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Highway funding law brings important tax law changes

August 10, 2015
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The Surface Transportation and Veterans Health Care Choice Improvement Act of 2015 was signed into law on July 31, 2015. This three-month extension of the Highway Trust Fund was the 34th stopgap extension of transportation programs since 2009. In addition to providing continued funding for federal transportation projects, the new law includes several important tax-related provisions affecting businesses and individuals.

Taxpayers subject to revised reporting deadlines
The highway funding law changes the due dates for several types of tax and information returns:

Partnership income tax returns. The new due date for partnerships with tax years ending on December 31 to file federal income tax returns is March 15. For partnerships with fiscal year ends, tax returns are due the 15th day of the third month after the close of the tax year.  Per prior law, calendar-year partnerships’ returns were due April 15, and returns for fiscal-year partnerships were due the 15th day of the fourth month after the close of the fiscal tax year.

Under the new law, the IRS may allow a maximum extension of six months (until September 15) to file Form 1065, “U.S. Return of Partnership Income,” for calendar-year taxpayers. This is up from the five months in prior law. Therefore, the extended due date for filing a partnership tax return doesn’t change; only the length of the extension period does.

Corporation income tax returns. The new deadline for C corporations to file income tax returns is the 15th day of the fourth month after the close of the corporation’s tax year. Accordingly, C corporations with tax years ending on December 31 must file federal income tax returns on or before April 15.  Based on prior law, such returns were due on the 15th day of the third month after the close of the corporation’s year. 

For tax years before 12/31/2025, under the new law, calendar-year C corporations that were granted an extension to file will need to submit their corporate tax return by September 15 (a five-month extension). For tax years after 12/31/2025, however, the extended due date for C corporations will be October 15 (a 6-month extension). Fiscal year corporations will be allowed a six-month extension except for June 30 fiscal year taxpayers, who are entitled to a seven-month extension.

The effective date for the new deadlines is for taxable years beginning after December. 31, 2015. For C corporations, however, with fiscal years ending on June 30, the change will only apply for tax years beginning after December 31, 2015.

S corporations must continue to file returns on the 15th day of the third month after year-end, with the extended due date still being the 15th day of the sixth month. Thus, S corporations are not affected by the new deadline revisions.

FinCEN Form 114 (F/K/A TD F 90-22.1). The deadline for Form 114, “Report of Foreign Bank and Financial Accounts,” changes from June 30 to April 15, with a maximum six-month extension. No extension was allowed for this form under prior law.

Form 3520. The due date for Form 3520, “Annual Return To Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts,” for calendar-year filers is April 15, with a maximum six-month extension ending on October 15.

The highway fund extension law also revises the extension periods for several filing deadlines. A maximum extension of 5½ months (until September 30) is available for calendar-year taxpayers that file Form 1041, “U.S. Income Tax Return for Estates and Trusts.” Based on prior law, the form had a due date of April 15, with a five-month extension to September 15.

Also under the new law, a maximum extension of 3½ months (until November 15) is available for Form 5500, “Annual Return/Report of Employee Benefit Plan,” for calendar-year plans. This is an extra month over the previous extension date. And, for those taxpayers filing Form 990 (exempt organizations); the automatic extension is increased from three months to six months.

In addition to the forms referenced above, revisions were made to other forms of less common usage. We emphasize that there was no change for individuals filing Form 1040 (individual income tax return).

Consistent basis report between estate and beneficiaries
The basis of any property acquired from a decedent is generally the fair market value of the property on the decedent’s date of death. Pre-Act law, however, did not explicitly require conformity to the value reported for estate tax purposes. The new law imposes a basis consistency standard, mandating conformity for the basis of property acquired from a decedent with the value reported on the estate tax return. A new information reporting requirement, as explained directly below, is imposed from a matching perspective so as to ensure conformity with the new basis consistency standard.

Large estates must report fair market values
Under the highway fund law, executors of large estates (those subject to estate tax) must provide the IRS and each of the estate’s heirs with statements identifying the fair market value of the inherited property as reported on the estate tax return. The Act’s reporting requirements also applies to beneficiaries required to file a partial estate tax return. Those failing to follow the new information reporting requirements are subject to the penalty for failure to file provisions. In addition, any underpayment of tax resulting from an understatement of basis under this provision will be subject to a 20% accuracy-related penalty.

These requirements are intended to ensure consistent reporting for estate and income tax purposes. The changes apply to any estate tax returns filed after July 31, 2015.

Overstated basis qualifies as understatement of gross income for six-year limitations period
The highway fund law also clarifies the statute of limitations for overstated tax basis. In 2012, the U.S. Supreme Court, in Home Concrete & Supply LLC, held that the extended six-year statute of limitations — which applies when a taxpayer “omits from gross income an amount properly includible” in excess of 25% of the gross income — didn’t apply to the overstatement of basis in sold property. 

The new law, which effectively overrides the Supreme Court’s decision, amends the tax code to clarify that an understatement of gross income due to an overstatement of unrecovered cost or other basis is an omission from gross income. The new law also provides that the adequate disclosure exception only applies to omissions of gross income and not for disclosures of unrecovered cost or other basis. The amendment applies to returns filed after July 31, 2015, as well as previously filed returns that are still open, as determined without regard to the new law.

Employers have more time to transfer excess pension assets
The highway fund law gives employers four more years to transfer — without adverse tax consequences — excess defined benefit plan assets to a retiree’s health benefits account or group term life insurance account that’s part of the plan. To make such transfers (which are allowed only once a year), a defined benefit plan must have assets of at least 125% of their funding target. Prior to the new law, such transfers are only allowed to be made through December 31, 2021. The new law extends the deadline to the end of 2025. 

Conclusion
As can be readily seen, the new law is much more than just about transportation funding; it will also result in noteworthy changes to the income tax obligations and reporting requirements for business owners and individuals. Citrin Cooperman is available to answer any questions that you have as to how these tax provisions are likely to affect you. 

In such context, please contact Paul LiRosi, Paul Dailey, or your Citrin Cooperman tax partner for further information.