The following article is provided courtesy of CCH, Inc.
The 106th Congress has passed all of its remaining spending and tax measures and has adjourned for the year. The Consolidated Appropriations Act, 2001 (HR 4577), approved on Dec. 15, contains the Community Renewal Tax Relief Bill of 2000 (HR 5662), a $25-billion, 10-year measure that encourages renewal of economically distressed communities. The bill also contains a two-year extension of tax-favored medical savings accounts (MSAs) and a provision enabling parents of kidnapped children to continue claiming the child as a dependent. The House approved the bill by a vote of 292-to-60 and the Senate approved the measure by unanimous consent.
The community renewal provisions provide for 40 urban and rural renewal communities within which taxpayers would be eligible for a capital gains tax exclusion on the sale of businesses or business assets and other tax incentives. In addition, the proposal designates nine new empowerment zones and would provide a $1,500 tax credit on the first $10,000 in business earnings.
Regarding the MSA provision, House Ways and Means Committee Chairman Bill Archer, R-Tex, said that "MSAs are the best patient checks on doctors and HMOs." He added that the legislation will help the uninsured and underinsured afford health insurance.
In addition, the bill specifies that investments in securities futures contracts would be treated for tax purposes as if the investor held the underlying asset itself. The package also contains roughly $8.64 billion for the IRS in fiscal year 2001.
Installment Tax Bill
Congress also passed legislation that would reinstate use of the installment method of accounting for accrual method taxpayers. The Installment Tax Correction Act of 2000 (HR 3594) repeals provisions in the Ticket to Work and Work Incentives Improvement Act of 1999 (PubLNo 106-170) that repealed the use of the installment method of accounting for those taxpayers. The House and the Senate passed the measure by unanimous votes.
Just months after the repeal of the installment method, Congress began hearing complaints that the law was harming those that did not receive payment all at once from a sale of a business, said Archer. Rep. Gerald D. Kleczka, D-WI, said that thousands of small businesses have been harmed due to the 1999 law provision, which was included in the Act as a funding mechanism. In some instances, businesses have had to pay more to the IRS in a tax year than they had received from the sale of a business during the year, he said. For some of the firms, the damage has been irreparable.
According to a bill summary, the installment sales provision in the 1999 law requires the taxpayer to recognize the full tax liability of the sale of a business in the year of the sale. Under previous law, whatever capital gain the seller realized would be taxed over the life of the note. "This provision is unexpectedly and adversely affecting the sale of closely held businesses by dramatically increasing the costs of closing the sale," according to the summary. HR 3594 was introduced by House Ways and Means Committee member Wally Herger, D-Cal, and is estimated to cost $2 billion over 10 years.
Herger said that reinstating the installment method would increase fairness in the tax code. Rep. John S. Tanner, D-TN, said that lawmakers thought the original provision in the Ticket to Work Act would close a tax loophole, but soon realized it was harmful. The current bill will ensure that businesses "will not have a tax liability until the money is actually realized," he said. Rep. Benjamin L. Cardin, D-MD, said that the legislation will help small businesses and "is the right policy."
Congress was unable to pass the $240 billion Certified Development Company Program Improvements Bill of 2000 (HR 2614); however, House lawmakers said on the floor that they are glad they can at least correct the mistake they made in 1999.