• Reduce the corporate tax rate from 35 percent to 28 percent
• Eliminate dozens of business tax loopholes and tax expenditures
  • LIFO Accounting
  • Oil & Gas Preferences
  • Insurance Industry Products
  • Tax Carried Interests Income as Ordinary Income
  • Special Depreciation for Corporate Aircraft
• Reform Corporate Tax Base
  • Address Accelerated Depreciation
  • Reduce Bias to Debt Financing
    • Include reducing deductibility of interest
  • Establish Greater Income Tax Parity Between Large C Corps & Large Pass-Throughs
• Reduce Gap Between Book and Tax Income

For Manufacturing:

• Reduce top rate to 25%
• Expand, simplify and make permanent the R&E Tax Credit.
• Extend, consolidate, and enhance key tax incentives to encourage investment in clean energy

Framework also has International Provisions and Small Business Provisions.

For Small Businesses:

• Expense up to $1 million in investments
• Expand cash accounting ($10 million gross receipts cap)
• Double deduction for start-up expenses ($5,000 to $10,000)
• Reform/Expand Health Insurance Tax Credit

No specific mention of low-income housing, new markets or historic tax credits.  Renewable energy addressed in section on extending, consolidating and enhancing clean energy incentives.

• Extend 100 Percent First-Year Depreciation Deduction. Applies to property acquired and placed in service through 2012 (2013 for property eligible for a one-year extension of the placed-in-service date).
• Provide Additional Tax Credits for Qualifying Advanced Energy Manufacturing Projects. Authorizes an additional $5 billion of credits, over two years.
• Provide Tax Credit for Energy-Efficient Commercial Building Property Expenditures.  Tax credit rate of $0.60 to $1.80 a square foot.
• Reform and Extend Build America Bonds.  Subsidy level of 30% through 2013 and 28% thereafter.  Use of bonds expanded also.
• Provide a New Manufacturing Communities Tax Credit.  For investment in communities that have suffered a major job loss event.  Could be structured like NMTC.  Provides $2 billion in credits a year for 3 years, 2012 to 2014. 
• Extend and Modify Certain Energy Incentives.  Extends production and investment tax credit for wind facilities for property placed in service in 2013.  Extends cash grant program for property placed in service in 2012 (including property where construction begins in 2012).  Makes credit refundable for property where construction begins in 2009 to 2013.  
• Extend and Modify the New Markets Tax Credit (NMTC).  $5 billion a year for two years, allows NMTC from QEIs made after 12/31/ 2011 to offset the AMT. 
• Low-Income Housing Tax Credit Provisions:

1. Allow LIHTC Properties to Use Average Income Restrictions.
2. Allow Real Estate Investment Trusts (REITS) to benefit from the LIHTC. Allows REITs to use LIHTCs to treat otherwise taxable dividend as tax-exempt.
3.  Provide 30%  Basis “Boost” to Certain Tax-Exempt Bond Financed Properties. For projects in difficult to develop areas, basis could be increased to 169% (130% * 130%).  To be eligible, property must receive “Federal-Investment-Protection Designation” from housing credit agency.  Designation could be given only to projects that satisfy the following requirements:
   1. The project involves the preservation, recapitalization, and rehabilitation of existing housing;
   2. The project demonstrates a serious backlog of capital needs or deferred maintenance;
   3. The project involves housing that was previously financed with Federal funds or benefited from LIHTC; and
   4. Because of that Federal support, the housing was subject to a long-term use agreement limiting occupancy to low-income households.  
4. Require LIHTC-Supported Housing to Provide Appropriate Protections to Victims of Domestic Violence.

• Extension of the payroll tax cut and unemployment insurance benefits for rest of 2012.
• Continuing to allow businesses to write-off the full amount of new investments.
• Project Rebuild, series of policies to help connect Americans looking for work in distressed communities with the work needed to re-purpose residential and commercial properties, creating jobs and stabilizing neighborhoods.
• $2.2 billion for advanced manufacturing R&D, a 19 percent increase over 2012.
• Tax incentives for manufacturers who create jobs in U.S.,doubles deduction for advanced manufacturing; establishes a Manufacturing Communities Tax Credit to encourage investment in communities affected by job loss.
• Elimination of 12 tax breaks to oil, gas, and coal companies will raise $41 billion over 10 years.
• National Infrastructure Bank to fund projects of national importance.
• Calls for individual tax reform that: cuts the deficit by $1.5 trillion, including the expiration of the high-income 2001 and 2003 tax cuts; simplifies the tax code, lowers tax rates, and protects progressivity; eliminates inefficient and unfair tax breaks for millionaires while making all tax breaks at least as good for the middle class as for the wealthy; and observes the Buffett Rule that no household making more than $1 million a year pays less than 30 percent of their income in taxes.
• Financial Crisis Responsibility Fee on largest financial institutions. Raises $61 billion over 10 years and is intended to offset cost of TARP and the President’s mortgage refinancing program.

S. 2074 is the companion legislation to the bipartisan H.R. 2479, the Creating American Prosperity through Preservation Act of 2011. H.R. 2479 was introduced in the House of Representatives in July by Reps. Aaron Schock and Earl Blumenauer.

Key Provisions

The CAPP Act would make five meaningful changes to the federal HTC. (Some of these changes have been proposed in earlier bills that were sometimes referred to as modernization legislation.)

First, the bill would help smaller projects by boosting the 20 percent credit to 30 percent for deals of less than $5 million in qualified rehabilitation expenditures. The increase in the credit amount will  make the rehabilitation of many small buildings and buildings in rural areas financially feasible.

Second, the bill would provide a 2 percent credit boost for achieving energy use savings at least 30 percent greater than established industry standards for similar buildings. This change would promote energy-efficiency and operating cost-savings by encouraging developers to use energy-efficient technology.

Third, the bill would eliminate the federal taxation of the proceeds of a state HTC transaction for both state credit certificate sales and credits allocated through partnerships. This provision addresses concerns raised by the 4th Circuit decision in the case Virginia Historic Tax Credit Fund v. Commissioner of Internal Revenue. This provision would support the 30 states that have state historic tax credits.

Fourth, the CAPP Act would also expand the number of properties that qualify for the credit by indexing the eligibility date from pre-1936 to 50 years and older. This change would expand the number of buildings that are eligible for rehabilitation.

And fifth, the bill would help target the historic credit’s impact to low-income communities by opening the door to not-for-profit project sponsors and building tenants. This change would create projects with high community benefit, while also stimulating on-going job and economic growth in low-income, underserved areas. This change would also lower transaction structuring costs, making the credit more efficient.

Support for the CAPP Act

The bipartisan introduction of the CAPP Act is an encouraging start for the bill, as is the understanding on behalf of its sponsors that the legislation, if enacted, would contribute to the economy’s recovery.

“I am extremely proud of this bill because it will help ensure that historic properties are restored and made useful once again, while creating jobs that will stimulate greater economic activity,” Cardin said. “The Historic Tax Credit has created some 2 million jobs nationwide since 1978 and by expanding the program to include energy-efficient improvements and additional restoration projects, we can create thousands of new jobs in renovating historic properties.”

Since its creation, the HTC has leveraged more than $90 billion of private-sector investment ($5 of private investment for every $1 of HTC) to preserve and rehabilitate more than 37,000 historic properties, including the creation of over 185,000 housing units, of which more than 75,000 are low and moderate-income units.

“The federal historic tax credit has proven to be a cost-effective creator of jobs and economic activity for more than thirty years,” said Tom Cassidy, vice president of government relations and policy at the National Trust for Historic Preservation. “The CAPP Act will ensure that, in the future, more “Main Street” communities can benefit from its revitalization effects, and nonprofit organizations can more easily access the credit to bring jobs and services to disinvested areas.”

What You Can Do  

The initial efforts of the Historic Tax Credit Coalition to support this bill were enhanced with the announcement last year that the National Trust for Historic Preservation would mount a major public education campaign to save the historic tax credit. The Trust is working to create a broad based coalition to build awareness of the value of the federal HTC in both Congress and the executive branch.

In December the Trust launched a web page where it has posted informational resources for supporters of the historic tax credit. Those resources include research and talking points to help the preservation community advocate for the historic tax credit and the CAPP Act. And just last week, the Trust posted a pledge for the preservation community to sign on in support of the historic tax credit.

In a statement about his plans, Rep. Levin suggests that investment managers such as private equity managers benefit from a loophole that allows them to pay a reduced 15 percent tax rate on income from carried interests, rather than federal income tax rates up to 35 percent. The change has passed the House of Representatives four times as part of broader measures since Rep. Levin first introduced it in 2007, but it has yet to pass the Senate.

The current reprise of the carried interest proposal was sparked, at least in part, by Republican Presidential candidate Mitt Romney’s statement that his effective tax rate is probably close to 15 percent. In a written statement on January 18, Rep. Levin said, “Gov. Romney’s statement that his tax rate is close to 15 percent likely reflects that he has benefited from a loophole that we have been trying to close for years.” On January 23, Romney released his tax returns to the public and the Washington Post reports his effective tax rate in 2010 was 13.9 percent.

However, the National Multi Housing Council warns that, if enacted as proposed, Rep. Levin’s proposal to change the taxation of income from carried interests would have substantially greater consequences than just raising income taxes for hedge fund managers. Specifically, NMHC warns that the proposal would significantly reduce the ability to develop or rehabilitate rental housing.

Last week, the National Multi Housing Council was one of 17 organizations that co-signed a letter of opposition to Rep. Chris Van Hollen, who has proposed raising the tax on income from carried interests to pay for the extension of the payroll tax holiday. In the letter the groups argue that while much discussion about changing the tax on income from carried interests focuses on its effect on hedge fund managers, the tax increase would directly hit commercial real estate. The letter reports that 46 percent of all investment partnerships in the U.S. are real estate partnerships, and that the vast majority of those use a carried interest structure. As such, the groups argue that a change in the tax treatment of income from carried interests would be a tax increase on commercial real estate.

Because of the potential implications for affordable rental housing, the affordable housing community should monitor these carried interest proposals closely and continue to assess the effect they would have on the development and preservation of affordable housing.

Tax Reform – Corporate

President Obama spoke about tax reform in two different sections of his address. He spoke first about corporate tax reform and later about personal tax reform.

The president advocated for a new emphasis on American manufacturing and tied that effort directly to corporate tax reform. He said, “We should start with our tax code.  Right now, companies get tax breaks for moving jobs and profits overseas. Meanwhile, companies that choose to stay in America get hit with one of the highest tax rates in the world … From now on, every multinational company should have to pay a basic minimum tax. And every penny should go towards lowering taxes for companies that choose to stay here and hire here in America.”

He also pressed for American manufacturers to get new and bigger tax cuts. “If you’re a high-tech manufacturer, we should double the tax deduction you get for making your products here,” he said. “And if you want to relocate in a community that was hit hard when a factory left town, you should get help financing a new plant, equipment, or training for new workers … It is time to stop rewarding businesses that ship jobs overseas, and start rewarding companies that create jobs right here in America. Send me these tax reforms, and I will sign them right away.”

A document released by the White House in conjunction with the State of the Union address called “The Blueprint for an America Built to Last,” proposes the creation of a new tax credit that would provide support for companies seeking to finance new factories, equipment, or production in communities that have been hardest hit by a company choosing to relocate or a military base shutting down.

In a fact sheet released today, the White House provided additional details. The proposed Manufacturing Communities Tax Credit would provide $6 billion in tax credits – $2 billion per year for three years – to encourage investments in communities affected by job loss. The sheet says the credit would be available for qualified investments that help finance projects in communities that have suffered a major job loss event. The document defines a major job loss event as when a military base closes or a major employer closes or substantially reduces a facility or operating unit, resulting in permanent mass layoffs.  The tax credit would support qualified investments in this affected community – made in conjunction with State Economic Development Agencies and other local entities – that improve local economic growth.

The president is also proposing to extend for all of 2012 a provision that allows businesses to expense the full cost of their investments in equipment, spurring investment in the United States.  The administration says that over the next two years, this would provide businesses with $50 billion in tax relief.

A related proposal would make permanent, enhance and simplify the Research and Experimentation Tax Credit. The administration says that about 70 percent of the benefit directly supports jobs in the United States, and every dollar spent encourages U.S.-based investment, as only research and experimentation performed in the United States is eligible.

Tax Reform – Personal

Later in his remarks, the President addressed the payroll tax holiday that is set to expire at the end of February as a segue to an appeal for personal tax reform. In those remarks he echoed earlier calls to end the so-called Bush tax cuts enacted in 2001. He said,  “Right now, we’re poised to spend nearly $1 trillion more on what was supposed to be a temporary tax break for the wealthiest 2 percent of Americans … Do we want to keep these tax cuts for the wealthiest Americans?  Or do we want to keep our investments in everything else …? [we] need to change our tax code so that people like me, and an awful lot of members of Congress, pay our fair share of taxes.”  

He recommended that tax reform should follow the Buffett Rule, which he defined as anyone making more than $1 million or more a year paying at least 30 percent in taxes. He also expressed support for a proposal put forward by Republican Sen. Tom Coburn: banning special tax subsidies or deductions for anyone making $1 million or more a year. 

Energy

In his remarks about energy issues, the president announced that he was directing the administration to allow the development of clean energy on enough public land to power 3 million homes.

He also acknowledged that deep political differences would make it difficult for Congress to pass comprehensive energy legislation. But nonetheless, he called for the creation of clean energy jobs. Specifically, he urged lawmakers to “double-down on a clean energy industry that never has been more promising. Pass clean energy tax credits. Create these jobs.”

In the fact sheet released today, the White House revealed that the administration also supports extending the Advanced Energy Manufacturing Tax Credit. The administration proposes providing an additional $5 billion in temporary tax credits that it estimates would drive nearly $20 billion in domestic clean energy manufacturing. The fact sheet says this would ensure new windmills and solar panels will incorporate parts that are produced and assembled by American workers. The Advanced Energy Manufacturing Tax Credit was created by the Recovery Act and oversubscribed more than three times over during the application process.

Employment

To boost employment, the president proposed efforts to promote new skills and better education.  Among the proposals he suggested were:

• a partnership between community colleges and businesses to help train and place 2 million skilled workers,
• a Veterans Jobs Corps that would help communities hire veterans as cops and firefighters,
• and reforming job training and Unemployment Insurance to help dislocated workers get back to work.

During these remarks, he referenced new tax credits for companies that hire veterans.  The Returning Heroes Tax Credit provides businesses that hire unemployed veterans with a credit of up to $5,600 per veteran, and the Wounded Warriors Tax Credit offers a credit of $9,600 per veteran for businesses that hire veterans with service-connected disabilities.

Housing

The mention of housing in the State of the Union address was focused on the mortgage crisis and the impact it had on the nation’s homeowners. President Obama said he planned to submit a plan to Congress that would give “every responsible homeowner the chance to save about $3,000 a year on their mortgage, by refinancing. “ To pay for the plan without adding to the deficit, he is proposing a “small fee on the largest financial institutions.”

What These Proposals Mean for Tax Credits

An emphasis on job creation, manufacturing and energy could strengthen support for programs such as the new markets tax credit, historic tax credit, low-income housing tax credit and renewable energy tax credit. It will be important, however, for the tax credit community to monitor tax reform efforts closely to ensure that changes to the tax code don’t weaken or eliminate these tools, which have documented track records of boosting employment and revitalizing communities.

Proposal Details

Limited, additional details were provided in the “The Blueprint for an America Built to Last” document and fact sheet.

Beyond that, it is likely that further details on these proposals will be included in the President’s proposed fiscal year 2013 budget, which the administration is scheduled to release on February 13.

So stay tuned in the coming weeks as additional information becomes available.

The state NMTC would be modeled after the federal new markets tax credit. Investments including, but not limited to, retail businesses, real property, financial institutions and schools would be eligible for the California NMTC.

Currently, nine states have state new markets tax credit programs: Ohio, Florida, Mississippi, Kentucky, Illinois, Maine, Oregon, Texas and Connecticut. Three states previously enacted state NMTCs: Missouri, Louisiana and Oklahoma. It is estimated that, on average, these states successfully leveraged $13 in federal NMTC for every dollar of state credits initially allocated for the state program. And California is one of three states, along with Wisconsin and Alabama, where state new markets tax credits have been proposed but not yet enacted.

The proposed creation of a state NMTC should be considered an affirmation of the federal new markets tax credit. The stated goal of the California NMTC would be to stimulate economic development and hasten the state’s economic recovery. The preamble of A.B. 643 states that investment in small business ventures is a proven method of stimulating economic activity, creating new jobs, and generating revenue by expanding the tax base.  It goes on to note that the federal New Markets Credit Tax Program has been “an effective means of stimulating state and regional economies due to its provision allowing the creation of matching state programs to leverage additional federal funds for investment capital benefitting local communities.” This kind of recognition of the federal tax credit is welcome as the NMTC community monitors developments in Congress and the potential for an extension of this successful program.

Back at the state level, letters of support for the California new markets tax credit program can be directed to:

Assembly Speaker John A. Pérez
State Capitol
State Capitol
P.O. Box 942849
Sacramento, CA 94249-0046
Tel: (916) 319-2046
Fax: (916) 319-2146

If you wish to copy Assemblyman Mike Davis, his office’s contact information is:

Assemblyman Mike Davis
State Capitol
P.O. Box 942849
Sacramento, CA 94249-0048
Tel: (916) 319-2048
Fax: (916) 319-2148

The so-called Volcker Rule of the Dodd-Frank Wall Street Reform and Consumer Protection Act places certain prohibitions and restrictions on the ability of a banking entity and non-bank financial company to make certain kinds of equity investments. Originally, comments were due by January 13, 2012.The comment period was extended as part of a coordinated interagency effort to allow interested persons more time to analyze the issues and prepare their comments. Comments on the proposal will be accepted until February 13, 2012. The Dodd-Frank bill requires that the rule’s provisions be implemented by July 21, 2012.

The tax credit community should continue to seize this opportunity to comment on the Volcker Rule because its implementation could have significant ripple effects for the affordable housing, community development and renewable energy communities. The rule generally prohibits banks and their holding companies from investing in hedge funds and private equity funds. Because the bill’s definition of private equity funds applies to equity investments in a broad range of limited liability company (LLC) and limited partnership (LP) transactions, the tax credit community – including the New Markets Tax Credit Working Group, Low-Income Housing Tax Credit Working Group and Renewable Energy Tax Credit Working Group – are submitting comments about the Volcker Rule’s potential effect on the tax credit equity market.

Exceptions

Under the proposed rule, several investments would be “permissible activities”. Specifically, investments that meet the “public welfare” definition of Section 5136 of the Revised Statutes (12 U.S.C. 24) are identified as a permitted activity. Within this same exception, historic rehabilitation tax credit (HTC) investments are specifically exempted. However, no other tax credit programs received the same exclusion.

This has created concern among the affordable housing, community development and renewable energy communities that the Volcker Rule could be interpreted in a manner that would prevent banking entities from making investments in transactions that involve tax credits that were not statutorily exempted, such as renewable energy tax credits (RETCs) and, to a much lesser extent, the new markets tax credit (NMTC) and low-income housing tax credit (LIHTC).

That said, public welfare investments are further defined elsewhere in the Dodd-Frank bill as investments designed primarily to promote the public welfare, including the welfare of low- and moderate-income communities or families (such as by providing housing, services or jobs). A national banking association may make such investments directly or by purchasing interests in an entity primarily engaged in making such investments. The NMTC and LIHTC communities applauded the inclusion of this language because it recognizes the congressionally legislated intent of the NMTC and LIHTC. However, while the LIHTC and NMTC qualify as public welfare investments and HTCs were explicitly excepted from the Volcker Rule, implications for the RETC are far less certain. Some RETC investments may qualify as public welfare investments based on factors such as location or population served, while other RETC investments will not.

Read more about the proposed rule, and what it could mean for the tax credit community, in this month’s issue of the Novogradac Journal of Tax Credits.

The affordable housing, community development and renewable energy communities would be wise to participate in the comment submission process to ensure that the implementation of the Volcker Rule doesn’t limit the involvement of banking entities in the LIHTC, RETC or NMTC programs, or other similar tax credits so banking entities may continue to participate in these important, job-creating programs.

And last week, law firm Miller and Chevalier filed an amicus brief in the Historic Boardwalk Hall case.

The amicus brief submitted last week was filed on behalf the National Trust for Historic Preservation and other historic preservation organizations. The amicus brief was shaped through consultation between and Chevalier and other law firms active with the Historic Tax Credit Coalition, including Bryan Cave, Squire Sanders, Kutak Rock and Holland and Knight.

The historic rehabilitation tax credit (HRTC) community is watching the outcome of this appeal closely, as it could have significant repercussions for historic preservation. As Historic Tax Credit Coalition Founder John Leith-Tetrault writes in the December 2011 issue of the Novogradac Journal of Tax Credits, the pending appeals court decision may well answer the question that the IRS continues to pose in a number of circumstances: whether traditional historic tax credit (HTC) structures that rely on managing member guaranties, fixed priority returns and standard put and call exit strategies to attract limited partner capital can meet the requirements for characterization as a federal tax partnership.

Indeed, in its amicus brief, the National Trust for Historic Preservation writes:

The Tax Court’s recent decision upholds the validity of the well-established method of facilitating investment in historic rehabilitation projects by forming partnerships among investors and property owners to undertake rehabilitation activities and thereby earn HRTCs for the partners. Reversing the Tax Court’s decision, as the Government requests, would undermine the authorities supporting investment in historic rehabilitation projects through partnerships, threatening the financing of future historic preservation projects.

If you have questions about the case or its implications for the historic tax credit community, please contact Tom Boccia, CPA, or Charlie Rhuda, CPA.

In order to preserve Section 1603 grant eligibility, taxpayers must demonstrate that they began construction after 2008 and before 2012. The determination of whether construction has begun before 2012 is addressed in the general guidance issued by Treasury in June 2009, and revised in March 2010 and April 2011 (the general guidance). The issue is also addressed in the FAQs, which were issued on June 25, 2010. Both the general guidance and FAQs provide for the following two methods used for determining when construction has begun:  a project can begin what Treasury refers to as physical work of a significant nature; and/or a project can meet what is known as the 5 percent safe harbor. A project can meet the safe harbor criteria by paying for or incurring 5 percent or more of the total final costs eligible for the investment tax credit before 2012, determined on the taxpayer’s method of accounting.

The new questions and answers address the 5 percent safe harbor, specifically changes of ownership after the safe harbor is met but before projects are placed in service. As my partner Tony Grappone, CPA, writes in the upcoming January issue of the Novogradac Journal of Tax Credits, FAQ 23 essentially requires successors in interest (transferees) to be related to the taxpayer that initially acquired the energy property (transferor). It’s not clear if this was Treasury’s intent or an unintended consequence.

So, how will FAQ 23 affect project finance and ownership for renewable energy projects?  It is generally expected that this new guidance will make project finance less attractive and more difficult.

It’s important to note that renewable energy transactions involving Section 1603 grants are complex and as such, readers are encouraged to contact their tax advisor to discuss how this guidance could affect their transactions specifically. 

If you have questions about the new guidance, please contact my partner Tony Grappone, CPA, in Novogradac & Company’s Boston office or Stephen Tracy, CPA, in Novogradac & Company’s San Francisco office.