In this newsletter you will find information on updates and changes in the law on both the Federal and State level. If you have any questions, please feel free to contact Andrew Sullivan at (504) 569-2900.
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On December 18, 2015, the Protecting Americans from Tax Hikes Act of 2015 (“PATH”) and the Consolidated Appropriations Act of 2016 (“CAA”) were signed by the President. As a result, several significant individual and business tax deductions, tax credits, and other important tax provisions were extended or made permanent, namely, bonus depreciation, the Section 179 deduction, the reduction in the S corporation recognition period for built-in gains tax, and the research and development credit under Section 41. Further detail about these changes and others is provided below.
Code Section 168 – Bonus Depreciation, MACRS Depreciation for Certain Building Improvements and Restaurants
Code Section 168(k) provides that a taxpayer that owns “qualified property” is generally allowed an additional first-year depreciation (“bonus depreciation”) deduction of fifty percent (50%) in the year that the property is placed in service provided the property is placed in service prior to the time frame specified in Section 168(k). Additionally, “qualified property” is exempt from the alternative minimum tax (AMT) depreciation adjustment, which requires that certain property depreciated on the 200% declining balance method for regular income tax purposes must be depreciated on the 150% declining balance method for AMT purposes.
To qualify for bonus deprecation and the AMT relief, prior law required that the qualified property must be placed in service before January 1, 2015 (with certain aircraft and long-production-property to be placed in service before January 1, 2016). Under the new law, the “timely-placed-in-service” requirement for qualified property is extended to January 1, 2020 (with the applicable placed-in-service period for certain aircraft and long-production-period property extended to January 1, 2021), effectively extending the bonus depreciation and AMT relief provisions for a five-year period. The new law is effective retroactively for property placed in service after December 31, 2014 (in tax years ending after December 31, 2014) and before January 1, 2020 (or January 1, 2021, for certain aircraft and long-production-period property). Accordingly, a fiscal year taxpayer that filed its 2015 tax return before the retroactive extension of bonus depreciation and AMT relief may want to consider filing an amended return if the taxpayer placed qualifying property in service during the relevant period.
The bonus depreciation deduction will begin to phase out for qualified property placed in service after December 31, 2017. 40% bonus depreciation will apply for qualified property placed in service in calendar year 2018 (and for certain aircraft and long-production period property placed in service in 2019), and 30% bonus depreciation will apply for qualified property placed in service in calendar year 2019 (and for certain aircraft and long-production-period property placed in service in 2020). Under the new law, no bonus depreciation will be available for property placed in service after 2019 (or after 2020 for certain aircraft and long-production-period property). The alternative minimum tax relief for qualified property is not phased out.
Furthermore, the new law retroactively restores and makes permanent the 15-year Modified Accelerated Cost Recovery System (“MACRS”) for “qualified leasehold improvement property,” “qualified retail improvement property,” and “qualified restaurant property.” Thus, if a fiscal year taxpayer placed qualified leasehold improvement property, qualified retail improvement property or qualified restaurant property in service in 2015, and the taxpayer has already filed its income tax return for that period, the taxpayer should consider amending the return to make use of the 15-year recovery period for that property.
Code Section 179 – Expensing
Generally, taxpayers may elect to treat the cost of any Section 179 property placed in service during the tax year as an expense that is not required to be capitalized for the tax year in which the Section 179 property is placed in service. Under prior law, for tax years beginning after calendar year 2014, a taxpayer’s annually allowable Section 179 expense could not exceed $25,000; and, the $25,000 limit had to be phased out by the amount by which the cost of the section 179 property placed in service exceeded $200,000. Under the new law, a taxpayer’s annually allowable Section 179 expense is $500,000 and the phase-out amount is $2,000,000. The new law is effective for tax years beginning after December 31, 2014.
Code Section 1374(d)(7) – Shortened S Corp Built-in Gains Holding Period Permanently Extended
When a C corporation elects to be taxed as an S corporation (or when an S corporation acquires property from a C corporation in a nontaxable carryover basis transaction), the S corporation may be subject to a corporate-level built-in gains tax. In particular, the S corporation will be subject to tax at the highest corporate rate on all gains that were built-in at the time of the election/acquisition if such gains are subsequently recognized during the applicable recognition period. Although the recognition period has been subject to several changes in the last few years, prior to enactment of PATH, the recognition period was ten (10) years.
The new law provides that, for S corporation tax years beginning after December 31, 2014, the recognition period is limited to five years, beginning on the first day of the first tax year for which the corporation is an S corporation. Thus, PATH makes a permanent change to the recognition period for built-in gains tax. The reduction in the built-in gains period applies retroactively to tax years beginning after December 31, 2014, and to all future periods.
Code Section 267(d) – Related-Party Loss Rules
The new law modifies the related-party loss rule of Section 267 by adding an exception for transfers from tax-indifferent parties. In general, Sec. 267(a) disallows a loss on the sale or exchange of property between related parties. Under prior Section 267(d), if a taxpayer acquired property by purchase or exchange from a transferor who sustained a loss that was not allowable as a deduction under Section 267(a) (i.e., because the transferor is a related party to the transferee), then any gain realized by the transferee on a subsequent sale/exchange would only be recognized to the extent that the gain exceeded the amount of loss disallowed to the transferor on the original sale/exchange.
Under the new law, the Code Section 267(d)(1) loss importation rule will not apply to the extent gain or loss with respect to the asset sold or exchanged (if otherwise allowed) is not subject to federal income tax in the hands of the transferor immediately before the transfer, but any gain or loss with respect to the asset is subject to federal income tax in the hands of the transferee immediately after the transfer. In other words, if the original sale/exchange is made by a tax-indifferent party (e.g., tax-exempt organizations, foreign persons, etc.) the basis of the property in the hands of the transferee will be its cost for purposes of determining gain or loss. This new exception is effective to sales and other disposition of property occurring after December 31, 2015 and to which Code Section 267(a)(1) applies to disallow a loss.
Code Section 408(d)(8) – Tax-Free Distributions from IRAs to Charities Made Permanent
A taxpayer may exclude from gross income so much of the aggregate amount of his “qualified charitable distributions” not exceeding $100,000 in a tax year. A “qualified charitable distribution” is an otherwise taxable distribution from a traditional or Roth IRA that is (1) made directly by the IRA trustee to a Code Section 170(b)(1)(A) charitable organization (other than a private foundation or donor advised fund) and (2) made on or after the individual for whom the IRA is maintained has attained age 70 ½. The new law makes this rule permanent and applies to any qualifying IRA distribution made in any tax year after December 31, 2014.
Code Section 41 – Research Credit
The research and development tax credit under Code Section 41 is retroactively restored and made permanent. The new law also makes two major changes to the credit beginning in 2016: (i) eligible small businesses may claim the credit against alternative minimum tax liability and (ii) the research credit can be used by smaller businesses against the employer’s Social Security portion of payroll tax liability.
Because the new law applies retroactively to qualifying amounts paid or incurred, any taxpayer who filed returns for a fiscal year including part of calendar year 2015 might wish to consider filing an amended return to apply the research credit to amounts paid or incurred after December 31, 2014.
Code Sections 6221, 6223 and 6241 – New Rules for Partnership Audits
Effective for returns filed for partnership tax years beginning after December 31, 2017, audit adjustment to items of partnership income, gain, loss, deduction or credit, and any partner’s distributive share thereof, are determined at the partnership level. Although the new partnership level audit determination rules apply to all partnerships regardless of size, partnerships with 100 or fewer partners may elect out of the new regime so long as its partners are eligible under Section 6221(b)(1)(C). Trusts and partnerships are not eligible partners. The role of “Tax Matters Partner” is replaced with an expanded “partnership representative” role, who will bind the partnership and the partners by his actions in the audit. A partnership for the purpose of this rule is a partnership required to file returns under Code Section 6031(a). Although the effective date might seem far in the future, individuals should consider amending existing partnership and LLC operating agreements in light of the new rules.
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