Note: S. 2242, which was reported out of the Senate Committee on Finance in October 2007, will be combined with S.2302, the Food and Energy Security Act of 2007 and offered as a substitute amendment to H.R.2419, the Farm, Nutrition, and Bioenergy Act, which will be considered on the Senate Floor beginning the week of November 5, 2007.
Summary and Background
S. 2242, the Heartland, Habitat, Harvest, & Horticulture Act of 2007, is a fully-offset bill that would establish supplemental agricultural disaster assistance, provide tax relief for farmers and ranchers, and create and extend tax incentives for conservation and alternative energy sources. S. 2242 would create an agricultural disaster relief trust fund to help ranchers and farmers hurt by crop and livestock losses, conservation,energy, and rural economic and agriculture development tax relief and tax incentives, and several revenue raisers and loophole closers that would offset the cost of the legislation.
The major items in the bill include:
(in $ thousands)
This legislation will be combined with S. 2302, the Food and Energy Security Act of 2007, and offered as a substitute amendment to H.R.2419, the Farm, Nutrition, and Bioenergy Act, which will be considered on the Senate Floor beginning the week of November 5, 2007. See the DPC Legislative Bulletin entitled, “S.2302: Food and Energy Security Act of 2007,” for more information on the legislation reported out of the Senate Committee on Agriculture on October 24, 2007.
Agricultural Disaster Assistance
Creation of an Agricultural Disaster Relief Trust Fund. Currently, farmers and ranchers may have to wait years to receive assistance from Congress when faced with a weather-related disaster such as drought, floods, or severe storms. S. 2242 would create an Agricultural Disaster Trust Fund to ensure that farmers have a dependable and timely safety net when disasters strike. S. 2242 would:
· Cover a portion of the “shallow losses” not covered by crop insurance. “Shallow losses” are crop losses below normal yield, but not large enough for crop insurance to provide assistance;
· Provide assistance to defray the cost of reestablishing orchards and vineyards to help specialty crop farmers whose trees, bushes and vines are lost due to a natural disaster; and
· Create a new program under which the Department of Agriculture (“USDA”) will conduct early pest detection and surveillance activities in coordination with State departments of agriculture, will prioritize and create action plans to address pest and disease threats to specialty crops, and will create an audit-based certification approach to protect against the spread of plant pests which could cause crop losses.
Provision of credits for the Conservation Reserve Program. Currently, participants in the USDA’s Conservation Reserve Program (“CRP”) receive cash payments. To encourage eligible producers to establish long-term, resource-conserving covers on eligible farmland, S. 2242 would allow a participant in CRP the option to choose between the regular cash payment and a tax credit equal to the value of the cash payment the participant would have otherwise received. The credit would be excludable from income and self-employment taxes.
Exclusion of CRP payments to retired or disabled individuals from self-employment taxes. Farmers enrolling their land in CRP receive payments for refraining from farming and for engaging in certain conservation practices mandated by USDA. S. 2242 would exclude CRP payments to retired or disabled individuals from self-employment taxes.
Make permanent Rural Heritage Conservation easement deduction. Gifts of conservation easements to organizations that are dedicated to maintaining natural habitats, open spaces, or traditional agriculture help protect our nation’s heritage. The charitable tax deduction for such conservation easements has proven to be a valuable incentive for making such gifts. S. 2242 would permanently extend an enhanced tax deduction for conservation easements, which would allow all taxpayers to deduct up to 50 percent of their adjusted gross income (AGI) for donations of conservation easements and carry forward the deduction up to 15 years. A bonus would allow ranchers and farmers to deduct up to 100 percent of their AGI for donations of conservation easements.
Creation of incentives for recovery and restoration of endangered species. Current law does not provide an income tax credit for endangered species recovery expenditures. S. 2242 would establish new incentives for taxpayers who take voluntary measures to aid in the recovery of certain species. These include a habitat protection easement tax credit; a habitat restoration tax credit for certain restoration costs; a tax deduction for the cost of actions to implement recovery plans; and an exclusion from income tax for payments received under various cost-share conservation programs.
Provision of option to elect credits for wetlands and grasslands protection. To encourage landowners to grant conservation easements that they sell to the government on real property, S. 2242 would allow a participant in the Wetlands Reserve Program and Working Grasslands Protection Program the option to choose between the cash payment for the easement that is currently authorized, or a new tax credit. The credit would be equal to the value of the payment they would have received after taxes were paid on the payment.
Creation of forest conservation bonds. In order to increase the ability of nonprofit organizations to acquire forests and forest lands to be dedicated to conservation purposes, S. 2242 wouldestablish a pilot project for forest conservation activities. S. 2242 would allow the issuance of tax-exempt timber conservation bonds, the proceeds of which would be used to acquire forest and forest lands for conservation management.
Deduction for qualified timber gain and timber REIT provisions. Under current law, gains on timber sales are eligible for capital gains tax treatment. S. 2242 wouldprovide an election to deduct from gross income 60 percent of qualified timber gain. In addition, in order to clarify and facilitate timber real estate investment trust (REIT) operations, S. 2242 modernizes timber REIT rules for timber property, including: 1) clarifying that gains from the sale of timber held for less than one year is qualifying income; 2) providing that mineral royalty income is qualifying income; 3) changing the taxable REIT subsidiary asset test for timber REITs from 20 percent to 25 percent; and 4) making changes to the safe harbors for timber property sales.
Provision of credit for residential wind. The promotion of viable alternative energy sources is an essential step toward reducing our dependence on oil and to reduce the harmful impacts of fossil fuel consumption. As wind energy is a proven and effective alternative means of electricity generation, S. 2242 wouldcreate a new 30 percent investment tax credit (capped at $4,000 per year) for qualified residential and commercial applications of small wind energy property.
Provision of landowner incentive to encourage electrical transmission build-out. Easement payments generally must be included in a taxpayer’s income for federal income tax purposes. S. 2242 wouldallow taxpayers who locate certain electricity transmission poles to exempt from gross income easement payments received from the electric utility or electric transmission company.
Modification of treatment of certain USDA energy grant/loans used for renewable power facilities. Current law requires a reduction in the Section 45 production tax credit for renewable electricity for grants, tax-exempt bonds, subsidized energy financing, and other credits. Because additional renewable energy infrastructure advances America’s environmental goals and is an important step toward reducing our dependence on oil, under S. 2242, theSection 45 credit would not be reduced by anyfinancing to farmers, ranchers, or rural small businesses issued under authority granted under USDA’s Section 9006 Renewable Energy and Energy Efficiency grant and guaranteed loan programs.
Expansion of special depreciation allowance to cellulosic biomass alcohol fuel plants. S. 2242 wouldexpand the eligible property qualifying for 50 percent expensing to include alcohol produced from any lignocelluosic or hemicellulosic matter that is available on a renewable or recurring basis (such as bagasse from sugar cane, corn stalks, and switchgrass).
Creation of small producer credit for cellulosic alcohol. The development of fuels from cellulosic materials, such as corn stover, switchgrass, and other organic materials that can be grown anywhere should play an important role in of reducing our dependence on oil. To take this industry from the level of demonstration projects to a practical and competitive fuel source and encourage new production capacity, S. 2242 creates a new production tax credit of 67¢ per gallon for cellulosic alcohol.
Extension of small ethanol producer credit. To encourage small producers to continue to participate in the ethanol industry, S. 2242 would extend for two years (through December 31, 2012) the 10¢ per gallon tax credit on the first 15 million gallons of ethanol production for small producers.
Creation of fossil-free alcohol production credit. The production of ethanol consumes a significant amount of fossil fuel. To encourage the use of alternative fuels in that production process, S. 2242 would create a new small producer alcohol credit of 10¢ per-gallon for four years (through 2011) for facilities that produce ethanol through a process that does not use a fossil-based resource. S. 2242 would also clarify that that both on- and off-site production of the methane qualifies for purposes of the credit so long as the other requirements of the provision are met
Extension of credits for biodiesel. To further encourage the development and use of biodiesel, S. 2242 wouldextend for two years (through December 31, 2010) the income tax credit, excise tax credit, and payment provisions for biodiesel. In order to encourage the participation of small producers into the market, this section would also extend the small agri-biodiesel produce credit for an additional four years (through December 31, 2012).
Extension of renewable diesel incentives. To further encourage the development and use of biodiesel, S. 2242 wouldextend for two years (through December 31, 2010) the $1 tax credit for diesel created through a thermal depolymerization process. This section would also cap, on a per-facility basis, the $1 credit at 60 million gallons per year of co-produced fuel, and is effective for fuel sold or used after the date of enactment.
Extension and modification of alternative fuels credit. S. 2242 would extend the alternative fuel excise tax credit through December 31, 2010, for all fuels except for hydrogen. In light of concerns over carbon emissions from coal facilities and the impact of such emissions on the environment, this section imposes a sequestration requirement for facilities producing liquid fuel from coal as a condition of credit eligibility.
Extension of alternative fuel refueling property installation credit. Because building additional renewable fuel infrastructure advances America’s environmental goals and is an important step toward reducing our dependence on oil, S. 2242 would extend the 30 percent investment tax credit for refueling property (capped at $30,000) for non-hydrogen property for one year (through December 31, 2010).
Rural Development and Agriculture Provisions
Improvement of Aggie Bonds. Aggie Bonds are tax-exempt bonds issued by state and local governments to provide low interest loans for first-time ranchers and farmers. Loan limits for first-time farmers have not been increased in more than two decades and the rules relating to the definition of “substantial farmland” have not kept pace with increases in land prices. S. 2242 would update Aggie Bonds by: 1) increasing the loan limit from $250,000 to $450,000 and indexing the limit amount for inflation; and 2) eliminating the dollar limitation in the definition of substantial farmland.
Modification of installment sale rules for certain farm property. Certain single-purpose agricultural or horticultural property (such as chicken barns, pig barns, or greenhouses) or any tree or vine bearing fruit or nuts may be depreciated more quickly than other real estate, but this depreciation is subject to a recapture provision when the property is sold. Toencourage the sale of farms to younger farmers who may not otherwise qualify for traditional financing, S. 2242 would allow a taxpayer to recapture depreciation taken on single-purpose agricultural property as ordinary income ratably over the term of an installment obligation rather than all at once in the year of the sale.
Allowance of Section 1031 eligibility for mutual ditch, reservoir, or irrigation company stock. Section 1031 of the Internal Revenue Code allows the tax-free exchange of like-kind property held for productive use in a trade or business, but does not apply to any exchange of stock. S. 2242 would clarify that the exchange of mutual ditch, reservoir, or irrigation company stock is effectively an exchange of real property and therefore qualifies for section 1031.
Establishment of Rural Renaissance Bonds. Toencourage economic development in rural areas, S. 2242 would create a new category of tax credit bonds with a total allocation of $400 million for projects such as rural electric, distance learning and telemedicine programs, rural telephone, broadband access, and rural community facility programs.
Creation of agricultural business security tax credit. Current law does not provide a credit for agricultural business security expenses. S. 2242 would provide a retailer of agricultural products and chemicals or a manufacturer, formulator, or distributor of certain pesticides a business tax credit for 30 percent of costs for the protection of such chemicals or pesticides, including employee security training and background checks, installation of security equipment, and computer network safeguards.
Establishment of drug safety and effectiveness testing for minor species credit. To help make more medications available to veterinarians and owners of minor species (such as sheep, goats, aquaculture), S. 2242 provides a 50 percent credit for safety and effectiveness testing expenses for new animal drugs intended for these species.
Reduction of the recovery period for farm equipment. A taxpayer generally may not deduct the cost of property used in a trade or business immediately, but must recover the cost over time through depreciation. Currently, the cost of farm machinery and equipment must be recovered over seven years. To lower the cost of capital for property used in agricultural trades or businesses, which will lead to additional investment in more equipment and employment of more workers, S. 2242 shortens the recovery period for certain farming business machinery and equipment to five years.
Creation of broadband technology and infrastructure tax incentives. S. 2242 creates a two-tiered tax incentive to stimulate new investment in broadband infrastructure to encourage wider availability of faster broadband service. These incentives include: 1) 50 percent expensing for investment in “current-generation” broadband infrastructure (5 megabits per second download, 1 megabit per second upload) in rural and underserved areas; and 2) and full expensing for “next generation” broadband investments (100 megabits per second download, 20 megabits per second upload) in rural, underserved and other residential areas.
Provision of energy efficient motors tax credit. To save energy from the promotion of more energy efficient products and increase the use of such motors, S. 2242 would provide a tax credit for the purchase of qualified energy efficient motors that meet or exceed certain energy efficiency standards, subject to limitations. Purchasers of qualified energy efficient motors would be allowed a credit in an amount equal to $15 per horsepower of qualified energy efficient motors placed in service by the taxpayer during the taxable year.
Revenue Raising Provisions
Modification of incentives relating to alcohol fuels. S. 2242 would reduce the 51-cent-per-gallon Volumetric Ethanol Excise Tax Credit by 5 cents beginning with the first calendar year after the year in which 7.5 billion gallons of ethanol (including cellulosic ethanol) have been produced.
Exclusion of denaturant from alcohol fuels credit. Because it is inappropriate to allow a credit that is intended to be for alcohol to be claimed on liquids that do not constitute alcohol, S. 2242 would exclude the volume of denaturant (a substance used to render alcohol toxic or undrinkable) in fuel for purposes of calculating the volume of alcohol eligible for the alcohol fuels credit.
Extension of tariff on ethanol. S. 2242 would extend the existing temporary tariff on imported ethanol for two years (through December 31, 2010).
Elimination and reductions of duty drawback on imported ethanol. Duties paid upon certain imports may be reclaimed at a later date if the same or similar product is exported. Current law treats ethanol blended with gasoline the same as jet fuel. S. 2242 would terminate that treatment. Any drawback for ethanol or ethanol blended with gasoline would still be allowed.
Treatment of alcohol and biodiesel fuel mixtures. S. 2242 would add qualified alcohol fuel mixtures and qualified biodiesel fuel mixtures to the definition of taxable fuel. In addition, S. 2242 would require additional reporting and documentation by the producers of these mixtures.
Limitation on Schedule F losses. With some exceptions, the amount of Schedule F (agricultural) losses that a taxpayer may use to reduce income is not limited, even for those who receive government assistance through payment programs and loan programs. S. 2242 would limit the amount of Schedule F losses that a taxpayer may use to offset income to $200,000 if the taxpayer receives Agriculture Program Payments or Commodity Credit Corporation (“CCC”) loans.
Modification of Optional Self-Employment Tax. Qualifying for Social Security benefits can be difficult for self-employed farmers and ranchers because they do not always have a steady income stream. When there are no earnings, no Social Security taxes are paid and no quarters are accrued. Through farm optional methods, farmers and ranchers may voluntarily pay Social Security taxes in order to earn quarters so that they can receive Social Security benefits. However, the payment thresholds are outdated and no longer allow farmers and ranchers to earn four quarters of credit per year. S. 2242 modifies the farm optional method so that electing taxpayers may be eligible to secure four credits of Social Security benefit coverage each taxable year. The proposal makes a similar modification to the nonfarm optional method.
Codification of information requirements for CCC transactions. Because income that is subject to information reporting is less likely to be underreported and the absence of information reporting on many types of payments results in underreporting and contributes to the tax gap, S. 2242 would codifya recent IRS ruling related to information requirements. The IRS held that the CCC must use Form 1099-G to report market gain associated with the repayment of a CCC loan regardless of whether the taxpayer repays the loan with cash or uses CCC certificates in repayment of the loan.
Modification of Section 1031 treatment for certain real estate. An exchange of property, like a sale, generally is a taxable event. However, no gain or loss is recognized if property held for productive use in a trade or business is exchanged for property of a Alike kind.@ For purposes of section 1031, the determination of Alike kind@ relates to the nature or character of the property and not grade or quality. Therefore, improved real estate and unimproved real estate are generally considered to be property of a Alike kind@ as this distinction relates to the grade or quality of the real estate. S. 2242 wouldmodify Section 1031 to disallow nonrecognition treatment exchanges of improved real estate for unimproved real estate for which the owner is receiving Agriculture Program Payments or CCC loans.
Disallowance of foreign SILO loss. In a foreign Sale-In/Lease-Out, or SILO, transaction, a foreign government or other foreign entity that does not pay U.S. tax “sells” property, such as a subway or sewer, to a U.S. taxable investor and then “leases” the property back for use. The effect is to transfer depreciation deductions from the tax-exempt entity, which cannot use the deductions, to a taxable entity that can, with little economic risk. A provision in the American Jobs Creation Act applied to leases entered into after March 12, 2004. S. 2242 would disallow future losses on foreign tax exempt use property for leases entered into on or before March 12, 2004.
Modification of foreign corporate estimated tax payments. In general, corporations are required to make quarterly estimated tax payments of their income tax liability. Under current law, in the case of a corporation with assets of at least $1 billion, the payments due in July, August, and September, 2012, will be increased to 115 percent of the payment otherwise due and the next required payment will be reduced accordingly. S. 2242 would increase the rate of otherwise applicable percentage by 7 percent.
Disallowance of “like kind” exchange treatment of collectibles. Collectibles, such as works of art, antique rugs, gems, stamps, coins, or bottles of wine, have elements of both investment and personal use. S. 2242 would exclude these articles from property qualifying for nonrecognition treatment, thus preventing “like kind” exchange treatment of collectibles.
Denial of deduction for certain fines, penalties, and other amounts. S. 2242 would clarify that amounts paid or incurred in connection with civil settlements to or at the direction of a government for the violation of any law or the potential violation of law are not deductible for federal income tax purposes. Under this section, amounts for restitution or remediation would be deductible. In addition, government agencies would be required to notify the IRS of settlements.
Increase in information return penalties. To encourage the filing of timely and accurate returns and generally improve tax administration and tax compliance, S. 2242 wouldincrease the penalties for failing to file correct information returns, failing to furnish correct payee statements, and failing to comply with other information reporting requirements.
Clarification of the economic substance doctrine and penalty for understatements attributable to transactions lacking economic substance. Courts generally deny claimed tax benefits if the transaction that gives rise to those benefits lacks economic substance independent of tax considerations. S. 2242 would clarify and enhance the application of the economic substance doctrine (but would not change current-law standards used by courts in determining when to utilize an economic substance analysis). Under the provision, in any case in which a court determines that the economic substance doctrine is relevant to a transaction, the doctrine would be satisfied only if: 1) the transaction changes in a meaningful way (apart from federal income tax consequences) the taxpayer’s economic position; and 2) the taxpayer has a substantial non-federal tax purpose for entering into such transaction.
S.2242 imposes a 30 percent penalty on understatements attributable to a non-economic substance transaction (unless the transaction was disclosed, in which case the penalty is 20 percent) and would deny any deduction for interest on unpaid taxes attributable to any non-economic substance transaction understatement (whether or not disclosed).
On September 21, 2007, the Senate Committee on Finance passed S. 2242 by voice vote. On September 25, 2007, Senator Baucus introduced S. 2242 and reportedthe legislation to the Senate with written report No. 110-206. The measure wasplaced on the Senate Legislative Calendar under General Orders, Calendar No. 446. This bill will be combined with S. 2302, the Food and Energy Security Act of 2007 that was reported out by the Senate Committee on Agriculture on October 24, 2007, and will be offered as a substitute amendment to H.R.2419, the Farm, Nutrition, and Bioenergy Act.