Tax-Exempt Bonds and Small Business Health Care Tax Credit Take a Hit from Sequester

The Internal Revenue Service said that budget sequestration would require reductions in refundable credits for certain tax-exempt bonds and the refundable portion of the Small Business Health Care Tax Credit for some small tax-exempt employers, along with whistleblower awards.

In a pair of emails Monday, the IRS noted that pursuant to the requirements of the Balanced Budget and Emergency Deficit Control Act of 1985, as amended, certain automatic cuts will take place as of March 1, 2013. The 1985 law, better known as the Gramm-Rudman-Hollings Act, provided the original basis for the budget sequestration process that was revived in 2011 as part of the Budget Control Act.

Under the provisions of the 2011 law, which aimed to curb the budget deficit, Congress and the Obama administration set a goal of identifying $1.5 trillion in deficit reduction measures, or else $1.2 trillion in automatic spending cuts over 10 years across most government agencies would begin in 2013. After numerous meetings and reports, and the efforts of the Simpson-Bowles Commission and a congressional “super committee,” Democrats and Republicans were unable to reach an agreement, and $85 billion in automatic spending cuts began to take effect on March 1.

In an email to the tax-exempt bond community, the IRS noted that Form 8038-CP claims for certain qualified tax-exempt bonds are subject to the sequester. The required reductions include a reduction to refundable credits under Section 6431 of the Tax Code applicable to certain qualified bonds. The sequester reduction is applied to Section 6431 amounts claimed by an issuer on any Form 8038-CP filed with the IRS that results in a payment to the issuer on or after March 1, 2013. The sequestration reduction rate will be applied until the end of the fiscal year (Sept. 30, 2013) unless there is some intervening congressional action, at which time the sequestration rate would be subject to change.

The reductions apply to Build America Bonds, Qualified School Construction Bonds, Qualified Zone Academy Bonds, New Clean Renewable Energy Bonds and Qualified Energy Conservation Bonds for which the issuer elected to receive a direct credit subsidy pursuant to Section 6431. As determined by the Office of Management and Budget, payments to issuers from the budget accounts associated with these qualified bonds are subject to a reduction of 8.7 percent of the amount budgeted for such payments.

For more information, visit Effect of Sequestration on Certain State & Local Government Filers of Form 8038-CP on the Tax Exempt Bonds Homepage of IRS.gov. Taxpayers and tax practitioners may also call the TEB Customer Service at 1-(877) 829-5500.

The sequester is also set to affect the Small Business Health Care Tax Credit, which was included as part of the Patient Protection and Affordable Care Act of 2010, the Obama administration’s signature health care reform law. The IRS noted in an email to tax-exempt organizations that the required cuts under sequestration include a reduction to the refundable portion of the Small Business Health Care Tax Credit for certain small tax-exempt employers under Section 45R of the Tax Code. As a result, the refundable portion of the claim will be reduced by 8.7 percent. The sequestration reduction rate will be applied until the end of the fiscal year (Sept. 30, 2013) unless there is some intervening congressional action, at which time the sequestration rate is subject to change.

Separately, the IRS also said Tuesday it was reducing whistleblower payment awards by 8.7 percent because of sequestration, unless Congress intervenes.

Last week, IRS Acting Commissioner Steven T. Miller informed IRS employees that sequestration might also require unpaid furloughs of five to seven days starting this summer, after tax season is over (see IRS Employees May Face 5- to 7-Day Furloughs from Sequester). Along with the reductions in employee pay, Miller also warned of other budget cuts at the agency, which has already seen its budget cut in the past two fiscal years.

“If sequestration occurs, we will continue to operate under a hiring freeze, reduce funding for grants and other expenditures, and cut costs in areas such as travel, training, facilities and supplies,” Miller wrote. “In addition, we will need to review contract spending to ensure only the most critical and mandatory requirements are fully funded.”