tion. Deductions that meet the general requirements of section 280A but that are disallowed solely because of the income limitation may be carried forward to subsequent taxable years, subject to the continuing application of the income limitation to prevent the use of such deductions to create or increase a net loss in any year from the business activity. Effective Date The provision is effective for taxable years beginning after December 31, 1986. Revenue Effect The provision is estimated to increase fiscal year budget receipts by a negligible amount. F. Repeal of Political Contributions Tax Credit (Sec. 112 of the Act and sec. 24 of the Code) 64 Prior Law Individual taxpayers could claim a nonrefundable income tax credit equal to one-half the amount of their contributions during the year to political candidates and certain political campaign organizations (Code sec. 24). The maximum allowable credit was $50 for an individual and $100 for a married couple filing a joint return. Reasons for Change The Congress concluded that, as part of the approach of the Act to reduce tax rates through base-broadening, it was appropriate to repeal the political contributions tax credit. The Congress also understood that data compiled by the Internal Revenue Service suggest that a significant percentage of persons claiming the credit have sufficiently high incomes to make contributions in after-tax dollars, without the benefit of the credit. Also, the credit provided no incentive for individuals with no income tax liability for the year. The small credit amount allowable per return under the dollar limitations made verification costly in relation to the tax liability at issue. Explanation of Provision The Act repeals the credit for political contributions. Effective Date The provision is effective for taxable years beginning after December 31, 1986. Revenue Effect The provision is estimated to increase fiscal year budget receipts by $327 million in 1988, $341 million in 1989, $354 million in 1990, and $368 million in 1991. 64 For legislative background of the provision, see: H.R. 3838, as reported by the House Committee on Ways and Means on December 7, 1985, sec. 112; H. Rep. 99-426, pp. 95-96; House floor amendment, 131 Cong. Rec. H 12731 (Dec. 17, 1985); H..R. 3838, as reported by the Senate Committee on Finance on May 29, 1986, sec. 112; S. Rep. 99-313, p. 86; and H. Rep. 99-841, Vol. II (September 18, 1986) p. 37 (Conference Report). TITLE II-CAPITAL COST PROVISIONS A. Depreciation; Regular Investment Tax Credit; and Finance Leases (Secs. 201, 202, 203, 204, 211, 212, and 213 of the Act and secs. 38, 46, 57, 168, 178, 179, 280F, 312(k), 467, 1245, 1250, and new sec. 49 of the Code)1 Prior Law Accelerated depreciation Overview The Economic Recovery Tax Act of 1981 ("ERTA") enacted the Accelerated Cost Recovery System ("ACRS") for tangible depreciable property placed in service after 1980. Under ACRS, the cost or other basis of eligible property (without reduction for salvage value) was recovered using an accelerated method of depreciation over a predetermined recovery period. Before ACRS was enacted, an asset's cost (less salvage value) was recovered over its estimated useful life. The pre-ACRS rules remain in effect for property placed in service by a taxpayer before 1981, and for property not eligible for ACRS. Under ACRS, the allowable recovery deduction in each taxable year was determined by applying a statutory percentage to the property's original cost (adjusted, as described below, for investment tax credit allowed). Personal property The statutory percentages for personal property were based on the 150-percent declining balance method for the early recovery years, switching to the straight-line method at a time to maximize the recovery allowance. Alternatively, taxpayers could elect to use the straight-line method over the applicable ACRS recovery period (or over a longer recovery period) with respect to one or more classes of ACRS property placed in service during a taxable year (sec. 168(b)(3)(A)). Under a "half-year" convention, the statutory tables and straight-line alternatives provided a half-year recovery allowance for the first recovery year, whether the property was placed in service early or late in the year. No recovery allowance was allowed in the taxable year in which a taxpayer disposed of an asset. The cost of eligible personal property was recovered over a threeyear, five-year, 10-year, or 15-year recovery period, depending on the recovery class of the property. 1 For legislative background of the provision, see: H.R. 3838, as reported by the House Committee on Ways and Means on December 7, 1985, secs. 201-211; H.Rep. 99-426, pp. 137-190; H.R. 3838, as reported by the Senate Committee on Finance on May 29, 1986, secs. 201-213; S.Rep. 99313, pp. 87-117; and H.Rep. 99-841, Vol. II (September 18, 1986), pp. 38-66 (Conference Report). The classification of personal property under ACRS generally was based on the Asset Depreciation Range ("ADR") system of the law in effect before 1981. Under the ADR system, a present class life ("midpoint") was provided for all assets used in the same activity, other than certain assets with common characteristics (e.g., automobiles). Property with an ADR midpoint life of four years or less (such as automobiles, light general purpose trucks, certain special tools, and over-the-road tractor units), racehorses more than two years old when placed in service, other horses more than 12 years old when placed in service, and property used in connection with research and experimentation were included in the three-year class. The 10-year class included long-lived public utility property with an ADR midpoint life from 18.5 to 25 years, certain burners and boilers, and railroad tank cars. Longer-lived public utility property having an ADR midpoint life over 25 years was in the 15-year class. Personal property not included in any other class was assigned to the five-year class. Taxpayers were required to reduce the basis of assets by 50 percent of the amount of regular or energy investment tax credits allowed with respect to personal property (and the reduced basis was used to compute recovery deductions). With respect to the regular investment tax credit, a taxpayer could elect a 2-percentage point reduction in the credit in lieu of the half-basis adjustment. Real property The statutory percentages for real property were based on the 175-percent declining balance method (200-percent for low-income housing described in prior law section 1250(a)(1)(B)(i)-(iv)), switching to the straight-line method at a time to maximize the deduction. For the year of acquisition and disposition of real property, the recovery allowances were based on the number of months during those years that the property was in service. Under a "mid-month' convention, real property (other than low-income housing) placed in service or disposed of by a taxpayer at any time during a month was treated as having been placed in service or disposed of in the middle of the month. For real property placed in service after May 8, 1985, the cost was recovered over a 19-year recovery period (15 years for lowincome housing), although longer recovery periods could be elected. Generally, low-income housing included projects eligible for various Federal, State, and local housing programs and projects where 85 percent of the tenants are eligible for, but do not necessarily receive, subsidies under Section 8 of the Housing Act of 1937. Component cost recovery was not permitted under ACRS. Thus, the same recovery period and method had to be used for a building as a whole, including all structural components. A substantial improvement (generally, one that is made over a two-year period at a cost that is at least 25 percent of a building's unadjusted basis) was treated as a separate building, the cost of which was separately recovered when the improvement was placed in service. If the 15-percent or 20-percent investment tax credit for rehabilitation expenditures was allowed, the basis of real property was reduced by the amount of credit earned (and the reduced basis was used to compute recovery deductions). The basis of real property was reduced by 50 percent of the 25-percent credit allowed for the rehabilitation of a certified historic structure. In addition, if a credit for rehabilitation expenditures was allowed, the straight-line method of cost recovery had to be used with respect to the rehabilitation expenditures. Recapture With certain limited exceptions, gain from the disposition of depreciable property was "recaptured" as ordinary income to the extent of previously allowed ACRS deductions (sec. 1245). For residential real property that was held for more than one year, gain was treated as ordinary income only to the extent the depreciation deductions allowed under the prescribed accelerated method exIceeded the deductions that would have been allowed under the straight-line method (prior law sec. 1250(b)(1)). In addition, recapture for qualified low-income housing was phased out after such property had been held for a prescribed number of months, at the rate of one percentage point per month (prior law sec. 1250(a)(1)(B)). For nonresidential real property held for more than one year, there was no recapture if the taxpayer elected to recover the property's cost using the straight-line method over the applicable ACRS recovery periods (prior law sec. 1245(a)(5)(C)). If accelerated depreciation was claimed with respect to nonresidential real property, the full amount of the depreciation deductions previously taken (to the extent of gain) was recaptured. Application of different depreciation methods for certain purposes In general, ACRS recovery allowances were reduced for property that is (1) used predominantly outside the United States ("foreignuse property"), (2) leased to a tax-exempt entity, including a foreign person-unless more than 50 percent of the gross income derived from the property was subject to U.S. tax-("tax-exempt use property"), or (3) financed with industrial development bonds the interest on which is exempt from taxation. Different depreciation methods were also used for purposes of computing earnings and profits of a domestic corporation and applying the minimum tax provisions. Foreign-use property The rationale for reducing ACRS deductions for foreign-use property is that the investment incentive is intended to encourage capital investment in the United States and should not be available to property used predominantly outside the United States. The recovery period for foreign-use personal property was equal to the asset's ADR midpoint life (12 years for property without a midpoint life), and the 200-percent declining balance method could be used. The recovery period for foreign-use real property was 35 years, and the 150-percent declining balance method could be used. A taxpayer could elect to use the straight-line method over the ap plicable recovery period or certain longer periods. Communications satellites, as defined in section 48(a)(2)(B), were excluded from the definition of foreign-use property. Other spacecraft (and interests therein) were not specifically excluded from the definition of foreign-use property. |