On December 18, 2015 President Obama signed the “Protecting Americans From Tax Hikes Act of 2015” (PATH Act). The PATH Act made its way through Congress by passing the House on December 17th by a vote of 318-109 and the Senate on December 18th by a vote of 65-33. Unlike prior year-end tax bills which gave one or two year extensions to certain tax provisions, the PATH Act makes permanent more than 20 tax provisions. Additionally, there are provisions to the PATH Act that extend other key tax provisions for two additional years as well as the 5-year extension on Bonus Depreciation.
Highlights from the PATH Act are as follows:
EXTENDERS FOR BUSINESSES
Code Section 179 Expensing
Prior to the PATH Act, the dollar limit for Code Section 179 expensing for 2015 had reverted to $25,000 with an investment limit of $200,000. The Act permanently sets the Code Section 179 expensing limit at $500,000 with a $2 million overall investment limit before phase out (both amounts indexed for inflation beginning in 2016).
Research Tax Credit
The research and development (R&D) tax credit is available to taxpayers with specified increases in business-related qualified research expenditures and for increases in payments to universities and other qualified organizations for basic research. The Act permanently extends the credit and increases the alternative simplified credit from 14 percent to 20 percent.
100-Percent Gain Exclusion on Qualified Small Business Stock
The 100-percent exclusion allowed for gain on the sale or exchange of qualified small business stock held for more than five years by non-corporate taxpayers is made permanent.
Reduced Recognition Period For S Corporation Built-In Gains Tax
The Act makes permanent the five-year recognition period for built-in gain following conversion from a C to an S corporation.
The Act also extends permanently and in some cases modifies:
▪ 15-year straight-line cost recovery for qualified leasehold improvements, restaurant property and retail improvements:
▪ Employer wage credit for employees who are active duty members of the uniformed services
▪ Treatment of certain dividends of regulated investment companies (RICs)
▪ The subpart F exception for active financing income
▪ Charitable deductions for the contribution of food inventory
▪ Tax treatment of certain payments to controlling exempt organizations
▪ Basis adjustment in stock when an S corporation makes charitable contributions of property
▪ Minimum low-income housing tax credit for non-federally subsidized buildings
▪ Military housing allowance exclusion in determining a low-income tenant
▪ RIC qualified investment entity treatment under FIRPTA
The Act extends bonus depreciation (additional first-year depreciation) under a phase-down schedule through 2019:
▪ at 50 percent for 2015-2017;
▪ at 40 percent in 2018; and
▪ at 30 percent in 2019.
The Act also continues the election to accelerate the use of AMT credits in lieu of bonus depreciation and increases the amount of unused AMT credits that may be claimed in lieu of bonus depreciation. Additionally, the Act modifies bonus depreciation to include qualified improvement property, and permits certain trees, vines and plants bearing fruits or nuts to be eligible for bonus depreciation when planted or grafted.
Work Opportunity Tax Credit
The Work Opportunity Tax Credit (WOTC) is extended through 2019. The Act also enhances the WOTC for employers that hire certain long-term unemployed individuals.
New Markets Tax Credit
The Act authorizes the allocation of $3.5 billion of new markets tax credits for each year from 2015 through 2019.
Look-thru Treatment for CFCs
The Act extends through 2019 the look-through treatment for payments of dividends, interest, rents, and royalties between related controlled foreign corporations under the foreign personal holding company rules.
More Two-Year Business Extenders
The Act extends, and in some cases modifies, through 2016:
- Indian employment credit/accelerated depreciation
- Railroad track maintenance credit
- Empowerment zones incentives
- Film/television expensing
- Mine rescue team training credit
- Election to expense mine safety equipment
- Qualified Zone Academy Bonds
- Three-year recovery period for certain race horses
- Seven-year recovery period for motorsports entertainment complexes
- Code Sec. 199 deduction for Puerto Rico
- Cover over of rum excise taxes
- Economic development credit for American Samoa.
EXTENDERS FOR INDIVIDUALS
State and Local Sales Tax Deduction
The election to claim an itemized deduction for state and local general sales taxes, in lieu of deducting state and local income taxes, expired after December 31, 2014. The Act makes the election permanent.
American Opportunity Tax Credit
The Act makes permanent the American Opportunity Tax Credit (AOTC), an enhanced version of the Hope education credit. The AOTC has been available at an increased level of $2,500, with adjusted gross income (AGI) phase-out amounts of $80,000 (single) and $160,000 (married filing jointly). The AOTC had been scheduled to expire after 2017.
Child Tax Credit
The Act makes permanent the reduced earned income threshold amount of an un-indexed $3,000. This provision had been scheduled to expire after 2017.
Earned Income Credit
The Act makes permanent the increase ($5,000) in phase-out amount for joint filers, scheduled to expire after 2017. The Act also makes permanent the increased 45 percent credit percentage for taxpayers with three or more qualifying children. Under prior law, both enhancements had been available only through 2017.
Teachers’ Classroom Expense Deduction
The Act permanently extends the above-the-line deduction for elementary and secondary–school teachers’ classroom expenses. It also modifies the deduction by indexing the $250 ceiling amount to inflation beginning in 2016. Additionally, the Act includes “professional development expenses” within the scope of the deduction.
Transit Benefits Parity
The Act permanently extends parity among transit benefits. These include van pool benefits, transit passes and qualified parking.
Distributions from IRAs
The Act permanently extends the provision for individuals age 70 1/2 and older to be allowed to make tax-free distributions from individual retirement accounts (IRAs) to a qualified charitable organization. The treatment continues to be capped at a maximum of $100,000 per taxpayer each year.
Qualified Conservation Contributions
A special rule allows contributions of capital gain real property for conservation purposes, with the contribution to be taken against 50 percent of the contribution base. Under the Act, this special rule is permanently extended. It is also modified for Alaska Native Corporations.
Qualified Tuition/Related-Expenses Deduction
The Act extends through 2016 the above-the-line deduction for qualified tuition and fees for post-secondary education.
Mortgage Debt Exclusion
The Act excludes from income cancellation of mortgage debt on a principal residence of up to $2 million ($1 million for a married taxpayer filing a separate return) through 2016. The Act also modifies the exclusion to apply to qualified principal residence indebtedness discharged in 2017 if discharge is made under a binding written agreement entered into in 2016.
Mortgage Insurance Premium Deduction
This measure treats mortgage insurance premiums as deductible interest that is qualified residence interest subject to AGI phase-out. The Act extends this special treatment through 2016.
Code Section 25C Credit
The Act extends through 2016 the Code Section 25C residential energy property credit.
Production Tax Credit
The FY 2016 omnibus extends the production tax credit (PTC) for wind energy through 2019 but subjects the credit to phase-down.
The FY 2016 omnibus extends the solar investment tax credit and the credit for qualified residential solar property but subjects the credits to phase-down. Under the omnibus, both credits will not be available after 2021.
Energy-Efficient Commercial Buildings Deduction
The Act extends through 2016 the deduction for energy-efficient commercial buildings. Additionally, the Act updates the energy-efficient standards.
Production Credit for Indian Coal Facilities
The Act extends through 2016 the production credit for qualified Indian coal facilities. The Act removes certain limitations and allows the credit to be claimed against the AMT.
Code Section 199 Deduction
The FY 2016 omnibus temporarily exempts a certain percentage of transportation costs of qualified independent refiners for purposes of the Code Section 199 deduction. The measure applies to tax years beginning after December 31, 2015 but is unavailable in tax years beginning after December 31, 2021.
More Energy Extenders
Also extended by the Act through 2016 are:
▪ Credit for alternative fuel refueling property
▪ Credit for 2-wheel plug-in electric vehicles
▪ Second generation biofuel producer credit
▪ Biodiesel and renewable diesel incentives
▪ Credit for energy-efficient new homes
▪ Special allowance for second generation biofuel plant property
▪ Special rules for sales/dispositions to implement FERC
▪ Excise credits for alternative fuels.
AFFORDABLE CARE ACT
The Act delays for two years the ACA excise tax on high-dollar health care plans, known as “Cadillac” plans. The Act also provides that payments of the tax will be deductible against income tax.
The Act imposes a moratorium on the ACA excise tax on qualified medical devices for two years. The tax will not apply to sales during calendar years 2016 and 2017.
Health Insurance Provider Fee
The FY 2016 omnibus imposes a moratorium for one year (2017) on the ACA’s health insurance provider fee.
Code Section 529 Plans
Under the Act, the purchase of computer equipment and technology with a distribution from a Code Section 529 plan is permanently considered a qualified expense. The Act also removes certain distribution aggregation requirements and allows the redeposit-it of 529 funds without penalty in certain circumstances when tuition is refunded.
The Act allows for amounts from 529 accounts to be rolled over to an ABLE account penalty-free, subject to certain limitations. The Act also removes the prior law requirement that ABLE accounts may be established only in the state of residence of the ABLE account owner.
The Act makes some technical corrections and clarifications to the revision of partnership audit rules in the Bipartisan Budget Act of 2015. Of particular note is a new Code Section 6225(c)(5) that governs “specified passive activity loss” of partners in certain publicly traded partnerships.
Effective for tax year 2016, the Act provides that C corporation timber gains are subject to a tax rate of 23.8 percent.
Under the Act, qualified individuals may generally roll over amounts from an employer-sponsored retirement plan to a SIMPLE IRA.
The Act includes technical amendments to prior legislation related to amounts received in certain bankruptcies by qualified airline employees and rolled over.
The Act clarifies the treatment of early retirement distributions for nuclear materials couriers, United States Capitol Police, Supreme Court Police, and diplomatic security special agents.
Code Sec. 501(c)(4) organizations
The Act repeals the current application process for Code Section 501(c)(4) organizations. In its place, the Act provides for a streamlined recognition process for organizations seeking 501(c)(4) status.
Under the Act, the IRS is directed to create procedures for Code Section 501(c) organizations, facing adverse determinations, to seek administrative appeal in IRS Appeals. The provision is retroactive to determinations made after May 19, 2014. Further, the Act allows Code Section 501(c)(4) organizations and other exempt organizations to seek judicial review of any revocation of exempt status
The Act clarifies that transfers to certain exempt organizations, such as civic leagues, labor or agricultural organizations, or business leagues under Section 501(c)(4),(5) or (6), are exempt from federal gift tax.
Under the Act, a spin-off involving a REIT qualifies as tax-free only if immediately after the distribution both the distributing and controlled corporation are REITs. Following a tax-free spin-off transaction, neither a distributing nor a controlled corporation will be allowed to elect to be treated as a REIT for 10 years.
The Act places limits on designations of dividends by REITs. The aggregate amount of dividends designated by a REIT as qualified dividends or capital gains dividends will not exceed the dividends actually paid by the REIT. Additionally, the Act repeals the preferential dividend rule for publicly offered REITs.
Earnings and profits
Under the Act, current (but not accumulated) REIT earnings and profits for any tax year are not reduced by any amount that is not allowable in computing taxable income for the tax year and was not allowable in computing its taxable income for any prior tax year.
The Act provides that a taxable REIT subsidiary is permitted to operate foreclosed real property without causing income from the property to fail to satisfy the REIT income tests.
More REIT provisions
▪ Treats debt instruments of publicly offered REITs and mortgages as real estate assets
▪ Addresses fixed percentage rent and interest exceptions for REIT income tests
▪ Provides alternative safe-harbor for determining percentage of assets a REIT may sell annually
▪ Clarifies asset/income tests regarding certain ancillary personal property
▪ Expands the treatment of REIT hedges
▪ Provides the IRS with authority for alternative remedies to address certain REIT distribution failures
▪ Clarifies the treatment of certain services provided by taxable REIT subsidiaries
▪ Provides various clarifications under the FIRPTA for REITs
IRS ADMINISTRATION AND BUDGET
The Act codifies the IRS’s Taxpayer Bill of Rights. The Act also authorizes taxpayers whose information has been wrongly disclosed, to ascertain certain facts about the disclosures.
The Act prohibits IRS employees from using personal email for official business. The Act also provides for termination of employment where employees perform, delay or fail to perform work to benefit a political purpose.
The FY 2016 omnibus appropriates $11.235 billion for funding of IRS operations. That represents an increase of $290 million compared to FY 2015 spending.
Additionally, in addressing tax administrative matters, the Act:
▪ Revises the requirements for ITINs
▪ Clarifies higher education information reporting
▪ Clarifies the treatment of certain credits for purposes of certain penalties
▪ Revises procedures to reduce improper claims
▪ Modifies tax collection periods for members of the Armed Forces hospitalized because of combat zone injuries
▪ Includes restrictions on taxpayers who improperly claimed credits in prior years
▪ Increases the penalty for paid preparers engaging in reckless/willful conduct
▪ Extends IRS authority to require truncated Social Security numbers on Form W–2.
▪ Clarifies enrolled agent (EA) designation.
The Act requires that certain information returns relating to employee wage information and nonemployee compensation be filed by January 31, generally the same date as the due date for employee and payee statements, and are no longer eligible for the extended filing date for electronically filed returns.
Further, no credit or refund for an overpayment for a tax year will be made to a taxpayer before the 15th day of the second month following the close of that tax year, if the taxpayer claimed the EIC or additional child tax credit on the return. The Act also includes a safe harbor for de minimis errors on information returns, payee statements and withholding.
The Act authorizes taxpayers to use the Tax Court’s small case procedures in interest abatement cases. The amount of interest for which abatement is sought cannot exceed $50,000. The Act also permits a taxpayer to seek review in the Tax Court of a claim for interest abatement where the IRS has failed to issue a final determination.
Venue and Administration
The Act makes several administrative changes related to:
- Venue for appeal of spousal relief and collection cases
- Limitations period for spousal relief or collections where a bankruptcy petition has been filed
- Rules of evidence
- Judicial conduct
The Act includes a number of provisions treated as “revenue” measures. The Act provides for:
▪ Updated standards for energy efficient commercial buildings deduction
▪ Excise tax credit equivalency for liquefied petroleum gas and liquefied natural gas
▪ Exclusion from gross income of certain clean coal power grants to non-corporate taxpayers
▪ Clarification of valuation rule for early termination of certain charitable remainder unitrusts
▪ Prevention of transfer of certain losses from tax indifferent parties
▪ Treatment of certain persons as employers with respect to motion picture projects.