Exception Under Subpart F for Active Financing Income

The Act extends for five years, through 2006, the exception from subpart F for "active financing" income. The active financing income exception is available for certain:

• Foreign personal holding company income
• Foreign base company services income
• Insurance income

The income must be derived from the active conduct of a banking, financing or securities business, or in the conduct of an insurance business, by a controlled foreign corporation (CFC).

Work Opportunity Credit

Employers may receive the work opportunity tax credit when they hire workers from one or more targeted groups. The credit generally is equal to 40 percent of wages paid in the first year (25 percent for employment of less than 400 hours) for a maximum credit of $2,400 per employee ($1,200 per summer youth employee).

The Act extends the work opportunity tax credit for two years. The credit is available for wages paid to or incurred for a qualified individual who begins work for an employer before 2004.

Welfare-to-Work Credit

Employers may receive the welfare-to-work tax credit on the first $10,000 of eligible wages paid to recipients of long-term family assistance during each of the first two years of employment, for a maximum credit over the two years of $8,500 per qualified employee.

The Act extends the welfare-to-work credit for two years. The credit is available for wages paid or incurred by the employer to qualified individuals who begin work for an employer before 2004.

Suspension of Depletion Limitation for Marginal Oil and Gas Wells

Percentage depletion deductions with respect to an oil or gas property generally may not exceed 100 percent of the net income from the property. The limitation was suspended for tax years beginning after 1997 and before 2002 for domestic production from marginal wells.

The Act extends the suspension of the 100-percent-of-net-income limitation for two additional years, to tax years beginning before 2004.

Cover Over of Rum Excise Tax

The Act extends through December 31, 2003, the increase in the portion of the federal excise tax collected on rum (to $13.25 from $10.50 per proof gallon) brought into the United States from Puerto Rico or the U.S. Virgin Islands that is "covered over" (i.e., paid) to those jurisdictions.

Credit for Energy Produced from Renewable Sources

The Act extends the credit for electricity produced from wind, closed-loop biomass, and poultry waste for two additional years. The credit is available for qualified facilities placed in service before 2004.

Repeal of Dyed-Fuel Mandate

The Act repeals a statutory mandate¹ that a fuel terminal must offer untaxed, dyed diesel fuel and kerosene if the terminal operator wishes to offer taxed, undyed diesel fuel and kerosene.

Mental Health Parity Excise Tax

Group health plans offering both mental health and medical and surgical benefits may not impose aggregate lifetime or annual dollar limits on mental health benefits that are not imposed on substantially all medical and surgical benefits. Employers sponsoring noncompliant plans must pay an excise tax of $100 per affected participant per day during the period of noncompliance, subject to a maximum tax (per tax year) of the lesser of: (1) 10 percent of the employer's group health plan expenses for the prior year or (2) $500,000.

The Act extends the excise tax to benefits for services provided before 2004.

Deduction for Cost of Clean-Fuel Vehicles and Vehicle Refueling Property

Taxpayers may deduct currently the costs of certain vehicles fueled by natural gas, liquefied natural gas, liquefied petroleum gas, hydrogen, electricity, or certain alcohol-based fuels (including ethanol and methanol). For such clean-fuel vehicles, the deduction is limited to:

• $2,000 for cars
• $5,000 for light trucks and vans
• $50,000 for heavy trucks, vans, and buses

The Act delays a scheduled phase-out of the deduction for qualified clean-fuel vehicles for two years, to allow a deduction for property placed in service before 2007. For clean-fuel vehicles, the phase-out schedule of the deduction is:

A deduction also is available for qualifying refueling property for clean-fuel vehicles. The lifetime deduction (i.e., the total deductions for all tax years) for refueling property is limited to $100,000 per location. The Act extends the deduction for clean-vehicle refueling property for two years to property placed in service before 2007.

Credit for Qualified Electric Vehicles

A 10-percent credit (up to a maximum credit of $4,000) is available for the purchase of certain new electric vehicles. The Act delays the phase-out of the credit for two years. The following table describes the new phase out schedule:

Medical Savings Accounts

The Medical Savings Account (Archer MSA) program permits certain self-employed individuals and employees of small businesses to open tax-free accounts that can be used to pay for certain medical expenses. The Archer MSA program was scheduled to expire at the end of 2002. The Act extends the program one year, through 2003.

Incentives for Investment on Indian Reservations

A credit of 20 percent is available for up to $20,000 of qualified wages and health insurance paid each year to a qualified employee who works on an Indian reservation. In addition, a special depreciation recovery period is allowed for qualified Indian reservation property. The credit expires for tax years beginning after 2003; the depreciation rule expires for property placed in service after 2003. The Act extends the Indian employment credit and the depreciation rules for Indian reservations for one year, for wages and insurance paid in tax years beginning before 2005, and property placed in service before 2005.

Use of Nonrefundable Credits Against AMT

Generally, nonrefundable tax credits are allowed only to the extent that a taxpayer's regular income tax liability exceeds the tentative minimum tax. This means that these nonrefundable credits cannot offset AMT liability. Nonrefundable personal credits could be used against AMT, but only for tax years beginning before 2002. The Economic Growth Tax Reconciliation and Relief Act of 2001² made this rule permanent for the child credit (beginning in 2001) and the adoption credit (beginning in 2002). The personal tax credits that remain subject to the temporary rule are:

• Dependent care credit
• Credit for the elderly and permanently disabled
• Credit for interest on certain home mortgages
• Hope and Lifetime Learning credits
• The DC homeowner's credit

The Act extends the temporary provision for two years, for tax years beginning in 2002 and 2003.

Qualified Zone Academy Bonds

State and local governments can issue qualified zone academy bonds (QZABs) to fund the improvement of eligible public schools. An eligible holder of a QZAB receives annual federal income tax credits in lieu of interest. For 1998 through 2001, there was authority for governments to issue $400 million per year of QZABs. The Act authorizes another $400 million per year of QZABs to be issued in 2002 and in 2003.

The information contained herein is of a general nature and based on authorities that are subject to change. Applicability to specific situations is to be determined through consultation with your tax adviser.

¹ IRC section 4101(e).

² Pub. L. No. 107-16.