Issue Brief: U.S. Corporate Tax Reform
A summary of recent tax law changes, and the outlook for 2016 and beyond
U.S. federal tax policy has a major influence on all U.S. businesses, including manufacturing. American corporate tax rates are among the highest in the industrial world, and various tax provisions affect IPC member companies and their ability to remain competitive in the global economy. Corporate tax reform proposals are a perennial hot topic in Washington, D.C.
With input from our members, and on their behalf, IPC advocates for corporate tax rates and incentives that stimulate business growth and investment.
IPC Applauds the 2015 PATH Act
Years of advocacy by IPC and other business groups gave way to legislative victory in December 2015 when Congress enacted, and President Barack Obama signed, a tax package known as the Protecting Americans from Tax Hikes Act, or PATH Act.
The PATH Act extended more than 50 tax policy provisions that had expired on December 31, 2014, including several that IPC members have long supported. In particular, a permanent extension of the R&D tax credit and the extension of bonus depreciation are significant victories for IPC and all manufacturing and technology industries.
While we urge our member companies to consult directly with their tax counsel for more specifics, here are the details of the PATH Act’s major provisions:
Permanent Extension of the R&D Tax Credit
Section 121 of the Act permanently extends the research and development (R&D) tax credit, allowing for an Alternative Simplified Credit of 14 percent. The Alternative Simplified Credit is used by the majority of IPC member companies.
Additionally, beginning in 2016, eligible small businesses (those with $50 million or less in annual gross receipts) may claim the credit against their alternative minimum tax (AMT) liability. The credit can be utilized by certain small businesses against the employer’s payroll tax (i.e., FICA) liability.
Expensing Real Property
Section 124 permanently extends the small business expensing limitation and phase-out amounts in effect from 2010 to 2014 ($500,000 and $2 million, respectively). These amounts currently are $25,000 and $200,000, respectively. The special rules that allow expensing for computer software and qualified real property also are permanently extended.
The provision modifies the expensing limitation by indexing both the $500,000 and $2 million limits for inflation beginning in 2016 and by treating air conditioning and heating units placed in service in tax years beginning after 2015 as eligible for expensing. The provision further modifies the expensing limitation with respect to qualified real property by eliminating the $250,000 cap beginning in 2016.
Exclusion of gains on certain small business stock
Section 126 extends the temporary exclusion of 100 percent of the gain on certain small business stock for non-corporate taxpayers to stock acquired and held for more than five years.
The Work Opportunity Tax Credit
Section 142 extends through 2019 the work opportunity tax credit, which is available to employers who hire individuals from certain groups that have consistently faced significant barriers to employment.
The provision also modifies the credit beginning in 2016 to apply to employers who hire qualified long-term unemployed individuals (i.e., those who have been unemployed for 27 weeks or more) and increases the credit with respect to such long-term unemployed individuals to 40 percent of the first $6,000 of wages.
Section 143 extends bonus depreciation for property acquired and placed in service during 2015 through 2019. The bonus depreciation is 50 percent for property placed in service during 2015, 2016 and 2017, and then it phases down to 40 percent in 2018 and 30 percent in 2019.
The provision continues to allow taxpayers to elect to accelerate the use of AMT credits in lieu of bonus depreciation under special rules for property placed in service during 2015.
Implications for Further Tax Reform in 2016 & Beyond
House Speaker Paul Ryan (R-WI), as well as House Ways and Means Committee Chairman Kevin Brady (R-TX) and Senate Finance Committee Chairman Orrin Hatch (R-UT), all insist that the PATH Act is just the beginning of comprehensive tax reform, and that in fact, the PATH Act will make broader tax reform significantly easier from a budgetary perspective.
The PATH Act improves the budget baseline by more than $500 billion, which could make it easier for Congress to lower corporate and individual tax rates in the next round.
Whether or not tax reform goes all the way to a vote in either chamber in 2016, IPC’s government relations team believes that both House and Senate leaders may hold hearings, float proposals, schedule “markups,” and possibly even bring bills to the floor—all in an effort to drive consensus on legislation to be re-introduced and driven to passage next year.
Thus, IPC’s engagement in the debate will remain critical. Other industries and interest groups will be seeking to influence future legislation, and so shall we.
Chairman Brady has publicly said that he would like to lower the corporate tax rate from 35 to 20 percent; encourage the repatriation of offshore corporate profits; and raise the R&D tax credit from 14 percent on qualified research expenses to 20 percent.
Throughout the coming months, IPC will monitor the debate closely; advocate on our members’ behalf; and arrange opportunities for our members to speak directly their elected representatives. In addition to their tax counsel, members with questions or comments should contact Ken Schramko at KenSchramko@ipc.org.