Posted on Jan 22, 2016

At the end of last year, the Protecting Americans from Tax Hikes Act of 2015 was signed into law. Known as the PATH Act, it does more than just extend expired and expiring tax provisions for another year. The new law makes many temporary tax breaks permanent.

This provides some stability in planning. When it comes to certain deductions and credits, taxpayers will no longer have to wait for Congress to pass a temporary tax extenders law — often at the end of the year — in order to plan tax-saving strategies.

Here’s an overview of how individuals and businesses can benefit from the latest tax package.

Tax Breaks for Individuals

American Opportunity education credit. Eligible taxpayers can take an annual credit of up to $2,500 for various tuition and related expenses for each of the first four years of postsecondary education. The credit phases out based on modified adjusted gross income (MAGI) beginning at $80,000 for single filers and $160,000 for joint filers, indexed for inflation. The new law makes this credit permanent.

Tuition and fees deduction. The new law extends through 2016 the above-the-line deduction for qualified tuition and related expenses for higher education. The deduction is capped at $4,000 for taxpayers whose adjusted gross income (AGI) doesn’t exceed $65,000 ($130,000 for joint filers) or, for those beyond those amounts, $2,000 for taxpayers whose AGI doesn’t exceed $80,000 ($160,000 for joint filers).

Small business stock gains exclusion. The PATH Act makes permanent the exclusion of 100% of the gain on the sale or exchange of qualified small business (QSB) stock acquired and held for more than five years. The 100% exclusion is available for QSB stock acquired after September 27, 2010.

A QSB is generally a domestic C corporation that has gross assets of no more than $50 million at any time (including when the stock is issued) and uses at least 80% of its assets in an active trade or business. The law also permanently extends the rule that eliminates QSB stock gain as a preference item for alternative minimum tax (AMT) purposes.

Charitable giving from IRAs. The PATH Act makes permanent the provision that allows taxpayers who are age 70½ or older to make direct contributions from their IRAs to qualified charitable organizations up to $100,000 per tax year. If you take advantage of this opportunity, you can’t claim a charitable or other deduction for the contributions, but the amounts aren’t considered taxable income and can be used to satisfy your required minimum distributions.

To qualify for the exclusion from income for IRA contributions for a tax year, you need to arrange a direct transfer by the IRA trustee to an eligible charity by December 31. Donor-advised funds and supporting organizations aren’t eligible recipients.

Transit benefits. Do you commute to work via a van pool or public transportation? The law makes permanent the requirement that limits on the amounts that can be excluded from an employee’s wages for income and payroll tax purposes be the same for parking benefits and van pooling / mass transit benefits.

For 2015, the monthly limit is $250. Before the PATH Act, the 2015 monthly limit was only $130 for van pooling / mass transit benefits. (The $250 limit increases to $255 for 2016.)

State and local sales tax deduction. Taxpayers can take an itemized deduction for state and local sales taxes, instead of for state and local income taxes. This tax break is now permanent. The deduction is especially valuable for individuals who live in states without income taxes and those who purchase major items, such as a car or boat.

Energy tax credit. The PATH Act extends through 2016 the credit for purchases of residential energy property. Examples include new high-efficiency heating and air conditioning systems, insulation, energy-efficient exterior windows and doors, high-efficiency water heaters and stoves that burn biomass fuel.

The provision allows a credit of 10% of expenditures for qualified energy improvements, up to a lifetime limit of $500.

Mortgage-related tax breaks. Under the new law, you can treat qualified mortgage insurance premiums as interest for purposes of the mortgage interest deduction through 2016. However, the deduction phases out for taxpayers with AGI of $100,000 to $110,000.

In addition, the PATH Act extends through 2016 the exclusion from gross income for mortgage loan forgiveness. It also modifies the exclusion to apply to mortgage forgiveness that occurs in 2017 as long as it’s granted pursuant to a written agreement entered into in 2016.

Educator expense deductions. Qualifying elementary and secondary school teachers can claim an above-the-line deduction for up to $250 per year of expenses paid or incurred for books, certain supplies, computer and other equipment, and supplementary materials used in the classroom. Under the new law, beginning in 2016, the deduction is indexed for inflation and includes professional development expenses.

Tax Breaks for Businesses

Section 179 deduction. Tax law allows businesses to elect to immediately deduct — or expense — the cost of certain tangible personal property acquired and placed in service during the tax year. The Section 179 deduction is in lieu of recovering the costs more slowly through depreciation deductions. Keep in mind the election can only offset net income — it can’t reduce it below $0 to create a net operating loss. There are also other restrictions.

The election is also subject to annual dollar limits. For 2014, businesses could expense up to $500,000 in qualified new or used assets, subject to a dollar-for-dollar phaseout once the cost of all qualifying property placed in service during the tax year exceeded $2 million. Without the PATH Act, the expensing limit and the phaseout amounts for 2015 would have sunk to $25,000 and $200,000, respectively.

The new law makes the higher limits permanent and indexes them for inflation beginning in 2016. It also makes permanent the ability to apply Sec. 179 expensing to qualified real property, reviving the 2014 limit of $250,000 on such property for 2015 but raising it to the full Sec. 179 limit beginning in 2016. Qualified real property includes qualified leasehold-improvement, restaurant and retail-improvement property.

Finally, the new law permanently includes off-the-shelf computer software on the list of qualified property. And, beginning in 2016, it adds air conditioning and heating units.

Bonus depreciation. Bonus depreciation allows businesses to recover the costs of depreciable property more quickly by claiming bonus first-year depreciation for qualified assets. It’s been extended, but only through 2019 and with declining benefits in the later years. For property placed in service during 2015, 2016 and 2017, the bonus depreciation percentage is 50%. It drops to 40% for 2018 and 30% for 2019.

The provision continues to allow businesses to claim unused AMT credits in lieu of bonus depreciation. Beginning in 2016, the amount of unused AMT credits that may be claimed increases.

Qualified assets include new tangible property with a recovery period of 20 years or less (such as office furniture and equipment), off-the-shelf computer software, water utility property and qualified leasehold-improvement property. Beginning in 2016, qualified improvement property doesn’t have to be leased to be eligible for bonus depreciation.

Accelerated depreciation of qualified real property. The PATH Act permanently extends the 15-year straight-line cost recovery period for qualified leasehold improvements (building alterations to suit the needs of a tenant), qualified restaurant property and qualified retail-improvement property. These expenditures are now exempt from the normal 39-year depreciation period.

This is beneficial for restaurants and retailers because they tend to remodel periodically. If eligible, they may first apply Section 179 expensing and then enjoy this accelerated depreciation on qualified expenses in excess of the applicable Section 179 limit.

Research credit. This valuable credit provides an incentive for businesses to increase their investments in research. However, the temporary nature of the credit deterred some businesses from pursuing critical innovations.

The PATH Act permanently extends the credit. Additionally, beginning in 2016, businesses with $50 million or less in gross receipts can claim the credit against AMT liability, and certain start-ups (generally, those with less than $5 million in gross receipts) that haven’t yet incurred income tax liability can use the credit against their payroll tax.

Work Opportunity tax credit. Employers that hire individuals who are members of a “target group” can claim this credit, which has been extended through 2019. The new law also expands the credit beginning in 2016 to apply to employers that hire qualified individuals who have been unemployed for 27 weeks or more.

The credit amount varies depending on:

  • The target group of the individual hired;
  • Wages paid to the employee; and
  • Hours worked by the new hire during the first year of employment.

The maximum credit that can be earned for each qualified adult employee is generally $2,400. The credit can be as high as $9,600 per qualified veteran. Employers aren’t subject to a limit on the number of eligible individuals they can hire.

You must obtain certification that an employee is a member of a target group from the appropriate State Workforce Agency before claiming the credit. The certification must be requested within 28 days after the employee begins work. For 2015, the IRS may extend the deadline as it did for 2014, when legislation reviving the credit for that year wasn’t passed until late in the year — meaning that the 28-day period had already expired for many covered employees hired in 2014.

Food inventory donations. The PATH Act makes permanent the enhanced deduction for contributions of food inventory for non-corporate business taxpayers. Under the enhanced deduction (which is already permanently available to C corporations), the lesser of basis plus one-half of the item’s appreciation or two times basis can be deducted, rather than only the lesser of basis or fair market value. Beginning in 2016, the limit on deductible contributions of inventory increases from 10% to 15% of the business’s AGI per year.

S corporation recognition period for built-in gains tax. S corporation income generally is passed through to its shareholders, who pay tax on their pro-rata shares. If a C corporation elects to become an S corporation, the newly created S corporation is taxed at the highest corporate rate (currently 35%) on all gains that were built-in at the time of the election and recognized during the “recognition period.”

Generally, this period is 10 years. But, under the new law, it’s only five years, beginning on the first day of the first tax year for which the corporation was an S corporation.

Commuting benefits. The PATH Act makes permanent the provision that established equal limits for the amounts that can be excluded from an employee’s wages for income and payroll tax purposes for parking fringe benefits and van-pooling / mass transit benefits. The limits for both types of benefits are now $250 per month for 2015. Without the parity extension, the limit for van-pooling / mass transit would be only $130.

Tax Planning with More Certainty

Many of these tax breaks may seem familiar, because they’re continuations from previous years. Under the PATH Act, there are now significant tax planning opportunities for individuals and businesses. The permanent extensions of some valuable tax breaks will make it easier for taxpayers to plan ahead. Keep in mind that this article only touches on some of the new law’s provisions. There may be extensions and enhancements that can benefit you as an individual taxpayer and your company if you’re a business owner or executive.

 

Contact your Cornwell Jackson tax advisor to determine how you can make the most of this tax relief.

 

 

Posted on Dec 17, 2015

Congressional leaders are lauding the agreement on a large extenders package that revives over 50 provisions—some permanently, such as the research credit, Code Sec. 179 expensing, and the child credit; some for five years, such as bonus depreciation, and over 25 other provisions through 2016. The $650-billion Protecting Americans from Tax Hikes (PATH) Bill of 2015 also includes over 60 other provisions on miscellaneous topics, including real estate investment trusts, tax administration and more.

“I think this is one of the biggest steps toward a rewrite of our tax code that we have made in many years, and it will help us start a pro-growth bold tax reform agenda in 2016,” House Speaker Paul Ryan, R-Wis., said during a press conference on December 16. “In addition to all of that, we are ending Washington’s days of extending tax policies one year at a time.”

Senate Finance Committee Chairman Orrin G. Hatch, R-Utah, said that the 52 separate provision have, on a relatively frequent basis, faced expiration and require Congress to reach agreements on further extensions. “Our bill would reduce that number down to 33 provisions, still far too many, but a significant relief in terms of the on-going extenders pressure,” said Hatch in a speech on the Senate floor.

A House vote on the PATH Bill is scheduled to take place on December 17 with the Senate vote expected to follow. The $1.1-trillion omnibus spending package is slated for House and Senate votes on December 18. Lawmakers are expected to approve both bills. Following the votes, Congress will adjourn for the remainder of the year.

Tax Extenders

The extenders package calls for making permanent over 20 tax-extender benefits, split 50-50 between business and individuals. Among the extenders that the package makes permanent are:

  • the research and development credit, with special utilization by small businesses;
  • Code Sec. 179expensing, at an indexed $500,000 level/$2 million limit (and eliminating the $250,000 cap beginning in 2016);
  • state and local sales tax deductions;
  • special 15-year, straight-line cost recovery for qualified leasehold improvements, and qualified restaurant and retail improvement property;
  • an enhanced Earned Income Tax Credit;
  • an enhanced Child Tax Credit;
  • a modified classroom-expense deduction;
  • parity for exclusion of employer-provided mass transit and parking benefits;
  • tax-free distributions of up to $100,000 from IRAs for charitable purposes (among other incentives for charitable giving); and
  • an enhanced American Opportunity Tax Credit.

The extenders package also extends and modifies through 2019:

  • bonus depreciation, at 50 percent for 2015-2017 and phased down to 40 percent in 2018 and 30 percent in 2019;
  • the Work Opportunity Tax Credit, modified and enhanced for employers who hire long-term unemployed individuals to 40 percent of the first $6,000 of wages;
  • the New Markets Tax Credit, with a $3.5-billion allocation; and
  • certain look-through treatment between related controlled foreign corporations.

Finally, most other tax provisions that were in the last extenders package and had expired retroactively after December 31, 2014, are revived for two years, through 2016. Notably, these provisions include: an extension and modification of the exclusion of mortgage debt discharge; an extension of the above-the-line deduction for qualified tuition and related expenses; and over a dozen incentives for energy production and conservation.

Many other miscellaneous tax provisions were also added to the extenders package under the headings:

  • Program Integrity—safeguards surrounding ITNs, information returns, and restrictions regarding education incentives, among others;
  • Family Tax Relief—exclusions under the Work College Program, improvements toCode Sec. 529 accounts, and rollovers into simple retirement accounts, among others;
  • Real Estate Investment Trusts—restrictions on tax-free spinoffs, limitations on designation of dividends, hedging provisions, and over 10 other REIT-related provision;
  • Tax Administration—rules for IRS employees, truncated Social Security Numbers for Form W-2, clarification of enrolled agent credentials, and tweaks to the new partnership audit rules, among others); and
  • S. Tax Court—rules regarding taxpayer access to the Tax Court and additional rules and clarifications.

IRS Budget

The Consolidated Appropriations Bill, 2016, provides $11.235 billion for funding of IRS operations, $290 million (3 percent) more than the fiscal year 2015 level. The agreement directs that the funds provided above the fiscal year 2015 level be devoted to making measurable improvements in the customer service representative level of service rate, improving the identification and prevention of refund fraud and identity theft and enhancing cyber security to safeguard taxpayer data.

Press Release provided by Wolters Kluwer. More information to come, please check back to our blog.

To learn more, please reach out to Derek Northup at 972-202-8000 or Derek.Northup@cornwelljackson.com.