The Protecting Americans from Tax Hikes Act of 2015 (PATH Act) does much more than just deal with extensions, permanent or otherwise. It contains numerous other provisions that impact tax administration, “family tax relief,” real estate investment trusts, and more. Our lower Manhattan CPA firm and our NYC CPAs provide the following guidance on these tax and accounting matters.
Permanent Extensions for Businesses
The PATH Act makes permanent many business-related provisions that had been up for renewal.
Code Sec. 179 Expensing
Pre-PATH Act, the dollar limit for Code Sec. 179 expensing for 2015 had reverted to $25,000 with an investment limit of $200,000. The PATH Act permanently sets the Code Sec. 179 expensing limit at $500,000 with a $2 million overall investment limit before phase out (both amounts indexed for inflation beginning in 2016).The PATH Act also makes permanent the special Code Sec. 179 expensing for qualified real property and removes the $250,000 cap related to this category of expenditure beginning in 2016. Some businesses may want to postpone larger purchases of such property until 2016 as a result. Also made permanent is the special rule allowing off-the-shelf computer software to be treated as Code Sec. 179 property and the ability of a taxpayer to revoke a Code Sec. 179 election without IRS consent.
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. Many businesses had complained that research investment requires years to realize potential and short extensions of the research credit were counterproductive. The PATH Act permanently extends and modifies the credit.
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. This benefit has proven a valuable method of funding certain startups. With a five-year holding period, it obviously still requires a long-term commitment. Trading such stock for other, similar stock, however, can be a useful option under which gain is allowed to be deferred.
Reduced Recognition Period For S Corporation Built-In Gains Tax
The PATH Act makes permanent the five-year recognition period for built-in gain following conversion from a C to an S corporation. A corporate-level tax, at the highest marginal rate applicable to corporations (currently, 35 percent), is imposed on an S corporation’s net recognized built-in gain (for example, gain that arose prior to the conversion of the C corporation to an S corporation and is recognized by the S corporation during the recognition period).
Other Permanent Business Extenders
The PATH 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
Five-Year Extensions for Businesses
The PATH Act makes several business-related provisions available for five-years, under the rationale that, although they should not be made permanent, they are sufficiently valuable at this time to be relied upon for more than the usual two-year extenders period.
Bonus Depreciation
The PATH 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 PATH 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 PATH 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. Certain longer-lived and transportation property may qualify for an additional one-year placed in service date.
Also related, bonus depreciation is increased by $8,000, unadjusted for inflation in computing the first-year depreciation for passenger autos.
Unlike Code Sec. 179 expensing (above), only new property is eligible for bonus depreciation.
Work Opportunity Tax Credit
The Work Opportunity Tax Credit (WOTC) is extended through 2019. The PATH Act also enhances the WOTC for employers that hire certain long-term unemployed individuals.
New Markets Tax Credit
The PATH 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 PATH 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.
Two-Year Business Extenders
The PATH 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.
ENERGY EXTENDERS
The PATH Act extends many energy provisions for businesses. Our New York City CPA firm can help you understand how these apply to your business.
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 election to treat wind energy facilities as energy property under the Code Sec. 48 investment tax credit is also extended and is also subject to phase-down.
Solar Incentives
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 PATH Act extends through 2016 the deduction for energy-efficient commercial buildings. Additionally, the PATH Act updates the energy-efficient standards.
Production Credit for Indian Coal Facilities
The PATH Act extends through 2016 the production credit for qualified Indian coal facilities. The PATH Act removes certain limitations and allows the credit to be claimed against the AMT.
Code Sec. 199 Deduction
The FY 2016 omnibus temporarily exempts a certain percentage of transportation costs of qualified independent refiners for purposes of the Code Sec. 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 PATH 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 PATH Act and the fiscal year 2016 omnibus affect several provisions under the ACA.
“Cadillac” plans. The PATH Act delays for two years the ACA excise tax on high-dollar health care plans, known as “Cadillac” plans. The PATH Act also provides that payments of the tax will be deductible against income tax. The ACA imposes the excise tax where the aggregate cost of qualified employer-sponsored health insurance coverage exceeds certain dollar amounts. The excise tax had been scheduled to apply to tax years beginning after December 31, 2017
Medical devices. The PATH 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. The ACA imposes a 2.3 percent excise tax on the sale of certain medical devices by the manufacturer or importer of the device.
Health Insurance Provider Fee. The FY 2016 omnibus imposes a moratorium for one year (2017) on the ACA’s health insurance provider fee. The ACA imposes a fee on each covered entity engaged in the business of providing health insurance for United States health risks. A self-insured employer is generally not a covered entity for purposes of the fee.
MISCELLANEOUS PROVISIONS
The main focus of the Protecting Americans from Tax Hikes Act of 2015 involves the over-50 temporary provisions known collectively as “Tax Extenders.” However, the PATH Act contains many more measures unrelated to extension of those provisions. Over 80 non-extender-related sections of the PATH Act cover a broad spectrum of miscellaneous tax provisions. Highlights of some of these provisions include the following changes.
Partnerships
The PATH 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 that governs “specified passive activity loss” of partners in certain publicly traded partnerships.
Timber Gains
Effective for tax year 2016, the PATH Act provides that C corporation timber gains are subject to a tax rate of 23.8 percent.
ADDITIONAL PROVISIONS – MORE THAN JUST EXTENDERS
- “Program Integrity” (including safeguards surrounding ITINs, information returns, and restrictions regarding retroactive claims of education incentives, use of the child credit, and earned income credit, among others);
- “Real Estate Investment Trusts” (including restrictions on tax-free spinoffs, limitations on designation of dividends, hedging provisions, and over a dozen other REIT-related provision);
- “Tax Administration” (including rules for IRS employees, truncated Social Security Numbers for Form W-2, clarification of enrolled agent credentials, and tweaks to the new partnership audit rules, among others); and
- “U.S. Tax Court” (including taxpayer access to the Tax Court along with additional rules and clarifications).
Employee Plans
Included in the PATH Act are several provisions affecting employee plans.
SIMPLE plans. Under the PATH Act, qualified individuals may generally roll over amounts from an employer-sponsored retirement plan to a SIMPLE IRA.
IRAs. The PATH Act includes technical amendments to prior legislation related to amounts received in certain bankruptcies by qualified airline employees and rolled over.
Retirement distributions. The PATH Act clarifies the treatment of early retirement distributions for nuclear materials couriers, United States Capitol Police, Supreme Court Police, and diplomatic security special agents.
RETURNS
The PATH 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.
IRS budget. 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. Lawmakers directed the IRS to use the additional funding to make “measurable improvements in the customer service “as well as improve the identification and prevention of refund fraud and identity theft, and enhance cyber security.
REVENUE PROVISIONS
The PATH Act includes a number of provisions treated as “revenue” measures such as updated standards for energy efficient commercial buildings deduction and treatment of certain persons as employers with respect to motion picture projects. Despite these revenue provisions, the PATH Act shows a net revenue loss in the amount of $622 billion.
If you would like more information as to how this affects your tax situation, please call our NYC CPA office. We are here to assist you.