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TEI comments on economic stimulus legislation.

February 3, 2009

On February 3, 2009, Tax Executives Institute submitted the following comments to the Democratic and Republican leaders of House Committee on Ways and Means and the Senate Committee on Finance concerning pending economic stimulus legislation.

As the preeminent association of in-house tax professionals, Tax Executives Institute endorses enactment of legislation to provide significant tax relief to, and hence effectively stimulate, American businesses. No sector of the economy or of the Nation has been untouched by the current economic downturn. The key in crafting effective stimulus legislation lies in properly balancing tax and non-tax provisions and, with respect to the tax provisions, the provisions affecting individual and business taxpayers.

TEI represents a cross-section of the business community, and our members work daily with the Internal Revenue Code and tax laws around the world. They deal with the tax laws on a day-to-day basis. TEI agrees that the stimulus bill should, at its core, include provisions that will directly and significantly stimulate business activity and hence have a "multiplier effect" beyond that of narrow tax and spending programs. Keeping this in mind, Tax Executives Institute recommends that Congress--

* Lengthen the carryback period for net operating losses to five years without a reduction in the amount of the losses to be carried back.

* Lengthen the carryback period for general business tax credits to five years and temporarily permit 100 percent of a taxpayer's net income tax liability to be offset by the general business credit.

* Extend the provision allowing additional first-year depreciation on qualified investments.

* Extend the period in which taxpayers may claim accumulated alternative minimum tax credits or research tax credits in lieu of the additional depreciation on qualified investments.

* Extend the research tax credit and make it permanent. At a minimum, extend the credit through December 31, 2010.

TEI supports these proposals because they can be enacted expeditiously; can be implemented with a minimum of administrative burden on taxpayers and the government; and, most significantly, will place much needed funds in the hands of distressed businesses at a critical time.

Lengthen the Net Operating Loss Carryback Period to Five Years

TEI supports lengthening the net operating loss carryback period from two years to five years, effective for taxable years ending in 2008 or 2009 (or, at the election of the taxpayer, taxable years beginning in 2008 or 2009). TEI would support the permanent enactment of a five-year NOL carryback period.

Section 172 of the Internal Revenue Code generally permits a net operating loss (NOL) of any year to be carried back two taxable years and then carried forward 20 taxable years. The current carryback and carry forward periods were (apart from a previous temporary provision) set by the Taxpayer Relief Act of 1997, not for any policy reason but simply as a budgeting device. Prior to that, the carryback and carryforward periods were 3 and 15 years, respectively.

The NOL provisions permit taxpayers to ameliorate the consequences of taxing income strictly on an annual basis. In effect, they permit a taxpayer to offset the income of good years with the losses from bad years in order to strike an average taxable income and liability computed over the course of a full business cycle. By expanding the NOL provisions, Congress can help smooth out swings in business income and provide a much needed cash infusion to the companies most severely affected by the current downturn. Moreover, expanding the carryback periods will provide NOL taxpayers with a means of expeditiously recovering taxes already paid into the government, which can be immediately used in the business.

Reject the 10-percent "Haircut." One proposal to expand the NOL period would require a taxpayer making an election to carryback the loss more than two years to permanently reduce the value of the loss by 10 percent. TEI urges the Congress to reject such a "haircut" proposal. In addition to unnecessarily complicating the calculation of the loss to be carried back, it is unclear what policy is served by the haircut. The stimulative value of the cash refunds produced by a carryback should not be diminished by a permanent haircut in the loss's value.

Lengthen the Carryback Period for General Business Tax Credits to Five Years and Increase the Limitation on Allowable Credits to 100 Percent of Tax Liability

Section 38 currently permits a credit against the income tax for the sum of the business credit carryforwards carried to the taxable year, the amount of the current year business credit, and the business credit carrybacks carried to the taxable year. General business tax credits include the research credit, low-income housing credit, and the work opportunity credit. The business credit for any taxable year may not exceed the excess of the taxpayer's net income tax over the greater of the taxpayer's tentative minimum tax or 25 percent of so much of the taxpayer's net regular tax liability as exceeds $25,000. Excess credits may be carried back one year and forward 20 years.

For the same reasons TEl supports lengthening the NOL carryback period, we fully support lengthening the carryback period for the general business tax credit to five years for taxable years ending in 2008 or 2009 (or, at the election of the taxpayer, taxable years beginning in 2008 or 2009). The carryback period permits taxpayers to offset the income of good years with excess credits from bad years in order to strike an average taxable income and tax liability computed over the course of a full business cycle.

We also support temporarily removing the limitation on business credits carried to taxable years ending in 2008 and 2009, thereby permitting such credits to offset the entire net income tax liability. Moreover, we support the proposal to allow carrybacks of business credits from taxable years ending in 2008 and 2009 (or at the election of the taxpayer, beginning in 2008 or 2009) to offset the entire net income tax liability.

Additional First-Year Depreciation

TEI supports extension of the provision allowing immediate expensing for 50 percent of qualified investments in capital, leasehold improvements, software, and property placed in service in 2009 with the remaining 50 percent depreciated under current rules. The extension of this provision should spur increased capital spending, which, in turn, should lead to an increase in manufacturing production levels and correspondingly in employment and jobs. Thus, the proposal represents an efficient and expedient means of providing an immediate economic stimulus.

The proposals currently under consideration would sunset the bonus depreciation provision after 12 additional months. Although TEI understands the motivation for time limiting the bonus depreciation provision, we suggest that the failure to provide at least a two- or three-year period of eligibility would be self-defeating. Even if a company makes an immediate decision to invest, it may not be possible for many companies to make plans, secure the necessary financing, and place qualified property in service within the additional 12 months. Because a longer period of time may be necessary to make reasoned investments, the time period should be extended.

Finally, we note that the stimulus effect of this depreciation provision would be significantly muted without a special provision permitting a deduction against both the alternative minimum tax and the regular tax computation. Absent such a provision, taxpayers claiming the additional first-year depreciation deduction might find themselves subject to the corporate AMT and thereby denied the full measure of economic stimulus.

Extension of Period to Claim Refundable AMT or Research Credits in lieu of Additional First-Year Depreciation

The Housing and Economic Recovery Act of 2008 included a temporary provision (section 168(k)(4)) permitting taxpayers to elect to receive 20 percent of the value of their AMT or research credits in lieu of additional firstyear "bonus" depreciation on eligible capital property. The election applies to qualified property placed in service after March 31, 2008, and before December 31, 2008. Proposals pending before Congress would extend the temporary provision by one year and permit corporations to increase the research credit or minimum tax credit limitation by the bonus depreciation amount with respect to eligible property placed in service in 2009 (2010 in the case of certain longer-lived and transportation property).

The effect of the proposal is to permit taxpayers who, because they are in a loss position, may not benefit immediately from the additional depreciation provision to monetize their AMT or research tax credits and obtain cash refunds to invest in their operations. Hence, TEl supports the provision because it provides an alternative incentive for investment in eligible property for taxpayers that might not otherwise benefit from claiming additional first-year depreciation on eligible property.

Extend the Research lax Credit--Make it Permanent

As part of the Emergency Economic Stabilization Act of 2008, Congress extended the section 41 research tax credit through December 31, 2009. The extension is the latest in a series of temporary extensions. Although neither the House nor Senate economic stimulus proposals address the research tax credit, the time is past due for the research credit to be made permanent. The research tax credit provides an important incentive for incremental investments in innovative projects that expand America's scientific and engineering expertise and increase the country's productivity. The repeated extension of the credit demonstrates the provision's widespread support, but its on-again, off-again nature impedes its effectiveness in encouraging companies to engage in incremental research projects in the United States. At this critical time, making the research credit permanent will send an important signal that business taxpayers can rely on the incentive and invest in research projects that extend beyond an artificial deadline. We urge Congress to do so. Alternatively, we urge Congress to extend the provision until at least December 31, 2010. Extending the provision now provides businesses with predictability and stability for financial planning and reporting purposes. In addition, it will preserve the credit's incentive through the current period of financial turmoil.


Tax Executives Institute appreciates the opportunity to recommend legislative changes for pending economic stimulus legislation. We urge Congress to take immediate action. If you have any questions about the Institute's views or if we can be of further assistance as Congress considers this important legislation, please do not hesitate to call either Timothy J. McCormally or Eli J. Dicker of the Institute's professional staff at 202.638.5601.
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Title Annotation:Tax Executives Institute
Publication:Tax Executive
Date:Jan 1, 2009
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