Update: Congress Passes Tax Extenders

December 18, 2015

Today, December 18, Congress passed significant legislation extending a host of tax deductions and credits. The Protecting Americans from Tax Hikes (PATH) Act of 2015 now heads to the President, who is expected to sign the legislation into law next week. The Act addresses a host of “tax extenders”, more than 50 of them, which have historically been temporary tax provisions. Unlike prior tax extender legislation, the Act makes many of the provisions permanent or extends them for two to five years.

Following is a summary of some of the more significant tax provisions included in the Act. In all instances, these extenders are reinstated retroactively to January 1, 2015. The permanency of each provision is addressed below.

Business Provisions:

  • Depreciation expense:
    • A significant increase is made to Section 179 limitations, and the increase is permanent. Section 179 is a deduction that businesses can generally claim on qualifying assets such as equipment, computers and furniture. The deduction can be up to 100% of the cost of the item.
      • The current annual deduction limitation of $25,000 is increased to $500,000, and will be indexed for inflation after 2015.
      • The annual investment limitation is increased from $200,000 to $2 million, and this amount will also be indexed. The investment limitation serves to limit the amount of the annual deduction.
      • Computer software is included in the definition of qualifying property.
      • Certain real property is included in the definition of qualifying property, and a deduction up to $250,000 can be claimed.
      • After 2015, HVAC units will become qualifying property for Section 179 as well.
    • Qualified leasehold improvements, qualified restaurant property and qualified retail improvement property are eligible for a 15-year depreciation life. This provision is permanent.
    • Bonus depreciation for new qualifying assets is extended. For years 2015 through 2017, 50% of qualifying assets can be deducted in the year the asset is placed in service, with the remainder subject to regular depreciation calculations. In 2018 this drops to 40%, and in 2019 it drops to 30%. There is no provision for bonus depreciation after 2019.
    • Qualifying vehicles are eligible for an additional $8,000 of depreciation in 2016 and 2017; $6,400 in 2018; and $4,800 in 2019.
  • Research and development (R&D) tax credit:
    • The credit is made permanent.
    • After 2015, small businesses (those having no more than $50 million in gross receipts) can apply the credit against the alternative minimum tax (AMT), an option that has not been available in recent years.
    • After 2015, startup businesses (those with less than $5 million in gross receipts) can claim up to $250,000 of the credit against their payroll (FICA) tax liabilities.
  • The recognition period for gains realized by S corporations after conversion from a C corporation (built-in gains tax period) is permanently reduced from 10 years to 5 years.
  • A provision to fully exclude gain from qualifying small business stock has been made permanent.
  • The work opportunity tax credit (WOTC) has been extended through 2018, and the credit has been enhanced.

Individual Provisions:

  • The nonbusiness energy property credit (with a lifetime maximum of $500) is extended for 2015 and 2016.
  • The child tax credit is made permanent. The maximum credit is $3,000 per child and is not indexed for inflation.
  • The American Opportunity Tax Credit, which applies to various post-secondary tuition and related expenses (up to $2,500), is made permanent.
  • The deduction for higher education expenses (up to $2,000 or $4,000, depending on income levels) is extended through 2016.
  • The $250 deduction for out-of-pocket expenses paid by educators is made permanent. After 2015, the amount will be indexed for inflation.
  • The state and local sales tax deduction, which can be claimed in lieu of state income tax, is made permanent.
  • The ability for taxpayers age 70½ or older to make tax-free distributions from an Individual Retirement Account (IRA) to a charity is made permanent. The maximum amount remains at $100,000.
  • The exclusion of discharge of indebtedness income from qualified principal residence debt (up to $2 million, $1 million for married individuals filing separately) is extended through 2016.
  • The ability to treat mortgage insurance premiums on a qualified residence as deductible mortgage interest is extended through 2016.

In addition to the above extenders, two provisions of the Affordable Care Act are delayed for two years: the medical device tax and the Cadillac tax.

This is a not a complete list of the changes made by the PATH Act, and there are many criteria and associated rules to consider.

Please contact JPS if you would like to better understand any of these provisions or their impact on you or your business.

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