This holiday season, taxpayers are receiving a "gift" from Washington, D.C. It's the Protecting Americans from Tax Hikes Act of 2015 or, simply, the PATH Act. It does more than just extend expired tax provisions for another year. The bipartisan deal makes about one-third of these tax provisions permanent. Many others have been extended for periods ranging from two to five years.
Several of these provisions can produce significant savings for taxpayers on their 2015 income tax returns, but quick action (before January 1, 2016) may be needed to take advantage of some of them. Here are some details on this tax savings package.
Which Tax Breaks Are Now Permanent for Individuals?
Major tax provisions made permanent by the PATH Act (some with modifications) that may help you save taxes include:
Enhanced American Opportunity credit. The new law makes permanent this credit of up to $2,500 per year for the first four years of post-secondary education. It phases out for adjusted gross income (AGI) starting at $80,000 (if single) and $160,000 (if married filing jointly).
Educator expense deductions. Qualifying elementary and secondary school teachers may claim an above-the-line deduction for up to $250 per year of expenses paid or incurred for books, certain supplies, computer and other equipment, and supplementary materials used in the classroom. Under the new law, beginning in 2016, the deduction is indexed for inflation and includes professional development expenses. Without this deduction, unreimbursed professional development expenses would be deductible only as unreimbursed-employee-business-expenses miscellaneous itemized deductions subject to the 2%-of-AGI floor.
In addition, the PATH Act includes provisions that permanently and retroactively allow individual taxpayers to:
- Deduct state and local general sales taxes in lieu of deducting state and local income taxes,
- Apply a special rule for contributions of capital gains real property made for conservation purposes, and
- Take tax-free distributions from IRAs for charitable purposes.
It also makes permanent the enhanced child credit and calls for "program integrity" and other safeguards to reduce improper payments under the child credit and American Opportunity credit programs.
Which Tax Breaks Are Now Permanent for Businesses?
For business taxpayers, major provisions that were permanently and retroactively reinstated by the PATH Act include:
Research credit. This credit equals the sum of:
- 20% of the excess (if any) of the qualified research expenses for the tax year over a base amount (unless the taxpayer elected an alternative simplified research credit),
- The university basic research credit, which is generally 20% of the basic research payments, and
- 20% of the taxpayer's expenditures on qualified energy research undertaken by an energy research consortium.
Important note: There are many additional rules attached to the research credit. If your business has already filed returns for a fiscal year that includes part of 2015, ask your tax adviser about filing an amended return to claim a refund for the amount of any additional tax paid because of not claiming amounts now eligible for the research credit.
In addition, for tax years that begin after December 31, 2015, eligible small businesses with $50 million or less of gross receipts may claim this credit against their alternative minimum tax liability. Also, for tax years that begin after December 31, 2015, small start-up businesses with less than $5 million of gross receipts may claim up to $250,000 per year of the credit against their employer FICA tax liability.
Increased Section 179 expensing election. For 2015, the new law revives the increased Sec. 179 expensing limit for qualifying fixed assets and phaseout threshold to $500,000 and $2 million, respectively. Under the previous rules, these amounts were set at $25,000 and $200,000, respectively, for tax years beginning after 2014.
Beginning in 2016, both of these amounts will be indexed for inflation. The special rules that allow expensing for computer software have also been permanently extended, as well as the rules for expensing qualified real property.
In addition, the new law permanently allows companies to use 15-year straight-line cost recovery for qualified leasehold improvements, qualified restaurant buildings and improvements, and qualified retail improvements.
Reduction in S corporation recognition period for built-in gains tax. An S corporation generally isn't subject to tax, but instead passes through its income to its shareholders, who pay tax on their pro-rata shares of the company's income. When a C corporation elects to become an S corporation (or when an S corporation receives property from a C corporation in a nontaxable carryover basis transfer), the S corporation is taxed at the highest corporate rate (currently 35%) on all gains that were built-in at the time of the election if the gain is recognized during a "recognition period."
Under the new law, this recognition period is five years (instead of the generally applicable 10-year period). It begins with the first day of the first tax year for which the corporation was an S corporation (or beginning with the date of acquisition of assets if the rules applicable to assets acquired from a C corporation applied). If an S corporation disposes of assets in a tax year beginning in 2012 (or after) and the disposition occurred more than five years after the first day of the relevant recognition period, the gain or loss on the disposition won't be taken into account in determining the net recognized built-in gain.
Exclusion of gains on certain small business stock. The new law allows taxpayers to exclude all of the gain on the disposition of qualified small business stock acquired after September 27, 2010. None of the excluded gain is subject to the alternative minimum tax. (Under the previous rules, the exclusion would have been limited to 50% of gain for stock acquired after December 31, 2014, and 7% of the excluded gain would have been an alternative minimum tax preference.)
Important note: You must hold the shares for more than five years to be eligible for this tax break, and companies must meet the definition of a qualified small business corporation.
- Other common business tax breaks that were made permanent under the new law include:
- Enhanced charitable deduction for contributions of food inventory,
- Basis adjustment to stock of S corporations making charitable contributions of property,
- Employer wage credit for employees who are active duty members of the uniformed services,
- Subpart F exception for active financing income of the U.S. parent of a foreign subsidiary,
- 9% minimum low-income housing tax credit rates for non-federally subsidized buildings,
- Military housing allowance exclusion for determining whether a tenant in certain counties is low-income, and
- Regulated investment company qualified investment entity treatment under the Foreign Investment in Real Property Tax Act.
Which Tax Provisions Have Been Temporarily Extended?
Not every break that expired December 31, 2014, has been permanently extended by the PATH Act. The following individual tax breaks have been retroactively extended only through 2016:
- Exclusion for discharged home mortgage debt,
- Mortgage insurance premiums as deductible qualified residence interest,
- Above-the-line deduction for higher education expenses, and
- Various energy-efficiency tax credits.
In addition, several major business-related provisions have been extended through 2019, such as:
First-year bonus depreciation. In general, for new property purchased and put in service this tax year through tax years starting in 2017, the first-year bonus depreciation percentage is 50%, and then it decreases to 40% in 2018 and 30% in 2019. The PATH Act continues to allow taxpayers to elect to accelerate the use of alternative minimum tax (AMT) credits in lieu of bonus depreciation under special rules for 2015. But beginning in the 2016 tax year, it would increase the amount of unused AMT credits that may be claimed in lieu of bonus depreciation.
Expanded Work Opportunity credit. This credit allows employers who hire members of certain targeted groups to get a credit against income tax of a percentage of first-year wages up to $6,000 per employee ($3,000 for qualified summer youth employees). If the employee is a long-term family assistance recipient, this credit is a percentage of first and second year wages, up to $10,000 per employee. Generally, the percentage of qualifying wages is 40% of first-year wages. However, it's 25% for employees who have completed at least 120 hours, but less than 400 hours of service for the employer. For long-term family assistance recipients, it includes an additional 50% of qualified second-year wages.
The maximum wages that can be used to calculate the credit for hiring a qualifying veteran generally is $6,000. However, it can be as high as $12,000, $14,000 or $24,000, depending on factors such as whether the veteran has a service-connected disability, the period of his or her unemployment before being hired, and when that period of unemployment occurred relative to the credit-eligible hiring date.
The new law retroactively extends this credit to eligible veterans and non-veterans who begin work for the employer before January 1, 2019. With respect to individuals who begin work for an employer after December 31, 2015, this credit also applies to employers who hire qualified long-term unemployed individuals, who have been unemployed for 27 weeks or more. The credit with respect to such long-term unemployed individuals is 40% of the first $6,000 of wages.
Other business tax breaks that have been temporarily extended through 2019 include: 1) the look-through rule for payments between related controlled foreign corporations under foreign personal holding company income rules, and 2) the New Markets credit for qualified equity investments to acquire stock in a community development entity.
Miscellaneous business tax provisions extended only through 2016 include:
- Employment credit for certain Indian tribe members and their spouses,
- Domestic production activities deduction for Puerto Rico,
- Qualified zone academy bond limitation,
- Empowerment Zone tax breaks for certain economically depressed areas, and
- Various energy-efficiency tax credits.
The Last-Minute Dash to Buy Fixed Assets
Many taxpayers put their equipment and vehicle purchases on hold, waiting to see if enhanced Section 179 and bonus depreciation deductions would be revived for 2015 to make it worth their while. In light of the recently extended tax breaks under the Protecting Americans from Tax Hikes (PATH) Act of 2015, some business owners may want to make an eleventh-hour dash to purchase qualifying fixed assets before year end.
Understand the Revised Expensing Limits
Before the PATH Act, the maximum Sec. 179 deduction for tax years beginning in 2015 would have been only $25,000, and the deduction would have been phased out dollar-for-dollar to the extent that total qualifying fixed asset purchases for the year exceeded $200,000. No Sec. 179 deductions would have been permitted for real estate improvements. And the 50% first-year bonus depreciation deduction generally wouldn't have been allowed for fixed assets placed in service in 2015.
Thankfully, Congress restored the $500,000 maximum Sec. 179 deduction with a $2 million phaseout threshold, as well as the Sec. 179 deduction for qualifying real estate improvements, indexing these amounts for inflation beginning in 2016. It also restored the 50% first-year bonus depreciation deduction for tax years beginning in 2015 through 2017. (The bonus depreciation deduction decreases to 40% in 2018 and 30% in 2019, however.)
Read the Fine Print
Qualifying assets can't just be ordered or delivered on your loading dock in a box or pallet on December 31, however. Assets must be placed in service (that is, hooked up and ready for business use) by the end of the tax year to be eligible for Sec. 179 and the bonus depreciation deduction.
The current favorable Sec. 179 and bonus depreciation rules can be a big tax-saver. But there are several restrictions that you might not know about. For example, the Sec. 179 deduction cannot exceed the taxpayer's business taxable income calculated before the deduction. As another example, special limitations apply to partnership and S corporation businesses and their owners.
Consult your tax adviser for details on how to most effectively take advantage of today's taxpayer-friendly Sec. 179 and bonus depreciation rules.
Where Can You Go for More Information?
Many of these tax breaks may seem familiar, because they're continuations from previous years. But some of the previous rules have been modified under the new law, so don't assume you know all the details. Moreover, we've only highlighted some of the more common individual and business tax breaks that have been extended. For more information on more obscure tax breaks and last-minute tax planning strategies, contact Adam E. Panek, CPA at 315.701.6328, or toll free at 800.422.1385 or email@example.com.