Tax Legislative Update

Transcription

1 Tax Legislative Update Breaking news from Capitol Hill from Grant Thornton s Washington National Tax Office C Dec. 18, 2015 President signs sweeping $680 billion tax agreement The president has signed the groundbreaking $680 billion tax deal approved by Congress that temporarily repeals the excise taxes on medical devices and high-cost health coverage, provides a one-year moratorium on the health insurance industry fee, and makes permanent 22 popular expired tax provisions, including: Research credit Increased Section 179 expensing limits State and local sales tax deduction Reduced five-year holding period for S corporation built-in gains Tax-free charitable distributions from IRAs of taxpayers age 70½ Subpart F exemption for active-financing income 15-year life for qualified leasehold, retail and restaurant improvements 100% exclusion from gain for qualified small business stock American Opportunity Tax Credit for higher education costs Contacts Mel Schwarz Partner, Washington National Tax Office T E mel.schwarz@us.gt.com Dustin Stamper Director, Washington National Tax Office T E dustin.stamper@us.gt.com Shamik Trivedi Manager, Washington National Tax Office T E shamik.trivedi@us.gt.com grantthornton.com/tax The tax legislation extends six other expired provisions for five years: Bonus depreciation (50% rate for , 40% in 2018 and 30% in 2019) Work opportunity tax credit with a larger credit for long-term unemployed New markets tax credit with a $3.5 billion annual allocation Controlled foreign corporation-related (CFC-related) payment look-through rule Section 45 production tax credit (PTC) and ability to claim Section 48 investment tax credit (ITC) for wind property (full PTC and ITC credit values for , 80% for 2017, 60% for 2018 and 40% for 2019) ITC for solar (30% credit rate for , 26% in 2020 and 22% in 2021) The remaining provisions that expired at the end of 2014 are generally extended for two years retroactively from the beginning of 2015, including the PTC for nonwind property, and the alternative fuel and biodiesel credits. The legislation includes all of the recently expired provisions, and makes several other important tax changes that will generally be effective beginning in 2016, including:

2 A cut in the alternative fuel credit for propane Technical corrections to the recently enacted partnership audit proposals Reforms for real estate investment trust (REIT) rules A one-year extension of the moratorium on taxes on Internet access A provision allowing independent refiners to exclude 75% of oil transportation costs from the calculation of the Section 199 deduction Various program integrity measures to improve tax compliance and administration, and to prevent certain retroactive claims of the child tax credit, Earned Income Tax Credit (EITC) and American Opportunity Tax Credit (AOTC) The tax deal was brokered along with a government omnibus funding agreement in negotiations between the White House and congressional leaders of both parties. The two bills were conceived as a package deal, and several of the tax provisions are actually included in the omnibus title. The omnibus title will also increase the IRS budget by $290 million, all dedicated to taxpayer services. The House approved the tax bill on a vote on Dec. 17 and the omnibus spending bill on a on Dec. 18. The bills were combined for the Senate (H.R. 2029) and approved in a vote on Dec. 18. The president signed the bill later that day for a Dec. 18 date of enactment. The agreement makes important modifications to several of the tax provisions that were extended or made permanent. The extension of bonus depreciation removes restrictions on improvement property subject to a lease, indexes the limit on passenger automobiles and increases the amount of alternative minimum tax (AMT) credits that can be used in lieu of bonus depreciation. In addition, the bill indexes to inflation the Section 179 expensing limit of $500,000 and the phaseout range of $2 million, and makes computer software and heating and air-conditioning property eligible. The bill includes two important enhancements to the research credit. Beginning in 2016, private businesses with up to $50 million in gross receipts can take the credit against the AMT, while businesses with less than $5 million in annual gross receipts and no more than five years of gross receipts can take up to $250,000 of the credit against their payroll taxes. Grant Thornton has been advocating strongly for both these changes. The bill does not replace the traditional credit with an alternative simplified credit at an increased rate of 20%, as the House had proposed. For a full description of how each expired provision is treated under the bill, see the table at the end of this update. Health care taxes The legislation suspends the 2.3% medical device excise tax for sales in 2016 and The tax first took effect in 2013, and device manufacturers and importers will still need to remit tax for all sales in Taxpayers can still pursue refund claims for overpayments while the tax was in effect, from The bill creates a similar one-year moratorium on the health insurance industry fee. It was first imposed in 2014 as an $8 billion fee allocated based on market share among all insurers with aggregate net premiums written. The fee rose to $11.3 billion for 2015 and 2016, but will now not be in effect for calendar year It will be scheduled to return at a $14.3 billion level in 2018.

3 The 40% excise Cadillac tax on high-cost health plans was scheduled to take effect in 2018, but is postponed until However, now that Congress has agreed to delay these taxes once, it will be easier for lawmakers to continue delaying them in the future or even to repeal them outright. Both taxes and the insurance industry fee are unpopular with both parties, and the leading Democratic candidates for president have all pledged to repeal the excise tax on high-cost health plans. There is a good chance these provisions never take effect again. Revenue raisers Compared to current law, the bill generally provides a massive tax cut that lawmakers did not try to offset. The revenue reduction is significantly less when measured against a current policy baseline. However, the effect on debt is generally the same regardless of whether an ostensibly temporary provision is perpetually extended or is permanent from the start, and future debt projections will now look worse because the permanent provisions will no longer be assumed to expire for scoring purposes. A handful of provisions in the bill do raise revenue, including proposals that would do the following: Tighten the energy standards for the Section 179D deduction for energy-efficient commercial buildings Peg the alternative fuel credit for liquefied natural gas (LNG) and liquefied petroleum gas (propane) to their energy equivalents in gasoline, resulting in a cut in the 50 cent per gallon credit to approximately 29 cents per gallon for LNG and 36 cents for propane Exclude clean coal grants from income while reducing the basis of the property and requiring payments to the Treasury Clarify valuations for early terminations of certain charitable remainder unitrusts Add restrictions for claiming the AOTC, EITC and child credit enhancements, which the administration accepted in exchange for making permanent the AOTC and enhancements to the child credit and EITC permanent Modify the related-party loss rules under Section 267(d) to prevent transfer of losses from tax-indifferent parties REIT changes The bill includes a package of reforms for real estate investment trusts (REITs) that will tighten some rules while easing restrictions in other areas. The major provisions include: Barring tax-free REIT spinoffs from non-reits Reducing the amount of REIT assets that can be stock of taxable subsidiary from 25% to 20% Repealing the preferential dividend rule for publicly offered REITs Limiting REIT dividends designated as qualified dividends to dividends paid Increasing the percentage of publicly traded REIT stock a foreign shareholder could hold to 10% before withholding is imposed on stock sales under the Foreign Investment in Real Property Tax Act (FIRPTA) Loosening the rules for determining whether a REIT was domestically controlled and the sale of its stock was exempt from FIRPTA

4 Exempting any U.S. real property interest held by a foreign pension fund from FIRPTA withholding Increasing the FIRPTA withholding rate from 10% to 15% for dispositions of U.S. real property interests Reporting changes The bill includes several significant changes to reporting requirements, including: Requiring all W-2 and W-3 forms and most Form 1099s to be filed by Jan. 31 Treating all information return errors of less than $100 (less than $25 in the case of withholding) as de minimis, and not requiring correction unless the recipient elects to have it corrected IRS and technical changes Tax writers also added many of the pet projects and less-controversial tax bills that the tax committees had considered over the past year, including provisions that do the following: Reduce the tax rate on timber gains to 23.8% for C corporations Allow independent refiners to exclude 75% of oil transportation costs from the calculation of domestic production activities deduction through 2021 Extend the moratorium on state and local taxes on Internet access from Sept. 30, 2015, to Sep. 30, 2016, with a retention of the grandfathering clause allowing taxes that were in effect when the first moratorium was enacted Make technical corrections to the recently enacted partnership audit rules Clarify several rules on the Tax Court s jurisdiction and administration Change several rules for how the IRS administers tax-exempt programs Tighten restrictions on IRS employees, such as prohibiting the use of personal accounts for official business Create a statutory taxpayer bill of rights Modify alternative tax on property and casualty insurance companies Waive bonding requirements when registering for alcohol excise taxes for taxpayers who expect to pay less than $50,000 in tax Expand the definition of hard cider for purposes of the reduced excise tax rate for hard cider Extend special charitable treatment to agricultural research organizations Outlook The deal not only provides much-needed short- and long-term certainty, but could also make tax reform easier in the future. The deal will permanently change the revenue baseline, meaning that future tax reform proposals would need fewer revenue raisers to be considered revenue neutral. On the other hand, the deal could make it more difficult in the future to extend the provisions that were not made permanent. For years, taxpayers have been able to rely on lawmakers extending almost all of these provisions every few years thanks largely to the

5 intense pressure to extend popular provisions like AMT relief and the research credit. Now that the AMT is indexed for inflation and provisions such as the research credit are permanent, lawmakers may not treat the remaining temporary provisions with the same sense of urgency when they are set to expire at the end of The following table details how the legislation treats each expired provision. Generally, extensions are effective Jan. 1, Modifications to extended provisions and new provisions will generally be effective Jan. 1, Provision Protecting Americans from Tax Hikes Act of 2015 (H.R. 2029) Individual tax provisions Itemized deduction for state and local sales taxes Makes permanent Above-the-line deduction for qualified tuition Extends through 2016 Above-the-line deduction of $250 for teacher classroom expenses Tax-free IRA contributions to charity after age 70½ Makes permanent, indexes for inflation and makes professional development expenses eligible Makes permanent Deduction for mortgage insurance premiums Extends through 2016 Transit and parking fringe benefit equalization Exclusion for principal residence debt forgiveness income American Opportunity Tax Credit Enhancements to EITC Enhancements to child credit General business tax provisions Research credit Qualified small business stock full gain exclusion New markets tax credit Reduced five-year holding period for S corporation built-in gains for dispositions Work opportunity tax credit Makes permanent Extends through 2016, including debt discharged in 2017 if subject to written agreement prior to 2017 Makes permanent along with new restrictions for claiming credit Makes permanent along with new restrictions for claiming credit Makes permanent along with new restrictions for claiming credit Makes permanent Makes credit refundable against up to $250,000 in payroll taxes for businesses with less than $5 million in annual gross receipts and no more than five years of gross receipts Private companies with less than $50 million in gross receipts can take the credit against AMT. Makes permanent Extends through 2019 with an annual allocation of $3.5 billion and extends carryover period to 2024 Makes permanent Extends through 2019, and increases the credit to 40% of first $6,000 of wages for individuals who have been unemployed for 27 weeks or more and have received unemployment compensation CFC-related payment look-through rule Extends through 2019 Subpart F exemption for active-financing income Low-income housing credit minimum credit Exclusion of military housing allowance for income test for low-income housing credit Makes permanent Makes current 9% minimum rate permanent Makes permanent Indian employment tax credit Extends through 2016 Employer wage credit for active-duty employees Makes permanent and expands credit to all employers beginning in 2016

6 Provision Protecting Americans from Tax Hikes Act of 2015 (H.R. 2029) RIC-qualified investment entity treatment under FIRPTA Interest and short-term capital gains related RIC dividends Conservation contributions of capital gain real estate Enhanced charitable deduction for gifts of food inventory Treatment of payments to controlling exempt organizations Basis adjustment to S corporation stock for charitable contributions of property Railroad track maintenance tax credit Makes permanent Makes permanent Makes permanent and enhances the deduction for Alaska Native Corporations Makes permanent and increases limitation from 10% to 15% of taxpayer s income. Makes permanent Makes permanent Extends through 2016 and expands to cover railroad track owned or leased as of Jan. 1, 2015, instead of Jan. 1, 2005 Mine rescue team training credit Extends through 2016 Depreciation provisions Bonus depreciation Section 179 expensing 15-year straight-line cost recovery for qualified leasehold improvements, qualified restaurant buildings and improvements, and qualified retail improvements Extends for property placed in service through 2019 (2020 for certain longlived and transportation property) with rate of 50% for , 40% for 2018 and 30% for 2019 Increases amount of unused AMT credit that can be claimed in lieu of bonus depreciation, with modifications to remove restrictions on improvement property subject to a lease, index the limit on passenger automobiles and modify the placed-in-service date for certain fruit- and nut-bearing plants Makes permanent and indexes for inflation the $500,000 expensing allowance and $2 million phaseout threshold, as well as the treatment of real property as eligible with existing restrictions Makes computer software and HVAC units eligible Makes permanent Three-year depreciation for racehorses Extends for property placed-in-service in 2015 or 2016 Seven-year cost recovery for motor-sports entertainment complexes Extends for property placed-in-service in 2015 or 2016 Expensing for advanced mine safety equipment Extends for property placed-in-service in 2015 or 2016 Special expensing for film and television productions Energy tax provisions Extends through 2016 and expands eligibility to cover certain live theatrical productions Section 30B fuel cell vehicle Extends through 2016 Hybrid and alternative fuel vehicle credits under Section 30B remain expired Section 30D plug-in electrical vehicle credit Credit for plug-in motorcycles that expired for 2014 is brought back for 2015 and 2016 Three-wheel vehicle credit remains expired General plug-in vehicle credit, which will begin to phase out once 200,000 vehicles are sold, is unchanged Credit for production of Indian coal Extends existing credit through 2016 and removes the placed-in-service restriction and allows against AMT in 2016 Cellulosic (second-generation) biofuel credit Extends through 2016 Special depreciation for cellulosic biofuel plant property Extends through 2016

7 Provision Protecting Americans from Tax Hikes Act of 2015 (H.R. 2029) Incentives for biodiesel and renewable diesel Alternative fuel and alternative fuel mixture credit Extends through 2016 and requires the IRS to issue guidance within 30 days of enactment, allowing submission for all 2015 claims over a 180-day period, with payment required within 60 days Extends through 2016 for all fuels, including propane used in forklifts, but a separate revenue offset reduced the tax credits for LNG and LPG from 50 cents per gallon to 29 cents a gallon and 36 cents a gallon, respectively Requires the IRS to issue guidance within 30 days of enactment, allowing submission for all 2015 claims over a 180-day period, with payment required within 60 days Alternative fuel vehicle refueling property credit Extends through 2016 Special rule for qualified electric utility dispositions to implement FERC or state restructuring policy Extends through 2016 Section 45 PTC Extends credit and ability to claim 30% Section 48 ITC in lieu of Section 45 credit to property with construction beginning before Jan. 1, 2017 PTC and election to claim ITC is further extended for wind property at 80% credit value in in 2017, 60% in 2018 and 40% in 2019 Section 48 ITC Extends solar ITC at full 30% rate for and then at a rate of 26% of 2020 and 22% for 2021 Section 45L energy-efficient new home credit Extends through 2016 Section 25C energy-efficient home improvement tax credit Section 179D deduction for energy-efficient commercial building property Extends through 2016 with updated energy efficiency standards Extends through 2016 and updates the energy-efficiency standards Incentives for specific locations Accelerated depreciation for Indian reservation business property Empowerment zone tax incentives Section 199 deduction for Puerto Rican production activities Increased limit on rum excise tax cover for Puerto Rico and the Virgin Islands Extends through 2016 and allows elections on a class-by-class basis Extends through 2016 and amends the requirements to treat certain employees as residents of an empowerment zone Extends through 2016 Extends through 2016 American Samoa economic development credits Extends through 2016 Qualified Zone Academy Bonds Provides a $400 million authorization for 2016 Tax professional standards statement This content supports Grant Thornton LLP s marketing of professional services and is not written tax advice directed at the particular facts and circumstances of any person. If you are interested in the topics presented herein, we encourage you to contact us or an independent tax professional to discuss their potential application to your particular situation. Nothing herein shall be construed as imposing a limitation on any person from disclosing the tax treatment or tax structure of any matter addressed herein. To the extent this content may be considered to contain written tax advice, any written advice contained in, forwarded with or attached to this content is not intended by Grant Thornton LLP to be used, and cannot be used, by any person for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code.

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