Congress Passes the Extenders Package
This past holiday season, taxpayers received a “gift” from Washington, D.C. —the Protecting Americans from Tax Hikes Act of 2015 or, simply, the PATH Act. This bipartisan deal made 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. 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.
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. The Protecting Americans from Tax Hikes (PATH) Act of 2015 modifies and makes permanent the credit for increasing research activities (research credit). The PATH Act also adds the research credit to the list of general business credit components designated as “specified credits” that may offset alternative minimum tax as well as regular tax, effective for years beginning after December 31, 2015. In addition, a qualifying small business may make an election to apply a specified amount of its research credit for the tax year against the 6.2% payroll tax imposed on the wages that it pays to its employees.
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.
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. 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?
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.
- Expanded Work Opportunity credit.
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
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 contact us.