The omnibus appropriations and tax extenders legislation makes substantial changes to numerous expiring tax provisions. In addition, the legislation makes numerous other tax changes unrelated to the expiring provisions. Following is a summary of the tax provisions in this “taxibus” legislation.1
Extensions of Expiring or Expired Provisions
The following chart summarizes the expiring or expired tax provisions that are extended by the legislation. Changes to certain expiring or expired provisions are described in more detail below.
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- An additional two-year delay of the “Cadillac” excise tax on high cost employer-sponsored health coverage
- A two-year moratorium on the medical device excise tax through 2017
- A one-year moratorium on the annual fee on health insurance providers for calendar year 2017
Discussion of Specific Expiring Provisions
Research and Development Credit
The legislation makes the Research and Development (R&D) credit permanent, and also contains a new benefit to start-up companies (i.e., for the first five ears the company has gross receipts) with gross receipts under $5 million. Those companies may apply $250,000 per year of credits against payroll taxes (not just income taxes) for the first five years in which a company has gross receipts. The bill also allows the R&D credit to be used against alternative minimum tax (AMT) for certain small businesses.
Exclusion from Gross Income of Discharge of Qualified Principal Residence Indebtedness
The legislation extends the exclusion from gross income of a discharge of qualified principal residence indebtedness through 2016. The provision also modifies the exclusion to apply to qualified principal residence indebtedness that is discharged in 2017, if the discharge is pursuant to a written agreement entered into in 2016.
The legislation extends bonus depreciation for property acquired and placed in service during 2015 through 2019 (with an additional year for certain property with a longer production period). The bonus depreciation percentage is 50% for property placed in service during 2015, 2016, and 2017 and phases down, to 40% in 2018, and 30% in 2019. The provision continues to allow taxpayers to elect to accelerate the use of AMT credits in lieu of bonus depreciation under special rules for property placed in service during 2015. The provision modifies the AMT rules beginning in 2016 by increasing the amount of unused AMT credits that may be claimed in lieu of bonus depreciation.
Increased Expensing Limitations and Treatment of Certain Real Property as Section 179 Property
The legislation permanently extends the higher small business expensing limitation and phase-out amounts in effect from 2010 to 2014 ($500,000 and $2 million, respectively). These amounts are currently $25,000 and $200,000, respectively. The special rules that allow expensing for computer software and qualified real property (qualified leasehold improvement property, qualified restaurant property, and qualified retail improvement property) also are permanently extended. The provision modifies the expensing limitation by indexing both the $500,000 and $2 million limits for inflation beginning in 2016. The provision further modifies the expensing limitation with respect to qualified real property by eliminating the $250,000 cap beginning in 2016.
Production Tax Credits
The tax extenders legislation includes a two-year extension for certain production tax credits under section 45, generally allowing credits with respect to qualified closed-loop biomass, open-loop biomass, geothermal, landfill gas, municipal solid waste, hydropower, and marine and hydrokinetic facilities construction of which begins before January 1, 2017. The tax extenders legislation also includes a two-year extension of the election to treat qualified facilities as energy property under the section 48 investment tax credit.
The omnibus legislation also includes a five-year extension for production tax credits under section 45 for qualified wind facilities construction of which begins before January 1, 2020. The credit is reduced by 20%, 40%, and 60% for facilities construction of which begins during calendar years 2017, 2018, and 2019, respectively. The election to treat qualified wind facilities as energy property under the section 48 investment tax credit is also extended by five years, subject to a similar phase out.
Other Significant Tax Provisions
The bill also includes several provisions related to real estate investment trusts (REITs). It would ban the type of spinoff transaction recently completed by companies such as Darden Restaurants Inc. and Windstream Holdings Inc. The IRS recently provided in Rev. Proc. 2015-43 that it would ordinarily not rule on any issue regarding whether such transactions qualified for tax-free treatment under section 355, and indicated that such transactions were under study in Notice 2015-59.
Specifically, the bill would make section 355 inapplicable to any distribution “if either the distributing corporation or controlled corporation is a real estate investment trust.” Exceptions would exist for spinoffs of a REIT by another REIT and for spinoffs of certain taxable REIT subsidiaries. Additionally, if a corporation is a distributing corporation or controlled corporation with respect to any distribution to which section 355 applies, the bill generally provides that such corporation would be ineligible to make a REIT election for any taxable year beginning before the end of the 10-year period beginning on the date of such distribution. These amendments, if enacted into law, would apply to distributions made on or after December 7, 2015. The bill adds a statement indicating that the amendments would not apply to any distribution pursuant to a transaction described in a ruling request initially submitted to the IRS on or before December 7, 2015, if the request has not been withdrawn and if a ruling has not been issued or denied in its entirety as of such date.
The bill would make numerous other changes to the tax treatment of REITs, and includes provisions that would reduce the percentage of REIT assets that may be invested in taxable REIT subsidiaries, repeal the preferential dividend rule for publicly offered REITs, treat debt instruments of publicly offered REITs as real estate assets, treat certain personal property that is ancillary to real property as real property for purposes of the asset test, and modify the calculation of REIT earnings and profits to avoid duplicate taxation. Many of these provisions appeared in former Chairman Camp’s Tax Reform Act of 2014.
The bill removes a provision that was in the prior version of the bill introduced on December 8, which provided that rents from real property and interest do not include amounts that are based on a fixed percentage of receipts or sales to the extent that such amounts are received or accrued from a single tenant that is a C corporation and the amounts received or accrued from such tenant constitute more than 25% of the total amount received or accrued by the REIT that is based on a fixed percentage of receipts or sales.
In addition, the bill would significantly relax the FIRPTA rules that apply to foreign investments in US REITs. Specifically, the bill would increase from 5% to 10% the ownership threshold for the FIRPTA exemption that applies to gains from the sale of regularly traded REIT shares or distributions by a REIT of gain from the sale or other disposition of US real property. It would also provide a complete exemption for sales by, or distributions to, a qualified shareholder of a REIT (i.e., certain foreign REITs or pass-through entities) to the extent that the qualified shareholder did not have greater than 10% shareholders or partners and substantially ameliorate the effects of Notice 2007-55 for these shareholders. The bill would also narrow the so-called “cleansing rule,” which excludes from the definition of U.S. real property interest an interest in a corporation that either has no real estate or has paid tax on its real estate transactions. Specifically, the cleansing rule would no longer apply if the corporation or any predecessor of the corporation was a RIC or REIT at any time during the shorter of (a) the period after June 18, 1980 during which the taxpayer held such stock, or (b) the five-year period ending on the date of the disposition of the stock. Finally, the bill would add a version of the administration's proposal to exempt from FIRPTA gain of a foreign pension fund from the sale of an interest in US real property.
The bill adds two additional provisions related to US real property interests. The first provision would increase the rate or withholding of tax on dispositions of US real property interests from 10% to 15%; the increased rate does not apply to the sale of a personal residence where the amount realized is $1 million or less. The second provision states that the so-called “cleansing rule” does not apply to the stock of a corporation if the corporation or any predecessor of the corporation was a RIC or REIT at any time during the shorter of (a) the period after June 18, 1980 during which the taxpayer held such stock, or (b) the five-year period ending on the date of the disposition of the stock. The other provision states that for purposes of determining whether dividends from a foreign corporation are eligible for a dividends received deduction, dividends from RICs and REITs are not treated as dividends from domestic corporations.
The bill also includes various provisions intended to ensure the integrity of a variety of tax programs, including:
- Moving up the filing deadline for Forms W-2, W-3, and 1099-MISC to January 31 to improve the IRS's ability to review compliance
- Providing the IRS additional time to review refunds based on EITC or CTC claims
- Requirements for issuance and renewal of individual taxpayer identification numbers (ITIN)
- Prohibition of retroactive EITC, CTC, and AOTC claims after issuance of a Social Security number or ITIN
- Procedures to reduce improper CTC and AOTC claims and restrictions on taxpayers who improperly made such claims in prior years
- Enhanced penalties for erroneous EITC, CTC, and AOTC claims
- Enhanced reporting requirements relating to AOTC claims
Miscellaneous and Additional Revenue Provisions
The extenders bill includes additional provisions providing individual and family tax relief, such as improvements to section 529 college savings accounts and excluding compensation for wrongful incarceration from income.
The bill includes a number of other miscellaneous tax provisions, such as increased deductibility of charitable contributions to agricultural research organizations and modifications to the alternative tax for certain small insurance companies. In addition, the bill includes a provision that excludes from gross income certain clean coal grants for eligible non-corporate taxpayers. Note that while this provision does not amend Internal Revenue Code section 118, it appears to be an effective application of section 118 (which in the case of corporations, excludes from gross income any contribution to the capital of the taxpayer) to certain government grants to partnerships and other non-corporate entities.
Of the revenue provisions included in the extenders bill, the provision projected to raise the most revenue creates a new exception to section 267(d) for transfers from tax-indifferent parties. This provision was included in Rep. David Camp’s tax reform discussion draft and in the Obama Administration’s 2016 revenue proposals. Because section 267(d) shifts the benefit of the loss from the transferor to the transferee, under current law losses can be imported into the US tax system in certain circumstances. This provision is intended to further limit the importation of losses.
The omnibus also includes a variety of miscellaneous tax provisions:
- A one-year extension of the Internet Tax Freedom Act, which provides for a moratorium on taxes on Internet access until October 1, 2016
- Allowance of a business deduction for the Cadillac tax
- A requirement for a report on the suitability of the use of the premium cost of the Blue Cross/Blue Shield standard benefit option under the Federal Employees Health Benefits Plan as a benchmark for the age and gender adjustment of the Cadillac tax thresholds
- A provision that would temporarily exempt 75% of transportation costs of certain independent refiners from calculating their domestic production activities under section 199
Administrative Provisions in the Extenders Bill:
The bill also contains several provisions regarding the IRS, including:
- A ban on use of personal email to conduct any official business by IRS employees
- New procedures for a section 501(c) organization to request an administrative appeal of an adverse determination
- A requirement that section 501(c)(4) organizations notify the IRS within 60 days of establishment of its intent to operate
- Expansion of section 1203(b) to provide for termination of employment of any IRS employee performing, delaying, or failing to perform any official action with respect to a taxpayer for the purpose of extracting personal gain or for a political purpose
- Removal of transfers of money or other property to section 501(c)(4), (5), or (6) organizations from the gift tax regime
- A provision permitting the IRS to promulgate regulations requiring or permitting employers to use a truncated Social Security number on Form W-2
- A provision correcting and clarifying certain technical issues in the new partnership audit rules enacted in the Bipartisan Budget Act of 2015 [For prior DTU coverage of the new partnership audit rules, click here]
Funding for the IRS in the Omnibus Bill:
The omnibus bill freezes most funding for the IRS at the fiscal year 2015 level. The bill includes the 2015 level of $10.9 billion for base IRS activities, but provides an additional $290 million targeted solely for taxpayer services to ensure that the agency responds to taxpayer questions in a timely manner, and to improve fraud detection and prevention and cybersecurity. In total, this is a reduction of $1.7 billion from the president’s request for the agency. The bill does not provide any additional funds for the IRS to implement the Affordable Care Act.
In addition, several provisions are included to prohibit the use of funds by the IRS and Treasury Department for various activities, including a prohibition on the use of funds during fiscal year 2016 to issue, revise, or finalize any regulation, revenue ruling, or other guidance not limited to a particular taxpayer relating to the standard used to determine whether an organization is operated exclusively for the promotion of social welfare for purposes of section 501(c)(4).
Provisions Relating to Tax Court
The bill contains a number of provisions related to the Tax Court, including:
- Increasing access to the Tax Court for interest abatement and innocent spouse cases
- Applying the Federal Rules of Evidence to Tax Court proceedings
- Requiring the Tax Court to prescribe rules establishing procedures for filing complaints with respect to the conduct of a Tax Court judge
- Creating an annual judicial conference of the Tax Court judges for the purpose of considering means of improving the administration of the court
- A provision stating that the Tax Court is not an agency of the executive branch but rather an independent body
The bill includes two provisions relating to tariffs. One provision delays implementation of changes in the classification of certain recreation performance outerwear products. The other is intended to ensure that that the reduction of tariffs on certain environmental goods is implemented in accordance with the Trade Priorities and Accountability Act of 2015.