Permanence for R&D credit, small business expensing and other popular tax provisions
The Consolidated Appropriations Act of 2016, or as it is more commonly known, the "Omnibus," does more than just fund the federal government for the remainder of the fiscal year. It also includes a wealth of tax provisions. These are concentrated in one portion of the bill: the Protecting Americans From Tax Hikes Act of 2015 (the PATH Act). But a few provisions—particularly the extension and phase-down of the tax credits for wind and solar energy and the two-year delay in the tax on so-called Cadillac plans—are placed elsewhere in the Omnibus.
The PATH Act is the culmination of the year-long effort to address a package of expired tax provisions. What began as a negotiation as to which provisions should be extended and for how long eventually developed into a more conventional tax package that includes not only those expired provisions but also, among other changes, a two-year moratorium on the medical device tax and significant changes to the rules regarding real estate investment trusts (REITs) and the Foreign Investment in Real Property Act (FIRPTA).
Extension of expiring and expired provisions
As in previous years, Congress let a host of temporary tax provisions, often referred to as "extenders" due to their frequent (and short) extensions, expire. And, as in previous years, Congress waited until December to pass an extension. However, unlike in previous years, Congress did not just talk about the need to provide permanent or long-term extension of the extenders—it actually agreed to extend permanently 22 of the expired or expiring provisions and to provide a five-year extension of four others. The rest of the expired provisions, or at least all of the expired provisions that the Senate Finance Committee proposed to extend earlier this year, were extended through 2016. For summary showing which provisions were extended, and for how long, see the chart below.
Expired tax provisions
| Provision (section of Internal Revenue Code) | Provision currently no longer applies to | Extension in PATH Act of 2015 |
| Credit for certain nonbusiness energy property (section 25C(g)) | Property placed in service after 12/31/14 | Extended for two years (through 12/31/16) and expanded for 2016 |
| Qualified fuel cell motor vehicle credit (section 30B(k)(1)) | Vehicles purchased after 12/31/14 | Extended for two years (through 12/31/16) |
| Alternative fuel vehicle refueling property (non-hydrogen refueling property) (section 30C(g)(2)) | Property placed in service after 12/31/14 | Extended for two years (through 12/31/16) |
| Credit for two- or three-wheeled plug-in electric vehicles (section 30D(g)) | Property acquired after 12/31/13 | Extended for two years (through 12/31/16) for two-wheeled vehicles |
| Second generation biofuel producer credit (section 40(b)(6)(J)) | Production after 12/31/14 | Extended for two years (through 12/31/16) |
| Incentives for biodiesel and renewable diesel (sections 40A, 6426(c)(6), and 6427(e)(6)(B)) | Fuel sold or used after 12/31/14 | Extended for two years (through 12/31/16) |
| Research and experimentation tax credit (section 41(h)(1)(B)) | Amounts paid or incurred after 12/31/14 | Permanently extended, retroactive to its expiration, and expanded after 2015 |
| Determination of applicable percentage of low income housing tax credit (section 42) | Allocations made after 12/31/14 | Permanently extended, retroactive to its expiration |
| Placed-in-service date for wind and certain other renewable resource facilities eligible to claim electricity production credit (section 45(d)) | Construction beginning after 12/31/14 | Extended for two years (through 12/31/16) for most renewables, but the credit for wind is extended and phased out in the Omnibus appropriations bill |
| Credit for production of Indian coal (section 45(e)(10)(A)) | Coal produced after 12/31/14 | Extended for two years (through 12/31/16) and expanded for 2016 |
| Indian employment tax credit (section 45A(f)) | Taxable years beginning after 12/31/14 | Extended for two years (through 12/31/16) |
| New markets tax credit (section 45D(f)(1)) | New allocations for calendar years beginning after 12/31/14 | Extended, retroactive to its expiration, through 2019 |
| Credit for certain expenditures for maintaining railroad tracks (section 45G(f)) | Expenditures paid or incurred during taxable years beginning after 12/31/14 | Extended for two years (through 12/31/16) and modified for 2016 |
| Credit for construction of new energy efficient homes (section 45L(g)) | Qualified new energy efficient homes acquired after 12/31/14 | Extended for two years (through 12/31/16) |
| Credit for energy efficient appliances (section 45M(b)) | Appliances purchased after 12/31/14 | Not extended |
| Mine rescue team training credit (section 45N) | Taxable years beginning after 12/31/14 | Extended for two years (through 12/31/16) |
| Employer wage credit for activated military reservists (section 45P) | Payments made after 12/31/14 | Permanently extended, retroactive to its expiration, and expanded after 2015 |
| Work opportunity tax credit (section 51(c)(4)) | Wages paid or incurred for individuals beginning work after 12/31/14 | Extended, retroactive to its expiration, through 2019, and expanded after 2015 |
| Allocation of bond limitation on Qualified Zone Academy Bonds (section 54E(c)(1)) | Obligations issued after 12/31/14 | Extended for two years (through 12/31/16) |
| Deduction for certain expenses of elementary and secondary school teachers (section 62(a)(2)(D)) | Taxable years beginning after 12/31/14 | Permanently extended, retroactive to its expiration, and expanded and indexed for inflation after 2015 |
| Discharge of indebtedness on principal residence (section 108(a)(1)(E)) | Discharges of indebtedness beginning after 12/31/14 | Extended for two years (through 12/31/16) and modified for 2016 |
| Parity for exclusion for employer-provided mass transit and parking benefits (section 132(f)) | Months after 12/31/14 | Permanently extended, retroactive to its expiration |
| Treatment of military basic housing allowances under low-income housing credit (section 142(d)) | Distributions after 12/31/14 | Permanently extended, retroactive to its expiration |
| Deduction for mortgage insurance premiums (section 163(h)(3)(E)) | Amounts paid or accrued after 12/31/14 | Extended for two years (through 12/31/16) |
| Deduction for state and local general sales taxes (section 164(b)(5)) | Taxable years beginning after 12/31/14 | Permanently extended, retroactive to its expiration |
| Three-year depreciation for race horses two-years old or younger (section 168(e)(3)(A)) | Horses placed in service after 12/31/14 | Extended for two years (through 12/31/16) |
| 15-year straight-line cost recovery for qualified leasehold improvements, qualified restaurant buildings and improvements, and qualified retail improvements (section 168(e)(3)(E)) | Qualified retail improvement property placed in service after 12/31/14 | Permanently extended, retroactive to its expiration |
| Seven-year recovery period for motorsports entertainment complexes (section 168(i)(15)) | Property placed in service after 12/31/14 | Extended for two years (through 12/31/16) |
| Accelerated depreciation for business property on an Indian reservation (section 168(j)(8)) | Property placed in service after 12/31/14 | Extended for two years (through 12/31/16), with election not to apply in 2016 |
| 50% "bonus" depreciation and election to accelerate alternative minimum tax (AMT) credits in lieu of bonus depreciation (sections 168(k) and 460(c)(6)(B)) | Property acquired after 12/31/14 | Fully extended in 2015 and extended with modifications (including phase-down to 30%) through 2019 |
| Special depreciation allowance for cellulosic biofuel plant property (section 168(l)) | Property placed in service after 12/31/14 | Extended for two years (through 12/31/16) |
| Special rules for contributions of capital gain real property made for conservation purposes (sections 170(b)(1)(E) and (b)(2)(B)) | Taxable years beginning after 12/31/14 | Permanently extended, retroactive to its expiration, and expanded to native corporations after 2015 |
| Enhanced charitable deduction for contributions of food inventory (section 170(e)(3)(C)) | Contributions made after 12/31/14 | Permanently extended, retroactive to its expiration, and expanded after 2015 |
| Increase in expensing to US$500,000/US$2,000,000 and expansion of definition of section 179 property (sections 179(b)(1), (b)(2), (d), and (f)) | Taxable years beginning after 12/31/14 | Permanently extended, retroactive to its expiration, and expanded and indexed for inflation after 2015 |
| Deduction to expense certain refineries (section 179C(c)) | Property placed in service after 12/31/14 | Not extended |
| Deduction for energy-efficient commercial buildings (section 179D(h)) | Property placed in service after 12/31/14 | Extended for two years (through 12/31/16) |
| Election to expense advanced mine safety equipment (section 179E(a)) | Property placed in service after 12/31/14 | Extended for two years (through 12/31/16) |
| Special expensing rules for certain film and television productions (section 181(f)) | Qualified film and television productions commencing after 12/31/14 | Extended for two years (through 12/31/16) and expanded to live theatrical productions for 2016 |
| Deduction allowable with respect to income attributable to domestic production activities in Puerto Rico (section 199(d)(8)) | Taxable years beginning after 12/31/14 | Extended for two years (through 12/31/16) |
| Above-the-line deduction for qualified tuition and related expenses (section 222(e)) | Taxable years beginning after 12/31/14 | Extended for two years (through 12/31/16) |
| Tax-free distributions from individual retirement plans for charitable purposes (section 408(d)(8)) | Distributions made in taxable years beginning after 12/31/14 | Permanently extended, retroactive to its expiration |
| Special rule for sales or dispositions to implement Federal Energy Regulatory Commission (FERC) or state electric restructuring policy (section 451(i)) | Taxable years beginning after 12/31/14 | Extended for two years (through 12/31/16) |
| Modification of tax treatment of certain payments to controlling exempt organizations (section 512(b)(13)(E)(iv)) | Payments received or accrued after 12/31/14 | Permanently extended, retroactive to its expiration |
| Favorable treatment of certain dividends of regulated investment companies (RICs) to foreign investors (sections 871(k)(1)(C) and (k)(2)(C)) | Dividends with respect to any taxable year of the RIC beginning after 12/31/14 | Permanently extended, retroactive to its expiration |
| RIC-qualified investment entity treatment under FIRPTA (section 897(h)(4)) | After 12/31/14 | Permanently extended, retroactive to its expiration |
| Exceptions under subpart F for active financing income (sections 953(e)(10) and 954(h)(9)) | Taxable years beginning after 12/31/14 | Permanently extended, retroactive to its expiration |
| Look-through treatment of payments between controlled foreign corporations (CFCs) under the foreign personal holding company rules (section 954(c)(6)) | Taxable years beginning after 12/31/14 | Extended, retroactive to its expiration, through 2019 |
| 100% exclusion for qualified small business stock (section 1202(a)(4)) | Stock acquired after 12/31/14 | Permanently extended, retroactive to its expiration |
| Basis adjustment to stock of S corporations making charitable contributions of property (section 1367(a)) | Contributions made after 12/31/14 | Permanently extended, retroactive to its expiration |
| Reduction in S corporation recognition period for built-in gains tax (section 1374(d)(7)) | Taxable years beginning after 12/31/14 | Permanently extended, retroactive to its expiration |
| Empowerment zone tax incentives (sections 1202(a)(2), 1391, 1394, 1396, 1397A, and 1397B) | Taxable years beginning after 12/31/14 | Extended (with retroactive technical amendments) for two years (through 12/31/16)and expanded for 2016 |
| Incentives for alternative fuel and alternative fuel mixtures (other than liquefied hydrogen) (sections 6426(d)(5) and (e)(3) and 6427(e)(6)(C)) | Fuel sold or used after 12/31/14 | Extended for two years (through 12/31/16) |
| Temporary increase in limit on cover over of rum excise tax revenues (from US$10.50 to US$13.25 per proof gallon) to Puerto Rico and the Virgin Islands (section 7652(f)) | Articles brought into the United States after 12/31/14 | Extended for two years (through 12/31/16) |
| Economic development credit for American Samoa (Section 119 of P.L.109-432) | Taxable years beginning after 12/31/14 | Extended for two years (through 12/31/16) |
| New York Liberty Zone tax-exempt bond financing (section 1400L(d)(2)(D)) | Bonds issued after 12/31/14 | Not extended |
Expiring provisions
| Provision (section of Internal Revenue Code) | Provision expires | Extension in PATH Act of 2015 |
| Enhanced child tax credit (section 24(d)(1)(B)) | After 2017 | Permanently extended |
| Enhanced American Opportunity Tax Credit (section 25A(i)) | After 2017 | Permanently extended |
| Enhanced Earned Income Tax Credit (section 32(b)) | After 2017 | Permanently extended |
Moratorium on the medical device tax
The 2.3 percent tax on the sale of medical devices, enacted as part of the Affordable Care Act, has been controversial from its inception, and there have been repeated attempts in Congress to repeal it. The PATH Act imposes a prospective two-year moratorium on its imposition, prohibiting the tax from applying to sales during 2016 and 2017.
REIT and other real estate changes
The PATH Act includes several changes to the rules for REITs. Most of the REIT subtitle was previewed in the extender "fall-back" bill released by Rep. Kevin Brady (R-TX), Chairman of the House Ways and Means Committee, on December 7. Although most of the provisions are technical changes requested by the REIT industry, several of these changes are significant. One of the most noteworthy is the new limitation on the ability to effect a tax-free spin-off involving a REIT.
In addition, the REIT subtitle includes several changes to the FIRPTA rules, several of which have nothing to do with REITs. For example, the rate of withholding under section 1445 of the US Internal Revenue Code would generally be raised to 15 percent from its current 10 percent level, and the definition of US real property holding corporations would be expanded to cover former RICs and REITs. On a more favorable note, the FIRPTA exceptions for stock in REITs would be broadened and a FIRPTA exception would be added for foreign pension funds.
Other revenue provisions
Title III of the PATH Act is aptly titled "Miscellaneous Provisions," but that label could apply to a lot more in the bill. Many of these provisions were included in the bill released by Chairman Brady and the bill approved earlier this year by the Finance Committee. The provisions include:
- An income exclusion for payments to wrongfully incarcerated individuals
- A lower rate on timber gains recognized by corporations
- Excise tax credit equivalency for liquefied natural gas
- A host of other, often industry-specific, low-cost provisions.
There are some new starters, such as new rules dealing with transfers of losses from tax-indifferent parties. These provisions are not easily summarized, and so a review of them is strongly recommended. Though they are narrow, they are so widely varied that many taxpayers will find a new benefit, an unwelcome surprise or some of both.
Administrative and compliance provisions
The PATH Act includes a package of compliance measures, which it refers to as "program integrity." These provisions are generally directed at certain provisions being extended in the PATH Act, such as the enhanced child credit and enhanced earned income tax credit. The compliance measures were viewed by many Republicans as a necessary condition for permanent extension of those provisions.
The act also includes a package of IRS reforms. Most of these provisions are directed at the IRS and IRS employees and are the result of the congressional hearings and investigations regarding the IRS and its treatment of so-called 501(c)(4) organizations.
Finally, the act includes minor fixes to the new partnership audit rules adopted as part of the Bipartisan Budget Act of 2015 and provisions related to the Tax Court and Tax Court procedure.
Next steps
Both the House and the Senate have passed the Omnibus with the tax provisions intact. President Obama is expected to sign the legislation early next week, meaning that the PATH Act and the other tax provisions in the Omnibus should be law before Christmas.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
