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Congress’ pre-Christmas Tax Blockbuster Brings As Much Coal As It Does Presents

Just before Christmas, Congress passed dozens of tax-law changes that affect businesses large and small, and since many apply retroactively, their impact is immediate.

Some of the changes will advance a sustainable economy, by supporting the use and production of renewable energy for instance. Others will inhibit it, for example, by enabling U.S. companies to shift income offshore. All will drive up the deficit because few, if any, are paid for.

The changes add certainty to the tax code because Congress made permanent more than 20 temporary tax breaks (the so-called tax extenders). These include the Research and Development (R&D) tax credit, which has been extended more than a dozen times since 1981, when it was first passed as a temporary break.

That additional permanence will advance broad tax reform, said House Ways and Means Committee Chairman Kevin Brady (R-Texas, 8th District): It creates a “path forward to pro-growth tax reform by ensuring that we will no longer have to spend months each year debating temporary tax extensions.”

Perhaps, but it also undercuts efforts to ensure U.S. multinationals pay their fair share of taxes, by continuing two tax breaks that U.S. companies use to shift their income offshore: The Active Financing Exception and the Controlled Foreign Corporation Look-Through Rule. The first was made permanent, the second extended for five years.

Some of the changes will benefit small businesses. For example, Congress made section 179 accelerated expensing permanent. Congress also raised the expensing limit under section 179 to $500,000 and indexed it to inflation. Without the change, the limit would be $25,000.

Congress made most of the changes through the Protecting Americans from Tax Hikes Act, or PATH Act. It made others as part of an omnibus-spending bill that it passed.

Both bills support renewable energy. For instance, the omnibus extends the production tax credit (PTC) for wind energy as well as the investment tax credit (ITC) for solar energy. Among other things, the PATH Act extends the credit for manufacturers of energy-efficient homes and the deduction for energy-efficient improvements to commercial buildings.

Congress did not pay for the PATH Act, so its changes add hundreds of billions of dollars to the federal deficit and deprive the government of revenue to pay for critical infrastructure and services. Congress could have paid for some of the costs by closing tax loopholes that boost the deficit but not the larger economy (such as those for oil and gas companies).

The tax-law changes also benefit nonprofits and individuals. For example, Congress made certain charitable-giving incentives permanent, including enhanced deductions for donations of unsold food inventory and land development rights.

For specifics on how the changes will affect you, consult your tax adviser. ASBC continues to work at both the federal and state level to encourage lawmakers to use fiscal policy as a tool to bring about a more sustainable economy.

John O'Neill is ASBC's tax policy analyst. To learn more, click here or contact John at