House approves major tax extender package with permanent, five-year,

Tax Insights
from Washington National Tax Services
House approves major tax extender
package with permanent, five-year,
and two-year extension provisions
December 17, 2015
In brief
The House of Representatives today voted 318 to 109 to pass legislation providing for retroactive,
permanent extension of 22 provisions, including the research credit, the Subpart F exceptions for active
financing income, and a number of provisions for business and individual taxpayers. The Protecting
Americans from Tax Hikes (PATH) Act of 2015 also renews for five years (2015 through 2019) lookthrough treatment of payments between related controlled foreign corporations (CFC look-through),
‘bonus’ depreciation (with a phase down), New Market Tax Credits, and the Work Opportunity Tax
Credit. Thirty other business and individual tax provisions that also expired at the end of 2014 would be
extended for two years (2015 and 2016). The bill also includes a two-year moratorium on the medical
device excise tax and a number of real estate investment trust (REIT), administrative, and miscellaneous
provisions. Joint Committee on Taxation (JCT) staff estimate the legislation will reduce federal revenues
by $622 billion over 10 years.
The House is scheduled to vote Friday, December 18, on the Consolidated Appropriations Act of 2016, a
$1.1 trillion bill funding the federal government through the remainder of fiscal year 2016. Included in
the spending bill are provisions that would delay for two years (2018 and 2019) implementation of the
Affordable Care Act (ACA) ‘Cadillac’ excise tax on high-cost employer-sponsored health insurance,
suspend for one year (2017) an ACA health insurance provider excise tax, and would extend and phase
out certain renewable energy incentives. In addition, the Internet tax moratorium is extended through
October 1, 2016. JCT staff estimate that tax provisions in the government funding bill will reduce federal
revenues by an additional $58 billion over 10 years.
Assuming both bills are approved by the House, the legislation will be combined into a single bill that the
Senate is expected to vote on as early as Friday night. White House officials have indicated that
President Obama will sign the legislation before a current temporary government funding bill expires on
December 22.
In detail
Lawmakers have spent the past
several weeks negotiating the
tax extenders and government
funding agreement. Earlier in
the year, the House had passed
bills to permanently extend
several provisions, while the
Senate Finance Committee in
July had approved a two-year
extension of the more than 50
expired tax provisions. A White
House priority was to make
permanent certain provisions
enacted in the 2009 stimulus
legislation benefiting lowerincome individuals that were set
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Tax Insights
to expire after 2017. The permanent
expansions of the child tax credit,
earned income tax credit, and
American Opportunity Tax Credit
education provision account for nearly
$200 billion of the total cost of the
legislation.
Permanent provisions
There are 22 business and individual
provisions that would be made
permanent under the bill:
 The current 20-precent traditional
research credit and the 14-percent
alternative simplified credit.
Beginning in 2016, the credit
would be modified so that eligible
small businesses (less than $50
million in gross receipts) can claim
the credit against alternative
minimum tax (AMT) liability and
qualified small businesses (less
than $5 million in gross receipts)
can utilize the credit against the
employer’s payroll tax liability.
Observation: The bill does not
include a provision in the Housepassed permanent research credit bill
that in 2016 would have repealed the
traditional 20-percent research credit
calculation method and increased the
rate for the alternative simplified
method from 14 to 20 percent.
 Subpart F exceptions for active
financing income.
 Increased Section 179 ‘small
business’ expensing limits; the
provision is modified beginning in
2016, including indexing the
limitation amount for inflation.
 15-year straight line cost recovery
for qualified leasehold
improvement property, qualified
restaurant property, and qualified
retail improvement property.
 The exclusion of 100 percent of the
gain on certain small business
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stock for non-corporate taxpayers
who acquire and hold for more
than five years qualified stock; gain
on such stock is eliminated as an
AMT preference item.
 The 20-percent employer wage
credit for employees called to
active military duty; beginning in
2016, this credit will apply to
employers of any size, rather than
only employers with 50 or fewer
employees.
 Passthrough treatment of certain
regulated investment company
(RIC) dividends to foreign
investors.
 Treatment of RICs as qualified
investment entities and as not
subject to withholding under the
Foreign Investment in Real
Property Tax Act (FIRPTA).
 Reduction in the S corporation
recognition period for built-in
gains from 10 to five years,
following conversion from a C
corporation.
 Basis adjustment in S corporation
stock for charitable contributions
of property.
 Charitable deduction for
contributions of real property for
conservation purposes and
enhanced deduction for certain
farmers and ranchers
 Certain tax-free distributions from
individual retirement accounts for
charitable purposes.
 The enhanced deduction for
charitable contributions of food
inventory for non-corporate
business taxpayers; beginning in
2016, deduction limitation and
valuation rules are modified.
 Modification of tax treatment of
certain payments to controlling
exempt organizations.
 Enhanced $1,000 child tax credit
(CTC), with an unindexed
threshold of $3,000 for calculating
the refundable credit amount.
 Enhanced American Opportunity
Tax Credit (AOTC), with increased
phase-out amounts.
 Enhanced Earned Income Tax
Credit (EITC).

Above-the-line deduction for
eligible expenses of elementary and
secondary school teachers, with the
$250 cap indexed for inflation
beginning in 2016 and modified to
include professional development
expenses.
 Parity for exclusion from income
for employer-proved mass transit
and parking benefits.
 Individual income tax deduction
for state and local sales taxes in
lieu of state and local income taxes.
 Minimum nine-percent LowIncome Housing Tax Credit
(LIHTC) rate for non-Federally
subsidized new buildings.
 Military housing allowance
exclusion for determining whether
a tenant in certain counties is lowincome for purposes of LIHTC
buildings.
‘Medium term’ extension through
2019
 ‘Bonus’ depreciation would be
extended for 50 percent of the cost
of property acquired and placed in
service during 2015, 2016, and
2017; for 40 percent in 2018; and
for 30 percent in 2019. The AMT
rules would be modified beginning
in 2016 by increasing the amount
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Tax Insights
of unused AMT credits that may be
claimed in lieu of bonus
depreciation. The provision also
would be modified to include
qualified improvement property
and to change when certain trees,
vines, and plants bearing fruit or
nuts may be eligible.
Observation: The $16.95 billion
estimated cost of the expanded ability
of taxpayers to elect to accelerate AMT
credits in lieu of bonus depreciation
indicates that taxpayers with
significant pre-2016 AMT credit
carryovers may be able to benefit
significantly from the increased
limitation. Taxpayers may need to
consider carefully the bonus
depreciation and AMT credit options
in calculating their deduction under
this provision.
 Look-through treatment for
payment of dividends, interest,
rents, and royalties between
related controlled foreign
corporations.
 Allocation of $3.5 billion of New
Markets Tax Credits annually, from
2015 through 2019.
 Work Opportunity Tax Credit
would be extended through 2019;
beginning in 2016, the credit is
increased and modified to apply to
employers who hire qualified longterm unemployed individuals.
Two-year extension of other
expired tax provisions
Other expired business and individual
provisions that would be renewed
through December 31, 2016 include:
 A modified exclusion from gross
income of discharge of qualified
principal residence indebtedness.
 Treatment of qualified mortgage
insurance premiums as interest for
purposes of the mortgage interest
deduction.
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 Above-the-line deduction for
qualified tuition and related higher
education expenses.
 Qualified zone academy bonds
authorization of $400 million
during 2016.
 Classification of certain race horses
as three-year property.
 Seven-year recovery period for
motorsports entertainment
complexes.
 Special expensing provision for
qualified film and television
productions.
 Modified empowerment zone tax
incentives.
 Energy tax credits for purchases of
non-business energy property;
installation of non-hydrogen
alternative fuel vehicle refueling
property; plug-in electric
motorcycles and two-wheeled
vehicles; cellulosic biofuel
producers; biodiesel and renewable
diesel; Indian coal facilities;
facilities producing energy from
certain renewable resources;
energy-efficient new homes;
biofuel plant property; energyefficient commercial buildings;
sales or dispositions to implement
FERC or state electric restructuring
policy for qualified electric utilities;
alternative fuels; and qualified fuel
cell motor vehicles.
REIT and FIRPTA provisions
The bill contains several modifications
to the rules for REITs and the
application of FIRPTA, including
provisions that would:
 Restrict tax-free spinoffs involving
REITs by providing that a spin-off
involving a REIT will qualify as
tax-free only if immediately after
the distribution both the
distributing and controlled
corporations are REITs. In
addition, neither a distributing nor
a controlled corporation could elect
to be treated as a REIT for 10 years
following a tax-free spin-off. The
provision generally would apply to
distributions on or after December
7, 2015; an exception would apply
to any transaction for which an
outstanding ruling request was
submitted to the IRS on or before
that date. JCT staff estimate this
provision would raise $1.9 billion
over 10 years.
 Increase from 5 to 10 percent the
maximum stock ownership a
shareholder may have held in a
publicly traded stock to avoid
having that stock treated under
FIRPTA as a United States real
property interest (USRPI) on
disposition. In addition, certain
publicly traded entities may own
and dispose of any amount of stock
in a REIT with the REIT stock
being treated as a USRPI except to
the extent an investor in the
shareholder holds more than 10
percent of that class of REIT stock.
The provision applies to
dispositions and distributions on
or after the date of enactment.
 Exempt any USRPI held by a
foreign retirement or pension fund
from FIRPTA withholding. The
provisions applies to dispositions
and distributions on or after the
date of enactment.
 Increase the rate of withholding tax
from 10 to 15 percent on
dispositions of USRPIs, effective
for dispositions occurring 60 days
after the date of enactment.
 Modify the ‘cleansing rule’ to
exclude any entity that was either a
REIT or a RIC during the relevant
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testing period. This provision
would apply to dispositions on or
after the date of enactment.
Spending bill provisions
Impact on future tax reform
Tax-related provisions in the FY 2016
funding bill would:
Leaders of the House and Senate tax
committees praised the tax extender
legislation for laying the groundwork
for tax reform. Ways and Means
Chairman Kevin Brady (R-TX) called
the legislation “an important piece of
our plan to replace our broken tax
code.” Finance Committee Chairman
Orrin Hatch (R-UT) said that by
“providing permanency and certainty
in the tax code, this bipartisan bill sets
the stage for a comprehensive tax
overhaul.” Finance Committee
Ranking Member Ron Wyden (D-OR)
called the legislation a “down payment
on tax reform.”
Observation: The favorable FIRPTA
exemption for foreign pension funds
was included in the Obama
Administration’s budget proposal,
while several of the other REIT
provisions had been included in a bill
approved by the Senate Finance
Committee earlier this year.
 Suspend for two years (2018 and
2019) implementation of the ACA
‘Cadillac’ tax on certain high-cost
insurance plans.
Other provisions
 Extend the credit for wind facilities
where construction begins before
2020, and phase out the credit for
construction beginning after 2016,
2017, and 2018.
 Two-year moratorium on the ACA
2.3-percent medical device excise
tax.
 ‘Program integrity’ provisions,
including modifications to filing
dates for employee wage
information (W-2, W-3) and
nonemployee compensation (e.g.,
1099-MISC); requirements for
issuance of individual taxpayer
identification numbers; and
measures to prevent retroactive
and improper tax credit claims.
JCT staff estimate that these
provisions would raise $6.9 billion
over 10 years.
 IRS provisions, including a
taxpayer bill of rights, a
prohibition on IRS employees’ use
of personal email accounts for
official business, and Section
501(c)(4) organization
administrative changes.
 Suspend for one year (2017) the
ACA annual excise tax imposed on
health providers.
 Extend the credit for solar energy
property, for which construction
begins before 2022, and phase out
the credit for construction
beginning after 2019 and 2020,
with a special placed-in-service
deadline.
 Extend the credit for solar electric
property and qualified solar water
heating property for expenditures
before 2022, and phase out the
credit for property placed in
service after 2016, 2019, and 2020.
 Allow independent refiners to
exclude 75 percent of oil
transportation costs from the
calculation of the Section 199
manufacturing deduction through
December 31, 2021.
 US Tax Court access and
administration provisions.
 Extend the moratorium on internet
access taxes until October 1, 2016.
 C corporation timber gains to be
subject to 23.8-percent tax rate,
effective for tax year 2016.
Note: The House recently approved a
permanent extension of the
moratorium on internet access taxes
as part of a final House/Senate US
Customs Service conference
agreement. A Senate vote on that
legislation may be delayed until 2016.
 Miscellaneous provisions,
including items relating to Section
529 accounts, hard cider, church
plans, and small insurance
companies.
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The permanent extension of the
research credit and 21 other
temporary provisions will affect the
federal budget baseline, which could
impact future tax reform legislation.
Previous reform proposals have had to
devote revenue from broadening the
corporate and individual tax base to
offset the cost of making permanent
the research credit and other widely
supported temporary tax provisions.
In future reform efforts, revenue from
such base-broadening proposals
instead could be used to lower
corporate and individual tax rates.
The takeaway
Making permanent a substantial
number of expired tax provisions in
the extenders package will provide
increased tax certainty for many
businesses and individuals. At the
same time, provisions that were not
made permanent in this legislation
will face the challenge later of
securing further extensions.
Congress is expected to review both
permanent and temporary tax
provisions in the future as part of
comprehensive tax reform addressing
both individuals and corporations.
While there is ongoing discussion of
‘international only’ tax reform, action
on a broad overhaul of US tax laws is
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Tax Insights
considered unlikely before 2017. The
shape of and prospects for
comprehensive tax reform is expected
to depend on the outcome of the 2016
elections and control of the White
House and Congress.
For additional details, click here for the 268-page JCT staff technical explanation of the Protecting Americans from Tax
Hikes (PATH) Act of 2015 and click here for the JCT revenue estimate.
Click here for the separate JCT staff revenue estimate for tax provisions that are included in the Consolidated
Appropriations Act of 2016.
Let’s talk
For a deeper discussion of how this might affect your business, please contact:
Tax Policy Services
Pam Olson
(202) 414-1401
[email protected]
Rohit Kumar
(202) 414-1421
[email protected]
Brian Meighan
(202) 414-1790
[email protected]
Scott McCandless
(202) 312-7686
[email protected]
Ed McClellan
(202) 414-4404
[email protected]
Lindy Paull
(202) 414-1579
[email protected]
Don Carlson
(202) 414-1385
[email protected]
Andrew Prior
(202) 414-4572
[email protected]
Larry Campbell
(202) 414-1477
[email protected]
National Economics & Statistics
Drew Lyon
(202) 414-3865
[email protected]
Peter Merrill
(202) 414-1666
[email protected]
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