Tax Law Alert: Bush Signs the Tax Relief and Health Care Act of 2006
President Bush today signed into law the Tax Relief and Health Care Act of 2006 (the Act). Some of the more noteworthy tax-related provisions of the Act include:
- Employers must file a return with the IRS reporting certain information related to an employee’s exercise of an incentive stock option or purchase pursuant to an employee stock purchase plan. Prior to the Act, employers were required to furnish information statements only to the person who received the stock.
- A taxpayer may elect to currently deduct, rather than depreciate, 50% of the costs of qualified advanced mine safety equipment. The election applies to qualified equipment placed in service after the date of enactment and on or before December 31, 2008.
- A new general business credit is created for costs related to train each qualified mine rescue team employee for taxable years beginning on or after January 1, 2006 and on or before December 31, 2008. The amount of the credit is the lesser of (i) 20% of the costs incurred in training the qualified mine rescue team employee and (ii) $10,000. The credit is allowed for taxable years beginning on or after January 1, 2006 and on or before December 31, 2008.
- The deduction for domestic production activities is expanded to include activities conducted in Puerto Rico. For purposes of calculating the amount of the deduction, qualified production activities income includes Puerto Rican-sourced gross receipts, if the gross receipts are otherwise subject to federal income tax. In addition, for purposes of determining the wage-based limitation for the deduction, the exclusion from the definition of wages for amounts paid for services performed in a foreign country or a U.S. possession do not apply to amounts paid for services performed in Puerto Rico. These changes apply for tax years beginning on or after January 1, 2006 and ending on or before December 31, 2007.
- Enactment of numerous energy-related provisions, including the extension of the production tax credit and energy credit and the creation of a special first year depreciation allowance for qualified cellulosic biomass ethanol plant property. For a summary of the energy-related tax provisions of the Act, please refer to our client alert.
- The enhanced deduction for certain donations of scientific property and computer equipment is expanded to include property assembled by the taxpayer in addition to property constructed by the taxpayer. The provision with respect to donations of scientific property is already permanent under current law. The provision with respect to computer donations is extended through 2007.
- Taxpayers operating vessels within the Great Lakes are eligible to elect to use the tonnage tax method.
Provisions Applicable to Individuals
- Individuals with certain long-term unused alternative minimum tax (AMT) credits in a tax year ending on or before December 31, 2012 may receive a refundable credit equal to the greater of (i) the lesser of (a) $5,000 or (b) the amount of the long-term unused AMT credit, or (ii) 20% of the amount of the long-term unused AMT credit. The amount of the refundable credit is subject to phase-out provisions identical to those applicable to deductions for personal exemptions. This refundable credit was created to benefit individuals who paid AMT because of the exercise of an incentive stock option.
- New guidelines are created with respect to rewards payable to an individual who provides information to the IRS concerning a tax law violation.
- The penalty for submitting a frivolous tax return is (i) increased from $500 to $5,000, (ii) extended to cover all taxpayers and all federal taxes and (iii) expanded to apply to certain submissions other than tax returns not withdrawn within a specified period.
Expiring Provisions Made Permanent
- The treatment of certain environmental cleanup settlement funds as beneficially owned by the by the United States, and thus exempt from tax, is made permanent. This treatment was set to expire on January 1, 2011.
- Changes previously made to the definition of "active business" with respect to tax-free corporate spin offs are made permanent. These changes were set to expire on January 1, 2011.
- The election to treat gain or loss from the sale or exchange of musical compositions or copyrights as capital gain or loss is made permanent. The election was set to expire on January 1, 2011.
- The reduction from 10,000 to 6,000 of the minimum number of deadweight tons required to qualify for the tonnage tax method is made permanent. The reduction was set to expire on January 1, 2011.
- Changes previously made with respect to the eligibility requirements for state veteran’s mortgage loan programs in Alaska, Oregon and Wisconsin are made permanent. These changes were set to expire on January 1, 2011.
Expiring Provisions Extended
- The election for individuals to deduct state and local sales taxes in lieu of state and local income taxes is extended through 2007.
- The above-the-line deduction for teacher classroom expenses is extended through 2007.
- The new markets tax credit, which provides a tax credit to taxpayers who invest in businesses located in qualified low-income neighborhoods, is extended through 2008. The credit is also modified to require regulations to ensure that non metropolitan counties receive a proportional allocation of qualified equity investments.
- The research and development tax credit is extended through 2007. The credit is also modified by increasing the value of the alternative incremental credit and adding a new alternative simplified credit. The due date for related elections is also extended.
- The provision allowing taxpayers to expense costs incurred in cleaning up certain contaminated sites is extended through 2007. The Act also expands the definition of an eligible contaminated site to include sites contaminated by petroleum products.
- The provision authorizing the issuance of qualified zone academy bonds (certain tax credit bonds issued by states and local governments to help repair schools, purchase school equipment and train teachers in economically distressed areas) is extended through 2007. The Act also imposes additional requirements concerning expenditures, arbitrage, and information reporting.
- The employment tax credit for certain wages and employee health insurance costs paid to individuals who live on or near Indian reservations is extended through 2007.
- Accelerated depreciation for certain businesses located on Indian reservations is extended through 2007.
- The 15-year depreciation period for certain restaurant improvements is extended through 2007.
- The percentage depletion for certain marginal wells is extended through 2007.
- Provisions providing that the IRS may share tax information with other federal and state authorities to facilitate combined employment tax reporting, investigate terrorist activities, and facilitate the repayment of student loans that are contingent on income are extended through 2007.
If you have any questions regarding any of the foregoing or any other aspect of the Act, please contact one of the attorneys listed below.
IRS Circular 230 notice: Any tax advice contained herein was not intended or written to be used, and cannot be used, by you or any other person (i) in promoting, marketing or recommending any transaction, plan or arrangement or (ii) for the purpose of avoiding penalties that may be imposed under federal tax law.