On Friday, December 18th, President Obama signed into law a bill, the PATH Act, which addressed tax extender provisions that had expired during the course of the past year.  The bill retroactively extends into law a host of key expired individual, business and energy tax breaks.  Some provisions have been temporarily extended; others have been made permanent.
At the top of the list is the research and development tax credit which has now been made permanent. In addition, starting with 2016, businesses below $50 million in gross receipts can claim the credit against Alternative Minimum Tax (AMT).  The bill extends temporarily the credit for startups below $5 million in gross receipts to claim a credit against payroll tax which is capped at $250,000 for up to five years.
Section 179 expensing has also been made permanent.  Section 179 expensing is now set at the $500,000 level.  Businesses with over $2 million of purchases will have the expense deduction phase out dollar for dollar up to $2.5 million.  In addition, the Section 179 cap is now indexed to inflation in $10,000 increments for future years.  Qualified real property is included. The bill continues to allow expensing for computer software and revocation of elections without IRS consent.
First year 50% bonus depreciation is extended through 2019.  Businesses of any size can continue to depreciate 50% of the total cost of equipment acquired and put into service during the current year and the next two years (through 2017).  After 2017, bonus depreciation is phased down to 40% in 2018 and 30% in 2019. Qualified leasehold property also continues to be eligible for 15-year MACRS depreciation.
Additional tax incentives for businesses include making permanent the reduced 5-year built-in-gains period for C corporations electing S corporation status.  The Act makes permanent provisions allowing for exclusion of tax gain on sale of Qualified Small Business Stock (QSBS).
For individual taxpayers, the child tax credit and HOPE/American Opportunity scholarship credits have now been made permanent but continue to be subject to income phaseouts/reductions. Employer provided mass transit and parking benefits, the election to itemize sales/use tax in lieu of state/local income taxes and IRA direct transfers to eligible charities of up to 100,000 per year for those aged 70.5 are now all made permanent. The exclusion of cancellation of indebtedness income for qualified mortgages is extended through 2016 as is the deductibility of qualified mortgage insurance premiums.
On the international side, the bill makes permanent the active financing exception for Subpart F income, which has been extended over the last decade on a temporary basis.  This exemption allows for deferral of income in financing overseas operations for U.S. corporations as it has been viewed to date as preventing a competitive disadvantage on the part of U.S. businesses that have been expanding overseas.
In addition to a number of REIT reporting reforms, such as restricting eligibility for tax-free spinoffs, expansion of permissible REIT hedges and repeal of the preferential dividend rule, there is an expansion of foreign investor exceptions subject to FIRPTA withholding.  The maximum ownership threshold has been increased to 10% from 5% for the public investor exception, (applicable to e.g., publicly-traded REITs). Foreign pensions are now also exempt from FIRPTA.  The FIRPTA rate of withholding has increased from 10% to 15% for sales other than those involving a personal residence.
Congressional action regarding Individual Taxpayer Identification Numbers (ITINs), reflects the growing concern over immigration and potential terrorist threats.  By 2020, the Treasury Department is required to adopt a system in which individuals have to file for an ITIN in person. Furthermore, individuals who were granted ITINs prior to 2013 will be required to renew them between 2017 and 2020. If an individual fails to pay taxes for three years, their ITIN will expire.
Following is a bullet point summary of major provisions:
Tax incentives for businesses:
•    § 41 R&D credit discussed above;
•    § 168 depreciation classifying certain race horses as three-year property;
•    § 168 depreciation allowing 15-year straight-line cost recovery for qualified leasehold improvements, qualified restaurant buildings and improvements, and qualified retail improvements discussed above;
•    Increased expensing limitations and treatment of certain real property as Sec. 179 property (discussed above);
•    The Subpart F exception for active financing income (IRC § 954(h)) is now made permanent as discussed above;
•    § 897 and § 1445 withholding exemptions expanded to increase public investor exception threshold to 10% from 5%; exemption for foreign pension funds and increased withholding rates.
•    § 856 REIT reforms including classification of debt instruments, asset and income test regarding ancillary personal property, hedging provisions; § 355 spin offs for REITs; § 857 REIT prohibited transaction safe harbors and service income; § 562 preferential REIT distribution and dividend rules
•    § 245 exclusion from dividends received deduction definition for RIC and REIT dividends
•    S corps: § 1374 five-year S corporation recognition period for built-in gains tax discussed above; and § 1367 allowance for basis adjustments to stock of S corporations making charitable contributions of property;
•    §1202 exclusion of 100% of gain on certain qualified small business stock discussed above;
•    Sec. 168 bonus first-year depreciation (for certain property with longer production periods, the property must be placed in service before Jan. 1, 2016) discussed above;
•    § 132 exclusion for employer-provided mass transit and parking benefits (discussed above);
•    § 168 election to accelerate AMT credit in lieu of bonus depreciation;
•    § 168 depreciation allowing reduced recovery period for motor sports entertainment complexes;
•    § 168 depreciation (reduced life) for business property on an Indian reservation;
•    § 170 enhanced charitable deduction for contributions of food inventory;
•    Pension plan provisions affecting multi-employer defined pension plans have been extended through 2015 which involve the extension of amortization periods continuing to reduce temporarily required employer contributions
•    181 expensing rules for eligible film and television productions;
•    Credits:  § 45D New Markets tax credit (and carry-overs of the unused limitation are extended through 2019) discussed above§ 45P Employer Wage Credit for employees who are active military; § 51 Work Opportunity Tax Credit; § 42 Temporary Minimum Low-income Housing tax credit for non-subsidized buildings; § 45G Railroad Track Maintenance Credit; Sec. 54E Qualified Tax Credit Bonds (Zone Activity);
•    § 199 Domestic Production Activities deduction allowable with respect to income attributable to domestic production activities in Puerto Rico;
•    § 512 modifying tax treatment of certain payments to certain controlled tax-exempt organizations;
•    Mutual Funds (RICS):  § 871 treatment of certain dividends from RICS; § 897 treatment of RICs as qualified investment entities under the Foreign Investment in Real Property Tax Act, P.L. 96-499;
•    Empowerment Zone tax incentives (Sec. 1391)
Tax incentives for individuals:
•    § 108 exclusion from gross income of discharge of qualified principal residence indebtedness (discussed above);
•    § 164 deduction for state and local general sales taxes in lieu of income tax itemization (discussed above);
•    § 163 allowance for mortgage insurance premiums to be treated as qualified residence interest (discussed above);
•    Use of § 408 IRA distributions for charitable purposes for those aged 70.5 or more (discussed above).
•    § 62 deduction for certain expenses of elementary and secondary school teachers;
•    § 170 charitable deduction for capital gain real property made for conservation purposes;
•    § 222 above-the-line deduction for qualified tuition and related expenses;
Energy tax incentives (credits) extended through 2014:
•    § 25C credit for non-business energy property;
•    § 30C credit for alternative fuel vehicle refueling property;
•    § 40 second-generation biofuel producer credit;
•    § 40A incentives for biodiesel and renewable diesel;
•    § 45 production credit for Indian coal facilities placed in service before 2009;
•    § 45 credits with respect to facilities producing energy from certain renewable resources;
•    § 45L credit for energy-efficient new homes;
•    § 168 allowance for biofuel plant property;
•    § 179D allowance for energy-efficient commercial buildings;
•    § 451 sales or dispositions to implement policies for qualified electric utilities;
•    § 6426 and § 6427 excise fuel tax credits.
Penalties increased for inflation after 2014:
•    § 6651, § 6698, § 6699, § 6721, § 6722 penalties for failure to timely file individual, corporate, partnership, S corporation returns or failure to timely pay taxes owed or failure to timely file correct information returns;
•    §6695 return preparer penalty;
For more detailed information on how this will affect your business or individual taxation, please contact us to schedule a private tax consultation.