The day we’ve been waiting for has finally arrived.
52 provisions of the tax code expired at the end of 2014, leaving us all quite uncertain about the fate of 2015 returns. Among those expired provisions were powerful business incentives and ones designed to help struggling families and homeowners. It’s all come roaring back. Just days ago, Congress passed The Protecting Americans from Tax Hikes (PATH) Act of 2015, renewing and making permanent important tax incentives that support both individuals and businesses. It has passed both houses of Congress, and will now move to the president. He’s expected to sign it. Here’s what you need to know.
Business Provisions Now Permanent:
Section 179 allowance
In recent years, the $500,000 limit has been extended on a year-by-year basis. Last year, it wasn’t extended until December, and then only on a retroactive basis. Therefore, on Jan. 1, 2015, the limit plummeted to its old level of $25,000.
PATH now gives businesses the permanent ability to expense up to $500,000 in qualified capital expenditures instead of having to depreciate the cost over a number of years. Taxpayers will continue to be eligible to apply Section 179 to purchases of computer software and qualified leasehold, retail, and restaurant improvements. A phase-out threshold of $2 million will apply, and all figures will be indexed for inflation in future years.
R&D Credit
This credit has often expired and then been retroactively restored, thereby limiting its effectiveness. But beginning in 2016, businesses with less than $50 million in gross receipts will forever be free to use the R&D credit to offset alternative minimum tax. In addition, certain start-ups without income tax liability will be able to offset payroll taxes with the credit. This is, perhaps, the biggest and most business-building extender of all.
Section 1202 Small Business Stock Capital Gains Exclusion
A taxpayer who sells qualifying small business stock held for longer than 5 years may now exclude 100% of the gain (up from 50% and subject to limitations). This is a great relief to investors who acquired Qualified Small Business Stock this year.
S corporation Capital Gains
S corps will now only be subject to corporate-level tax on the disposition of appreciated assets owned at the conversion date for five years, rather than ten. This is extremely meaningful to owners of C corporations who have contemplated making an election to be taxed as an S corporation.
Leasehold Improvements
PATH permanently allows landlords, restauranteurs, and retailers to depreciate leasehold improvements -- improvements made to a building to suit the needs of a particular tenant -- over 15 years, instead of 39.
Individual Provisions Made Permanent
Child Tax Credit
Parents are now permanently entitled to an additional refundable credit equal to 15% of earned income in excess of $3,000. This is in addition to a $1,000 credit per qualifying child.
American Opportunity Tax Credit
Taxpayers are now entitled to a permanent $2,500 credit for four years of post-secondary education, with phase-outs beginning at $80,000 (single) and $160,000 (married filing jointly).
Charitable Giving
The new law permanently extends certain charitable incentives for donors, including enhanced deductions for contributions of conservation property, tax-free IRA distributions made directly to charity by individuals over age 70½, and favorable rules for donations of food inventory and contributions of stock by S corporation shareholders.
Earned Income Tax Credit
The new deal makes permanent the enhanced credit for families with three or more children and increased phase-out range for married couples filing jointly.
5 Year Extensions (through December 31, 2019):
The New Markets Tax Credit
The NMTC provides tax credits for investments in businesses or real estate in low-income communities.
Bonus depreciation
This often-extended provision provides a depreciation deduction equal to 50% of the adjusted basis of qualifying property in the first year it is placed in service. Under PATH, the percentage drops to 40% for property placed in service in 2018 and to 30% for property placed in service in 2019. The bill also modifies the AMT rules to increase the amount of unused AMT credits that can be claimed in lieu of bonus depreciation. Bonus depreciation will now be allowed for “qualified improvement property”.
2 Year Extensions (through December 31, 2016)
Mortgage Tax Breaks
In the past, homeowners could benefit from a tax exclusion for mortgage loan forgiveness on debts of up to $2 million. A separate provision permitted tax deductions for mortgage insurance premiums subject to a phase-out starting at an AGI of $100,000. Both tax breaks are retroactively extended in this proposed bill.
Tuition deduction
A maximum above-the-line deduction of $4,000 will continue to be permitted for tuition costs for higher education.
Energy incentives
The following have been extended for 2 years:
Other Noteworthy Provisions
The new law would also delay two significant changes mandated by the ACA and delay the controversial excise tax that will apply to high-priced “Cadillac” health plans. In addition, the new law would allow the SBA to back a record number of small business loans. In the interest of time and space, we’ll discuss those issues later this week.
Again, this proposed bill still needs to cross the president’s desk, and we’ll continue to watch it until it becomes law. Regardless of your position on the PATH Act (and criticism abounds on all sides) it does allow us to act with some certainty as we plan and report to the IRS in the coming years. And at this point, we can take that as a win.