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Fiberglass, Fried Apples Tax Breaks in Limbo at Year End

Owens Corning wants a bigger market for its insulation. Cracker Barrel Old Country Store Inc. (CBRL) seeks to refurbish restaurants that churn out fried apples. Bank of New York Mellon Inc. is trying to avoid letting some competitors have an edge overseas.

They’re all being stymied by Congress and its inaction on tax policy.

Those U.S. companies and dozens more rely on tax breaks scheduled to lapse Dec. 31. Lawmakers, divided by partisan conflict and trying to build momentum for broader tax-code revisions, haven’t focused on the routine extensions.

As the breaks, known in Washington as “tax extenders,” near the end of their life, supporters are counting on Congress to do what it has done before: Absorb a flood of lobbying and revive the provisions retroactively.

“This is obviously very difficult for business, because it’s much harder to plan” with the fate of the breaks again up in the air, said Mel Schwarz, a partner in the Washington national tax office of the accounting firm Grant Thornton LLP. “It degrades the incentive value of something when it goes through this constant extension process.”

The nonpartisan congressional Joint Committee on Taxation lists 55 tax provisions scheduled to expire Dec. 31. Beneficiaries include wind turbine manufacturers, motorsports track owners and filmmakers.

American Samoa

The breaks include the $7 billion-a-year research and development tax credit, which has been in limbo since the early 1980s, and one for businesses in American Samoa, which costs the government less than $40 million a year in forgone revenue.

Owens Corning (OC), known for its pink-tinged fiberglass insulation, is lobbying for three energy-efficiency tax breaks. Cracker Barrel benefits from depreciation rules and a hiring credit. And BNY Mellon wants Congress to continue a rule that treats banks’ foreign operations like most other businesses.

Schwarz said one reason lawmakers haven’t removed the temporary status of the tax breaks is a hesitancy to make them permanent -- or kill them -- without more information on how well the provisions work.

Owens Corning, based in Toledo, Ohio, benefits indirectly from the breaks for energy efficiency -- one for commercial buildings, one for existing homes and another for new homes.

The company can’t measure with precision the breaks’ direct effect on sales, said John Libonati, Owens Corning’s vice president of government and public affairs in Washington.

The breaks end up at the mercy of broader political disputes, he said.

‘Comfort Zone’

“The ones that have survived for a while and seemed to have found a comfort zone and broad bipartisan support are in this basket,” Libonati said. “And so every year it’s: Will the basket get extended?”

The chairmen of the tax-writing committees in Congress this year have been debating the biggest changes to the U.S. tax system since 1986, including whether to make some of the temporary provisions permanent while jettisoning others.

Although they’ve struggled with a partisan divide over whether those changes should generate additional revenue, the two committee chairmen -- Democratic Senator Max Baucus and Republican Representative Dave Camp -- say they want tax-law revisions to become law in 2014.

“Nobody is willing to say tax reform is dead,” said Steve Elmendorf, a lobbyist who represents a coalition of multinational financial-services companies including BNY Mellon.

Advocates’ Focus

If it becomes clear the bigger efforts won’t succeed, he said, “All of the people who advocate for extenders will be regrouping and pushing to get an extenders bill sooner rather than later.”

The financial-services companies Elmendorf represents want to hold onto a provision that lets them defer U.S. taxation on “active” income they earn from overseas operations. Without the rule, they would be taxed immediately at the full U.S. corporate rate.

Cracker Barrel lists two expiring provisions in its federal disclosure forms as a focus of its lobbying.

One break would allow restaurant improvements to be depreciated more quickly, over 15 years instead of 39. Another would continue the Work Opportunity Tax Credit, which Cracker Barrel and other restaurants and retailers want to keep getting for hiring people from disadvantaged groups.

The company, based in Lebanon, Tennessee, operates 625 stores as of Nov. 1 and employed 71,000 people as of Aug. 2, according to securities filings.

Earnings Effect

The breaks’ expiration affects public companies’ reported earnings. Under financial accounting rules, companies can’t assume the existence of a tax break that hasn’t been extended.

Congress allowed many of the breaks to lapse at the end of 2011 and didn’t extend them for 2012 until January 2013. As a result, companies including Bristol-Myers Squibb Co. (BMY) and Intel Corp. (INTC) that benefit from the research credit couldn’t count its value in earnings until the first quarter of 2013.

Intel reported its first-quarter 2013 tax rate as 16.3 percent, down from 28.2 percent a year earlier, because the benefits from five quarters of the credit were all recognized in the first three months of 2013.

“In a perfect world, we would expect that the perfect investor would take this into account,” Schwarz said. “The well-informed investment banker on Wall Street can probably figure out what’s going on. But a guy who’s investing funds from halfway around the world, I don’t know whether he knows to drill through those numbers.”

Lawmakers occasionally talk about pruning the list of breaks and sometimes they let provisions expire for good, such as a tax credit for ethanol that vanished at the end of 2011.

Mostly, the tax extenders continue in their lapse-and-reinstate cycle to the bewilderment and frustration of companies with business decisions to make.

“People who don’t work day to day around the Congress, it’s hard to explain to them how this works,” said Elmendorf, who was a top aide to former House Democratic Leader Richard Gephardt of Missouri. “Because it’s not how the normal world operates.”

To contact the reporter on this story: Richard Rubin in Washington at rrubin12@bloomberg.net

To contact the editor responsible for this story: Jodi Schneider at jschneider50@bloomberg.net

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