Legislative update: Year-end bills include permanent extensions of some provisions, other policy changes

Year-end bills include permanent extensions

Congressional leaders early this morning introduced the “Protecting Americans from Tax Hikes Act of 2015” (PATH Act), as well as an omnibus spending package (the Omnibus Bill).

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Overview

The PATH Act would:

  • Make permanent some provisions in the Code that recently expired or that are scheduled to expire
  • Extend certain other expired provisions through 2019
  • Extend other expired provisions through 2016
  • Extend and phase out certain energy provisions over a defined schedule

Extensions of provisions that already have expired generally would be retroactive to the beginning of 2015.  

In addition, both the PATH Act and “Division P” of the Omnibus Bill include other significant tax policy changes, including provisions relating to real estate, the medical device excise tax, the so-called “Cadillac tax” on certain health care plans, loss deferral under section 267, modifications to the section 199 rules as applied to independent oil refiners, certain procedural matters, and a host of other issues.  

The Omnibus Bill also includes a temporary extension of the ban on states and localities taxing internet access.

Documents

PATH Act—read the statutory language [PDF 223 KB] and a section-by-section description [PDF 551 KB]

Omnibus Bill—read the statutory language [PDF 2.93 MB]

Revenue estimates

The Joint Committee on Taxation (JCT) has estimated that the PATH Act would lose approximately $622 billion over the 10-year scoring window.  The costs of extending items does not appear to have been offset. However, the PATH Act includes revenue raisers to offset the costs of other measures. The JCT has estimated that the tax provisions of the Omnibus Bill would lose approximately $58 billion over the 10-year scoring window.

Read the JCT revenue estimates

Congressional schedule

The House is expected to vote on the PATH Act tomorrow (December 17) and the Omnibus Bill on Friday (December 18).  Assuming the bills pass the House, Senate action is expected to follow shortly thereafter.  Passage of both bills likely will require bi-partisan support, so passage is not yet certain.

Permanent extensions (with some modifications)

The PATH Act would make permanent the following provisions:

  • The research credit, modified so that in general, beginning in 2016, certain eligible small businesses with $50 million or less in average annual gross receipts could use the credit against alternative minimum tax (AMT) liability and certain qualified small businesses with $5 million or less in gross receipts could use the credit against payroll tax liability
  • Exception under subpart F for active financing income
  • Increased expensing under section 179 (modified for tax years beginning after December 31, 2015, by indexing the expensing limits and phase-out amounts for inflation beginning in 2016, treating certain air conditioning and heating units as eligible for expensing, and eliminating the $250,000 cap with respect to qualifying real property)
  • Reduction in section 1374 built-in gains (BIG) tax recognition period to five years (with a special rule for distributions to shareholders pursuant to section 593(e))
  • Basis adjustment to stock of S corporations making charitable contributions of property
  • 100% exclusion of gain on qualified small business stock
  • 15-year straight-line cost recovery for qualified leasehold improvements, qualified restaurant buildings and improvements, and qualified retail improvements
  • Definition of regulated investment company (RIC) as qualified investment entity under the “Foreign Investment in Real Property Tax Act” (FIRPTA)
  • Treatment of certain dividends by RICs to foreign investors
  • Minimum credit rate and treatment of military housing allowances under low-income housing credit
  • Tax-free distributions from individual retirement accounts (IRAs) for charitable purposes
  • Enhanced charitable deduction for contributions of food inventory (modified to increase the limit on deductible contributions of food inventory and by providing special rules for valuing food inventory)
  • Modification of tax treatment of certain payments to controlling exempt organizations
  • Special rules for contributions of capital gain real property made for conservation purposes (modified to permit Alaska Native Corporations to deduct certain donations of conservation easements up to 100% of taxable income)
  • Parity for exclusion from income for employer provided mass transit and parking benefits
  • Deduction for state and local general sales taxes
  • Employer wage credit for activated military reservists (modified to apply to employers of all sizes for tax years beginning after December 31, 2015)
  • Deduction for certain expenses of elementary and secondary school teachers (modified to index the $250 cap on expenses for inflation and to include expenses for certain professional development courses for tax years beginning after December 31, 2015)
  • Enhanced child credit
  • American opportunity tax credit
  • Enhanced earned income tax credit

Temporary extensions through 2019

The PATH Act generally would extend the following expired provisions retroactively from the beginning of 2015 through 2019:

  • Bonus depreciation and election to accelerate AMT credit in lieu of bonus depreciation, modified so that (1) the bonus depreciation percentage would phase down from 50% for property placed in service during 2015, 2016, and 2017, to 40% for 2018, and 30% for 2019; and (2) generally beginning in 2016, the amount of unused AMT credits that may be claimed in lieu of bonus depreciation would be increased, “qualified improvement property” would be included, and certain trees, vines, and plants bearing fruit or nuts could be eligible for bonus depreciation when planted or grafted
  • Look-through treatment of payments between related controlled foreign corporations (CFCs) under foreign personal holding company rules
  • New markets tax credit
  • Work opportunity tax credit (modified to apply to qualified long-term unemployed individuals who begin work for the employer after December 31, 2015)

Long-term extension of energy credits with phase-outs

The Omnibus Bill includes long-term extensions to wind and solar tax credits along with a phase-out schedule for each. 

With respect to wind facilities, the “begin construction deadline” for the production tax credit would be extended five years from the current deadline of December 31, 2014, to December 31, 2019. In addition, the “begin construction deadline” with respect to the election to claim the investment tax credit in lieu of the production tax credit also would be extended to December 31, 2019. 

The amount of the credit would be determined by the year in which construction begins.

Period in which construction begins Reduction to credit
Before January 1, 2017 No reduction
After December 31, 2016, and before January 1, 2018 20% reduction
After December 31, 2017, and before January 1, 2019 40% reduction
After December 31, 2018, and before January 1, 2020 60% reduction

The effective date for these amendments relating to wind facilities under sections 45 and 48 would be January 1, 2015.

With respect to the 30% investment tax credit for solar energy facilities under section 48, such facilities would now be required only to have begun construction by a certain deadline—rather than being placed in service (i.e., a “begin construction deadline” approach). 

The deadline for solar energy property would be extended five years from the current deadline of December 31, 2016, to property whose construction begins on or before December 31, 2021.

Similar to the amendments for wind facilities, the investment tax credit for solar would be reduced the later construction begins:

Period in which construction begins Credit rate
Before January 1, 2020 30%
After December 31, 2019, and before January 1, 2021 26%
After December 31, 2020, and before January 1, 2022 22%

In addition—unique to the proposed amendments for solar energy property—for any project for which the construction begins before January 1, 2022, but is not placed in service before January 1, 2024, the credit rate would be 10%.

The effective date for these amendments relating to solar energy property under section 48 would be the date of enactment of the legislation.

 

Read more at TaxNewsFlash-Legislative Updates

 

Temporary extensions through 2016

The PATH Act would temporarily extend (generally from January 1, 2014, through December 31, 2016) the following provisions that expired at the end of 2014:

  • Exclusion of income from discharge of qualified principal residence indebtedness (with a modification for discharges pursuant to a binding written agreement entered into before January 1, 2017)
  • Accelerated depreciation for business property on Indian reservations (modified to allow a taxpayer to elect out of the special accelerated depreciation rules for property on Indian reservations for tax years beginning after December 31, 2015)
  • Indian employment tax credit
  • Nonbusiness energy property credit (with modifications relating to energy efficiency for property placed in service after December 31, 2015)
  • Credit for alternative fuel vehicle refueling property 
  • Second generation biofuel producer credit
  • Incentives for biodiesel and renewable diesel
  • Production credit for Indian coal facilities (with modifications removing the placed-in-service date limit, removing the nine-year limit, and allowed the credit to be claimed against AMT beginning in 2016)
  • Production tax credit for certain renewable sources of electricity (for facilities for which construction has commenced by the end of 2016)
  • Credit for construction of new energy efficient homes
  • Cellulosic biofuels bonus depreciation
  • Energy efficient commercial buildings deduction 
  • Special rule for sales or dispositions relating to FERC or sate electric restructuring policy for qualified electric utilities
  • Credits relating to alternative fuels
  • Credit for fuel cell motor vehicles
  • Deduction for mortgage interest premiums
  • Above-the-line deduction for qualified tuition
  • Railroad track maintenance credit (modified to define qualified expenditures by reference to expenditures owned or leased as of January 1, 2015, rather than as of January 1, 2005)
  • Mine rescue team training credit
  • Qualified zone academy bonds
  • Classification of certain race horses for cost recovery purposes
  • Cost recovery treatment of motorsports entertainment complexes
  • Election to expense mine safety equipment
  • Special expensing rules for certain film, television, and theatrical productions
  • Deduction with respect to income attributable to domestic production activity in Puerto Rico
  • Temporary increase in rum cover over limit
  • American Samoa economic development credit

In addition, the PATH Act would reinstate a 10% credit for the purchase of electric motorcycles in 2015 and 2016. The credit, which is capped at $2,500 per qualifying vehicle, was in place prior to 2014, but was allowed to expire on December 31, 2013. The provision would apply only to two-wheel, not three-wheel, electric vehicles.

Refer to the statutory language of the PATH Act for more details and for the complete list of provisions that would be extended by the legislation.

“Program integrity” provisions

The PATH Act includes a “program integrity” title that includes a host of procedural and compliance changes (most of which are scored as raising revenue). Some of the provisions in this title generally relate to the following:

  • Modification of filing dates of certain returns and statements relating to employee wage information and nonemployee compensation
  • Safe harbor for certain penalties for de minimis errors on information returns and payee statements
  • New requirements relating to taxpayer identification numbers (TINs) issued by the IRS
  • Expansion of certain penalties and due diligence requirements relating to the earned income tax credit, the child credit, and the American Opportunity tax credit
  • Changing penalty rules applicable to erroneous claims with respect to refundable credits
  • Reforms to reporting requirements for Form 1098-T so that educational institutions are required to report only qualified tuition and expenses actually paid

Real estate provisions

The PATH Act would make a number of changes to the real estate investment trust (REIT) rules.  Some of these provisions previously were included in former Ways and Means Chairman Camp’s Tax Reform Act of 2014 (and the Real Estate and Investment Jobs Act of 2015).  

One significant change would restrict tax-free spinoffs involving REITs, effective for distributions on or after December 7, 2015, subject to a “grandfather rule” for certain distributions pursuant to transactions described in ruling requests submitted to the IRS on or before such date.  A spin-off involving a REIT generally would qualify for tax-free treatment only if “Distributing” and “Controlled” both were REITs immediately following the spin (or if Controlled had been a taxable REIT subsidiary of the REIT, provided certain other conditions are satisfied).  Further, neither Distributing nor Controlled would be permitted to elect to be treated as a REIT for 10 years following a tax-free spin-off transaction (other than an election for Controlled when both Distributing and Controlled would be REITs immediately following the spin).

Other amendments would: (1) reduce the percentage of REIT assets that may be securities of taxable REIT subsidiaries from 25% to 20%; (2) create an alternative three-year averaging safe harbor (based on adjusted bases or fair market value) for the prohibited transactions tax; (3) repeal preferential dividend rules for publicly offered REITs and provide authority for alternative remedies for preferential dividends paid by REITs that are not publicly offered; and (4) modify the REIT earnings and profits rules to prevent duplication of taxation. Other REIT provisions also are included. 

With respect to FIRPTA, the PATH Act generally would: (1) increase the ownership threshold permitted for a foreign person in a publicly traded U.S. REIT without triggering FIRPTA (from 5% to 10%); (2) provide relief from FIRPTA for REIT stock held by certain “qualified shareholders”; (3) modify the rules for determining when a REIT or regulated investment company (RIC) is domestically controlled for purposes of the FIRPTA rules; and (4) provide an exemption from FIRPTA for U.S. real property interests held by foreign pension funds meeting certain conditions. 

In addition, the PATH Act includes revenue-raising provisions that generally would:  (1) increase the rate of withholding on dispositions of U.S. real property interests (other than personal residences) from 10% to 15%; (2) modify the application of the “cleansing rule” to interests in RICs and REITs; and (3) not treat dividends from RICs and REITs as dividends from related corporations (even if the RIC or REIT owns shares in a foreign corporation) for purposes of determining whether dividends from a foreign corporation are eligible for the dividends received deduction.

Temporary suspension of medical device excise tax

The PATH Act would impose a two-year moratorium on application of the medical device excise tax. Under the legislation, the tax would not apply to sales made between January 1, 2016 and December 31, 2017. 

“Cadillac tax”

The PATH Act would delay for two years the so-called “Cadillac tax”—an excise tax on certain high-cost health insurance plans. Under the PATH Act, the tax would not be in effect until January 1, 2020.

A separate provision would also provide a one-year moratorium (for 2017) on application of the fee applicable to health insurance providers. 

Temporary rule for oil refiners

The PATH Act would temporarily create a special rule for independent oil refiners that enhances the section 199 domestic manufacturing deduction. Specifically, the legislation would allow an independent refiner to reduce transportation costs allocable to “qualified production activities income” (QPAI) by 75%, thus increasing the amount of deduction. The rule would be applicable for tax years beginning between 2016 and 2021.

Partnership audit provisions

The PATH Act proposes a few amendments to the partnership audit reform measures that were recently enacted as part of the “Bipartisan Budget Act of 2015" (Pub. L. 114-74). These changes include modifications to the general rules for determining the amount of an imputed underpayment to take into account: (1) capital gains rates in the case of C corporation partners, and (2) passive activity losses in the case of publicly traded partnerships (PTPs).  The bill also includes a clarification to the period of limitations on making adjustments and other technical changes.

The PATH Act does not address a number of other significant issues that have been raised about the new regime. Read KPMG's description of the partnership audit provisions TaxNewsFlash-United States [PDF 185 KB]

Internet access moratorium

Section 633 of the Omnibus Bill includes an extension through October 1, 2016, of the ban on states and localities taxing internet access or placing multiple and discriminatory taxes on internet commerce.

Other provisions

The PATH Act also includes a host of other significant tax law changes. Some of these changes are revenue raisers that may have been included to offset the costs of provisions not related to extending provisions that expired or that are scheduled to expire. These provisions include the following:

  • Amendments to section 267(d) intended to prevent the transfer of certain losses from tax indifferent parties (estimated to raise approximately $1.24 billion over the 10-year scoring window)
  • Updated standards for the energy efficient commercial buildings deduction (estimated to raise approximately $8 million over the 10-year scoring window)
  • Excise tax credit equivalency for liquefied petroleum gas (LPG) and liquefied natural gas (LNG) (estimated to raise approximately $63 million over the 10-year scoring window)
  • Exclusion from gross income of certain clean coal power grants to non-corporate taxpayers (estimated to raise approximately $6 million over the 10-year scoring window)
  • Clarification of value rule for early termination of certain charitable remainder unitrusts (estimated to raise approximately $113 million over the 10-year scoring window)
  • Treatment of certain persons as employers for motion picture projects (estimated to raise approximately $45 million over the 10-year scoring window)
  • Special tax rate for timber gains of C corporations
  • An amendment to the section 831(b) election for small nonlife insurance companies to: (1) increase the annual premium limitation from $1.2 million to $2.2 million; and (2) add a “diversification” rule under which no single policyholder may be responsible for more than 20% of net written premium (or direct written premium, if greater)
  • Deductibility of charitable contributions to agricultural research organizations
  • Rollovers permitted from other retirement plans into simple retirement accounts
  • Tax administration provisions affecting the IRS, including a provision treating transfers to certain organizations that are exempt from tax under section 501(c)(4), 501(c)(5), or 501(c)(6) as exempt from gift tax
  • Provisions relating to taxpayer access to, and the administration of, the U.S. Tax Court
  • Other provisions
 
 
For more information, contact a member of KPMG’s Washington National Tax (WNT) Federal Legislative and Regulatory Services group:
 
John Gimigliano | +1 202-533-4022 | jgimigliano@kpmg.com
 
Carol Kulish | +1 202-533-5829 | ckulish@kpmg.com
 
Tom Stout | +1 202-533-4148 | tstoutjr@kpmg.com
 
Jennifer Bonar Gray | +1 202-533-3489 | jennifergray@kpmg.com

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