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HOUSE ETI REPEAL TAKING SHAPE

June 09, 2004

The tax break for car donations isn't dead yet.

The Senate has approved a bill that would limit the charitable deduction for donated motor vehicles to the sales price received by the charity when it sells the car. The car donation provision is part of a "must-pass" bill that would repeal the "extraterritorial income exclusion" ("ETI"). The World Trade Organization has imposed trade penalties on US goods that will remain in effect until the ETI is repealed.

The House Ways and Means Committee plans to work on its version of the "must-pass" Extraterritorial Income exclusion (ETI) repeal tomorrow, with a goal of passage by the full House next week. While Ways and Means Chairman Bill Thomas has put together a draft that may have enough support to get through the House, his bill may have a rocky reception in the Senate. His much more lenient car donation provision will be just one of many sticking points when Mr. Thomas meets with his Senate counterpart, Charles Grassley, to reconcile the bills.

A DIFFERENT APPROACH - MANUFACTURING BREAK FOR C CORPORATIONS ONLY

The ETI deduction is a favorite of large U.S. exporters. Both bills try to make up the loss of the deduction by providing other tax breaks to manufacturers. The two bills take very different approaches.

The Senate bill provides a special deduction for income from production activities, including manufacturing, construction and farming, for all taxpayers involved in such activities. The large Senate bill includes many other tax provisions, and is fully "paid for" by a package of anti-tax shelter provisions and loophole closers.

The House bill, by contrast, provides a reduced tax rate on production income to C corporations only, paired with a package international tax rule changes. To placate S corporations and partnerships, the House bill eases certain S corporation qualification rules and provides a number of other tax breaks, including extension of the $100,000 Section 179 deduction limitation an additional two years. The House bill also has revenue raisers, but they come $34 billion short of paying for the bill's tax breaks.

OTHER HOUSE, SENATE DIFFERENCES

In addition to confining the producer tax benefit to C corporations, there are a number of other significant differences in the house bill:

S CORPORATION PROVISIONS. The House bill includes 16 S corporation provisions, including

-a provision to make it possible for taxpayers owning bank stock in an IRA to get the stock out of the IRA so the bank can become an S corporation.

-An increase in the the maximum number of S corporation shareholders to 100 (75 under current law);

-Treatment of families as a single shareholder for purposes of counting shareholders.

AMT RELIEF. Current law excludes C corporations with gross receipts up to $7.5 million from alternative minimum tax. The House bill would raise the threshold to $20 million.

SALES TAX DEDUCTION. The House bill would permit taxpayers to elect to deduct state and local sales taxes instead of income taxes. Non-business sales taxes are non-deductible under current law.

TAX SHELTERS. In the words of Senator Grassley, "The Senate bill is very, very aggressive on closing of corporate loopholes and shelters whereas the House is very timid on that"

CAR DONATIONS. While the Senate bill limits the deduction for donated vehicles to their subsequent sales price, the House bill instead stiffens the appraisal requirements for vehicle donations.

Both bills have many other provisions unrelated to international trade to help secure support that are not consistent between the bills. When added to the different approaches the bills take to ETI repeal, Chairmen Thomas and Grassley have their work cut out for them. Tax Analysts quotes Senator Grassley as predicting a "very tough conference."

LINKS

The full text of the Chairman's Mark of HR 4520 (pdf format).

Ways and Means Summary of HR 4520 (pdf format).

Text of Senate Version of ETI repeal (S 1637).

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