With the April 2016 tax filing season behind us, even as we keep working on the ever-increasing number of returns on extension, it is time to start focusing clients on new tax issues they will be facing for the current tax year.
While the Protecting Americans from Tax Hikes Act, enacted in December 2015, made a number of the more popular regularly expiring provisions permanent, easing tax planning going forward, the PATH Act also left a large number of provisions to expire at the end of 2016, creating potential tax planning issues around those expirations. Then there are the usual phased-in effective dates of tax provisions from other earlier tax legislation that will affect 2016 planning. Next, there are the regulatory and judicial developments to take into account. Finally, even though most observers do not expect much in the way of new tax legislation this year, Congress does seem to be making some efforts at taking up at least international tax reform this year, and may again address those expiring tax provisions, which will require continued monitoring as well.
Here we will summarize some of those issues that tax practitioners are most likely to have to give additional attention to in 2016.
COUNTRY-BY-COUNTRY REPORTING
As part of the Organization for Economic Cooperation and Development’s Base Erosion/Profit-Shifting initiative, many countries are implementing country-by-country reporting requirements for multinational companies for 2016, requiring companies to provide a breakdown of income, employees and profit for the countries in which they operate. While the U.S. has issued proposed country-by-country reporting regulations and hopes to finalize regulations around mid-year 2016, the U.S. is not planning to implement country-by-country reporting until 2017.
Many U.S. multinational companies asked the Internal Revenue Service to accept optional reporting in 2016, so that they could comply worldwide by filing in the U.S. and not have to deal with the reporting requirements of other countries. The IRS, however, has said that it is not able to accept optional reporting in 2016. This leaves U.S. multinationals with the task of determining where and how to meet new country-by-country reporting requirements in 2016 in the various countries in which they operate.
EXPIRING TAX PROVISIONS
With the PATH Act leaving many tax breaks still expiring at the end of 2016, taxpayers and their advisors will want to take their possible expiration into account for 2016 tax planning purposes. Many of the tax breaks still expiring at the end of 2016 are focused on particular industries or regions. These include: the Indian employment credit; the railroad track maintenance credit; film, television and live theatrical production expensing; the mine rescue team credit; the election to expense mine safety equipment; the three-year recovery period for certain race horses; seven-year recovery for motorsports entertainment complexes; the Code Sec. 199 deduction for Puerto Rico; the cover over of rum excise taxes to Puerto Rico and the Virgin Islands; the economic development credit for American Samoa; and the production credit for Indian coal facilities.
A number of additional expiring provisions are energy-related. These include: the energy-efficient commercial buildings deduction; the credit for alternative fuel vehicle refueling property; the credit for two-wheeled plug-in electric vehicles; the credit for new qualified fuel cell motor vehicles; the second generation biofuel producer credit; biodiesel and renewable diesel incentives; the credit with respect to facilities producing energy from certain renewable resources; the credit for energy-efficient new homes; the special allowance for second generation biofuel plant property; the special rules for sales/dispositions to implement Federal Energy Regulatory Commission rules; and the excise tax credit for alternative fuels.
A few other expiring tax breaks are a little more broadly applicable. These include empowerment zone incentives for business, and, for individuals, the deduction for qualified tuition and fees, the mortgage debt exclusion, the deduction for mortgage insurance premiums, and the Code Sec. 25C credit for residential energy-efficient improvements. Tax advisors have long had to deal with the pending expiration of these provisions in prior years or even having to go through most of a year with those provisions already expired.
NEW FILING DATES
The tax filing season for the 2016 tax year will see the introduction of new return filing due dates: March 15 for partnership tax returns, April 15 for corporate tax returns (with some transitional rules for certain fiscal year corporations), and April 15 for FBAR reports. Tax return preparers will have to reschedule their priorities to accommodate these new requirements.
THE ACA
The Affordable Care Act has been coming up with a revised list of new provisions to look out for almost every year since its enactment in 2010. The 2016 changes are relatively modest compared to some other years, but still significant. The employer mandate penalty on applicable large employers who fail to offer affordable coverage is expanded in 2016 to apply to employers with 51 to 99 full-time-equivalent employees. Although these employers were already required to meet new reporting requirements in 2015, the expanded application of the penalty in 2016 will make planning for these employers even more significant.
The individual shared responsibility payment for failure to obtain health insurance will take another dramatic increase in 2016. The percentage of household income used to determine the penalty will rise to 2.5 percent for 2016, from 1 percent in 2014 and 2 percent in 2015. The applicable dollar amount for minimum payment levels will rise to $695 per person for 2016, from $95 in 2014 and $325 in 2015. Thus, it becomes ever more expensive for individual taxpayers to fail to obtain health insurance or qualify for one of the exemptions.
FOREIGN ASSET REPORTING
The hacking of the “Panama Papers” highlights how difficult it is becoming for even the wealthiest and most sophisticated individuals to hide wealth and income offshore. The year 2015 saw the Internal Revenue Service start to receive large quantities of information from foreign financial institutions about the accounts of their U.S. account holders. It is expected that the IRS will become ever more effective at identifying U.S. taxpayers with undisclosed foreign income in 2016. It remains advisable to come forward under the voluntary disclosure program before the IRS finds your client first.
TAX REFORM
Although it is often difficult to move tax legislation in an election year, some Republicans in the House of Representatives are pushing to do international tax reform in 2016. Key provisions that could be considered include: a move to a territorial tax system, a penalty for doing corporate inversions, and a one-time tax on profits held overseas by U.S. multinational companies, as well as several other provisions aimed at targeting specific tax loopholes.
The Obama administration in early April announced further regulatory efforts at stemming corporate inversions and pressed Congress for more comprehensive action, but Republicans in Congress have been so far unwilling to take up the inversion issue except in the larger context of international tax reform.
Although a legislative proposal on international tax reform could emerge from the House Ways and Means Committee in 2016, even most members within the ranks of congressional leadership do not seem to expect congressional passage this year. Even if enacted in 2016, the provisions would not likely be effective until 2017 or later, but individuals and companies with overseas activities would want to consider 2016 planning before any such changes come into effect.
SUMMARY
For the most part, tax planning for 2016 should not be too much different from the tax planning that has been done for the last few years.
To some extent, it will be made easier by the reduction in the number of regularly expiring provisions, with permanency lending more certainty to planning. As highlighted in the foregoing, however, there are always a few unique issues that will require special attention in 2016.
George G. Jones, JD, LL.M, is managing editor, and Mark A. Luscombe, JD, LL.M, CPA, is principal analyst at Wolters Kluwer Tax & Accounting.
