Legislative update: “Possible legislation” for extenders, other tax law changes

Possible legislation for extenders, other tax changes

House Ways and Means Chairman Kevin Brady (R-TX) late last night unveiled “possible legislation” to extend a package of over 50 tax provisions that expired at the end of 2014—the expired extender provisions. Generally, the proposal would extend the expired provisions for two years—retroactively from January 1, 2015, through December 31, 2016. The proposal also includes a variety of tax provisions unrelated to the expired provisions, including a provision that would restrict the tax-free spinoff rules with respect to real estate investment trusts (REITs) effective immediately.

Related content

KPMG observation

Negotiations among the White House, congressional Republicans, and congressional Democrats over the expired provisions are still in process.  As a result, it is not clear whether the proposal that was unveiled last night ultimately will be enacted.  However, even if the House and Senate end up crafting a different extenders package, it is possible that miscellaneous tax items in the proposal might find their way into the final deal. 

Extensions of expired provisions

The proposed “possible legislation” addresses substantially the same expired provisions that Congress extended through 2014 late last year. Thus, for example, the proposal generally would extend through 2016 the following (among other) provisions:

  • Bonus depreciation
  • The research credit
  • The exception under subpart F for active financing income
  • Look-through treatment of payments between related controlled foreign corporations (CFCs) under foreign personal holding company income rules
  • Reduced recognition period for S corporation “built-in gains” tax
  • Basis adjustment to stock of S corporations making charitable contributions of property
  • Increased expensing
  • Incentives for biodiesel, renewable diesel, second-generation biofuel, and alternative fuels
  • Production tax credit for wind and other renewable energy projects (without a phase-down of the credit, as having been considered by some in Congress)

In addition, the proposal 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 before 2014, but was allowed to expire on December 31, 2013. The provision would apply only to two-wheel, not three-wheel, electric vehicles.

The proposal would not extend the section 48 investment tax credit for solar and other sources of renewables. That credit is not scheduled to expire until December 31, 2016, and was presumably outside the scope of the proposal.

The proposal also includes modifications to some of the expired provisions (generally effective in 2016).  For example, the research credit would be modified to increase the alternative simplified credit and to allow certain eligible small businesses to claim the credit against both alternative minimum tax liability and payroll tax liability.

Other tax provisions

The possible legislative option also includes various tax law changes unrelated to the expired provisions.  For example, it includes:

  • A subtitle relating to REITs, as well as provisions relating to Foreign Investment in Real Property Act (FIRPTA)
  • Amendments to the recently enacted partnership audit reform rules
  • IRS reforms, 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
  • 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)
  • Other “miscellaneous” provisions relating to timber, certain qualified plans, certain excise tax matters, certain charitable contributions, and other tax matters
  • Updated standards for the energy efficient commercial buildings deduction
  • Treatment of certain persons as employers for motion picture projects
  • Excise tax credit equivalency for liquefied petroleum gas (LPG) and liquefied natural gas (LNG)
  • Exclusion from gross income of certain clean coal power grants to non-corporate taxpayers

REIT and FIRPTA provisions

The “possible legislation” proposes a number of changes to the 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 Act of 2015).

One significant change would restrict tax-free spinoffs involving REITs, effective for distributions on or after December 7, 2015 (i.e., yesterday). Under the proposal, a spin involving a REIT generally would qualify for tax-free treatment only if "Distributing" and "Controlled" both are REITs immediately following the spin (or if Controlled has 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 spinoff transaction.  

Another significant change would apply if a REIT’s combined rents and interest income that is derived from a single C corporation (other than a taxable REIT subsidiary of the REIT) and is based on a fixed percentage of receipts or sales of such corporation exceeds 25% of the total amount received or accrued by the REIT that is based on a fixed percentage of receipts or sales for the tax year. If this provision applies, then any such amounts that are attributable to leases entered after December 31, 2015, or debt instruments acquired after December 31, 2015, may not be treated as rents or interest.  This change would be effective for tax years ending after December 31, 2015.

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 proposal generally would (1) increase the ownership threshold permitted for a foreign person in a U.S. publicly traded REIT without triggering FIRPTA (from 5% to 10%), (2) provide relief from FIRPTA for 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.

It is worth noting that the proposals under the Tax Reform Act of 2014 to exclude timber and certain short-life property as real property for purposes of the REIT provisions are not included in the current proposal.  

Partnership audit provisions

The “possible legislation” 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 proposal also includes a clarification to the period of limitations on making adjustments and other technical changes.

KPMG observation

The "possible legislation" does not address a number of other significant issues that have been raised about the new partnership audit regime.

Documents

Read text of the possible legislation [PDF 412 KB]

© 2016 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

The KPMG logo and name are trademarks of KPMG International. KPMG International is a Swiss cooperative that serves as a coordinating entity for a network of independent member firms. KPMG International provides no audit or other client services. Such services are provided solely by member firms in their respective geographic areas. KPMG International and its member firms are legally distinct and separate entities. They are not and nothing contained herein shall be construed to place these entities in the relationship of parents, subsidiaries, agents, partners, or joint venturers. No member firm has any authority (actual, apparent, implied or otherwise) to obligate or bind KPMG International or any member firm in any manner whatsoever. The information contained in herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation. For more information, contact KPMG's Federal Tax Legislative and Regulatory Services Group at: + 1 202 533 4366, 1801 K Street NW, Washington, DC 20006.

Connect with us

 

Request for proposal

 

Submit

KPMG's new digital platform

KPMG's new digital platform