On Friday, legislation combining omnibus federal appropriations through the end of 2016 with a bill renewing and making permanent a number of temporary, individual and business tax provisions, known collectively as “tax extenders,” was approved by the House and Senate and signed into law by the President.
The Protecting Americans from Tax Hikes (PATH) Act makes several tax extenders permanent and renews others for five years, with many modifications to both. Historically, Congress has enacted short one-to two- year tax extenders bills, often late in the year and retroactively so the provisions expired again soon after enactment, causing uncertainty and unpredictability in business and individual tax planning. Notably, the $622 billion PATH Act and the $1.1 trillion Consolidated Appropriations Act also include provisions affecting the Affordable Care Act by suspending or delaying implementation of the medical device excise tax (suspended for 2016 and 2017), the so-called “Cadillac” tax (delayed until 2020), and the annual fee on health insurance providers (suspended for 2017).
The PATH Act includes several “wins” for the business community, including small businesses and S corporations that have been long-standing legislative priorities for FEI. FEI is an active participant in the “Broad Tax Extenders Coalition,” which promotes seamless and timely renewal of tax extenders for business continuity. Several highlights of the PATH Act include:
Permanent Business Extenders
- Research and experimentation credit: The PATH Act makes the research credit permanent – a long-standing priority for FEI and the R&D Credit Coalition, of which FEI is a member. The bill includes several modifications for small business. However, the PATH Act does not increase the alternative simplified credit at an increased rate of 20 percent (up from 14 percent) as approved by the House earlier this year.
- Increased expensing limits under section 179: The Path Act makes permanent the increased expending and phase-out threshold under section 179 – $500,000 and $2 million, respectively.
- Subpart F exception for active financing income: The PATH Act makes permanent the current exception from subpart F for certain foreign income derived in the active conduct of a banking, financing, securities or insurance business.
- Other business provisions made permanent:
- Reduced recognition period (i.e., five years rather than 10) after which S corporations can avoid built-in gains tax following conversion from C corporation status
- 15-year straight-line cost recovery for qualified leasehold improvements, qualified restaurant buildings and improvements, and qualified retail improvements
- Charitable contributions of food inventories (by businesses and individuals)
Long-term Business Extensions
- Bonus Depreciation: The PATH Act extends bonus depreciation for qualified property placed in service over the next five years (i.e., through 2019), subject to a phase-out schedule: 50 percent bonus depreciation continues for 2015, 2016, and 2017, with the percentage falling to 40 percent in 2018 and 30 percent in 2019. The bill also extends through 2019 the election to accelerate alternative minimum tax (AMT) credits in lieu of bonus depreciation, and increases the amount of unused AMT credits that may be claimed in lieu of bonus depreciation, starting in 2016.
- CFC look-through rule: The PATH Act extends through 2019 the application of the look-through rule, which excludes from subpart F certain payments of interest, dividends, rents, and royalties between related controlled foreign corporations (CFCs) under the foreign personal holding company rules.
- Other business provisions extended for five years:
- Work Opportunity Tax Credit (WOTC), with modifications
- New Markets Tax Credit, with modifications
- Expired energy incentives, including the Wind Production Tax Credit (PTC), investment tax credit (ITC) in lieu of PTC, and the solar ITC (in exchange for lifting the 40-year ban on crude oil exports)
Individual Tax Extenders
- State and local sales tax deduction: The PATH Act permanently extends the deduction for state and local sales taxes in lieu of a deduction for state and local income taxes.
- Employer-provided commuter benefits: The PATH Act makes permanent a provision providing for parity for the income exclusion allowed for employer-provided commuter benefits, bringing mass transit benefits up to a maximum $250 per month (from $130), in line with parking benefits.
- Other individual provisions made permanent:
- Earned Income Tax Credit (EITC)
- Child Tax Credit
The PATH Act also includes provisions addressing the tax treatment of REITs, as well as several technical corrections to rules regarding IRS audits of large partnerships that were enacted in the Bipartisan Budget Act of 2015. Additionally, the PATH Act includes several reforms to IRS operations that were previously approved by the House in 2015.
The Omnibus Appropriations Act component includes a provision that extends the Internet Tax Freedom Act (ITFA) through Oct. 1, 2016.
Making many of the tax extenders permanent also has the effect of lowering the budget baseline for future tax reform and gives tax writers more flexibility in achieving rate reduction. However, while the tax writing committees are not expected to move a tax reform package in 2016 prior to the presidential election, the committees will continue to lay the groundwork for a newly elected administration and Congress in 2017.
For more information, contact Karen Lapsevic, Director, Government Affairs at 202-626-7809 or firstname.lastname@example.org.