Rangel Takes Aim At Deferred Compensation In Tax Extenders Bill

by Leroy Baker, Tax-News.com, New York

16 May 2008

Legislation introduced into the House of Representatives on Wednesday proposing tax breaks for families, business, and clean energy production, is to be partly paid for by a provision that would deny certain tax benefits to executives receiving deferred compensation.

The Energy and Tax Extenders Act of 2008 (H.R. 6049), introduced by House Ways and Means Committee Chairman Charles Rangel (D - NY), would extend tax credits and deductions that expired last year or would expire at the end of this year. The bill was scheduled to be considered by the Ways and Means Committee on 15th May.

“This bill provides critical tax relief to American families and businesses without burdening future generations with an increase in the national debt,” explained Chairman Rangel.

“By extending these provisions, we help reassure families and businesses that their tax bills will not increase this year. This bill would also help companies move forward with critical investments to build new technologies and provide incentives for renewable energy and energy conservation to help reduce our nation’s dependence on foreign oil.”

The bill would provide tax relief for individuals and families, including:

  • Deduction of State and local sales tax
  • Deduction of tuition and other education expenses
  • Deduction of out-of-pocket expenses by teachers
  • Deduction of property taxes for non-itemizers, and
  • Relief for more than 12 million children through an expansion of the refundable child tax credit to taxpayers earning USD8,500 a year.

The bill also aims to provide tax incentives for businesses to invest in new technology by extending the research and development credit and active financing provisions.

Rangel’s legislation would also help reduce America’s dependence on foreign oil by encouraging the use and production of renewable energy through:

  • A six-year extension of the investment tax credit (ITC) for solar energy
  • Three-year extensions of the production tax credit (PTC) for energy derived from biomass, geothermal, hydropower, landfill gas and solid waste
  • A one-year extension of the PTC for energy derived from wind
  • Tax incentives for coal electricity plants that capture and sequester carbon dioxide.
  • Incentives for the production of renewable fuels such as biodiesel and renewable diesel and cellulosic biofuels
  • Incentives to encourage energy efficient products, such as plug-in hybrids cars, and incentives for energy conservation in both commercial buildings and residential structures, and
  • Tax credit bonds providing State and local government with funds to make energy conservation investments in public infrastructure and invest in research

The bill is to be paid for by two major revenue provisions: closing a tax loophole connected to the payment of deferred compensation; and delaying the implementation of worldwide allocation of interest.

The first of these measures would tax individuals on a current basis if such individuals receive deferred compensation from a tax indifferent party.

At present, the law generally allows executives and other employees to defer paying tax on compensation until the compensation is paid. This deferral is made possible by rules that require the corporation paying the deferred compensation to defer the deduction that relates to this compensation until the compensation is paid.

Matching the timing of the deduction with the income inclusion ensures that the executive is not able to achieve the tax benefits of deferred compensation at the expense of the Treasury.

Instead, the corporation paying the compensation bears the expense of paying deferred compensation as a result of the deferred deduction.

Where an individual is paid deferred compensation by a tax indifferent party (such as an offshore corporation), there is no offsetting deduction that can be deferred.

As a result, individuals receiving deferred compensation from a tax indifferent party are able to achieve the tax benefits of deferred compensation. This proposal is estimated to raise USD24.3bn over 10 years.

The second revenue provision would delay the implementation of a liberalized rule for allocating interest expense between United States sources and foreign sources for the purposes of determining a taxpayer’s foreign tax credit limitation.

Although enacted in 2004, this election is not available to taxpayers until taxable years beginning after 2008. The bill would delay the phase-in of this new liberalized rule for nine years (for taxable years beginning after 2017).

This proposal is estimated to raise USD29.962bn over 10 years.

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