On December 18, 2015, President Obama signed the Protecting Americans from Tax Hikes Act of 2015 (the “PATH Act”) after both houses of Congress voted to approve the budget measure and comprehensive spending bill. The PATH Act includes a broad range of tax extenders, either extending or making permanent several tax incentives, and also changes portions of the tax policy.
The budget measure provides two-year renewals for dozens of extenders, five-year renewals for some, and also contains provisions impacting Internal Revenue Service (“IRS”) administrative practices.
Permanent Tax Breaks
Under the PATH Act, many tax credits for individuals as well as businesses were made permanent. For individuals, tax-free distributions (up to $100,000) from qualified individual retirement plans for charitable purposes have been permanently extended. With the exclusion now permanently extended, individuals have the opportunity to make charitable contributions from either their traditional IRA or Roth IRA without the distributions being subject to federal income tax. For businesses, the reduced built-gain recognition period for S corporations of five-years has also been permanently extended. S corporations with a five-year built-in gain recognition period that extends beyond 2015 now have the opportunity to benefit from the permanently reduced five-year period. Additionally, the PATH Act has also permanently extended the Internal Revenue Code (“IRC”) Section 179 depreciable property limitation ($500,000) and phase-out amount ($2 million) aimed at benefiting small businesses. Without this extension, the limit would have been $25,000 with a phase-out amount of $200,000.
Five-Year Extensions
Other credits got five-year extensions, including bonus depreciation for qualified property, the work opportunity tax credit, the new markets tax credit and the look-through treatment for certain payments between related controlled foreign corporations.
Other Extensions and Tax Breaks
Energy-related provisions, including incentives for production of renewable biofuels, were renewed for two years. The wind energy production tax credit was also extended through the end of 2019. For businesses that plan to acquire assets for use in their trades or operations, bonus depreciation has been extended for property acquired and placed in service through 2019. Other tax-related measures were given another delayed effective date. A two-year moratorium was also placed on the 2.3% medical device excise tax which would stop it from going into effect until 2018. The “Cadillac tax” on high cost insurance plans, which was originally scheduled to take effect in 2018, has been delayed for another two years.
Changes to Tax Policy
The PATH Act also changes several areas of tax policy, including changes to the treatment of real estate investment trusts (“REITs”), such as restricting certain tax-free spinoffs of real property into REITs, and seeks to address certain IRS administrative practices. For foreign investors who own small interests in publicly traded corporations that are considered to be U.S. real property interests, the increased ownership percentage from 5% to 10% in certain REIT stock provides a broader exception to taxes imposed under the Foreign Investment in Real Property Tax Act of 1980 (FIRPTA) regime.
