Congress enacts tax extenders legislation

Congress passed a tax extenders bill, the Protecting Americans from Tax Hikes (PATH) Act of 2015, retroactively restoring a number of popular tax breaks for either a two- or five-year period and making some provisions permanent. In addition to the tax extenders, PATH contains new provisions regarding REITs, placing limitations on spin-offs, and restricting preferred dividends. PATH also places a two-year moratorium on the medical device excise tax (2016 and 2017). In a separate omnibus funding bill, the implementation of the “Cadillac tax” on certain high-cost employer health insurance plans is delayed for two years.

Most prominently, PATH extends bonus depreciation to 2019, permanently extends the section 179 expense deduction ($500,000 subject to phaseout), and permanently extends the research tax credit. The following is a discussion of some of the key provisions of this legislation.

Research tax credit. One of the key highlights of the tax extenders package is a provision that makes permanent the research and development tax credit (R&D credit). This is a major victory for US businesses that previously struggled with the regular uncertainty around the R&D credit. 

In addition to the permanency provision, the package also provides for significant expansion of the R&D credit. Beginning in 2016, eligible small businesses ($50 million or less in gross receipts) may claim the R&D credit against the alternative minimum tax (AMT). Additionally, certain small businesses ($5 million or less in gross receipts) will have the ability to offset the credit against payroll tax liability (for up to five years).

Learn more about the R&D credit developments >

Extension and modification of bonus depreciation. This 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, but then phases down to 40 percent in 2018 and 30 percent in 2019.

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. It 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 provision 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.

Permanent extension and modification of the section 179 deduction. This provision permanently extends the small business expensing limitation and phaseout amounts in effect from 2010 to 2014 ($500,000 and $2 million, respectively). The special rules that allow expensing of computer software and qualified real property (qualified leasehold improvement property, qualified restaurant property, and qualified retail improvement property) also are permanently extended.

The provision further 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. Finally, it modifies the expensing limitation with respect to qualified real property by eliminating the $250,000 cap beginning in 2016.

REIT restrictions. The restriction on spin-offs in the bill provides that a spin-off would only be tax free if, immediately after the distribution, both the distributing and controlled corporation are REITs. That essentially prevents an operating company that is not a REIT from dividing itself into two companies, one of which is a REIT. In addition, neither a distributing nor a controlled corporation would be permitted to elect to be treated as a REIT for 10 years following a tax-free spin-off transaction. The provision applies to distributions on or after Dec. 7, 2015, but not 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.

PATH would also prevent REITs from paying “preferential dividends” to one class of stockholders. Although REITs are required to have more than 100 shareholders, they are currently allowed to pay higher dividends to some shareholders. PATH prevents REITs from deducting the value of any preferential dividends paid, which would effectively end the practice. This will make it harder for businesses to set up REITs that pay most of their dividends to a single parent company.

We are still analyzing these new provisions and expect to comment further in the next few weeks.

Other notable extender provisions extended retroactive to Jan. 1, 2015, include:

Provisions made permanent

• Subpart F exception for active financing income
• 15-year straight-line cost recovery for qualified leasehold improvements, qualified restaurant buildings and improvements, and qualified retail improvements through 2016
• Reduced five-year recognition period for built-in gains tax for S corporations
• The minimum 9 percent low-income housing tax credit rate for nonfederally subsidized buildings
• Deduction for certain expenses of elementary and secondary school teachers (with modification)
• Itemized deduction for state and local general sales taxes in lieu of state income tax
• Parity for exclusion from income for employer-provided mass transit and parking benefits
• Special rule for contributions of capital gain real property made for conservation purposes (with modification)
• Tax-free distributions from individual retirement plans for charitable purposes
• 100 percent of gain on certain small business stock
• Employer wage credit for employees who are active duty members of the uniformed services (with modification)
• Charitable deduction for contributions of food inventory (with modification)

Provisions extended for five years through 2019

• Bonus depreciation – as discussed above
• New Markets Tax Credit
• Work Opportunity Tax Credit
• Look-through treatment of payments between related controlled foreign corporations under foreign personal holding company rules

Certain provisions extended for two years through 2016

• Exclusion from gross income of discharge of qualified principal residence indebtedness (with modification)
• Mortgage insurance premiums treated as qualified residence interest
• Above-the-line deduction for qualified tuition and related expenses
• Deduction allowable with respect to income attributable to domestic production activities in Puerto Rico
• Empowerment zone tax incentives (with modification)
• Moratorium on medical device excise tax (as discussed above)
• Credit for energy-efficient new homes
• Energy-efficient commercial buildings deduction (section 179D)
• Biodiesel and renewable diesel incentives

Please note this is not comprehensive. For a complete list, visit PATH, the House bill.

For more information on this topic, or to learn how Baker Tilly tax specialists can help, contact our team.

The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought. Tax information, if any, contained in this communication was not intended or written to be used by any person for the purpose of avoiding penalties, nor should such information be construed as an opinion upon which any person may rely.  The intended recipients of this communication and any attachments are not subject to any limitation on the disclosure of the tax treatment or tax structure of any transaction or matter that is the subject of this communication and any attachments.