In part 1 of this article, I covered a number of permanent and temporary extensions emanating from the Protecting Americans from Tax Hikes (PATH) Act of 2015, passed by Congress and signed by President Obama on Dec. 18, 2015.
To reiterate, this tax law change extended a number of expired tax breaks. Almost half of the provisions were extended permanently, and the remaining provisions were extended for at least one year. Here are a number of other changes you’ll want to know about related to credits and other legislation.
Delayed Refunds for Taxpayers Claiming the Earned Income Tax Credit or Additional Child Tax Credit. Starting with 2016 returns, no credit or refund will be made before Feb. 15, 2017. This allows additional time to help prevent identity theft and refund fraud, related to fabricated wages and withholdings. At present, the IRS plans to hold the entire refund. Taxpayers and preparers should submit returns as they normally do, and the IRS will begin accepting and processing tax returns once filing season begins. The IRS still expects to issue most refunds in less than 21 days. Refunds for returns related to the Earned Income Tax Credit (EITC) and Additional Child Tax Credit (ACTC) will be held until Feb. 15, and then they will be issued.
Section 179 Modifications Beginning in Tax Years After 2015. The $500,000 expensing limit and $2 million investment ceiling is now indexed for inflation. The expensing of qualified real property provision is made permanent without a carryover limit, and the $250,000 limit has been eliminated. Air conditioning and heating units are eligible for Section 179 expensing.
Residential Energy Efficient Property Credit. For 2016, the Residential Energy Efficient Property Credit can be claimed for 30 percent of the cost of each of the following: solar electric property, solar water heating property, fuel cell property, small wind energy property and geothermal heat pump property.
This credit was scheduled to expire for property placed in service after Dec. 31, 2016. It was extended through 2021 for solar electric property expenditures and solar water heating property expenditures. The credit percentage drops from 30 percent to 26 percent for property placed in service in 2020, and to 22 percent for property placed in service in 2021. Credits for fuel cell property, wind energy property and geothermal heat pump property expire for property placed in service after 2016.
Other Modifications for Tax Years After Dec. 13, 2015
The following types of building improvements are eligible for bonus depreciation:
- Building improvements, regardless whether the improvements are subject to a lease.
- The improvement need not be placed in service more than three years after the building was first placed in service.
- Structural components that benefit a common area are no longer excluded.
Regarding the research credit, eligible small businesses may offset the alternative minimum tax, as well as regular tax. The differential wage payment credit now applies to employers of any size (i.e., the less than 50 employee average no longer applies). The work opportunity credit has been expanded to now include individuals who were previously qualified long-term unemployed (27 weeks or more).
Taxpayer Identification Number (TIN) requirements have been beefed up to prevent retroactive credit claims:
- A TIN is not valid for earned income credit purposes, unless issued by the Social Security Administration on, or before, the due date for filing a return.
- The Child Tax Credit (CTC) is not allowed for any qualifying child, if the TIN was issued after the due date.
- For the American Opportunity Credit (AOTC), the requirement to provide a TIN is not met unless the TIN is issued on, or before, the due date; note: the provision does not apply to the Lifetime Learning Credit.
American Opportunity Credit and Tuition & Fees Deduction (beginning in Tax Year 2016). Taxpayers claiming the American Opportunity Credit must report the employer identification number (EIN) of the educational institution for expenses paid after Dec. 31, 2015, for education furnished in academic periods beginning after Dec. 31, 2015.
Educational institutions must include their EIN on Form 1098-T, Tuition Statement. Educational institutions must report on Form 1098-T only qualified tuition and related expenses actually paid (not amounts billed) for education furnished, in academic periods beginning after Dec. 31, 2015. A taxpayer must receive a payee statement (Form 1098-T or info required on the form, including TIN of student), under the 2015 Trade Preferences Extension Act of 2015.
Under a longstanding rule for improper claims, taxpayers who improperly claim the EITC can be barred from claiming the credit in future years. If an improper claim was due to reckless or intentional disregard of rules or regulations, the disallowance period is two years following the denial of an improper claim. If an improper claim was fraudulent, the disallowance period is 10 years. The PATH Act now extends the credit disallowance rules to the CTC and AOTC, beginning in Tax Year 2016.
Due Diligence Requirements for Child Tax Credit and American Opportunity Tax Credit. The PATH Act expands the preparer due diligence requirements associated with the EITC to now include the CTC and AOTC, beginning in tax year 2016. Form 8867, Paid Preparer’s Earned Income Credit Checklist, has been modified; completing the form is not a substitute for actually performing the necessary due diligence.
The IRS is in the process of modifying due diligence regulations. Preparers who fail to comply with due diligence requirements must pay a penalty of $510 (indexed for inflation) for each infraction. The due diligence requirement encompasses determination of eligibility for the credit and the amount of credit.
Increase in Preparer Willful or Reckless Conduct Penalty. Preparers are subject to a penalty equal to the greater of $5,000, or 50 percent of income, derived by the preparer as to the return or claim. Under the PATH Act, 50 percent has been increased to 75 percent.
Changes Outside of PATH Act
Adjusted Filing Deadlines for Tax Year 2016. For C corporations with tax years ending on June 30, the current filing date (Sept. 15) remains in effect until tax years beginning after Dec. 31, 2025, and will be extended to Oct. 15 thereafter. For calendar year C corporations, the automatic extension is five months (Sept. 15), until tax years beginning after Dec. 31, 2025. Then, the extension is increased to six months (Oct. 15). The reasoning behind this change is that partnerships and S corporations issue Schedule K-1s to partners and shareholders, and these K-1s are needed to prepare an individual tax return by April 15.
Revised Due Date for FinCEN Report. Form 114, Report of Foreign Bank and Financial Accounts (FBAR), is used to report a financial interest in, or signature authority over, a foreign financial account. For tax years beginning after Dec. 31, 2015, the form is due on April 15, with maximum extension of six months. Prior the upcoming tax season, the form needed to be received by the Department of Treasury on, or before, June 30 of the year immediately following the calendar year, with no extensions allowed.
New Exclusion for Payments From Work-Learning-Service Programs. The taxpayer may exclude from gross income any payments from certain work-learning-service programs operated by a work college, or a public or private non-profit, four-year, degree-granting institution, committed to community service.