GM 13-002

American Taxpayer Relief Act Enacted: Averts "Fiscal Cliff" for the Time Being

On January 2, 2013, the President signed into law HR 8, the American Taxpayer Relief Act, legislation to avert the so-called “fiscal cliff” which would have required deep across-the-board cuts in domestic and defense programs and would have resulted in increased taxes for most people. The Senate approved the bill January 1, 2013, by a vote of 89 to 8 while the House approved it on the same day, by a vote of 257 to 167. We report here on selected provisions which directly impact Indian tribes.

The Act deals with an array of pressing matters. One of the most contentious issues was the tax rate for the wealthiest taxpayers – the final bill raises tax rates on individuals with incomes above $400,000 ($450,000 for couples). Among other things the Act also provides for a two-month delay of a scheduled sequestration of FY 2013 appropriations, extends and modifies various Bush-era income and other tax provisions, extends unemployment emergency compensation and farm bill provisions (including the food stamp program and livestock disaster assistance ), blocks a scheduled 17 percent reduction in the Medicare reimbursement rate for physician services, and implements a permanent “patch” to prevent millions of taxpayers from being subjected to the alternative minimum tax. The Act does not raise the United States’ debt limit. For a summary of the Act, see:

Despite the enactment of HR 8, there are still serious, and sure to be divisive, issues facing Congress in the first three months of the 113th Congress which convened on January 2, 2013:

• A sequestration of FY 2013 funding from domestic and defense programs is scheduled to take place March 27, 2013, unless Congress takes action to stop it.
• The Continuing Resolution which is currently funding FY 2013 programs expires March 27, 2013, and Congress will need to provide funding for the rest of the fiscal year.
• The debt limit must be raised. Technically, the United States reached its debt limit at the end of December, 2012, but the Treasury Department is taking what it terms “extraordinary means” to keep the country afloat. No specific date has been determined for when the debt limit must be raised, but it will be within the next several months.
In addition, the President will submit his proposed FY 2014 proposed budget to Congress in early February 2013.

Sequestration Delay. The Act delays for two months the scheduled across-the-board sequestration of FY 2013 funds, estimated to be at 8.2 percent. Unless Congress acts, the sequestration would go into effect March 27, 2013 (the same day the current Continuing Resolution is set to expire unless an appropriations bill is enacted sooner), but a sequestration report would have to be made available on March 1, 2013.

The Act covers the cost of the two month delay in implementing a sequestration of funds by reducing the spending caps by $12 billion ($4 billion in FY 2013 and
$8 billion in FY 2014, divided between security and non-security programs). The rest of the cost ($12.2 billion) is covered by a change in the authority to transfer tax-deferred retirement accounts to Roth IRAs.

The Act does not change the provisions of the Budget Control Act of 2011 which specifies certain programs as being exempt from sequestration (VA medical accounts, child nutrition programs, Child Care Block Grants, Grants to States for Medicaid, Foster Care and Adoption Assistance, SSI, Social Security, and Temporary Assistance for Needy Families). Tribes and tribal organizations have advocated that Indian programs be exempted from sequestration of funds.

Extension of Certain Tax Provisions. The Act provides for the extension, through December 31, 2013, of a number of tax provisions important to Indian Country. Many of these provisions expired on December 31, 2011. The legislation specifies that they are now retroactively effective from that date forward until the new cutoff date: December 31, 2013 – hence the 2012 tax year is now included. The tax provisions specific to Indian Country include the:

• Indian employment tax credit
• accelerated depreciation for business property on an Indian reservation
• production credit for Indian coal facilities placed in service before 2009

In addition, the new markets tax credit is extended as well as empowerment zone tax incentives. These two provisions are not specific to Indian Country but provide important incentives for business investment in under-served areas of the country.

We provide a summary of each tax provision as described in the Joint Committee on Taxation’s May 14, 2012, report entitled: Overview Of Federal Tax Provisions And Analysis Of Selected Issues Relating To Native American Tribes And Their Members (JCX-40-12). A copy of the full report may be found here:

Indian employment tax credit: “A credit against income tax liability is allowed to employers for the first $20,000 of qualified wages and qualified employee health insurance costs paid or incurred by the employer with respect to certain employees. .. A qualified employee means any employee who is an enrolled member of an Indian tribe or the spouse of an enrolled member of an Indian tribe, who performs substantially all of the services within an Indian reservation, and whose principal place of abode while performing such services is on or near the reservation in which the services are performed.”

Accelerated depreciation for business property on Indian reservations: “Qualified Indian reservation property” eligible for accelerated depreciation includes property …: (1) used by the taxpayer predominantly in the active conduct of a trade or business within an Indian reservation; (2) not used or located outside the reservation on a regular basis; (3) not acquired (directly or indirectly) by the taxpayer from a person who is related to the taxpayer; and (4) not property placed in service for purposes of conducting gaming activities. Certain “qualified infrastructure property” may be eligible for the accelerated depreciation even if located outside an Indian reservation, provided that the purpose of such property is to connect with qualified infrastructure property located within the reservation (e.g., roads, power lines, water systems, railroad spurs, and communications facilities).

Credit for the production of Indian coal: “A credit is available for the production of Indian coal sold to an unrelated third party from a qualified facility for a seven-year period beginning January 1, 2006… The amount of the credit for Indian coal is $1.50 per ton for the first four years of the seven-year period and $2.00 per ton for the last three years of the seven-year period (adjusted for inflation; $2.267 per ton for coal sold in 2012). A qualified Indian coal facility is a facility placed in service before January 1, 2009, that produces coal from reserves that on June 14, 2005, were owned by a Federally recognized Indian tribe or were held in trust by the United States for an Indian tribe or its members.”

Empowerment zones: “Empowerment zones generally provide tax incentives for businesses that locate within certain geographic areas designated by the Secretaries of the Departments of Housing and Urban Development (HUD) and Agriculture. The targeted areas are those that have a condition of pervasive poverty, high unemployment, and general economic distress, and that satisfy certain eligibility criteria, including specified poverty rates and geographic size limitations. The tax incentives include the empowerment zone employment credit, increased expensing under section 179, enterprise zone facility bonds, rollover of gain from the sale of empowerment zone assets, and an increased exclusion of gain from the sale or trade of qualified small business stock.”

New Markets Tax Credit Program (NMTC Program)*: “Was established by Congress in 2000 to spur new or increased investments into operating businesses and real estate projects located in low-income communities. The NMTC Program attracts investment capital to low-income communities by permitting individual and corporate investors to receive a tax credit against their Federal income tax return in exchange for making equity investments in specialized financial institutions called Community Development Entities (CDEs). The credit totals 39 percent of the original investment amount and is claimed over a period of seven years (five percent for each of the first three years, and six percent for each of the remaining four years). The investment in the CDE cannot be redeemed before the end of the seven-year period.”
*This summary was found here:

Alaska Native Settlement Trusts. The Act makes permanent Section 646 of the tax code regarding treatment of Alaska Native Settlement Trusts. The referenced summary describes it as follows:

Permanently extend tax relief for Alaska settlement funds. The Economic Growth and Tax Relief Reconciliation Act of 2001 allowed an election in which Alaska Native settlement trusts can elect to pay tax at the same rate as the lowest individual marginal rate, rather than the higher rates that generally apply to trusts. Beneficiaries of the trust do not pay tax on the distributions of an electing trust’s taxable income. Finally, contributions by an Alaska Native corporation to an electing trust will not be deemed distributions to the corporation’s shareholders. The bill extends the elective tax treatment for Alaska Native settlement trusts for taxable years beginning after December 31, 2012.

Extension of the Special Diabetes Program for Indians. The Act also provides for a one-year extension of funding (at the current rate of $150 million per program, per fiscal year) for the Special Diabetes Program for Indians (SDPI) and the Special Diabetes Program for type-1 research (SDP). The programs are now funded through FY 2014. This funding is mandatory and should sequestration go into effect would only be subject to a two percent cut, rather than the 8.2 percent reduction that would be applied to discretionary spending.

Please let us know if we may provide additional information regarding the American Taxpayer Relief Act.