The Disaster Act: Extender Legislation: General Business Credits and Incentives

This Tax Blast will address four tax provisions, extended through 2020, which impact both domestic and multinational businesses. Two of these credits provide tax incentives for purchasing or leasing “green” vehicles and installing energy efficient improvements in commercial buildings. Another credit permits multinational businesses to redeploy cash among its foreign subsidiaries without triggering income inclusion for U.S. shareholders. The last credit provides incentives for employers to offer paid family and medical leave (“FML”) benefits to their employees.

Generally, under Subpart F of the Code, income of a controlled foreign subsidiary (“CFC”) must be included in the gross income of a U.S. shareholder in the year the income is earned by the CFC, regardless of whether the CFC makes a distribution to the U.S. shareholder that year. A CFC is any foreign corporation in which more than 50% of its stock is owned by U.S. shareholders, each of which must own at least 10% of the foreign corporation.

Since 2006, the Code provides an exception to the general Subpart F income inclusion rule for payments of dividends, interest, rents, and royalties between related CFCs. Sec. 954(c)(6). Under this “look-through” rule, such payments are not immediately taxable if the source of the payment from the related CFC is neither from Subpart F income nor from income effectively connected with the conduct of a U.S. trade or business. IRS Notice 2007-9 has more information on these rules.

The CFC look-through rule was set to expire at the end of 2019, but the Disaster Act extends it through 2020. As a result, U.S. multinationals can continue to reinvest their earnings among foreign subsidiaries without incurring an immediate tax on the undistributed income. This rule permits lower-tiered CFCs to pay dividends while allowing greater flexibility for U.S. shareholders in deciding when to repatriate CFC earnings.

As of 2018, a recent addition to the Code permits certain employers to claim a credit for providing paid FML benefits to their employees. Sec. 45S. To qualify, the employee’s FML pay must be at least 50% of the wages that they would normally receive. In addition, all full-time employees must be given at least two weeks of paid FML per year.

The credit is equal to 12.5% of the amount of wages paid to the employees while they are on leave. If the employee receives more than 50% of their regular wages while on leave, then the 12.5% credit amount is increased by 0.25 percentage points (but not above 25%) for each percentage point by which the rate of payment exceeds 50%.

The maximum amount of FML that may be considered with respect to any employee is 12 weeks per tax year. If the credit is claimed, then the employer cannot also claim a deduction for the same amounts paid.

This credit was set to expire at the end of 2019, but the Disaster Act extends it through 2020. Thus, employers have more time to implement a paid FML program for their employees and receive a generous tax benefit.

Currently, the Code provides a deduction for the costs associated with installing energy efficient improvements to a commercial building’s lighting, heating, cooling, ventilation, and hot water systems. Sec. 179D. The deduction cannot exceed $1.80 per square foot of construction. A partial deduction of $0.60 per square foot is available if certain subsystems meet energy standards but the entire building does not.

This deduction expired for property placed in service after 2017, but the Disaster Act extends it to property placed into service before 2021. Thus, now is the time to begin or resume those “green” energy improvements to commercial buildings.

The Code provides, as part of the alternative motor vehicle (“AMV”) credit, a credit for the purchase of new qualified fuel cell motor vehicles. Sec. 30B(b). The amount of the credit varies between $4,000 and $40,000, depending on the weight of the vehicle. Other vehicles, depending on their fuel efficiency, may qualify for an additional $1,000 to $4,000 credit.

This credit expired for property purchased after 2017, but the Disaster Act extends it to property purchased before 2021.