3. S. 108-Senators Grassley, Jepsen, Durenberger, and Thurmond Tax Incentives for Vocational Education Programs a. Increased charitable deduction for contributions of equipment to postsecondary vocational education programs Present Law In general, the amount of charitable deduction otherwise allowable for donated property must be reduced by the amount of any ordinary gain which the taxpayer would have realized had the property been sold for its fair market value on the date of the donation (Code sec. 170(e)). Thus, a donor of inventory or other ordinary-income property (property the sale of which would not give rise to long-term capital gain) generally may deduct only the donor's basis in the property, rather than its full fair market value. In the case of property used in the taxpayer's trade or business (sec. 1231 property), the charitable deduction must be reduced by the amount of depreciation recapture which would be recognized on sale of the donated property. Under a special rule, corporations are allowed an augmented charitable deduction for donations of newly manufactured scientific equipment or apparatus to a college or university for research use in the physical or biological sciences (sec. 170(e)(4), enacted in the Economic Recovery Tax Act of 1981).10 The augmented deduction is generally for the sum of (1) the corporation's basis in the donated property and (2) one-half of the unrealized appreciation (i.e., onehalf of the difference between the property's fair market value determined at the time of the contribution and the donor's basis in the property). However, in no event is the deduction under the special rule allowed for an amount which exceeds twice the basis of the property. Overview Explanation of Provision Section 1 of the bill would provide an augmented charitable deduction for taxpayers (not limited to corporations) making certain donations of tangible personal property to a public community college or public technical institute (within the meaning of sec. 742(b) of the Higher Education Act of 1965 11), or any other institution of 10 Under a special rule enacted in 1976, an augmented charitable deduction also is allowed for corporate contributions of certain types of ordinary income property donated for the care of the needy, the ill, or infants (sec. 170(e)(3)). 11 Section 742(b) of the Higher Education Act of 1965, as amended, defines a public community college or public technical institute as an institution of higher education which is under public supervision and control, and is organized and administered principally to provide a twoContinued (12) 13 higher education (within the meaning of section 1201(a) of such Act 12), if the donated property is used for training students enrolled in a postsecondary vocational education program. Requirements for favorable treatment To qualify, a donation of equipment would be required, under the bill, to satisfy the following requirements: (1) The donated property must not be transferred by the donee in exchange for money, other property, or services; (2) Substantially all of the use of the property by the donee must be for training students enrolled in a postsecondary vocational education program offered by the donee; and (3) The taxpayer must receive from the donee a written statement representing that the use and disposition of the donated property will be in accordance with the last two requirements. A postsecondary vocational education program would be defined as any organized education program which is either (1) a two-year program in engineering, mathematics, or the physical or biological sciences, designed to prepare a student to work as a technician or at the semiprofessional level in engineering, scientific, or other technological fields requiring the understanding and application of basic engineering, scientific, or mathematical principles of knowledge, or (2) directly related to the preparation of individuals for paid or unpaid employment or for a career which does not require a baccalaureate or advanced degree. Allowable deduction If all the requirements of section 1 of the bill are satisfied, the augmented charitable deduction allowed for the donation of equipment generally would be the sum of (1) the taxpayer's basis in the year program which is acceptable for full credit toward a bachelor's degree, or a two-year program in engineering, mathematics, or the physical or biological sciences which is designed to prepare the student to work as a technician and at a semiprofessional level in engineering, scientific, or other technological fields which require the understanding and application of basic engineering, scientific, or mathematical principles or knowledge; and the term includes a branch of an institution of higher education offering four or more years of higher education which is located in a community different from that in which its parent institution is located (20 U.S.C. sec. 1132e-1). 12 Section 1201(a) of the Higher Education Act of 1965, as amended, defines an institution of higher education as an educational institution in any State which (1) admits as regular students only persons having a certificate of graduation from a school providing secondary education, or the recognized equivalent of such a certificate; (2) is legally authorized within such State to provide a program of education beyond secondary education; (3) provides an educational program for which it awards a bachelor's degree or provides not less than a two-year program which is acceptable for full credit toward such a degree; (4) is a public or other nonprofit institution; and (5) is accredited by a nationally recognized accrediting agency or association or, if not so accredited, (A) is an institution with respect to which the Secretary [of Education] has determined that there is satisfactory assurance, considering the resources available to the institution, the period of time, if any, during which it has operated, the effort it is making to meet accreditation standards, and the purpose for which this determination is being made, that the institution will meet the accreditation standards of such an agency or association within a reasonable time, or (B) is an institution whose credits are accepted, on transfer, by not less than three institutions which are so accredited, for credit on the same basis as if transferred from an institution so accredited. such term also includes any school which provides not less than a one-year program of training to prepare students for gainful employment in a recognized occupation and which meets the provisions of clauses (1), (2), (4), and (5). For purposes of this subsection, the Secretary [of Education] shall publish a list of nationally recognized accrediting agencies or associations which he determines to be reliable authority as to the quality of training offered. Such term also includes a public or nonprofit private educational institution in any State which, in lieu of the requirement in clause (1), admits as regular students persons who are beyond the age of compulsory school attendance in the state in which the institution is located who have the ability to benefit from the training offered by the institution (20 U.S.C. sec. 1141). 14 donated property and (2) one-half of the unrealized appreciation. However, in no event would a deduction be allowed for any amount which exceeded twice the basis of the property. Effective Date The provisions of section 1 of the bill would be effective for donations made after 1982. b. Postsecondary vocational education instruction tax credit Present Law In general, employers may deduct as an ordinary and necessary business expense a reasonable allowance for salaries or other compensation for personal services actually rendered (sec. 162). Thus, a manufacturer generally may deduct reasonable compensation paid to an employee who, while regularly employed by the manufacturer in a nonteaching capacity, teaches vocational education courses part-time at a teaching institution, with or without compensation. In addition, a manufacturer generally may deduct reasonable compensation paid to a vocational education teacher regularly employed by a teaching institution who works temporarily for the manufacturer to upgrade his or her skills. Under present law, a targeted jobs tax credit is also available, on an elective basis, to employers who hire individuals from one or more of nine target groups (sec. 51). One such group consists of youths between the ages of 16 and 20 from economically disadvantaged families who receive instruction in and otherwise actively participate in certain cooperative vocational education programs. The targeted jobs credit is not available with respect to individuals who teach vocational education courses. General rules Explanation of Provision Section 2 of the bill would provide a new tax credit with respect to (1) postsecondary vocational education courses taught by qualified teaching employees of the taxpayer and (2) qualified vocational education instructors temporarily employed by the taxpayer. The amount of the credit generally would be $100 for each postsecondary vocational education course taught by a qualified teaching employee during the taxable year (not to exceed five courses per employee per taxable year), plus $100 for each qualified vocational education instructor temporarily employed during the taxable year. Definitions A postsecondary vocational education course would be defined as any course of instruction which— (1) Is offered by an institution of higher education as part of either (a) a two-year organized education program in engineering, mathematics, or the physical or biological sciences, designed to prepare a student to work as a technician or at the semiprofessional level in engineering, scientific, or other technological fields requir 15 ing the understanding and application of basic engineering, scientific, or mathematical principles of knowledge, or (b) an organized education program directly related to the preparation of individuals for paid or unpaid employment or for a career which does not require a baccalaureate or advanced degree; (2) Consists of a period of instruction which is at least equivalent to a course of instruction that provides three hours of instruction per week during an academic semester; and (3) Has been completed before the close of the taxable year. A qualified teaching employee would be defined as any individual employed full time by the taxpayer for the entire taxable year who taught at least one postsecondary vocational education course part-time at an institution of higher education (within the meaning of sec. 1201(a) of the Higher Education Act of 1965 13), does not receive any compensation from the institution of higher education, and was not a qualified vocational education instructor at any time during the taxable year. A vocational education instructor would be defined as any individual who (1) Was employed full time by the taxpayer for at least three months but not more than 12 months during the two-year period ending at the close of the taxable year; (2) Prior to this employment, taught postsecondary vocational education courses full-time at an institution of higher education; (3) Is teaching such courses full-time at an institution of higher education at the close of the taxable year; and (4) Is not employed by the taxpayer at the close of the taxable year. Double benefit Any credit allowed under the bill with respect to an employee would be in addition to any allowable deduction for reasonable compensation paid to the employee by the taxpayer. Limitations and special rules The amount of the vocational education instruction credit allowable in any taxable year generally would be limited to the taxpayer's income tax liability for the year reduced by (1) certain items of tax described in the last sentence of Code section 53(a), and (2) the sum of various other statutory credits allowable in the taxable year. 14 In addition, in the case of a taxpayer who owns an interest in an unincorporated trade or business, is a partner in a partnership, is a beneficiary of an estate or trust, or is a shareholder in an electing small business corporation, the amount of the vocational education credit attributable to such trade, business or entity which would be applied against tax could not exceed the amount of the taxpayer's 13 See note 12, supra. 14 The statutory credits which would be applied against tax before the vocational education instruction credit are: all allowable credits having a lower letter or number designation in the Code than the vocational education instruction credit (sec. 44H under the bill), except the wage withholding credit (sec. 31), the credit for certain uses of gasoline and special fuels (sec. 39), and the earned income credit (sec. 43). |