A Gift from Uncle Sam – Congress Passes Tax Extenders Legislation

Congress has just passed the tax extenders bill which the President signed on Friday, December 18, 2015. The bill is called the Protecting Americans from Tax Hikes Act of 2015 (PATH Act). The Act does considerably more than the legislation of recent years, making many of its provisions permanent including the research tax credit, the expensing of fixed asset purchases under Sec. 179 and certain educational tax credits. It extends bonus depreciation for five (5) years. The Act also imposes a two (2) year moratorium on the ACA medical device excise tax. In a separate budget bill, Congress delayed the ACA excise tax on the “Cadillac” health insurance plans for two (2) years.

Permanent Extenders for Businesses

  1. The Act permanently extends the Sec. 179 expensing election for fixed asset purchases with a $500,000 limit. This limit starts to phase out when the overall asset investment exceeds $2 million. Both of these amounts are subject to annual cost of living adjustments. The Act also makes permanent the special expensing provision for qualified real property.
  2. The Research and Development (R&D) tax credit, which provides credits for specified increases in certain research expenditures, has been made permanent. Many government contractors may be eligible for this credit. Starting in 2016, the Act allows qualified small businesses to use the credit to offset Alternative Minimum Tax, and it allows qualified start-up businesses to claim a portion of the credit against their employer FICA (Social Security tax liability).
  3. Taxpayers can exclude one hundred percent (100%) of the gain on the sale of Qualified Small Business Stock. None of the gain is subject to alternative minimum tax. The stock must be held for five (5) years and other limitations apply.
  4. The Act permanently changes the built-in-gain recognition period from ten (10) years to five (5) years for C Corporations converting to S status.
  5. The fifteen (15) year MACRS cost recovery period for qualified leasehold improvements, qualified restaurant property and qualified retail improvement property is made permanent.

Non-Permanent Business Extenders

The Act extends bonus deprecation (additional first year depreciation) as follows:

  • 50% for 2015-2017
  • 40% for 2018
  • 30% for 2019

Permanent Extenders for Individuals

  1. State and local sales tax deduction – This allows taxpayers who itemize deductions to claim either the State income tax deduction or the sales tax deduction, a clear benefit to individuals residing in states without state income tax
  2. American Opportunity Tax Credit – $2,500 educational tax credit, subject to a phase-out
  3. Child Tax Credit
  4. Earned Income Credit
  5. Above-the Line Deduction for Educator Expenses
  6. Qualified Charitable Distributions from IRAs – The $100,000 limit continues and the provision applies to taxpayers 70-1/2 and older
  7. Qualified Conservation Contributions
  8. Parity for Employer – Provided Parking and Mass Transit Benefits

Two Year Extenders for Individuals

  1. Qualified Tuition and Related Expenses Deduction
  2. Exclusion from income for Cancellation of Mortgage Debt on a Principal Residence – Limited to $2,000,000 ($1,000,000 if married filing separately)
  3. Limited Mortgage Insurance Premium Deduction

The information above touches on key provisions in the PATH Act; there are many other changes in this bill. Please contact Rubino & Company to discuss how these extenders may affect your specific tax situation.