Qualified railroad track maintenance expenditures paid or incurred in a taxable year by eligible taxpayers are eligible for a 50-percent business tax credit. The credit is limited to $3,500 times the number of miles of railroad track owned or leased by an eligible taxpayer. Railroad track maintenance expenditures are amounts, which may be either repairs or capitalized costs, spent to maintain railroad track (including roadbed, bridges, and related track structures) owned or leased as of January 1, 2005, by a Class II or Class III railroad. Eligible taxpayers are smaller (Class II or Class III) railroads and any person who transports property using these rail facilities or furnishes property or services to such a person. The taxpayer’s basis in railroad track is reduced by the amount of the credit allowed (so that any deduction of cost or depreciation is only on the cost net of the credit). The credit cannot be carried back to years before 2005. The credit covers expenditures from 2005-2007. For 2005-2008 the amount eligible is the gross expenditures not taking into account reductions such as discounts or loan forgiveness.
| 2004 | 2005 | 2006 | 2007 | 2008 | 2009 | 2010 | 2011 | 2012 | 2013 | 2014 | |
| Corporations | 0 | 70 | 140 | 120 | 160 | 160 | 60 | 20 | 10 | 10 | 0 |
| Individuals | 0 | 0 | 0 | 10 | 20 | 20 | 10 | 0 | 0 | 0 | 0 |
| Total | 0 | 70 | 140 | 130 | 180 | 180 | 70 | 20 | 10 | 10 | 0 |
This provision substantially lowers the cost of track maintenance for the qualifying short line (regional) railroads, with tax credits covering half the costs for those firms and individuals with sufficient tax liability. According to the Federal Railroad Administration, as of the last survey in 1993, these railroads accounted for 25% of the nation’s rail miles. These regional railroads are particularly important in providing transportation of agricultural products.
Source: Analytical Perspectives, President’s Fiscal Year Budget, 2006-2010.
Numbers provided are from the most recent estimate.
This provision was enacted as part of the American Jobs Creation Act of 2004 (P.L. 108-357). While no official rationale was provided in the bill, sponsors of earlier free-standing legislation and industry advocates indicated that the purpose was to encourage the rehabilitation, rather than the abandonment, of short line railroads, which were spun off in the deregulation of railroads in the early 1980s. Advocates also indicated that this service is threatened by heavier 286,000-pound cars that must travel on these lines because of inter-connectivity. They also suggested that preserving these local lines will reduce local truck traffic. These is also some indication that a tax credit was thought to be more likely to be achieved than grants. The temporary provision relating to discounts was added by H.R. 6111 (December 2006).
The arguments stated by the industry advocates and sponsors of the legislation are also echoed in assessments by the Federal Railroad Administration (FRA), which indicated the need for rehabilitation and improvement, especially to deal with heavier cars. The FRA also suggested that these firms have particular difficulty with access to bank loans. In general, special subsidies to industries and activities tend to lead to inefficient investment allocation since in a competitive economy businesses should earn enough to maintain their capital. Nevertheless it may be judged or considered desirable to subsidize rail transportation in order to reduce the congestion and pollution of highway traffic. At the same time, a tax credit may be less suited to remedy the problem than a direct grant since firms without sufficient tax liability cannot use the credit.
Source: Compendium of Background Materials on Individual Provisions, Congressional Research Service. December 2006. Washington, DC: U.S. Government Printing Office.
