Train commuters, retailers that hire food-stamp recipients and renewable-energy companies are concerned about what will happen if the tax breaks they rely upon lapse as scheduled Dec. 31.
The miscellaneous tax benefits won’t receive top billing next month as Congress debates whether to extend a payroll tax cut and expanded federal unemployment benefits that also are set to run out at the end of the year. That’s in part because breaks such as the research and development credit have a history of retroactive extension, with companies reconciling the benefits on their tax returns.
By contrast, breaks such as the Work Opportunity Tax Credit for companies that hire food-stamp recipients and similar groups of disadvantaged workers may have an immediate effect if they expire. Companies including Darden Restaurants Inc., Dunkin’ Brands Group Inc., and Yum! Brands Inc. have been lobbying Congress to continue the credit.
“It’s dangerous, certainly, to let this expire,” said Dave Koenig, vice president for tax and profitability at the National Restaurant Association in Washington. “We’re hopeful. Obviously, time is short.”
Koenig said restaurant companies likely would recruit fewer workers in the targeted groups if they’re uncertain whether they will be able to continue to receive tax credits of as much as $9,000 per worker. On Nov. 21, President Barack Obama signed a law providing tax breaks for hiring unemployed veterans that is based on the work opportunity credit. The veterans’ portion won’t expire until the end of 2012.
Miscellaneous Tax Breaks
The work opportunity credit is among dozens of expiring tax breaks that benefit companies as varied as Caterpillar Inc. and Whirlpool Corp. The miscellaneous breaks were last extended in December 2010 as part of a broader law that continued expiring individual income-tax cuts. By that point, most of the breaks had been lapsed since the end of 2009.
Lawmakers, consumed for the past few months by the deficit-reduction supercommittee, have barely focused on the expiring tax breaks. They are likely to disagree over their importance and on whether Congress should find offsetting spending cuts or tax increases to prevent extensions from adding to the budget deficit.
Companies have become accustomed to periodic expiration of some of the breaks. By the time they file their returns, retroactive extensions allow them to claim benefits. The lapse of tax breaks would have the biggest effect on the provisions that affect paychecks or that alter market incentives.
Transit Commuter Benefit
For example, without congressional action, commuters who spend more than $125 a month on public transit would no longer be able to sidestep income taxes on more than that amount starting Jan. 1. This year, workers can set aside as much as $230 for their commute before taxes.
“Many, many people across the country are going to see a very sizable increase in the cost of their commute, which is a tax increase,” said Dan Neuburger, CEO of Transitcenter Inc., a nonprofit provider of transit benefits to companies.
Already, he said, because decisions must be made about monthly deductions in advance, it’s likely already too late for workers to seek more than $125 in a pre-tax benefit for January.
Companies benefit from the transit break because they don’t have to pay their share of payroll taxes on the amounts set aside, and transit agencies have received a boost in riders.
“If they push this decision into next year, it’s going to result in an even larger tax increase to millions of people,” Neuburger said.
Lapsing Dec. 31
Lawmakers have shown little interest in extending some of the breaks that are slated to expire Dec. 31, including the 45-cent a gallon tax credit for ethanol refining and the 100 percent expensing for domestic investment, which will drop to 50 percent bonus depreciation Jan. 1.
The New Markets Tax Credit, which provides financing for development in low-income communities, also expires Dec. 31. Advocates for the program say a lapse could cause banks that provide the equity financing for the projects to show less interest in continuing that effort.
“A lot of projects that were depending on the equity will just plain disappear, because no one will know when it comes back,” said Bob Davenport, president of the National Development Council, a New York-based nonprofit group that helps finance projects funded with the credit.
A lapse of the credit will spur the price of the tax credits to drop in a nervous market, said Annie Donovan, chief operating officer at NCB Capital Impact, a nonprofit development company based in Arlington, Virginia. She is president of the board of the New Markets Tax Credit Coalition.
Also scheduled to expire at the end of the year is a program enacted in the 2009 stimulus law that allows renewable-energy companies to claim grants instead of tax credits. The Dec. 31 expiration of the program, known by its legal name of 1603, is causing companies to rush to start construction before January so they can apply for the grants, said Matt Haskins, who leads the U.S. renewable energy tax practice at PricewaterhouseCoopers LLP in Washington.
“The market is already working under the assumption that 1603 will expire and that no extension is imminent,” he said.
If the grant program disappears, underlying tax credits for renewable energy will remain. They are less useful, Haskins said, because a company involved in the transaction must have the ability to absorb them.