Companies have some work to do as they are closing their books on 2015 to tally up the benefits of the annual year-end tax package from Congress and determine how they will reflect those in their tax filings and financial statements.
The Protecting Americans from Tax Hikes Act of 2015, provides some uncharacteristic extensions on 30 provisions in the U.S. Tax Code that routinely expire and are renewed, sometimes retroactively. That pattern of expiration and renewal typically leaves corporate taxpayers uncertain about whether they will be able to benefit from a particular historical allowance going forward. With the PATH Act, Congress even elected to make permanent a few provisions of particular interest to public companies, ending the annual guesswork.
“This is a very large tax bill, and there’s something in there for nearly everyone,” says John Gimigliano, tax principal-in-charge of federal legislative and regulatory services at KPMG. “There’s almost nothing to dislike. It’s almost entirely tax benefits, and in many cases made permanent.”
Cathy Koch, Americas tax policy leader for EY, says two provisions in particular will provide significant benefit to public companies. One is a tax credit for research and development that has existed in temporary-but-renewed status for decades, now made permanent by the PATH Act. Another is a provision that provides permanent relief on U.S. taxation of active financing income arising in foreign-based subsidiaries.
By making the R&D credit and the active financing provisions permanent, Congress has given companies a longer runway of certainty that will make it easier for them to assert the tax benefits in financial statements and easier to perform tax planning in those areas, says Koch.
“This is a very large tax bill, and there’s something in there for everyone. There’s almost nothing to dislike. It’s just tax benefits, and in many cases made permanent.”
John Gimigliano, Tax Principal, KPMG
“These affect accrued taxes for financial accounting,” says Koch. “If it’s not extended after a certain time, you would have to disclose in the footnotes that we may not get this. Now we don’t have to worry about that. We’ve been doing this temporary stuff for so long the market has incorporated that information, but this simplifies things.”
The research credit has existed since 1981 and has expired and been renewed or extended multiple times, with only a one-year lapse in the 1990s where it did not exist. The credit can be calculated in different ways to reduce corporate tax expense for an entity that performs qualifying research and development activities.
“This reduces tax expense, not just deferred taxes, so that increases earnings and earnings per share,” says Steve Henley, senior managing director at CBIZ MHM. “A lot of tax incentives are depreciation items, which are important from a cash flow perspective, but that doesn’t produce earnings.” Now that Congress has made the credit retroactive to 2015 (it expired at the end of 2014) and chosen to make the R&D credit permanent, companies will be able to reflect it in their 2015 year-end financial statements and report it quarterly through earnings going forward, he says.
Below KPMG provides some tax-related provisions of the PATH Act.
The PATH Act also includes other significant tax law changes. Some of these changes are revenue raisers that may have been included to offset the costs of provisions not related to extending provisions that expired or that are scheduled to expire. These include the following:
Amendments to section 267(d) intended to prevent the transfer of certain losses from tax indifferent parties (estimated to raise approximately $1.24 billion over the 10-year scoring window)
Updated standards for the energy efficient commercial buildings deduction (estimated to raise approximately $8 million over the 10-year scoring window)
Excise tax credit equivalency for liquefied petroleum gas (LPG) and liquefied natural gas (LNG) (estimated to raise approximately $63 million over the 10-year scoring window)
Exclusion from gross income of certain clean coal power grants to non-corporate taxpayers (estimated to raise approximately $6 million over the 10-year scoring window)
Clarification of value rule for early termination of certain charitable remainder unitrusts (estimated to raise approximately $113 million over the 10-year scoring window)
Treatment of certain persons as employers for motion picture projects (estimated to raise approximately $45 million over the 10-year scoring window)
Special tax rate for timber gains of C corporations
An amendment to the section 831(b) election for small nonlife insurance companies to: (1) increase the annual premium limitation from $1.2 million to $2.2 million; and (2) add a “diversification” rule under which no single policyholder may be responsible for more than 20% of net written premium (or direct written premium, if greater)
Deductibility of charitable contributions to agricultural research organizations
Rollovers permitted from other retirement plans into simple retirement accounts
Tax administration provisions affecting the IRS, including a provision treating transfers to certain organizations that are exempt from tax under section 501(c)(4), 501(c)(5), or 501(c)(6) as exempt from gift tax
Provisions relating to taxpayer access to, and the administration of, the U.S. Tax Court
Don Reiser, managing director at CBIZ MHM, says the PATH Act provision extending until 2019 the “look through” treatment of certain payments between related corporate foreign-controlled entities also is significant to public companies. This is another provision that was enacted in 2006 on a temporary basis and has been extended for short periods, giving companies some uncertainty year to year on whether they could count on it for intracompany financing purposes.
The extension to 2019 is important because it enables companies to make certain investments in their foreign operations without being subject to U.S corporate income tax, says Reiser. “It gives companies a lot of flexibility to structure their operations in a way that achieves various objectives,” he says.
Yosef Barbut, tax partner at BDO USA, says the international provisions are important to all public companies with foreign operations, especially financial services entities. The U.S. government has struggled with how to treat foreign earnings of U.S. entities, with policy makers fretting over U.S. entities that assert their foreign earnings are permanently invested overseas, so never brought to the United States and subject to U.S. corporate income tax.
The PATH Act provisions represent a “patch” in lieu of more widespread corporate tax reform, says Barbut. “There’s a big camp out there that says until our government gets its act together and is able to pass major corporate tax reform, it just doesn’t make sense to bring it home,” he says.
Provisions around bonus depreciation also should intrigue public companies, says Joe Russo, another tax partner at BDO USA. The PATH Act extended the additional first-year depreciation allowance of 50 percent through 2017, then 40 percent in 2018 and 30 percent in 2019. It's an unusually long extension for that particular allowance, which is meant to serve as an investment incentive. “A lot of corporate taxpayers have been out there in limbo for quite some time, so this has been long awaited,” he says. "Taxpayers have been through this show for the last 25 years where it expires and then it is extended retroactively.”
Jim Brandenburg, a tax partner with advisory firm Sikich, says there are a handful of other provisions that might interest to certain public companies. The tax package extends to 2019 a new markets tax credit meant to encourage companies to invest in certain low-income areas. It also extends to 2019 and modifies the work opportunity tax credit, which gives companies a tax benefit for certain new hires. A number of other relief provisions won two-year extensions including those around empowerment zones, energy credits, and certain requirements of the Affordable Care Act.
Tax experts who have watched the annual Congressional action on the few dozen extender items that come up for renewal consideration at year-end say the good news in this year’s package might spell trouble for the remaining extender items in the future. “There’s been a lot of talk about what an amazing deal this is, but there is a bit of a downside,” says Dustin Stamper, a director in tax for Grant Thornton. Key provisions in the extender group have provided some weight to move the entire package through Congress. “Now that some key provisions are permanent, it’s not clear that Congress will extend some of the others. It’s not the slam dunk it once was.”