Tax Extenders Package Enacted | Practical Law

Tax Extenders Package Enacted | Practical Law

Recently enacted legislation includes the permanent extension of a number of expired business tax provisions, long-term extensions for other provisions affecting businesses, provisions affecting individuals, and significant changes to the rules governing real estate investment trusts and foreign investment in real property.

Tax Extenders Package Enacted

Practical Law Legal Update w-001-1091 (Approx. 3 pages)

Tax Extenders Package Enacted

by Practical Law Corporate & Securities
Published on 23 Dec 2015 • USA (National/Federal)
Recently enacted legislation includes the permanent extension of a number of expired business tax provisions, long-term extensions for other provisions affecting businesses, provisions affecting individuals, and significant changes to the rules governing real estate investment trusts and foreign investment in real property.
On December 18, 2015, President Obama signed into law the Protecting Americans from Tax Hikes Act of 2015 (PATH Act) and the Consolidated Appropriations Act, 2016. The PATH Act includes the permanent extension of a number of expired business tax provisions (including the research credit), long-term extensions for other provisions affecting businesses, provisions affecting individuals, and significant changes to the rules governing real estate investment trusts (REITs) and the rules for foreign investment in US real property under the Foreign Investment in Real Property Tax Act of 1980 (FIRPTA). This Update focuses on those provisions of most interest to businesses.

Permanent Extensions of Business Provisions

The PATH Act contains a number of permanent extensions of expired business provisions including:
  • The research and experimentation credit. In addition, beginning in 2016 eligible small businesses (those with $50 million or less in gross receipts) may claim the credit against alternative minimum tax liability. The credit also can be used by certain small businesses against the employer's payroll tax liability.
  • 15-year cost recovery for qualified leasehold improvements, qualified restaurant buildings and improvements, and qualified retail improvements.
  • Increased expensing limitation and phase-out amounts under IRC Section 179 ($500,000 and $2,000,000 respectively, indexed for inflation beginning in 2016).
  • Subpart F exception for active financing income.
  • Reduction in S corporation recognition period for built-in gains. This provision permanently extends the five-year recognition period.
  • Provisions allowing pass-through character of interest-related dividends and short-term capital gains dividends from regulated investment companies to foreign investors.

Long-term Extensions of Business Provisions

Long-term extensions of business provisions (through 2019) include:
  • Bonus depreciation. This provision extends bonus depreciation for property acquired and placed in service during 2015 through 2019 (with an additional year for property with a longer production period). The bonus depreciation is 50% for property placed in service during 2015, 2016 and 2017, 40% in 2018 and 30% in 2019.
  • The new markets tax credit. This provision authorizes the allocation of $3.5 billion of new markets tax credits for each year from 2015 to 2019.
  • Work opportunity credit. This provision extends and modifies the work opportunity credit. Beginning in 2016, the credit will apply to employers who hire long-term unemployed individuals.
  • Look-through treatment of payments between related controlled foreign corporations for purposes of determining Subpart F income.

REIT and FIRPTA Provisions

The PATH Act includes a number of significant changes to the rules governing REITs and the rules for foreign investment in US real property under FIRPTA, including:
  • Restrictions on tax-free spinoffs involving REITs. Under this new provision, a spin-off involving a REIT will generally qualify as tax-free only if immediately after the distribution both the distributing and controlled corporations are REITs. In addition, neither the distributing nor spun-off corporation can elect to be treated as a REIT for ten years following a tax-free spin-off transaction. This provision will prevent "Opco-Propco" spin-offs from qualifying for tax-free treatment and applies to distributions on or after December 7, 2015 (other than distributions pursuant to a transaction described in a ruling request to the IRS on or before that date).
  • Reduction in percentage limitation on assets of REIT which may be taxable REIT subsidiaries (TRSs). Under this provision, the securities of one or more TRSs held by a REIT may not represent more than 20% (rather than 25% under current law) of the value of the REIT's assets. This provision applies to tax years beginning after 2017.
  • Expansion of permissible services that a TRA may provide (effective for tax years beginning in 2016).
  • Exception from FIRPTA withholding for certain REIT stock. This provision (applicable to dispositions on or after the date of enactment) increases from 5 to 10 percent the maximum stock ownership a foreign shareholder can have in a publicly traded REIT to avoid having the stock treated as a US real property interest under FIRPTA on a disposition of the stock.
  • Increase in rate of FIRPTA withholding on dispositions of US real property interests. This provision (effective for dispositions occurring 60 days after the date of enactment) increases the rate of withholding on dispositions of US real property interests under FIRPTA from 10 to 15 percent.
  • Exception for interest held by foreign retirement or pension funds. Any US real property interest held by a qualified foreign pension fund is exempt from FIRPTA withholding, applicable to dispositions and distributions after the date of enactment.
The PATH Act also includes a number of energy provisions, including an extension of the production tax credit through 2019 for qualified wind facilities (and through 2016 for other qualified facilities.):