In what is becoming a sort of holiday tradition, Congress passed a massive piece of legislation on December 18th that includes numerous tax provisions – the “Protecting Americans from Tax Hikes (PATH) Act of 2015.” A key component of this legislation is the so-called “extender” provisions, which renew many tax deductions, credits and incentives that had expired last year. However, this package is more extensive and comprehensive than in prior years and includes both permanent and temporary tax relief provisions.
Some highlights of the legislation include:
- Research and Experimentation Credit now permanently extended. In addition, beginning in 2016 eligible small businesses ($50 million or less in gross receipts) may claim the credit against alternative minimum tax (AMT) liability, and the credit can be utilized by certain small businesses against the employer’s payroll tax (i.e., FICA) liability.
- Section 179 expensing limits increase. The increased Section 179 expensing limit and phase-out threshold ($500,000 and $2 million, respectively) are permanently extended. Both of these figures will be indexed for inflation beginning in 2016. Also permanently extended are the expensing rules for computer software and qualified real property. Additionally, the $250,000 cap relating to qualified real property is eliminated beginning in 2016.
- Bonus depreciation extended. Bonus depreciation is extended for five years (through 2019) subject to the following phase-out schedule: 50% bonus depreciation applies in 2015, 2016, & 2017; 40% bonus depreciation in 2018; and 30% bonus depreciation in 2019. The legislation continues to allow taxpayers to elect to accelerate the use of AMT credits in lieu of bonus depreciation in 2015. It also modifies the AMT rules beginning in 2016 by increasing the amount of unused AMT credits that may be claimed in lieu of bonus depreciation, and modifies the bonus depreciation rules to include qualified improvement property.
Other permanent business extenders include:
- Fifteen-year straight-line cost recovery for qualified leasehold improvements, qualified restaurant buildings and improvements, and qualified retail improvements.
- Exclusion of 100 percent of gain on certain small business stock.
- Reduction in S-corporation recognition period for built-in gains tax.
Other temporary business extenders (through 2019) include:
- New markets tax credit.
- Work opportunity tax credit.
- Tax-free treatment of distributions from individual retirement plans by individuals age 70 ½ and older for charitable purposes.
- Deduction of state and local sales taxes in lieu of deduction of state and local income taxes.
- Enhanced child tax credit and earned income tax credit.
- Deduction for certain expenses of elementary and secondary school teachers.
- Parity for exclusion from income for employer-provided mass transit and parking benefits.
- Charitable deduction for contributions of food inventory.
- Basis adjustment to stock of S corporations making charitable contributions of property.
- Enhanced American opportunity tax credit.
Extended Through 2016:
- Exclusion from gross income of discharge of qualified principal residence indebtedness.
- Treatment of mortgage insurance premiums as qualified residence interest.
- Above-the-line deduction for qualified tuition and related expenses.
Contributed by Jeffrey N. Horst, CPA, MST, Partner in RKL’s Tax Services Group and the firm’s tax functional leader. Jeff specializes in comprehensive tax planning and compliance services for businesses and their owners. He works with clients in a variety of industries including Real Estate Development and Construction and Manufacturing and Distribution.