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Congress Reaches Agreement in $1.1 Trillion Spending and Tax Deal


12/18/15

Synopsis

On December 16, 2015, Congress announced a year-end spending and tax deal entitled the “Protecting Americans from Tax Hikes Act of 2015 (PATH Act).” The legislation would prevent a government shutdown while renewing, extending, and making permanent significant tax incentives for individuals and businesses. The deal would suspend two Affordable Care Act taxes, lift the ban on crude oil exports, and make the research and development tax credit permanent. In addition, the bill includes several tax incentives for energy production and conservation. 

The tax package is estimated to cost $650 billion and would extend 50 tax credits. The appropriations package would fund the government for the remainder of the fiscal 2016 year and is estimated to cost $1.1 trillion. The House and Senate are expected to pass the legislation by the end of the week. Text of the legislation can be accessed here, a section-by-section summary of the entire Act can be found here. Key provisions of the legislation are summarized below. 

Research and Development (R&D) Tax Credit

  • The legislation would make the R&D tax credit permanent. Small businesses with less than $50 million in gross receipts can claim the credit against their alternative minimum tax liability. Certain small businesses can claim the credit to offset their payroll tax liability. (IRC §41(h), as amended by Act Sec. 121(a)(1))
     

Section 179 Expensing

  • Section 179 allows businesses to deduct the full purchase price of qualifying equipment and/or software that is purchased or financed during the tax year. The section 179 expensing limits were due to revert to the old $25,000 level. The legislation makes the $500,000 expensing limitation and $2,000,000 phase out amount permanent and indexes it for inflation in future years. Finally, the legislation eliminates the $250,000 cap with respect to qualified real property beginning in 2016. (IRC §179(b), as amended by Act Sec. 124(a))
     

Bonus Depreciation

  • 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 long production period). The bonus depreciation percentage is 50% for property placed in service during 2015, 2016 and 2017 and phases down with 40% in 2018, and 30% in 2019.
     

Extension of 15-year Straight-Line Cost Recovery

  • The legislation permanently extends the 15-year recovery period, instead of a 39-year recovery period, for qualified leasehold improvements, qualified restaurant property, and qualified retail improvement property. (IRC §168(e)(3)(E), as amended by Act Sec. 123)
     

Extension of Exclusion of 100% of Gain on Certain Small Business Stock

  • The legislation extends the temporary exclusion of 100% of the gain on certain small business stock for non-corporate taxpayers to stock acquired and held for more than five years. The legislation also permanently extends the rule that eliminates such gain as an AMT preference item. (IRC §1202(a)(4), as amended by Act Sec. 126(a))
     

Extension of Treatment of Certain Dividends of Regulated Investment Companies

  • The legislation permanently extends provisions allowing for the pass-through character of interest-related dividends and short-term capital gains dividends from regulated investment companies (RICs) to foreign investors. (IRC §871(k), as amended by Act Sec. 125)
     

Affordable Care Act

  • The legislation delays or suspends three taxes that were included in the Affordable Care Act.  It suspends the 2.3% excise tax on the sale of medical devices in 2016 and 2017. The legislation delays the 40% tax on high-cost health insurance plans until 2020. The legislation also suspends the Affordable Care Act’s tax on health insurance companies for one year.
     

Low-Income Housing Tax Credit

  • The legislation permanently extends application of the 9% minimum credit rate for the low-income housing tax credit for non-federally subsidized new buildings. (IRC §42(b)(2)(A), as amended by Act Sec. 131(a))
     

New Markets Tax Credit

  • The legislation authorizes the allocation of $3.5 billion of New Markets Tax Credits for each year from 2015 through 2019. The carryover period for unused New Markets Tax Credits is extended through 2024. (IRC §45D(f), as amended by Act Sec. 141)
     

Work Opportunity Tax Credit

  • The legislation extends the work opportunity tax credit through 2019. It also modifies the credit beginning in 2016 to apply to employers who hire qualified long-term unemployed individuals and increases the credit with respect to such long-term unemployed individuals to 40% of the first $6,000 of wages. (IRC §51(c)(4)(B), as amended by Act Sec. 142(a); IRC §S51(d)(1)(J) and 51(d)(15), as amended by Act Sec. 142(b))
     

Basis Adjustment for Charitable Contributions by S Corporations 

  • The legislation permanently extends the rule that a shareholder’s basis in the stock of an S corporation is reduced by the shareholder’s pro rata share of the adjusted basis of property contributed by the S corporation for charitable purposes. (IRC §1367(a)(2), as amended by Act Sec. 115(a))
     

Exclusion for Discharged Home Mortgage Debt 

  • The legislation extends through 2016 the exclusion from gross income of a discharge of qualified principal residence indebtedness. 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. (IRC §108(a)(1)(E), as amended by Act Sec. 151)
     

Extension of Tax-Free Distributions from IRA Plans for Charitable Purposes

  • The legislation permanently extends the ability of individuals at least 70 ½ years of age to exclude from gross income qualified charitable distributions from IRAs of up to $100,000 per tax year. (IRC §408(d)(8)(f), as amended by Act Sec. 112)
     

State and Local Sales Tax Deduction Made Permanent

  • The legislation permanently extends the option to claim an itemized deduction for State and local general sales taxes in lieu of an itemized deduction for State and local income taxes. The taxpayer may either deduct the actual amount of sales tax paid in the tax year, or alternatively, deduct an amount prescribed by the IRS. (IRC §164(b)(5)(l), as amended by Act Sec. 106)
     

Other Tax Provisions

  • Child Tax Credit – the legislation permanently extends the Child Tax Credit of $1,000 per qualifying child. (IRC §24(d)(1))
  • American Opportunity Tax Credit – the legislation makes the American Opportunity Tax Credit permanent. (Act Sec. 102)
  • Earned Income Tax Credit – the legislation makes the program permanent, including increasing the EITC amount for those with three or more children and the EITC marriage penalty has been reduced by increasing the income phase-out range by $5,000 for those who are married and filing jointly. (Act Sec. 103)
  • Tax Deduction for Teachers – the legislation would permanently allow elementary and secondary school teachers to deduct up to $250 in qualified expenses. (IRC §62(a)(2)(D), as amended by Act Sec. 104)
  • Transit Benefits – the legislation permanently extends the maximum monthly exclusion amount for transit passes and van pool benefits so that these transportation benefits match the exclusion for qualified parking benefits. These fringe benefits are excluded from an employee’s wages for payroll tax purposes and from gross income for income tax purposes. (Act Sec. 105)
     

What Does CohnReznick Think?
This legislation is welcome news as it permanently extends certain tax benefits and temporarily extends others for a few years. Many taxpayers will realize benefits from this and there is still time to act to benefit from the extenders applicable to fixed asset expensing in 2015.
 
Contact
 
For more information, please contact your client service professional or Kenneth Kanter, Managing Partner of CohnReznick’s Tax Department, at kenneth.kanter@cohnreznick.com or 973-364-6668.


Any advice contained in this communication, including attachments and enclosures, is not intended as a thorough, in-depth analysis of specific issues. Nor is it sufficient to avoid tax-related penalties. This has been prepared for information purposes and general guidance only and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is made as to the accuracy or completeness of the information contained in this publication, and CohnReznick LLP, its members, employees and agents accept no liability, and disclaim all responsibility, for the consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it.

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