This alert was posted prior to the passing of more recent tax legislation. Before acting on any of the information in the following piece, please consult with a tax expert to learn if and how current legislation might impact or nullify what is stated in this article.
On December 18, 2015, Congress passed the “Protecting Americans from Tax Hikes Act of 2015” (PATH). There are a number of tax relief provisions that were set to expire at the end of 2015. These have been either retroactively extended or made permanent.
What this mean for businesses:
PERMANENT INCREASE AND EXTENSION OF SEC. 179 EXPENSING: The provision permanently extends the small business expensing limitation and phase-out amounts in effect from 2010 to 2014 ($500,000 and $2 million, respectively). These amounts currently are $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 provision modifies the expensing limitation by indexing both the $500,000 and $2 million limits for inflation beginning in 2016 and 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.
EXTENSION AND MODIFICATION OF BONUS DEPRECIATION: The provision 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 provision 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 provision 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 provision 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.
15-YEAR STRAIGHT-LINE COST RECOVERY FOR QUALIFIED LEASEHOLD IMPROVEMENTS MADE PERMANENT: The provision permanently extends the 15-year recovery period for qualified leasehold improvements, qualified restaurant property, and qualified retail improvement property.
EXTENSION AND MODIFICATION OF RESEARCH CREDIT: The Research and Development tax credit which generally allows taxpayers a 20 percent credit for qualified research expenses or a 14 percent alternative simplified credit will be 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, The credit can also be utilized by certain small businesses against the employer’s portion of payroll tax (i.e., FICA) liability.
EXTENSION OF EXCLUSION OF 100% OF GAIN ON CERTAIN SMALL BUSINESS STOCK: The provision 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.
PERMANENT EXTENSION OF REDUCTION IN S CORPORATION RECOGNITION PERIOD FOR BUILT IN GAINS: The provision permanently extends 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 tax on built-in gains.
What this means for individuals:
ENHANCED CHILD TAX CREDIT MADE PERMANENT: The Child Tax Credit (CTC) allows taxpayers to claim a $1,000 tax credit for each qualifying child under age 17 that the taxpayer can claim as a dependent. The CTC phases out when taxpayers’ income exceeds certain thresholds. To the extent the CTC exceeds the taxpayer’s tax liability, the taxpayer is eligible for a refundable credit equal to 15% percent of earned income in excess of a threshold dollar amount. The provision permanently sets the threshold amount at an unindexed $3,000.
ENHANCED AMERICAN OPPORTUNITY TAX CREDIT MADE PERMANENT: 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 provision makes the AOTC permanent.
DEDUCTION OF CERTAIN EXPENSES OF ELEMENTARY AND SECONDARY SCHOOL TEACHERS MADE PERMANENT: The provision 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 include professional development expenses.
EXTENSION OF 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. This deduction phases out ratably for a taxpayer with AGI of $100,000 to $110,000.
EXTENSION AND MODIFICATION OF CREDIT FOR NONBUSINESS ENERGY PROPERTY: The provision extends through 2016 the credit for purchases of nonbusiness energy property. The provision allows a credit of 10 percent of the amount paid or incurred by the taxpayer for qualified energy improvements, up to $500.
EXTENSION OF ABOVE-THE-LINE DEDUCTION FOR QUALIFIED TUITION AND RELATED EXPENSES: The provision 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).
EXTENSION OF TAX-FREE DISTRIBUTIONS FROM INDIVIDUAL RETIREMENT PLANS FOR CHARITABLE PURPOSES: The provision permanently extends the ability of individuals at least 70½ 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.
Please keep in mind that these are just a few of the provisions that could affect you or your business. As always, please contact us if you have any questions or concerns.