Congress extends expired tax provisions and makes some permanent

A large number of expired tax provisions were extended—some permanently—as part of the omnibus spending bill, the Consolidated Appropriations Act, 2016, P.L. 114-113, signed into law by President Barack Obama on Dec. 18.

In a break from its usual practice, Congress made several provisions permanent (and, in some cases, modified them), giving taxpayers who take advantage of those tax breaks more certainty in the future.

Other provisions were extended for five years (through 2019). And many provisions were extended for two years (2015 and 2016). Among the permanent extensions were the Sec. 41 research credit (with modifications) and the Sec. 179 deduction (also with modifications). Bonus first-year depreciation was not be made permanent but was extended through 2019.

The bill also contains many other tax items, including delaying for two years the imposition of the so-called Cadillac health care tax under Sec. 4980I and the 2.3% medical device excise tax under Sec. 4191, which will not apply to sales during 2016 and 2017. The act also makes Jan. 31 the due date for Forms W-2, Wage and Tax Statement, and W-3, Transmittal of Wage and Tax Statements, and for returns or statements that report nonemployee compensation (such as Form 1099-MISC, ­Miscellaneous Income).

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PERMANENT EXTENSIONS

Child tax credit

The threshold amount for determining whether a taxpayer is eligible for the refundable (or additional) Sec. 24 child tax credit is permanently set at $3,000 (not indexed for inflation). That amount has been the threshold since 2009, but it was scheduled to expire at the end of 2017. The bill also precludes certain retroactive claims of the child tax credit by preventing taxpayers from amending a return (or filing an original return) for any prior year in which the taxpayer or the qualifying child did not have an individual taxpayer identification number (ITIN) in order to claim the credit. The bill adds a provision barring individuals from claiming the credit for 10 years if they fraudulently claimed the credit and for two years if they are found to have claimed the credit with reckless or intentional disregard of the rules. The IRS is given math error authority, which allows it to disallow improper credits without a formal audit if the taxpayer claims the credit in a period in which he or she is barred from doing so. The act also imposes due-diligence requirements on paid tax return preparers who prepare returns that claim the child tax credit.

American opportunity tax credit

The Sec. 25A American opportunity tax credit is made permanent and modified. The bill prohibits an individual from retroactively claiming the credit by amending a return (or filing an original return) for any prior year in which the individual or a student for whom the credit is claimed did not have an ITIN. The bill adds a provision barring individuals from claiming the credit for 10 years if they fraudulently claim the credit and for two years if they are found to have claimed the credit with reckless or intentional disregard of the rules. The IRS is given math error authority, which allows it to disallow improper credits without a formal audit if the taxpayer claims the credit in a period in which he or she is barred from doing so. Taxpayers claiming the American opportunity tax credit must report the employer identification number of the educational institution to which the taxpayer makes qualified payments under the credit. Finally, the act also imposes due-diligence requirements on paid tax return preparers who prepare returns that claim the American opportunity tax credit.

Earned income tax credit

The enhanced provisions of the Sec. 32 earned income tax credit (EITC) are made permanent. These provisions include an increased amount for families with three or more children and an increased phaseout range for married taxpayers filing jointly. The phaseout range is indexed for inflation for years after 2015. The bill also prevents retroactive claims of the EITC by prohibiting individuals from claiming the credit on an amended return (or original return) for any prior year in which the individual did not have a valid Social Security number.

OTHER PERMANENT EXTENSIONS

Individuals

Other permanent extensions of provisions affecting individuals include:

• The Sec. 62(a)(2)(D) deduction for certain expenses of elementary and secondary school teachers, which allows teachers to deduct up to $250 they spend to buy books, supplies, computer equipment, and other materials for use in their classrooms. The bill also indexes the $250 amount for inflation, beginning in 2016.
• Sec. 132(f), which provides parity between the exclusion for employer-provided mass transit and parking benefits by making the limit for the monthly tax exclusion for employer-provided transit passes and vanpools the same as the limit for employer-provided parking benefits.
• The Sec. 164(b)(5) deduction for state and local general sales taxes in lieu of a deduction for state and local income taxes.

Charitable provisions

Various incentives for charitable giving were also made permanent:

• The Sec. 170(b) charitable deduction for contributions of real property and the special rule for contributions of capital gain real property made for conservation purposes, which permits qualified conservation contributions to be deducted up to 50% of a taxpayer’s contribution base (100% for qualified farmers and ranchers). The bill also modifies this provision to allow Alaska Native Corporations to deduct conservation easement donations up to 100% of their taxable income.
• Sec. 408(d)(8), which allows taxpayers who are at least 70½ years old to make up to $100,000 in qualified charitable distributions from individual retirement plans without including the distributions in income.
• Sec. 170(e)(3)(C), which allows businesses to make contributions of “apparently wholesome food” to charities that will use it for the care of the ill, the needy, or infants and to take an above-basis deduction for these contributions of food inventory. The limitation is increased from 10% to 15% of the taxpayer’s adjusted gross income (15% of taxable income for C corporations) per year. New rules are introduced for valuing food inventory for these purposes.
• Sec. 512(b)(13)(E), which modifies the tax treatment of certain payments to controlling exempt organizations so that they are not treated as unrelated business income.
• Sec. 1367(a)(2), which allows S corporation shareholders to adjust their basis in their stock when the S corporation makes charitable contributions of property using their basis in the property instead of its fair market value.

Businesses

For businesses, the tax provisions that were made permanent include:

• The Sec. 41 research and development credit, which provides a credit for qualified research expenses. The bill also modifies the credit so that eligible businesses with $50 million or less in gross receipts can claim the credit against their alternative minimum tax (AMT) liability. Also, certain small businesses can claim the credit against their payroll tax liability.
• The Sec. 45P employer wage credit for employees who are active duty members of the uniformed services, which provides a credit for employers for up to 20% of the eligible differential wage payments made while an eligible employee is on active duty.
• Sec. 168(e)(3), which allows 15-year straight-line cost recovery for qualified leasehold improvements, qualified restaurant buildings and improvements, and qualified retail improvements.
• The Sec. 179 increased $500,000 expensing limit and $2 million phaseout threshold and an expanded definition of Sec. 179 property to include qualified real property. The bill also indexes the $500,000 and $2 million amounts for inflation beginning in 2016. It also treats air conditioning and heating units placed in service after 2015 as eligible for expensing. Finally, the bill eliminates the $250,000 cap with respect to qualified real property beginning in 2016.
• Secs. 871(k)(1) and (2), which exempt interest-related dividends and short-term capital gain dividends from a regulated investment company (RIC) from tax.
• Sec. 1202, which provides an exclusion of 100% of gain on certain small business stock.
• Sec. 1374(d)(7), which reduced the S corporation recognition period for built-in gains tax to five years.
• The Subpart F exception under Secs. 953(e)(10) and 954(h)(9) for active financing income.

Real estate investment

Several incentives for real estate investment were also made permanent:

• Sec. 42(b)(2) minimum low-income housing tax credit rate for nonfederally subsidized buildings, which allows a 9% minimum low-income housing credit rate for those buildings.
• Sec. 142(d)(2)(B)(ii), under which the military basic pay allowance for housing exclusion is disregarded with respect to a qualified building for purposes of the low-income housing credit.
• Sec. 897(h)(4), which treats RICs as qualified investment entities under the Foreign Investment in Real Property Tax Act, P.L. 96-499.

FIVE-YEAR EXTENSIONS

A handful of provisions got longer, but not permanent, extensions. Provisions that were extended through 2019 include:

• The Sec. 45D new markets tax credit (carryovers of the unused limitation were extended through 2021), which provides tax credits for investments in businesses or real estate in low-income communities.
• The Sec. 51 work opportunity tax credit equal to 40% of the qualified first-year wages of employees who are members of a targeted group. The bill also modifies this credit beginning in 2016 to allow it to be claimed by employers that hire qualified long-term unemployed individuals (those who have been unemployed for 27 or more weeks).
• Sec. 168(k), which provides a depreciation deduction equal to 50% of the adjusted basis of qualifying property in the first year it is placed in service (also known as bonus depreciation). The percentage phases down to 40% for property placed in service in 2018 and to 30% for property placed in service in 2019. The bill also modifies the AMT rules to increase the amount of unused AMT credits that can be claimed in lieu of bonus depreciation. Bonus depreciation will now be allowed for “qualified improvement property.” The bill also specifies that certain trees, vines, and fruit-bearing plants will be eligible for bonus depreciation when planted or grafted, rather than when placed in service.
• Sec. 954(c)(6), which provides for lookthrough treatment of payments of dividends, interest, rents, and royalties received or accrued from related controlled foreign corporations under the foreign personal holding company rules.

TWO-YEAR EXTENSIONS

Other expired provisions were extended for two years, retroactively for 2015 and through 2016. These include:

Individual tax incentives

Tax incentives for individuals extended through 2016 include:

• Sec. 108(a)(1)(E), which excludes from gross income discharge of qualified principal residence indebtedness income.
• Sec. 163(h)(3) treatment of mortgage insurance premiums as qualified residence interest, which permits a taxpayer whose income is below certain thresholds to deduct the cost of premiums on mortgage insurance purchased in connection with acquisition indebtedness on the taxpayer’s principal residence.
• Sec. 222, which provides an above-the-line deduction for qualified tuition and related expenses.

Business tax incentives

Business tax incentives extended through 2016 include:

• The Sec. 45A Indian employment tax credit for employers of enrolled members of Indian tribes (or their spouses) who work on and live on or near an Indian reservation.
• Sec. 45G, the railroad track maintenance credit, equal to 50% of the qualified railroad track maintenance expenditures paid or incurred by an eligible taxpayer.
• The Sec. 45N mine rescue team training credit, which provides a credit for a portion of training costs for qualified mine rescue team employees.
• Sec. 54E qualified zone academy bonds, which allows qualified schools to issue bonds for renovations (but not new construction), equipment purchases, teacher training, or development of course materials when they partner with private businesses.
• Sec. 168(e)(3)(A), which allows certain racehorses to be depreciated as three-year property instead of seven-year property.
• Secs. 168(i)(15) and (e)(3)(C)(ii) allowing a seven-year recovery period for motorsports entertainment complexes.
• Sec. 168(j), which allows owners accelerated depreciation for qualifying property used predominantly in the active conduct of a trade or business within an Indian reservation.
• The Sec. 179E election to expense mine safety equipment, which permits taxpayers to elect to treat 50% of the cost of any qualified advanced mine safety equipment as a deduction in the year the property is placed in service.
• The Sec. 181 special expensing rules for certain film and television productions, which allow taxpayers to treat costs of any qualified film or television production as a deductible expense. The provision is modified to also apply to live theatrical productions.
• Sec. 199(d)(8), which permits a deduction for income attributable to domestic production activities in Puerto Rico.
• Sec. 1391 empowerment zone tax incentives. The bill makes a modification to allow employees to meet the enterprise zone facility bond requirement if they reside in the empowerment zone, an enterprise community, or a qualified low-income community.
• The Sec. 7652(f) temporary increase in the limit on cover over of rum excise taxes from $10.50 to $13.25 per proof gallon to Puerto Rico and the Virgin Islands.
• The American Samoa economic development credit.

Energy tax incentives

Energy tax provisions extended through 2016 include:

• Sec. 25C, which provides a 10% credit for qualified nonbusiness energy property. The bill also updates the Energy Star requirements.
• Sec. 30B, which provides a credit for qualified fuel cell motor vehicles.
• Sec. 30C, which provides a 30% credit for the cost of alternative (non-hydrogen) fuel vehicle refueling property.
• The Sec. 30D 10% credit for plug-in electric motorcycles and two-wheeled vehicles.
• Sec. 40(b)(6), which provides a credit for each gallon of qualified second-generation biofuel produced.
• The Sec. 40A credit for biodiesel and renewable diesel, which includes the biodiesel mixture credit, the biodiesel credit, and the small agri-biodiesel producer credit.
• The Sec. 45(e)(10)(A)(i) production credit for Indian coal facilities.
• The Sec. 45 credits for facilities producing energy from certain renewable resources.
• Sec. 45L, which provides a credit for each qualified new energy-efficient home constructed by an eligible contractor and acquired by a person from the eligible contractor for use as a residence during the tax year.
• Sec. 168(l), which provides a depreciation allowance equal to 50% of the adjusted basis of qualified second-generation biofuel plant property.
• The Sec. 179D deduction for energy-efficient commercial buildings.
• The Sec. 451(i) special rule for sales or dispositions to implement Federal Energy Regulatory Commission or state electric restructuring policy for qualified electric utilities.
• The Secs. 6426(c) and 6427(e) excise tax credits for alternative fuels. 

About the author

Alistair M. Nevius is the JofA‘s editor-in-chief, tax. To comment on this article or to suggest an idea for another article, contact him at anevius@aicpa.org or 919-402-4052.