Tax Provisions in the Protecting Americans from Tax Hikes PATH Act of 2015
Posted on 12.19.15
President Obama signed the “Protecting Americans from Tax Hikes” (PATH) Act of 2015 into law on December 18, 2015
Update to Article: Senate Panel Extends More Than 50 Tax Breaks
By Alisha Sterdivant | Tax Manager
Back on August 7, 2015 in our article “Senate Panel Extends More Than 50 Tax Breaks,” we reported on the July 21st Senate and Finance Committee package of more than 50 temporary tax provisions due for extension. Among the numerous provisions were proposed extenders for key business and individual tax relief. At the time, it was anticipated that Congress would reach an agreement well in advance of December as tax planning would be well underway by year-end. However, the agreement was not reached until December 15th. President Obama signed into law on Friday, December 18 the new “Protecting Americans from Tax Hikes” (PATH) Act of 2015 which not only extends various temporary provisions for several years, but also make other tax provisions permanent. We are pleased that the PATH Act provides more certainty for tax planning going into 2016 and future years.
Let’s review some permanent updates and a few other extenders in more detail by section in order of Business, Individual and a few Energy tax incentives included in the PATH Act.
BUSINESS TAX PROVISIONS
Permanent business extenders included in the PATH Act:
- 15- Year write-off for qualified leasehold, retail improvement and restaurant property
- Section 179 expense limitation & phase-out
- Research Tax Credit
- Tax treatment of certain payments to controlling exempt organizations
- Special rules for qualified small business stock
- Lower shareholder basis adjustment for charitable contributions by S Corps
- Reduction in S corporation recognition period for built-in gains tax
- Differential Wage Payment Credit for Employers (details included in other business extenders sections)
15-year straight-line cost recovery for qualified leasehold improvements, qualified restaurant property, and qualified retail improvements, permanently extended
The PATH Act retroactively extends and makes permanent the 15-year cost recovery period previously used for qualified leasehold improvements, retail improvements and qualified restaurant property.
Increase in section 179 maximum expense amount and phase-out threshold, permanently extended
For taxable years beginning in 2015 and thereafter, a taxpayer may immediately expense up to $500,000 of Section 179 property annually, with a dollar for dollar phase-out of the maximum deductible amount for purchases in excess of $2 million. The Act also extends permanently the definition of Section 179 property to include computer software and the $250,000 cap on real property expensing will be eliminated (real property expensing includes property such as qualified leasehold improvement property, qualified restaurant property, and qualified retail improvement property). In addition to the tax incentives listed above, air conditioning and heating units will also be eligible for expensing under section 179.
Research Tax Credit, permanently extended
The PATH Act retroactively and permanently extends the Research Tax Credit for both the 20 percent traditional research tax credit and the 14 percent alternative simplified credit. Therefore Taxpayers, that have already filed fiscal year end returns that include part of 2015, may now file amended returns and claim refunds for additional taxes paid as a result of not being eligible to claim this credit.
Modification of tax treatment of certain payments to controlling exempt organizations, permanently extended
In general, interest, rent, royalties, and annuities paid to a tax-exempt organization from a controlled entity are treated as unrelated business income of the tax-exempt organization. The Pension Protection Act (PPA) provided that if a payment to a tax-exempt organization by a controlled entity is no more than fair market value, then the payment is excludable from the tax-exempt organization’s unrelated business income. The PATH Act retroactively and permanently extends these rules.
Special rules for qualified small business stock, permanently extended
Generally, non-corporate taxpayers may exclude 50 percent of the gain from the sale of certain small business stock acquired at original issue and held for more than five years. For stock acquired after September 27, 2010 and before January 1, 2015, the exclusion is 100 percent and the AMT preference item attributable for the sale is eliminated. The PATH Act permanently extends the 100 percent exclusion of the gain from the sale of qualifying small business stock held for more than five years and the AMT preference treatment.
Basis adjustment to stock of S corporations making charitable contributions, permanently extended
The Act retroactively and permanently extends the provision allowing S corporation shareholders a basis reduction in S stock by reason of a charitable contribution. The provision extends the amended rule allowing the shareholder to take into account their pro rata share of the deduction based on the adjusted basis of the contributed property not fair market value of charitable donation.
Reduction in S corporation recognition period for built-in gains tax, permanently extended
If a taxable corporation converts into an S corporation, the conversion is not a taxable event. However, following such a conversion, an S corporation must hold its assets for a certain period in order to avoid a tax on any built-in gains that existed at the time of the conversion. The American Recovery and Reinvestment Act reduced that period from 10 years to 7 years for sales of assets in 2009 and 2010. The Small Business Jobs Act reduced that period to 5 years for sales of assets in 2011. As a result of the 2015 PATH Act, the reduced 5-year holding period will be retroactively and permanently extended.
5 year business extenders:
- Bonus depreciation
- Work Opportunity Tax Credit
- New Markets Tax Credit, extended through 2019 (details included in other business extenders sections)
- First Year Depreciation Cap for Autos and Trucks, extended through 2019 (details included in other business extenders sections)
Bonus depreciation extended through 2019
The Act extends 50 percent bonus depreciation to qualified property purchased and placed in service before January 1, 2017 (before January 1, 2018 for certain longer-lived and transportation assets). Qualified property includes any improvement to an interior portion of a building which is nonresidential real property if improvement is placed in service after the date that building was first placed in service. There is also a conforming change to the percentage of completion rules for certain long term contracts relating to the 50% bonus depreciation.
Also per the Act, beginning in 2018, the federal bonus depreciation rate will gradually decrease to 40% and then 30% in 2019.
Under current extender, a taxpayer has the option to forgo bonus depreciation in favor of accelerating corporate Alternative Minimum Tax (AMT) credits. As part of this Act, beginning in 2016, there will be an increase in the amount of credit that may be claimed in lieu of bonus depreciation.
Work Opportunity Tax Credit extended through 2019
The PATH Act expands and extends the WOTC through 2019. The provision allows businesses to claim a work opportunity tax credit equal to a certain percentage of wages paid to new hires of one of nine targeted groups. The Act extends the WOTC to eligible veterans, non-veterans and long-term unemployed individuals (i.e., those who have been unemployed for 27 weeks or more). The credit with respect to such long-term unemployed individuals is 40% of the first $6,000 of wages.
The maximum credit varies by the targeted group. These groups include members of families receiving benefits under the Temporary Assistance to Needy Families (TANF) program, qualified veterans (including those who are unemployed, disabled, or receiving TANF), qualified ex-felons, designated community residents, vocational rehabilitation referrals, qualified summer youth employees, qualified food and nutrition recipients, qualified SSI recipients, and long-term family assistance recipients.
Other business extenders:
- New Markets Tax Credit, extended through 2019 ( carryover period for unused new market tax credit extended to 2024)
- Differential Wage Payment Credit for Employers, permanently extended (for payments to employees called to active duty 20% credit up to 20k differential pay)
- First Year Depreciation Cap for Autos and Trucks, extended through 2019 (extends the increase in section 280F limitations for light trucks and vans built on truck chassis)
INDIVIDUAL TAX PROVISIONS
Permanent extenders for individuals included in the PATH Act:
- Deduction for state and local general sales tax
- Tax-free distributions from individual retirement account (IRA) for charitable purposes
- Educator expense deduction, permanently
- American Opportunity Tax Credit
- Child Tax Credit
Deduction for state and local general sales tax, permanently extended
The PATH Act permanently extends the election to take an itemized deduction for State and local general sales taxes in lieu of the itemized deduction permitted for state and local income taxes.
Tax-free distributions from individual retirement account (IRA) for charitable purposes, permanently extended
The PATH Act permanently extends the provision that permits an Individual Retirement Arrangement (“IRA”) owner who is age 70-1/2 or older to exclude from gross income up to $100,000 per year in distributions made directly from the IRA to certain public charities.
Educator expense deduction, permanently extended ($250 above -the-line deduction)
American Opportunity Tax Credit, permanently extended
To increase the Hope Scholarship credit to $2,500 for four years of post-secondary education, and increase the beginning of the phase-out amounts to $80,000 (single) and $160,000 (married filing jointly). This provision is not retroactive and individuals are prohibited from filing amended returns to claim.
Child Tax Credit, permanently extended
Under the current law, a taxpayers can claim a $1,000 tax credit for each qualifying child under age 17 (claimed as a dependent). The credit phases out when taxpayers’ income exceeds certain thresholds. However, if the CTC exceeds the taxpayer’s tax liability, the taxpayer is eligible for a refundable credit currently equal to a percentage of earned income in excess of a threshold dollar amount. The PATH Act makes the Child Tax Credit permanent by setting this threshold dollar amount at $3,000. The Act will not provide for any increases in this threshold.
2 year extenders for individuals:
Mortgage Debt Relief, extended through 2016
The PATH Act extends the provision for the discharge of debt on a qualified principle residence. A taxpayer can exclude from income up to $2 million ($1 million if married filing separately) of debt discharged before Jan 1, 2017. This provision was created in the Mortgage Debt Relief Act of 2007 to shield taxpayers from having to pay taxes on cancelled mortgage debt stemming from mortgage loan modifications through 2010. It was extended through 2013 by the Emergency Economic Stabilization Act of 2008. The PATH Act will now extend this provision through 2016.
Deduction for mortgage insurance premiums, extended through 2016
The PATH Act extends the ability to deduct the cost of mortgage insurance on a qualified personal residence. The deduction is phased-out ratably by 10% for each $1,000 by which the taxpayer’s AGI exceeds $100,000. Thus, the deduction is unavailable for a taxpayer with an AGI in excess of $110,000. This provision will extend for two additional years, through 2016.
Energy provisions 2 year extenders:
- Credit for non-business energy property
- Credit for construction of new energy efficient homes
- Energy efficient commercial buildings deduction
Credit for non-business energy property (Section 25C), extended through 2016
The PATH Act extends for two years, through 2016, the 10 percent credit for purchases of energy efficient improvements to existing homes. Homeowners can claim up to $ 50 for an advanced main circulating fan, $200 for energy efficient windows, up to $150 for an efficient furnace or boiler, and up to $300 for other improvements, including insulation. The total credit is capped at $500 lifetime limit per taxpayer.
Credit for construction of new energy efficient homes, extended through 2016
The PATH Act extends for two years, through 2016, the credit for the construction of energy-efficient new homes that achieve a 30% or 50% reduction in heating and cooling energy consumption relative to a comparable dwelling constructed within the standards of the 2003 International Energy Conservation Code (including supplements). Contractors may claim up to a $2000 credit for each qualified new home constructed and acquired during the tax year.
Energy efficient commercial buildings deduction, extended through 2016
The PATH Act extends for two years, through 2016, the deduction for energy efficient commercial buildings. Taxpayers may deduct up to $1.80 per square foot for an efficiency improvement of at least 50 percent. The improvement can be made through efficient lighting systems, heating, cooling, ventilation, and hot water systems.
On Friday December 17th the long anticipated extensions coupled with quite a bit of permanent changes made its way through Congress with a 316-113 approval by the House and a 65-33 vote in the Senate. As mentioned above, the majority of these changes will permanently provide tax incentives for both businesses and individuals, while other provisions will be revisited in the coming years.
For further information, please contact your Keiter professional or call 804.747.000 | email: firstname.lastname@example.org.
Alisha serves real estate investment companies, joint ventures and partnerships, and commercial, multi-family and residential clients. Her specialty areas include partnership taxation, real estate, and special allocations & equity transactions.