Stalemate was broken sooner than expected
Given the usual gridlock in Washington, it was unexpected good news to hear that tax writers in the House and Senate were able to reach a deal with the White House on a spending bill that includes many so called “extenders”, which are a series of credits, special deductions and other tax provisions that expire periodically and need new legislation to extend their application. Many (but not all) provisions that expired at the end of 2017 are included in the Further Consolidated Appropriations Act of 2020 (the Act), which was just passed by the House and the Senate and will be signed by the President on Friday, Dec. 20, 2019.
One of the noteworthy items missing in the legislation is a technical correction of a drafting error in the Tax Cuts and Jobs Act (TCJA), which results in qualified improvement property being subject to long depreciation periods of buildings, rather than the intended 15 year recovery period.
Following is a summary of the more popular business tax provisions that are being extended.
Incentives for Employment, Economic Growth and Community Development
Railroad track maintenance credit
The credit for 50 % of qualified railroad track maintenance expenditures under section 45G is extended for five years, from applying for tax years beginning before Jan. 1, 2018 to now apply for tax years beginning before Jan. 1, 2023. The credit is limited to $3,500 multiplied by the number of miles of track owned or leased by the taxpayer at the end of the taxable year. The limitation is increased for miles of track assigned to an eligible taxpayer from Class II and Class III railroads.
Empowerment Zone Tax Incentives
The designation of certain geographic areas as empowerment zones under section 1391 is extended retroactively from the previous date of Dec. 31, 2017 so that any designation remains in effect through Dec. 31, 2020. In the case of an enterprise community, the designation continues to remain in effect for 10 years after the date of designation. There are numerous eligibility criteria set forth in section 1392.
There are several tax incentives that may apply to businesses located in an empowerment zone, including:
- Limited nonrecognition under certain circumstances for gain from the sale of a qualified empowerment zone asset:
- (1) qualified empowerment zone stock,
- (2) qualified empowerment zone partnership interest or (3) qualified empowerment zone business property);
- An increased section 179 expensing deduction;
- Tax-exempt bond treatment for certain bonds whose net proceeds are to be used to provide any enterprise zone facility.
Also retroactively extended for three years from expiring after Dec. 31, 2017 to expiring after Dec. 31, 2020 are the following credits and incentives:
- Indian employment credit (section 45A)
- Mine rescue team training credit (section 45N)
- Seven-year recovery period for motorsports entertainment complexes (section 168(i)(15))
- Accelerated depreciation for business property on Indian reservations (section 168(j))
- Election to expense qualified production costs of film, television or live theatrical productions (section 181)
The three-year cost recovery period for race horses is extended for any race horse which is placed in service before Jan. 1, 2021 and any race horse which is placed in service after Dec. 31, 2020 and is more than two years old at the time placed in service by its purchaser (section 168(e)(3)(A)).
Incentives for Energy Production, Efficiency and Green Economy Jobs
Biodiesel and renewable diesel credits
The Act extends the section 40A income tax credit (through the section 38 general business credit) for biodiesel and renewable diesel used as fuel. Section 40A allows for a credit of the sum of the biodiesel mixture credit, the biodiesel credit, and eligible small agri-biodiesel producer credits. The credit is retroactively extended to include tax years beginning Jan. 1, 2018 through tax years ending Dec. 31, 2022. Furthermore, the provision is effective for fuel used or sold after Dec. 31, 2017.
The Act extends the section 6426(c) excise tax credit and section 6427(e) outlay payment for biodiesel mixtures used for the sale or use in a taxpayer’s trade or business. The section 6426(c) allows for a $1.00 credit per gallon of biodiesel sold or used to produce a mixture used as a fuel. The excise tax credit and outlay payments are retroactively extended to include tax years beginning Jan. 1, 2018 through tax years ending Dec. 31, 2022. Furthermore, the provision is effective for fuel used or sold after Dec. 31, 2017. The sections 6426 and 6427 credits may not be used for the same fuel as accounted for under section 40A.
Alternative fuels credits
The Act extends the section 6426(d) alternative fuel credit and the section 6426(e) alternative fuel mixture credit. The alternative fuel credit allows for a $0.50 per gallon, or gallon equivalent, credit for certain alternative fuels that are sold or used as fuel in a motor vehicle or motorboat. Alternative fuels include liquefied petroleum gas (LPG), P series fuels, compressed natural gas (CNG), liquefied natural gas (LNG), liquefied nitrogen, liquid fuel derived from coal through the Fischer-Tropsch process, compressed or liquefied gas derived from biomass, and liquid fuel derived from biomass. The alternative fuel mixture credit allows for a $0.50 per gallon or gallon equivalent used by a taxpayer in producing alternative fuel mixtures for sale or use in its trade or business. The Act amends the definition of alternative fuel mixture to exclude LPG, CNG, LNG and compressed and liquefied gases derived from biomass. These excise tax credits are retroactively extended to include tax years beginning Jan. 1, 2018 through tax years ending Dec. 31, 2020. Furthermore, the provision is effective for fuel used or sold after Dec. 31, 2017.
The Act extends the section 6427(e) outlay payment for alternative fuels that are sold or used as fuel in a motor vehicle or motorboat. The section 6427(e) outlay credit is allowed as a payment on a taxpayer’s income tax return and is only available to the extend the credit has not been taken through section 6426. The outlay payment is retroactively extended to include tax years beginning Jan. 1, 2018 through tax years ending Dec. 31, 2020. Also, the provision is effective for fuel used or sold after Dec. 31, 2017.
Credits allowed under section 6426 generally must be claimed by the end of the first quarter following the last quarter of the claim. However, to allow taxpayers to claim credits for fuels eligible for credits during the previously expired and now retroactively extended period, the IRS will provide a one-time claim window to claim all outstanding credits. Procedures for these claims will be forthcoming and must be released within 30 days of the passage of the Act. The procedures will give a 180-day window for taxpayers to claim the credits.
Renewable electricity production tax credit
The renewable electricity production tax credit of section 45 contains multiple credits related to domestic electricity production activities from renewable resources. The amount of the credit is generally claimed over a five or ten year period, and has varying rates based on the type of facility and applicable inflation adjustment. The base amount is 1.5 cents per kWh for wind, closed loop biomass, geothermal, and solar facilities, rounded to the nearest tenth of a cent after the inflation adjustment from section 45(a). This brings the credit rate to 2.4 cents per kWh for 2018 and 2.5 cents per kWh for 2019 for the aforementioned facilities. For open-loop biomass, small irrigation power, landfill gas, trash, hydropower, and marine/hydrokinetic, the credit rate is 0.75 cents per kWh adjusted by inflation to the current rate of 1.2 cents per kWh in 2018 and 2019. The Act made multiple changes to section 45, including extending the expiration date until Dec. 31, 2020 for the following types of facilities:
- Closed loop biomass
- Open loop biomass
- Geothermal or solar energy
- Landfill gas facilities
- Trash Facilities
- Qualified hydropower facilities
- Marine and Hydrokinetic renewable energy
The election to treat qualified facilities as energy property for purposes of the section 48 investment tax credit is also extended to include facilities placed in service and construction of which has begun before Jan. 1, 2021 (for both property under section 45 and property described under section 45(d)). As it relates to wind power facilities, The Act extended the termination date to Dec. 31, 2020, and changed the phase out percentage to 40% for property which construction begins after Dec. 31, 2019 and before Jan. 1, 2021. The Act also extends the 40% credit to property treated as energy property under section 48(a)(5)(e), the construction of which begins after Dec. 31, 2019 and before Jan. 1, 2021. The amendments created by this act are effective as of Jan. 1, 2018.
New energy efficient homes tax credit
The new energy efficient homes credit of section 45L generally allows an eligible contractor to claim a tax credit of $1,000 or $2,000 for building a new energy efficient home. The $1,000 credit is available to homes that meet the energy star requirements, or have a level of annual heating and cooling energy consumption which is at least 30% below the annual level of heating and cooling energy consumption of a comparable dwelling unit and the building envelope component improvements account for at least 1/3 of that 30%. The $2,000 credit is available to homes with level of annual heating and cooling energy consumption which is at least 50% below the annual level of heating and cooling energy consumption of a comparable dwelling unit and the building envelope component improvements account for at least 1/5 of that 50%, or which conforms to the Federal Manufactured Home Construction and Safety Standards and meets the 50% requirement from above. The Act extends the credit retroactively to property placed in service after Dec.31, 2017, and extends the expiration date until Dec. 31, 2020.
Energy efficient commercial buildings deduction
The energy efficient commercial buildings deduction of section 179D is generally allowed for energy efficient commercial building property placed in service during the taxable year. The calculation considers only energy efficient commercial property that is depreciable and part of an interior lighting system; heating, cooling, ventilation, or hot water system; or building envelope, as well as certified to meet the ASHRAE/IESNA 50% energy reduction standard. The deduction is calculated as the product of $1.80 and the square footage of the building over the aggregate deductions under 179D for all prior tax years. If the 50% reduction of ASHRAE/IESNA is not met, but property otherwise meets the minimum reduction requirements delineated for the type of property in question, the calculation is reduced to use the product of $.60 instead of $1.80. This special deduction is extended retroactively to property placed in service after Dec. 31, 2017, and the expiration date is extended until Dec. 31, 2020.
Also retroactively extended for three years from expiring after Dec. 31, 2017 ( or before Jan. 1, 2018, as the case may be) to expiring after Dec. 31, 2020 (or expiring Jan. 1, 2021, as the case may be) are the following credits and incentives:
- Second generation biofuel producer credit (section 40(b)(6))
- Nonbusiness energy property credit (section 25C)
- Qualified fuel cell motor vehicle (section 30B)
- Alternative fuel refueling property credit (section 30C)
- Two-wheeled plug-in electric vehicle credit (section 30D)
- Special depreciation allowance for second generation biofuel plant property (section 168(l))
- Special rule for sales or dispositions to implement FERC or State electric restructuring policy for qualified electric utilities (section 451(k))
- Oil spill liability trust fund financing rate (section 4611(f))
The production tax credit for Indian coal under section 45(e)(10) is retroactively extended from the 12 year period beginning Jan. 1, 2006 (through 2017) to the 15 year period beginning Jan. 1, 2006 (through 2020).
Certain Provisions Expiring at the End of 2019
New Markets Tax Credit
The new markets tax credit (NMTC) under section 45D is designed to stimulate investment in low income communities. The NMTC provides a 39 % tax credit over a seven year period to investors that invest capital through a complex entity structure that facilitates loans and equity to businesses in low income communities for a minimum of seven years. The program is administered by an allocation of available funds that is set by the government. A new allocation of $5 billion is established for 2020 and the carryover period for unused allocations is extended from 2024 to 2025.
Employer credit for paid family and medical leave
The section 45S employer credit for paid family and medical leave (FML credit) was enacted as part of the TCJA and was originally scheduled to apply for only two years (2018 and 2019. The FML credit is extended for one year and will remain in effect through Dec. 31, 2020. Under section 45S employers are provided a tax credit between 12.5 % and 25 % for wages paid to qualifying employees on family or medical leave. To qualify, an employer must maintain a written family and medical leave policy providing qualified employees at least two weeks of paid family and medical leave, paying no less that 50 % of wages normally paid. The maximum amount of paid leave allowed per employee annually is 12 weeks. In addition, there are a number of qualification requirements and eligible reasons for the paid leave that apply
Work opportunity tax credit
The section 51 work opportunity tax credit (WOTC) is extended for one year and will now expire after Dec. 31, 2020. The WOTC consists of credits of varying amounts based on first year wages for several targeted disadvantaged groups of individuals. Eligible employees must be certified and claims must be filed with the applicable state agency within 28 days of the hire date. As with prior retroactive WOTC extensions, the IRS is expected to issue guidance providing a limited extension of the time to certify employees after the 28 day period.
Look-thru rule for related controlled foreign corporations
Section 954(c)(6) provides a look-thru rule where dividends, interest, rents, and royalties received or accrued from a related controlled foreign corporation (CFC) will not be treated as foreign personal holding company income to the extent attributable to property allocable to income of the related CFC that is not Subpart F income or income treated as effectively connected with the conduct of a trade or business in the U.S. This look-thru rule applied to taxable years of CFCs beginning before Jan. 1, 2020 and was extended one year to taxable years beginning before Jan. 1, 2021. The look-thru rule was likewise extended for taxable years of U.S shareholders with or within such taxable year of the CFC ends.
Other extensions of provisions expiring at the end of 2019
Also extended for one year, through Dec. 31, 2020 are the following:
- Certain capitalization and excise tax provisions related to beer, wine and distilled spirits;
- Credit for health insurance costs of eligible individuals (section 35)
The Act also contains several disaster relief provisions, extension of certain individual tax provisions and other miscellaneous tax changes.
None of these tax incentives were made permanent, so Congress will need to deal with many of these items again at the end of 2020.