee believes that the use of private debt 
collection agencies will help facilitate the collection of 
taxes owed to the Government. The Committee also believes that 
the safeguards it has incorporated, such as narrowing the class 
of receivables subject to collection and giving priority to 
previously approved contractors, will protect taxpayers' rights 
and privacy.
    The Committee believes that the increased collections that 
may result from the use of private debt collection agencies for 
limited classes of debts should be used to improve the ability 
of the Government to handle compliance matters overall. By 
funding the hiring and training of special compliance 
personnel, the Committee believes the IRS can establish a cadre 
of well-trained personnel who perform various compliance 
functions while protecting taxpayers' rights.

                        EXPLANATION OF PROVISION

Qualified tax collection contracts

    The provision requires the Secretary to enter into 
qualified tax collection contracts for the collection of 
inactive tax receivables. Inactive tax receivables are defined 
as any tax receivable (i) removed from the active inventory for 
lack of resources or inability to locate the taxpayer, (ii) for 
which more than 1/3 of the applicable limitations period has 
lapsed and no IRS employee has been assigned to collect the 
receivable; and (iii) for which, a receivable has been assigned 
for collection but more than 365 days have passed without 
interaction with the taxpayer or a third party for purposes of 
furthering the collection. Tax receivables are defined as any 
outstanding assessment which the IRS includes in potentially 
collectible inventory.
    The provision designates certain tax receivables as not 
eligible for collection under qualified tax collection 
contracts, specifically a contract that: (i) is subject to a 
pending or active offer-in-compromise or installment agreement; 
(ii) is classified as an innocent spouse case; (iii) involves a 
taxpayer identified by the Secretary as being (a) deceased, (b) 
under the age of 18, (c) in a designated combat zone, or (d) a 
victim of identity theft; (iv) is currently under examination, 
litigation, criminal investigation, or levy; or (v) is 
currently subject to a proper exercise of a right of appeal. 
The provision grants authority to the Secretary to prescribe 
procedures for taxpayers in presidentially declared disaster 
areas to request relief from immediate collection measures 
under the provision.
    The provision requires the Secretary to give priority to 
private collection contractors and debt collection centers 
currently approved by the Treasury Department's Financial 
Management Service on the schedule required under section 
3711(g) of title 31 of the United States Code, to the extent 
appropriate to carry out the purposes of the provision.
    The provision adds an additional exception to section 6103 
to allow contractors to identify themselves as such and 
disclose the nature, subject, and reason for the contact. 
Disclosures are permitted only in situations and under 
conditions approved by the Secretary.
    The provision requires the Secretary to prepare two reports 
for the House Committee on Ways and Means and the Senate 
Committee on Finance. The first report is required annually and 
due not later than 90 days after each fiscal year and is 
required to include: (i) the total number and amount of tax 
receivables provided to each contractor for collection under 
this section, (ii) the total amounts collected by and 
installment agreements resulting from the collection efforts of 
each contactor and the collection costs incurred by the IRS; 
(iii) the impact of such contacts on the total number and 
amount of unpaid assessments, and on the number and amount of 
assessments collected by IRS personnel after initial contact by 
a contractor, (iv) the amount of fees retained by the Secretary 
under subsection (e) and a description of the use of such 
funds; and (v) a disclosure safeguard report in a form similar 
to that required under section 6103(p)(5).
    The second report is required biannually and is required to 
include: (i) an independent evaluation of contactor 
performance; and (ii) a measurement plan that includes a 
comparison of the best practices used by private collectors to 
the collection techniques used by the IRS and mechanisms to 
identify and capture information on successful collection 
techniques used by the contractors that could be adopted by the 
IRS.

Special compliance personnel program

    The provision requires that the amount that, under current 
law, is to be retained and used by the IRS for collection 
enforcement activities under section 6306 of the Code be 
instead used to fund a newly created special compliance 
personnel program. The provision also requires the Secretary to 
establish an account for the hiring, training, and employment 
of special compliance personnel. No other source of funding the 
program is permitted, and funds deposited in the special 
account are restricted to use for the program, including 
reimbursement of the IRS and other agencies for the cost of 
administering the qualified debt collection program and all 
costs associated with employment of special compliance 
personnel and the retraining and reassignment of other 
personnel as special compliance personnel. Special compliance 
personnel are individuals employed by the IRS to serve either 
as revenue officers performing field collection functions, or 
as persons operating the automated collection system.
    The provision requires the Secretary to prepare annually a 
report for the House Committee on Ways and Means and the Senate 
Committee on Finance, to be submitted no later than March of 
each year. In the report, the Secretary is to describe for the 
preceding fiscal year accounting of all funds received in the 
account, administrative and program costs, number of special 
compliance personnel hired and employed as well as actual 
revenue collected by such personnel. Similar information for 
the current and following fiscal year, using both actual and 
estimated amounts, is required.

                             EFFECTIVE DATE

Qualified tax collection contracts

    The provision relating to qualified tax collection 
contracts applies to tax receivables identified by the 
Secretary after the date of enactment. The requirement to give 
priority to certain private collection contractors and debt 
collection centers applies to contracts and agreements entered 
into after the date of enactment, and the new exception to 
section 6103 applies to disclosures made after the date of 
enactment. The requirement of the reports to Congress is 
effective on the date of enactment.

Special compliance personnel program

    The provision relating to the special compliance personnel 
program applies to amounts collected and retained by the 
Secretary after date of enactment.

5. Exclusion of dividends from controlled foreign corporations from the 
   definition of personal holding company income for purposes of the 
 personal holding company rules (sec. 306 of the bill and sec. 543 of 
                               the Code)


                              PRESENT LAW

Personal holding company tax

    In addition to the regular corporate tax, an additional tax 
is imposed on a corporation that is a personal holding company. 
The tax is an amount equal to the maximum rate of tax on 
qualified dividends of individuals (currently 20 percent), 
multiplied by the corporation's undistributed personal holding 
company income above a dollar threshold.\378\ A personal 
holding company is a closely held corporation at least 60 
percent of the adjusted ordinary gross income (as defined) of 
which is personal holding company income.\379\ Personal holding 
company income includes dividends, interest, certain rents, and 
other generally passive investment income.\380\
---------------------------------------------------------------------------
    \378\Sec. 541.
    \379\Sec. 542.
    \380\Sec. 543.
---------------------------------------------------------------------------

Controlled foreign corporations

    In general, the U.S. does not impose tax on the income of a 
foreign corporation unless and until that income is distributed 
to U.S. shareholders. However, the rules of subpart F\381\ 
provide an exception for certain passive or readily movable 
income of a foreign corporation that, for a period of at least 
30 days during the taxable year, is more than 50-percent owned 
by U.S. shareholders each of which owns at least 10 percent of 
the corporate stock after applying attribution rules (a 
controlled foreign corporation). The pro rata share of such 
corporate earnings is currently included as income of the 10-
percent (or greater) shareholders that hold their stock on the 
last day of the taxable year. Except as otherwise provided for 
specific purposes of the Code, the inclusions are not treated 
as dividends. When the earnings are distributed to the U.S. 
shareholders, they are not again subject to tax.\382\
---------------------------------------------------------------------------
    \381\Secs. 951-965.
    \382\A separate set of rules applies to income of a foreign 
corporation that is a passive foreign investment corporation, generally 
defined as a foreign corporation 75 percent or more of the gross income 
of which is passive income, or 50 percent or more of the assets of 
which produce or are held for the production of passive income (sec. 
1297). Such income is either subject to an interest charge for deferral 
when it is ultimately distributed to a U.S. shareholder, or an election 
can be made to include income currently even if not distributed (secs. 
1291-1298). A corporation is not treated as a passive foreign 
investment corporation with respect to any U.S. shareholder during the 
period such corporation is a controlled foreign corporation of which 
the shareholder is a 10-percent or greater owner under the rules 
relating to controlled foreign corporations (sec. 1297(d)).
---------------------------------------------------------------------------
    When a controlled foreign corporation distributes money or 
other property to a U.S. shareholder out of its earnings and 
profits not previously included in the income of the 
shareholder, the amount of money or fair market value of the 
property is included in gross income as a dividend.\383\
---------------------------------------------------------------------------
    \383\A 10-percent corporate shareholder may be allowed a foreign 
tax credit for the foreign income taxes paid on the earnings and 
profits distributed as a dividend (sec. 902). Also, a dividends-
received deduction is allowed to a corporate shareholder to the extent 
the dividend is attributable to certain U.S. source income, and no 
foreign tax credit is allowed with respect to any such amount. (sec. 
245). A dividend received by an individual is a qualified dividend, 
eligible for the maximum 20-percent tax rates, if the dividend is from 
a qualified foreign corporation (generally, a corporation (i) that is 
eligible for certain treaty benefits or is incorporated in a U.S. 
possession, or (ii) the stock of which with respect to which the 
dividend is paid readily tradable on a U.S. securities market, and that 
in either case is not a passive foreign investment company (sec. 
1(h)(11)(C)).
---------------------------------------------------------------------------

                           REASONS FOR CHANGE

    The Committee believes that dividends paid by a controlled 
foreign corporation to a 10-percent U.S. shareholder, out of 
the controlled foreign corporation's earnings and profits that 
were not treated as passive income inclusions to the 
shareholder, are attributable to active business income of the 
controlled foreign corporation. Accordingly, it is appropriate 
to exclude these dividends from personal holding company income 
of the shareholder.
    The Committee also believes that the personal holding 
company tax currently deters the repatriation of earnings that 
would be repatriated if the U.S. corporate tax alone (but not 
the personal holding company tax) were applicable to the 
repatriated earnings.

                        EXPLANATION OF PROVISION

    Under the provision, dividends received by a 10-percent 
U.S. shareholder (as defined in section 951(b)) from a 
controlled foreign corporation (as defined in section 957(a)) 
are excluded from the definition of personal holding company 
income for purposes of the personal holding company tax.

                             EFFECTIVE DATE

    The provision applies to taxable years ending on or after 
the date of enactment.

6. Inflation adjustment for certain civil penalties under the Internal 
Revenue Code (sec. 307 of the bill and secs. 6651, 6652(c), 6695, 6698, 
                   6699, 6721, and 6722 of the Code)


                              PRESENT LAW

    The Code provides for both civil and criminal penalties to 
ensure complete and accurate reporting of tax liability and to 
discourage fraudulent attempts to defeat or evade tax. Civil 
and criminal penalties are applied separately. Thus, a taxpayer 
convicted of a criminal tax offense may be subject to both 
criminal and civil penalties, and a taxpayer acquitted of a 
criminal tax offense may nonetheless be subject to civil tax 
penalties. In cases involving both criminal and civil 
penalties, the IRS generally does not pursue both 
simultaneously, but delays pursuit of civil penalties until the 
criminal proceedings have concluded.
    Civil penalties are provided in Chapter 68 of the 
Code.\384\ Civil penalties are categorized into two types: 
additions to the tax and additional amounts (herein ``additions 
to tax''), and assessable penalties. The additions to tax are 
generally subject to deficiency proceedings, and some may be 
waived under certain circumstances, including a showing of 
reasonable cause under section 6664.\385\ Assessable penalties 
can be assessed without restrictions (such as the opportunity 
for preassessment judicial review) applicable in deficiency 
cases.\386\ Assessable penalties may also be waived under 
certain circumstances, including a showing of reasonable cause 
under section 6724.
---------------------------------------------------------------------------
    \384\Secs. 6651-6751.
    \385\Secs. 6651-6663.
    \386\Secs. 6671-6725.
---------------------------------------------------------------------------
    Some penalties are calculated by reference to the tax 
liability, while others are fixed dollar amounts. Penalties 
with a fixed dollar amount include penalties in the case of (1) 
failure to file a tax return or to pay tax,\387\ (2) failure to 
file certain information returns, registration statements, and 
certain other statements,\388\ (3) failure to furnish a copy of 
the tax return to the taxpayer, failure to sign the return, 
failure to furnish an identifying number, failure to retain a 
completed copy of the tax return or retain on a list the name 
and taxpayer identification number of the taxpayer for whom the 
return was prepared, failure to file correct information 
returns, negotiation of a taxpayer's check by the tax return 
preparer, and failure to be diligent in determining eligibility 
for the earned income credit,\389\ (4) failure of a partnership 
to file a return,\390\ (5) failure of an S corporation to file 
a return,\391\ (6) failure to file correct information 
returns,\392\ and (7) failure to file correct payee 
statements.\393\
---------------------------------------------------------------------------
    \387\Sec. 6651(a).
    \388\Sec. 6652(c).
    \389\Sec. 6695.
    \390\Sec. 6698.
    \391\Sec. 6699.
    \392\Sec. 6721.
    \393\Sec. 6722.
---------------------------------------------------------------------------
    The penalty provisions generally contain no automatic 
mechanism to adjust the amount of the penalty for inflation. 
However, the penalty provisions in sections 6721 and 6722 are 
adjusted for inflation every five years and provide a rounding 
rule.

                           REASONS FOR CHANGE

    The Committee believes that indexing these fixed-dollar 
penalties will encourage compliance with the tax law. By 
correlating increases in the amounts to increases in other 
types of dollar amounts in the economy generally, the penalties 
can continue to serve as a meaningful economic deterrent to 
non-compliant behavior.

                        EXPLANATION OF PROVISION

    The provision indexes the fixed-dollar civil tax penalties 
provided in sections 6651, 6652(c), 6695, 6698, 6699, 6721, and 
6722 each calendar year. The provision rounds penalty amounts 
down to the nearest multiple of five dollars if less than 
$5,000, otherwise the provision rounds penalty amounts down to 
the nearest multiple of $500. The provision does not modify the 
present-law rounding rules in sections 6721 and 6722.

                             EFFECTIVE DATE

    The provision is effective for returns required to be filed 
after December 31, 2014.

                    III. BUDGET EFFECTS OF THE BILL


                         A. Committee Estimates

    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 the ``Expiring Provisions Improvement Reform and 
Efficiency (EXPIRE) Act of 2014'' as reported.

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

                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 provisions of the 
bill involve increased tax expenditures (see revenue table in 
Part A., above). The revenue-increasing provisions of the bill 
involve reduced 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.

                       IV. VOTES OF THE COMMITTEE

    The Modification to the Chairman's Mark was deemed 
incorporated into the Mark.
    Amendment #5, Schumer/Enzi/Roberts/Stabenow/Cantwell #1, as 
modified: Modification of IRC Section 41--Innovators Job 
Creation Act--agreed to by voice vote.
    Amendment #49, Brown/Stabenow #7: Manufacturing communities 
tax credit--agreed to by voice vote.
    Amendment #87, Toomey #3: Eliminate crony capitalist energy 
tax credits--defeated by roll call vote, 6 ayes, 18 nays.
    Ayes: Hatch, Roberts, Enzi, Burr, Isakson, Toomey.
    Nays: Wyden, Rockefeller, Schumer, Stabenow, Cantwell, 
Nelson (proxy), Menendez (proxy), Carper (proxy), Cardin 
(proxy), Brown (proxy), Bennet, Casey (proxy), Warner (proxy), 
Grassley, Crapo (proxy), Cornyn (proxy), Thune, Portman.
    Amendment #6, Schumer/Warner #2: Modification of 
transportation fringe benefit--bike share--agreed to by voice 
vote.
    Amendment #18, Stabenow #9: Extension of the special rule 
for electronic transmission sales to implement FERC or state 
electric restructuring--agreed to by voice vote.
    Amendment #14, Stabenow #5: Two year extension of 
empowerment zone tax incentives--agreed to by voice vote.
    Amendment #85, Toomey/Hatch/Burr/Cornyn/Crapo/Roberts/
Portman/Isakson/Thune/Enzi #1: Save good paying American jobs 
and encourage life-saving innovation by delaying the medical 
device tax for two years. Senator Toomey moved to permit the 
consideration of the amendment notwithstanding the ruling of 
the Chair. The motion was defeated by a roll call vote, 9 ayes, 
13 nays.
    Ayes: Hatch, Grassley, Roberts, Enzi, Thune, Burr, Isakson, 
Portman, Toomey.
    Nays: Wyden, Rockefeller, Schumer, Stabenow, Cantwell, 
Nelson, Menendez, Carper, Cardin, Brown, Bennet, Casey, Warner.
    (Unanimous Consent granted to list Crapo as Aye)
    Amendment #26, Menendez/Toomey #1: Small business inflation 
protection Amendment--agreed to by voice vote.
    Amendment #43, Brown/Rockefeller/Portman/Casey/Schumer/
Stabenow #1: Extension for health coverage for displaced 
workers--agreed to by voice vote.
    Final Passage of the Expiring Provisions Improvement Reform 
and Efficiency Act of 2014--agreed to by voice vote.

                 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 civil tax penalties, requiring 
the Secretary to enter into a qualified tax collection contract 
or contracts with respect to the collection of inactive 
receivables, 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 requiring paid preparers 
to meet due diligence requirements with respect to the child 
tax credit similar to the earned income tax credit's 
requirements.
    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).
    The Committee has determined that the tax provisions of the 
reported bill do not contain Federal private sector mandates or 
Federal intergovernmental mandates on State, local, or tribal 
governments within the meaning of Public Law 104-4, the 
Unfunded Mandates Reform Act of 1995. The costs required to 
comply with each Federal private sector mandate generally are 
no greater than the aggregate estimated budget effects of the 
provision.

                       C. Tax Complexity Analysis

    Section 4022(b) of the Internal Revenue Service Reform and 
Restructuring Act of 1998 (the ``IRS Reform Act'') requires the 
staff of the Joint Committee on Taxation (in consultation with 
the Internal Revenue Service 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.

                   1. 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 2015 
(through 2016 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 after December 31, 
2012 and before January 1, 2016 (January 1, 2017, 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, 2016 (January 
1, 2017, 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 4 extension 
property'').\394\
---------------------------------------------------------------------------
    \394\An election with respect to round 4 extension property is 
binding for all property that is eligible qualified property solely by 
reason of the extension of the 50-percent additional first-year 
depreciation deduction.
---------------------------------------------------------------------------
    Under the bill, a corporation that has an election in 
effect with respect to round 3 extension property to claim 
minimum tax credits in lieu of bonus depreciation is treated as 
having an election in effect for round 4 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 3 extension property to elect to claim minimum 
tax credits in lieu of bonus depreciation for round 4 extension 
property. A separate bonus depreciation amount, maximum amount, 
and maximum increase amount is computed and applied to round 4 
extension property.\395\
---------------------------------------------------------------------------
    \395\In computing the maximum amount, the maximum increase amount 
for round 4 extension property is reduced by bonus depreciation amounts 
for preceding taxable years only with respect to round 4 extension 
property.
---------------------------------------------------------------------------
    The bill also includes a technical correction with respect 
to the taxable year for which an election under section 
168(k)(4) is made.

Number of affected taxpayers

    It is estimated that the provision will affect over ten 
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; however, the current year tax 
deduction associated with such assets will increase.

   2. 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 2014 and 2015, 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 2013.
    In addition, the bill extends, for taxable years beginning 
in 2014 and 2015, 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 2014 and 2015, 
including the limitation on carryovers and the maximum amount 
of $250,000 for each taxable year. For taxable years beginning 
in 2014 and 2015, the bill continues to permit a taxpayer to 
amend or irrevocably revoke an election for a taxable year 
under section 179 without the consent of the Commissioner.

Number of affected taxpayers

    It is estimated that the provision will affect over ten 
percent of small business tax returns.

Discussion

    While taxpayers purchasing section 179 property will still 
be required to complete and file Form 4562, significantly less 
detail is required to be included on such form. Accordingly, 
the compliance burden of many taxpayers will be reduced.

                        Department of the Treasury,
                                  Internal Revenue Service,
                                    Washington, DC, April 14, 2014.
Mr. Thomas A. Barthold,
Chief of Staff, Joint Committee on Taxation,
Washington, DC.
    Dear Mr. Barthold: I am responding to your letter dated 
April 8, 2014, in which you requested a complexity analysis 
related to the Expiring Provisions Improvement Reform and 
Efficiency (EXPIRE) Act of 2014.
    Enclosed are the combined comments of the Internal Revenue 
Service and the Treasury Department for inclusion in the 
complexity analysis in the Senate Committee on Finance report 
on the Expiring Provisions Improvement Reform and Efficiency 
(EXPIRE) Act. Our analysis covers the two provisions that you 
preliminarily identified in your letter: extension of bonus 
depreciation and increased expensing limitations and treatment 
of certain real property as section 179 property. Please note 
that for purposes of this complexity analysis, IRS staff 
assumed timely enactment of this legislation. If legislation is 
not enacted before the end of the year, there would be 
complexity for IRS and for taxpayers that is not addressed in 
this response.
    Our comments are based on the description of the provision 
provided in your letter. This analysis does not include 
administrative cost estimates for the changes that would be 
required. Due to the short turnaround time, our comments are 
provisional and subject to change upon a more complete and in-
depth analysis of the provisions.
            Sincerely,
                                                  John A. Koskinen.
    Enclosure.

  COMPLEXITY ANALYSIS OF THE COMMITTEE REPORT ON EXPIRING PROVISIONS 
         IMPROVEMENT REFORM AND EFFICIENCY (EXPIRE) ACT OF 2014


                   1. Extension of Bonus Depreciation


                               PROVISION

    The bill extends the 50-percent additional first-year 
depreciation deduction for two years, generally through 2015 
(through 2016 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 after December 31, 
2012 and before January 1, 2016 (January 1, 2017, 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, 2016 (January 
1, 2017, 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 4 extension property'').
    Under the bill, a corporation that has an election in 
effect with respect to round 3 extension property to claim 
minimum tax credits in lieu of bonus depreciation is treated as 
having an election in effect for round 4 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 3 extension property to elect to claim minimum 
tax credits in lieu of bonus deprecation for round 4 extension 
property. A separate bonus depreciation amount, maximum amount, 
and maximum increase amount is computed and applied to round 4 
extension property.
    The bill also includes a technical correction with respect 
to the taxable year for which an election under section 
168(k)(4) is made.

                         IRS/TREASURY COMMENTS

     The extension of the time period for property 
eligible for additional first-year depreciation would have no 
significant impact on Form 4562 or any other tax forms. The 
Instructions for Form 4562, Publication 946, and other 
instructions and publications would be revised to reflect the 
extension.
     No programming changes would be required by this 
Provision.

   2. Increased Expensing Limitations and Treatment of Certain Real 
                                Property


                               PROVISION

    The bill provides that the maximum amount a taxpayer may 
expense, for taxable years beginning in 2014 and 2015, 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 2013.
    In addition, the bill extends, for taxable years beginning 
in 2014 and 2015, 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 2014 and 2015, 
including the limitation on carryovers and the maximum amount 
of $250,000 for each taxable year. For taxable years beginning 
in 2014 and 2015, the bill continues to permit a taxpayer to 
amend or irrevocably revoke an election for a taxable year 
under section 179 without the consent of the Commissioner.

                         IRS/TREASURY COMMENTS

     The extension of the time period for property 
eligible for additional first-year depreciation would have no 
significant impact on Form 4562 or any other tax forms. The 
Instructions for Form 4562, Publication 946, and other 
instructions and publications would be revised to reflect the 
extension.
     No programming changes would be required by this 
provision.

       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).