Summary of the Senate Amendment to HR4440, the House-passed Katrina tax relief bill
Below is the text of the proposed Senate amendment to the House-passed Katrina tax relief legislation (H.R. 4440) along with comments from Chairman Grassley and Ranking Member Baucus of the Senate Committee on Finance.
“This important legislation focuses on the longer-term needs of the people on the Gulf Coast. The tax incentives are aimed at helping to rebuild the local and regional economy so that individuals and families can go home and rebuild their lives. I hope to see final action by Congress on this bill before the week ends,” said Sen. Chuck Grassley of Iowa, Finance Committee Chairman.
“The amendment the Senate has proposed shows the progress that can be made when leaders put aside their differences and work together for the good of the American people. We’ve put an agreement in place to help hurricane zone employers pay their workers, to help students go back to school in the Gulf Coast region, to help families afford housing and to help communities rebuild. As I’ve said many times, passing this vital Katrina relief is an urgent priority. I’m hopeful that the House will agree to this package and send it to the President by week’s end,” said Sen. Max Baucus of Montana, Finance Committee Ranking Member.
Summary of Senate Amendment to H.R. 4440
Creates additional tax-exempt bond authority to help rebuild devastatedinfrastructure in the GO Zone. Provides Louisiana, Mississippi and Alabama the authority toissue a special class of private activity bonds, called GO Zone Bonds, outside of the state volumecaps. Bond authority is approximately $7.9 billion for Louisiana, $4.8 billion for Mississippi and$2.1 billion for Alabama. These amounts are based on each State's population in the Zone,according to 2004 U.S. Census estimates. GO Zone Bonds can be issued by States andmunicipalities. Bond proceeds can be used to pay for acquisition, construction, and renovation ofnonresidential real property, qualified low-income residential rental housing, single-familyresidential housing, and public utility property (e.g., gas, water, electric and telecommunicationlines) located in the Zone. The current low-income housing targeting rules are relaxed so thatmore bond proceeds can be used to rebuild housing in the Zone. Up to $150,000 of GO Zonemortgage revenue bonds may be used to repair homes (as opposed to $15,000 under current law).In addition, the first-time homebuyer rule is waived. Interest payments on the bonds are notsubject to the AMT. The authority to issue GO Zone Bonds expires after December 31, 2010.Cost: $1.55 billion over ten years.
Additional Advance Refunding for Bonds. Provides States and municipalities in theKatrina Go Zone with one additional advance refunding before January 1, 2011 for certaingovernmental bonds (including 501(c)(3) bonds). Also provides one advance refunding forcertain private activity bonds used to finance airports, docks, and wharves. The additionalauthorization is up to $4.5 billion for Louisiana, $2.25 billion for Mississippi and $1.125 billionfor Alabama. The provisions also applies to 501(c)(3) bonds prior to January 1, 2011. Advancerefunding allows the bond issuer to restructure eligible debt by refinancing at a lower rate orspreading interest payments over a longer period of time. Cost: $741 million over ten years.
Expands Access to Low-Income Housing. Under current law, States receive allocationsof low-income housing tax credits based on population. The proposal allows States to allocatevolumes of additional housing credit amounts amount in years 2006 to 2008 of $18 per person inthe Zone as measured by 2004 population data. This will provide approximately $70 million forLouisiana, $37 million for Mississippi and $17 million for Alabama. Additionally, the GulfOpportunity Zone will be treated as a difficult development area, allowing investors to calculatecredits for a project on an amount equal to 130 percent of new construction or rehabilitationexpenditures. Cost: $1 billion over ten years.
Provides 50-percent bonus depreciation to help businesses rebuild in the Zone. Permits businesses to claim an additional first-year depreciation deduction equal to 50 percent ofthe cost of new property investments made in the Zone. The additional deduction applies topurchased computer software, leasehold improvements, certain commercial and residential realestate expenditures and equipment. All depreciation deductions (including bonus depreciation)would be exempt from the AMT. The provision applies to property placed in service throughDecember 31, 2007 (December 31, 2008 for real property). In addition, the Department ofTreasury would be granted authority to extend the 2003 bonus depreciation deadline for placinglong-lived property in service in certain circumstances for the Gulf Opportunity Zone, Rita Zoneor Wilma Zone for up to one year. Cost: $2 billion over ten years.
Increase in Expensing for Small Businesses. Current law permits certain smallbusinesses to deduct up to $100,000 of the cost of property used in the business. The proposalwould double this amount to $200,000 for qualifying expenditures made in the disaster areathrough 2007. This provision would also increase the level of investment at which benefits phaseout from $400,000 to $1 million of qualifying purchases, thus allowing more businesses to usethis tax benefit in rebuilding. This provision applies to all property placed in service in the GulfOpportunity Zone after August 27, 2005 through 2007. Cost: $7 million over ten years.
Partial Expensing for Demolition and Cleanup Costs. Under the proposal, 50 percentof the costs (that would otherwise be capitalized) related to site cleanup and demolition would bedeductible by businesses. Effective for amounts paid or incurred after August 27, 2005 through2007. Cost: $105 million over ten years.
Expensing to Promote Cleanup of Brownfields. The proposal extends the deductibilityof costs of cleaning up Brownfields in the Katrina GO Zone for 2 years and allows expensing forthe cleanup of petroleum products in the Katrina GO Zone. Effective for expenditures paid orincurred after August 27, 2005 through 2007. Cost: $48 million over ten years.
Increase in Rehabilitation Credit for Gulf Opportunity Zone Projects. Therehabilitation credit is raised from 1 percent to 13 percent of qualified expenditures for anyqualified rehabilitated building other than a certified historic structure. It also raises the creditfrom 20 percent to 26 percent of qualified expenditures for any certified historic structure. Cost:$78 million over ten years.
Increased Expensing and NOL Carryback for Qualified Timber Property. Undercurrent law, taxpayers may only deduct $10,000 of reforestation cost. The amendment raises thelimit to $20,000 and allows losses to be carried back for 5 years, rather than the current 2-yearcarryback. The proposal only applies to taxpayers owning less than 500 acres of timber in theKatrina (effective on 8/27/05), Rita (effective on 9/23/05), and Wilma (effective on 10/23/05)Zones. The increase in reforestation expensing limit is available for expenditures incurred priorto January 1, 2008. Cost: Less than $1 million over ten years.
Public Utility Casualty Loss Carryback. Taxpayers with casualty losses associatedwith public utility property caused by Hurricane Katrina can elect to either (i) carryback a netoperating loss attributable to certain casualty losses 10 years; or (ii) treat certain casualty lossesas having occurred 5 years prior to the disaster under the proposal. Provision is effective on dateof enactment. Cost: $95 million over ten years.
Net Operating Loss Carryback. The proposal extends the net operating loss carrybackperiod from 2 to 5 years for net operating losses attributable to (i) new investment and repairingexisting investment in the areas damaged by Hurricane Katrina; (ii) business casualty lossescaused by Hurricane Katrina; and (iii) moving expenses and temporary housing expenses foremployees working in areas damaged by Hurricane Katrina. Provision is effective on date ofenactment. Cost: $410 million over ten years.
Gulf Tax Credit Bonds. Authorizes Gulf Opportunity Zone States to issue debt servicetax credit bonds providing credits against Federal income tax instead of interest payments, so thatthese States can provide assistance to communities unable to meet their debt servicerequirements as a result of the hurricanes. Bonds would be required to mature before January 1,2008. At least 95 percent of bond proceeds must be used to redeem or to pay principal, interest orpremiums on outstanding bond, and such proceeds so used must be matched by an equal amountof State funds. The allocation of bonds per State would be $200 million for Louisiana, $100million for Mississippi and $50 million for Alabama. Cost: $57 million over ten years.
New Markets Tax Credit. Allow an additional $300 million in 2005 and 2006 and an additional $400 million in 2007 for New Markets Tax Credit (NMTC) authority for communitydevelopment entities (CDEs) operating in the Gulf Opportunity Zone. A NMTC allowsbusinesses investing in low-income communities lacking access to capital to take a 39% taxcredit over seven years for investments in qualified community development entities. Cost:$387 million over ten years.
Income Eligibility for Qualified Residential Rental Project Requirement. Allowoperators of qualified residential rental projects to rely on the representations of prospectivetenants displaced by Hurricane Katrina for purposes of determining whether the individualssatisfy the income limitations for qualified rental projects. Individual's tenancy must beginduring the six-month period beginning on the date the individual was displaced by HurricaneKatrina. Cost: Negligible revenue effect.
Public Utility Disaster Loss Carryback. Allow public utilities to carryback disasterlosses for five years. Cost: $24 million over ten years.
Employee Retention Credit. The Katrina Emergency Tax Relief Act of 2005 (P.L.109-73) provided a 40 percent tax credit for wages paid up to $6,000 if paid after August 28,2005, and before December 31, 2005, by employers located in the Katrina GO Zone whocontinue to pay their employees while their business is inoperable. The proposal modifies the taxcredit so that the provision applies to Katrina, Rita and Wilma Zones without regard to the of the employer. Cost: $114 million over ten years.
Hope Scholarship and Lifetime Learning Credit. Current law allows a HopeScholarship Credit in the first two years of postsecondary education equal to100% of the first$1,000 of qualified tuition and related expenses, and 50% of the next $1,000 for a maximum of$1,500. There is also a Lifetime Learning Credit available to students enrolled in one or morecourses at the undergraduate or graduate level (whether or not pursuing a degree), equal to 20%of the first $10,000 in qualified tuition and related expenses. The provision doubles the HopeCredit dollar amounts so the maximum credit would be $3,000, and doubles the LifetimeLearning Credit percentage from 20% to 40%, for a maximum Lifetime Learning Credit of$4,000 for students attending undergraduate or graduate institutions in the Gulf OpportunityZone. Room and board, books and fees would also be considered qualified expenses. Applies totax years 2005 and 2006. Cost: $55 million over ten years.
Employer-Provided Housing and Employer Tax Credit. Allows an employee toexclude from gross income up to $600 per month for lodging provided by his or her employerlocated in the Katrina Go Zone. Provides a credit to the employer equal to 30% of the amountwhich is excludable from the gross income of the qualified employee. Applies to lodgingprovided beginning on the first day of the first month beginning after the date of enactment andending on the date which is 6 months after that date. Cost: $246 million over ten years.
Early Withdrawals from Retirement Plans for Hurricanes Rita and Wilma. Presentlaw discourages distributions from tax-preferred retirement plans with penalties and otherlimitations. The provision waives the 10 percent penalty tax for premature distributions fromIRAs and qualified retirement plans for individuals who suffered an economic loss because ofRita or Wilma and whose principal residence is located in the Rita or Wilma disaster areas.
Individuals eligible for this waiver would be permitted to pay income tax on such distributionsratably over a three-year period. Amounts distributed could be re-contributed to a qualifiedretirement plan over the three-year period following the distribution date and receive rollovertreatment. The waiver of the 10 percent penalty, 3-year income averaging and recontributionprovisions for retirement plan withdrawals will be limited to $100,000 per individual.
Distributions for home purchases which were not finalized because of Hurricanes Rita or Wilma could also be re-contributed to a qualified retirement plan or IRA. Limitations on loans from qualified employer plans would be increased for Hurricane Rita and Hurricane Wilma victims by doubling the thresholds to the lesser of $100,000 or 100 percent of the individual's account balance. Payments due from hurricane victims on qualified plan loans on or after August 25,2005, and before January 1, 2007, could be deferred, and twelve months could be added to the maximum repayment period of affected loans. Cost: $174 million over ten years.
Corporate Charitable Contributions Relief for Hurricanes Rita and Wilma. Theamount allowed as a charitable deduction for a corporation in any taxable year may not exceed 10percent of the corporation's taxable income. The provision temporarily waives limits regardingcharitable cash contributions for Rita and Wilma relief. The provision is effective forcontributions before January 1, 2006. Cost: $91 million over ten years.
Casualty Loss Provision. Under present law, non-business casualty losses aredeductible by taxpayers who itemize only to the extent they exceed 10 percent of adjusted grossincome and a $100 floor. In some circumstances, taxpayers are permitted to include acurrent-year casualty loss on an amended prior year return. The provision eliminates the 10percent and $100 floor for casualty losses resulting from Hurricanes Rita (after 9/23/05) orWilma (after 10/23/05) and incurred in the disaster area, including those claimed on amendedreturns. Cost: $1.2 billion over ten years.
Gulf Coast Recovery Bonds. Expresses the sense of Congress that one or more series ofsavings bonds should be designated as "Gulf Coast Recovery Bonds."Combat Pay Treated as Earned Income for Purposes of the Earned Income TaxCredit (EIC). Pursuant to the Working Families Tax Relief Act of 2004 (P.L. 108-311), combatpay may be taken into account in computing taxable income for purposes of calculating theearned income credit. The provision expires in 2005. The Senate amendment extends theproposal through 2006. Cost: $14 million over ten years.
Interest Suspension. RRA '98 required IRS to suspend interest on tax deficienciesdetermined more than 18 months after the due date of the return. In the American Jobs CreationAct, the suspension was eliminated for interest accrued after October 3, 2004 on deficienciesresulting from certain tax shelters. This provision expands this to pre-October 3, 2004 interest,completely eliminating the interest suspension on certain tax shelters. It contains a carve out fortaxpayers participating in the IRS global tax shelter settlement initiative and also gives theSecretary exception authority in cases of reasonable cause and good faith. The proposaleliminates interest suspension on tax due amended returns. The provision generally applies as ifincluded in the JOBS Act; the amended return provision applies to documents filed after the dateof enactment. Raises: $50 million over ten years.
One-year Extension of Authority for Undercover Operations. This provision extendsthrough 2006 IRS authority to use the income earned by an undercover operation to payadditional expenses incurred in the undercover operation. Surpluses are required to be depositedinto the General Fund and the IRS must conduct a detailed financial audit of such undercoveroperations and provide an annual audit report to the Congress on all such undercover operations.Raises: Less than $500,000 over ten years.
Disclosures to Facilitate Combined Employment Tax Reporting. Extends through2006 IRS authority to disclose taxpayer identity information and signatures to States to allow forthe filing of a federal employment tax form to be used by the appropriate state (thus eliminatingthe taxpayer's requirement to file a separate form with the state). Provision has no revenue effect.
Disclosures Relating to Terrorist Activities. Extends through 2006 authority todisclose confidential tax information to certain Federal law enforcement agency and Federalintelligence agency officers and employees for purposes of investigating terrorist incidents,threats, or activities and for analyzing intelligence concerning such activities. Provision has norevenue effect.
Disclosures Relating to Student Loans. Extends through 2006 authority to disclosecertain taxpayer information (i.e., taxpayer name, mailing address, taxpayer identifying number,filing status and adjusted gross income) to the Department of Education needed by theDepartment to determine income contingent repayment of student loans. Provision has norevenue effect.
Tax Technical Corrections. These provisions are technical corrections needed withrespect to the American Jobs Creation Act of 2004 and other recently enacted tax legislation.The initial version of technical corrections was introduced as S. 3019, the Tax TechnicalCorrections Act of 2004, in the 108th Congress, and a second version was introduced on as S.1447, the Tax Technical Corrections Act of 2005. In both cases, the Committee on Ways andMeans Chairman Bill Thomas introduced companion measures, H.R. 5395 and H.R. 3376. TheSenate Finance Committee and the Committee on Ways and Means, in consultation with theJoint Committee on Taxation and the Department of the Treasury, are continuing to assessproposals for other technical corrections which may be needed to achieve congressional intent.Provisions have no revenue effect.
Trade Technical Correction. Makes technical correction to regional value-contentmethods for rules of origin lender under Public Law 109-53. Provision has no revenue effect.Emergency Requirement. Clarifies that all effects on revenue from the provisionscontained in the Senate Substitute fall under the emergency requirement of the BudgetReconciliation Act and do not affect net Budget totals.
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