Just before recessing for the holidays, Congress passed and President Obama signed the Protecting Americans from Tax Hikes (PATH) Act of 2015. The PATH Act does considerably more than the typical tax extenders legislation seen in prior years. It makes more than 20 key tax provisions permanent that affect individuals and businesses. Many of the tax extenders have also been enhanced.
Taxpayers had criticized some of the prior extender legislation as too short-lived to rely on for any sort of meaningful strategic planning. The new law is anticipated to help both those taxpayers and the economy in general.
Permanent Extensions for Individuals
The PATH Act makes several key individual extenders permanent:
- State and Local Sales Tax Deduction
- American Opportunity Tax Credit
- Child Tax Credit
- Teachers’ Classroom Expense Deduction
- Transit Benefits Parity
- Charitable Distributions from IRAs
- Qualified Conservation Contributions
Extensions for Individuals
The PATH Act renews several extenders related to individuals. Unfortunately, because of their retroactive application to the start of 2015, two-year provisions will be up for renewal again at the end of 2016.
- Qualified Tuition/Related-Expenses Deduction
- Cancellation of Mortgage Debt Exclusion
- Mortgage Insurance Premium Deduction
- Residential Energy Property Credit
Permanent Extensions for Businesses
The PATH Act makes permanent many business-related provisions that had been up for renewal:
Code Section 179 Expensing
Prior to enactment of the PATH Act, the dollar limit for Section 179 expensing for 2015 had reverted to $25,000 with an investment limit of $200,000. The PATH Act permanently sets the Section 179 expensing limit at $500,000 with a $2 million overall investment limit before phase out (both amounts indexed for inflation beginning in 2016).The PATH Act also makes permanent the special expensing for qualified real property and removes the $250,000 cap related to this category of expenditure beginning in 2016.
Research Tax Credit
Since its enactment in 1981, the research and development (R&D) tax credit has been constantly subject to expiration and retroactive extension. The PATH Act not only makes the credit permanent, but it also significantly enhances the usefulness of it. The credit is effective for 2015 and the enhancements become effective for tax years beginning after December 31, 2015. The two enhancements are:
- The R&D credit can offset alternative minimum tax (AMT) in 2016. AMT has been a major hindrance for business owners in making the R&D credit relevant; and
- Qualified small businesses can make an election to apply the R&D credit against payroll taxes. In the past, businesses with losses were not able to benefit from the R&D credit, starting in 2016 they will have the ability to see a cash flow benefit.
Other Permanent Business Extenders
The PATH Act also extends permanently and, in some cases, modifies:
- 15-year straight-line cost recovery for qualified leasehold improvements, restaurant property and retail improvements;
- Employer wage credit for employees who are active-duty members of the uniformed services;
- Charitable deductions for the contribution of food inventory;
- 100-Percent Gain Exclusion on Qualified Small Business Stock;
- Reduced Recognition Period For S Corporation Built-In Gains Tax; and
- Basis adjustment in stock when an S corporation makes charitable contributions of property.
Five-Year Extensions for Businesses
The PATH Act extends bonus depreciation (additional first-year depreciation) under a phase-down schedule through 2019:
- at 50 percent for 2015-2017;
- at 40 percent in 2018; and
- at 30 percent in 2019.
Work Opportunity Tax Credit
The Work Opportunity Tax Credit (WOTC) is extended through 2019. The PATH Act also enhances the WOTC for employers that hire certain long-term unemployed individuals.
New Markets Tax Credit
The PATH Act authorizes the allocation of $3.5 billion of new markets tax credits for each year from 2015 through 2019.
Two-Year Extensions for Businesses
The PATH Act extends, and in some cases modifies, through 2016:
- Empowerment zones incentives;
- Film/television expensing;
- Mine rescue team training credit and election to expense mine safety equipment;
- Three-year recovery period for certain race horses;
- Seven-year recovery period for motorsports entertainment complexes; and
- Code Sec. 199 deduction for Puerto Rico.
The PATH Act extends many energy provisions, including:
- Wind Energy Production Tax Credit;
- Solar incentives;
- Energy-Efficient Commercial Buildings Deduction;
- Credit for two-wheel plug-in electric vehicles; and
- Credit for energy-efficient new homes.
Affordable Care Act
The PATH Act and the fiscal year 2016 federal budget affect several provisions under the Affordable Care Act, notably two-year delays on the excise tax of so-called “Cadillac” health care plans and the excise tax on medical devices.
The main focus of the PATH Act involves the over-50 temporary provisions known collectively as “Tax Extenders.” However, the Act contains more than 80 more measures unrelated to extension of those provisions. These involve employee benefit plans, real estate investment trusts and tax administration matters.
Due to the large number of provisions covered in the PATH Act, this alert can only provide highlights. If you would like more information as to how this affects your tax situation, please call our office.