Mid-2015 Tax Policy Update

July 24, 2015 | Roger A. McEowen

Extender Legislation

Of importance to tax practitioners is what the Congress might do with the tax provisions that expired at the end of 2014 that need legislation to extend them through 2015 or beyond.  Of these expired provisions are expense method depreciation and bonus depreciation.  The Congress in recent years has waited until late in the year (or early the following year) to pass extender legislation for provisions that expired at the beginning of the year.  That makes planning very difficult, if not impossible, and puts a premium on utilizing tax strategies that maximize flexibility.

On July 21, the Senate Finance Committee passed a tax extenders bill by a 23-3 vote that would extend currently expired provisions for two years (through 2016) – beyond the 2016 elections.  Here’s just a few of the provisions included in the proposal:

  • 50% first-year bonus depreciation would be extended through 2016.
  • The limit on expense method depreciation would be restored to $500,000 with the reduction (on a dollar-for-dollar basis) starting at $2,000,000 of qualified property placed in service during the year.  An amendment to the chairman’s mark would index the both the $500,000 amount and the $2,000,000 amount for inflation for tax years beginning after 2014.
  • An extension through 2016 of the Work Opportunity Tax Credit (WOTC) and an expansion of the WOTC to include credits for hiring long-term unemployed persons – 40% credit on the first $6,000 of wages paid.
  • An extension through 2016 of the deduction available to K-12 teachers for certain classroom-related expenses.
  • An extension of the exclusion from gross income for qualified charitable distributions from an IRA through 2016.
  • An extension through 2016 of 15 year straight-line depreciation for qualified leasehold improvements, qualified restaurant buildings and improvements, and qualified retail improvements.
  • An extension through 2016 of the five-year period for built-in gains in a C corporation that has converted to an S corporation.

At the present time, it is not known when the full Senate will vote on the extenders.  What is also unknown is the approach that the House will take.  Will they go with the Senate’s 2-year approach or try for making permanent certain expired provisions?

Small Wind

In IRS Notice 2015-51, the IRS extended the deadline for small wind energy property meeting certain requirements to the end of 2015.  IRS had previously announced in Notice 2015-4 that such property that is acquired or placed in service after January 26, 2015, was required to meet particular rules to qualify for the investment tax credit (ITC).  A complication is that the I.R.C. §48 ITC is not permanent but is presently set to expire at the end of 2016.  Legislation (H.R. 2412) has been introduced that would extend the credit for five additional years. 

Federal Estate Tax

On July 6, the IRS has settled Estate of Davidson v. Comr. for $454 million.  The IRS had claimed that the Davidson’s estate, gift and GSTT liability was almost $3 billion (the decedent owned a significant stake in Guardian Industries and the Detroit Pistons). Another case involving a very aggressive IRS position has also been appealed – Cavallaro v. Comr., T.C. Memo. 2014-189.  In that case, IRS claimed that gift tax and interest exceeded $30 million in a matter that the taxpayers claimed was a tax-free merger of companies.  The cases show that at least some taxpayers are pushing back on very aggressive IRS tactics.

Other pending cases also show how aggressive IRS is with respect to some longstanding and well-accepted estate planning techniques.  We will be keeping our eyes on those cases for you and will have updates as they occur.