The Tax Increase Prevention and Reconciliation Act of 2005

In May, 2006, after an extended legislative process, tax cuts first enacted in 2003 were extended. Although the headline measures in the Act were aimed at individuals, a number of provisions affected corporations.

The tax bill was set to extend the life of the 15 percent rate of tax on most capital gains and qualifying dividends for two years until the end of 2010, preventing a tax increase at the start of 2009. The rate would be reduced to zero in 2008 for taxpayers in the 10- and 15-percent tax brackets. These proposals were expected to cost $20.551 billion over 5 years and $50.783 billion over 10 years.

Alternative Minimum Tax provisions extended the exemption levels though the end of 2006 but at a higher level - $62,550 (married) and $42,500 (other). The proposal is expected to cost $31.047 billion over 5 years. A further AMT patch was approved in late 2007.

Other key provisions included: increased expensing for small business allowing small firms to expense $100,000 (from $25,000) through 2009, expected to cost $7.274 billion over 5 years; and exception under subpart F for active financing and insurance income extended for two years, until the end of 2008 costing an expected $4.796 billion over 5 years.

In addition, then Senate Majority Leader Bill Frist secured two provisions in the legislation increasing the tax code’s fairness for songwriters. The first allows songwriters to claim the capital gains tax rate on music sales and will reduce songwriters’ taxes by up to 35 percent. Individual songwriters can pay up to 50 percent in income and self-employment taxes on their music under current law, while their corporate partners just pay 15 percent in capital gains taxes.

The second songwriter provision simplifies the accounting process for advances paid to songwriters. Songwriting advances can now be calculated according to a straight-line, three-year depreciation schedule.

"I applaud the Senate for passing important tax relief that will help keep our economy strong and growing," commented President Bush, who for many weeks had been pressuring lawmakers to arrive at a deal which included the investment tax cuts, despite their cost in terms of revenues.

"This legislation prevents an enormous tax hike that the American people do not want and would not welcome. The bill will extend policies that have helped our economy flourish," he added.

Additional provisions which did not make the final bill, but may be enacted separately, include the extension of R&D credits, and some employment tax credits.

The main components of the Act which are of interest to businesses were as follows:

Prior to the passing of the Act, US technology and manufacturing groups, including the Information Technology Association of America (ITAA) had urged Congress to pass a strengthened research and development tax credit, and suggested that lawmakers missed a critical opportunity to bolster a recovering economy by failing to act before the credit lapsed on December 31.

"We call on Congress to pass a strengthened research and development credit that allows for the creation of the alternative simplified credit as soon as possible in 2006," announced ITAA vice president Stephanie Childs, adding that:

"Allowing the credit to lapse weakens the industry even as it faces increasing innovation and competition from around the world. Technology companies of all stripes factor this tax credit into their plans to conduct research and development in the United States and to create high quality jobs."

However, in November 2006, there was still confusion over the issue of R&D, with senators on the tax-writing Finance Committee urging their Congressional colleagues to end their continuing procrastination on the passage of the Research and Development tax credit, which has left many thousands of US companies in limbo regarding their future investment strategies.

In a statement issued by committee chairman Chuck Grassley (R-Iowa) and ranking Democrat Max Baucus (D-Mon), Grassley remarked that continued "dilly-dallying" on the issue by lawmakers is curtailing the ability of firms to plan for the future, to make hiring decisions, and to make investments that will create jobs.

He also spoke of how his own constituents are growing increasingly frustrated with the Congressional deadlock on the issue.

"A lot of businesses, in good faith, relied on my assurances. They relied on the assurances of the congressional leadership, made in May of this year. These business people were assured that these extenders would be done," he admitted.

"And it’s not just management that cares. Iowa is a manufacturing state and we’re proud of our “R and D.” Thousands of Iowa employees have the right to ask why this popular provision is being delayed. Some of them could ask why something this popular is a hostage to be cavalierly shot," he remarked.

Baucus added:

“Sixteen thousand American businesses use the research and development tax credit – or they would, if Congress would do the right thing and renew it. Already this year, many companies have had to restate their earnings, because the tax cut they depended on to help finance their research and development efforts simply wasn’t there."

"It’s time to stop the annual exercise that threatens the research and development tax credit. It should be updated. It should be streamlined. It should be made permanent.”

The R&D tax credit, which expired the previous year, was included in the ill-fated 'trifecta' bill which failed to gain approval in the prior Congress. Republicans had included the credit, part of a series of popular tax extenders which enjoyed wide bi-partisan support, in the bill in a bid to force through a roll back in the estate tax, which by contrast was opposed by most Democrats and a few Republicans.

Also not making it into the final Act were various proposals to penalize companies who move their headquarters to an offshore location, in one case by denying their shareholders access to the concessionary 15% dividend tax rate.

 

BACK TO TOP