Order Code RL33890
Business Tax Issues in 2007
February 21, 2007
David L. Brumbaugh
Specialist in Public Finance
Government and Finance Division
Business Tax Issues in 2007
Summary
In recent years, business tax legislation has tended to focus on broad, structural
issues and economic performance in general. For example, the 2003 tax cuts for
capital gains and dividends were, in part, an incremental movement towards
eliminating the double-taxation of corporate income that is a structural feature of the
current U.S. business tax system. Also, these and other business tax cuts — for
example, temporary “bonus” depreciation — were designed to provide a fiscal
stimulus to spur an economy that remained sluggish after the 2001 recession. And
in 2004, Congress enacted a set of business tax cuts that were generally aimed at
boosting U.S. competitiveness through their impact on international trade and
investment.
Early indications are that consideration of business tax policy in 2007 may focus
on more narrow, sector-specific issues. And while overall economic performance is
always of concern to tax policymakers — particularly in the area of business taxation
— in early 2007 interest in business tax issues also appears to be driven by concerns
about tax equity and by a search for tax revenue that would help reduce the federal
budget deficit or offset tax cuts elsewhere. For example, energy taxation is being
explored as a way to raise revenue as well as a means to stimulate investment in
energy conservation and technology. Also, there appears to be considerable interest
in restricting corporate tax shelters. Both Congress and the Administration have
evinced an interest in tax cuts for small business — cuts that some view as a way to
counter the impact of minimum wage increases on small business. In February, both
the House and Senate approved bills containing small business tax benefits (an
amended version of H.R. 2 in the Senate, and H.R. 976 in the House). And there are
some indications that Congress may consider legislation that would make the
research and development tax credit a permanent rather than temporary part of the
tax code.
This report will be updated as legislative events occur.
Contents
The Current System . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Recent Legislation and Issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Current Issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Research and Experimentation Tax Credit and Other Temporary Benefits . . 3
Energy Taxation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Small Business Taxation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Tax Shelters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
International Taxation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Business Tax Legislation, 2001-2006 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Business Tax Issues in 2007
The business tax legislation enacted in recent years has tended to have as its
basis concern for broad economic performance. For example, the 2003 tax cuts for
dividends and capital gains were an incremental step towards a basic structural
reform of the tax system termed “tax integration,” designed to restrict the double-
taxation of corporate-source income. Also, the “bonus depreciation” and other
business tax cuts enacted in 2003 and afterwards were partly intended to provide a
broad fiscal stimulus to spur an economy that remained sluggish after the 2001
recession. And in 2004, Congress enacted an omnibus business tax bill (the
American Jobs Creation Act; P.L. 108-357) that had U.S. business operations in the
international economy as its principal focus.
Early indications are that business tax considerations in 2007 may focus on
more narrow, sector-specific issues rather than broad, structural concerns. For
example, in the year’s first months, both the House and Senate began consideration
of small-business taxation, while in January the House passed H.R. 6, a bill
restricting certain tax benefits for petroleum companies. And while a concern for
economic performance is still likely to be at the root of interest in business tax issues,
their consideration may also be driven by concerns about tax equity and by a search
for tax revenue. This report discusses what appear to be the most prominent business
tax issues at the outset of 2007: energy taxation, small business taxes, the research
and experimentation tax credit and other temporary tax benefits, corporate tax
shelters, and international taxation. In order to place these issues in context,
however, the report begins with a view of the current system’s basic structure, and
with a broad look at recent business tax legislation.
The Current System
The United States has what tax analysts sometimes term a “classical” system for
taxing corporate income. That is, it imposes a tax on corporate profits — the
corporate income tax — that is separate and generally in addition to the individual
income taxes that corporate stockholders pay on their corporate-source capital gains
and dividends. The corporate income tax applies a 35% rate to most corporate
taxable income, although reduced rates ranging from 15% to 34% apply to
corporations earning smaller amounts of income. The base of the tax is corporate
profits as defined by the tax code — generally gross revenue minus interest, wages,
the cost of purchased inputs, and an allowance for depreciation.
Over the past several decades — that is, since 1980 — federal corporate tax
revenue has generally varied between 1% and just over 2% of gross domestic product
(GDP). Congressional Budget Office (CBO) data show that corporate tax receipts
registered an “uptick” in fiscal years (FY) 2005 and 2006, rising to 2.3% and 2.7%
of GDP, respectively — an increase CBO attributed primarily to strong economic
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growth. However, CBO also projects corporate tax revenue to recede in future years
to a level closer to its long-term average.1 In FY2006, corporate taxes comprised
14.7% of total federal revenues, third place behind individual income taxes (43.4%)
and social security taxes (34.8%).2
Not all businesses are subject to the corporate income tax. Income earned by
partnerships is “passed through” and taxed to the individual partners under the
individual income tax without imposition of a separate level of tax at the partnership
level. Also, businesses that have no more than 100 stockholders and that meet
certain other requirements (“S” corporations), as well as certain other “pass through
entities” are not subject to the corporate income tax, but are taxed in the same manner
as partnerships.
Recent Legislation and Issues
The major tax cuts enacted in 2001 and 2003 with the Economic Growth and
Tax Relief Reconciliation Act (EGTRRA; P.L. 107-16) and the Jobs and Growth Tax
Relief Reconciliation Act (JGTRRA; P.L. 108-27), respectively, focused more on
individual income taxes than corporate taxes, and included measures such as
reductions in statutory tax rates, tax cuts for married couples, and expansion of the
child tax credit. However, JGTRRA contained a number of tax cuts aimed at
businesses, as did legislation enacted in 2002, 2004, and 2006.
The most prominent business tax cuts are described in this report’s final section
on an act-by-act basis, but we summarize them here in broad terms: temporary
“bonus” depreciation provisions (now expired) designed to spur investment
spending; capital gains and dividend reductions, intended (in part) to increase capital
formation and the flow of savings to the corporate sector; extension of a set of
narrowly-applicable temporary tax benefits (the “extenders”) that were addressed by
several acts, and provisions enacted in 2004 designed to boost U.S. manufacturing
and competitiveness (the domestic production deduction and foreign tax credit
provisions).
The policy questions the business tax legislation raised and that were debated
— again, in broadest terms — were as follows:
! What would be the impact of the investment incentives on the
economy’s capital stock? Does the reduced tax burden increase the
supply of capital and saving, thus increasing long-run growth? Or
is the economy’s supply of capital relatively fixed, meaning the
investment incentives simply interfere with the efficient allocation
of investment?
1 U.S. Congressional Budget Office, The Budget and Economic Outlook: Fiscal Years 2008-
2017 (Washington: GPO, 2007), p. 81. Available at the CBO website, at
[http://www.cbo.gov/publications/bysubject.cfm?cat=0].
2 Ibid., p. 1.
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! Were the enacted business tax cuts effective in stimulating the
economy in the short run, thus aiding recovery from the 2001
recession? Or do planning lags and other factors make business tax
cuts ineffective as a fiscal stimulus, meaning the relation between
the business tax cuts and economic recovery was serendipitous?
! What was the effect of the business tax cuts on the overall fairness
of the tax system? Did the reductions accrue primarily to relatively
high-income stockholders and corporate creditors, or were any
reductions on tax progressivity outweighed by positive employment
effects?
! How did the business tax cuts affect U.S. economic
competitiveness? Have provisions such as the domestic production
deduction helped revitalize domestic manufacturing, or does the
deduction and other competitiveness provisions interfere with the
efficient and flexible participation of U.S. businesses in the world
economy?
For more detailed discussion of these broad analytical issues, interested readers
are referred to CRS Report RL31824, Dividend Tax Relief: Effects on Economic
Recovery, Long-Term Growth, and the Stock Market, by Jane G. Gravelle; CRS
Report RL32502, What Effect Have the Recent Tax Cuts Had on the Economy? by
Marc Labonte; CRS Report RL32517, Distributional Effects of Taxes on Corporate
Profits, Investment Income, and Estates, by Jane G. Gravelle; and CRS Report
RS22445, Taxes and International Competitiveness, by David L. Brumbaugh.
We turn now, however, to more specific current issues.
Current Issues
Research and Experimentation Tax Credit
and Other Temporary Benefits
The tax code contains a set of relatively narrowly applicable tax benefits (the
“extenders”) that are temporary in nature — they each were enacted for only fixed
periods of time, and are each scheduled to expire on various dates. The benefits tend
to be tax incentives: provisions designed to encourage certain types of investment or
activity thought to be economically or socially desirable. As targeted tax incentives,
the benefits tend to raise a similar policy question, as follows: according to
traditional economic theory, smoothly functioning markets and undistorted prices
generally allocate the economy’s scare resources in the most efficient way possible.
Absent market malfunctions — failures that economists believe are more the
exception than the rule — economic theory indicates that tax benefits or penalties
that interfere with the market reduce economic efficiency and reduce economic
welfare. The question with each extender, then, is whether there is a market failure
or socially desirable goal that makes the incentive’s intervention in the market
desirable.
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One extender is the research and experimentation (R&E) tax credit, which was
first enacted in 1981, and which has been scheduled to expire, but which has been
renewed on numerous occasions. The credit provides businesses a tax benefit that
is linked to the firms’ increase in research outlays in the current year over a
statutorily defined base period. The credit is based on economic theory’s notion that
free markets do not operate smoothly in the case of research and development — that
absent government support, firms would not spend as much on research as is
economically efficient. (It could also be argued, however, that the amount of support
provided by the R&E credit and several other extant research subsidies more than
compensate for the theoretical shortfall in research.)
The R&E credit’s most recent extension was provided by the Tax Relief and
Health Care Act of 2006 (TRHCA; P.L. 109-432) in December 2006, and it is
currently scheduled to expire at the end of 2007; the extension included an additional,
alternative method that firms can use to calculate the credit, which may result in
additional tax savings for firms in certain circumstances. There has been interest in
the current Congress, however, in making the tax credit permanent.
The extenders in general have been a continuing issue for Congress — in part
because their temporary nature necessitates period action if they are not to expire, and
in part because of the strong support for many of the benefits. Thus, while TRHCA
extended many of the provisions in addition to the R&E credit, they may also receive
consideration in 2007.3
Energy Taxation
Democratic leaders have stated that energy taxation is an issue they intend to
address early in the new Congress. Their focus appears to be twofold: a revenue-
raising scaling-back of several tax cuts for petroleum firms that were enacted in
recent years and enactment of a new set of incentives aimed at energy conservation
and promotion of alternative energy sources. On January 18, the House passed H.R.
6, containing restrictions on several tax benefits for the petroleum industry.
One of the revenue-raising items in H.R. 6 denies the tax code’s Section 199
domestic production deduction to oil- and gas-related income.4 The deduction was
first enacted with the American Jobs Creation Act of 2004 (P.L. 108-357) and applies
to the domestic U.S. manufacturing, extractive, and agriculture industries in general,
not just to the petroleum industry. The deduction is phased in, with a rate equal to
6% of domestic production income in 2007-2009, and a permanent rate of 9% in
2010 and thereafter.
3 For a list of extenders addressed by TRHCA, see CRS Report RL33768, Major Tax Issues
in the 110th Congress, by David L. Brumbaugh.
4 Wesley Elmore, “Democrats Outline Early Agenda for 110th Congress,” Tax Notes, Jan.
8, 2007; Kurt Ritterpusch, “Early Components in Democrats’ Oil Industry Rollback Plan
Firm Up,” BNA Daily Tax Report, Jan. 5, 2006.
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A second revenue-raising provision in H.R. 6 is modification of the amortization
rules5 applying to geological and geophysical (G&G) costs that integrated oil
companies undertake. The Energy Policy Act of 2005 (EPACT05; P.L. 109-58)
initially provided a tax benefit for oil and gas exploration and development by
permitting two-year amortization of G&G costs. Economic theory indicates that, to
measure income accurately, outlays that help create oil wells and other assets having
value should be deducted only as the assets lose their worth. In the case of profitable
wells, two-year amortization likely provided favorable treatment similar to
accelerated depreciation. Initially, EPCT05’s treatment applied to both integrated
producers (i.e., large companies) and independent producers. The Tax Increase
Prevention and Reconciliation Act of 2006 (TIPRA; P.L. 109-222) lengthened the
amortization period to five years for integrated producers. H.R. 6 further lengthened
the amortization period to seven years for integrated producers.
There are indications that at least part of the revenue produced by cutting energy
tax benefits may be used to offset the revenue loss from expanded tax incentives to
develop renewable and alternative energy sources — for example, hydropower,
biofuel and ethonol, nuclear power, geothermal power, and solar energy.6
For a more detailed overview of energy tax policy, see CRS Report RL33578,
Energy Tax Policy: History and Current Issues, by Salvatore Lazzari; and CRS
Report RL33763, Oil and Gas Subsidies: Current Status and Analysis, by Salvatore
Lazzari.
Small Business Taxation
Congress has had a long-standing interest in tax policy towards small business,
and the first weeks of the 110th Congress have continued that pattern. Congressional
action on small business taxation has occurred in conjunction with federal minimum
wage legislation. The President and others have argued that an increase in the federal
minimum wage — an issue considered early in the 110th Congress — should be
coupled with consideration of tax cuts for small business. The tax cuts are viewed
by their proponents as a means of offsetting the extra cost burden a higher minimum
wage may place on small businesses. Tax provisions were not included in the House-
passed bill increasing the minimum wage (H.R. 2). However, on February 1, the
Senate approved an amended version of H.R. 2 that included a package of tax
benefits for small business and a set of revenue-raising measures designed to offset
part of the revenue loss expected from the tax benefits. The House subsequently
approved a tax bill (H.R. 976; approved on February 16) containing a set of small
business tax benefits more modest in size than the Senate’s.
One prominent provision of the Senate bill is an extension of the “expensing”
tax benefit for investment in machines and equipment — a tax benefit that applies
only to firms undertaking less than a certain level of investment, and that therefore
5 Rules for gradually deducting (“amortizing”) an item of cost or expense.
6 Steven Mufson, “Democrats Hope to Take from Oil, Give to Green Energy, The
Washington Post, Jan. 4, 2007, p. A01; Kurt Ritterpusch, “Baucus Says Subcommittee on
Energy Could be Added to Finance Committee,” BNA Daily Tax Report, Jan. 8, 2007.
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generally favors small business. The provision is a tax benefit in that it permits firms
to “expense” (deduct in the first year of service) a capped amount of investment
outlays rather than requiring the outlays to be deducted gradually in the form of
depreciation, as is required of most tangible investments. Permanent provisions of
the Internal Revenue Code cap the expensing allowance at $25,000 per year, and
begin a phase-out of the allowance when a firm’s investment exceeds $200,000.7
However, temporary rules initially enacted in 2003 and extended on several
occasions increased the annual cap and threshold to $100,000 and $400,000,
respectively. The increased amounts are indexed for inflation occurring after 2003;
the 2007 amounts for the cap and threshold are $112,000 and $450,000. TIPRA
provided the most recent extension in 2006, and extended the increased allowance
and threshold through 2009. The Senate bill provides a one-year extension, through
2010.
Another provision of the Senate minimum wage bill would liberalize current
restrictions on the use of cash accounting — a simplified and sometimes more
generous method of accounting that is currently only available for firms having
average annual gross receipts not exceeding $5 million in all prior years. The bill
would generally increase the eligibility cap to $10 million of average annual gross
receipts.
Other tax benefits in the Senate bill include liberalized depreciation rules for
leasehold and restaurant improvements and for new restaurants, an extension of the
temporary work opportunity tax credit (WOTC) for employers of individuals in
certain “high risk” groups, and more generous rules for Subchapter S corporations
(closely-held corporations not subject to the corporate income tax).
The revenue-raising offsets in the Senate version of H.R. 2 are generally
narrowly focused provisions designed to restrict a number of types of tax-saving
transactions or actions. The two largest provisions (in terms of revenue gain) would
generate tax revenue by applying earlier effective dates to restrictions first
implemented by the American Jobs Creation Act of 2004 (AJCA; P.L. 108-357), thus
applying the restrictions to more of the tax-saving transactions in question. One
provision applies AJCA’s restrictions to leasing transactions involving foreign
entities; a second applies to corporate “inversion” or “expatriation” transactions —
corporate reorganizations designed to shift titular ownership of U.S. corporate groups
to offshore entities in tax havens.
Like the Senate bill, the measure approved by the House on February 16 (H.R.
976) proposes to extend the increased Section 179 expensing allowance through
2010, but the House bill also would further increase the allowance and phase-out
threshold, to $125,000 and $500,000, respectively, and index those amounts for
inflation occurring after 2007. The House bill would also, like the Senate measure,
extend the WOTC, but for a shorter period: through 2008.
7 The cap is reduced on a dollar-for-dollar basis by each dollar of investment exceeding
$200,000. Thus, firms undertaking investment in excess of $225,000 cannot claim the
allowance under the permanent rules.
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In contrast to the Senate bill, H.R. 976 contains no provisions for leaseholds and
restaurants, nor Subchapter S provisions. The House bill also contains several
benefits not in the Senate bill. One inclusion prevents, in effect, an increase in the
minimum wage (should it occur) from reducing the tax credit employers currently
receive for social security (FICA) taxes they pay on tips that exceed the minimum
wage. A second provision expands the FICA/tip tax credit and the WOTC so that
they can offset a firm’s alternative minimum tax.
H.R. 976 contains fewer revenue-raising items than the Senate bill. The largest
would deny reduced capital gains and dividend rates to dependents under the age of
24 who do not provide more than half their own support with earned income. (The
bill also includes a measure that would shift the timing of estimated corporate tax
payments, resulting in a revenue gain FY2012 but a corresponding loss in FY2013.
The shift would thus be revenue neutral over those two years.)
Tax Shelters
An additional area in which Congress may look for tax revenues is corporate
“tax shelters” — phenomena that also concern policymakers because of their
corrosive effect on tax equity and popular perceptions about the tax system’s fairness.
In popular usage, the term “tax shelter” denotes the use of tax deductions or credits
produced by one activity to reduce taxes on another: the first activity “shelters” the
second from tax. In economic terms, a tax shelter can be defined as a transaction (for
example, an investment or sale) that reduces taxes without resulting in a reduced
return or increased risk for the participant.8 But the term is so vague and general in
most usages that it could also be defined simply as a tax saving activity that is viewed
as undesirable by the observer using the term. Under most definitions, tax shelters
can be either illegal and constitute “tax evasion” or legal, comprising “tax
avoidance.”
Congress has evinced considerable interest in tax shelters in recent years, and
has enacted some restrictions into law. The American Jobs Creation Act of 2004
(AJCA; P.L. 108-357) contained a number of provisions designed to restrict tax
shelters. In part, the act’s provisions were directed at specific tax shelters — for
example, leasing activities and the acquisition of losses for tax purposes (“built in”
losses). In addition, the act included provisions — for example, revised penalties and
reporting requirements — designed to restrict sheltering activity in general.9 In 2006,
the Senate version of TIPRA contained a number of tax shelter restrictions, but the
provisions were not included in the conference committee bill.
The Senate’s TIPRA provisions included what the bill termed a “clarification”
of the economic substance doctrine that has been followed in a number of court
decisions applying to tax shelters. Generally, the economic substance doctrine
8 These definitions are taken from Joseph J. Cordes and Harvey Galper, “Tax Shelter
Activity: Lessons from Twenty Years of Evidence,” National Tax Journal, vol. 38, Sept.,
1985, pp. 305, 307.
9 For a list and description, see CRS Report RL32193, Anti-Tax-Shelter and Other
Revenue-Raising Tax Proposals Considered in the 108th Congress, by Jane G. Gravelle.
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disallows tax deductions, credits, or similar benefits in the case of transactions not
having economic substance. The Senate version of TIPRA would have integrated
aspects of the doctrine into the tax code itself. A similar measure was contained in
the Senate version of the AJCA, but was not adopted, and given the relatively large
revenue estimates associated with the measure — the Joint Tax Committee estimated
that the Senate’s 2006 provision would increase revenue by $15.8 billion over 10
years — it is possible that the economic substance doctrine will again receive
congressional attention in the 110th Congress.
International Taxation
There are some indications that Congress may look to the tax treatment of U.S.
firms’ foreign income in searching for additional tax revenue. In part, the focus on
international taxation stems from a concern about tax benefits that are perceived to
promote foreign “outsourcing” — the movement of U.S. jobs overseas.
Economic theory is skeptical about whether tax policy towards U.S.
multinationals can have a long-term impact on domestic employment, although
short-term and localized impacts are certainly possible. Taxes can, however, alter
the extent to which firms engage in overseas operations rather than domestic
investment. Under current law, a tax benefit known as “deferral” poses an incentive
for U.S. firms to invest overseas in countries with relatively low tax rates. Deferral
provides its benefit by permitting U.S. firms to postpone their U.S. tax on foreign
income as long as that income is reinvested abroad in foreign subsidiaries. The
benefit is generally available for active business operations abroad, but the tax code’s
Subpart F provisions restrict deferral in the case of income from passive investment.
If made, proposals to restrict deferral may consist of expansion of the range of
income subject to Subpart F.
In recent years, however, the thrust of legislation has been more in the direction
of expanding deferral and cutting taxes for overseas operations. For example, the
American Jobs Creation Act of 2004 cut taxes on overseas operations in several
ways, while in 2006, TIPRA restricted Subpart F in the case of banking and related
businesses receiving “active financing” income and in the case of the “look through”
treatment overseas operations receive from subsidiary firms.10 (See also the
discussion of TIPRA, below.) Further, several analysts have recently argued that
attempts to tax overseas operations are either counterproductive or outmoded in the
modern integrated world economy.11 Traditional economic analysis, however,
10 “Lookthrough” rules generally apply the same treatment of particular items of income in
the hands of the recipient as in the hands of a payor. Thus, for example, a dividend paid to
a parent out of active business income of a subsidiary would remain active business income
in the hands of the parent rather than dividend income (i.e., passive investment income).
11 Mihir A. Desai and James R. Hines, Jr., “Old Rules and New Realities: Corporate Tax
Policy in a Global Setting,” National Tax Journal, vol. 57, Dec. 2004, pp. 937-960. For a
critique of Desai and Hines, see Harry Grubert, “Comment on Desai and Hines, “Old Rules
and New Realities: Corporate Tax Policy in a Global Setting,” National Tax Journal, vol.
58, June 2005, pp. 263-278.
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suggests that overseas investment that is taxed at a lower or higher rate than domestic
income impairs economic efficiency.
Business Tax Legislation, 2001-2006
The
Job Creation and Worker Assistance Act of 2002 (JCWA; P.L. 107-
147) contained temporary “bonus” depreciation provisions that permitted firms to
deduct an additional 30% of the cost of property in its first year of service rather than
requiring that portion to be depreciated over a period of years. The provision
generally applied to machines and equipment (but not structures) and was limited to
property placed in service after September 11, 2001, and before January 1, 2005.
JCWA also temporarily extended the net operating loss “carryback” period (the years
in the past from whose income a firm can deduct losses) to five years from two years.
The provision only applied to losses in 2001 and 2002. JCWA also temporarily
extended a set of expiring tax benefits (the “extenders” discussed above), many of
which applied to business taxes.
While a principal thrust of the Jobs and Growth Tax Relief Reconciliation
Act (JGTRRA; P.L. 108-27) was accelerating the effective date of individual
income tax cuts enacted in 2001, the act also contained a number of business
provisions. JGTRRA’s tax cuts for dividends and capital gains applied to individual
income taxes but nonetheless reduced the tax burden on stockholders’ corporate-
source income. Under the U.S. classical method of business taxation, corporate
source income is taxed twice: once under the corporate income tax and once under
the individual income tax — an instance of double-taxation that is thought by
economists to inefficiently restrict the flow of capital to the corporate sector.
JGTRRA’s reductions were an incremental step in the direction of removing the
double-taxation — a reform economists term tax “integration.” The reductions were
temporary, and were scheduled to expire at the end of 2008.
In addition to its capital gains and dividend reduction, JGTRRA increased bonus
depreciation to 50% and extended its coverage to the period between May 5, 2003,
and January 1, 2005. JGTRRA also temporarily (for 2003, 2004, and 2005)
increased the “expensing” allowance for small-business investment from $25,000 to
$100,000.
The American Jobs Creation Act of 2004 (AJCA; P.L. 108-357) grew out of
legislation designed to end a dispute between the European Union (EU) and the
United States over a U.S. tax benefit for exporting (the extraterritorial or ETI
provisions) that had been determined to contravene the World Trade Organization
agreements’ prohibition on export subsidies. The EU objected to the ETI benefit,
and imposed countervailing tariffs authorized by the WTO. AJCA repealed ETI, but
also enacted a set of new WTO-legal business tax cuts designed, in part, to offset the
impact of ETI’s repeal on domestic businesses. However, the scope of AJCA
substantially transcended ETI and its offsets, and the act was, in its final form, an
omnibus business tax bill.
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Aside from ETI’s repeal, AJCA’s most prominent provisions were a new
domestic production deduction equal to 9% of income from domestic (but not
foreign) production, and a set of tax cuts for multinational firms, including more
generous foreign tax credit rules governing interest expense. AJCA also temporarily
extended the $100,000 small business expensing allowance (through 2007).
The Tax Increase Prevention and Reconciliation Act of 2006 (TIPRA; P.L.
109-222) extended JGTRRA’s reduced rates for dividends and capital gains for two
years, through 2010. TIPRA also extended JGTRRA’s $100,000 small-business
expensing-allowance for two years, through 2009.
The Tax Relief and Health Care Act of 2006 (TRHCA; P.L. 109-432) was
passed in the post-election session of the 109th Congress. Many of the extenders had
expired at the end of 2005, and TRHCA extended them, generally for two years
(through 2007).