Just in time for Christmas, Congress passed, with bipartisan support, and the President signed, the “Protecting Americans from Tax Hikes Act of 2015” (PATH Act or Act). The Act was part of an omnibus $1.1 trillion federal government funding bill. Formerly known as the “extenders” bill, the PATH Act makes permanent several perennially extended temporary tax provisions, extends some such provisions through 2019, and extends the remainder through 2016. It also makes various tax administrative/enforcement changes and makes important changes in the real estate area related to REITs and to foreign investment in U.S. real estate. A few tax provisions were also added to the omnibus funding bill outside the PATH Act.
With the exception of a provision dealing with the issuance of Individual Taxpayer Identification Numbers (ITINs), a provision preventing the shifting of losses from a tax-indifferent (e.g., foreign) person to a U.S. taxpayer and a REIT provision described below, there were only minor revenue raisers in the package. While the more important extenders and changes are summarized below, many narrow, miscellaneous provisions that were extended or made permanent are not discussed.
A potentially important side effect of the PATH Act is how it changes the revenue baseline for future tax reform efforts. By making several expensive extenders permanent, it permanently reduces the 10-year revenue baseline against which future tax reform bills must be measured. Thus, in general, it should provide modestly greater flexibility in achieving revenue-neutral tax reform. For example, a reform proposal to reduce the amount of the R&E credit now would raise revenue (rather than reduce it were the R&E credit still only temporary); the resulting revenue could be used for rate reduction.
Tax Provisions in Omnibus Bill
- Cadillac Tax: The bill provides for a two-year delay (from 2018 to 2020) in the excise tax enacted as part of Obamacare that is imposed on expensive employer-sponsored health plans (the Cadillac tax).
- Health Insurance Provider Fee: The bill provides a one-year moratorium on the Obamacare annual fee on health insurance providers.
- Wind Energy: The bill extends (and extends the tapering of) the production tax credit and investment tax credit for wind energy facilities—from 80 percent to 60 percent to 40 percent, expiring after 2019 (as opposed to 2014).
- Solar Energy: The bill extends (and extends the tapering of) the investment credit for solar energy installations. The phase out begins for projects begun in 2020 and the credit expires in 2022 (rather than 2016).
Internet Access Tax: The bill provides a one year extension of the ban on internet access taxes.
- Research Credit: The section 41 credit for research and experimentation is made permanent. Additionally, eligible small businesses (under $50 million gross receipts) may claim the credit against AMT. Even smaller businesses (under $5 million gross receipts) may claim the credit against employer FICA liability, subject to certain limits.
- Subpart F Active Financing Income: The exclusion under section 954(h) is made permanent. Thus, income derived in the active conduct of banking, financing, or similar businesses will continue to be excluded from the definition of foreign personal holding company income under Subpart F.
- 15-year cost recovery: The 15-year, straight-line cost recovery under section 168 for qualified leasehold improvements, qualified restaurant buildings and improvements, and qualified retail improvement property is made permanent.
- Section 179: The increased expensing limitations under section 179 are made permanent. For 2014, the maximum amount a taxpayer could expense was $500,000 of the cost of qualifying property placed in service in that year. That amount was reduced by the amount by which property placed in service in that year exceeded $2 million. Those amounts are made effective for 2015 under the Act and are indexed for inflation for 2016 and thereafter. The Act also makes permanent the special rules that allow expensing for computer software and qualified real property, allows HVAC equipment placed in service after 2015 to qualify, and eliminates the $250,000 cap with respect to qualified real property.
- RICs: The Act permanently extends the provisions allowing for pass-through to foreign investors of the character of interest-related dividends and short-term capital gain dividends from regulated investment companies. It also makes permanent the exclusion of regulated investment companies (RICs) from withholding under FIRPTA.
- Small Business Stock: The 100 percent exclusion and exception from AMT for gains on the disposition of certain small business stock is made permanent. Among other requirements, the stock must not be owned by a corporation, must be acquired at original issue, and must be held for at least five years.
- Child Tax Credit: The $1,000 child tax credit is refundable to the extent it exceeds the taxpayer’s tax liability limited by a formula. The formula is 15 percent of earned income in excess of a threshold. The Act permanently sets the threshold at $3,000, rather than allowing it to return to $10,000 (indexed for inflation).
- Secondary Education: The American Opportunity Tax Credit (AOTC) is made permanent. The $2,500 AOTC, a credit for up to four years of post-secondary education expenses, is phased out for higher incomes.
- Earned Income Tax Credit: The Act makes permanent the recent temporary increases in the amount and income phase-out range of the EITC.
- Employer-provided Transportation Benefits: The Act permanently extends the increased maximum monthly exclusion amount for mass transit passes and van pool benefits to match the exclusion for qualified parking benefits.
- State and Local Sales Tax Deduction: The Act permanently extends the option to claim an itemized deduction for state and local sales taxes in lieu of an itemized deduction for state and local income taxes. A taxpayer may either deduct the actual amount of sales tax paid or, alternatively, deduct an amount prescribed by the IRS.
- Charitable Contributions: The Act reinstates and makes permanent the increased percentage limits and extended carryforward for qualified conservation contributions for post-2014 contributions. The Act also makes permanent the ability to exclude from gross income qualified charitable contributions from IRAs, as well as other minor charitable contribution extenders.
Extensions Through 2019
- New Markets Tax Credit: Section 45D provides a credit for certain investments in a qualified “community development entity” (entities providing investment capital for low-income persons or communities that are certified). The Act extends the credit for five years, through 2019, and extends the carryforward for unused credits through 2024.
- Work Opportunity Tax Credit: Section 51 and 52 provide a complex set of rules to calculate and claim a credit for certain first-year wages paid to new employees who are members of one of nine targeted groups. The targeted groups include certain veterans, ex-felons, certain disabled persons, and various other disadvantaged groups. The employer’s deduction for wages is reduced by the amount of the credit. The Act extends the credit through 2019 and expands it to cover qualified long-term unemployment recipients.
- Bonus Depreciation: Prior law allowed an additional first-year depreciation deduction equal to 50 percent of the adjusted basis of qualified property placed in service prior to January 1, 2015. The Act extends the bonus depreciation provision for property acquired and placed in service during 2015 through 2019, but reduces the additional first year depreciation amount to 40 percent of the adjusted basis of qualified property in 2018 and 30 percent in 2019. The Act revises the rules for interaction between bonus depreciation and the AMT and the rules dealing with orchards, groves and vineyards.
- Look-through for Payments Between Related CFCs: Under section 954(c)(6), which sunset at the end of 2014, dividends, interest, rents and royalties received or accrued by a controlled foreign corporation “CFC” from a related CFC were not treated as foreign personal holding company income to the extent attributable or properly allocable to income of the payor that was neither subpart F income nor treated as effectively connected income of a US trade or business. The Act extends for five years the application of this rule, to taxable years of a CFC beginning before January 1, 2020, and to taxable years of U.S. shareholders of a CFC with or within which such CFC’s taxable year ends.
Extensions Through 2016
Among the 30 provisions extended through 2016 are:
- Exclusion from gross income for discharge of indebtedness on principal residence;
- Treatment of mortgage insurance premiums as qualified residence interest;
- Above-the-line deduction for qualified tuition;
- Classification of certain racehorses as three-year property;
- Seven-year recovery period for motorsports entertainment complexes;
- Deduction with respect to income attributable to domestic production activities in Puerto Rico;
- Empowerment Zone tax incentives;
- Moratorium of the Obamacare medical device excise tax;
- Section 25C non-business energy property;
- Incentives for biodiesel; and
- Various alternative energy and energy conservation provisions.
Principal Real Estate-Related Provisions
- REIT Spin-offs: One of the largest of the very few revenue raisers in the Act is a provision restricting tax-free spinoffs involving Real Estate Investment Trusts (REITS). The provision provides that a spin-off involving a REIT will qualify as tax-free only if immediately after the transaction both the distributing and controlled corporations are REITs. The provision applies to distributions on or after December 7, 2015, unless a ruling request was submitted by that date.
- Taxable REIT Subsidiaries: The current law limit of 25 percent on the value of REIT assets that may be stock of taxable REIT subsidiaries is lowered to 20 percent, effective for tax years beginning after 2017.
- FIRPTA Exception for Certain Stock: The Act increases from 5 percent to 10 percent the maximum stock ownership a shareholder may hold in a publicly traded corporation to avoid having that stock treated as a U.S. real property interest when it is disposed of.
- U.S. Real Property Interests Held by Foreign Pensions: The Act exempts the U.S. real property interests held by foreign retirement and pension funds from FIRPTA withholding.
Tax Administration and Enforcement
A variety of changes are implemented by the Act intended to reduce fraudulent claims of the EITC and other credits. In addition, the Act makes various relatively minor tax administration changes, many intended to deal with the IRS dealings with tax-exempt organizations. One such change permits section 501(c)(4) organizations to seek review in federal court of any revocation or denial of exempt status by the IRS. Another makes modest technical corrections to the partnership audit rules enacted in the Bipartisan Budget Act of 2015 (discussed in the article that follows). Finally, the Act includes various provisions related to the Tax Court, including a provision stating that “the Tax Court is not an agency of, and shall be independent of, the executive branch,” and a provision specifying that the court use the general Federal Rules of Evidence (rather than the rules specific to the US District Court for the District of Columbia).