Tax Legislative Update Breaking news from Capitol Hill from Grant Thornton s Washington National Tax Office

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1 Tax Legislative Update Breaking news from Capitol Hill from Grant Thornton s Washington National Tax Office A Sept. 21, 2015 Congress tees up expired provisions for late-year extension Congress enters the fall needing to jump-start negotiations over the extension of the 50- plus popular tax provisions that expired at the end of Each chamber has made progress on extensions, but movement toward a final compromise remains slow. The Senate Finance Committee approved tax legislation on July 21 that would generally extend all 50-plus popular tax provisions for two years, retroactively from Jan. 1, 2015, through the end of House Republicans have taken a different tack. Instead of voting to extend all the provisions temporarily, they have voted to make select provisions permanent. Most recently, the House Ways and Means Committee approved five bills on Sept. 17 that would make the following provisions permanent: Bonus depreciation Above-the-line deduction for $250 for teacher classroom expenses Controlled foreign corporations (CFC)-related payment look-through rule Subpart F exemption for active-financing income 15-year cost recovery for qualified leasehold improvements, qualified restaurant buildings and improvements, and qualified retail improvements Contacts Mel Schwarz Partner, Washington National Tax Office T E mel.schwarz@us.gt.com Dustin Stamper Director, Washington National Tax Office T E dustin.stamper@us.gt.com Shamik Trivedi Manager, Washington National Tax Office T E shamik.trivedi@us.gt.com grantthornton.com/tax The bill to make bonus depreciation permanent would also remove restrictions on improvement property subject to a lease, index the limit on passenger automobiles and modify the alternative minimum tax (AMT) election in lieu of bonus depreciation. The full House has also voted to make the following eight provisions permanent: Alternative simplified research credit at an increased rate of 20% Increased Section 179 expensing limits Reduced five-year holding period for S corporation built-in-gains tax Election to deduct state and local sales tax Tax-free charitable individual retirement account (IRA) distributions for taxpayers 70½ years and older

2 Increased percentage limits and extended carryforward periods for charitable contributions of conservation easements and capital gain property (with enhancements for Alaska native corporations) Enhanced charitable deduction for contributions of food inventory S corporation basis reduction limit for charitable gifts The House R&D credit bill would also allow private companies with less than $50 million in gross receipts to take the credit against the AMT. The Senate version would allow businesses less than five years old with less than $5 million in annual gross receipts to take the credit against AMT and up to $250,000 of the credit against their payroll taxes. The House has not proposed any revenue-raising provisions, but the Senate bill uses minor offsets to cover enhancements to some of the extenders. The offsets would raise $1.8 billion by changing the tax treatment of clean coal power grants, expanding mortgage reporting, and cutting the alternative fuel credit rates for liquefied natural gas (LNG) and liquefied petroleum gas (LPG). The expansion of mortgage reporting has already been enacted on a separate unrelated highway funding bill. The cut in the alternative fuel credit rate also appears unlikely, as a parallel cut in the alternative fuel tax rate it was paired with has been enacted separately. Outlook The House and Senate may not be done with legislative maneuvering, but all that s really left is for leaders to agree on a compromise package. The full Senate could take up the Senate Finance Committee bill, and the Ways and Means Committee may move more legislation, but these actions will do little to affect the final outcome. Many Republicans hope to resurrect a proposed deal from late last year that would have made a handful of provisions permanent and extended the rest for two years. Senate Majority Leader Mitch McConnell, R-Ken., and Senate Minority Leader Harry Reid, D- Nev., were working on the deal when it fell apart after the administration objected that it did not extend enhancements to the earned income and child credit scheduled to expire at the end of Leaders could seek to add the extenders to other end-of-year priorities, such as a government funding bill or legislation addressing the debt limit. Ways and Means Committee Chair Paul Ryan, R-Wis., has discussed adding permanent extenders to a highway funding bill along with an international reform bill. A large deal to make some of the expired provisions permanent is probably a long shot, but not impossible. The most likely scenario remains a two-year retroactive extension of nearly all the provisions very late in the year, with a one-year retroactive extension as an absolute fallback. The following table compares how the expired tax provisions would be treated under the Senate markup and the House bills. The Senate Finance Committee s enhancements to certain provisions may be the least likely to be included in a final deal. Many similar changes were proposed last year but were excluded in the one-year extension ultimately enacted.

3 Individual tax provisions Itemized deduction for state and local sales taxes H.R. 622 would make permanent April 15 Above-the-line deduction for qualified tuition Above-the-line deduction of $250 for teacher classroom expenses Extends and indexes for inflation for 2015 and 2016, and makes professional development expenses eligible H.R would make permanent Tax-free IRA contributions to charity after age 70½ H.R. 644 would make permanent Feb 12 Deduction for mortgage insurance premiums Transit and parking fringe benefit equalization Exclusion for principal residence debt forgiveness income General business tax provisions Research credit and adds cost of bike share to definition of qualified transit benefit Chairman s mark would have extended through 2016 but an amendment was approved to make permanent. For businesses less than five years old with less than $5 million in annual gross receipts, the chairman s mark would allow research credits to offset alternative minimum tax and make up to $250,000 of credit refundable against payroll taxes. H.R. 880 was passed by the House on May 20 and would allow the traditional credit to expire but make the alternative simplified, basic research, and energy research credits permanent at a 20% rate. It would also all allow private companies with less than $50 million in gross receipts to take the credit against AMT. Qualified small business stock New markets tax credit Reduced five-year holding period for S corporation built-in gains for dispositions Work opportunity tax credit with an increased allocation of $3.94 billion in 2015 and 2016, and extends carryover period through 2021, and the chairman s mark adds a new category of eligible workers for those who have exhausted unemployment benefits H.R. 636 would make permanent Feb. 13 CFC-related payment look-through rule H.R would make permanent Subpart F exemption for active-financing income H.R. 961 would make permanent Low-income housing credit minimum credit Extends current 9% minimum rate through 2016 and establishes a 4% minimum rate for the acquisition of existing housing

4 Exclusion of military housing allowance for income test for low-income housing credit Indian employment tax credit Employer wage credit for active-duty employees RIC-qualified investment entity treatment under FIRPTA Interest and short-term capital gains related RIC dividends, and the chairman s mark expands credit to all employers and increases rate to 100% Conservation contributions of capital gain real estate Enhanced charitable deduction for gifts of food inventory Treatment of payments to controlling exempt organizations H.R. 644 would make permanent and enhance the deduction for Alaska native corporations. It was passed by the House on Feb 12. H.R. 644 would make permanent Feb 12 Basis adjustment to S corporation stock for charitable contributions of property Railroad track maintenance tax credit and expands to cover railroad track owned or leased as of Jan. 1, 2015, instead of Jan. 1, 2005 H.R. 636 would make permanent Feb 13 Mine rescue team training credit Depreciation provisions Bonus depreciation Section 179 expensing 15-year straight-line cost recovery for qualified leasehold improvements, qualified restaurant buildings and improvements, and qualified retail improvements Extends 50% bonus depreciation for property placed in service in 2015 and 2016 (2017 for certain long-lived and transportation property) and extends ability to claim unused AMT credits in lieu of bonus depreciation Extends and indexes for inflation the $500,000 expensing allowance and $2 million phaseout threshold to property placed in service in 2015 and 2016, and extends the treatment of real property as eligible with existing restrictions H.R would make 50% bonus depreciation permanent, along with the ability to claim unused AMT credit in lieu of bonus depreciation, with modifications to remove restrictions on improvement property subject to a lease, index the limit on passenger automobiles and modify the AMT election. It was passed by the Ways and. H.R. 636 would make $500,000 expensing allowance and $2 million phaseout threshold permanent and index them for inflation. It would also make computer software and HVAC units eligible and remove the restriction on revoking the election. It passed the House on Feb. 13. H.R. 765 would make permanent Three-year depreciation for racehorses Seven-year cost recovery for motor-sports entertainment complexes

5 Expensing for advanced mine safety equipment Special expensing for film and television productions, and the chairman s mark expands eligibility to cover some smaller live theatrical productions Energy tax provisions Section 30B fuel cell vehicle Hybrid and alternative fuel vehicle credits under Section 30B would remain expired Section 30D plug-in electrical vehicle credit Credit for plug-in motorcycles that expired for 2014 is brought back for 2015 and 2016 Three-wheel vehicle credit would remain expired General plug-in vehicle credit, which will begin to phase out once 200,000 vehicles are sold, is unchanged Credit for production of Indian coal Cellulosic (second-generation) biofuel credit Special depreciation for cellulosic biofuel plant property Incentives for biodiesel and renewable diesel Alternative fuel and alternative fuel mixture credit, and an amendment was approved that would convert it to a production credit that would add restrictions for blenders and requires the IRS to issue guidance within 30 days of enactment, allowing submission for all 2015 claims over a 180-day period, with payment required within 60 days for all fuels, including propane used in forklifts, but a separate revenue offset would reduce the tax credits for LNG and LPG from 50 cents per gallon to 29 cents a gallon and 36 cents a gallon respectively Requires the IRS to issue guidance within 30 days of enactment, allowing submission for all 2015 claims over a 180-day period, with payment required within 60 Alternative fuel vehicle refueling property credit Special rule for qualified electric utility dispositions to implement FERC or state restructuring policy Section 45 renewable electricity production credit Extends credit to property with construction beginning before Jan. 1, 2017, and extends ability to claim 30% Section 48 credit in lieu of Section 45 Section 45L energy-efficient new home credit Section 25C energy-efficient home improvement tax credit

6 Section 179D deduction for energy-efficient commercial building property Incentives for specific locations Accelerated depreciation for Indian reservation business property Empowerment zone tax incentives Section 199 deduction for Puerto Rican production activities Increased limit on rum excise tax cover for Puerto Rico and the Virgin Islands, updates the energy-efficiency standards, and allows tribal governments and nonprofits to allocate the deduction to the designer and allows elections on a class-by-class basis and amends the requirements to treat certain employees as residents of an empowerment zone American Samoa economic development credits Qualified Zone Academy Bonds Extends with a $400 million authorization for 2015 and 2016, and the chairman s mark reduces the private contribution requirement from 10% to 5% Tax professional standards statement This content supports Grant Thornton LLP s marketing of professional services and is not written tax advice directed at the particular facts and circumstances of any person. If you are interested in the topics presented herein, we encourage you to contact us or an independent tax professional to discuss their potential application to your particular situation. Nothing herein shall be construed as imposing a limitation on any person from disclosing the tax treatment or tax structure of any matter addressed herein. To the extent this content may be considered to contain written tax advice, any written advice contained in, forwarded with or attached to this content is not intended by Grant Thornton LLP to be used, and cannot be used, by any person for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code. The information contained herein is general in nature and is based on authorities that are subject to change. It is not, and should not be construed as, accounting, legal or tax advice provided by Grant Thornton LLP to the reader. This material may not be applicable to, or suitable for, the reader s specific circumstances or needs and may require consideration of tax and nontax factors not described herein. Contact Grant Thornton LLP or other tax professionals prior to taking any action based upon this information. Changes in tax laws or other factors could affect, on a prospective or retroactive basis, the information contained herein; Grant Thornton LLP assumes no obligation to inform the reader of any such changes. All references to Section, Sec., or refer to the Internal Revenue Code of 1986, as amended.