Permanence for R&D credit, small business expensing and other popular tax provisions

The Consolidated Appropriations Act of 2016, or as it is more commonly known, the "Omnibus," does more than just fund the federal government for the remainder of the fiscal year. It also includes a wealth of tax provisions. These are concentrated in one portion of the bill: the Protecting Americans From Tax Hikes Act of 2015 (the PATH Act). But a few provisions—particularly the extension and phase-down of the tax credits for wind and solar energy and the two-year delay in the tax on so-called Cadillac plans—are placed elsewhere in the Omnibus.

The PATH Act is the culmination of the year-long effort to address a package of expired tax provisions. What began as a negotiation as to which provisions should be extended and for how long eventually developed into a more conventional tax package that includes not only those expired provisions but also, among other changes, a two-year moratorium on the medical device tax and significant changes to the rules regarding real estate investment trusts (REITs) and the Foreign Investment in Real Property Act (FIRPTA).

Extension of expiring and expired provisions

As in previous years, Congress let a host of temporary tax provisions, often referred to as "extenders" due to their frequent (and short) extensions, expire. And, as in previous years, Congress waited until December to pass an extension. However, unlike in previous years, Congress did not just talk about the need to provide permanent or long-term extension of the extenders—it actually agreed to extend permanently 22 of the expired or expiring provisions and to provide a five-year extension of four others. The rest of the expired provisions, or at least all of the expired provisions that the Senate Finance Committee proposed to extend earlier this year, were extended through 2016. For summary showing which provisions were extended, and for how long, see the chart below.

Click here to view table.

Expiring provisions

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Moratorium on the medical device tax

The 2.3 percent tax on the sale of medical devices, enacted as part of the Affordable Care Act, has been controversial from its inception, and there have been repeated attempts in Congress to repeal it. The PATH Act imposes a prospective two-year moratorium on its imposition, prohibiting the tax from applying to sales during 2016 and 2017.

REIT and other real estate changes

The PATH Act includes several changes to the rules for REITs. Most of the REIT subtitle was previewed in the extender "fall-back" bill released by Rep. Kevin Brady (R-TX), Chairman of the House Ways and Means Committee, on December 7. Although most of the provisions are technical changes requested by the REIT industry, several of these changes are significant. One of the most noteworthy is the new limitation on the ability to effect a tax-free spin-off involving a REIT.

In addition, the REIT subtitle includes several changes to the FIRPTA rules, several of which have nothing to do with REITs. For example, the rate of withholding under section 1445 of the US Internal Revenue Code would generally be raised to 15 percent from its current 10 percent level, and the definition of US real property holding corporations would be expanded to cover former RICs and REITs. On a more favorable note, the FIRPTA exceptions for stock in REITs would be broadened and a FIRPTA exception would be added for foreign pension funds.

Other revenue provisions

Title III of the PATH Act is aptly titled "Miscellaneous Provisions," but that label could apply to a lot more in the bill. Many of these provisions were included in the bill released by Chairman Brady and the bill approved earlier this year by the Finance Committee. The provisions include:

  • An income exclusion for payments to wrongfully incarcerated individuals
  • A lower rate on timber gains recognized by corporations
  • Excise tax credit equivalency for liquefied natural gas
  • A host of other, often industry-specific, low-cost provisions.

There are some new starters, such as new rules dealing with transfers of losses from tax-indifferent parties. These provisions are not easily summarized, and so a review of them is strongly recommended. Though they are narrow, they are so widely varied that many taxpayers will find a new benefit, an unwelcome surprise or some of both.

Administrative and compliance provisions

The PATH Act includes a package of compliance measures, which it refers to as "program integrity." These provisions are generally directed at certain provisions being extended in the PATH Act, such as the enhanced child credit and enhanced earned income tax credit. The compliance measures were viewed by many Republicans as a necessary condition for permanent extension of those provisions.

The act also includes a package of IRS reforms. Most of these provisions are directed at the IRS and IRS employees and are the result of the congressional hearings and investigations regarding the IRS and its treatment of so-called 501(c)(4) organizations.

Finally, the act includes minor fixes to the new partnership audit rules adopted as part of the Bipartisan Budget Act of 2015 and provisions related to the Tax Court and Tax Court procedure.

Next steps

Both the House and the Senate have passed the Omnibus with the tax provisions intact. President Obama is expected to sign the legislation early next week, meaning that the PATH Act and the other tax provisions in the Omnibus should be law before Christmas.