ERRATA The following changes should be made to Description of Expiring Tax Provisions, published by the staff of the Joint Committee on Taxation on March 13, 1989, as JCS-8-89. (1) On page 7, the first sentence of the last paragraph should read as follows: There are no statutory R&D allocation and apportionment rules applicable to years after the year governed by TAMRA. (2) On page 23, the date in the last sentence of the last paragraph should be changed from January 1, 1989 to January 1, 1990. (3) On page 25, the third and fourth sentences of the last paragraph should read as follows: The Deficit Reduction Act of 1984 extended the sunset date for issues of qualified small-issue bonds for manufacturing facilities to December 31, 1988. The Tax Reform Act of 1986 extended that sunset date to December 31, 1989. 1. Allocation and apportionment of research ex- 2. Exclusion for employer-provided educational as- 3. Exclusion for employer-provided group legal B. Tax Provisions Expiring in 1989. 1. Tax credit for qualified research expenditures. 3. Business energy tax credits for solar, geother- mal property, and ocean thermal property....... 4. Qualified mortgage bonds and mortgage credit 5. Financially troubled financial institutions: re- organizations, NOLS, and FSLIC/FDIC assist- 6. Treatment of mutual fund shareholder ex- penses for purposes of the 2-percent floor on miscellaneous itemized deductions. 7. Qualified small-issue bonds. 8. Low-income housing tax credit...... 9. Deductibility of health insurance costs of self- 10. ESOP exception to additional tax on early withdrawals from qualified retirement plans... INTRODUCTION This pamphlet,1 prepared by the staff of the Joint Committee on Taxation, provides a brief description of certain tax provisions that expired in 1988 and of provisions scheduled to expire in 1989.2 The first part of the pamphlet is a summary listing of tax provisions that were extended by the Technical and Miscellaneous Revenue Act of 1988 and expired in 1988 and of tax provisions scheduled to expire in 1989. The second part provides a brief description of these expired and expiring tax provisions, including reference to recent legislative background. This pamphlet may be cited as follows: Joint Committee on Taxation, Description of Expiring Tax Provisions (JCS-8-89), March 13, 1989. Several of these proposals are also described in Joint Committee on Taxation, Summary of Revenue Provisions in President Bush's Fiscal Year 1990 Budget Proposal (JCS-6-89), March 3, 1989. Expired tax provisions I. SUMMARY The following tax provisions expired at the end of 1988, unless otherwise indicated: (1) Rules for allocation and apportionment of research expenses (expired at the end of the fourth month of the taxpayer's first taxable year beginning after August 1, 1987); (2) Exclusion for employer-provided educational assistance benefits; and (3) Exclusion for group legal services benefits, and tax exemption for an organization providing group legal services or indemnification against the cost of legal services as part of a qualified group legal services plan. Expiring tax provisions The following tax provisions are scheduled to expire at the end of 1989: (1) 20-percent tax credit for qualified research expenditures; (2) Targeted jobs tax credit; (3) 10-percent energy tax credits for solar and geothermal property, and 15-percent credit for ocean thermal property; (4) Tax exemption for qualified mortgage bonds and election to issue mortgage credit certificates; (5) Certain rules relating to financially troubled financial institutions (reorganizations, net operating losses, and FSLIC/FDIC assistance payments); (6) Treatment of mutual fund shareholder expenses for purposes of the 2-percent floor on miscellaneous itemized deductions; (7) Qualified small-issue bonds; (8) Low-income housing tax credit; (9) Deductibility of health insurance costs of self-employed individuals; (10) The ESOP exception to the additional tax on early withdrawals from qualified retirement plans; and (11) The $2 million exception to the generation-skipping transfer tax. II. DESCRIPTION OF PROVISIONS A. Expired Tax Provisions 1. Allocation and apportionment of research expenses (secs. 861(b), 862(b), and 863(b) of the Code) In general Present Law 3 U.S. persons are taxable on their worldwide income, including their foreign income. A U.S. person that earns foreign income may incur foreign income tax. Subject to the applicable foreign tax credit limitations, such a person may credit foreign income taxes against its U.S. tax liability. The purpose of the foreign tax credit and the foreign tax credit limitations is to yield primary taxing jurisdiction over U.S. persons' foreign income to foreign governments, while retaining residual taxing jurisdiction over such income for the United States and ensuring that the full U.S. tax is paid on domestic income. The foreign tax credit limitations operate by separating the taxpayer's total U.S. tax liability before tax credits ("pre-credit U.S. tax") into 2 categories: tax on U.S. source taxable income and tax on foreign source taxable income. Pre-credit U.S. tax on foreign source taxable income is further subdivided by limitation categories, or "baskets," of income. The pre-credit U.S. tax on any particular limitation category of foreign source income serves as the upper limit on credits for foreign taxes on that type of income. Each foreign tax credit limitation equals total pre-credit U.S. tax times the ratio of the taxable income in that limitation category to worldwide taxable income. Foreign source taxable income equals foreign source gross income less the expenses, losses, and other deductions properly apportioned or allocated thereto, and a ratable part of any deductions which cannot definitely be allocated to some item or class of gross income (Code sec. 862(b)). Deductions allocated and apportioned to foreign source gross income must be further allocated or apportioned among the separate limitation categories of foreign source gross income in order to arrive at foreign source taxable income in any one limitation category. Finally, allocation and apportionment of deductions to U.S. source gross income determines the amount of taxpayer's U.S. source taxable income (sec. 861(b)). Some of the provisions discussed in this section were treated more comprehensively in Part III of the April 2, 1987 pamphlet, prepared by the staff of the Joint Committee on Taxation for the Senate Committee on Finance, entitled Description of Proposals Relating to Research and Development Incentive Act of 1987 (S. 58) and Allocation of R&D Expenses to U.S. and Foreign Income (S. 716) (JCS-6-87). |