On May 20, 2010, Senate Finance Committee Chairman Max Baucus (D-Mont.) and House Ways and Means Committee Chairman Sander Levin (D-Mich.) introduced a proposal that would extend unemployment insurance benefits and eligibility for unemployment health care benefits through the end of 2010. The legislation also would extend loan programs for small businesses and extend dozens of popular expired and expiring tax cuts that provide the certainty families and businesses need to create jobs.  

The House further revised the legislation and after divisive debate passed the bill 215-204 on May 28. The House vote was supposed to take place earlier in May, leaving time for the Senate to take action, but opposition to the tax increases and higher deficits called-for in the bill delayed consideration until leadership was able to guarantee enough votes. As a result, the Senate had already left town for the Memorial Day recess, and only upon their return June 8 did the Senate receive the House-passed measure (H.R. 4213). Senator Baucus then laid down a Substitute Amendment.

Specifically, the American Jobs and Closing Tax Loopholes Act of 2010 (H.R. 4213), as amended by the Baucus Substitute Amendment, would reinstate for one year (through  2010) the research and development tax credit, and it would allow corporations to receive a refund of a portion of their AMT credits if they invest during 2010 in capital equipment for use in the U.S.

Additionally, the measure would extend for one year, through 2010: the special 15-year cost recovery period for certain leasehold improvements, restaurant buildings and retail improvements; active financing exception, from Subpart F of the tax code; five-year depreciation for farming business machinery and equipment that are used in a farming business; and new markets tax credit (NMTC) by permitting a maximum annual amount of qualified equity investments of $5 million. In order to ensure that the NMTC encourages AMT taxpayers to make qualifying investments, the bill would also allow NMTC to be claimed against the AMT with respect to qualified investments made between March 15, 2010 and January 1, 2012.

The bill includes a package of provisions developed jointly by the Treasury Department, the Committee on Ways and Means and the Senate Finance Committee to curtail abuses of the U.S. foreign tax credit system and other targeted abuses. This system is intended to ensure that U.S.-based multinational companies are not subject to double taxation. The bill would eliminate $14.451 billion of foreign tax credit loopholes. 

The Senate Substitute amendment also makes changes to the taxation of carried interest. While the House-passed version would tax 50 percent of carried interest at ordinary rates until Jan. 1, 2013 and then increase to 75 percent, the Senate bill would change the percentages so that initially 35 percent of carried interest is taxed as capital gains while 65 percent is taxed at ordinary income rates. In an effort to secure 60 votes for passage, senators included language that would allow assets held for at least seven years to be taxed at a 45-55 percent split.

Dropped from the House approved bill were extensions to the COBRA subsidy program and unemployment insurance benefits due to budgetary concerns from members of the Blue Dog Coalition. In the meantime, both the COBRA subsidy program and unemployment insurance benefit extension have expired on May 31 and June 2, respectively. While the Senate had originally planned to reinsert funds to extend both temporary programs, the unemployment insurance benefit extension was the only one to be included in Sen. Baucus’s substitute to H.R. 4213. 

Finally, the bill attempts to clarify that individuals that are engaged in professional service businesses are unable to avoid employment taxes by routing their earnings through an S corporation or limited partnership. The bill specifically targets abuse in situations in which the business is based on the reputation or skill of three or fewer service professionals or where a person is a partner in an S corporation service business. Although relatively targeted in the number and type of small businesses impacted, this provision is a concern, as it would apply to capital investments made by businesses engaged in the service sector, therefore hurting their ability to invest and create jobs. By targeting service sector S corporations, this proposal would increase taxes on small business owners who are fully complying with the law.

Majority Leader Reid faces a tight scheduling opportunity to get this bill completed, as he will need the support of every Democrat plus at least one Republican to move on this substitute amendment. With Senator Blanche Lincoln (D-Ark.) in an election run-off slated for Tuesday, the only available day where Sen. Reid might have the votes to move the process long is Wednesday, June 9.

Meanwhile, there are no votes scheduled on Friday or next Monday and debate on Senator Lisa Murkowski’s (R-Alaska) Resolution of Disapproval (climate change) is set to consume much of Thursday.