Midnight-hour tax legislation from Congress has become something of an annual tradition, but in 2016, Congress adjourned without any major last minute changes to the tax code.
The Protecting Americans Against Tax Hikes Act of 2015 (PATH Act) represents the most recent round of major tax legislation, which became law in late December 2015. The PATH Act addressed many of the more popular tax provisions that typically have been part of an end-of-year extenders package, but it did not address everything. Approximately 35 provisions expired on Dec. 31, 2016. The following are among the more significant expiring provisions that taxpayers may come to miss after 2016.
Business Tax Provisions
Businesses making investments in alternative energy technology should take note that 5-year cost recovery for certain energy investments was among the provisions that expired at the end of 2016. Code Section 168(e)(3)(B)(vi)(I) (by reference to Code Section 48(a)(3)(A)) allowed businesses that made investments in certain alternative energy technology to use a 5-year cost recovery period. Such investments included solar illumination property, qualified geothermal heat pump systems, combined heat and power system property, qualified fuel cell property, qualified microturbine property and qualified small wind energy property. The 2016 tax year stands to be the last year businesses are eligible to use the 5-year cost recovery period for such property.
Individual Tax Provisions
A few tax provisions popular with individual taxpayers will not be available after 2016. One very important provision was for the exclusion from taxable income for proceeds resulting from certain types of loan modifications. Such loan modifications affect many individual homeowners who maintain distressed mortgage loans and renegotiate those loans with lenders. Although the provision allowing for the exclusion of such debt discharge income expired at the end of 2016, the IRS provided some flexibility in determining whether a loan modification occurs by this time (see our previous article).
Other expiring provisions that were popular with individuals included the ability to count mortgage insurance premiums as qualified residence interest (a part of a taxpayer’s itemized deductions), the deduction of up to $4,000 for qualified tuition and related expenses (available regardless of a taxpayer’s itemized deductions), and the lower 7.5 percent-of-AGI floor limitation for medical expenses claimed by taxpayers age 65 and older (a part of itemized deductions).
Energy-Related Provisions
Several other energy-related provisions also expired at the end of 2016. One of the most significant for businesses is the energy-efficient commercial buildings deduction under Code Section 179D. Qualifying renovations placed in service before 2017 to interior lighting systems, HVAC and hot water systems, and the building envelope were eligible for a deduction equal to the cost of the systems, capped at $1.80 per square foot of the associated building. A partial deduction was also available in situations where the overall energy savings criteria for the full deduction was not achieved, but where such criteria was achieved with respect to one of the three specified systems, in which case the deduction had an associated cap of $0.60 per square foot of the associated building.
Credits for businesses involving the construction of energy-efficient homes will expire at the end of 2016, which provided for up to a $2,000 credit (Code Section 48 L). Also expiring is the option to claim up to a 30 percent business energy credit for investments in solar illumination property, qualified fuel cell property, and qualified small wind energy property, along with expiration of the option to claim up to a 10 percent business energy credit for investments in qualified geothermal heat pump systems, combined heat and power system property, and qualified microturbine property.
For individuals, the nonbusiness energy property credit (Code Section 25C), worth 10 percent of the cost of qualified energy-efficiency improvements, is expiring at the end of 2016. Improvements that qualified included energy-efficient windows, doors and roofs, as well as high-efficiency heating and air conditioning systems, and must have been made to a taxpayers’ primary residence before Dec. 31, 2016.
A 30 percent credit for individuals pertaining to expenditures incurred for qualified solar electric property, qualified solar water heating property, qualified fuel cell power plants, qualified small wind energy property and qualified geothermal heat pump property (Code Section 25D) also expired (solar electric and solar water heating property continues to be eligible for a reduced credit through 2021).
Determining the Impact
While there is a chance for retroactive renewal of these expired tax provisions, the incoming Administration’s objectives concerning a tax overhaul may complicate that prospect. Businesses and individuals alike should be prepared for the impact of these expiring provisions on their tax planning strategies. For questions or assistance in evaluating the effect of these expiring provisions, please contact your local CBIZ MHM tax advisor.
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