Facing a December 11 expiration of the current federal spending authorization, lawmakers this week passed a five-day continuing resolution to keep the federal government open through December 16 while they continue to seek agreement on agency funding for the rest of the fiscal year. Although a bill to extend 50-plus expired and expiring tax provisions might move through Congress separately, the fate of that package now is tied to the so-called omnibus spending bill.
Leadership and the senior members of the tax writing committees remain in discussions about a potential deal that would make some tax provisions permanent and provide multi-year extensions for others, but with many moving parts in play, a smaller short-term deal could be the fallback.
To safeguard against the possibility of a long-term extenders deal falling flat, House Ways and Means Committee Chairman Kevin, Brady, R-Texas, on December 7 released the Tax Increase Prevention and Real Estate Investment Act of 2015, which would retroactively extend the last year’s expired tax deductions, credits, and incentives through 2016 and make certain provisions more generous for 2016 only. The House has not taken action on the bill yet, and Ways and Means Chairman Brady has made clear that it is a “Plan B” in the event that the longer-term deal cannot be finalized.
This time last year, tax writers were similarly negotiating what they hoped would be a major tax deal to permanently extend a number of business and individual tax credits and deductions, but when negotiations broke down, the fallback was a one-year across-the-board retroactive extension that was signed into law December 19, 2014 only to expire again at the end of the year.
As of December 16, 2015, Republican and Democratic negotiators in the House clinched a deal late Tuesday on a $1.1 trillion spending bill and a huge package of tax breaks and tax extenders. The bill is expected to be paired with legislation that would extend about $750 billion in expiring tax breaks for businesses and individuals. This bill is currently not law but is expected to be voted on by both legislative chambers in the coming days.
The major provisions of the agreement are provided below:
Business: The agreement would permanently extend (and in some cases modify) the following provisions:
- The research and experimentation credit;
- Increased expensing limits under section 179;
- The subpart F exception for active financing income;
- 15-year straight-line cost recovery for qualified leasehold improvements, qualified restaurant buildings and improvements, and qualified retail improvements;
- The minimum 9 percent low-income housing tax credit rate for nonfederally subsidized buildings;
- The employer wage credit for employees who are active duty members of the uniformed services;
- Provisions allowing pass-through character of interest-related dividends and short-term capital gains dividends from regulated investment companies (RICs) to foreign investors;
- RIC qualified investment entity treatment under the Foreign Investment in Real Property Tax Act (FIRPTA); and
- The reduced recognition period for S corporation built-in gains tax.
Individual: For individuals, the agreement would permanently extend the:
- Itemized deduction for state and local general sales taxes in lieu of income taxes;
- Above-the-line deduction for classroom expenses paid by elementary and secondary school teachers;
- American Opportunity Tax Credit for higher education expenses;
- Parity for the income exclusion for employer-provided mass transit and parking benefits; and
- Enhancements to the earned income tax credit and child tax credit that were enacted in the American Recovery and Reinvestment Act of 2009 and scheduled to expire in 2017. These provisions were key to gaining Democratic support for the agreement; however, the agreement also provides for new safeguards to address Republican concerns about fraud and improper payments in these programs. The agreement does not include a provision sought by key House Democrats that would have indexed the child tax credit to inflation.
Charitable giving: Charitable giving incentives that would be made permanent (and in some cased modified) under the agreement include:
- Tax-free treatment of distributions from individual retirement plans by individuals age 70-1/2 and older for charitable purposes;
- The special rules for contributions of capital gain real property made for conservation purposes;
- The enhanced charitable deduction for contributions of food inventory;
- The modification of tax treatment of certain payments to controlling exempt organizations; and
- The basis adjustment to stock of S corps making charitable contributions of property.
Several other significant business provisions would not be made permanent but would receive multi-year extensions. The agreement would extend the following provisions for five years:
- Bonus depreciation and the election to accelerate alternative minimum tax credits in lieu of first-year bonus depreciation, phased down over five years and sunsetting in 2020. The agreement provides for 50 percent bonus depreciation in 2015, 2016, and 2017; 40 percent in 2018; and 30 percent in 2019.
- The lookthrough rule for payments between related controlled foreign corporations under the foreign personal holding company rules.
- The new markets tax credit and
- The work opportunity tax credit (expanded to make the credit available to employers who hire certain long-term unemployed individuals).