Introduction In the past, Congress has regularly acted to extend expired or expiring temporary tax provisions. Collectively, these temporary tax provisions are often referred to as "tax extenders." There are 33 temporary tax provisions scheduled to expire at the end of 2020. This report discusses six provisions related to the individual income tax: (1) the tax exclusion for canceled mortgage debt, (2) mortgage insurance premium deductibility, (3) the above-the-line deduction for qualified tuition and related expenses, (4) the credit for health insurance costs of eligible individuals, (5) the medical expense deduction adjusted gross income (AGI) floor of 7.5%, and (6) the exclusion for income of certain state and local tax rebates and reimbursement for volunteer firefighters and emergency medical responders. These six provisions were extended through 2020 in the Further Consolidated Appropriations Act, 2020 ( P.L. 116-94 ). The first three provisions had expired at the end of 2017 and have been included in recent tax extenders legislation. Two provisions are housing related. The provision allowing homeowners to deduct mortgage insurance premiums was first enacted in 2006 (effective for 2007). The provision allowing qualified canceled mortgage debt income associated with a primary residence to be excluded from income was first enacted in 2007. Both provisions were temporary when first enacted, but in recent years have been extended as part of tax extenders legislation. The above-the-line deduction for qualified tuition and related expenses was first added as a temporary provision in the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA; P.L. 107-16 ), and has regularly been extended since. The Further Consolidated Appropriations Act, 2020, also extended through 2020 individual provisions that expired in 2019 and 2018. The credit for health insurance costs of eligible individuals (also known as the health coverage tax credit [HCTC]) was scheduled to expire after 2019, whereas the medical expense deduction adjusted gross income (AGI) floor of 7.5% had expired at the end of 2018. The act also reinstated for one year, and expanded, a provision allowing for the exclusion from income of certain state and local tax rebates and reimbursement for volunteer firefighters and emergency medical responders that had expired in 2010. The three provisions that expired in 2018, 2019, or 2010 were not in the previous tax extenders legislation. The health coverage tax credit, which applied to recipients of trade adjustment assistance, among others, was last extended through 2019 by the Trade Preferences Extension Act of 2015 ( P.L. 114-27 ). The 7.5% floor for itemized deductions for medical expenses was provided through 2018 by the 2017 tax revision ( P.L. 115-97 , commonly known as the Tax Cuts and Jobs Act). The exclusion of reimbursements for volunteer firefighters and emergency medical respondents was originally enacted in the Mortgage Forgiveness Debt Relief Act of 2007 ( P.L. 110-142 ). In recent years, Congress has chosen to extend most, if not all, recently expired or expiring provisions as part of tax extenders legislation. The most recent tax extenders package is in the Taxpayer Certainty and Disaster Tax Relief Act of 2019, Division Q of the Further Consolidated Appropriations Act, 2020 ( P.L. 116-94 ). The temporary reinstatement of the exclusion for volunteer firefighters and emergency medical responders was in a different part of the act, Division O, the Setting Every Community Up for Retirement Enhancement ("SECURE") Act of 2019. The estimated cost of the extensions of temporary individual tax provisions enacted in the Further Consolidated Appropriations Act, 2020 ( P.L. 116-94 ) is provided in Table 1 . As described above, the first three provisions had expired at the end of 2017. Thus, they were extended for three years (with two years of the three-year extension being retroactive). The 7.5% medical expense deduction floor had expired at the end of 2018, meaning that one year of the two-year extension was retroactive. The health care tax credit was scheduled to expire at the end of 2019, and was extended for one year. The provision for volunteer firefighters and emergency medical responders is scheduled to be effective for one year (2020). Tax Exclusion for Canceled Mortgage Debt2 Historically, when all or part of a taxpayer's mortgage debt has been forgiven, the amount canceled has been included in the taxpayer's gross income. This income is typically referred to as canceled mortgage debt income. Canceled (or forgiven) mortgage debt is common with a short sale, in which a homeowner agrees to sell a house and transfer the proceeds to the lender in exchange for the lender relieving the homeowner from repaying any debt in excess of the sale proceeds. For example, in a short sale, a homeowner with a $300,000 mortgage may be able to sell the house for $250,000. The lender would receive the $250,000 from the home sale and forgive the remaining $50,000 in mortgage debt. Lenders report the canceled debt to the Internal Revenue Service (IRS) using Form 1099-C. A copy of the 1099-C is also sent to the borrower, who in general must include the amount listed in his or her gross income in the year of discharge. To understand why forgiven debt has historically been taxable, it may be helpful to explain why it is viewed as income from an economic perspective. Income is a measure of the increase in an individual's purchasing power over a designated period of time. When individuals experience a reduction in their debts, their purchasing power has increased (because they no longer have to make payments). Effectively, their disposable income has increased. From an economic standpoint, it is irrelevant whether a person's debt was reduced via a direct transfer of money to the borrower (e.g., wage income) that was then used to pay down the debt, or whether it was reduced because the lender forgave a portion of the outstanding balance. Both have the same effect, and thus both are subject to taxation. The Mortgage Forgiveness Debt Relief Act of 2007 ( P.L. 110-142 ), signed into law on December 20, 2007, temporarily excluded qualified canceled mortgage debt income that is associated with a primary residence from taxation. Thus, the act allowed taxpayers who did not qualify for one of several existing exceptions to exclude canceled mortgage debt from gross income. The provision was originally effective for debt discharged before January 1, 2010. Since then, the provision has regularly been extended as part of the tax extenders. The exclusion was most recently extended through December 31, 2020, in the Taxpayer Certainty and Disaster Tax Relief Act of 2019, enacted as Division Q of the Further Consolidated Appropriations Act, 2020 ( P.L. 116-94 ). The rationales for extending the exclusion are to minimize hardship for households in distress and lessen the risk that nontax homeowner retention efforts are thwarted by tax policy. The exclusion's supporters may also argue that extending the exclusion would continue to assist the recoveries of the housing market and overall economy. The exclusion's opponents may argue that extending the provision would make debt forgiveness more attractive for homeowners, which could encourage homeowners to be less responsible about fulfilling debt obligations. Some may also view the exclusion as unfair because its benefits depend on whether a homeowner is able to negotiate a debt cancelation, the taxpayer's income tax bracket, and whether the taxpayer retains ownership of the house following the debt cancellation. Mortgage Insurance Premium Deductibility5 Traditionally, homeowners who itemize their tax deductions have been able to deduct the interest paid on their mortgages, as well as any property taxes they pay. Beginning in 2007, homeowners could also deduct qualifying mortgage insurance premiums as a result of the Tax Relief and Health Care Act of 2006 ( P.L. 109-432 ). Specifically, homeowners could effectively treat qualifying mortgage insurance premiums as mortgage interest, thus making the premiums deductible if the homeowner itemized, and if the homeowner's adjusted gross income was below a certain threshold ($55,000 for single, and $110,000 for married filing jointly). Originally, the deduction was only to be available for 2007, but it was extended several times. The deduction was extended through December 31, 2020, in the Taxpayer Certainty and Disaster Tax Relief Act of 2019, enacted as Division Q of the Further Consolidated Appropriations Act, 2020 ( P.L. 116-94 ). Taxpayers of all ages may be less likely to claim the mortgage insurance premium deduction compared to prior periods because other provisions of the 2017 tax revision, including a higher standard deduction (in part as a trade-off for elimination of personal exemptions) and a cap on the deduction of state and local taxes, reduced the expected number of itemizers (projected to fall from about one-third of individual income tax returns to 11%). A justification for allowing the deduction of mortgage insurance premiums is that it helps to promote homeownership and, relatedly, the recovery of the housing market following the December 2007-June 2009 Great Recession. Homeownership is often argued to bestow certain benefits to society, such as higher property values, lower crime, and higher civic participation. Homeownership may also promote a more even distribution of income and wealth, as well as establish greater individual financial security. Furthermore, homeownership may have a positive effect on living conditions, which can lead to a healthier population. With regard to the first justification, it is not clear that the deduction for mortgage insurance premiums affects the homeownership rate. Economists have identified the high transaction costs associated with a home purchaseâmostly resulting from the down payment requirement, but also from closing costsâas the primary barrier to homeownership. The ability to deduct insurance premiums does not lower this barrierâmost lenders will require mortgage insurance if the borrower's down payment is less than 20% regardless of whether the premiums are deductible. The deduction may allow buyers to borrow more, however, because they can deduct the higher associated premiums and therefore afford a higher housing payment. Concerning the second justification, it is also not clear that the deduction for mortgage insurance premiums is still needed to assist in the housing market's recovery. Based on the S&P CoreLogic Case-Shiller U.S. National Composite Index, home prices have generally increased since the bottom of the market following the Great Recession. In addition, the available housing inventory is now slightly below its historical level. Both of these indicators suggest that the market is stronger than when the provision was enacted. Economists have noted that owner-occupied housing is already heavily subsidized via tax and nontax programs. To the degree that owner-occupied housing is oversubsidized, it could be argued that extending the deduction for mortgage insurance premiums would lead to a greater misallocation of resources that are directed toward the housing industry. Above-the-Line Deduction for Qualified Tuition and Related Expenses10 This provision allows taxpayers to deduct up to $4,000 of qualified tuition and related expenses for postsecondary education (both undergraduate and graduate) from their gross income. Expenses that qualify for this deduction include tuition payments and any fees required for enrollment at an eligible education institution. Other expenses, including room and board expenses, are generally not qualifying expenses for this deduction. The deduction is "above-the-line," that is, it is not restricted to itemizers. Individuals who could be claimed as dependents, married persons filing separately, and nonresident aliens who do not elect to be treated as resident aliens do not qualify for the deduction, in part to avoid multiple claims on a single set of expenses. The amount that can be claimed for the deduction is generally reduced by any tax-free assistance, if that assistance can be used to pay for expenses that qualify for the deduction. Tax-free assistance includes tax-free grants and scholarships (including Pell Grants), employer-provided educational assistance, and veterans' educational assistance. The maximum deduction taxpayers can claim depends on their income level. Taxpayers can deduct up to $4,000 if their income is $65,000 or less ($130,000 or less if married filing jointly); or $2,000 if their income is between $65,000 and $80,000 ($130,000 and $160,000 if married filing jointly). Taxpayers with income above $80,000 ($160,000 for married joint filers) are ineligible for the deduction. These income limits are not adjusted for inflation. The above-the-line deduction for qualified tuition and related expenses was enacted temporarily by the Economic Growth and Tax Relief Reconciliation Act of 2001 ( P.L. 107-16 ). It has been extended a number of times. Most recently, the deduction was extended through December 31, 2020, in the Taxpayer Certainty and Disaster Tax Relief Act of 2019, enacted as Division Q of the Further Consolidated Appropriations Act, 2020 ( P.L. 116-94 ). One criticism of education tax benefits is that the taxpayer is faced with a confusing choice of deductions and credits and tax-favored education savings plans, and that these benefits should be consolidated. Some tax reform proposals have consolidated these benefits into a single education credit. Taxpayers may claim the tuition and fees deduction instead of education tax credits for the same student. These credits include permanent tax credits: the American Opportunity Tax Credit (AOTC) and Lifetime Learning Credit. The AOTC is directed at undergraduate education and is limited to the first four years of postsecondary education. The Lifetime Learning Credit (20% of up to $10,000) is not limited in years of coverage. These credits are generally more advantageous than the deduction, except for higher-income taxpayers, in part because the credits are phased out at lower levels of income than the deduction. For example, for single taxpayers, the Lifetime Learning Credit begins phasing out at $59,000 for 2020. The deduction benefits taxpayers according to their marginal tax rate. Students usually have relatively low incomes, but they may be part of families in higher tax brackets. The maximum amount of deductible expenses limits the tax benefit's impact on individuals attending schools with comparatively high tuitions and fees. Because the income limits are not adjusted for inflation, the deduction might be available to fewer taxpayers over time if extended in its current form. The distribution of the deduction in Table 2 indicates that some of the benefit is concentrated in the income range where the Lifetime Learning Credit has phased out, but also that significant deductions are claimed at lower income levels. Because the Lifetime Learning Credit is preferable to the deduction at lower income levels, it seems likely that confusion about the education benefits may have caused taxpayers not to choose the optimal education benefit. Credit for Health Insurance Costs of EligibleÂ Individuals16 The credit for health insurance costs of eligible individuals, commonly known as the health coverage tax credit (HCTC), reduces the cost of qualified health insurance for eligible individuals. To be eligible to claim the HCTC, taxpayers must be (1) an eligible trade adjustment assistance (TAA) recipient; (2) an eligible alternative TAA recipient or reemployment TAA recipient; or (3) an eligible Pension Benefit Guaranty Corporation (PBGC) pension recipient. Additionally, an individual is not eligible for the HCTC if they have access to "other specified coverage," which includes coverage for which an employer (or former employer) incurs 50% of the cost as well as Medicare, Medicaid, the Children's Health Insurance Programs, and other federal and military health or medical benefit plans. Under this provision, eligible taxpayers are allowed a refundable tax credit for 72.5% of the premiums they pay for qualified health insurance for themselves and their family members. Eligible taxpayers with qualified health insurance may claim the tax credit (1) when tax returns are filed or (2) as advance payments, on a monthly basis, throughout the year. This latter option helps taxpayers pay for health plan premiums as they become due. The credit is not available for months beginning on or after January 1, 2021. The HCTC was originally authorized by the Trade Act of 2002 ( P.L. 107-210 ). The credit has been extended and modified several times. Extensions or modifications have been made in trade adjustment assistance legislation as well as tax extenders legislation. The Trade Preferences Extension Act of 2015 ( P.L. 114-27 ) extended the HCTC through December 31, 2019, and also made changes to address the interaction between the HCTC and the premium tax credit established under the Patient Protection and Affordable Care Act ( P.L. 111-148 , as amended). The credit was extended through December 31, 2020, in the Taxpayer Certainty and Disaster Tax Relief Act of 2019, enacted as Division Q of the Further Consolidated Appropriations Act, 2020 ( P.L. 116-94 ). Medical Expense Deduction Adjusted Gross Income (AGI) Floor of 7.5%21 Individuals are allowed to deduct unreimbursed medical expenses above a specific income threshold if they itemize their deductions. Prior to 2013, these deductions were allowed only for amounts in excess of 7.5% of income. Expenses reimbursed by an employer or insurance company are not eligible for deduction. The Patient Protection and Affordable Care Act ( P.L. 111-148 , as amended) increased the floor for individuals claiming the itemized deduction for medical expenses from 7.5% to 10% of adjusted gross income (AGI). The higher floor went into effect for taxpayers under age 65 beginning for the 2013 tax year. Individuals 65 or older, however, were still able to claim the deduction under the lower, 7.5% floor for tax years 2013 through 2016. The 2017 tax revision ( P.L. 115-97 ) temporarily allowed all taxpayers (not just those aged 65 or older) to claim the deduction subject to the 7.5% floor for the 2017-2018 tax years. The Taxpayer Certainty and Disaster Tax Relief Act of 2019, enacted as Division Q of the Further Consolidated Appropriations Act, 2020 ( P.L. 116-94 ), extends the 7.5% floor for all taxpayers through 2020. After 2020, under current law, the floor is scheduled to increase to 10% of AGI for all taxpayers. A complicated set of rules governs the expenses eligible for the deduction. Generally speaking, these expenses include amounts paid by the taxpayer on behalf of himself or herself, his or her spouse, and eligible dependents for the following purposes: (1) health insurance premiums (including employee payments for employer-sponsored health plans, Medicare Part B premiums, and other self-paid premiums); (2) diagnosis, treatment, mitigation, or prevention of disease, or for the purpose of affecting any structure or function of the body, including dental care; (3) prescription drugs and insulin (but not over-the-counter medicines); (4) transportation primarily for and essential to medical care; and (5) lodging away from home primarily for and essential to medical care, up to $50 per night for each individual. The current lower floor is for all taxpayers, and future extensions, if any, could make the lower floor general, or limit it to taxpayers 65 and over. Based on a 2011 special study of deductions by age, 58% of dollars deducted were by those 65 and over, who made up 39% of taxpayers claiming the deduction. Taxpayers of all ages may be less likely to claim the medical expense deduction compared to prior periods because, as mentioned previously, other provisions of the 2017 tax revision, including a higher standard deduction (in part as a trade-off for elimination of personal exemptions) and a cap on the deduction of state and local taxes, reduced the expected number of itemizers (projected to fall from about one-third of taxpayers to 11%). These provisions are slated to expire after 2025, but are in place for the next few years. The likelihood of itemizing generally increases with income. However, the AGI floor for the medical expenses deduction reduces the likelihood that very high-income individuals would claim the deduction. For all taxpayers, medical expenses alone might not make it worthwhile to itemize unless they can also claim other itemized deductions (e.g., home mortgage interest or state and local taxes). Benefits for Volunteer Firefighters and Emergency Medical Responders28 The Mortgage Forgiveness Debt Relief Act of 2007 ( P.L. 110-142 ) provided an exclusion from gross income of certain benefits for members of qualified voluntary emergency response organizations. These payments include the forgiveness or rebate of state and local income and property taxes or payments by states or their political subdivisions to reimburse for expenses. The exclusion was limited to $30 a month. The provision disallowed any itemized deductions for the state and local taxes otherwise excluded. This provision was enacted after a 2002 IRS decision that a reduction in property taxes for volunteers who are emergency responders was includible in gross income. The provision was temporary, effective from the date of enactment (December 20, 2007) through 2010. The provision was allowed to expire as scheduled. The SECURE Act of 2019, enacted as Division O of the Further Consolidated Appropriations Act, 2020 ( P.L. 116-94 ), reinstated the provision for 2020 and increased the amount to $50 a month. The reinstated provision is likely to have a wider scope than it previously did because of the reduction in the number of itemizers due to provisions of the 2017 tax act ( P.L. 115-97 ), which is expected to reduce the share of itemizers, previously about one-third of taxpayers, to an estimated 11%.


Introduction In the past, Congress has regularly acted to extend expired or expiring temporary tax provisions. Collectively, these temporary tax provisions are often referred to as "tax extenders." This report briefly summarizes and discusses the economic impact of the 17 business-related tax provisions that are scheduled to expire before 2025. There are 13 business-related temporary tax provisions scheduled to expire at the end of 2020. Most of these business-related provisions were included in past extenders legislation. The business tax extenders are diverse in purpose, providing various types of tax relief to businesses in different industries. Most recently, Congress extended expiring provisions in the Taxpayer Certainty and Disaster Tax Relief Act of 2019, enacted as Division Q of the Further Consolidated Appropriations Act, 2020 ( P.L. 116-94 ). This law retroactively extended, through 2020, eight temporary tax provisions that had expired at the end of 2017; it also extended five provisions scheduled to expire in 2019. The estimated cost of the 13 temporary business tax provision extensions enacted in the Further Consolidated Appropriations Act, 2020 ( P.L. 116-94 ) is provided in Table 1 . The most costly of these provisions are the employer credit for paid family and medical leave ($2.2 billion), the work opportunity tax credit ($2.0 billion), and the New Markets Tax Credit ($1.5 billion). Note that all three of these provisions were scheduled to expire at the end of 2019, and thus were extended for one year. In contrast, the eight other provisions that had expired at the end of 2017 and were extended through 2020 were effectively extended for three years. Four other business-related provisions are scheduled to expire in 2021 or 2022: (1) the 12.5% increase in the annual low-income housing tax credit (LIHTC) authority for four years (2018-2021), enacted as part of the 2018 Consolidated Appropriations Act, with a cost of $2.7 billion; (2) the computation of adjusted taxable income without regard to any deduction allowable for depreciation, amortization, or depletion for purposes of the interest deduction limit, set to expire by the 2017 tax revision (the Tax Cuts and Jobs Act, P.L. 115-97 ), with no separate cost estimate for this feature; (3) the five-year extension of the rum cover over, last extended retroactively for 2017 and forward through 2021 as part of the Bipartisan Budget Act of 2018 ( P.L. 115-123 ), with a cost of $0.6 billion; and (4) the credit for certain expenditures for maintaining railroad tracks, extended through 2022 in the Taxpayer Certainty and Disaster Tax Relief Act of 2019, with a cost of $1.1 billion. There are several options for Congress to consider regarding temporary provisions. Provisions that are scheduled to expire or have expired could be extended, and the extension could be short term, long term, or permanent. Alternatively, Congress could allow the provisions to expire and remain expired. Provisions Expiring in 2020 There are 13 business-related provisions scheduled to expire in 2020. All 13 of these provisions were extended in the Taxpayer Certainty and Disaster Tax Relief Act of 2019, enacted as Division Q of the Further Consolidated Appropriations Act, 2020 ( P.L. 116-94 ). Special Business Investment (Cost Recovery) Provisions The cost of assets that provide services over a period of time, such as machines or buildings, is deducted over a period of years as depreciation. The schedule of depreciation deductions depends on the asset's life and the distribution of deductions over that life. Straight-line depreciation is used for structures, where equal amounts are deducted in each year. For equipment, deductions are accelerated, with larger amounts deducted in earlier years. Equipment is most commonly depreciated over 5 years or 7 years, but some short-lived assets are depreciated over 3 years and some longer-lived assets are depreciated over 10, 15, or 20 years. Nonresidential structures are depreciated over 39 years. Aside from the desire for economic stimulus, traditional economic theories suggest that tax depreciation should match economic (physical) depreciation of assets as closely as possible. The depreciation provisions discussed below all allow earlier deductions for depreciation, which are valuable because of the time value of money. A fixed reduction in tax liability today is worth more than that same fixed reduction in tax liability in the future. Expensing provisions allow a firm to deduct the cost of an asset the year it is placed in service. Through 2022, bonus depreciation of 100% allows for full expensing of investments in qualifying equipment and property. It is scheduled to decrease to 80% in 2023, 60% in 2024, 40% in 2025, 20% in 2026, and 0% for property acquired and placed in service in 2027 and thereafter. The presence of bonus depreciation or expensing would make some temporary provisions more important (such as the benefits for motorsports complexes, which would otherwise become ineligible) and some less important (such as shortening lives for racehorses or Indian reservation property, or expensing for films and television, which would have received the benefit regardless). Special Expensing Rules for Certain Film, Television, and Live Theatrical Productions7 Investments in film and television productions are generally recovered using the income forecast method. Under this method, depreciation deductions are based on the pattern of expected earnings. The American Jobs Creation Act of 2004 ( P.L. 108-357 ) included special rules to allow expensing for certain film and television production costs. The provision's main purpose was to discourage "runaway" productions, or the production of films and television shows in other countries, where tax and other incentives are often offered. Initially, the provision was set to expire at the end of 2008. However, since 2008, the provision has regularly been extended as part of tax extender legislationâmost recently in the Further Consolidated Appropriations Act of 2020 ( P.L. 116-94 ). Under the special expensing rules for film, television, and live theatrical productions, taxpayers may elect to deduct immediately up to $15 million of production costs ($20 million for productions produced in certain low-income and distressed communities) in the tax year incurred. Eligible productions are limited to those in which at least 75% of the compensation paid is for services performed in the United States. For productions that started before 2008, the expensing deduction is not allowed if the aggregate production cost exceeds $15 million ($20 million for productions in designated low-income and distressed communities). Qualifying live theatrical productions are those generally performed in venues with an audience capacity of not more than 3,000 (or 6,500 for seasonal productions performed no more than 10 weeks annually). The provisions would cover most theatrical productions (the largest of the Broadway theatres, for example, has a seating capacity of less than 2,000). The ability to expense (deduct immediately) certain film, television, and live theatrical production costs provides a benefit by allowing deductions to be taken earlier, thus deferring tax liability. The magnitude of the benefit depends on the average lag time from production to earning income. For many films, production costs would be deductible in the year the film is released. If the film is released one year after the production costs are incurred, which may be the case for independent and smaller productions, the provision accelerates cost recovery by one year. The benefit conferred by accelerating cost recovery deductions by one year is limited. Taxpayers with limited or no tax liability may derive little or no benefit from the expensing allowance. The primary policy objective of providing special tax incentives for film and television producers is to deter productions from moving overseas, lured by lower production costs as well as tax and other subsidies offered by foreign governments. Because live theatre is tied to audience location, runaway productions are not a concern. However, providing expensing for live theatrical production costs could encourage investment in such productions and provide parity with film and television. In evaluating this incentive, one consideration is the economic value of domestic film, television, and theatre production relative to the cost of the targeted tax benefits. Seven-Year Recovery Period for Motorsports Entertainment Complexes10 An exception from the 39-year depreciation life for nonresidential structures exists for the theme and amusement park industry. Assets in this industry are assigned a recovery period of seven years. Historically, motorsports racing facilities have been included in this industry and also allowed a seven-year recovery period. However, ambiguities in the law led to questions about whether motorsports racing facilities were correctly categorized. When the Treasury reconsidered the appropriateness of this classification in 2004, Congress made the seven-year treatment mandatory through 2007 with the American Jobs Creation Act ( P.L. 108-357 ). Since 2004, the provision has been extended as part of tax extenders legislationâmost recently in the Further Consolidated Appropriations Act of 2020 ( P.L. 116-94 ), which extended the provision through December 31, 2020. Without this provision, motorsports racing facilities would be depreciated over the standard 39-year life. The tax authorities presumably estimated motorsports racing facilities to have slower depreciation rates than the seven-year life that applies to amusement park facilities. If so, the seven-year-life provision for motorsports racing facilities constitutes a subsidy to the auto racing industry that does not appear to have an obvious justification. Supporters argued that the provision preserves historical treatment and provides a stimulus to business. They also argued that the benefit helps make motorsports facilities more competitive with sports facilities that are often subsidized by state and local governments. Three-Year Depreciation for Racehorses Two Years or Younger11 Racehorses are tangible property, and taxpayers using racehorses in a trade or business must capitalize the cost of purchasing racehorses. The cost can then be recovered through annual depreciation deductions over time. The cost recovery period for racehorses is seven years, although racehorses that begin training after age two have a three-year recovery period. Under the temporary provision, this three-year recovery period is extended to all racehorses. In particular, all racehorses placed in service after December 31, 2008, have a three-year recovery period as a result of the Food, Conservation, and Energy Act of 2008 ( P.L. 110-246 ), with provisions subsequently extended. This provision was extended through December 31, 2020, by the Further Consolidated Appropriations Act of 2020 ( P.L. 116-94 ). The industry claims that reducing the recovery period to three years more closely aligns the recovery period with the racing life of a horse. The IRS cost recovery period suggests a longer view. Some racehorses continue in productive activity after their racing career through breeding, as well as having a residual value for resale. Taking those uses into account, a Treasury study estimated an overall economic life of nine years. This provision does not affect breeders who race their own horses, because they deduct the cost of breeding and thus have no basis (capital investment) in the horses. The provision generally benefits investors who purchase horses. Accelerated Depreciation for Business Property on an Indian Reservation13 The Omnibus Budget Reconciliation Act of 1993 ( P.L. 103-66 ) contained a provision allowing businesses on Indian reservations to be eligible for accelerated depreciation (through a reduction in the applicable recovery periods) as part of an effort to increase investment in Indian reservations. Since its initial temporary enactment, this provision has regularly been extended as part of tax extenders legislationâmost recently in the Further Consolidated Appropriations Act of 2020 ( P.L. 116-94 ), which extended the provision through December 31, 2020. Extending the provision might encourage additional investment on Indian reservations. However, if these provisions' main objective is to improve the economic status of individuals currently living on Indian reservations, it is not clear to what extent this tax subsidy will succeed, because it is not given directly to workers but instead is received by businesses. Capital subsidies may not ultimately benefit workers. It is possible that capital equipment subsidies may encourage more capital-intensive businesses and make workers relatively worse off. In addition, workers would not benefit from higher wages resulting from an employer subsidy if the wage is determined by regulation (the minimum wage) that is set higher than the prevailing market wage. Economic Development Provisions Empowerment Zone Tax Incentives14 Empowerment Zones (EZs) are federally designated geographic areas characterized by high levels of poverty and economic distress, where businesses and local governments may be eligible to receive federal grants and tax incentives. Since 1993, Congress has authorized three rounds of EZs (1993, 1997, and 1999) with the objective of revitalizing selected economically distressed communities. EZs are similar to Enterprise Communities (ECs) and Renewal Communities (RCs), which are also federally designated areas for the purposes of tax benefits and grants. A number of studies have evaluated the effectiveness of the EZ, EC, and RC programs. Government Accountability Office and Department of Housing and Urban Development studies have not found links between EZ and EC designation and improvement in community outcomes. Other research has found modest, if any, effects and called into question these programs' cost-effectiveness. This inability to link these programs to improvements in community-level outcomes should not be interpreted as meaning that the EZ, EC, and RC programs did not aid economic development. The main conclusion from these studies is that the EZ, EC, and RC programs have not been shown to have caused a general improvement in the examined localities' economic conditions. One possible cause for this inability to empirically show the program effects on a large geographic area is that the EZ tax incentives are relatively small. Another possibility is that the EZ tax incentives are targeted at business owners and do not provide direct benefits to workers in EZs. Six tax incentives are typically related to EZs: (1) local designation of an EZ; (2)Â increased exclusion of gain; (3) issuance of qualified, tax-exempt zone academy bonds (QZABs) in EZs; (4) EZ employment credits under the Work Opportunity Tax Credit (WOTC); (5) increased expensing under Internal Revenue Code (IRC) Section 179 for businesses located in EZs; and (6) nonrecognition of gain on rollover of EZ investments. EZs were created by legislation enacted in 1993, and most zones expired at the end of 2009. The provisions were extended in the Protecting Americans from Tax Hikes (PATH) Act of 2015 ( P.L. 114-113 ), which also amended the requirements for tax-exempt enterprise zone facility bonds to treat an employee as a resident of a particular EZ if the employee is a resident of a different EZ, EC, or qualified low-income community. Provisions were extended after 2015, and were last extended through 2020 by the Further Consolidated Appropriations Act of 2020 ( P.L. 116-94 ). For more analysis of EZs, see CRS Report R41639, Empowerment Zones, Enterprise Communities, and Renewal Communities: Comparative Overview and Analysis , by Donald J. Marples. American Samoa Economic Development Credit24 The American Samoa economy is largely dependent on three sectors: public works and government, tuna canning, and the residual private sector (e.g., tourism and other services). The American Samoa economic development credit (EDC) is a credit against U.S. corporate income tax in an amount equal to the sum of certain percentages of a domestic corporation's employee wages, employee fringe benefit expenses, and tangible property depreciation allowances for the taxable year with respect to the active conduct of a trade or business within American Samoa. The credit is available to U.S. corporations that, among other requirements, (1) claimed the now-expired possession tax credit (predecessor to the EDC) with respect to American Samoa for their last taxable year beginning before January 1, 2006; or (2) have qualified production activities income after December 31, 2011, in American Samoa (akin to production activities income eligible for Section 199 tax treatment in the United States). The credit's proponents claim it encourages eligible companies to locate, retain, or expand manufacturing operations in the territory. Media reports suggest the EDC's main beneficiary, thus far, has been StarKist, which has retained its cannery operations in American Samoa. The EDC was first enacted in the Tax Relief and Health Care Act of 2006 ( P.L. 109-432 ). This version of the EDC was only available to corporations that had previously claimed the possession tax credit, and it originally expired at the end of 2007. It has been extended numerous times. The American Tax Relief Act of 2012 ( P.L. 112-240 ) also expanded the EDC's criteria to include corporations that had not previously claimed the possession tax credit. The provision was most recently extended through 2020 by the Further Consolidated Appropriations Act of 2020 ( P.L. 116-94 ). New Markets Tax Credit27 The New Markets Tax Credit (NMTC) was enacted by the Community Renewal Tax Relief Act of 2000 ( P.L. 106-554 ) to encourage investors to invest in low-income communities (LICs) that traditionally lack access to capital. The NMTC is a competitively awarded tax credit overseen by the Community Development Financial Institutions (CDFI) Fund, organized within the Department of the Treasury. For each NMTC round authorized by Congress, the CDFI Fund ranks all requests for NMTC allocation authority and grants awards to those CDEs that score highest. A CDE is a domestic corporation or partnership that is an intermediary vehicle for the provision of loans, investments, or financial counseling in LICs. All taxable investors, such as banks, venture capital firms, and other private investors, are eligible to receive the NMTC. The NMTC's structure creates incentives for CDEs and private investors to participate in the program. CDEs benefit from the NMTC because they charge fees to their investors for organizing the NMTC application and for structuring the financing for a portfolio of community development projects. The private investors benefit because they receive, each year over seven years, an annual tax credit equal to 5% to 6% of the total amount paid for the stock or capital interest in the CDE that they purchase. Overall, the tax credit amounts to 39% of the cost of the qualified equity investment (less the CDE's fees) as long as the interest in the investment is retained for the entire seven-year period. Thus, even if the community development project funded by the CDE incurs some losses, the value of the tax credit could generate a positive return for the private financers. Opposition to the NMTC is partly based on the belief that corporations and higher-income investors primarily benefit from the provision or that the NMTC leads to an economically inefficient allocation of resources. For instance, while banks and other investors might benefit directly from the credit, a 2009 study found that the NMTC's benefits to selected low-income communities were modest. The study concluded that poverty and unemployment rates fall by statistically significant amounts in tracts that receive NMTC-subsidized investment relative to similar tracts that do not. From a national economic perspective, the NMTC's impact would be greatest in the case where the investment represents net investment in the U.S. economy rather than a shift in investment from one location to another. Another 2009 study found that corporate NMTC investment represented a shift in investment location, but a portion of individual NMTC investment (roughly $641 million in the first four years of the program from 2001 to 2004) represented new investment. The NMTC has been extended as a temporary tax provision since 2008, after its initial authorization expired at the end of 2007. In more recent years, the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 ( P.L. 111-312 ) extended NMTC authorization through 2011 and permitted a maximum annual amount of qualified equity investments of $3.5 billion. Following several other extensions, the Further Consolidated Appropriations Act of 2020 ( P.L. 116-94 ) extended the provision through 2020 with a maximum allocation authority of $5 billion. For more information on the NMTC, see CRS Report RL34402, New Markets Tax Credit: An Introduction , by Donald J. Marples and Sean Lowry; and CRS Report R42770, Community Development Financial Institutions (CDFI) Fund: Programs and Policy Issues , by Sean Lowry. Other Business Provisions Indian Employment Tax Credit33 The Indian employment tax credit is an incremental credit claimed by employers for qualified wages and health insurance costs. The credit is designed to encourage hiring of certain individualsâenrolled members of an Indian tribe and their spouses. There are restrictions limiting the benefit to services performed within an Indian reservation for individuals living on or near the reservation. The Indian employment credit is 20% of the excess of qualified wages and health insurance costs paid by an employer over base-year expenses. The credit is allowed for the first $20,000 in qualified wages and health insurance costs. The base year is 1993, such that the incentive is incremental to 1993 wages and health insurance costs (the base year has not been changed since the credit was enacted). The credit is not available for wages paid to an employee whose total wages exceed $30,000, as adjusted for inflation ($50,000 in 2019). The employer must reduce the deduction for wages by the amount of the credit. The Indian employment credit was first enacted in 1993, as part of the Omnibus Reconciliation Act of 1993 ( P.L. 103-66 ). It was initially scheduled to expire at the end of 2003, but has been regularly extended, often retroactively. Past extensions of the Indian employment credit have extended the termination date without updating the base year. Some have proposed updating the base year, in an effort to (1) eliminate the need for taxpayers to maintain tax records dating back to 1993 and (2) restore the credit's incremental design. The most recent extension was through 2020 in the Further Consolidated Appropriations Act of 2020 ( P.L. 116-94 ). Extending the Indian employment credit might encourage additional hiring of Indian tribe members and their spouses. Although the Indian employment credit may not increase overall employment on or near Indian reservations, it might increase employment among tribe members. Mine Rescue Team Training Credit35 Taxpayers that employ miners in underground mines located in the United States may be able to claim a tax credit for mine rescue team training expenses. The credit amount is limited to the lesser of (1) 20% of training program costs per employee (including wages paid to the employee while in training) or (2) $10,000. For a taxpayer to claim the credit for training provided to an employee, the employee must be a full-time miner who is eligible to serve as a mine rescue team member. The mine rescue team training credit was enacted in the Tax Relief and Health Care Act of 2006 ( P.L. 109-432 ). It was initially scheduled to be effective for 2006, 2007, and 2008. It has subsequently been extended as part of tax extenders legislation, most recently through 2020 in the Further Consolidated Appropriations Act of 2020 ( P.L. 116-94 ). The mine rescue team training credit was enacted at the end of 2006, following the high-profile mining accident at Sago Mine. There was an uptick in coal mining fatalities in 2006â47 fatalities were reported (12 were a result of the Sago Mine disaster). From 2007 through 2019, coal mining fatalities averaged 20 per year. During this period, fatalities were highest in 2010, reflecting the Upper Big Branch Mine disaster, where there were 29 fatalities. In the year with the lowest number of fatalities, 2016, there were 8. In 2019, there were 11 coal mining fatalities. Coal mining fatalities have generally been trending downward over time. In recent years, some of this might be explained by a decline in coal production and the decline in the number of coal miners. The fatality rate, however, has also tended to decline over time. A credit for mine rescue team training can encourage mine operators and employers to invest in additional training. The credit can also reduce the cost of complying with federal regulations regarding mine rescue team training. Federal regulations are the government's primary policy instrument governing coal mine safety, with tax incentives playing a small role. Employer Tax Credit for Paid Family and Medical Leave39 The employer credit for paid family and medical leave (PFML) can be claimed by employers providing paid leave (wages) to employees under the Family and Medical Leave Act of 1993 (FMLA; P.L. 103-3 ). The credit can be claimed for wages paid during tax years that begin in 2018, 2019, and 2020. The credit amount is equal to up to 25% of PFML wages paid to qualifying employees. The credit can only be claimed for PFML provided to certain employees with incomes below a fixed threshold. For credits claimed in 2019, employee compensation in 2018 cannot have exceeded $72,000. The amount of PFML wages for which the credit is claimed cannot exceed 12 weeks per employee per year. Further, all qualifying employees must be provided at least two weeks of PFML for an employer to be able to claim the credit. Tax credits cannot be claimed for leave paid by state or local governments, or for leave that is required by state or local law. To claim the credit, an employer must have a written family and medical leave policy in effect. The policy cannot exclude certain classifications of employees, such as unionized employees. The employer credit for paid family and medical leave was added to the IRC in the 2017 tax revision ( P.L. 115-97 ; commonly referred to as the Tax Cuts and Jobs Act). Initially, the credit was effective for wages paid in 2018 and 2019. The credit was extended for one year, through 2020, by the Further Consolidated Appropriations Act of 2020 ( P.L. 116-94 ). Providing a tax credit for employers that provide PFML should, on the face of it, tend to increase access to this benefit. How effective the credit will be at achieving this goal remains an open question. Employers may provide PFML to qualified employees for a number of reasons; attracting high-quality talent might be one. If most of the credit's beneficiaries are employers that would have provided PFML without the credit, then the credit is not a particularly efficient mechanism for increasing PFML. There is also the possibility that employers choose to substitute credit-eligible PFML for other forms of leave. An employer could reduce the amount of paid sick, personal, or vacation time off, knowing that employees use this time for paid family and medical leave purposes. If other benefits are scaled back in favor of tax-preferred FMLA leave, employees may not be better off. For more information, see CRS In Focus IF11141, Employer Tax Credit for Paid Family and Medical Leave , by Molly F. Sherlock. Work Opportunity Tax Credit42 The work opportunity tax credit (WOTC) is a nonrefundable wage credit intended to increase job opportunities for certain categories of disadvantaged individuals. The WOTC reduces the cost of hiring specified groups of disadvantaged individuals. WOTC-eligible hires include members of families receiving Temporary Assistance to Needy Families (TANF) benefits, certain members of families receiving food stamp benefits, ex-felons, and certain veterans. For most eligible hires that remain on a firm's payroll at least 400 hours, an employer can claim an income tax credit equal to 40% of wages paid during the worker's first year of employment, up to a statutory maximum. For most WOTC-eligible hires, the wage maximum is $6,000, for a maximum credit of $2,400. For eligible veterans, the maximum eligible wage varies between $6,000 and $24,000, depending on the veteran's characteristics and work history. Eligible summer youth hires' maximum wage to which the credit can be applied is $3,000. A credit equal to 25% of a qualified worker's wages is available for eligible hires that remain employed for at least 120 hours, but fewer than 400 hours. The WOTC was created as part of the Small Business Job Protection Act of 1996 ( P.L. 104-188 ). The WOTC evolved from an earlier tax credit designed to increase employment among targeted groups, the Targeted Jobs Tax Credit (TJTC), which was available from 1978 through 1994. When first enacted, the WOTC was scheduled to expire on October 1, 1997. Since 1997, the WOTC has been expanded, modified, and regularly extended. In several instances, the WOTC was allowed to lapse before being retroactively reinstated. It was most recently extended through 2020 in the Further Consolidated Appropriations Act of 2020 ( P.L. 116-94 ). The WOTC is designed to encourage employers to hire more disadvantaged individuals by compensating for potential higher training costs and possible lower productivity. Because the credit is focused on hiring from targeted groups, and not net job creation, it is not necessarily intended to create new jobs or promote recovery in labor markets. Studies evaluating the credit have examined whether it increases job opportunities for targeted disadvantaged individuals, and whether the WOTC is a cost-effective policy measure for achieving this objective. Early evidence on the WOTC suggested that although the credit did offset part of the cost of recruiting, hiring, and training WOTC-eligible employees, it had a limited effect on companies' hiring decisions. More recent studies have found that the WOTC provided benefits to certain groups: increasing the wage income of disabled veterans and increasing employment among long-term welfare recipients, for example. Researchers have also explored whether the credit causes employers to "churn" their workforce to take advantage of the credit, replacing currently credit-ineligible workers with credit-certified workers. Evidence of this behavior has not been found. For more information on the WOTC, see CRS Report R43729, The Work Opportunity Tax Credit , by Benjamin Collins and Sarah A. Donovan. Look-Through Treatment of Payments Between Related Controlled Foreign Corporations45 The temporary look-through rules were originally enacted in the Tax Increase Prevention and Reconciliation Act of 2005 ( P.L. 109-222 ), for 2006 through 2008, and subsequently extended. These rules effectively allow U.S. corporations to reduce tax paid by allowing them to shift the income of certain foreign subsidiaries in high-tax countries into a lower-taxed foreign subsidiary. Depending on its source, income earned abroad by foreign-incorporated subsidiaries of U.S. parents is taxed at full rates, not taxed at full rates, or not taxed at all. Tax rules require passive income (such as interest income) and certain types of payments that can be easily manipulated to reduce foreign taxes to be taxed at the full rate (21% for a corporate shareholder) if earned by controlled foreign corporations (CFCs). This income is referred to as Subpart F income, reflecting the part of the tax code where treatment is specified. Credits against the U.S. tax imposed are allowed for any foreign taxes paid on this income, and are applied on an overall basis (so that unused foreign taxes in one country can offset taxes paid on income in another country). Other income earned abroad by CFCs is subject to the global intangible low-taxed income (GILTI) provision, which taxes this foreign-source income at half the corporate tax rate (10.5%), after allowing a deduction for a deemed return of 10% on tangible assets. Credits are allowed for 80% of foreign taxes paid. This GILTI rate is scheduled to rise to 13.125% after 2025. Thus, some income (Subpart F) is taxed at the full rate, some income (GILTI) is taxed at partial rates, and some income (the deemed return from tangible assets) is not taxed. (For a more extensive discussion of international tax rules, see CRS Report R45186, Issues in International Corporate Taxation: The 2017 Revision (P.L. 115-97) , by Jane G. Gravelle and Donald J. Marples.) Unless an exception applies, Subpart F income includes dividends, interest, rent, and royalty payments between related firms. These items of income are subject to Subpart F because affiliated firms can use them to shift income and avoid taxation. For example, without Subpart F a U.S. parent's subsidiary (first-tier subsidiary) in a country without taxes (e.g., the Cayman Islands) could lend money to its own subsidiary (second-tier subsidiary) in a high-tax country. The interest payments would be deductible in the high-tax country, but no tax would be due in the no-tax country. Thus, an essentially paper transaction would shift income out of the high-tax country. A similar effect might occur if an intangible asset were transferred to the no-tax subsidiary, and then licensed in exchange for a royalty payment by the high-tax subsidiary. Subpart F taxes this income at full rates. Methods of avoiding Subpart F taxation were made easier in 1997, when U.S. entity classification rules (to be a corporate or noncorporate entity) were simplified to allow checking a box on a form. These "check-the-box" regulations provided a way to avoid treatment of payments as Subpart F income under certain circumstances by allowing firms to elect treatment as an unincorporated entity. They were originally intended to simplify classification issues for domestic firms and the IRS, but their usefulness in international tax planning quickly became evident. The Treasury issued regulations in 1998 to disallow their use to avoid Subpart F, but withdrew them after protests from firms and some Members of Congress. In the example above, if the high-tax subsidiary is not a direct subsidiary of the U.S. parent but is a subsidiary of the Cayman Islands subsidiary (i.e., a second-tier subsidiary), the Cayman Islands (first-tier) subsidiary can elect to treat the high-tax subsidiary as if it were a pass-through entity. This treatment would effectively combine the two subsidiaries into a single firm. This outcome can be achieved simply by checking a box, making the high-tax subsidiary a disregarded entity under U.S. law. Because there are no separate firms, no income is recognized by the Cayman Islands firm, although the high-tax subsidiary (second tier) is still a corporation from the point of view of the foreign jurisdiction in which it operates and can deduct interest in the high-tax jurisdiction. The look-through rules expand the scope of check-the-box. The rules were originally enacted in the Tax Increase Prevention and Reconciliation Act of 2005 ( P.L. 109-222 ), for 2006 through 2008, and subsequently extended, most recently through 2020 in the Further Consolidated Appropriations Act of 2020 ( P.L. 116-94 ). The check-the-box rules do not work in every circumstance. For example, if the related firms do not have the same first-tier parent, check-the-box does not apply. In some cases, because of foreign countries' rules about corporate and noncorporate forms, the check-the-box regulations' classification of some entities as per se corporations make this planning unavailable. In addition, other undesirable tax consequences (from the firm's point of view) could occur as a side effect of check-the-box. The look-through rule effectively puts this check-the-box type of planning into the tax code, rather than implementing it as a regulation (which could be altered without legislation), but disconnects it from the check-the-box regulations' creation of a disregarded entity. Related firms do not have to have the parent-child relationship; they can be otherwise related as long as they are under common control. The main argument against the look-through rules (and check-the-box as well) is that they undermine Subpart F's purpose, which is to prevent firms from using passive and easily shifted income to avoid taxation. The main argument for the provision is to allow firms the flexibility to redeploy earnings from one location to another without having U.S. tax consequences (foreign tax rules are unchanged). Firms could, for example, accomplish much of the treatment of look-through rules (even in the absence of check-the-box), but that may involve complex planning and inconvenience. An argument can also be made that in some cases (for example, with the payment of interest), the profit shifting is not harming the U.S. Treasury, but rather reducing taxes collected by foreign governments, as income is shifted out of high-tax countries into low-tax ones. Some might view this last argument as a "beggar-thy-neighbor" argument because it facilitates U.S. firms in using tax planning to reduce taxes paid to other countries. Provisions Modifying the Excise Taxes on Wine, Beer, and Distilled Spirits47 The temporary provisions modifying excise taxes on alcoholic beverages were originally enacted through 2019 in the 2017 tax revision (the Tax Cuts and Jobs Act, P.L. 115-97 ). The first provision applies to beer, wine, and distilled spirits broadly. The provisions that apply only to beer, wine, or distilled spirits are discussed separately below. In general, the uniform capitalization (UNICAP) rules require some costs that would otherwise be immediately deductible (such as interest and overhead) to be added to inventory or to the cost of property and deducted in the future when goods are sold or assets depreciated. In the case of interest costs, the rules apply only if the asset is long-lived or has a production period over two years or a production period over one year and a cost of more than $1 million. The production period includes any customary aging period. A temporary modification to the UNICAP rules exempts the aging periods for beer, wine, and distilled spirits from the production period for the UNICAP interest capitalization rules, thus leading to shorter production periods. Beer Absent the temporary excise tax modification provisions, the excise tax rate on beer producers is $18 per barrel (31 gallons), and small brewers that domestically produce no more than 2 million barrels annually are subject to a rate of $7 per barrel on the first 60,000 barrels. The temporary provision reduces the rate for small brewers (producing no more than 2 million barrels) to $3.50 per barrel on the first 60,000 barrels and $16 per barrel on the remaining production. Beer importers and large producers meeting certain requirements may also be eligible for the reduced rate of taxation. For all other producers or importers, the excise tax rates are $16 per barrel on the first 6 million barrels. The tax on beer is due when the beer is removed from the brewery for sale. Beer can be transferred between breweries that are commonly owned (and released from customs) without paying the tax (although tax would be paid on the eventual sale). The temporary provision also allows transfer without payment of tax to an unrelated brewer if the transferee accepts responsibility for paying the tax. Wine Excise taxes are imposed at different rates on wine, depending on the wine's alcohol content and carbonation levels. Still wines are taxed at $1.07 per wine gallon (w.g.) if they are 14% alcohol or less, $1.57/w.g. if they are 14% to 21% alcohol, and $3.15 per w.g. if they are 21% to 24% alcohol. Naturally sparkling wines are taxed at $3.40 per w.g. and artificially carbonated wines are taxed at $3.30 per w.g. Absent the temporary provisions, up to a $0.90 credit against excise tax liability ($0.056 per w.g. for hard cider) may be available for the first 100,000 w.g. removed by a small domestic winery producing not more than 150,000 w.g. per year. The per wine gallon tax credit rate is phased out on production in excess of 150,000 w.g. for wineries producing not more than 250,000 w.g. per year. This small winery credit does not apply to sparkling wine. The temporary provisions modify the credit for small domestic wineries to allow it to be claimed by domestic and foreign producers, regardless of the gallons of wine produced. The credit is also made available to sparkling wine producers. Also, a $1.00 credit against excise tax liability may be available for the first 30,000 w.g. removed annually by any eligible wine producer or importer. The credit is reduced to $0.90 on the next 100,000 w.g., and $0.535 on the next 620,000 w.g. In contrast to permanent law, this credit is not phased out based on production. For hard cider, the credit rates, above, are adjusted to $0.062 per gallon, $0.056 per gallon, and $0.033 per gallon, respectively. Mead is taxed according to wine excise tax rates depending on its alcohol and carbonation content. Naturally sparkling wines are taxed at $3.40 per w.g. and artificially carbonated wines taxed at $3.30 per w.g. Under the temporary provision, mead and certain sparkling wines are to be taxed at the lowest rate applicable to still wine of $1.07 per wine gallon. Mead contains not more than 0.64 grams of carbon dioxide per hundred milliliters of wine, which is derived solely from honey and water, contains no fruit product or fruit flavoring, and contains less than 8.5% alcohol. The sparkling wines eligible to be taxed at the lowest rate contain no more than 0.64 grams of carbon dioxide per hundred milliliters of wine, which are derived primarily from grapes or grape juice concentrate and water, which contain no fruit flavoring other than grape, and which contain less than 8.5% alcohol. Distilled Sprits Producers and importers of distilled spirits are taxed at a rate of $13.50 per proof gallon (ppg) of production. Under the temporary provision, the tax rate is lowered to $2.70 ppg on the first 100,000 proof gallons, $13.34 ppg for proof gallons in excess of that amount but below 22,130,000 proof gallons, and $13.50 ppg for amounts thereafter. The provision contains rules to prevent members of the same controlled group from receiving the lower rate on more than 100,000 proof gallons of distilled spirits. Distilled spirits are taxed when removed from the distillery, or, in the case of an imported product, from customs custody or bonded premises. Bulk distilled spirits may be transferred in bond between bonded premises without being taxed, but may not be transferred in containers smaller than one gallon. The temporary provision allows transfer of spirits in approved containers other than bulk containers without payment of tax. Provisions Expiring in 2021, 2022, or 2023 12.5% Increase in Annual LIHTC Authority48 The low-income housing tax credit (LIHTC) program, which was created by the Tax Reform Act of 1986 ( P.L. 99-514 ), is the federal government's primary policy tool for the development of affordable rental housing. LIHTCs are awarded to developers to offset the cost of constructing rental housing in exchange for agreeing to reserve a fraction of rent-restricted units for lower-income households. Although it is a federal tax incentive, the program is primarily administered by state housing finance agencies (HFAs) that award tax credits to developers. Authority for states to award tax credit is determined according to each state's population. In 2020, the amount of tax credits a state can award is equal to $2.8125 per person, with a minimum small population state authority of $3,217,500. These figures reflect a temporary increase in the amount of credits each state received for 2018-2021 as a result of the 2018 Consolidated Appropriations Act ( P.L. 115-141 ). The increase is equal to 12.5% above what states would have received absent P.L. 115-141 , and is in effect through 2021. For more information on the LIHTC, see CRS Report RS22389, An Introduction to the Low-Income Housing Tax Credit , by Mark P. Keightley. Computation of Adjusted Taxable Income Without Regard to Any Deduction Allowable for Depreciation, Amortization, or Depletion49 Prior to the 2017 tax revision (the Tax Cuts and Jobs Act, P.L. 115-97 ), the deduction for net interest was limited to 50% of adjusted taxable income (income before taxes; interest deductions; and depreciation, amortization, or depletion deductions) for firms with a debt-equity ratio above 1.5. Interest above the limitation could be carried forward indefinitely. The revision limited deductible interest to 30% of adjusted taxable income for businesses with gross receipts greater than $25 million. The provision also has an exception for floor plan financing for motor vehicles. Businesses providing services as an employee and certain regulated utilities are excepted from this new limit. Also, certain real property and farming businesses can elect out of this limit but must adopt a slower depreciation method for real property or farming assets. The restrictions on interest, called thin capitalization rules , were partially enacted to address concerns about large multinational businesses locating borrowing in the United States to shift profits out of the United States and to foreign, lower-tax, jurisdictions. Under prior law and the temporary provisions of the 2017 tax revision, this interest limit applies to earnings (income) before interest, taxes, depreciation, amortization, or depletion (referred to as EBITDA). After 2021, the 2017 tax revision changes the measure of income to earnings (income) before interest and taxes (referred to as EBIT). Because EBIT is after the deduction of depreciation, amortization, and depletion, it results in a smaller base and thus a smaller amount of eligible interest deductions. The temporary broader base (EBITDA), which expires in 2021, allows more interest deductions. The current, more generous rules for measuring the adjusted taxable income base are more beneficial to businesses with depreciable assets, although affected businesses might be able to avoid some of the change in the deduction rules by leasing assets from financial institutions, such as banks, that generally have interest income. This change in base is projected to have a significant revenue consequence: the Joint Committee on Taxation estimated the revenue gain from the provision to increase from $19.2 billion in FY2021 to $30.2 billion in FY2023, when the change is fully in effect, an increase of more than $10 billion. This revenue change suggests the cost of allowing the broader measure of income (EBITDA) through 2021 is around $10 billion annually. For additional discussion of the interest limitation, see CRS Report R45186, Issues in International Corporate Taxation: The 2017 Revision (P.L. 115-97) , by Jane G. Gravelle and Donald J. Marples. The Rum Cover Over51 Under permanent law, the excise tax on rum is $13.50 per proof gallon and is collected on rum produced in or imported into the United States. Under permanent law, $10.50 per proof gallon of imported rum is transferred or "covered over" to the Treasuries of Puerto Rico (PR) and the United States Virgin Islands (USVI). Temporary provisions have increased the transfer amount to $13.25. The law does not impose any restrictions on how PR and USVI can use the transferred revenues. Both territories use some portion of the revenue to promote and assist the rum industry. The cover-over provisions for rum extend as far back as 1917 for PR and 1954 for USVI. Originally, the full amount of the tax was covered over; however, the Deficit Reduction Act of 1984 ( P.L. 98-369 ) limited the cover over to $10.50 when the federal tax rates were increased to $12.50. The cap was intended to address the question of whether the rebates were proper given the lack of rebates to the states. The Omnibus Budget Reconciliation Act of 1993 (OBRA93; P.L. 103-66 ) temporarily increased the cap to $11.30 for five years, in a law that also reduced another benefit to the possessions (the possessions tax credit). When this increase expired, the cap was increased to $13.25, and it has subsequently been extended, most recently through 2021 by the Bipartisan Budget Act of 2018 ( P.L. 115-123 ). For additional information on the rum cover over see CRS Report R41028, The Rum Excise Tax Cover-Over: Legislative History and Current Issues , by Steven Maguire. Credit for Certain Expenditures for Maintaining Railroad Tracks52 Qualified railroad track maintenance expenditures paid or incurred in a taxable year by eligible taxpayers qualify for a 50% business tax credit. The credit is limited to $3,500 multiplied by the number of miles of railroad track owned or leased by an eligible taxpayer. Qualified railroad track maintenance expenditures are amounts, which may be either repairs or capitalized costs, spent to maintain railroad track (including roadbed, bridges, and related track structures) owned or leased as of January 1, 2005, by a Class II or Class III (regional or local) railroad. Eligible taxpayers are smaller (Class II or Class III) railroads and any person who transports property using these rail facilities or furnishes property or services to such a person. The taxpayer's basis in railroad track is reduced by the amount of the credit allowed (so that any deduction of cost or depreciation is only on the cost net of the credit). The credit cannot be carried back to years before 2005. The credit is allowed against the alternative minimum tax. The amount eligible is the gross expenditures, not accounting for reductions such as discounts or loan forgiveness. The provision was enacted in the American Jobs Creation Act of 2004 ( P.L. 108-357 ) and extended numerous times. The provision relating to discounts was added by the Tax Relief and Health Care Act of 2006 ( P.L. 109-432 ). The credit was allowed against the alternative minimum tax by the Emergency Economic Stabilization Act of 2008 ( P.L. 110-343 ). It was most recently extended through 2022 by the Further Consolidated Appropriations Act of 2020 ( P.L. 116-94 ). This provision substantially lowers the cost of track maintenance for the qualifying short-line (regional and local) railroads, with tax credits covering half the costs for those firms and individuals with sufficient tax liability. Class II and III railroads account for 32% of the nation's freight rail miles. These regional railroads are particularly important in providing transportation of agricultural products. Although no rationale was provided when the credit was introduced, sponsors of earlier freestanding legislation and industry advocates indicated that the purpose was to encourage the rehabilitation, rather than the abandonment, of short-line railroads. These railroads were spun off in the deregulation of railroads in the early 1980s. Advocates also indicated that this service is threatened by heavier 286,000-pound cars that must be used to connect with longer rail lines. They also suggested that preserving these local lines would reduce local truck traffic. There was also some indication that a tax credit was thought to be more likely to be achieved than grants. The arguments stated by industry advocates and sponsors of the legislation are also echoed in assessments by the Federal Railroad Administration (FRA), which indicated the need for rehabilitation and improvement, especially to deal with heavier cars. The FRA also suggested that these firms have limited access to bank loans.