The PATH Act was signed into law on December 18th, 2015 and is the legislative vehicle for passing what has become known as the “tax extenders,” those 50-60 various tax provisions that have lapsed, only to be extended, many times again. However, this time around, several of the tax extender provisions gained permanent status, rather than the usual two-year extension period. In addition, many other special provisions have been included related to the Family Tax Relief Credit, Program Integrity for certain tax-related items, real estate investment trusts, IRS administration reforms and U.S. Tax Court access and administration.
The following tax extenders were granted permanent extension status:
- The R&D credit, with modification for eligible small businesses ($50 million or less in gross receipts) to claim the credit against AMT and for certain small businesses to claim the credit against payroll (FICA) tax liability, rather than income tax
- 20 percent employee wage credit for employees called to active military duty
- 15-year recovery period for qualified leasehold improvements, qualified restaurant property and qualified retail improvement property
- Small business expensing limitations and phase-out amounts for Section 179 property
- Pass-through character of interest-related dividends and short-term capital gains dividends for regulated investment companies (RICs) to foreign investors
- Rule that eliminates 100 percent gain on certain small business stock as an AMT preference item
- Rule reducing to five years (rather than 10 years) the period for which an S corporation must hold its assets following conversion from a C corporation to avoid the built-in gain tax
- Exception from subpart F income for active financing income
- Application of the 9 percent minimum credit rate for the low-income housing credit for non-Federally subsidized new buildings
- Exclusion of military basic housing allowances from calculation of income for determining eligibility as a low-income tenant for purposes of low-income housing tax credit buildings
- Treatment of RICs as qualified investment entities, therefore not being subject to withholding under the Foreign Investment in Real Property Tax Act (FIRPTA)
Individual and General Provisions
- Enhanced Child Tax Credit
- Enhanced American Opportunity Tax Credit
- Enhanced Earned Income Tax Credit
- Certain expenses of elementary and secondary school teachers
- Maximum monthly exclusion amount for employer-provided mass transit and parking benefits
- Option to claim itemized deduction for state and local general sales taxes in lieu of itemized deduction for state and local income taxes
- Charitable deduction for contributions of real property for conservation purposes
- Ability of individuals 70 ½ years of age to exclude from gross income qualified charitable distributions from an IRA
- Enhanced deduction for charitable contributions of inventory of apparently wholesome foods for non-corporate business taxpayers
- Modification of the tax treatment of certain payments by a controlled entity to an exempt organization
- Rule providing that a shareholders 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
Provisions gaining extension, in full or part, through 2019 include the following:
- New Markets Tax Credit
- Work Opportunity Tax Credit, along with modifications for employers who hire long-term unemployed individuals
- 50 percent bonus depreciation, with modifications of AMT rules to increase the amount of unused AMT credits allowed to be claimed in lieu of bonus depreciation—also qualified improvement property is modified to include certain trees, vines and plants bearing fruit or nuts, when planted or grafted, rather than when placed in service
- Look-through treatment for payments of dividends, interest, rents and royalties between related controlled foreign corporations
Other lapsed tax extender provisions were extended through 2016, including a moratorium on the collection of the medical device excise tax on sales occurring in the calendars years 2016 and 2017.
Program Integrity Items
There were also a number of new tax provisions included in the Program Integrity section of the PATH Act. The Program Integrity items were designed to improve compliance with tax provisions, establish safe harbor positions from certain penalties, deal with the issuance of Individual Taxpayer Identification Numbers, prevent retroactive claiming of various credits (earned income, child or American Opportunity), expand paid tax preparer due diligence, expand the rules which bar individuals from claiming the earned income tax credit, apply a 20 percent penalty for erroneous claims related to the refundable portion of tax credits, expand the penalty for taxpayers who engage in willful or reckless conduct, taxpayer reporting of the American Opportunity Tax Credit and reforms the reporting requirements for Form 1098-T by educational institutions.
Family Tax Relief Credit
Family Tax Relief provisions included in the PATH Act provide exemption from gross income for payments from certain work-learning-service programs, expand the definition of qualified higher education expenses related to 529 accounts, allow ABLE accounts to be established in any state (not just the state of residence), exclude from gross income compensation related to wrongful incarceration, extend certain benefits paid by accident and health plans of a public retirement system, allow rollover amounts from an employer-sponsored retirement plan to a qualified SIMPLE IRA, clarify the effective dates for certain airline employees related to IRA contributions from certain bankruptcies, extend relief from penalties for certain special public safety officers and prevent the tax collection period on Armed Forces members hospitalized for combat zone injuries from being extended.
There were also special provisions made for trade, real estate investment trusts, IRS administrative reforms, and changes related to how taxpayers access the U.S. Tax Court, as well as certain administrative and clarification provisions related to the operations of the U.S. Tax Court.
We have begun the process of analyzing these new laws at Singer & Falk. Please call your tax professional for any and all questions related to this new bill.