The major bill that dealt with all of the provisions Congress passed a one year extender on the prior December was the PATH Act. This bill, in addition to extending various provisions, also added some brand new provisions to the tax law.
For the most part the bill retains those provisions that expired in 2014 with the same rules and limits for 2015. However the act makes some of these provisions permanent, extends others through 2019 and extenders the remainder through the end of 2015. As well, some provisions are modified for 2016 and later years.
The President signed the bill into law on December 18, 2015, making that date the “date of enactment” for provisions that reference that date.
At the end of 2014 members of Congress attempted to negotiate a deal to make some of the extenders permanent, but that deal failed to materialize resulting in a bill that, for the most part, extended everything only through December 31, 2014. But this year a deal was reached that took some provisions out of the category of “extenders” and placed them into the tax code without an expiration date.
Enhanced Child Tax Credit Made Permanent (IRC §24, Act §101)
The child tax credit (CTC) found at IRC §24 is a $1,000 credit. To the extent the CTC exceeds the taxpayer’s tax liability, the taxpayer is eligible for a refundable credit (the additional child tax credit) equal to 15 percent of earned income in excess of a threshold dollar amount (the “earned income” formula).
Until 2009, the threshold dollar amount was $10,000 indexed for inflation from 2001 (which would be roughly $14,000 in 2015). Since 2009, however, this threshold amount had been set at an unindexed $3,000 and had been scheduled to expire at the end of 2017, returning to the $10,000 (indexed for inflation) amount. The provision permanently sets the threshold amount at an unindexed $3,000.
Thus a taxpayer with a lower level of earned income will be eligible to receive a refunable child tax credit under IRC §24.
Enhanced American Opportunity Tax Credit Made Permanent (IRC §25A, Act §102)
The original Hope Scholarship Credit was a credit of $1,800 (indexed for inflation) for various tuition and related expenses for the first two years of post-secondary education. It phases out for AGI starting at $48,000 (if single) and $96,000 (if married filing jointly) – these amounts were also indexed for inflation.
The American Opportunity Tax Credit (AOTC) took those permanent provisions of the Hope Scholarship Credit and increased the credit to $2,500 for four years of post-secondary education, and increased the beginning of the phase-out amounts to $80,000 (single) and $160,000 (married filing jointly) for 2009 to 2017.
The provision makes the AOTC permanent. Thus we will no longer revert to the older Hope Scholarship Credit rules beginning in 2018.
Enhanced Earned Income Tax Credit Made Permanent (IRC §32, Act §103)
Low- and moderate income workers may be eligible for the earned income tax credit (EITC). For 2009 through 2017, the EITC amount had been temporarily increased for those with three (or more) children and the EITC marriage penalty has been reduced by increasing the income phase-out range by $5,000 (indexed for inflation) for those who are married and filing jointly.
These increases are made permanent by the PATH 2015 Act.
Extension and Modification of Deduction for Certain Expenses of Elementary and Secondary School Teachers (IRC §104, Act §104)
The provision permanently extends the above-the-line deduction (capped at $250) for the eligible expenses of elementary and secondary school teachers. As always, amounts expended in excess of that amount will generally remain deductible only if the taxpayer itemizes deductions and then as an employee business expense subject to the over 2% of adjusted gross income floor on miscellaneous itemized deductions.
Beginning in 2016, the provision also modifies the deduction to index the $250 cap to inflation and include professional development expenses as deductible under this provision.
Thus, professional development expenses will only be deductible as an employee business expense on 2015 tax returns, but can move to the front page of the Form 1040 on the 2016 return.
Extension of Parity for Exclusion from Income for Employer-Provided Mass Transit and Parking Benefits.
The provision permanently extends the maximum monthly exclusion amount for transit passes and van pool benefits so that these transportation benefits match the exclusion for qualified parking benefits. These fringe benefits are excluded from an employee’s wages for payroll tax purposes and from gross income for income tax purposes.
As always, retroactively extending this provision creates issues, since employers have been forced to use the lower exclusion amount during the year. The good news is that this will be the last time we need to do this.
The Joint Committee on Taxation, in the Technical Explanation of the Protecting Americans From Tax Hikes Act of 2015, House Amendment #2 to the Senate Amendment to H.R. 2029 (Rules Committee Print 114-40) (afterwards simply referred to in this manual as the PATH Technical Explanation) explains how the bill deals with this retroactively problem as follows:
The provision reinstates parity in the exclusion for combined employer-provided transit pass and vanpool benefits and for employer-provided parking benefits and makes parity permanent. Thus, for 2015, the monthly limit on the exclusion for combined transit pass and vanpool benefits is $250, the same as the monthly limit on the exclusion for qualified parking benefits. Similarly, for 2016 and later years, the same monthly limit will apply on the exclusion for combined transit pass and vanpool benefits and the exclusion for qualified parking benefits.
In order for the extension to be effective retroactive to January 1, 2015, expenses incurred for months beginning after December 31, 2014, and before enactment of the provision, by an employee for employer-provided vanpool and transit benefits may be reimbursed (under a bona fide reimbursement arrangement) by employers on a tax-free basis to the extent they exceed $130 per month and are no more than $250 per month. It is intended that the rule that an employer reimbursement is excludible only if vouchers are not available to provide the benefit continues to apply, except in the case of reimbursements for vanpool or transit benefits between $130 and $250 for months beginning after December 31, 2014, and before enactment of the provision. Further, it is intended that reimbursements of the additional amount for expenses incurred for months beginning after December 31, 2014, and before enactment of the provision, may be made in addition to the provision of benefits or reimbursements of up to the applicable monthly limit for expenses incurred for months beginning after enactment of the provision.
Extension of Deduction of State and Local General Sales Taxes (IRC §164, Act §106)
Taxpayers in those states without an income tax but which impose a sales tax (such as Texas and Washington, to name two large ones) can now rest easy that they will be able to claim a deduction for state sales taxes on Schedule A.
The provision permanently extends the option to claim an itemized deduction for State and local general sales taxes in lieu of an itemized deduction for State and local income taxes. The taxpayer may either deduct the actual amount of sales tax paid in the tax year, or alternatively, deduct an amount prescribed by the Internal Revenue Service (IRS).
Note that it is still the case that a taxpayer claims this deduction in lieu of a state and local income tax deduction. Thus if a state imposes both a state income tax and a general sales tax, the taxpayer must choose which deductible he/she wishes to take.
Extension and Modification of Special Rule for Contributions of Capital Gain Real Property Made for Conservation Purposes (IRC §170(b), Act §107)
The provision permanently extends the charitable deduction for contributions of real property for conservation purposes. The provision also permanently extends the enhanced deduction for certain individual and corporate farmers and ranchers.
The PATH Technical Explanation describes the pre-PATH laws in question as follows:
Under a temporary provision the 30-percent contribution base limitation on deductions for contributions of capital gain property by individuals does not apply to qualified conservation contributions (as defined under present law). Instead, individuals may deduct the fair market value of any qualified conservation contribution to the extent of the excess of 50 percent of the contribution base over the amount of all other allowable charitable contributions. These contributions are not taken into account in determining the amount of other allowable charitable contributions.
Individuals are allowed to carry over any qualified conservation contributions that exceed the 50-percent limitation for up to 15 years.
For example, assume an individual with a contribution base of $100 makes a qualified conservation contribution of property with a fair market value of $80 and makes other charitable contributions subject to the 50-percent limitation of $60. The individual is allowed a deduction of $50 in the current taxable year for the non-conservation contributions (50 percent of the $100 contribution base) and is allowed to carry over the excess $10 for up to 5 years. No current deduction is allowed for the qualified conservation contribution, but the entire $80 qualified conservation contribution may be carried forward for up to 15 years.
Farmers and ranchers
In the case of an individual who is a qualified farmer or rancher for the taxable year in which the contribution is made, a qualified conservation contribution is deductible up to 100 percent of the excess of the taxpayer’s contribution base over the amount of all other allowable charitable contributions.
In the above example, if the individual is a qualified farmer or rancher, in addition to the $50 deduction for non-conservation contributions, an additional $50 for the qualified conservation contribution is allowed and $30 may be carried forward for up to 15 years as a contribution subject to the 100-percent limitation.
In the case of a corporation (other than a publicly traded corporation) that is a qualified farmer or rancher for the taxable year in which the contribution is made, any qualified conservation contribution is deductible up to 100 percent of the excess of the corporation’s taxable income (as computed under section 170(b)(2)) over the amount of all other allowable charitable contributions. Any excess may be carried forward for up to 15 years as a contribution subject to the 100-percent limitation.
As an additional condition of eligibility for the 100-percent limitation, with respect to any contribution of property in agriculture or livestock production, or that is available for such production, by a qualified farmer or rancher, the qualified real property interest must include a restriction that the property remain generally available for such production. (There is no requirement as to any specific use in agriculture or farming, or necessarily that the property be used for such purposes, merely that the property remain available for such purposes.)
A qualified farmer or rancher means a taxpayer whose gross income from the trade or business of farming (within the meaning of section 2032A(e)(5)) is greater than 50 percent of the taxpayer’s gross income for the taxable year.
The provision modifies the deduction beginning in 2016 to permit Alaska Native Corporations to deduct donations of conservation easements up to 100 percent of taxable income.
Extension of Tax-Free Distributions from Individual Retirement Plans For Charitable Purposes (IRC §408(d)(8), Act §112)
The PATH Act permanently extends the ability of individuals at least 70½ years of age to exclude from gross income qualified charitable distributions from Individual Retirement Accounts (IRAs). The exclusion may not exceed $100,000 per taxpayer in any tax year.
The direct rollover will be counted as part of the taxpayer’s minimum required distribution for the year if the taxpayer has not already take at least the minimum required distribution (MRD) from the plan prior to direct contribution from the IRA to the charity.
Taxpayers who had already taken their minimum distribution before this bill passed in 2015 were “stuck” begin unable to reduce their distributions by this amount. Even if their distribution occurred within 60 days of the law being passed, the amount could not be placed back into the IRA since, if a taxpayer is subject to the MRD rules for a tax year distributions are not eligible for rollover until the taxpayer has taken the MRD amount for the year.
Extension and Modification of Charitable Deduction for Contributions of Food Inventory (IRC §170, Act §113)
The provision permanently extends the enhanced deduction for charitable contributions of inventory of apparently wholesome food for non-corporate business taxpayers.
That previously temporary provision is described in the PATH Technical Explanation as follows:
Under a temporary provision, any taxpayer engaged in a trade or business, whether or not a C corporation, is eligible to claim the enhanced deduction for donations of food inventory.37 For taxpayers other than C corporations, the total deduction for donations of food inventory in a taxable year generally may not exceed ten percent of the taxpayer’s net income for such taxable year from all sole proprietorships, S corporations, or partnerships (or other non C corporations) from which contributions of apparently wholesome food are made. For example, if a taxpayer is a sole proprietor, a shareholder in an S corporation, and a partner in a partnership, and each business makes charitable contributions of food inventory, the taxpayer’s deduction for donations of food inventory is limited to ten percent of the taxpayer’s net income from the sole proprietorship and the taxpayer’s interests in the S corporation and partnership. However, if only the sole proprietorship and the S corporation made charitable contributions of food inventory, the taxpayer’s deduction would be limited to ten percent of the net income from the trade or business of the sole proprietorship and the taxpayer’s interest in the S corporation, but not the taxpayer’s interest in the partnership.
Under the temporary provision, the enhanced deduction for food is available only for food that qualifies as “apparently wholesome food.” Apparently wholesome food is defined as food intended for human consumption that meets all quality and labeling standards imposed by Federal, State, and local laws and regulations even though the food may not be readily marketable due to appearance, age, freshness, grade, size, surplus, or other conditions.
The provision modifies the deduction beginning in 2016 by increasing the limitation on deductible contributions of food inventory from 10 percent to 15 percent of the taxpayer’s AGI (15 percent of taxable income (as modified by the provision) in the case of a C corporation) per year. The provision also modifies the deduction to provide special rules for valuing food inventory.
As the PATH Technical Explanation provides:
For taxable years beginning after December 31, 2015, the provision also modifies the enhanced deduction for food inventory contributions by: (1) increasing the charitable percentage limitation for food inventory contributions and clarifying the carryover and coordination rules for these contributions; (2) including a presumption concerning the tax basis of food inventory donated by certain businesses; and (3) including presumptions that may be used when valuing donated food inventory.
First, the ten-percent limitation described above applicable to taxpayers other than C corporations is increased to 15 percent. For C corporations, these contributions are made subject to a limitation of 15 percent of taxable income (as modified). The general ten-percent limitation for a C corporation does not apply to these contributions, but the ten-percent limitation applicable to other contributions is reduced by the amount of these contributions. Qualifying food inventory contributions in excess of these 15-percent limitations may be carried forward and treated as qualifying food inventory contributions in each of the five succeeding taxable years in order of time.
Second, if the taxpayer does not account for inventory under section 471 and is not required to capitalize indirect costs under section 263A, the taxpayer may elect, solely for computing the enhanced deduction for food inventory, to treat the basis of any apparently wholesome food as being equal to 25 percent of the fair market value of such food.
Third, in the case of any contribution of apparently wholesome food which cannot or will not be sold solely by reason of internal standards of the taxpayer, lack of market, or similar circumstances, or by reason of being produced by the taxpayer exclusively for the purposes of transferring the food to an organization described in section 501(c)(3), the fair market value of such contribution shall be determined (1) without regard to such internal standards, such lack of market or similar circumstances, or such exclusive purpose, and (2) by taking into account the price at which the same or substantially the same food items (as to both type and quality) are sold by the taxpayer at the time of the contributions (or, if not so sold at such time, in the recent past).
Extension of Modification of Tax Treatment of Certain Payments to Controlling Exempt Organizations (IRC §512, Act §114)
The provision permanently extends the modification of the tax treatment of certain payments by a controlled entity to an exempt organization. The issue relates the tax on unrelated business income of an exempt organization.
The PATH Technical Explanation explains what had been the expired provision as follows:
In general, organizations exempt from Federal income tax are subject to the unrelated business income tax on income derived from a trade or business regularly carried on by the organization that is not substantially related to the performance of the organization’s tax-exempt functions.39 In general, interest, rents, royalties, and annuities are excluded from the unrelated business income of tax-exempt organizations.
Section 512(b)(13) provides rules regarding income derived by an exempt organization from a controlled subsidiary. In general, section 512(b)(13) treats otherwise excluded rent, royalty, annuity, and interest income as unrelated business taxable income if such income is received from a taxable or tax-exempt subsidiary that is 50-percent controlled by the parent taxexempt organization to the extent the payment reduces the net unrelated income (or increases any net unrelated loss) of the controlled entity (determined as if the entity were tax exempt).
In the case of a stock subsidiary, “control” means ownership by vote or value of more than 50 percent of the stock. In the case of a partnership or other entity, “control” means ownership of more than 50 percent of the profits, capital, or beneficial interests. In addition, present law applies the constructive ownership rules of section 318 for purposes of section 512(b)(13). Thus, a parent exempt organization is deemed to control any subsidiary in which it holds more than 50 percent of the voting power or value, directly (as in the case of a first-tier subsidiary) or indirectly (as in the case of a second-tier subsidiary).
For payments made pursuant to a binding written contract in effect on August 17, 2006 (or renewal of such a contract on substantially similar terms), the general rule of section 512(b)(13) applies only to the portion of payments received or accrued in a taxable year that exceeds the amount of the payment that would have been paid or accrued if the amount of such payment had been determined under the principles of section 482 (i.e., at arm’s length). A 20- percent penalty is imposed on the larger of such excess determined without regard to any amendment or supplement to a return of tax, or such excess determined with regard to all such amendments and supplements.
The PATH Technical Explanation explains the provision in the new law as follows:
The provision reinstates the special rule and makes it permanent. Accordingly, under the provision, payments of rent, royalties, annuities, or interest by a controlled organization to a controlling organization pursuant to a binding written contract in effect on August 17, 2006 (or renewal of such a contract on substantially similar terms), may be includible in the unrelated business taxable income of the controlling organization only to the extent the payment exceeds the amount of the payment determined under the principles of section 482 (i.e., at arm’s length). Any such excess is subject to a 20-percent penalty on the larger of such excess determined without regard to any amendment or supplement to a return of tax, or such excess determined with regard to all such amendments and supplements.
Extension of Basis Adjustment to Stock of S Corporations Making Charitable Contributions of Property (IRC §1367, Act §115)
S corporations that made a contribution of appreciated capital gain property to a charity sometimes found their shareholders ran into a problem. While the deduction would be set at the fair market value of the property, no gain would be recognized by the S corporation and thus no increase in basis took place for the shareholder. However the shareholder still had to reduce the basis of his/her shares by their allocable share of the fair market value of the property.
This decrease in basis in the stock may mean that the shareholder would be unable to get the full benefit from the deduction. Even if the full deduction is allowed, that reduction in basis would likely lead to a negative result in the future.
Partners did not have this problem because the law there provided that their basis was only reduced by the basis of the property in the hands of the partnership, despite the partner obtaining a fair value deduction amount. Congress had been passing temporary patches in recent years to have the S corporation shareholder treated in the same manner as a partner. The most recent patch expired on December 31, 2014.
The PATH Act permanently extends the rule providing that a shareholder’s basis in the stock of an S corporation is reduced by the shareholder’s pro rata share of the adjusted basis of property contributed by the S corporation for charitable purposes. The extension applies for 2015 and all future years.
Extension and Modification of Research Credit (IRC §§38, 41 and 3111(f), Act §121)
The provision permanently extends the research and development (R&D) tax credit, eliminating what had been one of the oldest “extender” provisions in the tax law.
The PATH Act also makes modifications to the credit beginning in 2016. The PATH Technical Explanation describes these changes as follows:
Specified credits allowed against alternative minimum tax
The provision provides that, in the case of an eligible small business (as defined in section 38(c)(5)(C), after application of rules similar to the rules of section 38(c)(5)(D)), the research credit determined under section 41 for taxable years beginning after December 31, 2015, is a specified credit. Thus, these research credits of an eligible small business may offset both regular tax and AMT liabilities.
Payroll tax credit
Under the provision, for taxable years beginning after December 31, 2015, a qualified small business may elect for any taxable year to claim a certain amount of its research credit as a payroll tax credit against its employer OASDI liability, rather than against its income tax liability. If a taxpayer makes an election under this provision, the amount so elected is treated as a research credit for purposes of section 280C.
A qualified small business is defined, with respect to any taxable year, as a corporation (including an S corporation) or partnership (1) with gross receipts of less than $5 million for the taxable year, and (2) that did not have gross receipts for any taxable year before the five taxable year period ending with the taxable year. An individual carrying on one or more trades or businesses also may be considered a qualified small business if the individual meets the conditions set forth in (1) and (2), taking into account its aggregate gross receipts received with respect to all trades or businesses. A qualified small business does not include an organization exempt from income tax under section 501.
The payroll tax credit portion is the least of (1) an amount specified by the taxpayer that does not exceed $250,000, (2) the research credit determined for the taxable year, or (3) in the case of a qualified small business other than a partnership or S corporation, the amount of the business credit carryforward under section 39 from the taxable year (determined before the application of this provision to the taxable year).
For purposes of this provision, all members of the same controlled group or group under common control are treated as a single taxpayer. The $250,000 amount is allocated among the members in proportion to each member’s expenses on which the research credit is based. Each member may separately elect the payroll tax credit, but not in excess of its allocated dollar amount.
A taxpayer may make an annual election under this section, specifying the amount of its research credit not to exceed $250,000 that may be used as a payroll tax credit, on or before the due date (including extensions) of its originally filed return. A taxpayer may not make an election for a taxable year if it has made such an election for five or more preceding taxable years. An election to apply the research credit against OASDI liability may not be revoked without the consent of the Secretary of the Treasury (“Secretary”). In the case of a partnership or S corporation, an election to apply the credit against its OASDI liability is made at the entity level.
Application of credit against OASDI tax liability
The payroll tax portion of the research credit is allowed as a credit against the qualified small business’s OASDI tax liability for the first calendar quarter beginning after the date on which the qualified small business files its income tax or information return for the taxable year. The credit may not exceed the OASDI tax liability for a calendar quarter on the wages paid with respect to all employees of the qualified small business.
If the payroll tax portion of the credit exceeds the qualified small business’s OASDI tax liability for a calendar quarter, the excess is allowed as a credit against the OASDI liability for the following calendar quarter.
The Secretary is directed to prescribe such regulations as are necessary to carry out the purposes of the provision, including (1) to prevent the avoidance of the purposes of the limitations and aggregation rules through the use of successor companies or other means, (2) to minimize compliance and record-keeping burdens, and (3) for recapture of the credit amount applied against OASDI taxes in the case of an adjustment to the payroll tax portion of the research credit, including requiring amended returns in such a case.
Extension and Modification of Employer Wage Credit for Employees Who Are Active Duty Members of the Uniformed Services (IRC §45P, Act §122)
The provision permanently extends the 20-percent employer wage credit for employees called to active military duty. For 2015 the credit is restored in the same form as it had when it expired at the end of last year.
As the PATH Technical Explanation notes:
In the case of an employee who is called to active duty with respect to the armed forces of the United States, some employers voluntarily pay the employee the difference between the compensation that the employer would have paid to the employee during the period of military service less the amount of pay received by the employee from the military. This payment by the employer is often referred to as “differential pay.”
Wage credit for differential pay
If an employer qualifies as an eligible small business employer, the employer is allowed a credit against its income tax liability for a taxable year in an amount equal to 20 percent of the sum of the eligible differential wage payments for each of the employer’s qualified employees during the year.
An eligible small business employer means, with respect to a taxable year, an employer that: (1) employed on average less than 50 employees on business days during the taxable year; and (2) under a written plan of the taxpayer, provides eligible differential wage payments to every qualified employee. For this purpose, members of controlled groups, groups under common control, and affiliated service groups are treated as a single employer. The credit is not available with respect to an employer that has failed to comply with the employment and reemployment rights of members of the uniformed services.
Differential wage payment means any payment that: (1) is made by an employer to an individual with respect to any period during which the individual is performing service in the uniformed services of the United States while on active duty for a period of more than 30 days, and (2) represents all or a portion of the wages that the individual would have received from the employer if the individual were performing services for the employer. Eligible differential wage payments are so much of the differential wage payments paid to a qualified employee as does not exceed $20,000. A qualified employee is an individual who has been an employee of the employer for the 91-day period immediately preceding the period for which any differential wage payment is made.
No deduction may be taken for that portion of compensation that is equal to the credit.80 In addition, the amount of any other income tax credit otherwise allowable with respect to compensation paid to an employee must be reduced by the differential wage payment credit allowed with respect to the employee. The credit is not allowable against a taxpayer’s alternative minimum tax liability. Certain rules applicable to the work opportunity tax credit in the case of tax-exempt organizations, estates and trusts, regulated investment companies, real estate investment trusts and certain cooperatives apply also to the differential wage payment credit.
Beginning in 2016, the provision modifies the credit to apply to employers of any size, rather than employers with 50 or fewer employees, as under current law.
Extension of 15-Year Straight-Line Cost Recovery for Qualified Leasehold Improvements, Qualified Restaurant Buildings and Improvements, and Qualified Retail Improvements (IRC §168, Act §123)
The PATH Act permanently extends the 15-year recovery period for qualified leasehold improvements, qualified restaurant property, and qualified retail improvement property.
The PATH Technical Explanation describes each type of qualifying property below:
Qualified leasehold improvement property
Section 168(e)(3)(E)(iv) provides a statutory 15-year recovery period for qualified leasehold improvement property placed in service before January 1, 2015. Qualified leasehold improvement property is any improvement to an interior portion of a building that is nonresidential real property, provided certain requirements are met. The improvement must be made under or pursuant to a lease either by the lessee (or sublessee), or by the lessor, of that portion of the building to be occupied exclusively by the lessee (or sublessee). The improvement must be placed in service more than three years after the date the building was first placed in service. Qualified leasehold improvement property does not include any improvement for which the expenditure is attributable to the enlargement of the building, any elevator or escalator, any structural component benefiting a common area, or the internal structural framework of the building. If a lessor makes an improvement that qualifies as qualified leasehold improvement property, such improvement does not qualify as qualified leasehold improvement property to any subsequent owner of such improvement. An exception to the rule applies in the case of death and certain transfers of property that qualify for non-recognition treatment.
Qualified leasehold improvement property is generally recovered using the straight-line method and a half-year convention. Qualified leasehold improvement property placed in service after December 31, 2014 is subject to the general rules described above.
Qualified restaurant property
Section 168(e)(3)(E)(v) provides a statutory 15-year recovery period for qualified restaurant property placed in service before January 1, 2015. Qualified restaurant property is any section 1250 property that is a building or an improvement to a building, if more than 50 percent of the building's square footage is devoted to the preparation of, and seating for on-premises consumption of, prepared meals. Qualified restaurant property is recovered using the straight-line method and a half-year convention. Additionally, qualified restaurant property is not eligible for bonus depreciation unless it also satisfies the definition of qualified leasehold improvement property. Qualified restaurant property placed in service after December 31, 2014 is subject to the general rules described above.
Qualified retail improvement property
Section 168(e)(3)(E)(ix) provides a statutory 15-year recovery period for qualified retail improvement property placed in service before January 1, 2015. Qualified retail improvement property is any improvement to an interior portion of a building which is nonresidential real property if such portion is open to the general public and is used in the retail trade or business of selling tangible personal property to the general public, and such improvement is placed in service more than three years after the date the building was first placed in service. Qualified retail improvement property does not include any improvement for which the expenditure is attributable to the enlargement of the building, any elevator or escalator, any structural component benefiting a common area, or the internal structural framework of the building. In the case of an improvement made by the owner of such improvement, the improvement is a qualified retail improvement only so long as the improvement is held by such owner.
Retail establishments that qualify for the 15-year recovery period include those primarily engaged in the sale of goods. Examples of these retail establishments include, but are not limited to, grocery stores, clothing stores, hardware stores, and convenience stores. Establishments primarily engaged in providing services, such as professional services, financial services, personal services, health services, and entertainment, do not qualify. Generally, it is intended that businesses defined as a store retailer under the current North American Industry Classification System (industry sub-sectors 441 through 453) qualify while those in other industry classes do not qualify.
Qualified retail improvement property is recovered using the straight-line method and a half-year convention. Additionally, qualified retail improvement property is not eligible for bonus depreciation unless it also satisfies the definition of qualified leasehold improvement property.98 Qualified retail improvement property placed in service after December 31, 2014 is subject to the general rules described above.
Extension and Modification of Increased Expensing Limitations and Treatment of Certain Real Property as Section 179 Property (IRC §179, Act §124)
The PATH Act permanently extends the small business expensing limitation and phase-out amounts in effect from 2010 to 2014 ($500,000 and $2 million, respectively). These amounts would have reverted to $25,000 and $200,000, respectively, beginning in 2015. The special rules that allow expensing for computer software and qualified real property (qualified leasehold improvement property, qualified restaurant property, and qualified retail improvement property) also are permanently extended. The PATH Act also makes permanent the permission granted to a taxpayer to revoke without the consent of the Commissioner any election, and any specification contained therein, made under section 179.
For 2015 the §179 provisions that apply are the ones that were in force in 2014, but Congress made certain modifications going forward.
The PATH Act modifies the expensing limitation by indexing both the $500,000 and $2 million limits for inflation beginning in 2016 and by treating air conditioning and heating units placed in service in tax years beginning after 2015 as eligible for expensing. The provision further modifies the expensing limitation with respect to qualified real property by eliminating the $250,000 cap beginning in 2016.
Extension of Treatment of Certain Dividends of Regulated Investment Companies (IRC §871(k), Act §125)
The provision permanently extends provisions allowing for the pass-through character of interest-related dividends and short-term capital gains dividends from regulated investment companies (RICs) to foreign investors.
Extension of Exclusion of 100 Percent of Gain on Certain Small Business Stock (IRC §1202, Act §126)
The PATH Act extends the temporary exclusion under IRC §1202 of 100 percent of the gain on certain small business stock for non-corporate taxpayers to stock acquired and held for more than five years. This provision also permanently extends the rule that eliminates such gain as an AMT preference item.
Extension of Reduction in S-Corporation Recognition Period for Built-In Gains Tax (IRC §1374, Act §127)
The provision permanently extends the rule reducing to five years (rather than ten years) the period for which an S corporation must hold its assets following conversion from a C corporation to avoid the tax on built-in gains.
This provision had previously existed in two forms from its inception back in 2009. The latter version is the one being extended. As the PATH Technical Explanation described those provisions:
Special rules for 2012, 2013, and 2014
For taxable years beginning in 2012, 2013, and 2014, the term "recognition period" in section 1374, for purposes of determining the net recognized built-in gain, was applied by substituting a five-year period for the otherwise applicable 10-year period. Thus, for such taxable years, the recognition period was the five-year period beginning with the first day of the first taxable year for which the corporation was an S corporation (or beginning with the date of acquisition of assets if the rules applicable to assets acquired from a C corporation applied). If an S corporation with assets subject to section 1374 disposed of such assets in a taxable year beginning in 2012, 2013, or 2014 and the disposition occurred more than five years after the first day of the relevant recognition period, gain or loss on the disposition was not be taken into account in determining the net recognized built-in gain.
The rule requiring the excess of net recognized built-in gain over taxable income for a taxable year to be carried over and treated as recognized built-in gain in the succeeding taxable year applied only to gain recognized within the recognition period. If an S corporation subject to section 1374 sold a built-in gain asset and reported the income from the sale using the installment method under section 453, the treatment of all payments received was governed by the provisions of section 1374(d)(7) applicable to the taxable year in which the sale was made.
Application to regulated investment trusts and real estate investment trusts
A regulated investment company ("RIC") or a real estate investment trust ("REIT") that was formerly a C corporation (or that acquired assets from a C corporation) generally is subject to the rules of section 1374 as if the RIC or REIT were an S corporation, unless the relevant C corporation elects "deemed sale" treatment. The regulations include an express reference to the 10-year recognition period in section 1374.
Extension of Subpart F Exception for Active Financing Income (IRC §§953 and 954, Act §128)
The PATH Act makes permanent the temporary exceptions from subpart F foreign personal holding company income, foreign base company services income, and insurance income for certain income that is derived in the active conduct of a banking, financing, or similar business, as a securities dealer, or in the conduct of an insurance business.
Extension of Temporary Minimum Low-Income Housing Tax Credit Rates for Non-Federally Subsidized Buildings (IRC §42, Act §131)
The PATH Act permanently extends application of the 9-percent minimum credit rate for the low-income housing tax credit for non-Federally subsidized new buildings.
Extension of Military Housing Allowance Exclusion for Determining Whether a Tenant in Certain Counties is Low-Income (IRC §42, Act §132)
The PATH Act permanently extends the exclusion of military basic housing allowances from the calculation of income for determining eligibility as a low-income tenant for purposes of low-income housing tax credit buildings.
Extension of RIC Qualified Investment Entity Treatment Under FIRPTA (IRC §§897 and 1445, Act §133)
The PATH Act permanently extends the treatment of Registered Investment Companies (RICs, normally referred to as a mutual fund) as qualified investment entities and, therefore, not subject to withholding under the Foreign Investment in Real Property Tax Act (FIRPTA).
The PATH Technical Explanation notes:
The provision does not apply with respect to the withholding requirement under section 1445 for any payment made before the date of enactment, but a RIC that withheld and remitted tax under section 1445 on distributions made after December 31, 2014 and before the date of enactment is not liable to the distributee with respect to such withheld and remitted amounts.
Extensions through 2019
Some items will remain as extender issues, but they get a reprieve through 2019. Thus Congress won’t need to revisit these items until midway through the next Presidential Administration’s first term.
Extension of New Markets Tax Credit (IRC §45D, Act §141)
The PATH Act extends the new markets tax credit for five years, through 2019, permitting up to $3.5 billion in qualified equity investments for each of the 2015, 2016, 2017, 2018 and 2019 calendar years. The Act also extends for five years, through 2024, the carryover period for unused new markets tax credits.
Extension and Modification of Work Opportunity Tax Credit (IRC §§51 and 52, Act §142)
The provision extends through 2019 the work opportunity tax credit.
For 2015 the credit will come back to life in the same form it had in 2014 (when it again was retroactively extended midway through December). However there will be modifications to the credit beginning in 2016 that will apply until its now planned expiration date at the end of 2019.
The provision also modifies the credit beginning in 2016 to apply to employers who hire qualified long-term unemployed individuals (i.e., those who have been unemployed for 27 weeks or more) and increases the credit with respect to such long-term unemployed individuals to 40 percent of the first $6,000 of wages.
As the PATH Technical Explanation notes:
... [T]he provision expands the work opportunity tax credit to employers who hire individuals who are qualified long-term unemployment recipients. For purposes of the provision, such persons are individuals who have been certified by the designated local agency as being in a period of unemployment of 27 weeks or more, which includes a period in which the individual was receiving unemployment compensation under State or Federal law. With respect to wages paid to such individuals, employers would be eligible for a 40 percent credit on the first $6,000 of wages paid to such individual, for a maximum credit of $2,400 per eligible employee.
Since qualification for this credit generally requires “pre-certification” the late restoration of this credit for 2015 will necessitate, yet again, an IRS notice indicating how employers are going to get the late certification.
Extension and Modification of Bonus Depreciation (IRC §168(k), Act §143)
The PATH Act restores bonus depreciation to the law, retroactive to January 1, 2015. For 2015 the rules will be the same as they were for 2014. But the new law makes changes in future years, including reducing the amount of bonus depreciation that can be claimed in the final two years before it’s now scheduled expiration.
The provision extends bonus depreciation for property acquired and placed in service during 2015 through 2019 (with an additional year for certain property with a longer production period).
The bonus depreciation percentage is 50 percent for property placed in service during 2015, 2016 and 2017 and phases down, with 40 percent in 2018, and 30 percent in 2019.
The amount added to the maximum deduction limits allowed for a qualified “luxury auto” also phase down. As the PATH Technical Explanation notes:
The $8,000 increase amount in the limitation on the depreciation deductions allowed with respect to certain passenger automobiles is phased down from $8,000 by $1,600 per calendar year beginning in 2018. Thus, the section 280F increase amount for property placed in service in 2018 is $6,400, and for 2019 is $4,800. The increase does not apply to a taxpayer who elects to accelerate AMT credits in lieu of bonus depreciation for a taxable year.
The provision continues to allow taxpayers to elect to accelerate the use of AMT credits in lieu of bonus depreciation under special rules for property placed in service during 2015. The provision modifies the AMT rules beginning in 2016 by increasing the amount of unused AMT credits that may be claimed in lieu of bonus depreciation.
The Act also modifies bonus depreciation to include qualified improvement property and to permit certain trees, vines, and plants bearing fruit or nuts to be eligible for bonus depreciation when planted or grafted, rather than when placed in service.
Beginning in 2016 modifications are made to the definition of what qualifies as qualified improvement property. As the PATH Technical Explanation notes:
After 2015, the provision allows additional first-year depreciation for qualified improvement property without regard to whether the improvements are property subject to a lease, and also removes the requirement that the improvement must be placed in service more than three years after the date the building was first placed in service.
Note that this is a significant expansion in this provision, allowing it to be used for improvements to property owned by a related party and leased to the taxpayer, as well as brand new buildings rather than having to be more than 3 years old.
A footnote in the PATH Technical Explanation describes the “placed in service” date for plants bearing fruits and nuts, noting:
In the case of any tree or vine bearing fruits or nuts, the placed in service date does not occur until the tree or vine first reaches an income-producing stage. Treas. Reg. sec. 1.46-3(d)(2). See also, Rev. Rul. 80-25, 1980-1 C.B. 65, 1980; and Rev. Rul. 69-249, 1969-1 C.B. 31, 1969.
Thus, beginning in 2016, a farmer will claim bonus depreciation when the tree or vine is planted or grafted and will not need to wait until it becomes productive.
Extension of Look-Thru Treatment of Payments Between Related Controlled Foreign Corporations Under Foreign Personal Holding Company Rules(IRC §954(c)(6), Act §144)
The provision extends through 2019 the look-through treatment for payments of dividends, interest, rents, and royalties between related controlled foreign corporations.
Extensions through 2016
For the remaining extenders, Congress went back to the system it had been using before last year and granted a two-year reprieve for a number of expired provisions. Thus these extenders are retroactively placed in force for 2015 and they will continue to be in force until the end of 2016.
Extension and Modification of Exclusion from Gross Income of Discharge of Qualified Principal Residence Indebtedness (IRC §108, Act §151)
The provision extends through 2016 the exclusion from gross income of a discharge of qualified principal residence indebtedness.
The provision also modifies the exclusion to apply to qualified principal residence indebtedness that is discharged after December 31, 2016, if the discharge is pursuant to a written agreement entered into before December 31, 2016
As a practical matter, it would seem that if a truly binding agreement to discharge the debt was entered into between the taxpayer and the creditor prior to December 31, 2016, that would indicate a debt discharge for federal tax purposes in 2016. However lenders are likely to issue Forms 1099C based on the year they finally write it off their books, even if they gave up the right to collect earlier.
As well, even if the agreement is conditional (the debt is reduced only if the taxpayer stays current) Regulation §1.1001-3 requires valuing the “revised” debt by assuming the borrower will take all steps necessary to minimize the principal paid while complying with the debt’s terms—thus, again, putting the discharge when the agreement is signed (see Revenue Procedure 2013-16 for additional explanation of this issue).
So it would appear only if there was a written agreement where the debt was to be reduced if certain events took place that were out of the borrower’s control would this provision apply.
Another interesting thing to note is that the original section by section summary of the bill published by the Ways and Means Committee indicated this “written agreement relief” only applied if the written agreement was entered into in 2016 and the discharge took place in 2017, but the actual law text only looks to the written agreement being entered into before December 31, 2016 and the discharge taking effect after that date. The Joint Committee’s explanation also does not contain that year specific requirement, so presumably the summary’s text is in error.
Extension of Mortgage Insurance Premiums Treated as Qualified Residence Interest (IRC §163, Act §152)
The Act extends the deduction for private mortgage insurance premiums for two years (with respect to contracts entered into after December 31, 2006). Thus, the provision applies to amounts paid or accrued in 2015 and 2016 (and not properly allocable to any period after 2016).
This deduction phases out ratably for a taxpayer with AGI of $100,000 to $110,000.
Extension of Above-the-Line Deduction for Qualified Tuition and Related Expenses (IRC §222, Act §153)
The Act extends through 2016 the above-the-line deduction for qualified tuition and related expenses for higher education. The deduction is capped at $4,000 for an individual whose AGI does not exceed $65,000 ($130,000 for joint filers) or $2,000 for an individual whose AGI does not exceed $80,000 ($160,000 for joint filers).
Extension of Indian Employment Tax Credit (IRC §45A, Act §161)
The provision extends through 2016 the Indian employment tax credit. The Indian employment credit provides a credit on the first $20,000 of qualified wages paid to each qualified employee who works on an Indian reservation.
Extension and Modification of Railroad Track Maintenance Credit (IRC §45G, Act §162)
The Act extends through 2016 the railroad track maintenance tax credit. For 2015 the terms under which the credit is granted remain unchanged. But in 2016 the date by which the railroad must have owned or leased the track is moved forward.
The Act modifies the credit to apply to expenditures for maintaining railroad track owned or leased as of January 1, 2015 (rather than January 1, 2005, as under current law).
Extension of Mine Rescue Team Training Credit (IRC §45N, §Act 163)
The PATH Act extends through 2016 the mine rescue team training tax credit. Employers may take a credit equal to the lesser of 20 percent of the training program costs incurred, or $10,000.
Extension of Qualified Zone Academy Bonds (IRC §54E, Act §164)
The PATH Act authorizes the issuance of $400 million of qualified zone academy bonds during 2016. The bond proceeds are used for school renovations, equipment, teacher training, and course materials at a qualified zone academy, provided that private entities have promised to donate certain property and services to the academy with a value equal to at least 10 percent of the bond proceeds.
Extension of Classification of Certain Race Horses as 3-Year Property (IRC §168, Act §165)
The PATH Act extends the 3-year recovery period for race horses to property placed in service during 2015 or 2016.
Extension of 7-Year Recovery Period for Motorsports Entertainment Complexes (IRC §168, Act §166)
The Act extends the 7-year recovery period for motorsport entertainment complexes to property placed in service during 2015 or 2016.
Extension and Modification of Accelerated Depreciation for Business Property on an Indian Reservation (IRC §168(j), Act §167)
The PATH Act extends accelerated depreciation for qualified Indian reservation property to property placed in service during 2015 or 2016.
For 2015 the rules are unchanged, but for 2016 the provision also modifies the deduction to permit taxpayers to elect out of the accelerated depreciation rules.
Extension of Election to Expense Mine Safety Equipment (IRC §179E, Act §168)
The PATH Act extends the election to expense mine safety equipment to property placed in service during 2015 or 2016.
Extension of Special Expensing Rules for Certain Film and Television Productions (IRC §181, Act §169)
The Act extends through 2016 the special expensing provision for qualified film, television, and live theater productions. In general, only the first $15 million of costs may be expensed.
Beginning in 2016 this rule is expanded to include live theatrical productions. As the PATH Technical Explanation notes:
The provision also expands section 181 to include any qualified live theatrical production commencing after December 31, 2015. A qualified live theatrical production is defined as a live staged production of a play (with or without music) which is derived from a written book or script and is produced or presented by a commercial entity in any venue which has an audience capacity of not more than 3,000, or a series of venues the majority of which have an audience capacity of not more than 3,000. In addition, qualified live theatrical productions include any live staged production which is produced or presented by a taxable entity no more than 10 weeks annually in any venue which has an audience capacity of not more than 6,500. In general, in the case of multiple live-staged productions, each such live-staged production is treated as a separate production. Similar to the exclusion for sexually explicit productions from the present-law definition of qualified productions, qualified live theatrical productions do not include stage performances that would be excluded by section 2257(h)(1) of title 18 of the U.S. Code, if such provision were extended to live stage performances.
The modifications for live theatrical productions apply to productions commencing after December 31, 2015. For purposes of this provision, the date on which a qualified live theatrical production commences is the date of the first public performance of such production for a paying audience.
Extension of Deduction Allowable with Respect to Income Attributable to Domestic Production Activities (§199 Deduction) in Puerto Rico (IRC §199, Act §170)
The provision extends through 2016 the eligibility of domestic gross receipts from Puerto Rico for the domestic production deduction.
Extension and Modification of Empowerment Zone Tax Incentives (IRC §§1391 and 1394,Act §171)
The provision extends through 2016 the tax benefits for certain businesses and employers operating in empowerment zones. Empowerment zones are economically distressed areas, and the tax benefits available include tax-exempt bonds, employment credits, increased expensing, and gain exclusion from the sale of certain small-business stock.
The provision modifies the incentive beginning in 2016 by allowing employees to meet the enterprise zone facility bond employment requirement if they are residents of the empowerment zone, an enterprise community, or a qualified low-income community within an applicable nominating jurisdiction. As the PATH Technical Explanation notes:
The provision also amends the requirements for tax-exempt enterprise zone facility bonds to treat an employee as a resident of an empowerment zone for purposes of the 35 percent in-zone employment requirement if they are a resident of an empowerment zone, an enterprise community, or a qualified low-income community within an applicable nominating jurisdiction. The applicable nominating jurisdiction means, with respect to any empowerment zone or enterprise community, any local government that nominated such community for designation under section 1391. The definition of a qualified low-income community is similar to the definition of a low income community provided in section 45D(e) (concerning eligibility for the new markets tax credit). A "qualified low-income community" is a population census tract with either (1) a poverty rate of at least 20 percent, or (2) median family income which does not exceed 80 percent of the greater of metropolitan area median family income or statewide median family income (for a nonmetropolitan census tract, does not exceed 80 percent of statewide median family income). In the case of a population census tract located within a high migration rural county, low-income is defined by reference to 85 percent (as opposed to 80 percent) of statewide median family income. For this purpose, a high migration rural county is any county that, during the 20-year period ending with the year in which the most recent census was conducted, has a net outmigration of inhabitants from the county of at least 10 percent of the population of the county at the beginning of such period.
The Secretary is authorized to designate "targeted populations" as qualified low-income communities. For this purpose, a "targeted population" is defined by reference to section 103(20) of the Riegle Community Development and Regulatory Improvement Act of 1994 (the "Act") to mean individuals, or an identifiable group of individuals, including an Indian tribe, who are low-income persons or otherwise lack adequate access to loans or equity investments. Section 103(17) of the Act provides that "low-income" means (1) for a targeted population within a metropolitan area, less than 80 percent of the area median family income; and (2) for a targeted population within a non-metropolitan area, less than the greater of (a) 80 percent of the area median family income, or (b) 80 percent of the statewide non-metropolitan area median family income.
Extension of Temporary Increase in Limit on Cover Over of Rum Excise Taxes to Puerto Rico and the Virgin Islands (IRC §7652(f), Act §172)
The provision extends the $13.25 per proof gallon excise tax cover-over amount paid to the treasuries of Puerto Rico and the U.S. Virgin Islands to rum imported into the United States during 2015 or 2016. Absent the extension, the cover-over amount would be $10.50 per proof gallon.
Extension of American Samoa Economic Development Credit (Sec. 119 of Pub. L. No. 109-432, Act §173)
The provision extends through 2016 the existing credit for taxpayers currently operating in American Samoa.
Moratorium on Medical Device Excise Tax (IRC §4191, Act §174)
The provision provides for a two-year moratorium on the 2.3-percent excise tax imposed on the sale of medical devices. The tax will not apply to sales during calendar years 2016 and 2017.
Extension and modification of credit for nonbusiness energy property (IRC §, Act §)
The provision extends through 2016 the credit for purchases of nonbusiness energy property. The provision allows a credit of 10 percent of the amount paid or incurred by the taxpayer for qualified energy improvements, up to $500.
Beginning in 2016 the efficiency standards are modified so that that windows, skylights, and doors must meet Energy Star 6.0 standards to qualify for the credit.
Extension of Credit for Alternative Fuel Vehicle Refueling Property (IRC §30C, Act §182)
The provision extends through 2016 the credit for the installation of non-hydrogen alternative fuel vehicle refueling property. (Under the old law, hydrogen-related property were already eligible for the credit through 2016.) Taxpayers are allowed a credit of up to 30 percent of the cost of the installation of the qualified alternative fuel vehicle refueling property.
Extension of Credit for 2-Wheeled Plug-In Electric Vehicles (IRC §30D, Act §183)
The PATH Act extends through 2016 the 10-percent credit for plug-in electric motorcycles and 2-wheeled vehicles (capped at $2,500).
Extension of Second Generation Biofuel Producer Credit (IRC §40(b)(6), Act §184)
The Act extends through 2016 the credit for cellulosic biofuels producers.
Extension of Biodiesel and Renewable Diesel Incentives (IRC §40A, Act §185)
The Act extends through 2016 the existing $1.00 per gallon tax credit for biodiesel and biodiesel mixtures, and the small agri-biodiesel producer credit of 10 cents per gallon. The provision also extends through 2016 the $1.00 per gallon production tax credit for diesel fuel created from biomass. The provision extends through 2016 the fuel excise tax credit for biodiesel mixtures.
As well, the PATH Technical Explanation details the following modification:
As it relates to fuel sold or used in 2015, the provision creates a special rule to address claims regarding excise tax credits and claims for payment for the period beginning on January 1, 2015 and ending on December 31, 2015. In particular the provision directs the Secretary to issue guidance within 30 days of the date of enactment. Such guidance is to provide for a one-time submission of claims covering periods occurring during 2015. The guidance is to provide for a 180-day period for the submission of such claims (in such manner as prescribed by the Secretary) to begin no later than 30 days after such guidance is issued. Such claims shall be paid by the Secretary of the Treasury not later than 60 days after receipt. If the claim is not paid within 60 days of the date of the filing, the claim shall be paid with interest from such date determined by using the overpayment rate and method under section 6621 of the Code.
Extension and Modification of Production Credit for Indian Coal Facilities (IRC §45, Act §186)
The PATH Act extends through 2016 the $2 per ton production tax credit for coal produced on land owned by an Indian tribe, if the facility was placed in service before 2009. A coal facility is allowed only nine years of credit.
The Act modifies the credit beginning in 2016 by removing the placed-in-service-date limitation, removing the nine-year limitation, and allowing the credit to be claimed against the AMT.
Extension and Modification of Credits with Respect to Facilities Producing Energy from Certain Renewable Resources (IRC §§45 and 48, Act §187)
The provision extends the production tax credit for certain renewable sources of electricity to facilities for which construction has commenced by the end of 2016. However, the credit is not extended for wind facilities.
Extension of Credit for Energy-Efficient New Homes (IRC §45L, Act §188)
The Act extends through 2016 the tax credit for manufacturers of energy-efficient residential homes. An eligible contractor may claim a tax credit of $1,000 or $2,000 for the construction or manufacture of a new energy efficient home that meets qualifying criteria.
Extension of Special Allowance for Second Generation Biofuel Plant Property (IRC §168(l) and Act §189)
The provision extends through 2016 the 50-percent bonus depreciation for cellulosic biofuel facilities.
Extension of Energy Efficient Commercial Buildings Deduction (IRC §179D, Act §190)
The provision extends through 2016 the above-the-line deduction for energy efficiency improvements to lighting, heating, cooling, ventilation, and hot water systems of commercial buildings.
Extension of Special Rule for Sales or Dispositions to Implement FERC or State Electric Restructuring Policy for Qualified Electric Utilities (IRC §451(i), Act §191)
The provision extends through 2016 a rule that permits taxpayers to elect to recognize gain from qualifying electric transmission transactions ratably over an eight-year period beginning in the year of sale (rather than entirely in the year of sale) if the amount realized from such sale is used to purchase exempt utility property within the applicable period.
Extension of Excise Tax Credits Relating to Alternative Fuels (IRC §§6426 and 6427, Act §192)
The provision extends through 2016 the 50 cents per gallon alternative fuel tax credit and alternative fuel mixture tax credit.
Extension of Credit for New Qualified Fuel Cell Motor Vehicles (IRC §30B, Act §30B)
The provision extends through 2016 the credit for purchases of new qualified fuel cell motor vehicles. The provision allows a credit of between $4,000 and $40,000 depending on the weight of the vehicle for the purchase of such vehicles.
The next section of the bill is entitled “Program Integrity” and it really deals with compliance and/or identity theft related issues.
Modification of filing dates of returns and statements relating to employee wage information and nonemployee compensation to improve compliance (IRC §§6071 and 6402, Act §201)
Refund fraud/identity theft has become a major problem in tax administration and Congress has recognized that a major problem is that the IRS must start processing returns long before information returns are required to be filed with the IRS. This portion of the law will not eliminate the problem, but it will serve to reduce the time period during which the IRS will be accepting returns and issuing refunds but not yet being in possession of the payor’s information reporting forms.
The Act now requires forms W-2, W-3, and returns or statements to report non-employee compensation (e.g., Form 1099-MISC), to be filed on or before January 31 of the year following the calendar year to which such returns relate. Note that the provision eliminates the extra month that was given to employers and payors who filed their returns electronically—all returns will need to go to the taxing agencies on the same date on which they must be provided to the recipients.
As the PATH Technical Explanation provides:
The provision requires that certain information returns 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 under section 6071(b). Specifically, the provision accelerates the filing of information on wages reportable on Form W-2 and non-employee compensation. The due date for employee and payee statements remains the same. Non-employee compensation generally includes fees for professional services, commissions, awards, travel expense reimbursements, or other forms of payments for services performed for the payor's trade or business by someone other than in the capacity of an employee.
The provision also provides additional time for the IRS to review refund claims based on the earned income tax credit and the refundable portion of the child tax credit in order to reduce fraud and improper payments, with the IRS not issuing any refunds for returns that claim these credits until February 15 (that is, generally one month after the e-filing season starts).
The Joint Committee explains:
Additionally, the provision requires that no credit or refund for an overpayment for a taxable year shall be made to a taxpayer before the 15th day of the second month following the close of that taxable year, if the taxpayer claimed the EITC or additional child tax credit on the tax return. Individual taxpayers are generally calendar year taxpayers, thus, for most taxpayers who claim the EITC or additional child tax credit this rule would apply such that a refund of tax would not be made to such taxpayer prior to February 15th of the year following the calendar year to which the taxes relate.
The provision is effective for returns and statements relating to calendar years after the December 18, 2015 (e.g., the forms for 2016 filed filed in 2017).
Safe harbor for de minimis errors on information returns and payee statements (IRC §§6721 and 6722, Act §202)
The provision establishes a safe harbor from penalties for the failure to file correct information returns and for failure to furnish correct payee statements by providing that if the error is $100 or less ($25 or less in the case of errors involving tax withholding), the issuer of the information return is not required to file a corrected return and no penalty is imposed. A recipient of such a return (e.g., an employee who receives a Form W-2) can elect to have a corrected return issued to them and filed with the IRS.
As the PATH Technical Explanation explains:
The provision creates a safe harbor from the application of the penalty for failure to file a correct information return and the penalty for failure to furnish a correct payee statement in circumstances in which the information return or payee statement is otherwise correctly filed but includes a de minimis error of the amount required to be reported on such return or statement. In general, a de minimis error of an amount on the information return or statement need not be corrected if the error for any single amount does not exceed $100. A lower threshold of $25 is established for errors with respect to the reporting of an amount of withholding or backup withholding. The provision requires broker reporting to be consistent with amounts reported on uncorrected returns which are eligible for the safe harbor. If any person receiving payee statements requests a corrected statement, the penalty for failure to file a correct information return and the penalty for failure to furnish a correct payee statement would continue to apply in the case of a de minimis error.
The provision is effective for returns and statements required to be filed after December 31, 2016.
The provisions is meant to reduce the issuance of revised Forms 1099 for minor amounts, something that taxpayers see regularly. Thus the provision should reduce the number of returns that end up being redone by CPAs just before delivery to a client due to last minute receipt of a revised Form 1099. But note that the rule will not take effect in time for the filing of 2015 tax returns.
Requirements for the issuance of ITINs (IRC §6109, Act §203)
The provision provides that the IRS may issue taxpayer identification numbers (ITIN) if the applicant provides the documentation required by the IRS either (a) in person to an IRS employee or to a community-based certified acceptance agent (as authorized by the IRS), or (b) by mail. The provision requires that individuals who were issued ITINs before 2013 are required to renew their ITINs on a staggered schedule between 2017 and 2020. The provision also provides that an ITIN will expire if an individual fails to file a tax return for three consecutive years. The provision also directs the Treasury Department and IRS to study the current procedures for issuing ITINs with a goal of adopting a system by 2020 that would require all applications to be filed in person.
In a rarity in this Act for items that make changes, this provision is effective for requests for ITINs made after the December 18, 2015.
Prevention of retroactive claims of earned income credit, child tax credit or American Opportunity Credit) after issuance of social security number (IRC §§24, 25A and 32, Act §§204, 205 and 206)
The Act prohibits an individual from retroactively claiming the earned income tax credit, child tax credit or American Opportunity credit by amending a return (or filing an original return if he failed to file) for any prior year in which he did not have a valid social security number.
The explanation notes:
The provision denies to any taxpayer the EITC, child credit, and American opportunity tax credit, with respect to any taxable year for which such taxpayer has a taxpayer identification number that has been issued after the due date for filing the return for such taxable year. Similarly, a qualifying child (in the case of the EITC and child credit) or a student (in the case of the American opportunity credit) is not taken into account with respect to any taxable year for which such child or student is associated with a taxpayer identification number that has been issued after the due date for filing the return for such taxable year.
The provision applies to returns, and any amendment or supplement to a return, filed after the December 18, 2015, though there are exceptions. Per the explanation:
The provision generally applies to any return of tax, and any amendment or supplement to any return of tax, which is filed after the date of the enactment. However, the provision shall not apply to any return of tax (other than an amendment or supplement to any return of tax) for any taxable year which includes the date of the enactment, if such return is filed on or before the due date for such return of tax.
Procedures to reduce improper claims (IRC §24, 25A, 32 and 6695, Act §207
The provision expands the paid-preparer due diligence requirements with respect to the earned income tax credit, and the associated $500 penalty for failures to comply, to cover returns claiming the child tax credit and American Opportunity Tax Credit. The provision also requires the IRS to study the effectiveness of the due diligence requirements and whether such requirements should apply to taxpayer who file online or by filing a paper form.
The current due diligence rules for the EITC, which the Act expands to the child tax credit and American Opportunity Credit, are summarized in the explanation:
Under Section 6695(g) of the Code, a penalty of $500 may be imposed on a person who, as a tax return preparer,410 prepares a tax return for a taxpayer claiming the EITC, unless the tax return preparer exercises due diligence with respect to that claim. The due diligence requirements extend to both the determination of eligibility for the credit and the amount of the credit, as prescribed by regulations, which also detail how to document one's compliance with those requirements.411 The position taken with respect to the EITC must be based on current and reasonable information that the paid preparer develops, either directly from the taxpayer or by other reasonable means. The preparer may not ignore implications of information provided by taxpayers, and is expected to make reasonable inquiries about incorrect, inconsistent or incomplete information.
The conclusions about eligibility and computation, as well as the steps taken to develop those conclusions, must be documented, using Form 8867, "Paid Preparer's Earned Income Credit Checklist," which is filed with the return. The basis for the computation of the credit must also be documented, either on a Computation Worksheet, or in an alternative record containing the requisite information. The preparer is required to maintain that documentation for three years.
The penalty may be waived with respect to a particular return or claim for refund on the basis of all facts and circumstances. The preparer must establish that he routinely follows reasonable office procedures to ensure compliance. The failure to comply with the requirements must be isolated and inadvertent. The enhanced duties of due diligence required with respect to the EITC do not extend to other refundable credits.
The provision applies to tax years beginning after December 31, 2015.
Restrictions on taxpayers who improperly claimed credits in prior year (IRC §24, 25A, 32 and 6213, Act §208)
The provision expands the rules under current law, which bar individuals from claiming the earned income tax credit for ten years if they are convicted of fraud and for two years if they are found to have recklessly or intentionally disregarded the rules, to apply to the child tax credit and American Opportunity Tax Credit. The provision adds math error authority, which permits the IRS to disallow improper credits without a formal audit if the taxpayer claims the credit in a period during which he is barred from doing so due to fraud or reckless or intentional disregard.
The provision applies to tax years beginning after December 31, 2015.
Treatment of credits for purposes of certain penalties (IRC §§6664 and 6676, Act §209)
The provision applies the 20-percent penalty for erroneous claims under current law to the refundable portion of credits (reversing the Tax Court decision in Rand v. Commissioner). The provision also eliminates the exception from the penalty for erroneous refunds and credits that currently applies to the earned income tax credit, and the provision provides reasonable-cause relief from the penalty.
The explanation provides the following details on the effective date:
The provision amending the definition of underpayment is effective for returns filed after the date of enactment and for returns filed on or before the date of enactment if the statute of limitations period for assessment has not expired. The provision repealing the exception from the erroneous claim penalty is effective for claims filed after the date of enactment.
The original section by section explanation published by Ways and Means had indicated it only applied to returns filed after December 31, 2015, but it appears now that it applies to quite a few more returns.
As was noted earlier, the “date of enactment” for this law is December 18, 2015.
Increase the penalty applicable to paid tax preparers who engage in willful or reckless conduct (IRC §6694(b) and Act §210)
The provision expands the penalty for tax preparers who engage in willful or reckless conduct, which is currently the greater of $5,000 or 50 percent of the preparer’s income with respect to the return, by increasing the 50 percent amount to 75 percent.
The provision applies to returns prepared for tax years ending after December 18, 2015.
Employer identification number required for American opportunity tax credit (IRC §25A and 6050S, Act §211)
The Act requires a taxpayer claiming the American opportunity tax credit to report the employer identification number (EIN) of the educational institution to which the taxpayer makes qualified payments under the credit. The law modifies the reporting requirements under section 6050S of the Code to require an educational institution to provide its employer identification number on the Form 1098-T.
The provision applies to tax years beginning after December 31, 2015, and expenses paid after such date for education furnished in academic periods beginning after such date.
Higher education information reporting only to include qualified tuition and related expenses actually paid (IRC §6050S, Act §212)
The provision reforms the reporting requirements for Form 1098-T so that educational institutions are required to report only qualified tuition and related expenses actually paid, rather than choosing between amounts paid and amounts billed, as under current law.
The provision applies to expenses paid after December 31, 2015 for education furnished in academic periods beginning after such date.
The reader probably recognizes that when a section of a tax bill is entitled “Miscellaneous Provisions” that the provisions under the section will have little to do with the rest of the law, but rather are tax items that were going to be attached to the first available tax vehicle with a chance of passing.
Exclusion for Amounts Received under the Work Colleges Program (IRC §117, Act §301)
The provision exempts from gross income any payments from certain work-learning-service programs that are operated by a work college as defined in section 448(e) of the Higher Education Act of 1965.
As the explanation notes:
The provision exempts from gross income any payments from a comprehensive student work-learning-service program (as defined in section 448(e) of the Higher Education Act of 1965) operated by a work college (as defined in such section). Specifically, a work college must require resident students to participate in a work-learning-service program that is an integral and stated part of the institution's educational philosophy and program.
The provision is effective for amounts received in tax years beginning after December 18, 2015.
Improvements to Section 529 Accounts (IRC §529, Act §302)
The law expands the definition of qualified higher education expenses for which tax-preferred distributions from 529 accounts are eligible to include computer equipment and technology.
The law modifies 529-account rules to treat any distribution from a 529 account as coming only from that account, even if the individual making the distribution operates more than one account.
The Act treats a refund of tuition paid with amounts distributed from a 529 account as a qualified expense if such amounts are re-contributed to a 529 account within 60 days.
These provisions are effective for distributions made or refunds after 2014, or in the case of refunds after 2014 and before the date of enactment, for refunds re-contributed not later than 60 days after date of enactment.
Elimination of Residency Requirement for Qualified ABLE Programs (IRC §§529 and 529A, Act §303)
The provision allows ABLE accounts (tax-preferred savings accounts for disabled individuals), which currently may be located only in the State of residence of the beneficiary, to be established in any State. This will allow individuals setting up ABLE accounts to choose the State program that best fits their needs, such as with regard to investment options, fees, and account limits.
Another change allows for amounts from qualified tuition programs (also known as 529 accounts) to be rolled over to an ABLE account without penalty. Normally such a transfer would be treated as a taxable distribution subject to penalties if not used for education related expenses.
Such rolled-over amounts count towards the overall limitation on amounts that can be contributed to an ABLE account within a taxable year, so the 529 plan cannot be used as an “end-run” around the annual limits on the amounts that may be contributed on the behalf of any ABLE account beneficiary. Any amount rolled over that is in excess of this limitation shall be includible in the gross income of the distributee.
The provision is effective for tax years beginning after December 31, 2014
Exclusion for Wrongfully Incarcerated Individuals (IRC §139F and Act §304)
The provision allows an individual to exclude from gross income civil damages, restitution, or other monetary awards that the taxpayer received as compensation for a wrongful incarceration. A “wrongfully incarcerated individual” is either: (1) an individual who was convicted of a criminal offense under Federal or state law, who served all or part of a sentence of imprisonment relating to such offense, and who was pardoned, granted clemency, or granted amnesty because of actual innocence of the offense; or (2) an individual for whom the conviction for such offense was reversed or vacated and for whom the indictment, information, or other accusatory instrument for such offense was dismissed or who was found not guilty at a new trial after the conviction was reversed or vacated.
The provision applies to tax years beginning before, on, or after the date of enactment (so, effectively, any year for which the statute for filing a claim for refund remains open).
Clarification of Special Rule for Certain Governmental Plans (IRC §105(j), Act §305)
The provision extends the special rule under current law for certain benefits paid by accident or health plans of a public retirement system to such benefits paid by plans established by or on behalf of a State or political subdivision. To qualify, such plans must have been authorized by a State legislature or received a favorable ruling from the IRS that the trust’s income is not includible in gross income under either section 115 or section 501(c)(9) of the tax code, and on or before January 1, 2008, have provided for payment of medical benefits to a deceased participant’s beneficiary.
The provision is effective for payments after December 18, 2015.
Rollovers Permitted from Other Retirement Plans into Simple Retirement Accounts (IRC §408(p)(1)(B), Act §306)
The provision allows a taxpayer to roll over amounts from an employer-sponsored retirement plan (e.g., 401(k) plan) to a SIMPLE IRA, provided the plan has existed for at least two years.
The provision applies to contributions made after December 18, 2015.
Technical Amendment Relating to Rollover of Certain Airline Payment Amounts (Sec. 1106 of the FAA Modernization and Reform Act of 2012, Act §307)
The provision clarifies the effective dates of \the FAA Modernization and Reform Act of 2012 to allow certain airline employees to contribute amounts received in certain bankruptcies to an IRA without being subject to the annual contribution limit.
The provision allows any amount that comes within the definition of an airline payment amount as a result of the 2014 amendments to be rolled over within 180 days of receipt or, if later, within the period beginning on December 18, 2014, and ending 180 days after December 18, 2015.
The provision is effective as if included in the FAA Modernization and Reform Act of 2012.
Treatment of Early Retirement Distributions for Nuclear Materials Couriers, United States Capitol Police, Supreme Court Police, and Diplomatic Security Special Agents (IRC §72(t), Act §308)
After creating a new exception from the 10-percent penalty for premature distributions from retirement accounts for certain specified federal government employees earlier in the year, Congress added to that list in PATH Act. The Act extends the relief under current law, which provides an exception to the 10-percent penalty on withdrawals from retirement accounts before age 50 for public safety officer, to include nuclear materials couriers, United States Capitol Police, Supreme Court Police, and diplomatic security special agents.
The provision is effective for distributions after December 31, 2015, which is the same date as those who received the relief in the bill passed in the summer of 2015.
Prevention of Extension of Tax Collection Period for Members of the Armed Forces Who are Hospitalized as a Result of Combat Zone Injuries (IRC §6502 and 7508(e), Act §309)
The provision requires that the collection period for members of the Armed Forces hospitalized for combat zone injuries may not be extended by reason of any period of continuous hospitalization or the 180 days after hospitalization. Accordingly, the collection period expires 10 years after assessment, plus the actual time spent in a combat zone.
The provision applies to taxes assessed before, on, or after the date of the enactment—or, as was noted earlier, for any assessment that didn’t already have the statute closed on collection.
Real Estate Investment Trusts
Congress added provisions dealing with what they saw as “issues” with real estate investment trusts (REITs).
Restriction on Tax-Free Spinoffs Involving REITs (IRC §355, Act §311)
The provision provides that a spin-off involving a REIT will qualify as tax-free only if immediately after the distribution both the distributing and controlled corporation are REITs. In addition, neither a distributing nor a controlled corporation would be permitted to elect to be treated as a REIT for ten years following a tax-free spin-off transaction.
The provision applies to distributions on or after December 7, 2015, but shall not apply to any distribution pursuant to a transaction described in a ruling request initially submitted to the IRS on or before such date, which request has not been withdrawn and with respect to which a ruling has not been issued or denied in its entirety as of such date.
Reduction in Percentage Limitation on Assets of REIT Which May Be Taxable REIT Subsidiaries (IRC §856, Act §312)
The provision modifies the rules with respect to a REIT’s ownership of a taxable REIT subsidiary (TRS), which is taxed as a corporation. Under the provision, the securities of one or more TRSs held by a REIT may not represent more than 20 percent (rather than 25 percent under current law) of the value of the REIT’s assets.
The provision is effective for tax years beginning after 2017.
Prohibited Transaction Safe Harbors (IRC §857, Act §313)
The provision provides for an alternative three-year averaging safe harbor for determining the percentage of assets that a REIT may sell annually. In addition, the provision clarifies that the safe harbor is applied independent of whether the real estate asset is inventory property. The provision generally is effective for tax years beginning after the date of enactment. However, the clarification of the safe harbor takes effect as if included in the Housing Assistance Tax Act of 2008.
Repeal of Preferential Dividend Rule for Publicly Offered REITs (IRC §562, Act §§314 and 315)
The provision repeals the preferential dividend rule for publicly offered REITs. The provision is effective for distributions in tax years beginning after 2014.
Authority for Alternative Remedies to Address Certain REIT Distribution Failures (IRC §857, Act §316)
The provision provides the IRS with authority to provide an appropriate remedy for a preferential dividend distribution by non-publicly offered REITs in lieu of treating the dividend as not qualifying for the REIT dividend deduction and not counting toward satisfying the requirement that REITs distribute 90 percent of their income every year. Such authority applies if the preferential distribution is inadvertent or due to reasonable cause and not due to willful neglect.
The provision applies to distributions in tax years beginning after 2015.
Limitations on Designation of Dividends By REITs (IRC §857, Act §316)
The provision provides that the aggregate amount of dividends that could be designated by a REIT as qualified dividends or capital gain dividends will not exceed the dividends actually paid by the REIT. The provision is effective for distributions in tax years beginning after 2014.
Debt Instruments of Publicly Offered REITs and Mortgages Treated as Real Estate Assets (IRC §856, Act §317)
The provision provides that debt instruments issued by publicly offered REITs, as well as interests in mortgages on interests in real property, are treated as real estate assets for purposes of the 75-percent asset test. Income from debt instruments issued by publicly offered REITs are treated as qualified income for purposes of the 95-percent income test, but not the 75percent income test (unless they already are treated as qualified income under current law). In addition, not more than 25 percent of the value of a REIT’s assets is permitted to consist of such debt instruments.
The provision is effective for tax years beginning after 2015.
Asset and Income Test Clarification Regarding Ancillary Personal Property (IRC §856, Act §318)
The provision provides that certain ancillary personal property that is leased with real property is treated as real property for purposes of the 75-percent asset test. In addition, an obligation secured by a mortgage on such property is treated as real property for purposes of the 75-percent income and asset tests, provided the fair market value of the personal property does not exceed 15 percent of the total fair market value of the combined real and personal property. The provision is effective for tax years beginning after 2015.
Hedging Provisions (IRC §857, Act §319)
The provision expands the treatment of REIT hedges to include income from hedges of previously acquired hedges that a REIT entered to manage risk associated with liabilities or property that have been extinguished or disposed. The provision is effective for tax years beginning after 2015.
Modification of REIT Earnings and Profits Calculation to Avoid Duplicate Taxation (IRC §§562 and 857, Act §320)
The provision provides that 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 (e.g., certain amounts resulting from differences in the applicable depreciation rules). The provision applies only for purposes of determining whether REIT shareholders are taxed as receiving a REIT dividend or as receiving a return of capital (or capital gain if a distribution exceeds a shareholder’s stock basis).
The provision is effective for tax years beginning after 2015.
Treatment of Certain Services Provided By Taxable REIT Subsidiaries (IRC §857, Act §321)
The provision provides that a taxable REIT subsidiary (TRS) is permitted to provide certain services to the REIT, such as marketing, that typically are done by a third party. In addition, a TRS is permitted to develop and market REIT real property without subjecting the REIT to the 100percent prohibited transactions tax. The provision also expands the 100-percent excise tax on non-arm’s length transactions to include services provided by the TRS to its parent REIT.
The provision is effective for tax years beginning after 2015.
Exception from FIRPTA for Certain Stock of REITs and Interests Held By Foreign Retirement or Pension Funds (IRC §§897 and 1445, Act §§322 and 323)
The provision increases from 5 percent to 10 percent the maximum stock ownership a shareholder may have held in a publicly traded corporation to avoid having that stock treated as a U.S. real property interest on disposition. In addition, the provision allows certain publicly traded entities to own and dispose of any amount of stock treated as a U.S. real property interest, including stock in a REIT, without triggering FIRPTA withholding. However, an investor in such an entity that holds more than 10 percent of such stock is still subject to withholding. The provision applies to dispositions and distributions on or after the date of enactment.
The provision exempts any U.S. real property interest held by a foreign pension fund from FIRPTA withholding. The provision applies to dispositions and distributions after the date of enactment.
Increase in Rate of Withholding of Tax on Dispositions of United States Real Property Interests (IRC §1445, Act §324)
The provision provides that the rate of withholding on dispositions of United States real property interests is increased from 10 percent to 15 percent. The increased rate of withholding, however, does not apply to the sale of a personal residence where the amount realized is $1 million or less.
The provision is effective for dispositions occurring 60 days after December 18, 2015.
Interests in RICs and REITs Not Excluded from Definition of United States Real Property Interests (IRC §897, Act §325)
The provision provides that the “cleansing rule” (which applies to corporations that either have no real estate or have paid tax on their real-estate transactions) applies only to interests in a corporation that is not a qualified investment entity. In addition, the proposal provides that the cleansing rule applies to stock of a corporation only if neither the corporation nor any predecessor of such corporation was a regulated investment company (RIC) or REIT at any time during the shorter of (a) the period after June 18, 1980 during which the taxpayer held such stock, or (b) the five-year period ending on the date of the disposition of the stock.
The provision applies to dispositions on or after December 18, 2015.
Dividends Derived from RICs and REITs Ineligible for Deduction for United States Source Portion of Dividends from Certain Foreign Corporations (IRC §245, Act §326)
The provision provides that for purposes of determining whether dividends from a foreign corporation (attributable to dividends from an 80-percent owned domestic corporation) are eligible for a dividend received deduction, dividends from RICs and REITs are not treated as dividends from domestic corporations, even if the RIC or REIT owns shares in a foreign corporation. The provision applies to dividends received from RIC and REITs on or after the date of enactment of this Act.
Apparently Congress felt the need for another section called “additional provisions” that are a subset of “miscellaneous provisions” (apparently the miscellaneous miscellaneous provisions). But, in any event, here is what Congress came up with.
Deductibility of Charitable Contributions to Agricultural Research Organizations (IRC §§170(b) and 501(b), Act §331)
The Act provides that charitable contributions to an agricultural research organization are subject to the higher individual limits (generally up to 50 percent of the taxpayer’s contribution base) if the organization commits to use the contribution for agricultural research before January 1 of the fifth calendar year that begins after the date of the contribution. In addition, agricultural research organizations are treated as public charities per se, without regard to their sources of financial support.
The provision is effective for contributions made on or after December 18, 2015.
Removal of Bond Requirements and Extending Filing Periods for Certain Taxpayers With Limited Excise Tax Liability (IRC § 5061(d), 5173(a), 5351, 5401 and 5551, Act §332)
The provision allows producers of alcohol that reasonably expect to be liable for not more than $50,000 per year in alcohol excise taxes to pay such taxes on a quarterly basis rather than twice per month (and those reasonably expecting to be liable for not more than $1,000 per year to pay such taxes annually, rather than on a quarterly basis). The provision also exempts such producers from bonding requirements with the IRS.
The provision is effective 90 days after the December 18, 2015.
Modifications to Alternative Tax for Certain Small Insurance Companies (IRC §831(b), Act §333)
The provision increases the maximum amount of annual premiums that certain small property and casualty insurance companies can receive and still elect to be exempt from tax on their underwriting income, and instead be taxed only on taxable investment income. The provision increases the maximum amount from $1.2 million to $2.2 million for calendar years beginning after 2015, and indexes it to inflation thereafter. To ensure that this special rule is not abused, the provision also requires that no more than 20 percent of net written premiums (or if greater, direct written premiums) for a tax year is attributable to any one policyholder. Alternatively, a company would be eligible for the exception if each owner of the insured business or assets has no greater an interest in the insurer than he or she has in the business or assets, and each owner holds no smaller an interest in the business than his or her interest in the insurer.
The provision is effective for tax years beginning after 2016.
Treatment of Timber Gains (IRC §1201; Act §334)
The provision provides that C corporation timber gains are subject to a tax rate of 23.8 percent.
The provision is effective for tax year 2016.
Modification of Definition of Hard Cider (IRC §5041, Act §335)
The provision defines hard cider for purposes of alcohol excise taxes as a wine with an alcohol content of between 0.5 percent and 8.5 percent alcohol by volume, with a carbonation level that does not exceed 6.4 grams per liter, which is derived primarily from apples, apple juice concentrate, pears, or pear juice concentrate, in combination with water.
The provision is effective for articles removed from the distillery or bonding facility during calendar years beginning after 2015.
Church Plan Clarification (IRC §414; Act §336)
The provision prevents the IRS from aggregating certain church plans together for purposes of the non-discrimination rules, which prevent highly compensated participants from receiving disproportionate benefits under the plan, and it provides flexibility for church plans to decide which other church plans with which they associate. The provision also prevents certain grandfathered church defined-benefit plans from having to meet certain requirements relating to maximum benefit accruals, and it allows church plans to offer auto-enroll accounts similar to 401(k)s. Additionally, the provision make it easier for church plans to engage in certain reorganizations and allows church plans to invest in collective trusts.
The provision generally is effective on or after December 18, 2015. However the PATH Technical Explanation provides:
The changes made to the controlled group rules and the provision relating to limits on defined benefit section 403(b) plans apply to years beginning before, on, or after the date of enactment of the provision. The provision relating to automatic enrollment is effective on the date of enactment. The provision relating to plan transfers and mergers applies to transfers or mergers occurring after the date of enactment. The provision relating to investments in group trusts applies to investments made after the date of enactment.
Updated ASHRAE Standards for Energy Efficient Commercial Buildings Deduction (IRC §179D, Act §341)
The provision modifies the deduction for energy efficient commercial buildings by updating the energy efficiency standards to reflect new standards of the American Society of Heating, Refrigerating, and Air Conditioning Engineers beginning in 2016.
Excise Tax Credit Equivalency for Liquefied Petroleum Gas and Liquefied Natural Gas (IRC §6426; Act §342)
The provision converts the measurement of the alternative fuel excise tax credit for liquefied natural gas and liquefied petroleum gas from 50 cents per gallon to 50 cents per energy equivalent of a gallon of diesel fuel, which is approximately 29 cents per gallon for liquefied natural gas and approximately 36 cents per gallon for liquefied petroleum gas.
The provision is effective for fuel sold or used after 2015.
Exclusion from Gross Income of Certain Clean Coal Power Grants to Noncorporate Taxpayers (Act §343)
The provision excludes from gross income certain clean power grants received under the Energy Policy Act of 2005 by an eligible taxpayer that is not a corporation. The provision requires an eligible taxpayer to reduce the basis of tangible depreciable property related to such grants by the amount excluded. The provision requires eligible taxpayers to make payments to the Treasury equal to 1.18 percent of amounts excluded under the provision. The provision is effective for grants received in tax years after 2011.
Clarification of Valuation Rule for Early Termination of Certain Charitable Remainder Unitrusts (IRC §664(e); Act §344)
The provision clarifies the valuation method for the early termination of certain charitable remainder unitrusts. Per the PATH Technical Explanation:
Under the provision, in the case of the early termination of a NICRUT or NIMCRUT, the remainder interest is valued using rules similar to the rules for valuing the remainder interest of a charitable remainder trust when determining the amount of the grantor's charitable contribution deduction. In other words, the remainder interest is computed on the basis that an amount equal to five percent of the net fair market value of the trust assets (or a greater amount, if required under the terms of the trust instrument) is to be distributed each year, with any net income limit being disregarded.
The provision is effective for the termination of trusts after December 18, 2015.
Prevention of Transfer of Certain Losses from Tax Indifferent Parties (IRC §267, Act §345)
The provision modifies the related-party loss rules, which generally disallow a deduction for a loss on the sale or exchange of property to certain related parties or controlled partnerships, to prevent losses from being shifted from a tax-indifferent party (e.g., a foreign person not subject to U.S. tax) to another party in whose hands any gain or loss with respect to the property would be subject to U.S. tax.
The provision generally is effective for sales and exchanges of property acquired after 2015.
Treatment of Certain Persons as Employers with Respect to Motion Picture Projects (IRC §3512, Act §346)
The provision allows motion picture payroll services companies to be treated as the employer of their film and television production workers for Federal employment tax purposes.
A normal structure in the motion picture industry is for a worker to be employed by one payroll service company, but actually for a number of different studios during the year. The IRS had succeeded in Cencast in holding that the FICA and FUTA limits has to be met with regard to wages paid for work by each studio, rather than treating the individual as having a single employee for FICA and FUTA payroll tax purposes.
Effectively this law meant to reverse the result in the decision of Cencast Services, L.P. v. United States, 729 F.3d 1352 (Fed. Cir. 2013) and have a single employer for FICA/FUTA purposes, but only for this single industry.
The provision is effective for remuneration paid after 2015.
Internal Revenue Service Reforms
Duty to Ensure That IRS Employees are Familiar With and Act in Accord With Certain Taxpayer Rights. (IRC §7803, Act §401)
The provision amends the tax code to require the IRS Commissioner to ensure that IRS employees are familiar with and act in accordance with the taxpayer bill of rights, which includes the right to:
1. be informed;
2. quality service;
3. pay no more than the correct amount of tax;
4. challenge the position of the IRS and be heard;
5. appeal a decision of the IRS in an independent forum;
9. retain representation;
10. a fair and just tax system.
The provision is effective on December 18, 2015.
IRS Employees Prohibited from Using Personal Email Accounts for Official Business (Act §402(
The provision prohibits employees of the IRS from using a personal email account to conduct any official business, codifying an already established agency policy barring use of personal email accounts by IRS employees for official governmental business.
The provision is effective on December 18, 2015.
Release of Information Regarding the Status of Certain Investigations (IRC §6103, Act §403)
The provision allows taxpayers who have been victimized by the IRS, for example, through the unauthorized disclosure of private tax information, to find out basic facts, such as whether the case is being investigated or whether the case has been referred to the Justice Department for prosecution.
The provision applies to disclosures made on or after December 18, 2015.
Administrative Appeal Relating to Adverse Determinations of Tax-Exempt Status of Certain Organizations (IRC §7123, Act §404)
The provision requires the IRS to create procedures under which a 501(c) organization facing an adverse determination may request administrative appeal to the IRS Office of Appeals. This includes determinations relating to the initial or continuing classification of
(1) an organization as tax-exempt under section 501(a);
(2) an organization under section 170(c)(2);
(3) a private foundation under section 509(a); or
(4) a private operating foundation under section 4942(j)(3).
The provision applies to determinations made after May 19, 2014.
Organizations Required to Notify Secretary of Intent to Operate under 501(c)(4) (IRC §§506, 6033 and 6652, Act §405)
The provision provides for a streamlined recognition process for organizations seeking tax exemption under section 501(c)(4). The process requires 501(c)(4) organizations to file is a simple one-page notice of registration with the IRS within 60 days of the organization’s formation. The current, voluntary 501(c)(4) application process will be eliminated. Within 60 days after an application is submitted, the IRS is required to provide a letter of acknowledgement of the registration, which the organization can use to demonstrate its exempt status, typically with state and local tax authorities.
Per the PATH Technical Explanation:
The provision generally is effective for organizations organized after the date of enactment.
Organizations organized on or before the date of enactment that have not filed an application for exemption (Form 1024) or annual information return or notice (under section 6033) on or before the date of enactment must provide the notice required under the provision within 180 days of the date of enactment.
Declaratory Judgments for 501(c)(4) and Other Exempt Organizations (IRC §7428, Act §406)
The provision permits 501(c)(4) organizations and other exempt organizations to seek review in Federal court of any revocation of exempt status by the IRS.
The provision applies to pleadings filed after December 18, 2015.
Termination of Employment of Internal Revenue Service Employees for Taking Official Actions for Political Purposes, (IRC §1203(b); Act §407)
The provision makes clear that taking official action for political purposes is an offense for which the employee should be terminated. The bill amends the Internal Revenue Service Restructuring and Reform Act of 1998 to expand the grounds for termination of employment of an IRS employee to include performing, delaying, or failing to perform any official action (including an audit) by an IRS employee for the purpose of extracting personal gain or benefit for a political purpose.
The provision takes effect on December 18, 2015.
Gift Tax Not to Apply to Contributions to Certain Exempt Organizations (IRC §2501(a); Act §408)
The provision treats transfers to organizations exempt from tax under section 501(c)(4), (c)(5), and (c)(6) of the tax code as exempt from the gift tax.
The provision applies to transfers made after December 18, 2015.
Extend Internal Revenue Service Authority to Require Truncated Social Security Numbers on Form W-2, (IRC §6051, Act §409)
The new law requires employers to include an “identifying number” for each employee, rather than an employee’s SSN, on Form W-2. This change will permit the Department of the Treasury to promulgate regulations requiring or permitting a truncated SSN on Form W-2.
This is another change being made to attempt to control ID theft and refund fraud by limiting the risk that an employee’s social security number will end up being compromised due to being on the W-2 that is being provided to the employee, such as if the W-2 is lost in the mail or if a W-2 is accidentally (or intentionally) taken by another employee. However for now taxpayers and employers need to wait for IRS guidance in this area.
The provision is effective on the December 18, 2015.
Clarification of Enrolled Agent Credentials.
The provision permits enrolled agents approved by the IRS to use the designation “enrolled agent,” “EA,” or “E.A.”
The provision is effective on the December 18, 2015.
Partnership Audit Rules.
The Act corrects and clarifies certain technical issues in the partnership audit rules enacted in the Bipartisan Budget Act of 2015.
The PATH Technical Explanation outlines these revisions as follows:
The provision corrects and clarifies several provisions relating to partnership audits to express the intended rule.
Modifying an imputed underpayment based on applicable highest tax rates
The provision strikes the reference to ordinary income of corporations in the rule that provides procedures for modification of an imputed underpayment to make clear that a lower rate of tax may be taken into account in the case of either capital gain or ordinary income of a partner that is a C corporation.
Modifying an imputed underpayment based on certain passive losses of publicly traded partnerships
Under the provision, certain section 469(k) passive activity losses can reduce the imputed underpayment of a publicly traded partnership under the centralized system. The imputed underpayment can be determined without regard to the portion of the underpayment that the partnership demonstrates is attributable to (i.e., would be offset by) specified passive activity losses attributable to a specified partner. The amount of the specified passive activity loss is concomitantly decreased, and the partnership takes the decrease into account in the adjustment year with respect to the specified partners to which the decrease relates.
A specified passive activity loss for any specified partner of a publicly traded partnership means the lesser of the section 469(k) passive activity loss of that partner (1) for the partner's taxable year in which or with which the reviewed year of the partnership ends, or (2) for the partner's taxable year in which or with which the adjustment year of the partnership ends. A specified partner is a person who continuously meets each of three requirements for the period starting with the partner's taxable year in which or with which the partnership reviewed year ends through the partner's taxable year in which or with which the partnership adjustment year ends. These three requirements are that the person is a partner of the publicly traded partnership; the person is an individual, estate, trust, closely held C corporation, or personal service corporation; and the person has a specified passive activity loss with respect to the publicly traded partnership.
Limitations period for partnership adjustments
The provision clarifies the unintended conflict between section 6231 (barring the Secretary from issuing the notice of final partnership adjustment earlier than the expiration of the 270 days after the notice of a proposed adjustment) and section 6235 (requiring that a notice of final partnership adjustment be filed no later than 270 days after the notice of proposed adjustment in the case of a partnership that does not seek modification of the imputed underpayment). As amended, section 6235 provides that a notice of final partnership adjustment to a partnership that does not seek modification of an underpayment in response to a notice of proposed adjustment may be issued up to 330 days (plus any additional number of days that were agreed upon as an extension of time for taxpayer response) after the notice of proposed adjustment.
Forum for judicial review
The provision correctly identifies the Court of Federal Claims in section 6234.
The provision adds a cross reference within the alternative payment rules to the time period for seeking judicial review, clarifying that judicial review is available to a partnership that has made the election under the alternative payment rules.
Restriction on authority to amend partner information statements
The provision corrects the conforming amendment so that it correctly strikes the last sentence of section 6031(b) under prior law, which sentence related to repealed provisions on electing large partnerships.
United States Tax Court
The law also contains number of provisions related the United States Tax Court
Filing Period for Interest Abatement Cases.
The provision permits a taxpayer to seek review by the Tax Court of a claim for interest abatement when the IRS has failed to issue a final determination. The provision applies to claims for interest abatement filed after the date of enactment.
Small Tax Case Election for Interest Abatement Cases.
The provision expands the current-law procedures for the Tax Court to consider small tax cases (i.e., cases with amount in dispute that are under $50,000) to include the review of IRS decisions not to abate interest, provided the amount of interest for which abatement is sought does not exceed $50,000. The provision applies to cases pending and cases commenced after the date of enactment.
Venue for Appeal of Spousal Relief and Collection Cases.
The provision clarifies that Tax Court decisions in cases involving spousal relief and collection cases are appealable to the U.S. Court of Appeals for the circuit in which an individual’s legal residence is located or in which a business’ principal place of business or principal office of agency is located. The provision applies to Tax Court petitions filed after the date of enactment.
Suspension of Running of Period for Filing Petition of Spousal Relief and Collection Cases.
The provision suspends the statute of limitations in cases involving spousal relief or collections when a bankruptcy petition has been filed and a taxpayer is prohibited from filing a petition for review by the Tax Court. Under the provision, the suspension is for the period during which the taxpayer is prohibited from filing such a petition, plus 60 days. The provision applies to Tax Court petitions filed after the date of enactment.
Application of Federal Rules of Evidence.
The provision requires the Tax Court to conduct its proceedings in accordance with the Federal Rules of Evidence (rather than the rules of evidentiary rules applied by the United States District Court of the District of Columbia, as under current law). The provision applies to proceedings commenced after the date of enactment.
Judicial Conduct and Disability Procedures.
The provision authorizes the Tax Court to establish procedures for the filing of complaints with respect to the conduct of any judge or special trial judge of the Tax Court and for the investigation and resolution of such complaints. The provision applies to proceedings commenced 180 days after the date of enactment.
Administration, Judicial Conference, and Fees.
The provision extends to the Tax Court the same general management, administrative, and expenditure authorities that are available to Article III courts and the Court of Appeals for Veterans Claims. The provision also permits the Tax Court to conduct an annual judicial conference and charge reasonable registration fees. Additionally, the provision authorizes the Tax Court to deposit certain fees into a special fund held by the Treasury Department, with such funds available for the operation and maintenance of the Tax Court. The provision is effective on the date of enactment.
Clarification Relating to United States Tax Court.
The provision clarifies that the Tax Court is not an agency of, and shall be independent of, the Executive Branch. The provision is effective upon the date of enactment.