Tax Credits, Depreciation, and Other Provisions Extended and/or Modified
Several major items were addressed by the new legislation:
- The research and development credit – The Act permanently extends the R&D credit. Beginning in 2016, eligible small businesses ($50 million or less in gross receipts) may claim the credit against alternative minimum tax liability, and the credit can be used by certain small businesses against the employer’s payroll tax (i.e., FICA) liability.
- Increased expensing limitations and treatment of certain real property as §179 property -The Act retroactively retains the 2015 limits, i.e., a taxpayer may elect to expense up to $500,000 of equipment costs (with a phase-out for purchases in excess of $2,000,000). The Act also permanently extends the higher expensing limitation and phase-out amounts. Starting in 2016, the limitations will be indexed for inflation. The special rules that allow expensing for computer software and qualified real property (qualified leasehold improvement property, qualified restaurant property, and qualified retail improvement property) are also permanently extended by the tax deal. Furthermore, beginning in 2016, the $250,000 qualified real property expensing limitation is eliminated.
- Bonus depreciation – The Act extends bonus depreciation for property acquired and placed in service during 2015 through 2019 (with an additional year for certain property with a longer production period). The bonus depreciation percentage is 50% for property placed in service during 2015, 2016 and 2017 and phases down, to 40% in 2018, and 30% in 2019.
Other extensions and modifications were made to the following credits and other Code provisions:
- The new markets tax credit (extended through 2019);
- The work opportunity tax credit (extended through 2019; adds qualified long-term unemployed individuals as eligible hires);
- Employer wage credit for employees who are active duty members of the uniformed services (made permanent; allows all businesses to be eligible);
- 15-year straight-line cost recovery for qualified leasehold improvements, qualified restaurant buildings and improvements, and qualified retail improvements (made permanent);
- Look-thru treatment of payments between related controlled foreign corporations under foreign personal holding company rules (extended through 2019);
- Indian employment tax credit (extended through 2016);
- Railroad track maintenance credit (extended through 2016; changes owned/lease date);
- Mine rescue team training credit (extended through 2016);
- Qualified zone academy bonds (extended through 2016);
- Classification of certain race horses as 3-year property (extended through 2016);
- 7-year recovery period for motorsports entertainment complexes (extended through 2016);
- Accelerated depreciation for business property on an Indian reservation (extended through 2016);
- Election to expense mine safety equipment (extended through 2016);
- Special expensing rules for certain film and television productions (extended through 2016; adds live theatrical productions as eligible);
- Deduction with respect to income attributable to domestic production activities in Puerto Rico (extended through 2016);
- Empowerment zone tax incentives (extended through 2016; employee residence test modified);
- Increase in limit on cover over of rum excise taxes to Puerto Rico and the Virgin Islands (extended through 2016);
- American Samoa economic development credit (extended through 2016);
- Removal of bond requirements and extending filing periods for certain alcohol producers taxpayers with limited excise tax liability.
Provisions Affecting S Corporations, RICs and Other Business Activities
- Extension of exclusion of 100% of gain on qualified small business stock – The Act permanently extends the exclusion of 100% of the gain on certain small business stock for non-corporate taxpayers to stock acquired after September 27, 2010, and held for more than five years. This provision also extends the rule that eliminates such gain as an AMT preference item. The changes are effective for stock acquired after December 31, 2014.
- Extension of reduction in S corporation recognition period for built-in gains tax – The Act permanently reduces the §1374 recognition period to five years for tax years beginning in 2015. Pre-existing installment sales continue to be governed by the holding periods for the years of sale. Effective for tax years beginning after December 31, 2014.
- Extension of favorable S corporation’s charitable contribution of property – The shareholder’s basis in S corporation stock is reduced by the shareholder’s pro rata basis in the donated property (rather than the pro rata fair market value of the donated property had the provision expired).
- Extension of subpart F exception for active financing income – The Act permanently extends the subpart F exceptions for income in the active conduct of a banking or financing business, an insurance business, or business as a securities dealer. Effective for tax years of a foreign corporation beginning after December 31, 2014, and to tax years of United States shareholders with or within which any such tax year of such foreign corporation ends.
- Modifications to alternative tax for certain small insurance companies – The Act increases to $2,200,000 the limitation on net written premiums or direct written premiums, above which the election is not available. This amount is adjusted for inflation beginning in 2016. In addition, the Act adds a diversification requirement that can be met either by diversifying risk or by diversifying ownership of interests in the company. Effective for tax years beginning after December 31, 2016. (A post is coming soon with detailed information about these changes to IRC §831(b) affecting small captive insurance companies).
- Treatment of timber gains – The Act taxes C corporation timber gains at a tax rate of 23.8%. Effective for tax years beginning after 2015.
- Extension of treatment of certain dividends of regulated investment companies – The Act permanently extends provisions allowing for the pass-through character of interest-related dividends and short-term capital gains dividends from regulated investment companies to non-resident aliens. Effective for tax years beginning after December 31, 2014.