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2015 Saw Significant Tax Law Changes, But Tax Extenders Remain up in the Air.
(Parker Tax Publishing December 7, 2015)
Congress made significant changes to the Tax Code in 2015, including a restructuring of Partnership and C corporation return due dates, sharp increases to information reporting penalties, and a repeal of TEFRA partnership audit procedures. But a permanent or multi-year extension of dozens of tax breaks, known not-so-affectionately as the "tax extenders," remains up in the air with just two weeks left before Congress recesses for the year.
A recap of the 2015's most important tax law changes and this year's version of the tax extenders debacle follows.
Status of Tax Extenders Remains Uncertain
Last year, on December 19, the President signed into law the Tax Increase Prevention Act of 2014, retroactively extending enhanced Section 179 expensing and dozens of other tax breaks for one year. On January 1, 2015, just thirteen days later, the provisions expired, starting the tax extenders cycle anew.
In July, the Senate Finance Committee voted 23 to 3 to approve a package of tax extenders provided for in the Tax Relief Extension Act of 2015 (S. 1946). The bill proposed to extend for two years 52 tax breaks that expired at the end of 2014, including the increased small business expensing limitation and phase-out amounts under Code Sec. 179 ($500,000 and $2 million respectively), the 50 percent bonus depreciation, the deduction for state and local sales taxes, and the Code Sec. 41 research credit.
Senate Finance Committee Chairman Orrin Hatch, commenting on the bill, said that legislators should be working to make a number of the tax extender provisions permanent, but in order to make the process less contentious and to ensure that much needed relief to taxpayers could be more quickly provided, he agreed to defer the issue of permanence until a later time.
Despite strong bipartisan support from the Finance Committee, the Senate extenders bill has since languished, as have two House bills that would make permanent the research tax credit (H.R. 880) and Code Sec. 179 expensing for small businesses (H.R. 636).
With the end of the legislative year drawing near, negotiations are currently focused on which, if any, extenders are to be made permanent. Republicans are looking to make several business tax breaks permanent, primarily Code Sec. 179 expensing and the research credit. Democrats wish to make permanent provisions for tax credits benefitting low income taxpayers, such as the Earned Income Tax Credit and the Child Tax Credit (both set to expire in 2018), along with various clean energy credits.
On November 30, House Majority Leader Kevin McCarthy said he expected the legislation would be finished by December 18. On the same day, Hatch also sounded an optimistic note, saying, "We're working on it and we'll get it done."
Steep Increases in Information Reporting Penalties Set to Take Effect in January
On June 29, President Obama signed into law the Trade Preferences Extension Act of 2015 (Pub. L. 114-27). The law significantly increases, for the second time in five years, the penalties imposed under Code Secs. 6721 and 6722 for failures relating to information returns and payee statements. These increases take effect on January 1, 2016.
Practice Aid: See ¶320,690 for a client letter that explains the requirement to file Form 1099 and alerts clients to the increased penalties for failing to comply.
For each information return or payee statement with respect to which a failure occurs, the penalty has been increased from $100 to $250, and the maximum penalty that may be imposed has increased from $1,500,000 to $3,000,000.
The lower maximum penalties for taxpayers with gross receipts of $5,000,000 or less has also been increased. For such taxpayers, the maximum penalty is now $1,000,000, up from $500,000.
For taxpayers who intentionally disregard the filing requirements for information returns and payee statements, the per failure penalty increased from $250 to $500.
Common forms subject to these penalties include: Schedule K-1 (Forms 1041, 1065, and 1120S); Form 1098, Mortgage Interest Statement; Form 1098-E, Student Loan Interest Statement, Form 1099-C, Cancellation of Debt; Form 1099-INT, Interest Income; Form 5498, IRA Contribution Information; and Form W-2, Wage and Tax Statement.
Congress Swaps Partnership and C Corp Deadlines
On July 31, President Obama signed into law the Surface Transportation and Veterans Health Care Choice Improvement Act of 2015 (Pub. L. 114-41), which restructures the due dates for Partnership and C corporation tax returns beginning with the 2016 tax year, with a goal of reducing the need for extended and amended tax returns.
Once the new rules take effect, partnerships will be required to file their returns by the 15th day of the third month following the close of a tax year. For calendar year partnerships, the due date will be March 15, instead of April 15.
OBSERVATION: The filing deadlines for S corp returns remain unchanged, meaning that partnership and S corp returns will now share the same due dates.
In general, C corporations will have until the 15th day of the fourth month following the close of the tax year to file their returns. For calendar year C corps, this means the due date will be April 15, instead of March 15.
A special rule exempts C corps with fiscal years ending on June 30 from this change until tax years beginning after Dec. 31, 2025. Thus, the filing deadline for such corporations will remain September 15 until 2026 (when it will change to October 15).
The bill also modifies the automatic extension periods for C corporations. Calendar year C corps are provided a five month automatic extension for returns for tax years beginning after December 31, 2015 and ending before January 1, 2026. For fiscal year C corps with tax years ending on dates other than June 30, the length of automatic extensions remains unchanged at six months. For fiscal year C corps with tax years ending on June 30, a special seven month automatic extension applies for tax years beginning after December 31, 2015 and ending before January 1, 2026.
Bipartisan Budget Act Replaces TEFRA Partnership Audit Procedures
On November 2, President Obama signed into law the Bipartisan Budget Act of 2015 (Pub. L. 114-74) (2015 BBA), which repealed TEFRA partnership audit procedures and replaced them with a single centralized audit system.
With respect to partnership audit rules, the 2015 BBA repeals the voluntary centralized audit procedures for electing large partnerships, as well as the TEFRA procedures (i.e., rules adopted as part of the Tax Equity and Fiscal Responsibility Act of 1982). Under the new system, the audit and adjustments of all partnership items are generally determined at the partnership level, although an opt-out provision to the new rules is available for certain partnerships.
OBSERVATION: Under the new rules, distinctions among partnership items, non-partnership items, and affected items no longer exist.
The changes relating to the partnership audit provisions generally apply to returns filed for partnership tax years beginning after December 31, 2017. However, except for the election relating to the opt-out provision, a partnership may elect to apply the new partnership audit rules to any return of the partnership filed for partnership tax years beginning after November 2, 2015, and before January 1, 2018.
In addition, the new law revises the "family partnership" rules in Code Sec. 704(e) to clarify that Congress intended the rules to merely explain that a family member who received, via gift, a capital interest in a partnership where capital is a material income-producing factor (as opposed to services), should be respected as a partner in the partnership and should be taxed on the income from that partnership. The changes relating to family partnerships and partnership interests created by gift apply to partnership taxable years beginning after December 31, 2015.
Transportation Bill Allows IRS to Use Private Debt Collectors
On December 3, Congress passed the Fixing America's Surface Transportation (FAST) Act (H.R. 22). The President is expected to sign the bill into law.
The FAST act funds federal surface transportation programs for the next five years (through fiscal year 2020), paid for in part by tax provisions.
The act amends Code Sec. 6306 to allow the IRS to use private debt collection agencies to locate and contact delinquent taxpayers, and to arrange for payment of those taxes.
In addition, the IRS is required to use amounts marked for collection enforcement activities under Code Sec. 6306 to fund a "special compliance personnel program" under new Code Sec. 6307 in order to hire, train, and employ individuals to use automated collection systems or as field collection officers.
The act also adds new Code Sec. 7345, which calls for the denial, revocation, or limitation of a passport for any individual with a delinquent tax debt in excess of $50,000.
Additional Changes Made to the Tax Code in 2015
In addition to the major changes to the Code described above, the laws passed this year made several other significant changes to the tax code:
The Bipartisan Budget Act of 2015 (Pub. L. 114-74) repeals the automatic enrollment provisions added by the ACA, effective November 2, 2015.
The Surface Transportation and Veterans Health Care Choice Improvement Act of 2015 (Pub. L. 114-41) amended Code Sec. 6501, effectively overruling the Supreme Court's holding in U.S. v. Home Concrete & Supply, LLC, 2012 PTC 94 (S. Ct. 4/25/12), to clarify that an understatement of gross income by reason of an overstatement of unrecovered cost or other basis is an omission from gross income for purposes of the six year statute of limitations under Code Sec. 6501(e).
In addition, that law also provides a new consistency standard for reporting basis in property received by reason of death under Code Sec. 1014, new information reporting requirements for inherited property, additional details taxpayers will need to disclose on mortgage information returns, and an extension for transfers of excess pension assets to retiree health accounts. For taxpayers with foreign bank accounts, the law directs the IRS to change the due date for FinCEN Report 114, relating to Report of Foreign Bank and Financial Accounts (FBAR), from June 30 to April 15, with a maximum extension for a six month period ending on Oct. 15.
The Trade Preferences Extension Act of 2015 (Pub. L. 114-27) extended and modified the Health Coverage Tax Credit to allow those eligible to claim the credit against the premiums they paid for certain health insurance coverage through 2019. That law also added a provision which limits the refundable portion of the child tax credit for taxpayers who elect to exclude foreign earned income from tax.
Lastly, the Protecting Affordable Coverage for Employees Act (Pub. L. 114-60 ) (PACE Act) amended the Affordable Care Act's (ACA) non-tax definition of a "small business." Although not designed as a tax measure, the PACE Act does have an indirect effect on cafeteria plan benefits. Under Code Sec. 125(f)(3), certain qualified health plans may be offered through cafeteria plans if the employee's employer is a qualified employer under the ACA. Because a "qualified employer" in this context is defined as certain small employers, the PACE Act's modification of the definition of "small employers" will affect qualified benefits under Code Sec. 125. (Staff Editor Parker Tax Publishing)
Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.
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