It sounds pretty impressive, doesn’t it? What’s more impressive is that, this time, Congress did not wait until the very end of the year – or the beginning of the next year for that matter – to pass some important and long-awaited legislation. (the “Act”).

Most businesses and their advisers would have preferred to know months ago that many of the provisions summarized below were certain to be extended with retroactive effect. In that case, they would have had some time to do some tax planning.  But, as they say, “it’s better late than never,” “there’s always next year,” and “don’t look a gift horse in the mouth.” You get the drift.

What follows are some highlights of the Act that may be of interest to the closely-held business.

Permanent Extensions

Basis adjustment to S corporation stock.

The Act permanently extended the rule providing that a shareholder’s basis in the stock of an S corporation is reduced by the shareholder’s pro rata share of the adjusted basis of property contributed by the S corporation for charitable purposes.

Research credit.

The research and development (R&D) tax credit was permanently extended. Additionally, beginning in 2016, eligible small businesses ($50 million or less in gross receipts) may claim the credit against alternative minimum tax (AMT) liability, and the credit can be utilized by certain small businesses against the employer’s payroll tax (i.e., FICA) liability.

15-year straight-line cost recovery for qualified improvements.

The Act permanently extended the 15-year recovery period for qualified leasehold improvements, qualified restaurant property, and qualified retail improvement property.

Section 179 property.

The small business expensing limitation and phase-out amounts in effect from 2010 to 2014 ($500,000 and $2 million, respectively) were extended permanently.

The special rules that allow expensing for computer software and qualified real property (qualified leasehold improvement property, qualified restaurant property, and qualified retail improvement property) also were permanently extended.

The expensing limitation was modified by indexing both the $500,000 and $2 million limits for inflation beginning in 2016.

Exclusion of 100% of gain on certain small business stock.

The Act extended permanently the exclusion for 100% of the gain on certain small business stock for non-corporate taxpayers to stock acquired and held for more than five years. It also permanently extended the rule that eliminates such gain as an AMT preference item.

Extension of reduction in S-corp. recognition period for built-in gains tax.

The Act permanently extended the rule reducing to five years (rather than ten years) the period for which an S corporation must hold its assets following conversion from a C corporation to avoid the corporate-level tax on built-in gains.

Extensions through 2019

New markets tax credit.

The Act authorized the allocation of $3.5 billion of new markets tax credits for each year from 2015 through 2019.

 Bonus depreciation.

The Act extended bonus depreciation for property acquired and placed in service during 2015 through 2019 (with an additional year for certain property with a longer production period).

The bonus depreciation percentage is 50 percent for property placed in service during 2015, 2016 and 2017 and phases down, with 40 percent in 2018, and 30 percent in 2019.

The Act allows 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. The provision modified the AMT rules beginning in 2016 by increasing the amount of unused AMT credits that may be claimed in lieu of bonus depreciation.

Extensions through 2016

Empowerment zone tax incentives.

The Act extended through 2016 the tax benefits for certain businesses and employers operating in empowerment zones.

Empowerment zones are economically distressed areas, and the tax benefits available include tax-exempt bonds, employment credits, increased expensing, and gain exclusion from the sale of certain small-business stock.

The Act modified the incentive beginning in 2016 by allowing employees to meet the enterprise zone facility bond employment requirement if they are residents of the empowerment zone, an enterprise community, or a qualified low-income community within an applicable nominating jurisdiction.

Additional Provisions

 Return filing dates: employee wages and nonemployee compensation.

The Act requires forms W-2, W-3, and returns or statements to report non-employee compensation (e.g., Form 1099-MISC), to be filed on or before January 31 of the year following the calendar year to which such returns relate.

The provision is effective for returns and statements relating to calendar years after the date of enactment (December 18, 2015).

Increase withholding on dispositions of United States real property interests

The Act increased the rate of withholding on dispositions by foreigners of United States real property interests from 10% to 15%.

The provision is effective for dispositions occurring 60 days after the date of enactment.

Alternative tax for certain small insurance companies

The Act increased the maximum amount of annual premiums that certain small property and casualty insurance companies (including “captives”) can receive and still elect to be exempt from tax on their underwriting income, and instead be taxed only on taxable investment income.

The Act increased the maximum amount from $1.2 million to $2.2 million for calendar years beginning after 2015, and indexed it to inflation thereafter. To ensure that this special rule is not abused, the Act also requires that no more than 20 percent of net written premiums (or if greater, direct written premiums) for a tax year is attributable to any one policyholder.

Alternatively, a company would be eligible for the exception if each owner of the insured business or assets has no greater an interest in the insurer than he or she has in the business or assets, and each owner holds no smaller an interest in the business than his or her interest in the insurer.

The provision is effective for tax years beginning after 2016.

Transfer of certain losses from tax indifferent parties

The Act modified the related-party loss rules, which generally disallow a deduction for a loss on the sale or exchange of property to certain related parties or controlled partnerships, to prevent losses from being shifted from a tax-indifferent party (e.g., a foreign person not subject to U.S. tax) to another party in whose hands any gain or loss with respect to the property would be subject to U.S. tax.

The provision generally is effective for sales and exchanges of property acquired after 2015.

What’s Next?

Are you kidding? We’re heading into an election year. Perhaps that’s why the so-called “extenders” described above were finally passed.

Estate tax repeal? Discouraging corporate tax havens? Overhauling the Code? All bets are off until 2017.

Happy New Year. Until then, we hope that you will continue to follow our weekly postings.