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Congress Permanently Extends Numerous Tax Provisions (PATH) Including Increased Section 179 Expensing and Enhanced Child Tax Credit.
(Parker Tax Publishing Updated January 11, 2015)
On December 18, 2015, the President signed into law the Protecting Americans from Tax Hikes (PATH). H.R. 2029.
H.R. 2029 ("the law") permanently extends many tax provisions that previously had been up for renewal for one or two years at a time. The uncertainty each year for individuals and businesses alike as to whether Congress would revive expired tax provisions that taxpayers had come to rely on led to problems in estimating taxes due, made business investment decisions more difficult, and delayed the release of tax forms. Some years even saw extension legislation passed for years that had already ended.
Practice Aid: CPA Client Letter: 2015 Tax Extenders (PATH) for Individual Taxpayers. and CPA Client Letter: 2015 Tax Extenders (PATH) for Business Taxpayers.
In addition to permanently extending numerous tax breaks, the law temporarily extends dozens of others for periods ranging from two to five years. The law also contains various other tax provisions, including a few new tax breaks and a delay in the start of the "Cadillac Tax" on high-cost employer sponsored health insurance from 2018 to 2020.
BUSINESS TAX PROVISIONS
Permanent Extension of Code Sec. 179 Expensing and Modification of Amounts Eligible for Expensing
One of the biggest wins for businesses is the permanent extension of the increased small business Code Sec. 179 expensing limitation and phase-out amounts in effect from 2010 to 2014 of $500,000 and $2 million, respectively. Both the $500,000 and $2 million limits are indexed for inflation beginning in 2016. For 2015, the limitation and phase-out amounts were slated to be $25,000 and $200,000, respectively.
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 are permanently extended.
The law modifies the expensing limitation 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.
Temporary Extension and Modification of Bonus Depreciation
The law extends 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 law 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. The law modifies the AMT rules beginning in 2016 by increasing the amount of unused AMT credits that may be claimed in lieu of bonus depreciation. The law also modifies bonus depreciation to include qualified improvement property and to permit certain trees, vines, and plants bearing fruit or nuts to be eligible for bonus depreciation when planted or grafted, rather than when placed in service.
Permanent Extension of Research and Development Credit and Eligibility of Small Businesses to Claim the Credit Against AMT
Another big win for businesses is the permanent extension of the research and development (R&D) tax credit.
Additionally, beginning in 2016, businesses with $50 million or less in gross receipts may claim the R&D credit against alternative minimum tax (AMT) liability.
Also beginning in 2016, qualified small businesses ($5 million or less in gross receipts and no gross receipts for any tax year preceding the five-tax-year period ending with such tax year) may claim the R&D credit against their payroll tax liability.
Other Business Tax Breaks Extended
Work Opportunity Tax Credit. The law extends through 2019 the work opportunity tax credit. 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).
New Markets Tax Credit. The law authorizes the allocation of $3.5 billion of new markets tax credits for each year from 2015 through 2019.
15-Year Straight-Line Cost Recovery for Qualified Property. The law permanently extends the 15-year recovery period for qualified leasehold improvements, qualified restaurant property, and qualified retail improvement property.
Classification of Certain Race Horses as 3-Year Property. The law temporarily extends the 3-year recovery period for race horses to property placed in service during 2015 or 2016.
7-Year Recovery Period for Motorsports Entertainment Complexes.The law extends the 7-year recovery period for motorsport entertainment complexes to property placed in service during 2015 or 2016.
Accelerated Depreciation for Business Property on an Indian Reservation. The law extends accelerated depreciation for qualified Indian reservation property to property placed in service during 2015 or 2016. It also modifies the deduction to permit taxpayers to elect out of the accelerated depreciation rules.
Special Expensing Rules for Certain Film and Television Productions. The law extends through 2016 the special expensing provision for qualified film or television productions. In addition, for productions beginning after 2015, the law adds qualified live theatrical production expenses to the special expensing provisions.
Look-Thru Treatment of Payments between Related Controlled Foreign Corporations. The law extends through 2019 the look-through treatment for payments of dividends, interest, rents, and royalties between related controlled foreign corporations.
Wage Credit for Employees on Activity Military Duty. The law permanently extends the 20 percent employer wage credit for employees called to active military duty. For tax years beginning after 2015, the provision modifies the credit to apply to employers of any size, rather than employers with 50 or fewer employees, as under current law.
Exclusion of 100 Percent of Gain on Certain Small Business Stock. The law permanently 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. This provision also permanently extends the rule that eliminates such gain as an AMT preference item.
Miscellaneous Business Tax Provisions Extended Through 2016. The law also extends through 2016 the following business tax breaks:
(1) Indian employment tax credit.
(2) Railroad track maintenance credit.
(3) Mine rescue team training credit.
(4) Qualified zone academy bonds.
(5) Election to expense mine safety equipment.
(6) Deduction allowable with respect to income attributable to domestic production activities in Puerto Rico.
(7) Empowerment zone tax incentives.
(8) Temporary increase in limit on cover over of rum excise taxes to Puerto Rico and the Virgin Islands.
(9) American Samoa economic development credit.
INDIVIDUAL TAX PROVISIONS
Permanent Extension of the Enhanced Child Tax Credit
One of the biggest wins on the individual side is the permanent extension of the enhanced child tax credit (CTC). The CTC is a $1,000 credit. To the extent the CTC exceeds the taxpayer's tax liability, the taxpayer is eligible for a refundable credit (the additional child tax credit) equal to 15 percent of earned income in excess of a threshold dollar amount (the "earned income" formula). Until 2009, the threshold dollar amount was $10,000 indexed for inflation from 2001 (which would be roughly $14,000 in 2015). Since 2009, however, this threshold amount has been set at an unindexed $3,000 and was scheduled to expire at the end of 2017, returning to the $10,000 (indexed for inflation) amount. The law permanently sets the threshold amount at an unindexed $3,000.
The law prohibits an individual from retroactively claiming the child tax credit by amending a return (or filing an original return if he failed to file) for any prior year in which the individual or a qualifying child for whom the credit is claimed did not have an individual taxpayer identification number. The law applies to returns, and any amendment or supplement to a return, filed after the December 18, 2015.
Finally, the law expands the paid preparer due diligence requirements, to cover returns claiming the child tax credit.
Permanent Extension of Earned Income Tax Credit
Low- and moderate-income workers are eligible for the earned income tax credit (EITC). For 2009 through 2017, the EITC amount had been temporarily increased for those with three (or more) children and the EITC marriage penalty had been reduced by increasing the income phase-out range by $5,000 (indexed for inflation) for those who are married and filing jointly. The law makes these provisions permanent.
The law also eliminates the exception from the 20-percent penalty for erroneous refunds and credits that applied to the EITC, but provides reasonable-cause relief from the penalty. The provision generally applies to returns filed after December 31, 2015.
Finally, the law prohibits an individual from retroactively claiming the EITC by amending a return (or filing an original return if he failed to file) for any prior year in which he did not have a valid social security number. The provision applies to returns, and any amendment or supplement to a return, filed after December 18, 2015.
Permanent Extension of Enhanced American Opportunity Tax Credit (AOTC)
The Hope Scholarship Credit is a credit of $1,800 (indexed for inflation) for various tuition and related expenses for the first two years of post-secondary education. It phases out for AGI starting at $48,000 (if single) and $96,000 (if married filing jointly). These amounts are also indexed for inflation. The American Opportunity Tax Credit (AOTC) takes those permanent provisions of the Hope Scholarship Credit and increases the credit to $2,500 for four years of post-secondary education, and increases the beginning of the phase-out amounts to $80,000 (single) and $160,000 (married filing jointly) for 2009 to 2017. The law makes the AOTC permanent.
The law also prohibits an individual from retroactively claiming the AOTC by amending a return (or filing an original return if he failed to file) for any prior year in which the individual or a student for whom the credit is claimed did not have an individual taxpayer identification number (ITIN). The provision applies to returns, and any amendment or supplement to a return, filed after December 18, 2015.
Finally, effective for tax years beginning after December 31, 2015, the law expands the paid preparer due diligence requirements, to cover returns claiming the AOTC.
Other Tax Breaks for Individuals Extended
Deduction for Certain Expenses of Elementary and Secondary School Teachers. The law permanently extends the above-the-line deduction (capped at $250) for the eligible expenses of elementary and secondary school teachers. Beginning in 2016, the provision also modifies the deduction to index the $250 cap to inflation and includes professional development expenses.
Parity for Exclusion from Income for Employer-Provided Mass Transit and Parking Benefits. The law permanently extends the maximum monthly exclusion amount for transit passes and van pool benefits so that these transportation benefits match the exclusion for qualified parking benefits. These fringe benefits are excluded from an employee's wages for payroll tax purposes and from gross income for income tax purposes.
Extension of Deduction of State and Local General Sales Taxes. The law permanently extends the option to claim an itemized deduction for state and local general sales taxes in lieu of an itemized deduction for state and local income taxes. The taxpayer may either deduct the actual amount of sales tax paid in the tax year, or alternatively, deduct an amount prescribed by the IRS.
Exclusion from Gross Income of Discharge of Qualified Principal Residence Indebtedness. The law extends through 2016 the exclusion from gross income of a discharge of qualified principal residence indebtedness. It also modifies the exclusion to apply to qualified principal residence indebtedness that is discharged before 2017 or subject to a written agreement entered into before January 1, 2017.
Mortgage Insurance Premiums Treated as Qualified Residence Interest. The provision extends through 2016 the treatment of qualified mortgage insurance premiums as interest for purposes of the mortgage interest deduction.
Above-the-Line Deduction for Qualified Tuition and Related Expenses. The law extends through 2016 the above-the-line deduction for qualified tuition and related expenses for higher education. The deduction is capped at $4,000 for an individual whose AGI does not exceed $65,000 ($130,000 for joint filers) or $2,000 for an individual whose AGI does not exceed $80,000 ($160,000 for joint filers).
Miscellaneous Provisions Affecting Individuals
The law also introduces a few new tax breaks:
(1) an exemption from gross income any payments from certain work-learning-service programs that are operated by a work college;
(2) elimination of the residency requirement for qualified ABLE programs; and
(3) a provision allowing a taxpayer to roll over amounts from an employer-sponsored retirement plan (e.g., 401(k) plan) to a SIMPLE IRA, provided the plan has existed for at least two years.
CHARITABLE GIVING INCENTIVES
Contributions of Capital Gain Real Property Made for Conservation Purposes
The law permanently extends the charitable deduction for contributions of real property for conservation purposes. It also permanently extends the enhanced deduction for certain individual and corporate farmers and ranchers. The law modifies the deduction for tax years beginning after 2015 to permit Alaska Native Corporations to deduct donations of conservation easements up to 100 percent of taxable income.
Tax-Free Distributions from Individual Retirement Accounts for Charitable Purposes
The law permanently extends the ability of individuals at least 70 1/2 years of age to exclude from gross income qualified charitable distributions from individual retirement accounts (IRAs). The exclusion may not exceed $100,000 per taxpayer in any tax year.
Charitable Deduction for Contributions of Food Inventory
The law permanently extends the enhanced deduction for charitable contributions of inventory of apparently wholesome food for non-corporate business taxpayers. The law modifies the deduction beginning in 2016 by increasing the limitation on deductible contributions of food inventory from 10 percent to 15 percent of the taxpayer's AGI (15 percent of taxable income (as modified by the provision) in the case of a C corporation) per year. The law also modifies the deduction to provide special rules for valuing food inventory.
Basis Adjustment to Stock of S Corporations Making Charitable Contributions of Property
The law permanently extends 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.
ENERGY INCENTIVES
The law extends the following energy tax incentives for alternative and renewable energy sources through 2016.
(1) Credit for nonbusiness energy property;
(2) Credit for alternative fuel vehicle refueling property;
(3) Credit for 2-wheeled plug-in electric vehicles;
(4) Second generation biofuel credit;
(5) Incentives for biodiesel and renewable diesel;
(6) Credit for Indian coal facilities;
(7) Credits with respect to facilities producing energy from certain renewable resources;
(8) Credit for energy-efficient new homes;
(9) Special allowance for second generation biofuel plant property;
(10) Deduction for energy efficient commercial buildings;
(11) Special rule for sales or dispositions to implement FERC or State electric restructuring policy for qualified electric utilities;
(12) Excise tax credits relating to certain fuels and
(13) Credit for new qualified fuel cell motor vehicles.
HEALTHCARE RELATED TAX PROVISIONS
The law provides for a two-year moratorium on the 2.3-percent excise tax imposed on the sale of medical devices under the Affordable Care Act. Thus, the tax will not apply to sales during calendar years 2016 and 2017. The omnibus spending bill, attached as an amendment to H.R. 2029, would also delay from 2018 to 2020 the start of the "Cadillac tax" on high-cost employer sponsored health coverage. (Staff Editor Parker Tax Publishing)
Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.
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