On December 18, 2015 President Obama signed the “2016 Consolidated Appropriations Act” that not only funded the government in 2016, but also made a large number of extensions, delays, and changes to a wide array of individual and business tax provisions.

Hopefully these summaries will be helpful. I have grouped them based on topic, and my expectation is that you jump directly into the topic you are most interested in. The result is that there is some redundancy in the terms since some of the provisions apply to more than one topic.

I hope you find this helpful and if you have any questions feel free to give me a call

Matt. Erskine

Contents

Small Business Expensing Limits Extended

Cadillac Tax and Health Insurance Provider Fee Delayed

Wind and Solar Tax Breaks Extended

50+ Individual “extenders” to Existing tax breaks

50+ Business “extenders” to existing tax breaks

Energy Related Tax Breaks

Real Estate Investment Trust Changes

Bonus Depreciation Changes

Research Credit

Small Business Expensing Limits Extended

In what is easily the most positive tax legislative action taken for small business in the past several years, Congress recently made permanent the $500,000 Section 179 expensing limit, thus enabling a small business to elect to expense up to $500,000 of investment in new equipment and other qualifying property instead of having to depreciate the cost over a number of years.

In recent years, the $500,000 limit and some other favorable aspects of the election have been extended for a year or two at a time, but sometimes these provisions weren’t extended until December, leaving many taxpayers uncertain for most of a tax year as to whether the higher expensing limit and other favorable provisions would be extended. What’s worse, the $500,000 limit and other favorable provisions expired again at the end of 2014. Most dramatically, on Jan. 1, 2015, the limit reverted to its old level of $25,000 and the other favorable provisions also lapsed, once again plunging taxpayers into uncertainty.

I am happy to report that the uncertainty is over. The recently enacted “Protecting Americans from Tax Hikes Act of 2015” (i.e., the 2015 PATH Act) makes the higher expensing limit and other favorable provisions permanent.

To provide a bit more detail, the new law, retroactive so as to not leave out tax years beginning in calendar year 2015:

  1. . . . makes permanent the expensing of up to $500,000 annually of the cost of qualifying property; as was true for earlier years for which the $500,000 limit was in place, the amount of expensing allowed is subject to gradual reduction (down to zero) once the total qualifying property placed in service during the year exceeds $2 million;
  1. . . . makes permanent the eligibility for expensing of most computer software;
  1. . . . makes permanent the eligibility for expensing of qualified real property (certain leasehold building improvements, retail building improvements and restaurant property); and
  1. . . . makes permanent the ability to revoke an election, or change its specifics, without IRS consent.

And, for tax years beginning after calendar year 2015 (post-2016 years), the new law:

  1. . . . indexes both the $500,000 and $2 million limits for inflation;
  1. . . . ends the exclusion from expensing of air conditioning and heating units; and
  1. . . . removes the $250,000 cap on qualified real property expensing; the capped expensing nevertheless also had to be applied against the $500,000 limit.

Cadillac Tax and Health Insurance Provider Fee Delayed

The recently enacted 2016 Consolidated Appropriations Act delays two taxes that were enacted to fund the Affordable Care Act (ACA): (1) the “Cadillac tax” and (2) the health insurance provider fee. I’m writing to give you a brief overview of these provisions in the new law.

Under the recent legislation, the “Cadillac tax,” the tax on expensive employer-sponsored health plans which was scheduled to start in 2018, has been postponed for two years. The tax, a key revenue source and cost-control measure in the 2010 health law, is a 40% levy on employer benefit plans whose value exceeds a government-set threshold. The tax applies to company plans valued at more than $10,200 for individual coverage and $27,500 for a family. However, as I stated above, the tax is now on hold and will not take effect until 2020.

The new legislation not only postponed the effect of the excise tax, it also repealed a provision of the ACA that provided that the excise tax is not deductible as a business expense. This will lessen the bite of the Cadillac tax if it ever goes into effect.

The second tax provision delayed by the 2016 Consolidated Appropriations Act is the ACA’s annual health insurance provider fee. Actually, the new law imposes a one-year moratorium on the tax (for 2017), as the tax has been in effect since 2014 and will go back into effect for 2018. The moratorium is the legislative response to the perception that the insurance rates under the ACA are too high and that this fee is playing a role in the high rates.

Wind and Solar Tax Breaks Extended

In a major boost to the wind and solar industries, the recently enacted 2016 Consolidated Appropriations Act, contains provisions extending tax breaks for wind and solar energy companies. I’m writing to give you a brief overview of these provisions in the new law.

For qualified wind facilities, the new law provides for a renewable electricity production credit (subject to several limitations), and an alternative energy credit which a taxpayer may elect in lieu of the production credit. Both credits were extended at previous levels through 2016. After 2016, both the production credit and the alternative energy credit for qualified wind facilities will be phased out by reducing the credit value to 80% of the present value in 2017, 60% in 2018, and 40% in 2019, after which the wind tax credits will expire.

As for solar energy property, the new legislation extends the temporary 30% energy credit for solar property from its current expiration after Dec. 31, 2016, for three additional years through 2019. The energy credit for solar energy property will then be phased out, providing a 26% credit in 2020, and a 22% credit in 2021. For any property that is under construction before 2022, but not placed in service before 2024, the energy credit is reduced to 10%. Similarly, the new law extends the temporary credit for solar residential energy-efficient property.

50+ Individual “extenders” to Existing tax breaks

Congress has once again extended the “extenders,” a varied assortment of more than 50 individual and business tax deductions, tax credits, and other tax-saving laws which have been on the books for years but which technically are temporary because they have a specific end date. This package of tax breaks has repeatedly been temporarily extended for short periods of time (e.g., one or two years), which is why they are referred to as “extenders.” Most of the tax breaks expired at the end of 2014, but now, in the recently enacted Protecting Americans from Tax Hikes Act of 2015 (i.e., the 2015 PATH Act), the extenders have been revived and extended once again, but this time Congress has taken a new tack. Instead of just rolling the package of provisions over for a year or two, it actually made some of the provisions permanent and extended the remaining provisions for either five or two years, while making significant modifications to several of the provisions.

I’m writing to give you an overview of the key tax breaks for individuals that were extended by the new law. Please call our office for details of how the new changes may affect you.

The extended provisions include:

  1. . . . tax credits for low to middle wage earners that were originally enacted as part of the 2009 stimulus package and were slated to expire at the end of 2017; made permanent; these tax credits are: (1) the American Opportunity Tax Credit, which provides up to $2,500 in partially refundable tax credits for post-secondary education, (2) eased rules for qualifying for the refundable child credit, and (3) various earned income tax credit (EITC) changes;
  2. . . . the $250 above-the-line deduction for teachers and other school professionals for expenses paid or incurred for books, certain supplies, equipment, and supplementary material used by the educator in the classroom; made permanent; also modified, beginning in 2016, to index the $250 cap to inflation and include professional development expenses;
  3. . . . the exclusion of up to $2 million ($1 million if married filing separately) of discharged principal residence indebtedness from gross income; extended through 2016; the new law also modifies the exclusion to apply to qualified principal residence indebtedness that is discharged in 2017, if the discharge is pursuant to a binding written agreement entered into in 2016;
  4. . . . parity for the exclusions for employer-provided mass transit and parking benefits; made permanent;
  5. . . . the deduction for mortgage insurance premiums deductible as qualified residence interest; extended through 2016;
  6. . . . the option to take an itemized deduction for State and local general sales taxes instead of the itemized deduction permitted for State and local income taxes; made permanent;
  7. . . . the increased contribution limits and carryforward period for contributions of appreciated real property (including partial interests in real property) for conservation purposes is made permanent; the new law also extends the enhanced deduction for certain farmers and ranchers;
  8. . . . the above-the-line deduction for qualified tuition and related expenses; extended through 2016; and
  9. . . . the provision that permits tax-free distributions to charity from an individual retirement account (IRA) of up to $100,000 per taxpayer per tax year, by taxpayers age 70½ or older; made permanent.

50+ Business “extenders” to existing tax breaks

Congress has once again extended the “extenders,” a varied assortment of more than 50 individual and business tax deductions, tax credits, and other tax-saving laws which have been on the books for years but which technically are temporary because they have a specific end date. This package of tax breaks has repeatedly been temporarily extended for short periods of time (e.g., one or two years), which is why they are referred to as “extenders.” Most of the tax breaks expired at the end of 2014, but now, in the recently enacted Protecting Americans from Tax Hikes Act of 2015 (i.e., the 2015 PATH Act), the extenders have been revived and extended once again, but this time Congress has taken a new tack. Instead of just rolling the package of provisions over for a year or two, it actually made some of the provisions permanent and extended the remaining provisions for either five or two years, while making significant modifications to several of the provisions.

I’m writing to give you an overview of the key tax breaks affecting business that were extended by the new law. Please call our office for details of how the new changes may affect you or your business.

The extended business credits and special depreciation and expensing rules include:

    1. . . . the research credit; made permanent; additionally, beginning in 2016 eligible small businesses ($50 million or less in gross receipts) may claim the credit against alternative minimum tax (AMT) liability, and the credit can be used by certain even smaller businesses against the employer’s portion of the Social Security portion of the employer’s payroll tax (i.e., FICA) liability;
    2. . . . the minimum low-income housing tax credit rate for nonfederally subsidized new buildings; made permanent;
    3. . . . the military housing allowance exclusion for determining whether a tenant in certain counties is low-income (differential wage payment credit); made permanent;
    4. . . . the Indian employment tax credit; extended through 2016;
    5. . . . the new markets tax credit; extended through 2019;
    6. . . . the railroad track maintenance credit; extended through 2016; the new law modifies the credit to apply to expenditures for maintaining railroad track owned or leased as of Jan. 1, 2015 (rather than Jan. 1, 2005, as under prior law);
    7. . . . the mine rescue team training credit; extended through 2016;
    8. . . . the employer wage credit for activated military reservists; made permanent; 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 prior law;
    9. . . . the work opportunity tax credit; extended through 2019; the new law 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 50% of the first $6,000 of wages;
    10. . . . qualified zone academy bonds; extended through 2016;
    11. . . . three-year depreciation for racehorses; extended through 2016;
    12. . . . 15-year straight line cost recovery for qualified leasehold improvements, qualified restaurant buildings and improvements, and qualified retail improvements; made permanent;
    13. . . . 7-year recovery period for motorsports entertainment complexes; extended through 2016;
    14. . . . accelerated depreciation for business property on an Indian reservation; extended through 2016; the new law also modifies the deduction to permit taxpayers to elect out of the accelerated depreciation rules;
    15. . . . 50% bonus depreciation; extended for property placed in service during 2015 through 2019 (but 2016 through 2020 for certain property with a longer production period and certain aircraft); the 50% rate is phased down to 40% for property placed in serviced during 2018 (but 2019 for the long production period property and aircraft) and 30% for property placed in serviced during 2019 (but 2020 for the long production period property and aircraft); phase down is also required for the $8,000 increase, for bonus-depreciation eligible cars, of the first-year depreciation and expensing dollar cap for cars; the provision makes qualified building improvements (no longer just qualified building leasehold improvements) bonus depreciation eligible and permits most plants bearing fruit or nuts to be eligible for bonus depreciation when planted or grafted rather than when income-producing;
    16. . . . the election to accelerate alternative minimum tax (AMT) credits in lieu of additional first-year depreciation; extended 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;
    17. . . . the enhanced charitable deduction for contributions of food inventory is made permanent; the new law modifies the deduction by increasing the limitation on deductible contributions of food inventory from 10% to 15% of the taxpayer’s adjusted gross income (15% of taxable income in the case of a C corporation) per year and also modifies the deduction to provide special rules for valuing food inventory;
    18. . . . increase in elective business expensing (up to $500,000 annual write-off of eligible business property costs that is phased out once those costs exceed $2,000,000 for the year) is made permanent; made permanent too is the allowance of expensing for computer software and qualified real property (certain leasehold improvement, retail improvement and restaurant property; the $500,000 and $2,000,000 limits are indexed for inflation for tax years beginning after 2015; expensing is allowed for air conditioning and heating units placed in service in tax years beginning after 2015; the $250,000 cap on the expensing of qualified real property is eliminated for tax years beginning after 2015; the election and the specifics of the election are made revocable;
    19. . . . the election to expense mine safety equipment; extended through 2016;
    20. . . . special expensing rules for certain film and television productions; extended through 2016; the new law modifies the rules to apply to the cost of live theatrical productions;
    21. . . . the deduction allowable with respect to income attributable to domestic production activities in Puerto Rico; extended through 2016;
    22. . . . the exclusion from a tax-exempt organization’s unrelated business taxable income (UBTI) of interest, rent, royalties, and annuities paid to it from a controlled entity; made permanent;
    23. . . . the special treatment of certain dividends of regulated investment companies (RICs); made permanent;
    24. . . . the definition of RICs as qualified investment entities under the Foreign Investment in Real Property Tax Act; made permanent;
    25. . . . exceptions under subpart F for active financing income; made permanent;
    26. . . . look-through treatment for payments between related controlled foreign corporations (CFCs) under the foreign personal holding company rules; extended through 2019;
    27. . . . the exclusion of 100% of gain on certain small business stock; made permanent; the new law also permanently extends the rule that eliminates such gain as an AMT preference item;
    28. . . . the basis adjustment to stock of S corporations making charitable contributions of property; made permanent;
    29. . . . the reduction in S corporation recognition period for built-in gains tax; made permanent;
    30. . . . the empowerment zone tax incentives; extended through 2016; the new law modifies the incentive 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; and
    31. . . . the American Samoa economic development credit; extended through 2016.

The new legislation also includes a two-year delay in a pair of new taxes installed as part of the healthcare reform law: a levy on medical devices (which would have started in 2016) and another on high-end health insurance plans, known as the “Cadillac tax,” which would have applied beginning in 2018.

Energy Related Tax Breaks

The list of extended provisions includes a host of energy-related tax breaks of importance to businesses and individuals. I’m writing to give you an overview of the key tax breaks that were extended by the new law. Please call our office for details of how the new changes may affect you or your business.

  1. The energy provisions that are extended include:
  2. the nonbusiness energy property credit for certain energy-efficient improvements to the taxpayer’s main home; extended through 2016;
  3. the credit for alternative fuel vehicle refueling property; extended through 2016;
  4. the credit for two-wheeled plug-in electric vehicles; extended through 2016;
  5. the second generation biofuel producer credit (formerly cellulosic biofuels producer tax credit); extended through 2016;
  6. the incentives for biodiesel and renewable diesel; extended through 2016;
  7. the Indian coal production tax credit; extended through 2016; the new law modifies the credit by removing the placed-in-service-date limitation, and allowing the credit to be claimed against the AMT;
  8. the renewable electricity production credit, and the election to claim the energy credit in lieu of the renewable electricity production credit (except with respect to wind facilities); extended through 2016;
  9. the credit for construction of energy efficient new homes; extended through 2016;
  10. second generation biofuels bonus depreciation; extended through 2016;
  11. the energy efficient commercial buildings deduction; extended through 2016;
  12. the special rule for sale or disposition to implement federal energy regulatory commission (FERC) or State electric restructuring policy for qualified electric utilities; extended through 2016;
  13. the incentives for alternative fuel and alternative fuel mixtures through 2016; and
  14. the credit for new qualified fuel cell motor vehicles; extended through 2016.

Real Estate Investment Trust Changes

The recently enacted “Protecting Americans from Tax Hikes Act of 2015” (i.e., the 2015 PATH Act) that make major changes to the Foreign Investment in Real Property Tax Act (FIRPTA), some geared toward encouraging greater foreign investment in U.S. real estate and some having the effect of lessening the attractiveness of such investment.

FIRPTA is a law dating back to the 1980s, a time when foreign purchases of iconic American real estate fed widespread anxiety that foreign investors could dominate the U.S. real estate market. FIRPTA addressed those fears by erecting barriers to foreign ownership of U.S. real estate, most notably by requiring foreign investors to pay a 30% withholding tax on real estate investments in the U.S. However, this requirement didn’t apply to foreign investors who owned shares in real estate investment trusts (REITs), provided they owned less than 5% of the REIT’s stock.

The new legislation seeks to lessen the negative impact that FIRPTA places on foreign investment in U.S. real estate and thus spur such investment by making two changes to this area of the tax law:

  1. Exception from FIRPTA for certain stock of REITs. The new law increases from 5% to 10% the maximum stock ownership a shareholder may have held in a publicly traded stock 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 in a REIT with the REIT stock being 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% of such stock is still subject to withholding. The provision applies to disposition and distributions on or after the date of the new law’s enactment.
  1. Exception for interests held by foreign retirement or pension funds. The new law exempts any U.S. property interest held by a foreign pension fund from FIRPTA withholding. It is thought that this exception will significantly soften FIRPTA’s bite, since a large portion of investment is done by pension funds. The new provision applies to dispositions and distributions after the date of the new law’s enactment.

However, the new legislation increases the rate of withholding on dispositions of U.S. real property interests from 10% to 15%, although the increased rate of withholding doesn’t apply to the sale of a personal residence where the amount realized is $1 million or less.

The new law also provides that interests in regulated investment companies (RICs) and real estate investment trusts (REITs) are not excluded from the definition of United States real property interests. Specifically, the new law 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, under the new law, the cleansing rule applies to stock of a corporation only if neither the corporation nor any predecessor of that corporation was a RIC or REIT at any time during the period after June 18, 1980 during which the taxpayer held that stock or the five-year period ending on the date of the disposition of the stock, whichever is shorter.

Finally, the new law provides that dividends derived from RICs and REITs are ineligible for the deduction for the United States source portion of dividends from certain foreign corporations. 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 dividends 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.

Bonus Depreciation Changes

Businesses are allowed to deduct the cost of capital expenditures over time according to depreciation schedules. In previous legislation, Congress allowed businesses to more rapidly deduct capital expenditures of most new tangible personal property, and certain other new property, by permitting an additional first-year write-off of the cost. For qualified property placed in service before Jan. 1, 2015 (before Jan. 1, 2016 for certain property with a longer production period and certain aircraft), the additional first-year depreciation was 50% of the cost. The new law extends additional first-year depreciation for investments placed in service during 2015 through 2019 (with an additional year for the longer production period property and aircraft). The bonus depreciation percentage is 50% and phases down to 40% in 2018, and 30% in 2019. However, for the long production period property and aircraft, the 40% and 30% rates apply instead in 2019 and 2020 respectively.

For property placed in service in 2015, the new leaves in place the prior rules as to what kinds of property qualify for additional first-year depreciation. Generally the property must be (1) tangible depreciable property with a recovery period of 20 years or less; (2) water utility property; (3) computer software; or (4) qualified leasehold improvement property. Also, the original use of the property must commence with the taxpayer; used machinery doesn’t qualify.

However, for property placed in service after 2015, the new law includes as a qualifying category of property “qualified improvement property” instead of “qualified leasehold improvement property.” The new category is broader than the old category and includes any improvement to an interior portion of a building which is nonresidential real property if the improvement is placed in service after the date the building was first placed in service, but not including any improvement for which the expenditure is attributable to the enlargement of the building, any elevator or escalator, or the internal structural framework of the building.

In a win for agricultural interests, the new law also permits certain trees, vines, and other plants bearing fruit or nuts to be eligible for bonus depreciation when planted or grafted, rather than when placed in service.

And, as was true for property placed in service before 2015, the new law allows taxpayers to elect to accelerate the use of AMT credits in exchange for giving up bonus depreciation (and other accelerated depreciation) for bonus-depreciation-eligible property placed in service during 2015. And, the provision modifies the rules for that exchange, beginning in 2016, by changing the limit on the unused AMT credits that may be claimed in lieu of bonus depreciation.

Research Credit

The recently enacted “Protecting Americans from Tax Hikes Act of 2015” (i.e., the 2015 PATH Act) contains a provision making permanent the popular research credit, which encourages businesses to invest more in R&D than they otherwise would through a tax credit for spending on qualified research. The credit (1) is for 20% of current year qualified spending that exceeds a base amount related to gross receipts in certain earlier years and (2) can’t exceed 10% of the total spending in the current year on qualified research. Alternatively, taxpayers can irrevocably choose a simpler calculation.

The credit had lapsed for expenditures in 2015, but the legislation is also effective for those expenditures.

And importantly, the new law also makes two major changes to the credit, both favorable to small businesses. First, it provides that beginning in 2016 eligible small businesses ($50 million or less in gross receipts) may claim the credit against alternative minimum tax (AMT) liability. Also, beginning in 2016, the new law also provides that the credit can be used by certain even smaller businesses against the employer’s portion of the Social Security portion of the employer’s payroll tax (i.e., FICA) liability.

 

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