New tax laws passed in December 2015 include a wide-ranging deal on tax extenders, making some items permanent. This legislation is great news for taxpayers because it gives more certainty about the tax provisions. If taxpayers follow the prescribed steps they know that they can achieve the anticipated tax result.
The Protecting Americans from Tax Hikes Act of 2015 (PATH) renews and makes permanent important tax incentives that support both individuals and job creators, and extends certain other tax provisions.Among the provisions made permanent are:
1. The enhanced Child Tax Credit, (10% of earned income, with a $3,000 phase-out threshold).
2. The enhanced American Opportunity Tax Credit, (and $1,800 credit for higher education costs, with phase-out threshold beginning at AGI of $96,000 for joint filers, $48,000 for single)
3. The enhanced Earned Income Tax Credit.
4. The charitable deduction of contributions of real property for conservation purposes.
5. The Research & Development Tax Credit was extended and made permanent (and for the first time beginning in 2016 it is available to be claimed as a credit against AMT or the employer’s payroll tax liability), the credit is 20% of qualified R&D costs over a calculated base amount. These rules are very complex, so please call us if you incur any R&D costs.
6. Depreciation and Expensing
a. Section 179 expensing (on up to $500,000 of purchases, which reduces after purchases of $2 million or more) is now permanent.
b. The ability to revoke a Code Sec. 179 election without IRS consent is made permanent.
c. The rule that allows expensing for computer software is now permanent.
d. Qualified Real Property Section 179 Expensing
i. Beginning in 2016 the Sec. 179 expensing of qualified real property is now permanent
ii. Qualified real property includes qualified improvements to leasehold, restaurant and retail
iii. For 2015 any unusable Sec. 179 expense that is claimed for qualified real property may
iv. But for years after 2015 any unused Section 179 expense for qualified real
e. Beginning in 2016 air conditioners and heating units are eligible for expensing
f. A provision that allows retailers and restaurants to depreciate remodeling and other improvements to their stores over 15 years rather than the previous standard of 39 years is now permanent. This is important because retailers typically remodel every five to seven years
g. Bonus depreciation of qualified new property is extended through 2019 (see below)
h. Bonus depreciation will be phased out over five years
i. 50% bonus for property placed in service in 2015 through 2017
ii. 40% bonus for property placed in service in 2018
iii. 30% bonus for property placed in service in 2019 property not be carried forward to a future year property may be carried forward to future years.
i. First-year depreciation cap for qualifying automobiles is increased to $8,000 through 2019,
j. For property placed in service during 2015, the Act allows taxpayers to elect to accelerate the use of AMT credits in lieu of bonus depreciation under special rules. Beginning in 2016, the Act modifies the AMT rules by increasing the amount of unused AMT credits that may be claimed in lieu of bonus depreciation
k. Taxpayers can expense the cost of producing qualified TV and film productions through 2016,
l. Though, not part of the PATH act, we note here that per the IRS capitalization regulations, beginning 1-1-2016 the de minimis safe harbor limit for expensing “lower-cost assets” is increased from $500 to $2,500 for a unit-of-property (UOP) if the taxpayer has no applicable financial statement (“AFR” - generally audited financial statements) and the limit remains at $5,000 for a UOP if the taxpayer does have an AFR. The IRS will not challenge the higher $2,500 limit if a taxpayer claims it in a year before 2016. To claim the higher expensing for a UOP a taxpayer must have a written expensing policy in place at the beginning of the tax year, and it must be consistently applied.
7. The above-the-line deduction for teachers who buy school supplies and incur professional development costs (deduction is limited to $250).
8. The tax break for employer provided fringe benefits for mass transit ($130 per month) and parking benefits ($250 per month).
9. The option to claim an itemized deduction for state and local general sales taxes in lieu of a deduction for state and local income taxes.
10. The ability of individuals at least 70½ years of age to exclude from gross income qualified charitable distributions from Individual Retirement Accounts (IRAs) of up to $100,000 per taxpayer in any tax year.
11. Income from active financing income is exempt from Subpart F Income.
12. An S-Corporation needs to hold its assets for only five years (rather than 10 years) following conversion from a C corporation to avoid the tax on built-in gains.
13. Certain capital gains and dividends paid by a Regulated Investment Company (a RIC) to non-resident alien individuals or foreign corporations may be excludable from income, and RIC’s are permanently included in the definition of a “qualified investment entity”.
14. Gain from disposition of qualified small business stock (acquired after 9-27-2010 and before 1-1-2015) is 100% excludable for regular and AMT taxation.
15. A Shareholder in an S-Corp must reduce the basis of his S stock by the pro-rata share of the adjusted basis of property contributed to a charity.
16. Certain payments of income from a controlled subsidiary to a tax-exempt parent organization are taxable.
17. Qualified farmer corporations may deduct qualified conservation contributions up to 100% of taxable income.
18. C-corporations may get enhanced deductions for donations of food inventory.
19. Eligible small business employers get a credit of 20% of up to $20,000 of pay differential paid to employees called to active duty in the US uniformed services.
20. Low-income housing credit is stabilized at 9%.
21. Basic housing allowance of military members is excluded from income for purposes of calculating the low-income housing credit.
Among the provisions extended, but NOT made permanent are:
1. Bonus Depreciation. A separate provision that allows 50 percent of the cost of improvements to be written off under “bonus deprecation” is extended for five years through 2019, (but the allowable percentage is reduced to 40% for 2018 and 30% for 2019), and the allowance has been expanded to cover stores and restaurants that are owned rather than just those that are leased.
2. First-year depreciation cap for qualifying automobiles is increased to $8,000 through 2019.
3. The exclusion from income of discharged home mortgage debt is extended through 2016.
4. The itemized deduction for home mortgage insurance premiums is extended through 2016.
5. The above-the-line deduction for higher education tuition and related expenses (up to $4,000) is extended through 2016, (it is subject to various phase-out thresholds).
6. The $500 (lifetime limit) credit for qualified energy property was extended through 2017.
7. The Work Opportunity Tax Credit, which gives retailers a tax incentive to hire the disabled, welfare recipients and other economically challenged individuals, would be renewed for five years. The WOTC gives a credit of up to $6,000 for first year wages of new hires from certain qualifying groups (such as veterans and un-employed or under- employed individuals).
8. The act suspends the 2.3 percent excise tax on medical devices through 2017 and
9. The act delays for two years the so-called "Cadillac tax" on high-priced health insurance plans that was supposed to begin in 2018.
10. The wind energy production tax credit
a. Extended for five years
b. Will be 100 percent of the calculated amount in 2015 and 2016, 80 percent in 2017, 60 percent in 2018 and 40 percent in 2019.
c. There is a phase-down of the industry-specific credit.
11. The Section 48(a) 30% credit for qualified solar energy property is extended to include property for which construction begins before January 1, 2022; also the credit percentage reduces over time.
12. The Section 25D 30% credit for residential energy-efficient solar property installed on a tax payers residence is extended to include property for which construction begins before January 1, 2022; also the credit percentage reduces over time.
13. Contractor credit of up to $2,000 for building new energy efficient homes is extended through 2016,
14. The tax package includes an extension of the existing biodiesel fuel blenders credit, the small agri-biodiesel producer credit, the tax credit for cellulosic biofuels producers, the alternative fuel vehicle refueling tax credit, and bonus depreciation for cellulosic biofuel facilities.
15. A deduction is allowed for the cost of “energy efficient commercial building property” (“energy efficient improvements to lighting, heating, cooling, ventilation, and hot water systems of commercial buildings”) placed in service during the tax year. The maximum deduction for any building for any tax year is the excess (if any) of the product of $1.80 times the square footage of the building, over the aggregate amount of the deduction for the relevant building for all earlier tax years.
16. Foreign investors would gain advantages in increasing investment in U.S. real estate
a. by increasing their ownership percentage of publicly traded REITs without being taxed on sales of
b. by exempting foreign retirement and pension funds from being taxed on sales of REITs holding
17. It also delays assessment of some of the taxes associated with the Affordable Care Act.
18. Rents, royalties, interest and dividends from one controlled foreign corporation to another CFC may not be treated as foreign personal holding company income, (FPHCI).
19. The New Markets Credit for investments in a qualified community development entity (CDE) is extended through 2019.
20. 20% Credit for excess wages and insurance costs paid to certain Indians is extended through 2016.
21. Domestic Production Deduction rules for Puerto Rico are extended through 2016.
22. Certain public bond limitations and Empowerment Zone tax breaks are extended through 2016.
Since, the IRS has to process these changes in time for the upcoming tax season, don’t be surprised if there are delays in obtaining the tax forms necessary of report many of the items listed above.the interests, and U.S. real estate.
Please contact us at Goldsmith Molis & Gray PLLC if you have any questions about these very important tax law changes. This summary was prepared by George Gabler of Goldsmith Molis & Gray PLLC.It is intended only as a general summary of some of the various tax law changes that occurred in December 2015. It does not discuss important details and limiting and qualifying factors that may apply for each of tax law provisions. Therefore it is important that you seek additional guidance before implementing or relying on these matters.