Congress recently passed two significant pieces of tax legislation: (1) the Protecting Americans from Tax Hikes (PATH) Act, which extended or made permanent various expired or expiring tax provisions, and (2) the Consolidated Appropriations Act, 2016, which in addition to funding the government, provided for a number of significant tax changes.
Among the many provisions affecting businesses, the research and development credit was made permanent and in certain cases is creditable against the alternative minimum tax or FICA tax. Various benefits for S corporations and their shareholders were made permanent, including the reduction of the period for recognizing built-in gains. The 100% exclusion for the gain on small business stock was made permanent.
Businesses will also see significant benefit from changes made to the depreciation and expensing provisions. Higher section 179 expensing limitation amounts were all made permanent, and bonus depreciation was extended through 2019 (50% for property placed in service from 2015 through 2017, 40% for 2018, and 30% for 2019). The 15-year period to write off leasehold improvements, restaurant property, and retail property was also made permanent. Numerous other changes were made, including the extension of the new markets tax credit.
Important changes were also made to various energy tax provisions, especially the production tax credit and investment tax credit that apply to renewable energy. For wind and solar, the date by which construction must begin for a project to be eligible was extended by five years (to January 1, 2020, and January 1, 2022, respectively). However, the credit is phased out for facilities beginning construction in 2017 or later (for wind), and 2020 or later (for solar). For other types of renewable energy (e.g., biomass, geothermal, municipal solid waste, landfill gas, and certain hydropower facilities), the begin construction date was extended by two years to January 1, 2017. Certain benefits for biodiesel and other biofuels were also retroactively extended.
The PATH Act effectively ends a strategy that has become very popular among activist investors and companies, the tax-free Real Estate Investment Trust (REIT) spin-off. The Act does provide a benefit to REITs though, by allowing foreign investors to hold up to 10% of a REIT without triggering a hefty withholding tax on the sale of an interest in the REIT. The Appropriations Act also delayed the imposition of the controversial “Cadillac” tax on high cost employer-sponsored health coverage until 2020.
The PATH Act and the Appropriations Act made more than one hundred changes, tweaks, extensions, etc. to tax provisions.