Business Tax Issues in 2009
Donald J. Marples
Specialist in Public Finance
April 8, 2009
Congressional Research Service
7-5700
www.crs.gov
R40500
CRS Report for Congress
P
repared for Members and Committees of Congress
Business Tax Issues in 2009
Summary
In 2008, congressional business tax issues focused on stimulating the economy and renewing
general farm legislation. In February, Congress enacted the Economic Stimulus Act of 2008. The
act’s two business investment provisions provided for a temporary increase of small business
expensing and temporary “bonus” depreciation limits. In May, the Food, Conservation, and
Energy Act of 2008 (P.L. 110-234) was enacted and modified several alternative fuel production
tax credits. As 2008 came to a close, the Emergency Economic Stabilization Act of 2008 (P.L.
110-343), which extended a number of business tax provisions and created or modified a number
of renewable energy and energy efficiency provisions, was enacted.
In 2009 attention has continued to focus on stimulating the economy. In February, Congress
enacted the American Recovery and Reinvestment Act of 2009 (P.L. 111-5). Two of the act’s
business tax provisions provided for a temporary increase of small business expensing and
temporary “bonus” depreciation limits, while other provisions allow a delayed recognition of
cancelation of debt income and five-year carryback of net operating losses for small-businesses.
The act also modified several renewable energy provisions, including the Renewable Energy
Production Tax Credit, the Investment Tax Credit, and tax credit for Alternative Fueling Property.
As the year progresses, it is anticipated that congressional deliberations will once again turn
towards the extension of several expiring business tax provisions, energy taxation, tax shelters,
and international taxation. This report will be updated in the event of significant legislative
activity.
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Business Tax Issues in 2009
Contents
The Current System .................................................................................................................... 1
Legislation in 2009 ..................................................................................................................... 2
American Recovery and Reinvestment Act of 2009 (P.L. 111-5) ............................................ 2
Selected Business Tax Issues....................................................................................................... 2
Business Tax Cuts to Stimulate the Economy ........................................................................ 2
Research and Experimentation Tax Credit and Other Temporary Benefits.............................. 3
Energy Taxation .................................................................................................................... 4
Tax Shelters .......................................................................................................................... 4
International Taxation ........................................................................................................... 5
Appendixes
Appendix. Business Tax Legislation and Issues, 2001-2008......................................................... 7
Contacts
Author Contact Information ........................................................................................................ 9
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Business Tax Issues in 2009
t the beginning of 2009, economic stimulus proposals dominated the congressional
debate. In February Congress enacted the American Recovery and Reinvestment Act of
A 2009 (P.L. 111-5). Two of the act’s business provisions provided for a temporary increase
of small business expensing and temporary “bonus” depreciation limits, while other provisions
allow a delayed recognition of cancelation of debt income and five-year carryback of net
operating losses for small-businesses. The act also modified several renewable energy provisions,
including the Renewable Energy Production Tax Credit, the Investment Tax Credit, and tax credit
for Alternative Fueling Property.
As the year progresses, it is anticipated that congressional deliberations will once again turn
towards the extension of several expiring business tax provisions, energy taxation, tax shelters,
and international taxation, while continuing to examine opportunities to stimulate the economy.
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.
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 FY2005 and FY2007, rising to 2.3% and 2.7% of GDP,
respectively—before reverting to a historically normal 2.1% in 2008. CBO projects corporate tax
revenue as a percentage of GDP to continue declining through 2010, reflecting reduced corporate
profits due to the economic recession.1
CBO data show a similar trend regarding corporate tax receipts as a share of total taxes, with an
“uptick” in FY2005 and FY2007 from 12.9% to14.4% of total federal revenues—before reverting
to a 12.1% in 2008. CBO, again, projects the percentage of total revenue from corporate tax
revenue to recede through 2010.
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.
1 U.S. Congress, Congressional Budget Office, The Budget and Economic Outlook: Fiscal Years 2009-2019,
(Washington: GPO, 2009).
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Legislation in 2009
American Recovery and Reinvestment Act of 2009 (P.L. 111-5)
The American Recovery and Reinvestment Act of 2009 (ARRA) contained multiple business tax
provisions. The majority of these provisions can be grouped into two general categories of
incentives: those which promote investment in alternative energy and those which benefit the
cash-flow of businesses.
The major business-related energy incentives in ARRA focus on promoting renewable energy.2
The principal renewable energy provision increases the number of facilities eligible for the
Renewable Energy Production Tax Credit (PTC) through a three-year extension of the placed-in-
service date requirement. This provision is estimated to cost $13.1 billion over the next 10 years
and comprises approximately 73% of the cost of the business-related energy provisions in
ARRA.3 The remainder of the energy provisions focus on modifications to the Investment Tax
Credit (ITC), including the creation of the Advanced Energy Manufacturing Facility Investment
Tax Credit which is estimated to cost $2.3 billion over 10 years.
The major business incentives in ARRA focus on increasing near term cash flow through the
acceleration of capital cost recovery options and deferral of certain income related to the
discharge of indebtedness. ARRA contains two provisions which accelerate capital cost recovery:
an extension of bonus depreciation and enhanced small business expensing. The deferral of
certain income related to the discharge-of-indebtedness provision allows cancellation of debt
income (CODI) to be deferred for four or five years and recognized as income over the following
four years. These three provisions are estimated to cost approximately $6.7 billion over 10 years.
In contrast, the remaining business incentives in ARRA are estimated to raise nearly $600 million
over 10 years.
Selected Business Tax Issues
Business Tax Cuts to Stimulate the Economy
After the passage of ARRA, the 111th Congress has continued deliberations focused on
stimulating the economy. One topic of these discussions was on how the tax code—and business
provisions—could aid economic conditions. Given the policy goal of increasing aggregate
demand, business tax cuts, such as in ARRA, have traditionally focused on “cash-flow” and
investment measures.
2 See CRS Report R40412, Energy Provisions in the American Recovery and Reinvestment Act of 2009 (P.L. 111-5),
coordinated by Fred Sissine, for a complete description of the energy provisions in ARRA.
3 The revenue estimates used in the section are all contained in U.S. Congress, Joint Committee on Taxation,
Estimated Budget Effects of the Revenue Provisions Contained in The Conference Agreement For H.R. 1, The
“American Recovery And Reinvestment Tax Act of 2009”, committee print, 111th Cong., 1st sess., February 12, 2009,
JCX-19-09.
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Cash-flow provisions attempt to stimulate the economy by allowing businesses to realize existing
tax attributes in the current period, as opposed to in future years. These measures allow
businesses immediate access to working capital that may be useful to maintaining business
operations. An example of a cash-flow measure in ARRA was the extension of the net operating
loss carryback period from two to five years. The Gulf Opportunity Zone Act of 2005 (P.L. 109-
135) enacted a similar provision for qualified losses occurring in the Gulf Opportunity Zone (or
GO Zone).
Investment measures attempt to stimulate the economy by inducing investment spending.
Typically this is attempted through measures that change the cost of capital. Examples of
investment measures in ARRA were one year extensions—through the end of 2009—of bonus
depreciation and small business expensing.4 The Economic Stimulus Act of 2008 (P.L. 110-185)
also contained a one-year extension of these provisions, covering 2008.
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: according
to traditional economic theory, smoothly functioning markets and undistorted prices generally
allocate the economy’s scare resources in the most efficient way. 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
overall 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.
One extender is the research and experimentation (R&E) tax credit, which was first enacted in
1981, and which has been renewed on numerous occasions. The credit provides businesses a tax
benefit that is linked to firms’ increases 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 is, 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.)5
The R&E credit’s most recent extension was provided by the Emergency Economic Stabilization
Act of 2008 (P.L. 110-343) in October 2008. The act also increased the rate for the alternative
simplified credit (ASIC) from 12% to 14% and repealed the alternative incremental research
credit (AIRC) for the 2009 tax year only. In the 111th Congress, there has been interest in
extending the R&E credit and in making the tax credit permanent.
4 CRS Report RL31852, Small Business Expensing Allowance: Current Status, Legislative Proposals, and Economic
Effects, by Gary Guenther
5 See CRS Report RL31181, Research and Experimentation Tax Credit: Current Status and Selected Issues for
Congress, by Gary Guenther, for a more complete description of the R&E credit.
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The extenders in general have been a continuing issue for Congress—in part because their
temporary nature necessitates periodic action if they are not to expire, and in part because of the
strong support for many of the benefits.6 As noted above, an element of Division C of P.L. 110-
343, the Tax Extenders and Alternative Minimum Tax Relief Act of 2008, extended the R&E
credit. In addition, the act retroactively extended several temporary tax provisions for individuals
and businesses through December 31, 2009.
It is expected that the extenders will continue to receive congressional attention in 2009.
Energy Taxation
At the outset of the 111th Congress, the focus of energy taxation appears to be two-fold:
enactment of a new set of incentives aimed at energy conservation and promotion of alternative
energy sources and a revenue-raising, scaling-back of tax cuts that were enacted in recent years
for the oil and gas companies.
The first of these two goals were addressed, in part, in ARRA, which contained a number of
provisions to encourage investment in alternative energy and alternative energy production. These
previsions are outlined above.
In addition, the President’s FY2010 Budget Outline contains several provisions aimed at
achieving the second goal.7 If fully enacted the provisions would eliminate tax preferences for the
oil and gas industry estimated to raise $25.3 billion over 10 years.8 The repeal of the Section 199
domestic production deduction, enacted in JOBS ACT 2004 and never fully implemented,
accounts for over 40% of this total. Another nearly 44% of the total is achieved through the
elimination of two provisions enacted during World War I: the expensing of intangible drilling
costs and percentage depletion.
Tax Shelters
Corporate “tax shelters” are another area where Congress may look for tax-increasing revenues.
They 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.9 But the term is so vague and general in most usages
that it is sometimes defined simply as a tax-saving activity that is viewed as undesirable by the
6 For a list of extenders addressed by TRHCA, see CRS Report RL33768, Major Tax Issues in the 110th Congress, by
Jane G. Gravelle, and for a broader discussion on extenders, see CRS Report RL32367, Certain Temporary Tax
Provisions (“Extenders”) Expired in 2007, by Pamela J. Jackson and Jennifer Teefy.
7 Office of Management and Budget, Budget of the Federal Government: Fiscal Year 2010, Washington, D.C.,
February 26, 2009, Table S-6.
8 All revenue estimates of the President’s FY2010 Budget Outline are contained in U.S. Congress, Joint Committee on
Taxation, Estimated Budget Effects of The Revenue Provisions Contained in the President’s Fiscal Year 2010 Budget
Proposal, committee print, 111th Cong., March 30, 2009, JCX-22-09.
9 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.
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observer using the term. Under most definitions, tax shelters can be either illegal and constitute
“tax evasion” or legal, constituting “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.10 In 2006, the Senate
version of the Tax Increase Prevention and Reconciliation Act (TIPRA, P.L. 109-222) contained a
number of tax shelter restrictions, but the provisions were not included in the conference report.
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 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.
The President’s FY2010 Budget Outline includes the codification of the economic substance
doctrine as a revenue-raising “offset” for tax cuts elsewhere in the tax code. This provision is
estimated to raise $8.1 billion over 10 years.
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 AJCA 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”
10 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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treatment overseas operations receive from subsidiary firms.11 Further, several analysts have
argued that attempts to tax overseas operations are either counterproductive or outmoded in the
modern integrated world economy.12 Traditional economic analysis, however, suggests that
overseas investment that is taxed at a lower or higher rate than domestic income impairs
economic efficiency. However, a consensus appears to be emerging that the U.S. corporate
income tax rate should be reduced.13
11 “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 firm 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).
12 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.
13 House Committee on Ways and Means, “Chairman Rangel Pledges to Work with Administration and Congressional
Republicans to Restore America’s Fiscal Health,” press release, February 23, 2009.
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Appendix. Business Tax Legislation and Issues,
2001-2008
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. JGTRRA, however, contained a number of
tax cuts aimed at businesses, as did legislation enacted in nearly each year since 2004.
The most prominent business tax cuts can be summarized as follows: temporary “bonus”
depreciation provisions 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—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?
• 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 do the deduction and other competitiveness provisions
interfere with the efficient and flexible participation of U.S. businesses in the
world economy?
Enacted Legislation
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
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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 originally 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.
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.
(In early 2007, P.L. 110-28 extended the increased expensing allowance through 2010.)
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).
The Small Business and Work Opportunity Tax Act of 2007 (P.L. 110-28) continued
Congress’s long-standing interest in tax policy towards small business. Tax cuts for small
business (increased business expensing and the work-opportunity tax credit) were included as a
means of offsetting the extra cost burden the higher minimum wage.
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The Economic Stimulus Act of 2008 (P.L. 110-185) contained two provisions which affect
business investment; a temporary, one year increase in the limitations on the expensing of certain
depreciable business assets and temporary “bonus” depreciation, for certain property acquired in
2008. Both provisions permit firms to deduct a greater percentage of the cost of property in the
first year of service rather than gradually depreciating the whole value of the asset over time.
The Food, Conservation, and Energy Act of 2008 (P.L. 110-234) included tax-provisions
which affect businesses were several tax credits for the production of fuels from alternative
sources.14
The Emergency Economic Stabilization Act of 2008 (P.L. 110-343) extended a number of
business tax provisions and created or modified a number of renewable energy and energy
efficiency provisions.
Author Contact Information
Donald J. Marples
Specialist in Public Finance
dmarples@crs.loc.gov, 7-3739
14 See CRS Report RL34696, The 2008 Farm Bill: Major Provisions and Legislative Action, by Renée Johnson et al.,
for a more complete description of the act’s energy-related provisions.
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