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.
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.
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:
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.
The possible legislative option also includes various tax law changes unrelated to the expired provisions. For example, it includes:
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.
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.
The "possible legislation" does not address a number of other significant issues that have been raised about the new partnership audit regime.
Read text of the possible legislation [PDF 412 KB]
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