Congress has once again extended the “extenders,” a varied assortment of more than 50 individual and business tax deductions, tax credits and other tax-saving laws, which have been on the books for years, but which technically are temporary because they have a specific end date. This package of tax breaks has repeatedly been temporarily extended for short periods of time (e.g., one or two years), which is why they are referred to as “extenders.” Most of the tax breaks expired at the end of 2014, but now, in the recently enacted Protecting Americans from Tax Hikes Act of 2015 (2015 PATH Act), the extenders have been revived and extended once again — but this time Congress has taken a new tack. Instead of just rolling the package of provisions over for a year or two, Congress actually made some of the provisions permanent and extended the remaining provisions for either two or five years, while making significant modifications to several provisions.
The following provides a brief overview of the key tax breaks affecting business that were extended by the new law.
Permanent Section 179 Expensing Increases
In what is easily the most positive tax legislative action taken for small business in the past several years, Congress made permanent the $500,000 Section 179 expensing limit, enabling a small business to elect to expense up to $500,000 of investment in new equipment and other qualifying property, instead of having to depreciate the cost over a number of years.
In recent years, the $500,000 limit and some other favorable aspects of the election have been extended for a year or two at a time, but sometimes these provisions weren’t extended until December, leaving many small business owners uncertain for most of a tax year as to whether the higher expensing limit and other favorable provisions would be extended.
This uncertainty is now over. The recently enacted 2015 PATH Act makes the higher expensing limit and other favorable provisions permanent.
Extension of Bonus Depreciation
Businesses are allowed to deduct the cost of capital expenditures over time according to depreciation schedules. In previous legislation, Congress allowed businesses to more rapidly deduct capital expenditures of most new tangible personal property, and certain other new property, by permitting an additional first-year write-off of the cost. For qualified property placed into service before Jan. 1, 2015 (before Jan. 1, 2016 for certain property with a longer production period and certain aircraft), the additional first-year depreciation was 50% of the cost. The new law extends additional first-year depreciation for investments placed into service during 2015–2019 (with an additional year for the longer-production-period property and aircraft). The bonus depreciation percentage is 50%, phasing down to 40% in 2018 and 30% in 2019.
Permanent and Expanded R&D Credit
The PATH Act contains a provision making permanent the popular research and development (R&D) credit, which provides a tax credit for incremental increases in qualified research expenses in the current year. There are two methods for calculating the R&D credit for increased research expenses, which the new law has not changed. The credit had lapsed as of December 31, 2014, but the new legislation is effective for 2015.
The most significant change in the new tax law affects which taxes the R&D credit can offset. Beginning in 2016, eligible small businesses ($50 million or less in gross receipts) may claim the credit against alternative minimum tax (AMT) liability. This is a significant tax benefit for owners of pass-through entities (S corporations and partnerships), which pass the R&D credit through to their owners to claim on their income tax returns.
Also, beginning in 2016, the new law provides that the credit can be used by certain even smaller businesses against the employer’s portion of the Social Security portion of the employer’s payroll tax (i.e., FICA) liability.
Other Miscellaneous Business Provisions
- The 15-year straight-line cost recovery for qualified leasehold improvements, qualified restaurant buildings and improvements, and qualified retail improvements is now permanent.
- The work opportunity tax credit is extended through 2019. The new law also modifies the credit, beginning in 2016, to apply to employers who hire qualified long-term unemployed individuals (i.e., those who have been unemployed for 27 weeks or more), and increases the credit with respect to such long-term unemployed individuals to 50% of the first $6,000 of wages.
- The election to accelerate alternative minimum tax (AMT) credits in lieu of additional first-year depreciation is extended for property placed into service during 2015. This provision modifies the AMT rules, beginning in 2016, by increasing the amount of unused AMT credits that may be claimed in lieu of bonus depreciation.
- The exclusion of 100% of gain on certain small-business stock is now permanent, and the new law also permanently extends the rule that eliminates such gain as an AMT preference item.
- The reduction in S corporation recognition period for built-in gains tax is now permanent.
Postponement of Obamacare Taxes
The 2015 PATH Act also includes a two-year delay in a pair of new taxes installed as part of the healthcare reform law. The levy on medical devices, which would have started in 2016, is delayed until 2018, and the 40% tax on high-value health insurance plans, known as the “Cadillac tax,” will now be effective January 1, 2020, rather than the beginning of 2018.
Individual Tax Provisions
The following outlines the provisions of the 2015 PATH Act that impact individual taxpayers:
- The provision that permits tax-free distributions from an individual retirement account (IRA) of up to $100,000 per taxpayer per tax year, by taxpayers age 70 1/2 or older, to charities is now permanent.
- The option to take an itemized deduction for state and local general sales taxes, instead of the itemized deduction permitted for state and local income taxes, is now permanent.
- The deduction for mortgage insurance premiums deductible as qualified residence interest is extended through 2016.
- Tax credits for low-to-middle-wage earners, originally enacted as part of the 2009 stimulus package and slated to expire at the end of 2017, are now permanent. These tax credits are 1) the American Opportunity Tax Credit, which provides up to $2,500 in partially refundable tax credits for post-secondary education, 2) eased rules for qualifying for the refundable child credit, and 3) various earned income tax credit (EITC) changes.
- Parity for the exclusions for employer-provided mass transit and parking benefits are now permanent.
If you would like more details about these changes or any other aspect of the new law, please do not hesitate to call our office.